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Inland Real Estate Corp. (NYSE:IRC)

Q3 2012 Results Earnings Call

November 1, 2012 3:00 PM ET

Executives

Dawn Benchelt - Director, Investor Relations

Mark Zalatoris - President and CEO

Brett Brown - Chief Financial Officer

Scott Carr - President, Property Management

Analysts

Todd Thomas - KeyBanc Capital Markets

R.J. Milligan - Raymond James

Jeff Donnelly - Wells Fargo

Josh Patinkin - BMO Capital Markets

Operator

Good afternoon. And welcome to the Inland Real Estate Corporation’s Third Quarter 2012 Earnings Conference Call and Webcast. All participants will be in listen-only mode. (Operator Instructions)

After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Ms. Dawn Benchelt, Director of Investor Relations. Please go ahead.

Dawn Benchelt

Thank you, Laura. And thank you for joining us for Inland Real Estate Corporation’s third quarter earnings conference call. The earnings release and supplemental financial package have been filed with the SEC today and posted to our website inlandrealestate.com. We are hosted -- 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 and current expectations of the future. There are numerous uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements.

For a discussion of these risk factors, 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, 2011, and subsequent 10-Q filings.

During the presentation, management may reference non-GAAP financial measures that we believe help investors better understand our results. Examples include funds from operations, EBITDA and same-store net operating income. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release and supplemental dated November 1, 2012.

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 to Mark.

Mark Zalatoris

Thank you, Dawn. Good afternoon, everyone, and thank you for joining us. Before we begin, I want to take a moment to express our concern for the millions of Americans that have been impacted by Hurricane Sandy. Our thoughts are with them as they deal with the affects of this wide reaching store and eventually begin the process of rebuilding homes and businesses.

Also, we appreciate the effort that many of you who reside and work in the affected areas have taken in order to participate in our earnings call today, as well as all the other calls scheduled during this very trying time.

Turning to our results for the quarter, as we near the end of the year, I want to report on the progress we’ve made on our objectives for portfolio operations, the balance sheet and growth.

We are pleased with the positive momentum and portfolio fundamentals, which include sequential improvements and key performance metrics.

Consolidated same-store NOI rose 5% for the quarter and 5% year-to-date over the prior year periods. This is our seventh consecutive quarter of gains in same-store NOI. Strong NOI performance was fueled by gains of financial occupancy, as new tenants began paying rent.

For the quarter, financial occupancy for the consolidated same-store portfolio climbed to 89.2%, an increase of 200 basis points over the third quarter of 2011. We also recorded occupancy gains for the total portfolio.

Here, lease and financial occupancy were 93.1% and 90.6%, respectively. Both levels increased 20 basis points over the last quarter and 40 basis points over the first quarter of 2012.

Let’s move to leasing activity, which is proving to be very dynamic this year. In fact, this quarter marks our third consecutive quarter of increasing leasing volume. We signed leases for more than 424,000 square feet within the total portfolio in the third quarter.

While 50% of that square footage was leased to anchor tenants, as well the new average base rent for two big-box spaces leased to national retailers drove the substantial increase in new lease rent spreads for the quarter.

Turning to the balance sheet. We’ve strengthened our financial position by securing amendments to our consolidated unsecured credit facilities. These amendments increased total capacity of the facility by $50 million to $350 million. They also reduced our cost of borrowing and extend our debt maturity profile. Brett will provide additional details later in the call.

However, I want to stress the benefits of the increased capacity of the facility. Additional liquidity provided by the agreement enhances our financial flexibility to take advantage of opportunities that need be acted upon quickly. This includes paying off higher rate loans or debt as a discount and acquiring properties for own balance sheet and our joint ventures.

The larger capacity of the credit facilities provides opportunity capital for a joint venture with PGGM. This venture is our primary growth vehicle over the next one to two years. And I’m pleased to report that in October we upsize the acquisition terms for the venture.

Remember, in fact it provides for the acquisition of approximately $4 million including leverage of additional retail centers within the Midwest. We will invest side by side with PGGM. Our partner will contribute additional equity of approximately $100 million and we will contribute equity of approximately $120 million.

We will not contribute additional consolidated properties to the venture with the exception of the Cleveland area Westgate Shopping Center. That acquisition was originally sourced with the PGGM venture in mind.

However, we ultimately acquired the asset in our own balance sheet, as the venture was already fully invested when the property closed this past March. The target gross value of the PGGM joint venture portfolio had full investment as approximately $900 million including leverage.

I want to note the benefits of leveraging the PGGM joint venture to grow our company. First, the venture allows us to grow our asset base using institutional capital at a time when we may not want to issue equity given particular market conditions.

