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Inland Real Estate Corporation (NYSE:IRC)

Q2 2008 Earnings Call Transcript

August 5, 2008 3:00 pm ET

Executives

Dawn Benchelt –Director, IR

Mark Zalatoris – President & CEO

Scott Carr – President of Property Management

Brett Brown – CFO

Analysts

Jeff Donnelly – Wachovia

Paul Adornato – BMO Capital Markets

Sabina Batia [ph] – Basso Capital

Operator

Hello and welcome to the Inland Real Estate Corporation 2008 second quarter earnings conference call and webcast. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation.

(Operator instructions)

Now, I would like to turn the conference over to Ms. Dawn Benchelt, Director of Investor Relations. Ms. Benchelt?

Dawn Benchelt

Thank you for joining us for Inland Real Estate Corporation's second quarter 2008 earnings conference call. The second quarter earnings release and supplemental financial information package has been filed with the SEC today, August 5, 2008 and posted to our Web site, www.inlandrealestate.com. We are hosting a live webcast of today's call which is accessible on our Web site.

Before we begin, please note that today's discussion contains forward-looking statements which are management's intensions, 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 documents filed by the company with the SEC, specifically our annual report on Form 10-K for the year ended December 31, 2007

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

Now, I'll turn the call over Mark.

Mark Zalatoris

Thank you, Dawn and welcome everyone. On the call today, I'll provide highlights of our results followed by an update on our asset transactions and development joint venture activities. Then I'll turn the call over to Scott and Brett for a more detailed discussion of our portfolio and financial performance. We've put into place a resilient platform of everyday and value based retail located in demographically strong Midwest markets. This defensive platform of assets historically has performed well throughout economic cycles. True to form, our portfolio continued to deliver steady performance overall in the second quarter. We will also continue to benefit from aligned external growth initiatives.

For the second quarter, we reported FFO of $0.36 per share, an increase of nearly 3% over the second quarter of 2007 and in line with our internal expectations. After adjusting for one-time items that essentially offset each other, FFO for the quarter increased primarily due to increased income from joint venture initiatives and the same store portfolio, as well as greater gains from sales of investment securities.

We achieved this increase in FFO despite a very challenging market environment and a decrease in rental income related to certain big box vacancies. Scott will address our tenanting efforts with regard to the vacancies a little later in the call. We are confident of our ability to re-tenant these spaces due to the strength of the locations and have already made substantial progress.

Turning to leasing, during the quarter for the total portfolio, we signed 68 leases totalling over 334,000 square feet of gross leased new area. We also reported solid rental rate increases of almost 15% on 15 new leases and over 12% on 50 renewing leases.

We believe these solid leasing spreads reflect the strength of our property locations. They also illustrate that healthy retailers will pay to be in the best locations even in a challenging and economic environment. Same store net operation income for the quarter increased 3.2% year-over-year, primarily due to lease termination income of approximately $1.1 million recorded during the period.

After adjusting for that one-time income item, same store NOI held steady to slightly negative compared to the prior year quarter, as leasing gains of increased tenant recovery income partially offset the loss of income related to store closings.

I'm also pleased to report that we recorded fee income from unconsolidated joint ventures of $2.4 million for the first six months of this year. This is an increase of over 116% compared to the same period last year.

I'll begin my review of asset transactions and joint venture initiatives with the Inland Real Estate Exchange Corporation joint venture. As a brief review, our joint venture with IREX is providing a valuable fee income stream that grows steadily over time as the venture acquires additional assets. This is an effective strategy in which we leverage our balance sheet capacity to acquire properties for the venture while IREX handles the indication of asset to 1031 exchange investors.

We split a one-time acquisition fee with IREX that averages 5% of the asset purchase price and earn a recurring annual fee for managing the property on behalf of the 1031 investors. Through the sale of equity interest to 1031 investors, we quickly recover our investment and then recycle the capital into new IREX JV acquisitions a couple of times a year.

