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Inland Real Estate Corp. (NYSE:IRC)

Q3 2007 Earnings Call

November 7, 2007, 03:00 pm ET

Executives

Dawn Benchelt - Investor Relations, Director

Mark Zalatoris - EVP and Chief Operating Officer

Brett Brown - Chief Financial Officer and VP

Scott Carr, - President, Inland Commercial PropertyManagement Inc.

Analysts

Paul Adornato - BMO Capital Markets

Jeff Donnelly - Wachovia Capital Markets

Bob Larson - Glenn Oak Capital

Operator

Greetings, ladies and gentlemen. And Welcome to the InlandReal Estate Third Quarter Earnings Conference Call. At this time, allparticipants are in a listen-only mode. A brief question-and-answer sessionwill follow the formal presentation. (Operator Instructions)

As a reminder, this conference is being recorded. It is nowmy pleasure to introduce your host, Ms. Dawn Benchelt. Thank you. You maybegin.

Dawn Benchelt

Thank you for joining us for Inland Real EstateCorporation’s third quarter 2007 earnings conference call. The third quarterearnings release and supplemental financial package have been filed with theSEC today, November 7th, 2007, and posted to our website www.inlandrealestate.com. Inaddition, we are hosting a live webcast of today’s call which is accessible onour website.

Before we begin, please note that today's discussioncontains forward-looking statements, which are management's intentions,beliefs, expectations, representations, plans or predictions of the future andare typically identified by such words as believe, expect, anticipate, intend,estimate, may, will, should and could.

There are numerous risks and uncertainties that could causeactually results to differ materially from those set forth in theforward-looking statements. For a more complete discussion of these risks anduncertainties, please see our filing on Form 10-K for the year ended December31, 2006.

I would now like to introduce Inland Real Estate Corporation's,Chief Operating Officer, Mark Zalatoris.

Mark Zalatoris

Thank you, Dawn. Welcome everyone. Joining me today areChief Financial Officer, Brett Brown and Scott Carr, President of our PropertyManagement Subsidiary. Bob Parks, our President and CEO was unable toparticipate today due to a case of laryngitis and asked me to lead off today'scall with a few summary opening comments and then I'll provide more detail onour operations.

For the third quarter, we are pleased to report consistentoverall performance in solid core operations. These results for the quarterindicate that we're on track to deliver full year results that are in line withthe guidance we have provided.

Highlights for the quarter and nine months include quarterlyfunds from operations or FFO of $22.8 million or $0.35 per share, which meanfirst time our analyst meet expectations.

Year-to-date increases of 3.4% in FFO and 7% in FFO pershare and a 5% gain in total revenues. Strong leasing activity was spreadapproximately 25% on average, rents for both new and renewal leases andcontinued progress on our accretive joint venture activities.

Brett will review our performance results for the quarterand year-to-date and then I'll bring us up to date on our operations andportfolio initiatives. But I'd first like to take a moment to comment on thecurrent retail environment.

We are all aware of the media coverage of the housingindustry downturn, subprime market wows, tightening lending standards andrising energy costs and how these factors may impact US economy and consumerspending.

There are also concerns about how an economic slowdown mayimpact retailers and in turn the retail real estate sector. Because of thelocation of our assets the types of assets we own, and the tenants we dobusiness with we believe our portfolio is well positioned to handle the bumpsthat may occur in the economy.

Approximately 77% of our assets are located in the strongmarkets of Chicago and Minneapolis. These are markets that the Chicago Tribune recentlynoted as sites to the Midwest blahs. The Tribune stating Urban Land InstitutePrice Water House Cooper study reported that both Chicago and Minneapolis havevery corporate bases and highly diverse economics.

In fact, our retail assets benefit from favorabledemographics across our core markets. Our centers are well located incommunities averaging 90,000 in population and 86,000 in income within athree-mile radius of our properties.

We also specialize in the type of shopping centers thatconsumers visit for everyday needs such as food and household items,prescriptions and dry cleaning. In fact, 45% of our retail centers are anchoredwith grocery stores.

In addition, our tenant base is well diversified comprisedof 70% national retailers and 30% local retailers well known to theircommunities and no one tenant comprises more than 6% of our company's annualbase rent, which helps minimize risks to our revenue stream.

In summary, our portfolio is concentrated in stronggeographic markets, our retail centers are largely necessity based and ourtenant are well diversified. These key portfolio attribute drive steadyperformance through economic cycles.

Now, I'll turn it over to Brett to review the company'sfinancial performance for the third quarter. Brett?