Second, we can build our Midwest asset base concentration faster and as half to required equity, on a scale we may not be able to do on our own at this time. As well buying properties to the joint venture can increase our yield on those investments by 100 basis points through the fee income we earned.

And finally, at the end of the ventures lifespan, we expect to be in a position to buyout our partner and fold all these high-quality properties into our consolidated portfolio. As we said on our last call, we believe our company today is best position in our 18-year history.

The positive portfolios trends we reported on a result of effective management, leasing strategies and leverage both our premier locations and substantial presence within our core markets. In addition, we are improving our balance sheet position and making progress on accretive gross strategies.

We are focused on communicating this progress to the investment community and we are hopeful that market recognition of a growing track record of consistent performances, as well as accomplishments in other key areas will result the higher multiple and stock price. This in turn will provide additional flexibility to use overall leverage and grow the company.

Now, I’ll turn the call over to Scott who will cover portfolio operations. Scott?

Scott Carr

Thank you, Mark, and good afternoon, everyone. The progress made in improving our portfolio over the past two years is evident in the consistently stronger performance results, highlighted by the seventh consecutive quarter of increased same-store NOI.

For the consolidated same-store portfolio, NOI rose 5.5% for the quarter and 5% for the nine months ended September 30, over comparable periods in 2011. The increase for the third quarter and nine months, primarily were driven by higher consolidated same-store financial occupancy. This metric rose by 200 basis points over the third quarter of 2011, as tenants open for business and commence paying rent.

The increase in same-store NOI is also enhanced by lower operating expenses, where in addition to a substantial savings in snow removal costs last winter, we have also decreased controllable expenses by 4.9% year to date. This type of cost savings are tied to the economies of scale achieved through our strategy of clustering assets.

Looking ahead, we expect same-store NOI growth for the fourth quarter to be slightly negative, due to lower real estate tax expense recorded in the fourth quarter of last year. However, we continue to expect healthy growth in same-store NOI for the full year, and we now expect that consolidated same-store NOI for 2012 will increase by 2% to 4% over 2011.

We also continued to see steady gains in occupancy rates for the total portfolio. In fact, leased occupancy is at its highest level since year-end 2011. Total portfolio leased occupancy was 93.1% at quarter end, an increase of 20 basis points over last quarter and 40 basis points over the first quarter.

Total portfolio occupancy decreased by 100 basis points from the third quarter of 2011, primarily due to lease terminations and expirations of certain big-box spaces, currently being repositioned or under contract for sale.

As we discussed on prior calls, two vacant big-box spaces, one in Indianapolis and one in a Chicago suburb are currently under contract for sale to a national discount retailer. We do not exclude from occupancy calculations with square footage of assets held for sale or undergoing redevelopment, as we still own those properties.

The two assets under contracts for sale will continue to impact occupancy rate until those transactions are completed. But in the meantime, we believe it is important to provide insight into occupancy trends in our stabilized core portfolio. That said, excluding the two assets held for sale, total portfolio leased occupancy at quarter end was 94.3%, which is an increase of 20 basis points over the third quarter of 2011.

At quarter end, the total portfolio leased occupancy rate for anchor space was 95.3% and for non-anchor tenants it was 87.7%. Our leased occupancy rate for non-anchor tenants is one of the highest within our peer group. We attribute this to the strength of our locations, our dominant presence within our Midwest markets, allowing us to do multiple deals with retailers and the resiliency of those markets overall, which have recovered more quickly than other areas of the country.

Leasing volume for the total portfolio has increased for the third consecutive quarter. In the third quarter, we executed 94 leases for more than 424,000 square feet. This is an increase of 6% in square feet leased over the trailing four quarter average. We signed 17 new leases with an average base rent that increased 39.7% over the prior in-place rent and 56 renewal leases with an average base rent that increased 14% over the expiring rent.

This marks the seventh consecutive quarter of improved rent spreads for new leases signed within the total portfolio. We also signed 21 non-comparable leases with an average base rent of $16.72 per square foot.

The primary drivers of leasing activity within our core markets are new market entrants, retailers relocating to a better market position and those adjusting their store formats to improve profitability. This quarter, we executed four leases with anchor tenants for more than 102,000 square feet of space, which is nearly 50% of all square feet leased under new leases for the period.

At, Hawthorne Village Commons shopping center in Vernon Hills, Illinois, we negotiated the early termination of a lease with Dominick’s Finer Foods, and executed a new lease with Hobby Lobby for 47,000 square feet of GLA. Hobby Lobby is relocating to our center to be closer to the heart of the trade area, and will pay rent nearly three times that of the former tenant, Dominick’s.

Multiple retailers expressed interest in this space, including some grocers. Over after evaluating trends in the local trade area, we determine that replacing the grocer with a soft goods retailer was the best way to increase the value of the center.