During the quarter, we acquired for the IREX joint venture an 18,000 square-foot office building in (inaudible) Indiana for $5.6 million. The building is 100% leased by the University of Phoenix, the largest private university in North America. We also contributed the Fox Run Square Shopping Center to the IREX JV, a 144,000 square-foot grocery-anchored shopping center acquired this past January.

Additionally, in early July, we contributed $60.8 million in cash to the IREX JV in order to purchase four buildings in sale leaseback transactions from Banc of America. The aggregate purchase price was $152.6 million and includes approximately $90 million of mortgage debt. The office buildings in Pennsylvania, Nevada, Maryland and New Mexico comprised a total of 840,000 square feet of space and are 100% leased by Banc of America.

We believe these properties are attractive investments due to the strength of the tenant, which at year end was ranked the number one US baking institution in equity size. In addition, these assets offer no multi-tenant and low turnover risks as well as long-term leases structured with annual increases.

Now, as of mid July, all nine properties acquired in 2007 for the venture have been sold to 1031 investors, including the three AT&T office buildings we acquired last December. The capital we originally invested to acquire these properties has been fully recovered and reinvested into the Banc of America acquisition that I just referenced.

For fiscal year of 2008, we anticipated sourcing $100 million of new acquisitions for the IREX joint venture, but with the recent acquisitions of the University of Phoenix building and the four Banc of America office buildings, I'm very pleased to report that we've exceeded our annual IREX acquisitions goal by over 80%. Additional acquisitions in 2008 for the JV will depend in part on the acquisitions market and the timing of pending syndications.

Turning to development joint ventures, although the lease-up has lengthened at certain developments due to the current economy's impact on retailer decision-making process, we continue to make progress on our projected pipeline. At North Aurora Town Center in North Aurora, Illinois, we closed during the quarter on a $2.4 million 4.7 acre pad sale to Ashley Furniture for the development of a 50,000 square-foot store.

In addition, the Best Buy build-to-suit is substantially complete and we expect turnover to the tenant this month, with the store opening plan for the fourth quarter. Also, in August, we expect to finalize the sale of the La-Z-Boy Store that opened for business last quarter to a third party investor. In addition, we are in active negotiations with several other retail users for land parcel sales at this development. We're also seeing excellent activity at the Orchard Crossing in Fort Wayne, Indiana.

In July, we sold for $1.2 million a total of 1.2 acres of land to RVs [ph] for a 35,000 square-foot restaurant. Also at this center, fashion home goods retailer Gordmans is expected to take possession of a new 50,000 square-foot store this month with the opening planned for early fourth quarter.

In addition, Famous Footwear has signed at lease for 65,000 square feet of space and is scheduled to open by the end of the year. Finally, we're negotiating leases with two fashion retailers and a discount retailer for space at Orchard Crossing.

Now, our Wal-Mart anchored Savannah Crossing development in Aurora is tracking to plan. Construction of Walgreens pharmacy is progressing well with the store scheduled to open by year end. The completed multi-tenant outlet buildings are almost fully leased and currently being marketed for sale. Additional pad sales are also planned for this development.

At our Tuscany Village development in Clermont, Florida, we are currently under contract for a land sale to a national discount grosser. And we recently signed a land sale contract for 15 acres to a national discount anchor. Site work at this development is essentially finished, which will facilitate a quick delivery to these users.

We're also in discussions with two national retailers to anchor our Lantern Commons development in Westfield, Indiana. Expect the activity with other retailers to ramp up after an anchor has been signed. Retailer interest in Lantern Commons building [ph] is more detailed when the planned highway improvements in Westfield become public.

Now, from a leasing prospective, the shops at Lakemore [ph] in Lakemore, Illinois will probably take longer than we originally anticipated. We remain very confident in this location's potential as it is surrounded by well-established communities that are currently under retail.

However, given that retailers have slowed their near-term expansion in growth markets, we believe it's realistic to anticipate that the stabilized delivery date of this project might be an additional year beyond the initially scheduled timeframe of 2010.

Across the development pipeline, we are still projecting a weighted average return on cost of approximately 9%. Turning quickly to dispositions, during the quarter, we sold for approximately $1.7 million an 11,000 square foot neighborhood shopping center in Batavia, Illinois. Proceeds were used to pay down debt and for general corporate purposes.

