Inland Real Estate's CEO Discusses Q2 2013 Results - Earnings Call Transcript

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Inland Real Estate Corporation (NYSE:IRC) Q2 2013 Results - Earnings Call Transcript August 8, 2013 2:00 PM ET


Dawn Benchelt - IR

Mark Zalatoris - President and Chief Executive Officer

Brett Brown - Chief Financial Officer

Scott Carr - President of Property Management


Craig Schmidt - Bank of America Merrill Lynch

Todd Thomas - KeyBanc Capital Markets

R.J. Milligan - Raymond James & Associates

Tammy Fique - Wells Fargo Securities, LLC


Good afternoon and welcome to the Inland Real Estate Corporation second quarter 2013 earnings conference call. All participants will be in a listen-only mode. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Dawn Benchelt, Director of Investor Relations. Please go ahead.

Dawn Benchelt

Thank you for joining us for Inland Real Estate Corporation second quarter earnings conference call. The earnings release and supplemental financial information package has been filed with the SEC today and posted to our website, We're 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, 2012.

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 August 8, 2013.

Participating on today’s call will be, Mark Zalatoris, IRC’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. Hello everyone, and thanks for joining us this afternoon. On our call today, I will touch on our second quarter results, and provide an overview of our recent transaction activity including the acquisition of New York State Teacher Retirement System’s ownership interest in the IN Retail Fund joint venture.

Scott will then cover our portfolio performance and strong leasing activities during the quarter. Finally, Brett will review our balance sheet and capital markets activity. I am pleased to report that the second quarter was a very productivity one for the company with substantial progress made in our strategic objectives to enhance the company’s growth profile, improved portfolio performance and strengthen our financial position.

Indeed, as we stand at the mid-point of 2013, I am more confident than ever that we are well positioned to continue to drive growth and create value going forward. So a brief review on our results this quarter.

For the second quarter, we reported adjusted FFO of $0.25 per share representing an increase of 13.6% over the same period in 2012. The consolidated same-store operating income grew 1.2% for the quarter and 2.2% for the first half of 2013.

As a reminder, this year we have taken offline 350,000 square feet of spacing conjunction with redevelopment and repositioning projects. This activity will impact same-store NOI growth for this year, but expect to the projects to positively impact same-store NOI in 2014 and create additional value for the long-term.

Despite that near-term impact on income, we have increased our guidance for 2013 consolidated same-store NOI based primarily on our expectations for lease termination income in the second half of the year. Scott and Brett will provide additional information on guidance changes later in the call.

In addition, I would like to note that the current consolidated same-store portfolio does not include any assets previously owned by the joint venture with NYSTRS. With regards to leasing, we continue to experience record setting volumes and our team again achieved healthy spread on average base rents during the quarter.

During the second quarter, we signed 94 leases representing nearly 614,000 square feet within the total portfolio. This exceeds the amount of square feet leased in any of the prior nine quarters and as a 62.4% increase over the leasing volume reported in the second quarter of last year.

Our strong leasing volumes continue to drive higher occupancy for the portfolio and mid-year for the total portfolio leased occupancy was 94.4% and our financial occupancy was 91.8% representing increases of 150 basis points and 140 basis points respectively over one year ago. This progress is the reflection of the hard work of our leasing management teams as well as the high quality and solid value of our portfolio.

Moving on, I’ll now address our acquisition of NYSTRS’s interest in the IN Retail Fund joint venture for $121.1 million in cash. We believe this transaction represents an important strategic accomplishment and significant values add for our company. The IN Retail Fund is comprised of 13 high quality shopping centers totaling 2.3 million square feet in our primary markets with an estimated fair value of $395.6 million and total outstanding mortgage debt at the time of closing of $152.2 million.

Purchase price represents the 6.7% capitalization rate on a forward 12 month basis. Including the positive contribution from new leases start to commence in 2014, we expect to quickly improve our unlevered yield to 7%. We now own 100% of the IN Retail Fund and its assets, debt and operations are now reflected in our consolidated financial statements.