Brett Brown

Great. Thanks Mark and hello everyone. As Mark said, we diddeliver consistent overall performance during the quarter. The FFO and FFO pershare levels reported within our stated guidance for the year and in line withconsensus estimates.

Recap the performance of the three and nine months endedSeptember 30th '07. Funds from operations or FFO was $22.8 million for thethird quarter a decrease of 1.5% from $22.2 million in the third quarter of2006.

On a per share basis, FFO in the third quarter was $0.35,that’s an increase of $0.01 or 2.9% over the three months ended September 30th,'06. The decrease in FFO dollars for the third quarter compared to the prioryear is due to increased interest expense and that increases is partially offsetby the increase in fee income from the IREX joint venture.

The increase in FFO per share, as well as a result of thedecrease in the number of common shares outstanding in '07 as you recall. Inthe fourth quarter of '06, we funded the purchase of nearly $2.8 million sharesor a common stock and that was with the portion of the proceeds from ourconvertible note offering we did back in November.

Now, we reported net income of $10 million for the thirdquarter a decrease of 31.4% over the $14.6 million reported for the thirdquarter '06 and on a per share basis net income was $0.15 in the third quarter,net decrease of 31.8% from $0.22 last year.

Decreases in net income and net earnings per share areprimarily due to the differences in gain or sale investment properties in thecomparable three months period. And third quarter of this year we didn't haveany gains or sales on investment properties versus gains of $3.9 million or$0.06 per share in the third quarter '06.

The nine months ended September 30th, '07, FFO increased$2.3 million or 3.4% up to $69.9 million and that's compared to the same periodin '06. On a per share basis FFO for the nine months increased $0.07 to a$1.07, that's from $1 even last year.

FFO increased for the nine months primarily due to increasedfee income earned from our IREX joint venture activities, as well as, a gain onsales, venture interest and land that we recorded in the first quarter of '07.

For the nine months ended September 30th, '07, net incomewas $32.4 million, a decrease of 11.7%, compared to net income of $36.7 millionfor the prior year. Net income per share was $0.50 cents for the nine monthsended September 30th, '07, a decrease of $0.04 or 7.4% from the prior year.

And the decreases in net income and net income per share areprimarily due to again decreased gains from sale of investment properties thisyear versus last year.

In '07 we recorded gains from investment property sales of$1.2 million or $0.02 a share, compared to gains of $6 million even or $0.09per share in '06. And the impact of decreased gains from property sales waspartially offset by the increased fee income from the joint venture activitythat we earned this year in '07.

Total revenues increased 2.7% to $45.4 million during thequarter up from $44.2 million for the third quarter 2006. For the nine monthsended September 30th, '07 total revenues increased $6.6 million or 5% even to$138.7 million up from $132.1 million for the prior year period and again, asprimarily due to additional property acquisitions.

For the three months and nine months period ended September30th, '07 for same store net operating income excluding the impact ofstraight-line and intangible lease rent was $29.6 million and $88 millionrespectively.

These results were essentially level with the same store netoperating income for the comparable periods in '06. Same store net operatingincome for the quarter was impacted really due to delayed recommencements and aslight loss of income due to [co-tempting] issues.

Year-to-date same store performance was also impacted bynon-recoverable operating expenses related to environmental remediation relatedto a former tenant that was incurred in the first half of this year.

As of September 30th, '07, financial occupancy for ourportfolio was 95.7% above both the 94.6% level reported at June 30th, '07 and95.5% at September 30th, '06. Basically we've been playing catch-up all year onthe occupancy and basically we’re about where we were at the year ago level andyear-end level, excuse me.

EBIDTA or earnings before interest, taxes, depreciation andamortization increased 4.1% to $32.8 million during the third quarter, comparedto $36.6 million one year ago.

For the nine-month period EBIDTA increased 7.2% to $113.4million from $105.7 million last year and EBIDTA coverage of interest expensewas 2.7 times for the third quarter, compared to 2.6 times last quarter.

At September 30th, the company has an equitymarket capitalization of $1 billion and total debt outstanding of $1.1 billion,which includes our pro-rata share of debt in unconsolidated joint ventures fora total market capitalization of 2.1 billion.

Our debt to total market capitalization was 50.7% atSeptember 30th and including the convertible notes approximately 86% of ourdebt was fixed and a weighted average interest rate of 5.19%. The variableportion of our debt is primarily unsecured line of credit, which had anoutstanding balance of $80 million at September 30th, '07.

The loan maturities and secured debt we have in place haveprotected our balance sheet from the impact of recent fluctuations in the debtmarket. Even with the current rate environment. We believe we have anopportunity to realize savings embedded in our loan maturities.