The new lease with Hobby Lobby is noteworthy, because it illustrates the opportunity we have to grow income by replacing an underperforming grocer, paying below market rent with a healthy best-of-class retailer. Another example is the Chatham Ridge Shopping Center in Chicago where we leased 12,000 square feet to Anna’s Linens.

We declined the renewal offer from the prior tenant, LA Fitness in order to lease the space to Anna’s at a rent that is 61% higher than the prior in-place average rent. Anna’s Linens considers this a bull’s eye location within the Chicago market. And this value priced retailer is locating to a high profile corner space and what is arguably the best shopping center in the trade area, with the dense urban population base of solid middle-class shoppers.

These two leases were the main drivers of the substantial increase in new lease spreads for the quarter, and they illustrate the opportunities we continue to create within the portfolio. By proactively identifying underperforming retailers and the opportunities to mark-to-market, we are able to grow revenue in long-term value.

I would like to note that our density within our Midwest markets gives us more visibility and firepower with retailers than our size might otherwise indicate. The leases we signed with Ross Dress for Less, the new entrants of the Chicago market exemplify this competitive advantage.

During the quarter, we executed our seventh lease with Ross for a 27,000 square foot space at one of our suburban Chicago centers, and we are currently negotiating two other lease.

Finally, the trend retailers’ right-sizing provides us with opportunity to create space for other retailers and increase rents. An example is Rivertree Court in Vernon Hills, where we are relocating and downsizing Office Depot within the center from any existing space of 27,000 square feet to 6,000 square feet.

We are negotiating a lease for the space to be vacated by Office Depot at a rent that is 54% higher than Office Depot was paying. And Office Depot is paying a rent for their new space that is 75% higher than the prior tenant. In addition to the economic benefit, we expect the quality of the center will benefit from the increased consumer traffic generated by this new retailer.

Turning to transactions. In the third quarter, we acquired for our joint venture with IPCC, two triple net single tenant retail property leased to Walgreens. One in Villa Park, Illinois, and the other in New Bedford, Massachusetts, for a combined purchase price of $7.5 million. Including those acquisition, the IPCC joint venture has purchased approximately $84 million of assets year-to-date, moving us closer to our annual goal of approximately $100 million in acquisitions for the venture.

Dispositions for the quarter consisted of the sale for $2.3 million of a single tenant property leased to Walgreens in a suburban St. Louis, Missouri. This was our only consolidated asset in the St. Louis area, which is not a target market for us.

After the close of the quarter, we also sold the 44,000 square foot Hartford Plaza in Naperville, Illinois for $4.5 million. This asset is an unanchored strip center where we believe the opportunity to grow income is limited.

Year-to-date, we have sold four non-core assets for a total sale price of $12.2 million. In addition to these completed dispositions, we currently have four assets under contract for sale and five other non-core assets being marketed for sale. We expect to enhance the growth profile of our portfolio by continuing to sell non-core assets, and reinvesting the proceeds into properties with greater growth potential.

Effective portfolio operations and healthy performance demonstrates that our operating fundamentals have been restored. The result is a reinvigorated portfolio that is providing the stable platform for us to continue to focus on redeveloping and repositioning our assets to meet retailers demand for new stores, and increase the overall value of our company.

Now, I’ll turn it over to Brett who’ll provide more detail on balance sheet initiatives and our financial performance.

Brett Brown

Thank you, Scott and good afternoon everyone. At this point of fiscal year, we’ve met many of our key balance sheet objectives for 2012. And a central part of our long-term capital plan, these objectives are designed to enhance our liquidity, decrease our cost of debt and extend our debt maturity schedule.

During the quarter, we amended our consolidated unsecured credit agreement. This was an important benchmarks in improving our financial position. As Mark noted, the amended agreement provides additional liquidity to pursue our growth objectives.

Specifically, the capacity of the term loan and line of credit facility were each increased to $175 million from $150 million, providing a total capacity of $350 million. In addition, the amended agreement further reduces the rate on borrowings by 35 basis points to 55 basis points depending on leverage levels, which is expected to provide $1.3 million in annual interest expense savings at current debt levels and amounts outstanding on those facilities.

It unlinks the maturity dates of the term loan and line of credit to rebalance our maturity profile. It extends the term of the line of credit facility by two years to 2016, and the term loan by three years to 2017. The amended agreement diversifies our lending group by adding PNC Bank, and it incorporates an investment grade pricing grid that would apply to borrowings when we obtain investment grade status.

During the quarter, we refinanced four assets and closed one new loan all with life companies for 10-year terms. We refinanced the Minneapolis area of Quarry Retail shopping center with the loan of $18.1 million, and the Riverdale Commons retail property with the loan of $16 million. Both loans are interest only and have a fixed rate of 3.75%.

