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Inland Real Estate Corp. (NYSE:IRC)

Q3 2007 Earnings Call

November 7, 2007, 03:00 pm ET


Dawn Benchelt - Investor Relations, Director

Mark Zalatoris - EVP and Chief Operating Officer

Brett Brown - Chief Financial Officer and VP

Scott Carr, - President, Inland Commercial Property Management Inc.


Paul Adornato - BMO Capital Markets

Jeff Donnelly - Wachovia Capital Markets

Bob Larson - Glenn Oak Capital


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

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Dawn Benchelt. Thank you. You may begin.

Dawn Benchelt

Thank you for joining us for Inland Real Estate Corporation’s third quarter 2007 earnings conference call. The third quarter earnings release and supplemental financial package have been filed with the SEC today, November 7th, 2007, and posted to our website In addition, we are hosting a live webcast of today’s call which is accessible on our website.

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

There are numerous risks and uncertainties that could cause actually results to differ materially from those set forth in the forward-looking statements. For a more complete discussion of these risks and uncertainties, please see our filing on Form 10-K for the year ended December 31, 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 are Chief Financial Officer, Brett Brown and Scott Carr, President of our Property Management Subsidiary. Bob Parks, our President and CEO was unable to participate today due to a case of laryngitis and asked me to lead off today's call with a few summary opening comments and then I'll provide more detail on our operations.

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

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

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

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

We are all aware of the media coverage of the housing industry downturn, subprime market wows, tightening lending standards and rising energy costs and how these factors may impact US economy and consumer spending.

There are also concerns about how an economic slowdown may impact retailers and in turn the retail real estate sector. Because of the location of our assets the types of assets we own, and the tenants we do business with we believe our portfolio is well positioned to handle the bumps that may occur in the economy.

Approximately 77% of our assets are located in the strong markets of Chicago and Minneapolis. These are markets that the Chicago Tribune recently noted as sites to the Midwest blahs. The Tribune stating Urban Land Institute Price Water House Cooper study reported that both Chicago and Minneapolis have very corporate bases and highly diverse economics.

In fact, our retail assets benefit from favorable demographics across our core markets. Our centers are well located in communities averaging 90,000 in population and 86,000 in income within a three-mile radius of our properties.

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

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

In summary, our portfolio is concentrated in strong geographic markets, our retail centers are largely necessity based and our tenant are well diversified. These key portfolio attribute drive steady performance through economic cycles.

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

Brett Brown

Great. Thanks Mark and hello everyone. As Mark said, we did deliver consistent overall performance during the quarter. The FFO and FFO per share levels reported within our stated guidance for the year and in line with consensus estimates.

Recap the performance of the three and nine months ended September 30th '07. Funds from operations or FFO was $22.8 million for the third quarter a decrease of 1.5% from $22.2 million in the third quarter of 2006.

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 prior year is due to increased interest expense and that increases is partially offset by the increase in fee income from the IREX joint venture.

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

Now, we reported net income of $10 million for the third quarter a decrease of 31.4% over the $14.6 million reported for the third quarter '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 are primarily due to the differences in gain or sale investment properties in the comparable three months period. And third quarter of this year we didn't have any 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 period in '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 increased fee income earned from our IREX joint venture activities, as well as, a gain on sales, venture interest and land that we recorded in the first quarter of '07.

For the nine months ended September 30th, '07, net income was $32.4 million, a decrease of 11.7%, compared to net income of $36.7 million for the prior year. Net income per share was $0.50 cents for the nine months ended 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 are primarily due to again decreased gains from sale of investment properties this year 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 $0.09 per share in '06. And the impact of decreased gains from property sales was partially offset by the increased fee income from the joint venture activity that we earned this year in '07.

Total revenues increased 2.7% to $45.4 million during the quarter up from $44.2 million for the third quarter 2006. For the nine months ended 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, as primarily due to additional property acquisitions.