We have $100 million in maturities coming due in 2008 thatwe plan to refinance to lower rates. In addition, we expect to be able toimprove the ratio of secured and unsecured debt by leveraging fewer propertieswith greater amounts of debt.

Also within the next few months we plan to renegotiate ourexisting $150 million line of credit and we anticipate bringing our borrowingrate down to market pricing and providing additional covenant flexibility. Webelieve these financing opportunities will strengthen our balance sheet andpositioned as well for 2008.

Turning to guidance for maintaining our original guidancethat we expect FFO per common share for fiscal year 2007 to be in the range of$1.40 to $1.43. Our current expectations for the full year same store netoperating income is that performance will be basically flat compared to lastyear primarily due to the factors I mentioned previously, mainly timing of newtenants coming online, decreased income due to certain cotenancy leaseprovisions and the impact of non-recoverable expenses incurred in the firsthalf of the year.

Looking ahead to 2008, given the company's final budgets forthe coming year have not been yet approved the premature to provide '08guidance on this call. We plan to provide guidance for the coming year when wereport fourth quarter and year-end results.

I'll now, turn the call over to Mark to provide an update onour portfolio operations. Mark?

Mark Zalatoris

Thanks, Brett. I'd like to begin by providing a review ofthe current acquisitions environment. Anecdotally, we've heard the cap rateshave increased 25 to 50 basis points on higher quality assets and strongdemographic markets are little more than that in second markets.

However, in the Chicago Minneapolis markets where we focusthe competition for our quality retail properties remains fierce withinstitutional buyers still bidding at the lower cap rates. We remain hopefulthat we shortly will see pricing improvement and tend to be in a position totake advantage of the situation for our own account and on behalf of our jointventure partners.

During the quarter, we leveraged a strong relationship withdevelopers we had within the Chicago area market to make one opportunisticportfolio acquisition. This acquisition meets our investment requirements andalso gives us greater flexibility with an adjacent investment property.

We acquired for $10.9 million four fully developed outletpads in Orland Park, Illinois. This property is adjacent to the 600,000 squarefoot Orland Park retail center in which we already own an interest through ajoint venture.

The current tenants of the ground lease pads include OliveGarden, TGIF Friday, National City Bank of the Midwest and Canoe ClubRestaurant. Now, I'd like to provide a brief update of our joint ventureinitiatives.

Turning to our 1031 exchange tenant and common venture withInland Real Estate Exchange Corporation this partnership has proven to be apractical means to bolster fee income and investment returns in the currenttough acquisitions environment.

Our role in this venture is to source properties and provideproperty management leasing services. IREX lends their syndication expertiseand provides access to one of the largest US broker dealer networks.

Each sort of, property provides a 4% to 5% acquisition fee,which we split equally with IREX. In addition, we earn an annual management feefor properly managing these assets, which are mainly located within our coremarkets.

The ownership typically stays intact in these assets 7 to 10years providing us with a long-term management fee income stream. Year-to-datethrough our IREX joint venture our taxable re-subsidiary has recognized morethan $3 million in fee income before income tax provision. This is an increaseof 85.6% over the same period last year.

And just recently in October, our activities on behalf ofour 1031 exchange joint venture included the acquisition of the GreenfieldCommon Center in Aurora Illinois for $6 million. This is a 32,000 square footbuilding currently leased to office depot and factory card and party outlet.

We earlier communicated that we met our annual goal ofproviding $100 million in IREX acquisitions by this past May and we continue toexperience robust demand from 1031 exchange buyers, thus necessitating additionalacquisitions.

Looking ahead, we expect to complete at least another $100million of acquisitions for this joint venture in 2008 with potential upsidefor more dependent again on the acquisitions environment. Included in thesupplemental financial package we filed today is a schedule of the currentstatus of our IREX joint venture properties.

Moving to development joint ventures, the projectsundertaken by our tax re-subsidiary Inland Venture Corporation are anotherincreasingly important source of growth. Working with five differentdevelopment teams has allowed us to diversify our risk, enables us to leveragethe unique strengths of each developer.

Development properties are typically entitled before wereinvest. These developers are skilled at sourcing prime development landcompleting the entitlement process and signing up big box anchors. Our companysteps into our established relationships within our anchored to quicklycomplete the projects.

This speeds up the development time line and enables toventures to achieve higher yields. Our preferred return on equity ranges from9% to 13%. Once that prefer returns has been satisfied whatever remains isdivided with the development partner according to a pre-negotiated percentage.

In addition, we have the option to either acquire thefinished asset at a 25 to 50 basis point discount to the current market caprate or to sell it. In working with our development partners and leveraging ourcomplementary skill sets historically we've been able to produce yields on costof 9% to 11%.