We also obtain two cross collateralized loans, totaling $10.6 million on Dunkirk Square and Park Place Plaza in the Minneapolis market. Both loans are interest only for the first five years and have a fixed rate of 4.35%. And finally, we closed the new loan in the amount of $22 million, interest-only for five years also with the fixed rate of 4.35% on the Riverdale Court -- RiverTree Court shopping center in Vernon Hills, Illinois.

I want to provide a brief update on our Algonquin Commons. Two weeks ago, the lender opted to move forward with a note sale and we expect to bid on the note. We will continue to update you on the status of that property as it progress.

Turning to maturities. At September 30th, we had approximately $50 million of consolidated secured debt on 10 assets that will mature in the fourth quarter. We paid off two of those loans and we are in documentation to refinance the remainder of the pool loan.

With regard to the unconsolidated portfolio, two loans mature in December, one of which will be paid off and the others to be refinanced. We negotiated to pay off the debt on one of our unconsolidated development joint venture projects at a discount, and the other will be extended

For 2013, we have only one consolidated loan of $14.8 million and fours loans on three properties in our joint venture with NYSTRS, totaling $31.8 million and we will provide an update on the refinancing progress on those loans next quarter.

At quarter end, our debt-to-total market capitalization rate was 54.4%, which compares favorably to 59.8% at the end of the third quarter of 2011 and is about equal to last quarter. As we said on our last call, we are targeting a debt to market capital very closer to 50% or below through a combination of stock price appreciation and directing portions of future equity raises for delevering.

For the quarter, our interest expense coverage ratio was 2.8 times which was consistent with last quarter and compares favorably to 2.5 times for the third quarter of 2011. Our fixed charge coverage ratio was 2.1 times for the quarter, consistent with both the first and second quarters of this year.

And we expect this ratio will continue to improve as a result of lower interest expense and future gains and operating income from our positive leasing efforts. Our total net debt to the total EBITDA ratio was 7.2 times, compared to 7.3 times for the prior quarter and 7.6 times for the year ago quarter.

Turning to the income statement. For the quarter, total revenue decreased by $852,000 from the third quarter of 2011. This was primarily due to decreased of $655,000 in tenant recoveries, due to a corresponding decrease in property operating and real estate tax expense, both of which are partially recoverable under tenant leases.

Fee income from unconsolidated joint ventures, decreased by $254,000 compared to the third quarter of 2011. This was due to the timing of acquisition fee income from the IPCC joint venture, which is recognized as interests in assets are sold to tenant-in-common investors.

We expect most of the acquisition fee income from assets purchased by the IPCC joint venture in March to be recognized in the fourth quarter. And a lower acquisition fee income was offset by higher asset and property management fee income, primarily from our joint ventures with PGGM, NYSTRS and IPCC.

Asset and property management related fee income from our joint ventures with those three partners increased by $363,000 or 51% over the third quarter of 2011, and for the nine months ended September 30, 2012, property management fee income from those ventures increased by more than $1 million, or 55% over the same period of 2011.

I also want to note that we’ve added to our supplemental financial package a consolidated balance sheet and income statements to reflect our pro rata share of joint ventures. And we’ve included those schedules to enable investors to see the true size of the asset base in which we have an ownership interest and to provide additional information on joint venture operations.

Other additional disclosures illustrate that our total assets under management, which includes those assets sold to the tenant-in-common investors, they continued to grow and is currently over $2.5 billion and that’s an increase of $300 million over a year ago.

Turning to expenses for the quarter. Total expenses increased by $800,000. The increase was due to higher depreciation and amortization expense from new acquisitions and the write-off of tenant improvements, as well as higher G&A expense from a marginal increase in headcount for the increased joint venture activity. The increase was partially offset by a lower real estate tax expense and property operating expense related to the contribution of assets to the PGGM joint venture.

Interest expense for the quarter decreased by $1.3 million from the prior year quarter. The decrease was related to the repurchase of high rate convertible notes in November of 2011, lowers rates on our debt and the contribution of consolidated properties to the PGGM joint venture.

Turning to FFO. On a per share basis, we reported FFO adjusted of $0.22 compared to $0.22 for the third quarter of 2011. This result is also in line with our expectations and FIRST CALL consensus estimates for the quarter.

With regard to guidance for 2012, we continue to expect adjusted FFO for common share to range from $0.84 to $0.89 and average total portfolio of financial occupancy to range from 90% to 91%. There is one change to guidance as Scott mentioned. We now expect consolidated same store NOI for the full year to increase between 2% and 4% over the prior year.