For the three months and nine months period ended September 30th, '07 for same store net operating income excluding the impact of straight-line and intangible lease rent was $29.6 million and $88 million respectively.

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

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

As of September 30th, '07, financial occupancy for our portfolio was 95.7% above both the 94.6% level reported at June 30th, '07 and 95.5% at September 30th, '06. Basically we've been playing catch-up all year on the occupancy and basically we’re about where we were at the year ago level and year-end level, excuse me.

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

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

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

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

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

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

Also within the next few months we plan to renegotiate our existing $150 million line of credit and we anticipate bringing our borrowing rate down to market pricing and providing additional covenant flexibility. We believe these financing opportunities will strengthen our balance sheet and positioned as well for 2008.

Turning to guidance for maintaining our original guidance that 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 net operating income is that performance will be basically flat compared to last year primarily due to the factors I mentioned previously, mainly timing of new tenants coming online, decreased income due to certain cotenancy lease provisions and the impact of non-recoverable expenses incurred in the first half of the year.

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

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

Mark Zalatoris

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

However, in the Chicago Minneapolis markets where we focus the competition for our quality retail properties remains fierce with institutional buyers still bidding at the lower cap rates. We remain hopeful that we shortly will see pricing improvement and tend to be in a position to take advantage of the situation for our own account and on behalf of our joint venture partners.

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

We acquired for $10.9 million four fully developed outlet pads in Orland Park, Illinois. This property is adjacent to the 600,000 square foot Orland Park retail center in which we already own an interest through a joint venture.

The current tenants of the ground lease pads include Olive Garden, TGIF Friday, National City Bank of the Midwest and Canoe Club Restaurant. Now, I'd like to provide a brief update of our joint venture initiatives.

Turning to our 1031 exchange tenant and common venture with Inland Real Estate Exchange Corporation this partnership has proven to be a practical means to bolster fee income and investment returns in the current tough acquisitions environment.

Our role in this venture is to source properties and provide property management leasing services. IREX lends their syndication expertise and 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 fee for properly managing these assets, which are mainly located within our core markets.

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

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

We earlier communicated that we met our annual goal of providing $100 million in IREX acquisitions by this past May and we continue to experience robust demand from 1031 exchange buyers, thus necessitating additional acquisitions.

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

Moving to development joint ventures, the projects undertaken by our tax re-subsidiary Inland Venture Corporation are another increasingly important source of growth. Working with five different development teams has allowed us to diversify our risk, enables us to leverage the unique strengths of each developer.

Development properties are typically entitled before we reinvest. These developers are skilled at sourcing prime development land completing the entitlement process and signing up big box anchors. Our company steps into our established relationships within our anchored to quickly complete the projects.

This speeds up the development time line and enables to ventures to achieve higher yields. Our preferred return on equity ranges from 9% to 13%. Once that prefer returns has been satisfied whatever remains is divided with the development partner according to a pre-negotiated percentage.

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

Our development joint venture program has grown substantially in a relatively short time. Let me briefly provide an update on this. 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 town center development with our partner North American real estate.

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

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

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

At this time, our total acquisition pipeline including all joint ventures is approximately $400 million. We expect to fund this pipeline with existing sources of capital including income from our investment properties, amounts raised from our dividend re-investment plan, retained earnings, draws on our acquisition line of credit and proceeds from financing secured by investment properties.

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

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

We completed the sale of the tenant common interest during the 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 be recycled into another acquisition.

Our development joint ventures are also structured to develop attractive returns within a relatively short time frame, freaking up capital, which is then reinvested. Our development partners bring us projects that typically include land sale components to national retailers, the closing for which have ranged from a week to approximately a year after initial land purchase.

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, our IREX and development joint ventures are proving to be a resourceful way to recycle capital and generate fee income in a challenging environment for core acquisitions.

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

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

And we believe our high leasing spreads support our view that our well-located centers continue to be in demand by retailers. In addition, these leasing spreads illustrate the opportunity we have to increase property NOI through continued grooming of our tenant base.