Our development joint venture program has grownsubstantially in a relatively short time. Let me briefly provide an update onthis. During the quarter, we added two new development projects. In September,we acquired for $23 million 63 acres of land adjacent to our North Aurora towncenter development with our partner North American real estate.

The new venture will be developed into a mix of big box andjunior anchor retail space and freestanding outlet buildings. We anticipateselling a portion of the property to one or more anchor big box retailers fortheir own store construction. In fact, we're currently in serious discussionswith a national retailer for a 24-acre land parcel sale as well as with severalother junior anchors.

We also acquired for $5 million a 100,000 square footbuilding plus adjacent outlet building and 7.5 acres of land in Boise, Idahowith our partner pine tree institutional realty. This asset is located next toa thriving Albertson's grocery anchor center. The larger building formerly aKmart is currently vacant and will be redeveloped into a mix of junior anchorand smaller shop retail spaces.

Our development ventures are benefiting from the momentumgenerated earlier this year because our development sites are well located.We're seeing continuing interest from national retailers looking to expandalbeit somewhat more cautiously than before.

At this time, our total acquisition pipeline including alljoint ventures is approximately $400 million. We expect to fund this pipelinewith existing sources of capital including income from our investmentproperties, amounts raised from our dividend re-investment plan, retainedearnings, draws on our acquisition line of credit and proceeds from financingsecured by investment properties.

At this time, the company has no plans to issue new commonequity particularly in light of current pricing. While we're confident that wehave sufficient resources to fund our current growth initiatives, we continueto deploy our available capital very efficiently.

Our joint venture growth vehicles not only generate feeincome and attractive returns of rate capital efficient. Recent example of thecapital efficiency of these ventures are the best buy in Burbank, Illinois, weacquired earlier this year on behalf of our tenant and common joint venturewith IREX.

We completed the sale of the tenant common interest duringthe current quarter and earned an acquisition fee of approximately $250,000.The money we originally invested to acquire this, as it is now available to berecycled into another acquisition.

Our development joint ventures are also structured todevelop attractive returns within a relatively short time frame, freaking upcapital, which is then reinvested. Our development partners bring us projectsthat typically include land sale components to national retailers, the closingfor which have ranged from a week to approximately a year after initial landpurchase.

These land sales enable us to quickly recoup our initial investment.The remaining land is free and clear and ready to be developed. In summary, ourIREX and development joint ventures are proving to be a resourceful way torecycle capital and generate fee income in a challenging environment for coreacquisitions.

Turning to leasing activity, our leasing team produced solidresults this quarter for the three months ended September 30. The companyexecuted 78 leases totaling 379,000 square feet. Fourteen new leases weresigned comprising approximately 40,000 square feet with an average rental rateof 16 per square foot to 17 per square foot, an increase of $3.43 per quarterapproximately 26% over averaging expiring rent.

Fifty-nine renewal leases were signed, comprisingapproximately 316,000 square feet with an average in rental rate of $15 persquare foot, representing an increase of almost $3 per square foot orapproximately 25% over expiring rents. Additionally, there were five new leasesexecuted for 23,000 square feet of previously unoccupied or newly created spaceat an average rental rate of $13.67 per square foot.

And we believe our high leasing spreads support our viewthat our well-located centers continue to be in demand by retailers. Inaddition, these leasing spreads illustrate the opportunity we have to increaseproperty NOI through continued grooming of our tenant base.

We continually review our portfolio to identifyopportunities to proactively replace lower paying tenants now occupying highlydesirable locations with stronger retailers who can afford to pay higher rentsat current market rates.

Leased occupancy of our portfolio was consistent with ourhistoric average of 95%. On September 30, the portfolio was 95.6% leasecompared to 95.7% last quarter and 96.2% at September 30, 2006.

As of October, our portfolio consisted of 150 communityneighborhood, power, lifestyle and single retail tenant centers comprising over14 million square feet of retail space under management.

During the third quarter, we delivered consistent overallresults in performance and core operations that demonstrate we're on track tomeet our projections for the year. In addition, we're now realizing the rewardsof our strategic joint venture initiatives. In spite of the current retail readenvironments, we believe we're providing shareholders and sale real estateinvestment opportunity.

In fact, dividend growth has been 40% over the life of thecompany and the dividend we paid in October was our 144 consecutive monthlydividend paid to investors. At Inland Real Estate Corporation, we're leveraging$1.7 billion, high quality asset base, market strength, operational expertiseand creative growth initiatives to build long-term value for our shareholders.

We appreciate your participation in today's call, and nowI'd like to open the call for your questions.

