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Executives

Dawn Benchelt - Director IR

Robert Parks - President and CEO

Mark Zalatoris - COO

Brett Brown - CFO

Scott Carr - President of Property Management

Analysts

Paul Adornato – BMO Capital Markets

Jeff Donnelly - Wachovia

Bob Sarason - Glenn Oak Capital

Inland Real Estate Corporation (IRC) Q4 2007 Earnings Call February 14, 2008 3:00 PM ET

Operator

Hello and welcome to the Inland Real Estate Corporation 2007 fourth quarter and year end Earnings Call and webcast. Participants will be in a listen-only mode. There will be an opportunity to ask questions at the end of today's presentation (Operator Instructions) Please note this conference is being recorded.

Now, I'd like to turn the conference over to Ms. Dawn Benchelt. Please go ahead.

Dawn Benchelt

Thank you for joining us today. The fourth quarter earnings release and supplemental financial information package have been filed with the SEC today February 14, 2008 and posted to our website www.inlandrealestate.com. In addition, we are hosting a live webcast of today's call, which is also 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.

There are numerous risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements. For a more complete discussion of these risks and uncertainties, please refer to the document filed by the company with the SEC specifically our annual report on form 10-K for the year ended December 31, 2006 and our quarterly report on form 10-Q for the period ended September 30, 2007.

Participating on today's call will be Robert Parks, President and Chief Executive Officer; Chief Operating Officer, Mark Zalatoris; Chief Financial Officer, Brett Brown; and Scott Carr, President of Property Management.

Now, I'll turn the call over to Mr. Parks.

Robert Parks

Thank you, Dawn. Welcome everyone. I would like to start today's call by providing some highlights of our fourth quarter and full year 2007 results. These highlights demonstrate the strength of our real estate platform and the effectiveness of our business strategy. I'll then the call over to Brett and Mark for their detail review of our financial and operational performance.

I'm pleased to report solid performance results for the company in 2007. For the year, FFO per share increased 7.5% to $1.43 and in the fourth quarter FFO per share was up 9.1% over the same period in 2006. In 2007, average rents for new leases increased more than 30% over the expiring leases, and average rents for renewal leases increased 20%. In addition, earnings from our joint venture initiatives made a meaningful contribution to our bottom line in'07 with fee income for these initiatives up more than 77%.

There is no doubt that the current economic climate is generating from anxiety for everyone. It is important to recognize that this management team is carefully assessing potential impact of the near term economic challenges on our business and we have factored that into our expectations for 2008. Despite the ongoing challenging economic news, we believe that the fundamentals of our business position us very well for the future.

First our portfolios concentrated in Chicago and Minneapolis, St. Paul. These are our established markets with strong demographics, dense population then above average household income. These factors make these markets compelling to retailers. The retail assets, we own are predominately necessity and value oriented.

Our neighborhood and community shopping centers tend to provide dependable income streams through all economic cycles. The long-term nature of many of our leases also provides downside protection. As an example, 45% of our portfolio is anchored by grocery stores with leases averaging 20 to 25 years in length. In addition, our portfolio continues to deliver strong leasing results in the form of high occupancy rates and double digit rent increases.

And finally, as low risk and low leverage borrow, we have good access to capital by our long-term relationships with banks and life insurance company lenders. We believe the sound foundation we have put into place in terms of market concentration that too help the Midwest markets and an everyday retail asset base will enable us to continue to deliver consistent performance. In addition, our joint venture initiatives have proven to be an effective means to diversify our capital resources and enhance company growth.

I'll now turn the call over to Brett for review of the company's financial performance, Brett.

Brett Brown

Well, thank you, Bob, and hello everyone. For the fourth quarter and year ended December 31, 2007, we delivered solid financial results meeting our expectations and exceeding the Streets projection for FFO, net income, revenue and EBITDA. FFO for the quarter was $23.8 million or $0.36 per share representing increases of 10.3% and 9.1% respectively over fourth quarter 2006.

Net income for the quarter was $11.4 million representing increase of 34.9% over fourth quarter '06. Net income per share was $0.17 for the same period, an increase of 30.8% from the prior year period. Both the dollar and per share increases in FFO for the quarter were primarily due to increased income from properties acquired in '07 as well as income from our same store portfolio plus additional earnings from our unconsolidated joint venture activities. Net income and net income per share for the quarter increased due to these same factors plus the gain on sale of investment properties of approximately $1.3 million or about $0.02 per share compared to no sales in the prior year quarter.

For the full year, the reported FFO per share of $1.43 came in at the top of our guidance range and represented an increase of 7.5% over the prior year. Total FFO for the full year increased 5.1% to $93.7 million. The increases in FFO and FFO per share for the year were primarily due to increased income from properties acquired during this year or during '07 as well as the income from the same store portfolio along with additional earnings from joint venture activities and land sale gains related to development joint ventures.