With that, I'll turn the call over to Scott for an update on our portfolio operations. Scott?

Scott Carr

Thank you, Mark. Good afternoon everyone. There's no denying that the operating environment is very challenging right now. Distressed retailers are exiting the marketplace and healthy retailers are taking steps to protect themselves during the current economic downturn. We are finding that healthy retailers continue to selectively plan for new stores, focusing primarily on stable markets with attractive in place demographics.

They are also taking this opportunity to reposition existing locations in proven markets. In a tough environment, this conservative growth strategy enables retailers to increase their market share while limiting risk to their overall business plans. In addition, we've been talking to retailers who are looking for alternative locations to replace stores that were originally planned for new developments which are now experiencing delays as a consequence of the credit market turmoil.

With regards to leasing, we are experiencing the full spectrum of the current market conditions. On the one side, some retailers continue to curtail expansion plans, lengthen decision process, and we're seeing much lower lease up times and lower leasing volume on certain development projects.

On the other side, we're experiencing relatively healthy activity in our core portfolio, which is concentrated in markets with dense populations and high income levels. As Mark mentioned, we are also benefiting from the strength of our locations as we managed through recent tenant bankruptcies. Leases on five Wickes furniture stores were rejected at the end of April and we expect to get two Linens 'n Things leases back by the end of this month.

It's important to note that while vacancies from tenant bankruptcies do have a short-term impact on our operating results, these vacancies also presents an opportunity to mark leases to market and upgrade the tenants at these centers. We're making excellent progress with our efforts to re-tenant the former Wickes spaces.

Last quarter, we executed a replacement lease with a national sporting good retailer for the former Wickes store at Riverdale Commons in Minnesota. Not only is the new lease of a higher rental rate per square foot, but we have expanded the gross leasable area at that location by 7,000 square feet. This store is scheduled to open this fall. And today, we announced that we have signed a least with Nordstrom Rack for the 35,000 square foot former Wickes store in Orland Park, Illinois.

That's at our Orland Park Place Shopping Center which is a dominant regional power center in the South Suburban Chicago market and one of Chicago's fastest growing trade area.

Nordstrom Rack is a perfect fit with the center’s other premier retailers, which include Bed Bath & Beyond, Barnes & Noble, Dick's Sporting Goods, Filene's Basement, Marshalls, Office Depot, and Sports Authority, amongst others. We look forward to the Nordstrom Rack opening in the first half of 2009.

We've been aggressive in our leasing efforts at the other Wickes locations as well. Currently, we are negotiating a lease for one of those spaces and letters of intent are in process for the remaining two Wickes locations.

The two Linens 'n Things store closings, one in Schaumburg, Illinois and the other in Rochester, Minnesota are each located within strong regional shopping hubs and we are confident that we would be able to re-tenant those spaces and improve the quality of retailers within the centers. We will continue to work through these current market conditions just as we have effectively managed challenging situations in the past.

Historically, our same store NOI growth has been the strongest following one of these periods. However, until we re-tenant these big boxes, we do expect the vacancies to impact near term operating results. Looking at the bigger picture, our strategy of replacing weaker tenants with healthy retailers ultimately enhances the value of our centers and produces tangible long-term benefits.

Turning to the performance of our same store portfolio, this set of properties is comprised of 126 properties that were owned and operated for the same three and six month periods in 2008 and 2007.

Same store net operating income excluding the impact of straight line and intangible lease rents increased 3.2% to $31.5 million from $30.5 million for the second quarter 2007. For the six months ended June 30, 2008, same store NOI increased 1.3% to $61.8 million from $61 million in the same period last year.

The three and six months increase in same store NOI were primarily due to lease termination income of $1.1 million recorded during the quarter. The majority of this income pertained to a single lease termination transaction where we terminated the lease for a Dark [ph] Roundy's grocery store and simultaneously executed a lease with a replacement tenant. This is the first step in the repositioning of this particular center.