Answer-and-Question Session

Operator

(Operators Instruction) Our first question comes from theline of Paul Adornato with BMO Capital Markets. Please proceed with yourquestion.

Paul Adornato - BMO Capital Markets

Hi. Good afternoon. I was wondering if you could help uslook beyond the signed development deals and give us a sense of what you thinkthe tenants' appetite will be for new space, let's say in, the second half of2008 and beyond.

Scott Carr

Hi Paul. It's Scott. There's no doubt we're seeing a lotmore deliberation on the part of tenants before committing to deals and we'relooking for fourth quarter sales performance to be a real bellwether for us.

Overall, in the outlying areas where the housing was drivinggrowth and that has stopped, we're seeing a little bit more slowdown, but wereally don't have much involvement in those types of areas.

We're concentrated in more in -- even with our newdevelopment projects, they're really in established areas or you know in areasthat have experienced the growth. So, we are looking for a definite trendflowing in deals.

We're seeing in each category, there seems to be strongplayers stepping forward and still doing business, but then there's also a weakplayer pulling back, and we're just kind of watching things as they go forward,and I think we will see deals taking longer and expansion slowing.

Paul Adornato - BMO Capital Markets

Okay. And you did mention, I think in some of yourdevelopment properties, tenants such as Olive Garden and those restaurantconcepts that might be a little more susceptible to discretionary spending. Howmany -- or what percentage do restaurants make up of your portfolio? And what'sthe outlook for those concepts?

Brett Brown

Well, from an income standpoint, no single tenant in thatcategory is more than 1% of income. So our exposure is well diversified tothose tenants. You know, as a category it's something we watch salesperformance on, but for the most part in our new developments where we'redealing with those tenants we're pursuing pad sales, not leases.

So that we don't have long-term exposure to those types ofconcepts, but there is an area where, we've seen some flowing and expansion.And we're trying to manage that risk accordingly.

Paul Adornato - BMO Capital Markets

Okay. And I think, I asked this last quarter, but I'll askit again. What's your current thinking on stock buybacks given alternativeinvestments that you have available to you?

Mark Zalatoris

Well, Paul this is Mark. We talk about stock buyback programat directors meetings, every quarter, actually. I think it's always been atopic and currently our research rating in particular our company looks like avery attractive investment.

The only thing that -- we always come back to is do we feelthat we can invest the money at even potentially higher returns in the areas inwhat our business is which is owning retail real estate, developing retail realestate.

And we still have come up with the same answer that thoseopportunities still exist. And I would rather be able to have enough power toacquire assets on behalf of our joint venture partners and earn those fees anddrive up our income, I think, than they have spent the capital on reducing ouroutstanding share balance, to be honest with you.

Paul Adornato - BMO Capital Markets

Okay. And turning to JVCs, I think you did provide a breakupof transaction fees versus on going fees. I was wondering if you could justsummarize that and where you think, how we should best model those two types offees from the JVs going forward.

Brett Brown

Paul, this is Brett. And the onetime fees obviously we wouldincur throughout the year as we sell these properties. You know, the timing isunfortunately a little bit lumpy because from when you acquire the property towhere our partner syndicates that out and sells it to the investor you haveabout a four to six-month time lag there. And so you could have all sales rightaway in one month or it could be somewhat later than that.

So that's a little challenging, but obviously, if we boughtmost of these in the early part of the year, so we expect to have most of thatsold out by the end of this year. So we should have you know, be able toachieved most of this fee income by the end of the year, but again it dependson when we can sell those in. So that's a little tougher.

As far as the on going income free income from the propertymanagement fees, that just continues to increase again as the properties aresold to the ticket investors and we start earning a 100% of the fee once thatproperty is sold out. And so that will continue to grow throughout the years.

Paul Adornato - BMO Capital Markets

And I was wondering, given your experience with the tickmarket. Can you see that as some sort of bellwether for real-estatetransactions in general; that is an increase or a decrease in tick activity asindicative of property owner's comfort with the current market?

Mark Zalatoris

Well, Paul, this is Mark. I think that what our partner istelling us is they have continual increased demand now, whether they're takingmarket share away from some of their competitors, which I think they are it'sone component. And is the overall demand in the whole tick market increasing.They seem to think so, I don't know at what pace or what percentage.

But what they're coming back to us is give us more productgive us more product. To extent that -- and I think your question is will thecurrent market conditions or economic conditions slow down sales by theseinvestors of their investment property?

It's a possibility, but you remember there are a lot ofdifferent types of property sellers, including farm owners and those kinds ofthings that are not -- outside of the traditional realm of, what we think ofcommercial real estate and they need 1031 exchange treatment alternatives.

