XNYS:IRC Inland Real Estate Corp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2012

 

or

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                          to                         

 

Commission File Number 001-32185

(Exact name of registrant as specified in its charter)

 

Maryland

 

36-3953261

(State or other jurisdiction

 

(I.R.S. Employer Identification No.)

of incorporation or organization)

 

 

 

2901 Butterfield Road, Oak Brook, Illinois

 

60523

(Address of principal executive offices)

 

(Zip code)

 

Registrant’s telephone number, including area code:  630-218-8000

 

N/A

(Former name, former address and former fiscal
year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check One):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o
(do not check if a smaller reporting company)

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  Yes o  No x

 

As of May 9, 2012, there were 89,068,837 shares of common stock outstanding.

 

 

 



Table of Contents

 

INLAND REAL ESTATE CORPORATION

(a Maryland corporation)

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

Part I — Financial Information

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets at March 31, 2012 (unaudited) and December 31, 2011

2

 

 

 

 

Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2012 and 2011 (unaudited)

4

 

 

 

 

Consolidated Statements of Equity for the three months ended March 31, 2012 (unaudited)

5

 

 

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011 (unaudited)

6

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

41

 

 

 

Item 4.

Controls and Procedures

42

 

 

 

Part II — Other Information

 

 

 

 

Item 1.

Legal Proceedings

43

 

 

 

Item 1A.

Risk Factors

43

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

43

 

 

 

Item 3.

Defaults Upon Senior Securities

43

 

 

 

Item 4.

Mine Safety Disclosures

43

 

 

 

Item 5.

Other Information

43

 

 

 

Item 6.

Exhibits

43

 

 

 

 

Signatures

46

 

 

 

 

Exhibit Index

47

 

1



Table of Contents

 

Part I - Financial Information

 

Item 1.  Financial Statements

 

INLAND REAL ESTATE CORPORATION

Consolidated Balance Sheets

March 31, 2012 and December 31, 2011

(In thousands, except per share data)

 

 

 

March 31, 2012
(unaudited)

 

December 31, 2011

 

Assets:

 

 

 

 

 

Investment properties:

 

 

 

 

 

Land

 

$

345,421

 

314,384

 

Construction in progress

 

1,849

 

1,669

 

Building and improvements

 

1,032,775

 

950,421

 

 

 

 

 

 

 

 

 

1,380,045

 

1,266,474

 

Less accumulated depreciation

 

322,568

 

323,839

 

 

 

 

 

 

 

Net investment properties

 

1,057,477

 

942,635

 

 

 

 

 

 

 

Cash and cash equivalents

 

10,962

 

7,751

 

Investment in securities

 

11,998

 

12,075

 

Accounts receivable, net

 

30,450

 

30,097

 

Investment in and advances to unconsolidated joint ventures

 

95,063

 

101,670

 

Acquired lease intangibles, net

 

54,883

 

31,948

 

Deferred costs, net

 

18,776

 

18,760

 

Other assets

 

13,803

 

14,970

 

 

 

 

 

 

 

Total assets

 

$

1,293,412

 

1,159,906

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

35,382

 

33,165

 

Acquired below market lease intangibles, net

 

23,445

 

11,147

 

Distributions payable

 

4,639

 

4,397

 

Mortgages payable

 

451,669

 

391,202

 

Unsecured credit facilities

 

295,000

 

280,000

 

Convertible notes

 

27,979

 

27,863

 

Other liabilities

 

19,820

 

21,719

 

 

 

 

 

 

 

Total liabilities

 

857,934

 

769,493

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Preferred stock, $0.01 par value, 6,000 Shares authorized; 4,400 and 2,000 Series A shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively

 

110,000

 

50,000

 

Common stock, $0.01 par value, 500,000 Shares authorized; 89,049 and 88,992 Shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively

 

890

 

890

 

Additional paid-in capital (net of offering costs of $69,883 and $67,753 at March 31,      2012 and December 31, 2011, respectively)

 

782,566

 

783,211

 

Accumulated distributions in excess of net income

 

(450,652

)

(435,201

)

Accumulated comprehensive loss

 

(6,142

)

(7,400

)

 

 

 

 

 

 

Total stockholders’ equity

 

436,662

 

391,500

 

 

 

 

 

 

 

Noncontrolling interest

 

(1,184

)

(1,087

)

 

 

 

 

 

 

Total equity

 

435,478

 

390,413

 

 

 

 

 

 

 

Total liabilities and equity

 

$

1,293,412

 

1,159,906

 

 

The accompanying notes are an integral part of these financial statements.