In the second half of the year, we anticipate additional lease termination income related to the repositioning initiatives at this center as well. Also contributing to the increase in the same store NOI was a decrease in non-reimbursable tenant-related expenses year-over-year.

Additionally, same store base rental income increased once again over the prior year periods. The increase in base rental income indicates to us that in spite of the tough leasing environment, the leasing gains we have achieved are having a positive impact on the same store rental growth. Second quarter same store base rental revenue was up 1.1% over the year ago quarter despite a decrease of an eight-tenths of a percent in same store financial occupancy from the second quarter of 2007.

Adjusted for the impact of the lease termination income in the quarter, same store NOI would have been essentially level with last year primarily due to the loss of income related to the Wickes store closings.

For the full year 2008, we continue to expect that same store NOI will be essentially flat principally due to the impact in the coming months of the Wickes and Linens 'n Things bankruptcies.

The big box vacancies that I have referenced have also impacted occupancy this quarter. The former Wickes stores comprise over 200,000 square feet of space that is currently unoccupied. We expect those vacancies plus the two Linens 'n Thing store closings to continue to negatively impact the occupancy rates through the remainder of the year. Once our big box vacancies are remediated, we expect occupancy rates to climb back towards historic levels.

For the total portfolio, which includes properties owned in our joint ventures, both leased occupancy and financial occupancy were 93.6%. In order to provide additional insight into our portfolio performance in this quarter’s financial supplement, we have provided a schedule of occupancy percentages on a consolidated, unconsolidated, and total portfolio basis.

Mark earlier highlighted our leasing gains for the total portfolio, so I will quickly review second quarter leasing activity for the consolidated portfolio, which is comprised of properties that we own 100%. We signed a total of 61 leases for the consolidated portfolio aggregating over 316,000 square feet of gross leasable area. The solid leasing activity and spreads illustrates the continued pricing power of our well-positioned portfolio, despite the difficult leasing environment.

To break out leasing details for the consolidated portfolio, 12 new leases were signed with an average rental rate of $9.03 per square foot, an increase of 9.4% over average expiring rents. 46 renewal leases were signed with an average rental rate of $12.48 per square foot representing an increase of 12.6% over expiring rents.

Additionally, three leases were executed for previously unoccupied or newly created space at an average rental rate of $24.17 per square foot. In the smaller tenant space, we still have not seen a significant increase in business failures to date. Our default rate in that mom and pop tenants remains level with our 2007 default rate. We have noted however that leasing activity in the mom and pop sector has slowed with volumes slightly lower than they were in the same period last year.

Now, I will turn it over to Brett for a review of the company's financial performance.

Brett Brown

Thank you, Scott, and good afternoon everyone. For the second quarter of 2008, FFO was $23.8 million, an increase of 3.8% compared to $23 million even for the second quarter of 2007. FFO per share for the quarter was $0.36 per share, an increase of 2.9% compared to $0.35 last year.

As Mark mentioned earlier, after adjusting total one-time items in the quarter that basically offset each other, second quarter FFO and FFO per share increased year-over-year primarily due to increase income from the IREX joint venture and the same store portfolio. Greater gains from the sale of certain investment securities also contributed to the quarterly increase. And it bears repeating that we achieved this increase in FFO notwithstanding a loss of income related to these big box vacancies that we've been mentioning.

Now, I'll walk through the one-time items we recorded this quarter. During the quarter, we recorded a deferred partnership gain of $3.2 million that we recognized upon the repayment of the related mortgage receivable. As both Mark and Scott mentioned, we also recorded lease termination income of $1.1 million, a significant increase over our historic quarterly average of about $150,000. And in addition, we recognized greater gains from sale of investment securities compared to the second quarter of '07, and that's all reported in the other income and expense category. These items were essentially offset by other charges we recorded in the second quarter. During the quarter, we recorded a non-cash charge of $2.5 million related to a decline in value of certain investment securities determined to be other than temporary during this period.

We also recorded a $700,000 impairment to adjust the book value of the consolidated property currently in this contract for sale. For the second quarter, net income decreased 6.8% to $10 million even and net income per share decreased 6.3% of $0.15 per share compared to the year ago quarter. These decreases were primarily due to the one-time charges I just referenced for the greater depreciation expense resulting from write-off of the tenant improvements related to the vacancies.