And now, we are keeping FFO guidance in the same range as we had previously and that’s due to a slight reduction in what we expect when we sell the Westgate Shopping Center that’s a $74 million center to PGGM venture later this month.

As for 2013 guidance, it’s premature to comment on that at this time. And we will finalize our budget and forecast over the next several weeks and provide guidance for next year on our fourth quarter earnings call.

And now I’ll turn the call back over to Mark for some closing comments.

Mark Zalatoris

Thank you, Brett. Today at our call, we outlined the progress made on the key fronts of portfolio operations, the balance sheet and growth. We’re pleased with this progress and optimistic about the momentum.

This momentum includes sequential improvements in portfolio performance, including consolidated same-store NOI, leasing volume and total portfolio occupancy, enhanced liquidity and flexibility afforded by amendments to our credit facilities, point to material headway in our long-term capital plan as well as the expanded acquisition threshold for the PGGM joint venture which now has the targeted gross value of $900 million of full investment is another step forward in our growth strategy.

With this point, we’d be happy to take your questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) and our first question today comes from Todd Thomas of KeyBanc Capital Markets.

Todd Thomas - KeyBanc Capital Markets

Hi. Good afternoon. Thanks. Thanks for providing me additional operating and balance sheet detail in the supplement on pages 41 to 43. That’s very helpful. Just a question on PGGM joint venture, you mentioned that one of the benefits of the ventures that you’ll be able to potentially buy out PGGM. Just couple of questions, the JV have a finite life and is there anything predetermined pricing?

Scott Carr

Hi, Todd. This is Scott. The venture has a 10-year life span. After five years, we can start buying PGGM out on a pro rata basis, 20% per year. And we have the right to do that with either stock or cash. And the valuation, there is a mechanism for valuation determination based on how we value the assets on a quarterly basis.

With that venture, we do quarterly valuations as well as annual rolling appraisals. That’s part of their requirement at PGGM. So that sets the value. So it would be after five years that we could look at that potential.

Todd Thomas - KeyBanc Capital Markets

Okay. And the valuation would simply be what the latest appraised valuation is?

Scott Carr

Correct.

Todd Thomas - KeyBanc Capital Markets

Okay. And then just in terms of acquisitions in investment activity, what are you seeing in the pipeline. I mean, are there good opportunities out there or they similar to what they’ve been or how are things changing out there?

Scott Carr

It’s been very competitive. We don’t see quite the flow of products we would like to or we had anticipated. Pricing is being very aggressive forcing up fair amount of cap rate compression. And we’re working hard to source more deals of market and/or pursuing the potential of some development projects, which will be done in conjunction with PGGM with the intent of owning the assets.

The competitions we’re seeing across the board has been significant and pricing expectations continue to get higher.

Todd Thomas - KeyBanc Capital Markets

Okay. And then in terms of dispositions, the four assets on the contract and the five that are being marketed. How much in gross proceeds would the sale of those assets generate and what’s the expected timing there and if you could break it out between what’s on the contract and what’s being marketed. That would be helpful?

Scott Carr

Sure. Right now, it’s under contract for assets, proceeds roughly of about $17.2 million and we would anticipate probably about nine of that, maybe as much as $11 million happening by the end of the year and the larger portion about $6.5 million will fall into 2012 probably second quarter of mid-to-late second quarter. It’s a little more complicated redevelopment transaction.

And then the other assets what you have in the marketplace right now gross proceeds is up about $35 million, it’s what we’re estimating. So, all total we are looking at a program between what we’ve sold, what we have under contract and what we have in the marketplace of disposition of $65 million to $70 million worth of assets with the intent of redeploying that capital.

Todd Thomas - KeyBanc Capital Markets

Okay. And then just a question on -- well, in terms of the those dispositions, are they single tenant properties or they neighborhood community centers and I’m just wondering regarding the 24 single tenant properties, you did sale Walgreens in the quarter. But I’m sort of also wondering what your view on those properties as you know, do you consider single tenant property to be core holdings or is that what you’re interested in selling over time?

Mark Zalatoris

No. What we are selling is really a fair mix. We sold one grocery anchored center year-to-date, we have another under contract. We’re bringing a power center to market in Naperville, Illinois and then the rest are pretty much are unanchored strips, where we have that the properties of 15,000 to 45,000 square feet most in mom and pop tenants.

And those are assets that we purchased early on relatively high cap rates from the 9% to 13% cap rate. And we really have done all we can to re-tenant and boost income. And we feel now is the time to harvest the gains on those assets.

Those who have been selling very well at fairly attractive cap rates. So, it’s a mix and what we are looking to call from the portfolio that its really driven either by harvesting the gains we’ve made on those smaller asset or looking at those assets that we’ve maximize value or lower yielding that we feel we can reposition that capital into better assets.