FFO per share also increased for the year, as a result of a reduction in the number of common shares outstanding in 2007. You may recall that in the fourth quarter of 2006, we funded a repurchase of 2.8 million shares of common stock with a portion of that proceeds coming from our convertible notes offering.

Net income for the full year was $43.8 million a decrease of 3% from the prior year. The modest decline was primarily due to decreased gains from sales of investment properties in 2007 versus 2006. The lower level of gains from property sales were partially offset by increased income from new property acquisition and income from the same store portfolio as well as additional earnings from our joint venture activities and gains from land sales through development partnerships. Net income per share for the year was $0.67, which was leveled with the prior year.

Total revenues for the quarter were $46.8 million, an increase of 6.1% compared to the fourth quarter of 2006 and year-over-year total revenues increased 5.2% to $185 million primarily due to increased revenue from property acquisitions and our same store portfolio increases.

As Bob communicated, our unconsolidated joint ventures made a significant contribution in FFO at 2007. Fee income from JVs before income tax provision was $4.4 million, an increase of 77.2% over the prior year. [Equity] earnings from unconsolidated joint venture for 2007 was $4.8 million, an increase of 68.2% from 2006. During the same store portfolio for the fourth quarter, net operating income excluding the impact of straight line and intangible lease rent was $29.6 million, an increase of 3.6% over the same period of 2006.

For the full year same store NOI increased 1.1% to $117.3 million in line with the guidance, we provided last quarter and it's important to note that the high occupancy and low turnover that's characteristic of our portfolio tends to limit the same store NOI growth. However, those same attributes provide stability in a challenging economic environment.

Same store NOI at 2007 was also impacted by the timing of new tenants coming online, decreased income from one center due to co-tenancy lease provisions and some non-recoverable environmental remediation expenses, we incurred in the first half of the year and that related to a former tenant.

Earnings before taxes, interest, taxes, deprecation and amortization or EBITDA was $37 million for the quarter, an increase of 4.4% compared to the fourth quarter of '06 and for the full year our EBITDA was $150.4 million and $6.4 increase over the prior year. As one measure used to assess the company's ability to serve per debt or EBITDA coverage of interest expense ratio was a healthy 2.6 times for the quarter now its consistent with the year ago quarter and 2.7 times for the full year '07 and that was also consistent with the prior year.

At December 31, '07, the company had an equity market capitalization of approximately $930 million and total debt outstanding of $1.1 billion and that includes our pro-rata share of debt in unconsolidated joint ventures. 84% of our debt including the convertible notes was fixed at a weighted average interest rate of 5.17% and the variable rate portion of our debt was primarily our unsecured line of credit, which had an outstanding balance of roughly $100 million at December 31.

Let's take a minute to talk about the opportunities we have this year to strengthen our financial position, realized savings and unlock of tracked equity embedded within our current debt maturities. In 2008, we have just under a $100 million about $95 million in mortgage loans maturing and those come due -- we expect to refinance that rates lower than expiring rates even at today's lending environment. Although the CNBS market has slowed almost to a halt banks and life insurance companies remain reliable sources of capital for low risk, low leverage borrowers like ourselves.

We also expect to be able to improve our ratio of secured and unsecured debt by leveraging a smaller number of properties with larger amounts of debt or utilize some type of unsecured financing vehicle. Therefore the debt maturities that expire in 2008 represent a real opportunity for us to realize pricing advantages and increased flexibility with encumbering asset. Our existing $150 million line of credit matures in April this year and we are currently negotiating a new line with our banker, confident that under our new facility we'll be able to increase our flexibility and achieve savings from an improved debt profile.

Turning to guidance after making adjustments for current economic conditions including the impact of a rich bankruptcy, which Mark will discuss a little more later we expect that FFO per common share will be in the range of $1.46 to $1.49 for the full year '08. We are anticipating same store net operating income growth in the range of 1.5% to 2% rental rate increases of 10%, 12% on new and renewal leases with stable occupancy throughout the year.

We also anticipate $2.5 million to $3.5 million in gross fee income related to $100 million to $150 million of property acquisitions sourced for our joint venture within the real estate exchange corporation and in addition to that we expect to recognize income of $1 to $2 million from land sale gains through our co-investment development partnerships.

In summary, we have a stable operating platform that continues to deliver steady results and our effective joint venture strategy is producing sustainable incremental growth. In 2007, this combined strategy of consistent operations and layered on growth strategies produced year-over-year FFO per share growth of 7.5%. In addition, we are comfortable that we have already accessed the capital to fund our ongoing business plans. We expect to maintain a leverage neutral balance sheet position throughout this year.