We continually review our portfolio to identify opportunities to proactively replace lower paying tenants now occupying highly desirable locations with stronger retailers who can afford to pay higher rents at current market rates.

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

As of October, our portfolio consisted of 150 community neighborhood, power, lifestyle and single retail tenant centers comprising over 14 million square feet of retail space under management.

During the third quarter, we delivered consistent overall results in performance and core operations that demonstrate we're on track to meet our projections for the year. In addition, we're now realizing the rewards of our strategic joint venture initiatives. In spite of the current retail read environments, we believe we're providing shareholders and sale real estate investment opportunity.

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

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

Answer-and-Question Session


(Operators Instruction) Our first question comes from the line of Paul Adornato with BMO Capital Markets. Please proceed with your question.

Paul Adornato - BMO Capital Markets

Hi. Good afternoon. I was wondering if you could help us look beyond the signed development deals and give us a sense of what you think the tenants' appetite will be for new space, let's say in, the second half of 2008 and beyond.

Scott Carr

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

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

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

We're seeing in each category, there seems to be strong players stepping forward and still doing business, but then there's also a weak player 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 your development properties, tenants such as Olive Garden and those restaurant concepts that might be a little more susceptible to discretionary spending. How many -- or what percentage do restaurants make up of your portfolio? And what's the outlook for those concepts?

Brett Brown

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

So that we don't have long-term exposure to those types of concepts, 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 ask it again. What's your current thinking on stock buybacks given alternative investments that you have available to you?

Mark Zalatoris

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

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

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

Paul Adornato - BMO Capital Markets

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

Brett Brown

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

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

As far as the on going income free income from the property management fees, that just continues to increase again as the properties are sold to the ticket investors and we start earning a 100% of the fee once that property 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 tick market. Can you see that as some sort of bellwether for real-estate transactions in general; that is an increase or a decrease in tick activity as indicative of property owner's comfort with the current market?

Mark Zalatoris

Well, Paul, this is Mark. I think that what our partner is telling us is they have continual increased demand now, whether they're taking market share away from some of their competitors, which I think they are it's one 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 product give us more product. To extent that -- and I think your question is will the current market conditions or economic conditions slow down sales by these investors of their investment property?

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

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

Paul Adornato - BMO Capital Markets

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

Mark Zalatoris

No. As matter of fact, that's the interesting thing. The broker dealer network that really brings in this investors to them is the same broker dealer network that the any group of companies has developed over the years to sell out the interest in the real estate securities of they have offered.

The limited partnerships and now REIT shares that's a national market. Those broker dealers are located all around the country and these 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.


Thank you. Our next question comes from the line of Jeff Donnelly 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, Inland is largely a secured lender in that area that we've seen more pricing pressure due to the unsecured rating agencies of course prefer to see larger swaths of your portfolio unencumbered.

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

Brett Brown

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

So we do plan to take those out either by incurring greater debt on fewer assets or if the opportunity presents itself we would like to do an 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 is it 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 taking more in terms of how the rating agencies are going to look at you and what ratio they want to see.

Brett Brown

Yes. I'd say less than 50% unsecured. It will take a little bit of time to get there as we have as, you know, most of it there but we'll continue 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 growth rate I think you are saying is flat year-to-date, what do you think you can come out for full year 2007?

Brett Brown

I don't think we're going to have as much pickup as we initially intended. Just timing of things coming online has really dragged unfortunately. 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's about 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 are look at where the market rents are today and you look at what your rollover exposure 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 growth pick up next year just a rough estimate?

Brett Brown

Yes. I would make that same assumption it does just based on the timing of the lag and that and really in our long-term average is going to be 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 mentioned or because of maybe heavier than usual rollover, do you think you could go above 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 your balance sheet capacity would you devote to IREX, is there a limit at which you would push back and not take anymore?