So for the time being, we're being told that the marketsrobust and we need to help provide them with product and we going to do all wecan do to meet that demand.

Paul Adornato - BMO Capital Markets

And what's IREX's footprint or where do they give most oftheir business? Is it mostly a Mid-western business?

Mark Zalatoris

No. As matter of fact, that's the interesting thing. Thebroker dealer network that really brings in this investors to them is the samebroker dealer network that the any group of companies has developed over theyears to sell out the interest in the real estate securities of they haveoffered.

The limited partnerships and now REIT shares that's anational market. Those broker dealers are located all around the country andthese investors are coming from all parts of the country.

Paul Adornato - BMO Capital Markets

Okay. Thank you.

Mark Zalatoris

You're welcome.

Brett Brown

Thank you.

Operator

Thank you. Our next question comes from the line of JeffDonnelly with Wachovia. Please proceed with your question.

Jeff Donnelly - Wachovia Capital Markets

Good afternoon, guys.

Mark Zalatoris

Hi, Jeff.

Brett Brown

Hi, Jeff.

Jeff Donnelly - Wachovia Capital Markets

I guess this is a good one for you Brett. You know, Inlandis largely a secured lender in that area that we've seen more pricing pressuredue to the unsecured rating agencies of course prefer to see larger swaths ofyour portfolio unencumbered.

As you guys look forward, how do you think about yourbalance sheet and what maybe should we be thinking about a mix of secured andunsecured in '08 and'09?

Brett Brown

I think as we mentioned, as we come up to the maturitiesthat we have in '08 will give us an opportunity to unsecured more of thebalance sheet and that really our goal. It's been our goal to not have to paythese loans off and incurred any prepayment penalties.

So we do plan to take those out either by incurring greaterdebt on fewer assets or if the opportunity presents itself we would like to doan unsecured type of note offering perhaps to take out the secured mortgages.

Jeff Donnelly - Wachovia Capital Markets

And I guess is there a target that you have for that or isit I guess we'll kind a see as it goes.

Brett Brown

Dollar amount or…

Jeff Donnelly - Wachovia Capital Markets

Dollar amount or percentage amount, I guess, I am takingmore in terms of how the rating agencies are going to look at you and whatratio they want to see.

Brett Brown

Yes. I'd say less than 50% unsecured. It will take a littlebit of time to get there as we have as, you know, most of it there but we'llcontinue to work on it in like you say '08 and '09.

Jeff Donnelly - Wachovia Capital Markets

Okay. And in end just concerning your same store NOI growthrate I think you are saying is flat year-to-date, what do you think you cancome out for full year 2007?

Brett Brown

I don't think we're going to have as much pickup as weinitially intended. Just timing of things coming online has really draggedunfortunately. We anticipated the low end of the 2%, 3% percent range at 2%.Now, I think it will probably be in the 0% to 1% or low. So I think that'sabout the best we can do at this point in the year.

Jeff Donnelly - Wachovia Capital Markets

And just, are you able to give us a sense I mean if you arelook at where the market rents are today and you look at what your rolloverexposure is for 2008, I apologize but I didn't get a chance to look.

And would you expect that we'd see same store NOI growthpick up next year just a rough estimate?

Brett Brown

Yes. I would make that same assumption it does just based onthe timing of the lag and that and really in our long-term average is going tobe still in the 2% range but so hopefully we can get into that into '08.

Jeff Donnelly - Wachovia Capital Markets

Do you think it's because of some of the lag you mentionedor because of maybe heavier than usual rollover, do you think you could goabove three years or is that less likely?

Brett Brown

I think it will stretch.

Jeff Donnelly - Wachovia Capital Markets

Okay. And just last question was actually on IREX, I mean,you may have touched on this earlier and I missed it, but then how much of yourbalance sheet capacity would you devote to IREX, is there a limit at which youwould push back and not take anymore?

Mark Zalatoris

Well Paul. I am sorry Jeff I will tell you what I think ourgoal is $100 million this year we've achieved the next and we've exceeded it andthe demand is strong and it does revolve. So you think about how much at anyone point in time you want to have outstanding from your balance sheetcommitted to it.

I'm very comfortable with $100 million worth of ourfinancial resources out there and then a lot of times we end up doing isputting on financing that tick by special tick provisions in it after we closeon the property gets our capital back.

It's a continuing fluid movement. But if we commit at anyone point we had $100 million outstanding. That may represent $150 millionworth of property easily and I think, that we can balance sheet can supportthat knowing that it's a short-term type investment.