In addition, we were extremely pleased to largely fund the acquisition with an underwritten equity offering of 9 million common shares which generated net proceeds of $91.6 million. We believe the NYSTRS transaction validates our strategy of investing alongside institutional partners through joint ventures. This approach allows us to grow our portfolio in a capital efficient way, while earning fee income that increases the yield on our equity, with the end goal of consolidating assets on balance sheet at an appropriate time in the future.

Acquiring NYSTRS’s interest in the joint venture NST at this time (inaudible) to several of our strategic goals, this required 13 high quality centers in our core markets, enhancing the quality of our portfolio and having significant portfolio owned asset base.

Second, the acquisition simplifies the company's structure by reducing the number of unconsolidated joint ventures. And third, the NYSTRS transaction primarily funded with equity works towards our goal strengthening the balance sheet by lowering leverage levels and increasing our equity market capitalization.

Outside of the NYSTRS transaction, we continue to explore acquisition opportunities within our target markets, looking for retail properties with high quality rent loans, permanent market position, solid demographics and opportunities for future value creation. As previously announced in April for the consolidated portfolio, we purchased Warsaw Commons, a brand new 87,000 square foot shopping center located in northern Indiana for $11.4 million excluding subsequent earn-outs. This center was acquired at attractive pricing through an off-market transaction and is 95.5% leased for a stable of national retailers, including TJMaxx, PetSmart, Ulta, Shoe Carnival and Dollar Tree.

During the quarter, we also acquired Eola Commons and Winfield Pointe Centers located in the suburbs west of Chicago. We acquired notes on both of these small centers last year and through foreclosure proceedings received titles to the assets in April. After the close of the quarter, we sold Eola Commons to a third-party for $4.4 million, a price above its current carrying value and we're also marketing Winfield Pointe for sale. These acquisitions represent a unique opportunity to capture significant return on the short-term investment.

Turning to the IPCC joint venture, during the quarter the venture purchased three family Dollar stores in Wisconsin, Missouri and Texas for a total of $3.2 million. And in July, we invested $9.8 million of equity in the IPCC joint venture to acquire the Freedom Commons retail center in Naperville, Illinois for a purchase price of $24.4 million. The amount of additional equity we invested in the venture with IPCC during the second half of this year will depend on the pace of the sales to investors.

Our goal is to evolve the equity investors in the IPCC joint venture multiple times per year while limiting our total investments to a range of $20 million to $30 million at any one point in time to preserve our liquidity.

Finally we continue to recycle capital by selling assets in (inaudible) within our strategy or after little opportunity for further value creation, with proceeds we invested in higher quality properties.

At the start of second quarter, we have sold five operating properties for net proceeds of $15.9 million bringing our year-to-date dispositions to $22.4 million. We continue to target full year sales within a range of $30 million to $50 million and we’ll update you on our progress as the year continues.

I’ll now turn to Scott who will review the operational leasing results from the second quarter. Scott?

Scott Carr

Thank you Mark, and good afternoon everyone. On today’s call I will provide additional color on assets we acquired in the NYSTRS transaction. I’ll also discuss our operating results and leasing activity for the quarter and provide an update on some of our value creation projects.

I’d like to begin with our acquisitions of NYSTRS interest in the IN Retail Fund. This transaction adds to the consolidated portfolio 11 retail properties in Chicago, one property in Minneapolis, St. Paul and one property in Racine, Wisconsin.

The assets are distributed among the three asset types we target, with community and neighborhood centers comprising 55% of the GLA and power centers making up the remaining 45%. We believe this transaction is quality accretive as the IN Retail properties are among the best in our portfolio.

In terms of demographics the IN Retail portfolio is supported by an average population base of approximately 111,000 and household incomes of nearly $82,000 within a three mile radius. It includes tenants such Whole Foods, Nordstrom Rack, Bed Bath & Beyond, TJMaxx, and some top performing jewel grocery stores.

The acquisition of the IN Retail portfolio also improves the leased and financial occupancy of our consolidated portfolio. Leased occupancy of the consolidated portfolio was 93.1% at quarter end representing increases of 110 basis points over the prior quarter and 240 basis points over the second quarter of 2012.