For the six months ended June 30, 2008, FFO decreased less than 1% or nine-tenth of a percent to $46.7 million and FFO per share decreased 1.4% to $0.71 from $0.72 last year. Net income for the six month period was $20.4 million, a decrease of 8.9% compared to the same period last your. Net income per share was $0.31 a decrease of 8.8% compared to $0.34 per share for the six months ended June 30, '07. After netting out the one time items in the quarter, FFO and net income for the six months ended June 30, 2008 decreased primarily due to greater gains from land sales through our joint ventures in '07 compared to ‘08.

Turning the revenue, total revenues for the quarter increased 4.5% to $47.5 million from $45.6 million for the year ago period. For the six months ended June 30, 2008, total revenue was $97.8 million, an increase of 4.4% over the prior period.

Regarding IREX joint venture fee income, really the main driver of the revenue increases were from that venture. Second quarter fee income from unconsolidated joined ventures was $1.4 million, representing substantial increase of over 200% from prior quarter. And as Mark mentioned, for the first half of '08, we recorded joint venture fee income of $2.4 million and that's an increase of over 100% compared to the first quarter – excuse me, first six months of '07.

Our current guidance anticipates at least $3.75 million in gross fee income this year related to $100 million of property acquisitions sourced for the IREX joint venture in '08, plus the $50 million from the '07 acquisitions where we required in the fourth quarter last year.

Although we have exceeded our annual goal of $100 million in assets with the July acquisition of the Banc of America office properties, it's important to note that the exact time of when fee income will be recognized is difficult to predict. This is because we recognize acquisition fee income as sales to the 1031 investors are completed. Therefore, we believe it's prudent to maintain our IREX joint venture fee income assumption at this current level.

Moving to the balance sheet and other financial metrics, as one measure of the company's ability to service and incur debt, our earnings before interest, taxes, depreciation and amortization or EBITDA to interest expense coverage ratio was 2.8 times for the quarter compared to 2.7 times for the first quarter '08 and 2.6 times for the second quarter of '07.

At June 30, 2008, the company had a total market capitalization of approximately $2 billion and our debt to total market capitalization was 51.7% as of the last day of the quarter. Including the convertible notes, approximately 83% of our debt is fixed at a weighted average interest rate of 5.06%. And most of our variable rate debt is our unsecured line of credit, which as of June 30, had an outstanding balance of $85 million and an all-in rate of 4%.

We renewed our three-year line of credit during the quarter which now provides increased availability of $155 million, up from $159 million. And with this renewed credit facility, we've strengthened our existing banking relationships and established new relationships with additional lenders.

Lending group includes, KeyBanc, Wachovia, Banc of America, Wells Fargo, and Bank of Montreal. Strong financial position is particularly important in the current credit constrained environment, and by leveraging the strength of our balance sheet and lending relationships, we are able to take advantage of new investment opportunities such as the acquisition of the Banc of America office buildings.

We're also working to reposition our balance sheet and move to a more unsecured profile that will provide increase flexibility. At this time, we have strong indications of interest from our existing bank group to finance a term loan, and we expect to utilize this additional capacity to free up availability in our line of credit and retire the remaining 2008 debt maturities which are $65.6 million at June 30.

And finally, with respect to guidance, we’re reaffirming our original projections. We expect FFO per common share to be in the range of $1.46 to $1.49 for fiscal year 2008. We expect the positive impact of our re-leasing efforts, increased lease termination income, and lower than expected debt costs to offset the negative impact of lost income from tenant bankruptcies. There's also the possibility that we may recognize additional fee income from IREX joint venture sales this year. However, we may be required to record additional non-cash impairment charges in subsequent quarters to adjust the cost base of certain investment securities.

With that, I'll turn it back over to Mark.