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

Mark Zalatoris

Thanks, Brett. I want to begin by providing our perspective on the retail environment and the impact of our expectations for 2008. The economic slowdown has made everyone cautious. As a result there is a tremendous amount of deliberation on the part of national retailers regarding expansion plan. Strong players are still active but they are moving more slowly. We are seeing continuing interest from national retailers seeking in-fill locations versus locations that are on the leading edge of the development curve and our development partners are reporting the same.

We continually monitor the retail sector in order to anticipate events and to protect our business. Given the economic downturn, we have modeled more cost assumptions for 2008 to confer anticipated slightly lower rental rate increases, slightly longer leased up periods and a possible uptake in retailer bankruptcies and store closings.

Earlier this month one of our multiple location tenants, Wickes Furniture filed for bankruptcy. Their current plan of reorganization calls for a liquidation of assets and we have been named now to the creditors' community. Wickes paid approximately $2.2 million per year in gross rent to the company including reimbursements and represented approximately 1% of our total base rent in 2007.

Wickes leases five stores from us. One in Minneapolis, which was closed in 2007and four others in Illinois. We have been carefully monitoring this financial situation for sometime and proactively working to identify replacement tenant in the event of store closings. We are days away from signing a replacement lease with a national sporting goods retailer for the workspace in Minnesota at a higher rental rate per square foot and have agreed to increase the gross leaseable agree to that location by 7,000 square feet of which Chicago area stores are located in some of our strongest and most in demand centers. We are currently talking to multiple uninterested prospects for all of them with locations. So, we are very optimistic about retiring the space in a timely fashion.

Overall, we continuously monitor the help of our tenants on both the macro and individual store bases. Our property management team analysis retailer performance and performs regular portfolio reviews. At the local level, our property managers maintain an active dialogue with individual store managers gathering anecdotal information about traffic levels and the sales activity, where we sense any weakness of our leasing staff is immediately outworking to release that space. Also in anticipation of an economic downturn, we have increased our leasing staff to effectively deal with the potentially higher tenant turnover.

Important to note that they are all weak and healthy players in every retail sector. Strong retailers often find opportunities in a consolidating sector and will execute a strategy of intelligent growth to expand their market share. In addition, I'd like to point out that it is a whole our tenant base is very stable approximately 70% of our portfolio space is leased to national retailers and no single tenant comprises more than 7% of our annual base rent.

Four our top ten tenants are grocery store chains. As Bob mentioned 45% of our portfolio is anchored by grocery stores with very long leases. Grocery stores are considered to be virtually recession proof particularly those that occupy the number one and two market positions, as our grocery tenants do. And regarding our smaller local tenants, today we have not seen a significant increase in mom-and-pop tenant failures. However, we have made adjustments to our forecast anticipation, our uptake and small tenant turnover.

Now turning to leasing activity in the fourth quarter. Our leasing team did produce excellent results despite the softening economic condition. For the three months, ended December 31, the company executed 89 leases totaling over 396,000 square feet of retail space. Twenty eight new leases were signed comprising over 90,000 square feet with an average rental rate of $17.46 per square foot, that's an increase of $15.7 average expiring rents.

58 renewal leases were also signed comprising approximately 272,000 square feet with an average rental rate of $15.25 per square foot representing an increase of $18.5 over the expiring rents and we did signed three leases for nearly 34,000 square feet of previously unoccupied or newly created space at an average rate of $16.80 per square foot.

Given the current economic trends, we believe is prudent the amount of considerable rental rate growth for 2008, but we also believe there is substantial opportunity. We continue to grow rents in our retail centers over the long-term. Many of our rental rates are under market. We expect to grow these rents, as leases expire and as we replace lower paying tenants with stronger retailers, who can afford to pay higher rents at current market rates.

Our historically strong leased occupancy rates speak to the stability of our portfolio. At December 31, our portfolio was 95.6% leased in line with the leased occupancy percentage for the previous three quarters of 2007. Over the past two years, we maintain a leased occupancy rate of 95.6% or higher.

And I'd like to go into an update on dispositions, acquisitions, and joint venture initiatives. In the area of dispositions in 2007, we sold two retail centers in Illinois for an aggregate sales price of approximately $13.6 million. This includes the sale in the fourth quarter of Maple Plaza, a 31,000 square foot neighborhood shopping center Downers Grove, Illinois for approximately $4.3 million.

Proceeds from these dispositions were used to pay down debt for general corporate purchases and to fund acquisitions. We are always looking for opportunities to groom our portfolio and recycle that capital into opportunities that can produce the higher return.

Turning to acquisitions during the fourth quarter, we acquired four properties on behalf of our 1031 Exchange Tenant in Common joint venture with Inland Real Estate Exchange Corporation. Our IREX joint venture has proven to be a capital efficient means to generate a long-term fee income stream that positively impacts our bottom line.