Two-thirds of the improvement in consolidated leased occupancy is attributable to the NYSTRS portfolio with the balance coming from gains from our leasing activity.

Additionally we continue to manage these assets with no increase in headcount and using existing resources as we have done for the past nine years as managing partners for the venture.

Finally we believe the portfolio has long term growth opportunities that we are uniquely able to capture given our knowledge of these assets and their markets.

As Mark noted we are projected an increase of 30 basis points an initial yield based on leases signed not yet in occupancy and the in-process leasing activity. For example at Woodfield Commons in Schaumburg, Illinois we are constructing a new store for us that will be delivered prior to year end and in the second quarter we executed lease with half price books for 10,000 square foot space that we expect to deliver in the first quarter of next year.

Turning to portfolio operations as this midyear point we are very pleased with the strong performance of our portfolio. As Mark noted we are seeing steady increases on consolidated same store NOI. I would like to highlight that this is organic growth from higher rental income on new and renewal leases and occupancy gains.

Excluding lease termination income, consolidated same store NOI for the three and six months ended June 30, 2013 rose 2.8% and 3.1% respectively over the quarter and six months ended June 30, 2012.

As we have previously noted, consolidated same-store NOI for the full year will be impacted by redevelopment projects and asset sales over the course of 2013. However, we are raising our prior guidance for consolidated same-store NOI growth to a range of 2% to 3% from a range of 1% to 2%. The guidance increase is primarily due to a lease termination fee of approximately $2 million that we will receive from Best Buy in the third quarter, as a result of our repositioning of the Shops at Orchard Place in Skokie, Illinois.

In this instance, we negotiated the early termination of lease with Best Buy and have signed a new lease with Nordstrom Rack. This is an example of our efforts to diversify and upgrade the quality of our tenant base by adding best-of-class retailers to our centers.

Nordstrom Rack will further enhance the existing tenant lineup which includes BSW, Alta, Tier I and Party City at one of our most productive centers.

Turning to leasing, activity during the quarter was very strong with 94 leases signed for 614,000 square feet of space, 76 of these leases were signed with non-incurred tenants primarily national retailers and franchise operators. Apparel players, such as Rule 21, Dressbarn, Shoe Carnival and Famous Footwear continue to drive leasing activity for the 5,000 to 8,000 square foot stores.

Regarding small shops base, restaurant concepts, professional and medical service providers, (Inaudible) plant operators continue to exhibit solid demand. Total portfolio non-incurred leased occupancy was 89% at quarter end, up 50 basis points over the prior quarter and 230 basis points over one year ago. In the coming quarters, we believe we can nominally increase non-incurred occupancy due to the strong demographics in consumer traffic at our centers.

Moving to anchor leasing, for the quarter we signed an impressive 18 leases for 427,000 square feet of space with anchor tenants. The most square feet leased to anchor tenants since the fourth quarter of 2010. This activity was primarily driven by 15 big box renewals. At quarter end, our total portfolio of anchor lease occupancy was 96.5%, an increase of 20 basis points over the prior quarter and a 110 basis points over the second quarter of 2012. We continue to see strong demand from value based junior box retailers looking to maintain market share and increase net new store counts. For example, this quarter, we signed new anchor leases with Ross, (inaudible) Stores and Half Price Books.

Additionally, the renewal leases signed with anchor tenants during the quarter speak to the strong performance of these retailers within our centers. During the second quarter, we signed four renewal leases with Michaels, two with Bed, Bath & Beyond and renewed individual leases with PetSmart, (inaudible) Stores, (inaudible) and Walgreens. Regarding rental rates, we continue to benefit from our infill locations and supply constrained markets. The average base rent on new leases signed within the total portfolio was up 25.8%, and average base rent on renewals increased 5.2% over expiring average rents.