Mark Zalatoris

Well, there's no doubt we're operating through a difficult retail market and an overall weakened economy. We're operating effectively within this environment by concentrating on the core functions of our operations such as our strong leasing efforts. Overall performance for the quarter was solid and on track. We also continue to focus on the targeted redevelopment and repositioning of core assets as well as aligned external growth initiatives that enhance the bottom line value of this company.

We believe that our historically resilient retail asset base, one that is largely value and necessity based, as well as the mature markets that we operating in will sustain and benefit us over the longer term. Our efforts along with an attractive dividend yield that stood at 6.8% as of June 30 have not gone unnoticed by the marketplace.

Our five year total return of 15.2% at June 30 has outpaced the retail REIT sector average of 13.2%. I'm most grateful for the continued investor interest in our company and will continue to work extremely hard to provide results that should reward our shareholders through continued total return benefits.

With that, we'd like to open up the call for your questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Jeff Donnelly at Wachovia.

Jeff Donnelly – Wachovia

Good afternoon guys. A first questions and I will try not to dominate your call. The first question actually is for Scott. I was curious, in situations where you are seeing retailers ad space to the mix, has there been a change in the way that they are underwriting new locations? Are they seeking out even only the most proven sites? And I guess beyond that, any change in what they are looking for in the leasing front beyond the financial terms, like operating covenants or waivers of those I should say, co-tenancy, subletting, et cetera?

Scott Carr

Yes, it's definitely a flight to quality in that they are going after those locations that are premium and there's no doubt that they have a little more negotiating leverage today. The healthy attractive retailers that we're dealing with, they're driving firm deals. We're always pretty principled in what we do with regard to operating covenants. There are certain things that are critical we think to the viability of the center and we fight pretty hard when we're talking about things that could kick out in operating covenants and the main thrust for us is always to maintain as much control as we can. So, where we do have to give a kick out, we always to recoup on the unamortized costs and then likewise if they have the ability to go dark, we are very adamant on getting recapture rights, so that we can control the health of the space, the health of the center overall.

Jeff Donnelly – Wachovia

I'm sorry, my fingers weren't fast enough earlier – but beyond the Nordstrom Rack, what was the update again, I'm sorry, on releasing the Wickes spaces?

Scott Carr

Up in the Twin Cities area, in Coon Rapids, we leased the former Wickes to the Sports Authority and added 7000 square feet for them and then Nordstrom Rack, the one in Norland Park. The three remaining ones, we have a lease in negotiation with a prospect and we have LOIs on the remaining two.

Jeff Donnelly – Wachovia

That's great. If I could just switch over, I am not sure who to best direct it to, but on the IREX joint venture, I just had a few questions. Are you guys seeing I guess resale spreads widen or narrow between where you guys are buying and subsequently selling IREX assets?

Mark Zalatoris

Jeff, the only mark up so to speak is this acquisition fee that is built in or if market price is even higher, we're not trying to achieve that. I think it's a program that we source good assets that we and IREX believes are very saleable and marketable to 1031 investors, who clearly will have no desire to manage. They're looking for a current – a good current yield with some slow but steady growth potential. On the Bank of America building, leases were written with annual increases so that – that's a kind of – exactly the kind of lease that the AT&T Call Center buildings were written and that was met with tremendous enthusiasm by the 1031 investors. So we don't try to widen the spread so to speak because we are in essence selling to the investors at what the market price might be plus the fee that we believe is a fair fee for not only sourcing but arranging the financing and all the other work behind putting a tenant in common structure in place.

Jeff Donnelly – Wachovia

But, I guess how dynamic then is the return that they are seeking? You're not doing this on an instantaneous basis. At times you're holding these assets for a period of time. Do you see much fluctuation in the returns they're expecting?

Mark Zalatoris

Well, no. We're not trying to hold the assets for very long at all. If anytime that, the only one in the sense this past quarter we contributed the Fox Run Center a little bit – a few months after we acquired it due to the fact that we needed to put the right kind of financing on it first. We recently (inaudible) for all cash then had to go out and seek the right kind of financing which allow tenant and common investors to come in. So it took a little few months longer than we'd like. Pretty much, we acquire the properties and they go on their pipeline for syndication, pretty much as fast as they can physically get the offer memorandum written, reviewed, blue skied all those kind of things. We don't intend to have any lengthy holding period on these assets.