Mark Zalatoris

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

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

It's a continuing fluid movement. But if we commit at any one point we had $100 million outstanding. That may represent $150 million worth of property easily and I think, that we can balance sheet can support that 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 you do acquire. Because I don’t know, I can't give an example off the top of my head but I imagine there assets that might be ideal for the tick market and great investments in that regard because of the fees and profit you can make but might not be an asset you necessarily want to hold if the music stops and you get stuck holding that asset in IRC.

I mean, I guess, how do you make that determination, for example, if you're buying one of the assets you hold now, like an office property 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 look for retail in our geographic area of focus, that's our number one priority and sometimes opportunities arise and our acquisition guys know that the tick market looks at other assets just as favorably as retail in many cases.

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

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

But commercial properties, retail, number one priority and then some of the others we have brought like triple net lease headquarters building or medical office building that's leased out to a high-credit medical user 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 other public 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 you sort of stretch your imagination that far to say, for example, like in American Financial which is being acquired is that something you could run through that tick system, I know it's pretty large but?

Mark Zalatoris

Yes. Like you know, we're a subset of the exchange corporation's total activity. They do receive other properties through the Inland Group's acquisition function and that's -- the groups that have been buying for the American REIT etcetera, let's say and so they may consider certainly other opportunities like that.

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

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

Jeff Donnelly - Wachovia Capital Markets

Great. Thank you, guys.

Mark Zalatoris

Thank you.

Brett Brown

Thanks, Jeff.


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

Bob Larson - Glenn Oak Capital


Brett Brown

Hi, Bob.

Bob Larson - Glenn Oak Capital

How are you doing, guys?

Mark Zalatoris


Bob Larson - Glenn Oak Capital

A quick question, a couple of questions, actually. One, as far as acquisitions go, is it still fair to assume or am I missing something that really the acquisition market has precluded you from buying assets for your core and effectively the current environment as you see it in acquisitions has 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 that we believe that cap rates are moving up.

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

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

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

Bob Larson - Glenn Oak Capital

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

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

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

Mark Zalatoris

Well. We're frustrated by where we're trading. There's no question 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 it has to do with being out for only a few years and we need to demonstrate consistent performance.

And I'll be frank with you that last year we had no growth in our FFO because we spent the time to undertake some new growth initiatives that it will take a year or two to really start to show benefits from those activities including the IREX venture which we're seeing tremendous income growth this year from the development joint ventures which are bringing on not only some income through these out lot land sales etcetera, as well as, the opportunity to add to our portfolio assets when they're finished at much better than 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 the groundwork for good growth and then continue performance from that. We'll get the market comfortable. Now if you talk about when we first started trading, we were a 100% retail owned which means individual shareholders no institutional ownership at that time.

Today, we're over 75% owned by institutions and we have the biggest 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, I think, sophisticated. They must see some good value in our company and hope that the marketplace recognizes it and unlocks it shortly we hope that happens too.

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

Bob Larson - Glenn Oak Capital

Okay. Fair enough. Lastly with respect to, I know you addressed the share buyback before versus the growth in the portfolio. So you did 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 funds from the convert made sense to use at a share buyback price and on a go forward basis, you think it's better invested in growing the portfolio, is that basically where we're at?

Mark Zalatoris

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

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

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

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

Bob Larson - Glenn Oak Capital


Mark Zalatoris

You know, that wouldn't make any sense. So we kind of look at -- when we put together our pro forma of our capital spend requirements in the 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 then that 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


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 somebody else, what is the equity commitment that was estimated to be required at that level?

Mark Zalatoris

Well, you know a lot of that would entail use of project financing, 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 coming out of properties that have debt and need to replace that debt.

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

Bob Larson - Glenn Oak Capital

Okay. Thanks, guys.

Mark Zalatoris

Sure. Thank you.


Thank you. Ladies and gentlemen, at this time there are no further questions. Mark, do you have any closing comments?

Mark Zalatoris

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


Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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