We acquired the properties for the expansion with our own capital initially, but get repaid through the subsequent investment by the tenant in common purchasers usually within three to six months. We are therefore able to revolve the same money into a new round of acquisitions for the venture a couple of times in the same year. Last quarter, we reported the October 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.

In December, we acquired for our IREX joint venture three office buildings that are sale leaseback with AT&T services, located in Evansville, Indiana; Davenport, Iowa and Joplin, Missouri. These three newer completely redeveloped properties were acquired for an aggregate purchase price of $44.3 million and comprise a total of 252,000 square feet. We anticipate a strong appetite on the part of 1031 Exchange investors for these triple net AT&T call centers. And we anticipate earning our attractive annual fee for managing these properties.

For the year ended, December 31, 2007, we acquired a total of nine properties on behalf of the IREX joint venture comprising approximately 982,000 square feet and $150 million of cost. Thereby, we achieved a 150% of our 2007 IREX's acquisitions goal of $100 million in asset. We expect to experience continued robust demands from 1031 Exchange buyers going forward. As Brett said we anticipate completing at least another $100 million of acquisitions for the IREX joint venture in 2008 with potential upside for more depending on the acquisitions environment.

And related to this in January, we acquired for $23.5 million the Fox Run Square of 143,000 square foot shopping center in Naperville, Illinois, anchored by the Dominick's Finer Foods store and Ace Hardware. The acquisition of this asset, which will be contributed to IREX joint venture puts us well on the road to achieving that $100 million acquisitions goal, we have set for 2008.

Our asset-based joint venture with the New York State Teachers Retirement System continues to be a very successful partnership for both parties. Today, we invested approximately $320 million in Midwest retail through the venture and over the past two years, we have earned fee income of approximately $3.8 million. And we continue to discover the marketplace for additional [attractively] to be price stable -- stabilized properties to add to this portfolio.

Now, I want to talk a little bit about our development ventures. We were asked to provide more color on that and I want to make initial comments that we are utilizing a disciplined partnership strategy that diversifies our risks. We believe that our in-place development joint ventures are productive of use of our capital with estimated stabilized returns on development costs ranging between 8% to 16%.

Our co-investment partnerships with five established development teams are capital efficient. It provides attractive returns and provide us with the option to acquire finished assets at a discount to the current market cap rate or sell them for a profit. So, now I'm going to give you an update on each of these development projects. Savannah Crossing in Aurora Illinois is with our partner TMK development. The early land sales to Wal-Mart and home developer enabled us to quickly recoup all of our initial investment leaving the rest of the land free and clear for development. Wall Mart and Walgreens stores anchored the center and both are schedule to open for business in the first half of this year.

Two multi-channel shop buildings were also near completion and already 81% leased. We are currently developing outlets and recently closed on a 1.2 acre pad sale to Fifth Third Bank. The $1.5 million sales of Fifth Third produced a $675,000 gain for the development partnership. We anticipate this project to be completed by the end of 2008 with a projected return on cost of approximately 16%.

The North Aurora Towne Centre development venture with North American real estate surrounds an existing center anchored by Target and JC Penney. Best Buy and Lazy Boy has signed leases for build a suits at this location with stores opening in 2008. We are currently negotiating the sales with five acres and land to a home furnishings retailer and we are also on discussions with a national retailer for a 24 acre land parcel sale.

In addition, Verizon Wireless and Hair Cuttery have signed leases for space in the multi tenant shop buildings completed last month. And we have signed letters of intent from two restaurant chains, a national retailer and entertainment concept at this location.

Phases one and two of the development are scheduled for completion in 2009 and Phase three is expect to be finished by year end 2010. The total estimated cost of this project is $100 million with the return on cost estimated to be approximately 9%. The third shops at Latemore joint venture with Tucker Development Corporation surrounded by well established communities that are currently under retail.

Site work at this development is scheduled to begin this summer and project is scheduled to be completed in the fourth quarter of 2010. We are currently negotiating letters of intent with a big box anchor and a number of junior boxes anchor for this development. Stabilized return on cost was expected to be about 8.25% on a total estimated project cost of $94 million.

Now we have three development projects with our partner Pine Tree Institutional Real Estate. Southshore Shopping Center in Boise, Idaho, Orchard Crossings in Fort Wayne Indiana and our new land tenant and commons venture in the suburb of Indianapolis. The Southshore Center located next to a thriving Albertson's grocery anchored center is the former Kmart.

This is a redevelopment into a mix of junior anchor and smaller shop retail spaces. We are currently negotiating letters of intent with three national retailers, the target completion date for this development is late 2009 and we expect to have a stabilized return on cost of approximately 10% and total cost of $13.7 million.