Jeff Donnelly – Wachovia

How long have you typically held the assets that you've had thus far?

Mark Zalatoris

You mean complete ownership when it goes down from a hundred to zero when it's completely out? It's usually around four to five months.

Jeff Donnelly – Wachovia

Just one last question, I know it's probably a remote possibility but just I'm curious. To the extent, it's because you are really in a situation where there seems to be a lot – obviously a lot of stress in retailing, but also (inaudible) economy. To the extent that you guys had some situation whether it's a tenant bankruptcy in a properly held in the IREX JV, would you guys need to take a charge to your earnings or value impairment because that asset was technically held for sale?

Mark Zalatoris

You mean before the tenant, common investors –

Jeff Donnelly – Wachovia

Bought it.

Mark Zalatoris

I would think not. I mean in a retail center that's multi-tenant, the expectation is you are going to actually re-lease it to the tenants, that leases usually have increases in income built in, bumps in rents, et cetera. We, on our own portfolio, have never really had to take an impairment charge on assets unless they were in a position where we had definite ending to it, such as the sale transaction like we had this quarter where unfortunately the sale price was a little bit below our book value and then you write it down to that book value. That's the kind of treatment that you must follow. So because you always believe that you'll be able to replace a tenant and see that income stream grow over time.

Jeff Donnelly – Wachovia

Okay. Actually my last question was on I guess for Brett and that is excluding the lease termination fee income you guys recognized in the quarter, do you have an estimate of how much I guess Wickes and other tenant bankruptcies may have collectively impacted your Q2 results?

Brett Brown

Q2 was probably in the 600,000 I want to say, if I remember correctly.

Jeff Donnelly – Wachovia

Okay, that's helpful. Thank you.

Operator

Our next question goes from Paul Adornato from BMO Capital Markets.

Paul Adornato – BMO Capital Markets

Hi, good afternoon.

Mark Zalatoris

Hi, Paul.

Paul Adornato – BMO Capital Markets

With respect to IREX since it seems to be definitely a growing part of your business, could you remind us or give us an update on just the total volume of 1031s that they're doing each year?

Brett Brown

Yes, IREX's goal is approximately $500 million worth of transactions per year. They actually believe they have higher demand than that but they are in a sense physically constrained by their ability to put the offerings together, get the broker/dealer networks signed up, will have to do their own due diligence, etc., it's a function of the staffing levels that they have and the time involved with the outside legal counsel putting together the offering memorandums and so on. So, but they have achieved around $500 million in the last year or two and anticipate at least that this year.

Paul Adornato – BMO Capital Markets

And how does the demand for 1031 product perform in this weakening economy? I guess if real state prices are in general expected to go down, is there kind of rush to kind of lock in a gain on the part of individual investors?

Brett Brown

It's kind of an interesting thing, we were very worried ourselves about, is there going to be a decline in actual need for 1031 replacement property due to the transaction levels slowing down, the sale activities slowing down at the front end of the 1031 transaction. And there might be overall globally a little bit of slowing down in that regard, but we've noticed that IREX has basically observed that they have increased demand because they have taken market share from some of their other competitors who have not been able to perform in this debt constrained marketplace, etc., where IREX's business model is to acquire the property prior to putting the offering together. Put the financing on it ahead of the offering and not try to coordinate a mass closing with the tech investors to actually acquire the property which is almost next to impossible in my opinion to do it properly. And some of the other competitors that have utilized that kind of model have not succeeded.

So they're taking market share; those guys are going by the wayside, and to your point there, some of the potential salaries out there trying to take advantage of the higher prices before cap rates chop or go up any higher than they have, may be so. But it's interesting that if you survey their total investor base, they have some cash investors, they're not even coming out at 1031 sales at all. They have the type of investors that are selling farmland, that have no basis, relatively no basis in the farmland and are going to retire and just live off the income off of this replacement property as well as those selling regular commercial properties. So it's a widely varied investor base and I think they will continue to look to them for replacement property.