I’d like to note that second quarter marked the 10th consecutive quarter of positive spreads on new leases and continued positive spreads on renewal leases, sign within the total portfolio. Our blended rent spread including new and renewal leases executed within the total portfolio was up 7.6%. Now I’d like to update you on a couple of our value add projects, where we are improving tenant quality and mix while increasing NOI through redevelopment of underutilized space. At Aurora Commons and Aurora Illinois, we are currently redeveloping a former Jewel Store into junior anchor space for multiple retailers. A project that reduces our exposure to jewel, while revitalizing the center.

I am pleased to announce that during the quarter, we signed lease with Ross for 26,000 square feet of space at an average rent that is 50% higher than the rent previously paid by Jewel. We expect to sign a lease with the second junior anchor during the third quarter at similar rent levels. The redevelopment of Aurora Commons demonstrate the opportunity that exist within the portfolio to mark-to-market, as we recapture space that was previously occupied by tenants paying below market rents.

The Aurora Commons redevelopment is expected to cost approximately $2.6 million with a projected return on cost of 19%. We also continue to work with retailers to adjust their store format, this activity provides us with the opportunity to diversify and strengthen our tenant mix and drive NOI in valuation through redevelopment. For example, at Pine Tree Plaza in Jamesville, Wisconsin, during the quarter we downsized the Staple store from 24,000 to 15,000 square feet. This allowed us to sign a new lease with Dress Barn to backfill the vacated space at rents 42% higher than the previous rent.

At the same center we also right sized a famous footwear store to 7400 square feet and then signed a lease with [IMart] for the 3500 square feet of remaining space realizing an increase of 79% over the former rent. Additionally we are capitalizing on retail advertise per new stores in urban environments. During the quarter we executed a lease with (inaudible) Stores for 16000 square feet at a multi-level Joffco Square Shopping Center located in Chicago’s South Loop neighborhood.

The second Florida space leased by Jo-Ann is an example of retailers’ flexibility with store format in order to add locations in dense urban markets. We are pleased that Jo-Ann Stores got those squares for one of their urban locations in Chicago and we look forward to their store opening later this year. Finally we are participating in the growth of high-end specialty grocers. By leveraging our local relationships and deep market knowledge, we secured a reverse built-to-suit opportunity for a new 21,000 square foot fresh market store in Lincolnshire, Illinois.

We celebrated the grand opening of that store in June, this project was completed a head of schedule in nine months’ time with a 10% yield on cost. In summary we continue to work to increase occupancy, drive positive rent spreads and enhance the overall quality of our portfolio. We are experiencing health demand for our infill locations from value and discount retailers as well as from specialty and high-end retailers. We have been able to leverage our substantial market presence and strong relationships to drive leasing and reposition assets with the goal of maximizing the long term growth potential of our portfolio.

With that I'll turn it to Brett for a discussion of our financial results.

Brett Brown

Thank you Scott and good afternoon everyone. We are very excited about our accomplishments this quarter and I'd like to begin with a review of our balance sheet and particularly the NYSTRS acquisition and its impact. Then I'll discuss our quarterly results and provide an update on our guidance for 2013.

During the quarter we were pleased to bring the joint venture to NYSTRS to our intended conclusion, coupled with our equity rates we were able to achieve several important strategic objectives, including upgrading our consolidated portfolio, simplifying our balance sheet and reducing leverage.

I'll now outline how these transactions advanced our balance sheet objectives and our longer-term goal of an investment grade rating. This transaction expanded our total consolidated assets by $400 million to $1.6 billion, importantly, we added 4 assets to our unencumbered asset base, including Whole Foods Anchored, Ravinia Plaza on which we repaid the mortgage debt subsequent quarter end. We now have $700 million of consolidated unencumbered assets.

Our total debt-to-gross assets including our share of unconsolidated joint ventures was 48.1% at quarter end. This metric improved by 290 basis points and 50 basis points respectively, over the prior three months in the quarter ended June 30, 2012. Net debt-to-EBITDA pro rata consolidation improved to 6.6 times for the quarter from 7.2 times one year ago. We also continue to lower our leverage by repaying existing loans, as I mentioned we repaid our loan on Ravinia Plaza which amounted to $10.6 million. We also repaid a portion of pool loan Cub Foods Buffalo Grove in the amount of $3.8 million and subsequently sold that property. The remainder of 2013 excluding the two loans on Eola Commons, we have only one secured loan maturing which is the $14.8 million loan on Orchard Crossing in Fort Wayne, Indiana that we're repaying next week upon maturity.