During the fourth quarter, we completed the land sale of 11.5 acres to Target Corporation for $4.5 million of Orchard Crossings that's in Fort Wayne, Indiana. In addition, fashion and homegoods retailer Gordmans signed a lease for a $50,000 square foot build to suite at this location.

Letters of intent on another 40,000 square feet have been received from five other national and regional fashion retailers. To-date approximately 67% of project owned gross leasable area at Orchard Crossing is committed or pre-leased. We expect to complete this development in the first half of 2009. Stabilized return and cost for this project is expected to be 8.75% on total project cost of approximately $33 million. In the fourth quarter, we also acquired for $16.7 million, 63 acres of land in the suburb of Indianapolis through our Pine Tree venture.

We expect to develop [Latrine] Commons into 438,000 square feet of multi-tenant retail space plus freestanding out parcels for sellers ground lease. We are already negotiating letters of intent with two national retailers to anchor the centers and have received indications of interest from at least five junior anchors. We anticipate a stabilized return of 8.5% on cost of $65 million for this project.

Finally turning to Tuscany Village our joint venture with the Paradise Group in Orlando area, we are fairly negotiating land sales contracts with a national discount grocer and two restaurant chains. Two other national retailers are considering entering the project and we are negotiating letter of intent with a handful of junior box anchors.

Site work for the project is near completion and we remain on track to complete the project in the fourth quarter of 2009. We expect a stabilized return on cost of 8.25% and total project cost of $58.7 million for this development. But we are currently being paid for preferred return of 10% on the $5.6 million of equity we have invested in the project.

The majority of our required equity investment and these developments has been funded for our existing developments and we expect the remaining capital to come from in-place construction loans. Now one last thing before I turning the call back to Bob for some final comments, I'd like to encourage everyone that hasn't already done so to stop at your local community shopping center on the way home tonight and support the retailers located their by picking up a Valentines Day gift for your someone special.

Now, back to Bob.

Robert Parks

That was good Mark, thank you. And there was a lot of detail on that I know people are asking for more so, that was good. In 2007, we delivered the strong overall performance results to our shareholders. We accomplished this through a consistent focus on our core operations and implementation of aligned growth initiatives.

Our well located properties are maintaining high occupancy rates producing double digit rent increases and generating steady cash flows. We are building on that solid foundation with controlled joint venture initiatives that diversify and recycle our capital resources to provide opportunities to expand our platform and drive growth.

The coming months will no doubt brings continuing challenges, as we navigate through an uncertain economic environment. However we believe that our properties, tenants, operational expertise and resulting market strength will enable us to continue to provide a stable and secure investment opportunity for our shareholders.

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

Question-and-Answer Session

Operator

Thank you (Operator Instructions). Our first question will come from Paul Adornato from BMO Capital Markets. Please go ahead sir.

Paul Adornato – BMO Capital Markets

Hi good afternoon. I was wondering if we can get a little bit more detail on the Wickes situation just to be clear have they already stopped paying rents.

Scott Carr

Paul this is Scott. Excuse me. Wickes filed and they are still paying rents and operating. They are moving toward liquidation with their first choice being resulting higher change most likely it's going to be a location by location liquidation. But they are -- when they filed they were actually current with rent through January and all of our locations then they are under the post efficient paying rent, while they are operating until the ultimate outcome of lease.

Paul Adornato – BMO Capital Markets

Okay. And how much security do you have with that tenant?

Scott Carr

In terms of security deposits?

Paul Adornato – BMO Capital Markets

Yes.

Scott Carr

We are actually -- none of these have security deposits because of the stature of the company at the time the leases were done being a national retailer as such. But we're also -- we are very optimistic in this scenario in terms of the outcome.

Paul Adornato - BMO Capital Markets

Okay. And what is assumed in '08 guidance in terms of downtime if any?

Scott Carr

We're anticipating about a half year's loss in income from those locations. Now with the one location up in Minneapolis we are days away from signing a new lease, which we'll actually have online by fourth quarter '08. So, that will be a quickly turnaround. The rest of them we'll continue to receive rents until the time of an ultimate outcome and it is feasible that some one could buy the leases or possible. But we're anticipating that we'll be getting on leases there and we're proceeding accordingly in terms of our releasing effort.

Paul Adornato - BMO Capital Markets

Okay. And looking at the development of JVs, first of all, do you have any kind of forward commitments with any of the development joint ventures

Scott Carr

No.

Paul Adornato - BMO Capital Markets

That is are you required to do additional deals or do you approve them as they re presented to you?

Mark Zalatoris

Paul this is Mark. We've no forward commitments with any of our partners. What we do have is a first look opportunity with our partners in all the deals that they are considering. As a matter of fact that we've looked at a couple of deals that we declined to proceed with on our partners based on various circumstances, conditions or locations, timing etcetera. So, I think it's structured the right way, where we limit our obligations and yet we've been able to diversify the risk in a sense because working with five different development partners. And then almost in all cases we also ask them to put skin in the game by contributing equity side by side with us up to 15%.