Paul Adornato – BMO Capital Markets

And does IREX have other JV partners like similar to yourselves that are providing products for them?

Mark Zalatoris

No, they don’t, not at this current time.

Paul Adornato – BMO Capital Markets

Okay, thank you.

Operator

Our next question comes from Sabina Batia [ph] from Basso Capital.

Sabina Batia – Basso Capital

Hi there, I was wondering if you can give us some more details on your unsecured credit lines. You mentioned you renewed it and it was from 150 to 155, just wanted to know was this done at the same rate and if not, what is the new rate, and if you're still keeping the accordion feature, the $250 million accordion feature? And the last thing is, is there any change in the covenants made over the renewal?

Brett Brown

This is Brett and just to run through briefly. We did achieve virtually identical pricing and I think at the top end, it's a grid. Originally it was 120 to 160 basis points over LIBOR, currently it is 120 to 165 basis over LIBOR. So marginal increase on the top end. Covenants virtually identical, we did build in another pricing grid that when we achieve and an encumbered asset base to support that, that it does go down to 100 to 150 basis points over LIBOR, and so that was one of the other covenants. And so it's an unsecured debt coverage ratio that's in there.

Sabina Batia – Basso Capital

Okay.

Brett Brown

And so we expect to meet that by the end of the year and we will get that better pricing once we pay off these secured mortgages that will be – they mature here in the fourth quarter.

Sabina Batia – Basso Capital

So if you don’t need it, then it just sticks to 120 to 165?

Brett Brown

Correct.

Sabina Batia – Basso Capital

Okay. Do you keep accordion feature of the 250? I believe you have that right?

Brett Brown

Yes, it's a little bit smaller actually. It's – now the total would up to 300, so it's a $145 million accordion.

Sabina Batia – Basso Capital

Okay, all right. Okay, thanks a lot.

Brett Brown

All right, thank you.

Operator

Our next question is from Jeff Donnelly of Wachovia.

Jeff Donnelly – Wachovia

Hey, just a quick follow-up. I wasn’t sure what sort of – I guess what cushion might be in your presence guidance or reiterating your guidance maybe in anticipation of further tenant issues down the road given that we are in an environment where we continue to see a string bankruptcies and store closings?

Brett Brown

We have built a little more exactly. That's why we have been keeping the guidance where it is, in spite of the larger increases and lease termination income that we expect as Scott mentioned, as well as potential pretty increased IREX fee income with the large acquisition from (inaudible). So there is a little bit of cushion built in there.

Jeff Donnelly – Wachovia

I know you really can't name names but I guess, are there any tenants on you watch list that may be appeared recently or categories for example that are they are showing up – I mean like for example one of your top-10 tenants is CarMax and I can't imagine that auto sales is doing particularly well. I mean are there categories maybe you could talk about?

Brett Brown

The categories across the board, we've been watching, have been furniture and electronics, the restaurant group and keeping an eye on different apparel players because the softness continues in that sector. And I think as the economy, if the downturn drags on, we will get to that point where maybe a few more retailers will fall out because they can't weather the storm. But, right now, I don’t think it's anything out of the ordinary that we've been watching for the first half of the year.

Jeff Donnelly – Wachovia

Okay, great. Thank you guys.

Brett Brown

All right.

Operator

We show no further questions at this time. I would like to turn the conference back over to Mr. Zalatoris for any closing remarks.

Mark Zalatoris

I'd like to thank everyone for joining us on the call today. We look forward to your continued interest in the company. We hope to provide you with more positive results even beyond what we've talk about today on our next conference call and you are in as well. So thank you all for attending, look forward to talking to you in the future.

Operator

To access the digital replay of this conference, you may dial 1-877-344-7529 or 1-412-317-0088 beginning at 4:45 Eastern Time today. You will be prompted to enter a conference number which will be 421300. You will be prompted to record you name and company when joining. You may access the replay of the webcast through the Inland Real Estate Corporation web site. The conference has now concluded. Thank you for attending today's presentations; you may now disconnect.

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Source: Inland Real Estate Corporation Q2 2008 Earnings Call Transcript

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