Jeff Donnelly - Wachovia Capital Markets

And I'm curious how do you think about the assets that youdo acquire. Because I don’t know, I can't give an example off the top of myhead but I imagine there assets that might be ideal for the tick market andgreat investments in that regard because of the fees and profit you can makebut might not be an asset you necessarily want to hold if the music stops andyou get stuck holding that asset in IRC.

I mean, I guess, how do you make that determination, forexample, if you're buying one of the assets you hold now, like an officeproperty asset? Does it bother you go to out of retail or outside of regions?

Mark Zalatoris

You know, Jeff, it's just not our goal. Our goal is to lookfor retail in our geographic area of focus, that's our number one priority andsometimes opportunities arise and our acquisition guys know that the tickmarket looks at other assets just as favorably as retail in many cases.

And again, it's an ongoing dialogue with the exchangecorporation regarding their ability to place their property with the right typeof investor and how fast that will happen. Typically if it's a triple net leasetype property with a good credit tenant, we're not going to be too concernedabout even holding it if the music stops, as you say.

But we certainly aren't looking to go very far stream and Idoubt you'll ever see us buy apartments, for example, because we don't have themanagement skill-set within IRC to manage those.

But commercial properties, retail, number one priority andthen some of the others we have brought like triple net lease headquartersbuilding or medical office building that's leased out to a high-credit medicaluser etcetera, we would definitely not be too worried about.

Jeff Donnelly - Wachovia Capital Markets

And maybe this is being too ambitious but some of the otherpublic companies out there that are net lease companies, a handful of them,particularly in the office net lease space area have really been, I guess,beaten up of late.

Does that provide opportunities for you guys, I mean, do yousort of stretch your imagination that far to say, for example, like in AmericanFinancial which is being acquired is that something you could run through thattick system, I know it's pretty large but?

Mark Zalatoris

Yes. Like you know, we're a subset of the exchangecorporation's total activity. They do receive other properties through theInland Group's acquisition function and that's -- the groups that have beenbuying for the American REIT etcetera, let's say and so they may considercertainly other opportunities like that.

I think again we're very comfortable sticking closer to ourarea of experience and expertise which is the retail area and that's really, Iwould say our acquisition guys that are on our IRC staff would spend 90% oftheir time when they're pursuing IREX acquisitions in retail.

Occasionally, a deal comes up that they know would work wellfor IREX and they bring it to them. But their goal -- their mantra is to go outand find retail for us particularly in areas where we can manage themeffectively being here, Minneapolis or around the Midwest.

Jeff Donnelly - Wachovia Capital Markets

Great. Thank you, guys.

Mark Zalatoris

Thank you.

Brett Brown

Thanks, Jeff.

Operator

Thank you. Our next question comes from the line of [BobLarson] with [Glenn Oak Capital]. Please proceed with your question.

Bob Larson - Glenn Oak Capital

Hello.

Brett Brown

Hi, Bob.

Bob Larson - Glenn Oak Capital

How are you doing, guys?

Mark Zalatoris

Great.

Bob Larson - Glenn Oak Capital

A quick question, a couple of questions, actually. One, asfar as acquisitions go, is it still fair to assume or am I missing somethingthat really the acquisition market has precluded you from buying assets foryour core and effectively the current environment as you see it in acquisitionshas made it only feasible to deal acquisitions in the joint ventures?

Mark Zalatoris

Well, you're probably right on with that for the most part.We've not been able to, for example, find a property for our joint venture with[NARE] so far this year to add to what we've already acquired which is over$400 million worth for them and they're of the mind-set and the discipline thatwe believe that cap rates are moving up.

Unfortunately there's still institutional capital outside ofthem and maybe it's foreign institutional capital etcetera that still looks forthese high quality retail and it is taking a little longer than we all hope forto see the cap rates move up but we think that it will eventually happen and itis starting to happen and especially in secondary markets.

So, yes. I'm happy that we have the IREX venture in which wecan provide properties that have a yield that's attractive to the investorsthat have growth potential and may not necessarily fit what we need going inday one but works for them so we can continue to provide fee income to ourcompany through those activities while we look for portfolio opportunitieswhich we think will come.

It's just -- you know, right now everything is up in littlebit of state of flux. We're optimistic, though that we'll see better and betterreturns in the near future.

Bob Larson - Glenn Oak Capital

Okay. When I look at -- and I think you analyze this on yourwebsite when you compare yourself to your core group and look at the multiplesthat are out there and IRC trades at a higher dividend yield, significant leadin its core group and trade at a lower FFO multiple and yet.

I look at the company since we've gone public in the lastthree -and-a-half years, and it's underperformed most of those companies andnow trades at a level that's probably right where it was when it went public inJune of 2004.