Paul Adornato - BMO Capital Markets

And it sounds like you will start a development without necessarily in anchor in hand, is that true? And if so, what are the criteria for starting new developments?

Mark Zalatoris

Well, we'll look at each situation on a case-by-case basis. But where our partners feel strongly and we can collaborate that based upon our knowledge of the marketplace. We'll go ahead and acquire a site generally what happens is we're not land banking on these developments. Generally, our development partners, who have been working on particular development for up to two years, one to two years in advance securing all the entitlements getting the zoning and everything we need from the municipality as well as having initial discussions with the retailers.

And then generally, we're not talking about we may not have signed leases but generally they do have letters of intent are strong indications of interest from the major retailers they need to kick start the development. So, when they come to us a lot of that is already taken place and behind so that there is very little downtime from the time you close the land to the time you are underway in the construction going vertical for your initial signed leases.

Paul Adornato - BMO Capital Markets

And you mentioned perhaps a slight up tick might be expected in terms of the small tenant turnover? Do small tenants, who get into trouble, do they declare bankruptcy or do they simply not renew?

Robert Parks

In most cases the chain is triggered by us defaulting the tenant. And I'd say for the most part these tenants view in the end file some probably half of them file some kind of bankruptcy protection. The rest of them, we generally get some kind of settlements. We're very aggressive in terms of security with our mom and pop tenants in that we often require multiple months worth of rent security deposit, letters of credit to backup any investment we may have done and most often we get personal guarantees, where we go after husband and wife to secure their obligations in Middle East and we're very diligent in pursuing that.

Paul Adornato - BMO Capital Markets

Okay, thanks very much.

Robert Parks

Thanks, Paul.

Operator

Thank you. Our next question comes from Jeff Donnelly from Wachovia. Please go head.

Jeff Donnelly - Wachovia

Good afternoon, guys.

Robert Parks

Hi, Jeff.

Brett Brown

Hi, Jeff.

Jeff Donnelly - Wachovia

Yes, I think I guess of your joint venture with IREX is one where you effectively I guess your loan on your balance sheet capacity sort of speak and return you get obviously upside in that property in some fees. But in this environment, where credit availability is a little bit tougher than it was certainly a year ago, are you guys less interested in feeding that JVs maybe going forward I know there are some growth in there and for your guidance for 2008. I guess, I want to see the risk that you end up buying product and holding it for a period and time for our product -- for our profit the risks as that you end up holding something that you are not able to flip as you originally thought?

Brett Brown

Well, actually Jeff we feel that this is a real efficient use of capital because it does revolve back to us fairly quickly in the three to six month period. We'll really close on any property that we've identified. I viewed that's more than just lending our balance sheet what we are doing is providing our acquisition expertise because the exchange corporation really doesn't have that and in house. The greater Inland Group of companies helps find them properties.

But the issue has been that they came kind of lower on the chain the pecking order of it and guess what worse. And so they have such great demand that they need more products. So, when we see stabilized retail properties all the time then for whatever reason won't work in our own portfolio but work really well for the exchange corporation. So, we can utilize our own acquisition guys don't like to identify that but to negotiate and close those deals.

Now lending our balance sheet as long, as it revolves around back to us through returning common sales in three or six months to me is a really efficient use of that capital and again we're not going to commit to close on the deal unless we've basically a commitment from our partner the Exchange Corporation that there is evidently synidicatable asset given the structure, the size, the location, the type of financing etcetera. So, I think our risk is fairly low in that regard.

Jeff Donnelly - Wachovia

I'm curious if just hypothetically you guys buying asset for a $100 and you sell it for $110 to that JV how much of that incremental cost $10 do you guys get to captured IRCs or fees and your participation because they would -- I guess it would strike then you guys should be capturing the lion share because you are saying if you do the acquisitions, the management and the balance sheet capacity I know they have the syndication business but…

Brett Brown

Right well there is two aspects to it if you are out there. There is the initial fee, which is the acquisition fee I guess you want to call it and that's the markup. So and we're not like some of other sponsors out there (inaudible) marking them up by 10% ours is 4% to 5%. And that's why I think there is such good demand out there. And there are some deal costs, which added another percent or something like that there is organizational offering cost, legal fees.

But the acquisition fee gets spilt 50/50 between Exchange Corporation and ourselves alright and that's compensate us for all our work in the acquisition process and in a sense you say tying up a little portion of our balance sheet because we're not get suffering a negative return on the money that we put out because we get the property income while before its syndicated and as it's being syndicated our interest grow from 100% down to the zero. We're still getting the property income on that percentage that we own and that covers our cost by far.