Over the next two calendar years, we have approximately $138 million of secured debt maturing. We intend to pay off a certain number of these mortgage loans as they come due, utilizing our unsecured line of credit and/or other unsecured debt as well as proceeds from asset sales and our issuance of equity.

Overtime, we expect to achieve a more favorable debt profile as we retire secured debt and acquire new properties with less leverage. Over the coming quarters, we intend to continue these balance sheet successes by working to increase our unencumbered asset base and reduce our leverage.

Early in the quarter, we issued 449,000 shares of common stock to our aftermarket equity program for net proceeds of $5 million. Later this past quarter, we sold 9 million shares of common stock through an underwritten equity offering that generated net proceeds of $91.6 million. We use the proceeds as well as cash on hand and a drop from our credit facility to acquire NYSTRS’ interest in the IN Retail Fund joint venture for $121 million.

As a result of those capital raises, our equity market capitalization increased to $1 billion at June 30, 2013, compared to $908 million at the end of the first quarter 2013 and $747 million at June 30, 2012. The equity raises also helped lower our debt-to-market capitalization to 47.4% at quarter end, representing improvements of 190 basis points and 680 basis points respectively over the last quarter and the year ago quarter.

Overall, our credit profile improved and our public quote increased adding liquidity. Our decision to fund the acquisition of IN Retail primarily with equity preserve availability on our line of credit facility for other users. At June 30, we had $110 million available on the line of credit. As of today, we have $85 million available due to the repayment of secured debt I mentioned and the acquisition of properties for the IPCC joint venture.

Now I turn to operating results. We reported FFO of $0.28 per share and FFO adjusted of $0.25 for the second quarter of 2013. The difference between FFO and FFO adjusted was primarily due to of $3.1 million gain from settlement and receivables related to our acquisitions through foreclosure of the Eola Commons and Winfield Pointe Center for the quarter which Mark discussed.

On a per share basis, FFO increased 3.7% and FFO adjusted rose 13.6% over the second quarter of 2012. For the quarter, the increase in FFO adjusted was primarily due to higher revenues, lower interest expense, an increase of $1.4 million and income from unconsolidated properties reported in equity and earnings of one consolidated joint ventures.

In addition, we recognized that $3.3 million lease termination fee recorded in income from discontinued operations related to Cub Foods Buffalo Grove, which was sold during the quarter and was included in our original guidance for the year.

Turning to revenue, total revenue for the quarter was $42.9 million, a 9.2% increase over the second quarter of last year. Rental income increased by $1.4 million primarily due to the consolidation of NYSTRS joint venture assets.

And our recovery income increased by $1 million, reflecting a corresponding increase in property operating and real estate tax expense and fee income totaling $2 million for the quarter, an increase of $1 million over the prior year period. This increase was driven by higher acquisition fees from our IPCC joint venture and increased asset and property management fee income of both the IPCC and PGGM joint ventures.

Our total expenses for the quarter increased by $3.6 million due to the consolidation of NYSTRS joint venture assets. In addition, real estate tax expense increased due to rising rates and property values. G&A rose due to legal cost and additional staff, and depreciation and amortization expense increased as a result of new acquisitions and tenant improvements related to new leases.

We also have a one-time income tax expense of $1.6 million related to the gain from outstanding receivables by our taxable resubsidiaries. In contrast, our interest expense decreased by approximately $850,000 due to lower rates on our unsecured credit facilities, loan repayments and a lower weighted average interest rate on outstanding consolidated debt.

Importantly, I’d like to point out that on an ongoing basis, property revenue, operating expense, real estate tax expense and depreciation and amortization expense will all increase due to the consolidation of NYSTRS’s interest joint venture assets.

Finally, I would also like to note that we recorded a $94.5 million gain during the quarter from a change in control of investment properties as a result of the acquisition of NYSTRS’ interest in the joint venture.