I guess it's a question of is there -- it seems like apersistent disconnect between what the underlying value of the assets are andhow the public market values those assets, and is there any approach to try andnarrow that gap over time?

Mark Zalatoris

Well. We're frustrated by where we're trading. There's noquestion and we think we're scream bargain as a matter of fact and you know,it's really when we sit back and look at it and say why -- I think partly ithas to do with being out for only a few years and we need to demonstrateconsistent performance.

And I'll be frank with you that last year we had no growthin our FFO because we spent the time to undertake some new growth initiativesthat it will take a year or two to really start to show benefits from thoseactivities including the IREX venture which we're seeing tremendous incomegrowth this year from the development joint ventures which are bringing on notonly some income through these out lot land sales etcetera, as well as, theopportunity to add to our portfolio assets when they're finished at much betterthan market cap rates which will just grow income that much more down the road.

So you need to spend the time, I guess, to set thegroundwork for good growth and then continue performance from that. We'll getthe market comfortable. Now if you talk about when we first started trading, wewere a 100% retail owned which means individual shareholders no institutionalownership at that time.

Today, we're over 75% owned by institutions and we have thebiggest names in the business, the dedicated REIT investors owning our shares,as well as, non-dedicated REIT investors. They must see and they're fairly, Ithink, sophisticated. They must see some good value in our company and hopethat the marketplace recognizes it and unlocks it shortly we hope that happenstoo.

I don't know what to tell you other than we are frustratedthat we are thus recognized from the value of our assets and the growthpotential that we have created going forward, and we hope that that gets turnedaround soon.

Bob Larson - Glenn Oak Capital

Okay. Fair enough. Lastly with respect to, I know youaddressed the share buyback before versus the growth in the portfolio. So youdid the last time you bought back shares when you did the convertible offering,is that correct?

And then you felt at that point that some of those fundsfrom the convert made sense to use at a share buyback price and on a go forwardbasis, you think it's better invested in growing the portfolio, is thatbasically where we're at?

Mark Zalatoris

Well. You know -- yes, but I don't think, I'm not going toguarantee that that viewpoint won't change. It will be discussed at our nextdirector's meeting as it is every quarter and there are different points ofview regarding that.

Certainly, where we are today, it makes you want toreevaluate that. We're unbelievably a bargain. I think we're trading at a placewhere if you look at our effective yield, its almost double digit by buying ourshares.

So, we do still see that we can achieve as good or betterreturns with our investment alternatives and it's going to be a toughevaluation and I think that that we have a healthy discussion every quarterwith our directors.

And -- but at this point we feel that we have good uses inthe marketplace for our capital. And we're, we're not necessarily flushed withcapital that we will go out and, you never want to do -- I would say you neverwant to go out and buy back your shares if done shortly thereafter down theroad. You need to issue equity to raise capital.

Bob Larson - Glenn Oak Capital

Right.

Mark Zalatoris

You know, that wouldn't make any sense. So we kind of lookat -- when we put together our pro forma of our capital spend requirements inthe next 12 to 18 months, you know do we have what we need to accomplish that,yes. We do without issuing capital. But, if we allocated now to buyback thenthat will change the equation, so that's a continual valuation.

Bob Larson - Glenn Oak Capital

Okay. And lastly, you talk about a $400 million, I think,was the number I heard.

Mark Zalatoris

Yes.

Bob Larson - Glenn Oak Capital

Acquisition pipeline but that's a join venture pipeline. So what-- based on the structure of the various joint ventures the IREX or somebodyelse, what is the equity commitment that was estimated to be required at thatlevel?

Mark Zalatoris

Well, you know a lot of that would entail use of projectfinancing, particularly if it's going to be on the behalf of the IREX venture,because they always put on secured financing for their investors usually comingout of properties that have debt and need to replace that debt.

So you're right. The equity is a lot less than that and evenin development joint ventures a number of our projects have constructionfinancing involved with them. So I would say, you know the equity is probablyone-fourth of that, maybe $100 million.

Bob Larson - Glenn Oak Capital

Okay. Thanks, guys.

Mark Zalatoris

Sure. Thank you.

Operator

Thank you. Ladies and gentlemen, at this time there are nofurther questions. Mark, do you have any closing comments?

Mark Zalatoris

I'd just like to thank even for their attendance today. Andwe look forward to having a great fourth quarter and being able to speak withyou all beginning of 2008. Thanks for your attendance.

Operator

Thank you. Ladies and gentlemen, this concludes today'steleconference. You may disconnect your lines at this time. Thank you for yourparticipation.

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Source: Inland Real Estate Corporation Q3 2007 Earnings Call Transcript

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