Then, the second more compelling aspect is the long-term revenue stream from the management leasing fees we've got for managing those properties for those tenants and common owners. We're very profitable on that and so it's the long-term annuity and it continues to build every year as we add more assets, it's just layers on to the prior year's assets that were continuing to earn management fees for. But to me it's a great, great relationship and a great way to boost the income clearly.

Jeff Donnelly - Wachovia

And I could, obviously just switch gears over to the development side, I guess or the land acquisitions side. In some of the quarters, you guys had acquired the 63 acres of land in Westfield Indiana, which I think is just going through Carmel. That areas are certainly close to the affluent suburbs located to the north side of Minneapolis, but I guess, I'd say, it's sort of in the opposite direction from downturn Indi?

I guess, I'm here again, I guess, I'm kind of concerned I mean, do you think the development business generally is getting a little long in the tooth of it maybe make sure it want to be less apt to sort of being trying to speculate on land a little bit or even on starting some developments at this point? Given this curious, I mean, how confident are you in those types of markets that shouldn't be broad -- it's a broad based event against development it just seems like it was fairly a tertiary market for you?

Brett Brown

Well, I think Westfield is a very strong community and the demographics are very strong like you mentioned initially it's a very affluent area like Carmel there and the location (inaudible) you would have statistics, where you can measure them. But the location is right on a state highway with that's being redeveloped into more than interstate type thing would be one of the main exchanges right under our property look here right on one of the corners of a four way interchange that's being build. So, it's very strategically located and that which is driving tremendous retailer interest.

Scott Carr

And it just really a unique compelling site. Mark mentioned the highway redevelopment and that's actually going to impact some of the area retailers, which is shifting demand for our location is going to impact access to other existing centers, while providing access to this center. And you're looking at a population base with an average household income in excess of $100,000.

So, it's a very affluent area. The city is very cooperative and the retailer indications of interest we've had are just very compelling to the site. It's going to be a very unique development and I think it's really going to capitalize on the changes that are occurring in that market.

Jeff Donnelly - Wachovia

Yeah. I'm not concerned about the incomes as much as if there is a lot more farmland or rooftops so I just -- I'm concerned that retailers right now are looking for rooftops. But are you saying that you've got interest right now from retailers for that site I mean its not just?

Scott Carr

Yes. We've very strong interest from both anchor and junior box players. And we're very optimistic and especially with the dynamics of the market that are being impacted by this highway redesign. It's really going to put our site at a strategic advantage to the others.

Jeff Donnelly - Wachovia

And just two last questions. One, for Brett I guess back in the third quarter, I think you guys mentioned that going forward you might look to move or increase your unsecured debt portion of your balance sheet just given where the credit markets are today, I guess, what's your thinking on that right now? Do you think as loans come to you, you will keep them or refinance on a secured basis or?

Brett Brown

No we've a couple of instances and we'll look to the market what's available at the time. We are hoping the things the time and the maturities that we've coming up they mature in October, November is the greater portion of those. So, we'd like the debt markets to come back by that time we'd be able to get into some private placement or another.

But if that doesn't happen, we'll then we can just believe we had the banks and the life insurance companies so they have been very competitive then the rates although we've got recently are below, where we've right now but you're right, it would not allow us to get to an unsecured position right away. So, hopefully we'll play where the market has been.

Jeff Donnelly - Wachovia

Okay. And just one last question I guess maybe it has two parts to it though was that I think originally you guys were beginning at 2007 or end of 2006 you are looking for a little better than I guess call 2% to 3% NOI growth in 2007 and you end up finishing around 1.1. In retrospect what led to that disparity I guess fairly to your original guidance and have you been able to factor that into 2008 guidance. I mean, some of I guess, the lessons learned in the past year?

Scott Carr

Yeah, I mean it was basically delayed lease sales starts and we saw that pick up there in the fourth quarter as we had a real solid 3.6 in the quarter, which help to get the year to the 1% which we anticipated mentioning on the third quarter call. And we also had the onetime cost of the environmental remediation obviously that's something you don't anticipate and we can't at least forecast when stuff like that comes out. So, we don't anticipate anything like that next year and we factored in more conservative rental rate growth and that sorry, I believe what we've laid out simply outlook.

Jeff Donnelly - Wachovia

Okay, that's great. Thank you.

Scott Carr

Thanks John.

Operator

Thank you. Our next question comes from the [Bob Sarason] from Glenn Oak Capital. Please go ahead.

Bob Sarason - Glenn Oak Capital

Hi guys how are you?

Robert Parks

Hi, Bob.

Brett Brown

How are you doing?

Bob Sarason - Glenn Oak Capital

Couple of questions I've noted obviously in the last year given all the restocks including most of the retail REITs, but a couple of other competitors have done two things one is they have recently increased their dividend and some bringing from 5% to 10% on an annual basis and I noticed that IRC's dividend increases have never been in that range?