Todd Thomas - KeyBanc Capital Markets

Okay. Great. Thank you.

Operator

And the next question is from R.J. Milligan of Raymond James.

R.J. Milligan - Raymond James

Hey, good afternoon, guys.

Mark Zalatoris

Hi. R.J.

R.J. Milligan - Raymond James

Curious what the new lease spreads would have looked like x the two big anchor deals that you signed, just trying to get a more reasonable or representative run rate?

Mark Zalatoris

Sure. If we took those two out, the spread in the consolidated portfolio would have been 7% positive.

R.J. Milligan - Raymond James

On the new leases?

Mark Zalatoris

Yeah.

R.J. Milligan - Raymond James

Okay. Great. Scott, wondering if you could give some more color, I don’t know, I may have missed your comments before on the call, but on SuperValu and I know you guys gave a lot of updates on last quarters call. But given some of the developments that we’ve seen, what your thoughts are and what the ultimate solution is for SuperValu?

Scott Carr

Well, we are still watching that very closely and we know about as much as everyone else does and what you read. And then that right now there appears to be interest from the venture capital primarily Cerberus in the lead from what you would hear.

We still look at the core value of the operating entities, our exposure, its Jewel and Cub. And we feel both in market share and value to SuperValu that both of those brands have considerable viability. We look across our portfolio regularly and we’re very pleased that our average sales are in excess of $500 a foot.

Our average rental rates are at or below market. And we feel, whether it’s a grocery, re-tenanting or a different re-tenanting, the potential of our sites is strong. But we really feel that’s plan B to what will be someone buying 32% market share of Jewel in Chicagoland and 20% market share of Cub in Minneapolis, St. Paul.

So, we think the entities will survive. We just don’t know in what ownership form whether it’s a single buyer or whether it’s split up I mean I think the greatest value or SuperValu is some of the parts. But SuperValu right now seems intent on a whole company transaction.

So, we just kind of are watching it closely and waiting and seeing. And we’re also managing our exposure to SuperValu as much as we can. We’re going to taking back two SuperValu stores this year or at the end of the year and then into 2013. One, we’re going to be redeveloping with soft goods retailers. We have three big boxes or mid-size boxes in negotiation now to reposition that center. And the other one we’re replacing with another grocery operator. And this is part of our continuing management of that exposure.

R.J. Milligan - Raymond James

Okay. Great. Thanks, guys.

Operator

And next we have question from Jeff Donnelly of Wells Fargo.

Jeff Donnelly - Wells Fargo

Good afternoon, guys. Scott, it sounds like you don’t expect to see Zalatoris Foods emerge as the winning bidder for SuperValu.

Scott Carr

We have kicked around the idea of taxable REIT subsidiary.

Jeff Donnelly - Wells Fargo

Okay.

Brett Brown

Only if you put on the apron and run them.

Jeff Donnelly - Wells Fargo

I’m curious Scott just to more to help us drill in the leasing a little better, are you seeing more, I guess, inbound phone calls for space from what I’ll call local mom and pop type tenants. The folks will you use less than 2500 square feet. Is that nature of demand turning corners. It’s still more of the kind of mid-size boxes and bigger boxes that are coming from national tenants that are driving things?

Scott Carr

For us the activity in those smaller mom and pop tenants 2500 square feet and below that’s been building for the past 18 months. And we’ve seen our shop occupancy go from the low of about 83% to where we’re approaching 88%. So, this has been continual for us. And it has just been building month-over-month. It seems there is a bit more availability to financing for these people.

And the ones we’re dealing with are generally opening a second or third or fourth location. So, it’s been a very good positive trends for us and there’s no doubt that the activity is giving us a lot more leverage in latitude in dealing with these people.

Jeff Donnelly - Wells Fargo

And then my follow-up. And do you think this is more about new stores for them or is it just you sort of stealing market share if you will?

Scott Carr

No. There is no doubt it’s been net store gain new business formation. We did our share of stealing back in 2010 and early 2011, but around the midpoint of 2011 is where we saw it start to change and its built quarter-by-quarter. And it’s been across the board with the franchise concepts, the independent concepts, it seems the franchised stores are giving a lot more support to franchises in terms of assisting with financing, assisting with modifying structure to allow for additional stores. So, it’s been very positive trends and it’s translated to into our existing tenant base. Our small shops existing are far more stable than they were 18 and 24 month ago.

Jeff Donnelly - Wells Fargo

And just maybe to switch gears for Mark, in prior call you talked about, I guess, the sort of growth being on new radar screen just ways to find on avenue to get bigger maybe for Inland. Have you ever thought of going in the other direction maybe in, I guess, they’re shrinking the portfolio to enhance the average quality because there is talk out there that pricing on transactions has picked up and there is more interest in.