Regarding our outlook, we are pleased to increase our annual guidance for FFO adjusted to a range of $0.89 to $0.93 per common share from $0.88 to $0.92. We are raising guidance for 2013 consolidated same-store NOI which we now expect to range between 2% to 3%. Increase in same-store NOI guidance is due to approximately $2 million of additional lease termination income that was not in our original guidance. We continue to expect consolidated same-store financial occupancy at year-end within a range of 89% to 90%.

Our revised guidance takes into account the impact of the acquisition of NYSTRS interest in the IN Retail joint venture, expected increase of lease termination income offset by higher G&A expense as well as the increased share count from our capital raise.

In closing, during the quarter we strengthened and streamlined our balance sheet and expanded our asset base while making strong progress on leasing. We continue to execute on our strategic objectives and look forward to communicating our progress in the future.

With that, we'll open the call up for questions. Operator?

Question-and-Answer Session


(Operator Instructions). Our first question comes from Craig Schmidt of Bank of America.

Craig Schmidt - Bank of America Merrill Lynch

Thank you. I guess my reading of the financial occupancy is now at 91.8%, but the yearend guidance is 89% to 90%, if I'm reading that right, what is bringing your occupancy down for the end of the year?

Scott Carr

Craig, it's Scott. The 91.8% financial occupancy is the total portfolio which includes both same-store and our unconsolidated assets. The 89% to 90% occupancy we refer to in guidance reflects only our same-store occupancy, which we anticipate same-store occupancy to be flat throughout the year, primarily due to the 350,000 square-feet of space we’ve taken offline for redevelopment and that’s offset by other spaces that are being delivered over the course of the year. The same store we're still projecting relatively flat occupancy in the 89% to 90% range, but it is correct, our total portfolio occupancy is 91.8%.

Mark Zalatoris

And today we’re at 89.2% same-store financial occupancy at June 30.

Craig Schmidt - Bank of America Merrill Lynch

Okay, that's helpful. And I know it's a small amount but why are your real estate taxes lower this year versus last year?

Scott Carr

I think we had some adjustments in some of the various properties and it's always hard to track based on what the population of properties are in each given period.

Mark Zalatoris

Craig, this is Mark. We've also been pretty successful lowering assessments and properties, particularly the ones in Illinois, Cook County in particular. So, you get lower assessments means lower tax bills.


The next question comes from Todd Thomas of KeyBanc Capital Markets.

Todd Thomas - KeyBanc Capital Markets

First question. Just regarding the NYSTRS acquisition, I was just wondering if you can just give us a little bit of a background of sort of how those discussions started and why NYSTRS chose to sell its stake and it sounds like some of the near-term upside that baked in. I was just curious is that upside that’s sort of in the bag at this point or is that part of your underwriting and expectations for leasing up space over the first 12 months?

Scott Carr

Todd, its Scott. The NYSTRS acquisition, I mean it was always our long-term plan to gain a 100% ownership for this portfolio and it’s just came about as a negotiated transaction. We did have buy/sell rates in the agreement, we have an ongoing working relationship with NYSTRS and we thought the time was right from our perspective and in terms of cost of capital and being able to acquire the assets. So we ended up negotiating a transaction which was seamless and rather comfortable for both of us, it ended very well for us.

We look at the portfolio. A lot of the upside we have in place going in from our first 12 months into the second is in place activity where we had leases signed that haven’t been delivered yet. So that valuation gain is something we are anticipating into the coming year.

So there is about 30 basis points in return that we expect to gain over the first 24 months of ownership and that’s from again in-place leases. As an example what I mentioned in the comments we are delivering space to Ross at Woodfield Commons and having a new lease sign with half price books. And again that’s the intimacy we had with the portfolio having the insights on where those opportunities lie for the future.

Todd Thomas - KeyBanc Capital Markets

Okay. So that was part of the negotiated pricing on that transaction, the 30 basis point increase in the yield essentially?