And the other thing I've seen is throughout the retail REITs buying back their own stock because they feel like it's a compelling value at this point and I just wanted to get your thoughts on may be those two measures as supposed to what some of your competitors have done?

Mark Zalatoris

Well Bob this is Mark and I'd say we do have a history of raising our dividend on an average at least one per year and we're -- when you look at it at dividend increase this year a little bit later on I think our board wants to feel comfortable that we're on our ways pursuing to our 2008 guidance and it probably be something similar to what we did last year, where we raised to $0.02 a share in the springtime and we'll definitely take a look at that.

And again, I think one of our goals is to get our payout ratio into a very competitive position with our peer group and we're down there now at around high 60% range and that bodes well for -- hopefully getting the right kind of recognition on stock price from the multiple those kinds of considerations. And as far as share buybacks go it is something that I think we've need to take a look at we do believe we're compelling buy at the price that we're training and I'm sure most of our brethren feel the same way.

One of the things that we'd consider is use of recycle capital meaning moneys that we've received from sales of some assets and every year we do prune our portfolio by a couple of properties and reinvest that money into something that earns a great return. Well at this price there is a compelling return. So, I think that is something that we need to evaluate discuss it at the Board level the next time we get the Board together.

Bob Sarason - Glenn Oak Capital

Okay, all right. Just tell me side comment is that when you start talking about $0.01 and $0.002 dividend increase I mean percent wise obviously that a little over 2%. And I've just seeing what your competitors and again I think in the last four years when you look at the returns on the stock, most of the returns the fact that we, it's pretty much all of them seems to you've gone public have come from dividend and it just seems like some of your competitors feel more comfortable with four or five regency just upped their dividend 10%. So, it just seems like you always seem extremely conservative on the dividend and a just a thought on that I guess?

Mark Zalatoris

Okay. Well, I appreciate that. I mean, I'd imagine that regency was down at the lowest end of the payout ratio because over the many years that they have been out there compared to us they've gotten their payout ratio that low and there is a point where they have to raise it certain amount to remain 90% of the taxable income to maintain REIT. So, that's a nice problem to have obviously. But their effective dividend yields was probably a bit below ours given the current pricing.

Bob Sarason - Glenn Oak Capital

Right, okay. Is 70% basically your target or is there a specific target which you have for payout ratio?

Mark Zalatoris

Well, we definitely wanted to get it down to at least 70% which we're there now.

Bob Sarason - Glenn Oak Capital

Okay.

Mark Zalatoris

So then, that's why I feel that the Board will probably be receptive to recommendation of an increase in our dividend rate. Clearly, the most effective the cheapest source of capital for us for growth is our retained earnings. So, we're not going to increase our dividend by the total amount of our FFO growth. But at some component of it every year, I think is appropriate.

Bob Sarason - Glenn Oak Capital

Okay, all right. Thanks guys.

Mark Zalatoris

You bet.

Robert Parks

Thank you.

Operator

Thank you. We have a follow-up question from Jeff Donnelly from Wachovia. Please go ahead sir.

Jeff Donnelly - Wachovia

Hey, I'm sorry, guys.

Robert Parks

No problem.

Mark Zalatoris

Go ahead.

Jeff Donnelly - Wachovia

I wanted to ask you guys earlier -- in the quarter you had a loss on investment and securities and I think it was about $3 million I think this quarter. Can you just refresh my memory on -- I guess, how big is that portfolio and to the extent you can, what specially is in it?

Brett Brown

Jeff, its Brett. The size of the investments right now, in the stocks are roughly it's about $22 million at the end of the year. And in that is predominately re-preferred shares with some recounted shares. So, as you know the market has been beat up a bit and that's major portion of the generalized loss there.

Jeff Donnelly - Wachovia

Have you thought about to some extent is I guess maybe sub investing in securities I'm assuming if other folks even probably get back in the earned shares as well?

Robert Parks

Like, Mark was mentioning down on the prior question that we've had there is something that -- that the Board looks at for time-to-time and we'll continue to look at that

Jeff Donnelly -Wachovia

Okay, great. Thanks guys.

Robert Parks

All right, thanks Jeff.

Operator

Thank you. That does conclude today's question-and-answer session. I'd like to turn the conference back over to Mr. Parks. Please go ahead sir.

Robert Parks

Okay folks, thanks very much for your interest today and for your participation. We really appreciate you are taking your time out of your day to join us and look forward to talking to you again next quarter. So, have a very nice Valentine's Day. Remember to stop at your local retailer and pickup a box of chocolates or something. And we'll talk to you soon. Thanks.

Operator

That does conclude today's conference call. You may now disconnect.

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Source: Inland Real Estate Corporation Q4 2007 Earnings Call Transcript
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