I will say sort of to may be the assets out there and some of your competitors have been selling off their non-core retail. I think Equity One for example, explored that in a pretty chunky manner. Have you guys ever contemplated doing such a move maybe even just selling off of a piece of your the bottom tier of your portfolio that means kind of I mean it shrink yourself, but it improves the quality of your portfolio, maybe meaningful then on the radar screen you think?

Mark Zalatoris

Well, Jeff, we are kind of doing that in a little greater fashion than we have in the past few years. Given what’s Scott kind of diagrammed out for one of the prior callers. In that, dollar amount has increased this year probably increased next year and there is an attempt to kind of bolster.

When we look at we’ve been buying in our joint ventures particularly with PGGM, these are higher quality assets without question bolster the size, tenant mix, credit quality, the whole spectrum and so its kind of natural that we would kind of rotate out of some of the lower quality assets, smaller assets et cetera.

We -- not necessarily going to doing in a wholesale basis, but clearly and a little bit greater scope that we’ve done before. Shrinking the company down where we are to me is problematic in the sense that it limits our ability to attract the cost of capital, float is lower all kind of issues.

So, I think improved quality of the portfolio was clearly a goal. I think all of us have and we have been I think active in doing that and we’ll continue to do that. But I don’t see a shrinking the overall size of the company.

As a matter of fact, I think one of things that’s been a little bit not quite understood is really how large in the sense we are with the amount of the assets under management that we do have, which we’ve taken some efforts in this quarter to kind of explain and enhance disclosure in the supplemental.

When we buy these assets for the IPCC joint venture and they get solved. They don’t show up anywhere on our balance sheet, but we manage them and we are earning some good fee income of them. And so there is a lot of quality property that we’re responsible for that’s not necessarily reflected on our balance sheet.

Jeff Donnelly - Wells Fargo

That’s helpful. And just before I wrap up, a question or two for Brett, I think you put into your -- I guess most recent pricing structure that, I guess, pricing for achieving investment grade rating, underlying. I think it was -- do you have a timeline for achieving that -- achieving investment grade rating or how do -- how should we think about that?

Brett Brown

It something clearly we’d like to attain here in the next 18, 24 month, still a little bit of work to do as far as an encumbering more assets as well as just growing the overall size of the portfolio, the consolidated portfolio. So, it’s not going to happen in the near-term, but it is something that we working towards and have very preliminary discussions with, I think that’s the general timeline, we were looking at.

Jeff Donnelly - Wells Fargo

And just one last question and I’ll yield the floor. Just year-to-date your same-store NOI I believe is up about 5% and but your guidance for the year is in the range of 2% to 4%, I guess, sort of two questions. Why there is short deceleration in the fourth quarter and I guess at the point in the year why is the range so wide 2% to 4% for the year? Is there something hanging out there that’s going to lead to NOI growth swinging around a lot in the fourth quarter?

Brett Brown

Yeah. It’s actually nothing with the current year’s fourth quarter. It’s the prior year’s fourth quarter. Scott kind of mentioned in his remarks where we add in the prior year a sizable decrease in real estate taxes mainly Cook County and that’s where we had an over -- a larger amount of vacancy. And so we enjoyed most of that decrease rather than having to give it back to the tenants.

And so, as last year’s outsized fourth quarter compare to the current year, which is on par with the current quarter. So, it will roll back for the fourth quarter here. The comparison will be slightly negative, which will bring in the current year than into inline with our forecasted expectation. But it is definitely still top line rental growth that’s driving everything for the current year.

Jeff Donnelly - Wells Fargo

Okay. Thanks, guys.

Brett Brown

You bet.

Operator

And our next question is from Josh Patinkin of BMO Capital Markets.

Josh Patinkin - BMO Capital Markets

Hi. Good afternoon. Looking at the anchor spaces, Hobby Lobby and Anna’s Linens, so did you point those out to just give us an idea of more like them to come?

Mark Zalatoris

Yeah.

Josh Patinkin - BMO Capital Markets

I guess, I should say are there more to come like that?

Scott Carr

Well, Josh, this is Scott. Those are the types of retailers we are talking to today as well as obviously Ross, TJ Maxx, Bed Bath & Beyond, but from the opportunities where were at with occupancy in the portfolio, we are looking forward for these opportunities. So where we can displace an underperforming tenant or lower rent paying tenant have the opportunity to gain control of our space.

We’re actively out there marketing to these people. So, we are working on a two to three year timeline of sitting down with retailers trying to identify where we can create opportunities and then going back to our existing tenant base and letting them know that we are going to be changing.