Mark Zalatoris

Todd, its Mark. I would agree with that, NYSTRS knew about those leases, they approved them as well. So it’s a negotiated price on today’s income with some credit given for future growth. We think it’s fair, it was a fair price. At the 6.7 capital we look at properties of that quality. In today’s marketplace, they are being offered for sale. So we think it was even if the 30 basis point growth wasn’t baked in, that was fair price and obviously I think it work for other side as well.

Todd Thomas - KeyBanc Capital Markets

And then just regarding the Best Buy early termination at the Shops at Orchard pretty nice leasing transaction at Nordstrom Rack, I was just curious whether you approached Best Buy or they came to you and whether you had Nordstrom Rack sort of in your back and maybe if you could just give us a little bit of insight as to how that transaction came about, what the change of events was sort of like?

Scott Carr

Sure, Todd, it’s Scott again. It was a situation as we continually do looking at those tenants that we feel are better to replace or upgrade in terms of tenancy and we had the conversation with Nordstrom Rack presenting them this particular location. We knew that this was the location that Best Buy would be willing to do a termination on. They made that clear to us. So we again negotiated the transaction with the replacement tenant, Nordstrom Rack and then approached Best Buy and simultaneously conclude the deal. And those were both third quarter but again significant impact to us for our going forward for the year.


Our next question comes from R.J. Milligan of Raymond James & Associates.

R.J. Milligan - Raymond James & Associates

Scott a question for you on the discussion about same-store occupancy, now given that you’ve taken quite a bit of space offline for redevelopment, would you expect sort of above average rent in that occupancy, yes we are looking to 2014?

Scott Carr

Well, we are delivering the bulk of this space towards the end of the year and into 2014. So while we haven’t specifically addressed 2014 guidance yet, we will definitely see an impact from the delivery of space at the end of this year going into next year.

R.J. Milligan - Raymond James & Associates

So if leasing continues on the same pace and then you are bringing that pace back on it would be an above average sort of growth rate in occupancy.

Scott Carr

Yeah. It's an ongoing process for us and it's something we address annually in terms of what opportunities we have for this, but we would expect it to grow.

R.J. Milligan - Raymond James & Associates

Okay. And Mark, just if you could comment on sort of the acquisition volumes, what you guys are looking at, what's coming in the door, is it more than three months ago, is it less that three months ago and what you're seeing having the cap rates over the past couple of months.

Mark Zalatoris

Well, we continue to see good product flow, it's competitive out there, we didn’t closed any properties for the PGGM venture in this past quarter, but we have 300 contracts, and we expect them to close into the third quarter and all added together and that's about a $150 million. So we're still very active in the marketplace, I don't think cap rates have really moved much with the rise in interest rates. So our expectations are still holding pretty firm, I don't think they are going to compress any further however. So I mean we're out there and active and I think by the end of the year we'll see we'll have accomplished a pretty good pace for acquisitions for all of our interest both joint ventures and balance sheet.


The next question comes from Tammy Fique of Wells Fargo.

Tammy Fique - Wells Fargo Securities, LLC

I'm just wondering the new guidance range includes the termination fee from Best Buy, I guess that implies $0.02 increase versus the $0.01 that you announced is there something else that we should be considering that’s offsetting that in the second half?

Brett Brown

Tammy, its Brett. You are right, it's about $2 million lease termination fee but that comes with a cost. Obviously, we no longer will have the rental income from this tenant going forward and so that’s about $700,000. So that offset us there, as well as we have some slightly higher G&A expenses as I mentioned in the scripted remarks that we had in the current quarter and expected going forward as well. So all in, we expect that $0.01 and increase for the year.

Tammy Fique - Wells Fargo Securities, LLC

Okay and then just circling back with on the G&A expenses. I think you mentioned that there was some legal costs that were included in the second quarter? Can you maybe quantify that so we have a good run rate for the remainder of the year?

Brett Brown

It's part of an extra $200,000 for the quarter. We had some litigation as you are aware of with the (inaudible) comments that's been adding up there. So just figured we would increase that through the end of the year with real know anticipation as far as timing on that but as well as second quarter also includes your annual report and legal fees for proxies and stuff like that. So the second quarter can be a little higher than other quarters as well as the ICSE conferences in second quarter and that's a big cost for us as well in May there.