And that’s an opportunity that we’ve always cultivated and being in the position we are with the portfolio we stabilized. We are being far more aggressive with the lack of new development in the marketplace second generation space is gaining value almost daily. And we need to be on top of that to capitalize on the opportunities where we have underperforming tenants or lower rents in place.

Josh Patinkin - BMO Capital Markets

Okay. Very good. And when you bring in soft goods retailer like that, you get the bump in NOI which is great. How do you balance the risk of decreased customer traffic or other merchandising considerations when you lose a grocer tenants for our center?

Mark Zalatoris

It’s always a product of the mix of the center. Because we also look at what else we have in place. In our objective is to always have a multi-anchored center where we are mixing both food and soft goods. So that in the event that you want to replace one component with the other whether you introduce food to a center that didn’t have it or takeaway food from a center that did have it, you still have counter balancing uses.

So generally, we always have another junior anchor or comparable type soft goods, non-food retailer in place. So, it really is just shifting the synergy in the center and it may not have the daily shop of a grocery store, but it brings in a different profile customer that plays well across the overall center.

Josh Patinkin - BMO Capital Markets

Okay. And turning to the small shop side, you mentioned that some of the Mom & Pops are now getting financing more from franchise source or other sources, if you -- would you guys or have you been participating in that with increased tenant allowances?

Mark Zalatoris

No. We have not. We are -- especially with the small shop tenants very diligent in our underwriting. And we’re not in the business of financing their operations, but we’ve seen much more availability of capital for some of these tenants. And again, the franchise orders being far more active not necessarily in providing the financing, but identifying the financing.

They’ve been very active in finding lenders, who will work with a certain profile of franchisee and that’s been very successful. And then franchisers have also been modifying their structure in terms of franchise fees and costs for some of their better operators to encourage them to open more stores.

Josh Patinkin - BMO Capital Markets

Okay. Right and then shifting gears and looking at the stock pricing, I think I heard you say that right now it might not be the best time or market to be issuing equity into. Would you consider -- have you considered different markets to try to close some of that discount in the stock price?

Brett Brown

What markets are you referring?

Josh Patinkin - BMO Capital Markets

I guess, I just to would ask are you looking at any other markets other than ones you’re investing in?

Mark Zalatoris

Coast versus Midwest?

Scott Carr

You mean geographic market?

Josh Patinkin - BMO Capital Markets

Sure. Yeah. Geographically.

Scott Carr

Okay. It’s always a consideration for us. But again it’s always been our objective to try to duplicate our business strategy, which is really establishing or clustering of assets where we can operate efficiently and leverage and grow into what we hope would be a market concentration or market dominance.

So, we would never preclude any geographic area. We haven’t identified one far outside the Midwest at this point. There are other markets in the Midwest that we still have targeted such as Wisconsin, Ohio, Indiana. There is still plenty of runway for us in those areas. But we would certainly -- we’re not looking to change the profile -- not everyone can be federal. We feel confident in our business model in the markets we operate. And we’re more focused on duplicating our operating strategy rather than chasing the Gateway cities or top five MSAs.

Josh Patinkin - BMO Capital Markets

Okay. Well, thanks very much, guys.

Scott Carr

Thank you.

Mark Zalatoris

Thank you.

Operator

And next we have a follow-up question from R.J. Milligan of Raymond James.

R.J. Milligan - Raymond James

Hi, guys. Just want to follow-up on Josh’s question about the guidance for fourth quarter. So Brett you mentioned that you expect same store NOI to be slightly negative. The guidance of 2% for the full year, I mean, it would depend on the mix of the portfolio. But if you assume the same-store portfolio as the same, it would be a negative -- it would imply a negative 7% same-store NOI growth for the fourth quarters. Is that within the realm of possibility or is it a mix issue?

Brett Brown

It would not be to that to that magnitude. It is closer to negative say 1% to 3%.

R.J. Milligan - Raymond James

Okay. So then the same-store portfolio I guess is changing if you are running at that 5% run rate, you are going to be looking at a different pool than in the previous three quarters?

Brett Brown

No. And you can’t blend for synergies, you actually have to take the total dollars.

R.J. Milligan - Raymond James

Okay. Yeah. Sounds good. Thanks, guys.

Brett Brown

Okay. You bet.

Operator

And this concludes our question-and-answer session. I would like to turn the conference back over to Mark Zalatoris for any closing remarks.

Mark Zalatoris

So, thank you. And as always we thank all our participants for joining us on today’s call. And we look forward to seeing many of you at NAREIT’s Annual Convention REITWorld later this month. And then once again, our best wishes and hopes for some semblance of normalcy to all those folks in Eastern Seaboard, who have suffered from this week storm. Good afternoon, everybody.

Operator

Thank you. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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