Tammy Fique - Wells Fargo Securities, LLC

I guess, you also mentioned that you were selling some properties that don’t meet your strategy. Can you maybe give us a sense of what percent of portfolio you think falls in to that group?

Scott Carr

Tammy its Scott. In terms of a percentage of the portfolio, we've really been focusing on different strata of assets that primarily our unanchored stripped portfolio which we have been working down very aggressively over the past few years. And then we're looking at those properties where we feel have maximized value and don’t see the growth profile or perhaps tenant quality we want go going forward. So that’s really been our focus this year, we are projecting dispositions in the $30 million to $50 million range, we’ve closed about $22.6 million year-to-date. So we are on good pace for that and on a go forward, we would look for this type of level of activity for the next couple of years, as we focus on our long term objective, which is to increase the quality of the portfolio, grow the portfolio and also diversify geographically. So we are looking to recycle capital to this initiative and fund our growth strategy.


Our next question comes from Todd Thomas of KeyBanc Capital Markets. Please go ahead.

Todd Thomas - KeyBanc Capital Markets

Just a couple of quick follow-ups. So just wondering if you could just give us any color on the properties or maybe the markets of the properties or in that you are under contract to buy with PGGM and I am assuming that these properties were or brought to PGGM and looked at several weeks or may be even months ago and I am just curious if either you or they have adjusted underwriting assumptions maybe either exit the cap rates or going in yield given the increase in interest rates, we’ve seen here?

Scott Carr

Hi Todd its Scott again. I think with PGGM their acquisition strategy is very much in line with ours and that we will of course focus on our core markets in Minneapolis in Chicago, but we are also again looking to diversify geographically and looking throughout the central United States as really, as we reiterated before our platform for going forward. The assets we’ve shown PGGM, one of them has been under contract for some time and then other two are more recently put under contract over the course of this past quarter. I would say at this point we have given some consideration to exit cap rates for the most though are underwriting standards are pretty much stable, primarily because our investment thesis with PGGM is a lower leverage. We look to keep that portfolio between 40% and 50% and we’ve been placing debt that’s coterminus with our expected life span as a program which is seven to ten years.

Todd Thomas - KeyBanc Capital Markets

What you would say you’ve increased exit cap rates by in your underwriting now may be 25 basis points 50 basis points?

Scott Carr

That brings at about 25 basis points.

Todd Thomas - KeyBanc Capital Markets

The two acquisitions where you acquired the notice and were closed on in the quarter [Iowa] and [Wind field], I was just wondering are you pursuing other investment of this nature or are these assets that IRC would want to earn long term or are you just looking at these sort of opportunistically with the primary intention to sell.

Scott Carr

These were unique opportunities, it was definitely a short term investment strategy and again it comes from our presence here in the market place we get unique opportunities presented to us as individual assets these would not be long term core assets that we would like to own and subsequently we sold one almost immediately upon taking title and we will do a little lease up on the remaining Wind field assets and look to sell that in short order as well. I wouldn’t say no purchases are going to be a major portion of our strategy, but this one was just a unique opportunity at short term investment but a very attractive return.

Todd Thomas - KeyBanc Capital Markets

Just one quick last one if I may, Brett on the income statement, the increase in the income from unconsolidated joint ventures, I think I may have missed it in your comments, my apologies. But what cause that increase this quarter?

Brett Brown

It's just the addition of more from the PGGM there and less depreciation pressure from the other portfolios, I think it's less depreciation NYSTRS mainly since that’s no longer consolidated portfolio, or unconsolidated portfolio excuse me.


This concludes our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Mark Zalatoris

Well, thanks for your time and attention on today's call. Results we reported for the second quarter demonstrate strong execution on our strategic plan for the company. And as we move in to the second half of the year, we are excited about the opportunities that lie ahead. We look forward to updating you on our progress when we report third quarter results in November. Have a good day.


The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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