 

2



Table of Contents

 

INLAND REAL ESTATE CORPORATION

Consolidated Balance Sheets (continued)

March 31, 2012 and December 31, 2011

(In thousands, except per share data)

 

The following table presents certain assets and liabilities of consolidated variable interest entities (VIEs), which are included in the Consolidated Balance Sheet above as of March 31, 2012.  There were no consolidated VIE assets and liabilities as of December 31, 2011.  The assets in the table below include only those assets that can be used to settle obligations of consolidated VIEs.  The liabilities in the table below include third-party liabilities of consolidated VIEs only, and exclude intercompany balances that eliminate in consolidation.  Reference is made to footnote 3 of this Quarterly Report on Form 10-Q for additional information related to the deconsolidation of the VIE assets and liabilities.

 

 

 

March 31, 2012

 

 

 

(unaudited)

 

Assets of consolidated VIEs that can only be used to settle obligations of consolidated VIEs:

 

 

 

 

 

 

 

Investment properties:

 

 

 

Land

 

$

15,353

 

Building and improvements

 

50,529

 

 

 

 

 

 

 

65,882

 

Less accumulated depreciation

 

42

 

 

 

 

 

Net investment properties

 

65,840

 

 

 

 

 

Accounts receivable, net

 

28

 

Acquired lease intangibles, net

 

11,494

 

Other assets

 

549

 

 

 

 

 

Total assets of consolidated VIEs that can only be used to settle obligations of consolidated VIEs

 

$

77,911

 

 

 

 

 

Liabilities of consolidated VIEs for which creditors or beneficial interest holders do not have recourse to the general credit of the Company:

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

56

 

Acquired below market lease intangibles, net

 

3,590

 

Mortgages payable

 

22,430

 

Other liabilities

 

556

 

 

 

 

 

Total liabilities of consolidated VIEs for which creditors or beneficial interest holders do not have recourse to the general credit of the Company

 

$

26,632

 

 

The accompanying notes are an integral part of these financial statements.

 

3



Table of Contents

 

INLAND REAL ESTATE CORPORATION

Consolidated Statements of Operations and Comprehensive Income

For the three months ended March 31, 2012 and 2011 (unaudited)

(In thousands except per share data)

 

 

 

Three months ended
March 31, 2012

 

Three months ended
March 31, 2011

 

Revenues:

 

 

 

 

 

Rental income

 

$

28,116

 

29,748

 

Tenant recoveries

 

10,225

 

13,771

 

Other property income

 

398

 

460

 

Fee income from unconsolidated joint ventures

 

1,038

 

1,163

 

Total revenues

 

39,777

 

45,142

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

Property operating expenses

 

7,166

 

10,112

 

Real estate tax expense

 

7,297

 

8,822

 

Depreciation and amortization

 

15,334

 

12,351

 

General and administrative expenses

 

4,507

 

3,718

 

Total expenses

 

34,304

 

35,003

 

 

 

 

 

 

 

Operating income

 

5,473

 

10,139

 

 

 

 

 

 

 

Other income

 

1,523

 

705

 

Loss from change in control of investment properties

 

 

(1,400

)

Gain on sale of joint venture interest

 

52

 

313

 

Interest expense

 

(8,715

)

(10,957

)

Loss before income tax benefit (expense) of taxable REIT subsidiaries, equity in earnings (loss) of unconsolidated joint ventures and discontinued operations

 

(1,667

)

(1,200

)

 

 

 

 

 

 

Income tax benefit (expense) of taxable REIT subsidiaries

 

121

 

(121

)

Equity in earnings (loss) of unconsolidated joint ventures

 

32

 

(359

)

Loss from continuing operations

 

(1,514

)

(1,680

)

Income from discontinued operations

 

8

 

345

 

Net loss

 

(1,506

)

(1,335

)

 

 

 

 

 

 

Less: Net income attributable to the noncontrolling interest

 

(3

)

(36

)

Net loss attributable to Inland Real Estate Corporation

 

(1,509

)

(1,371

)

 

 

 

 

 

 

Dividends on preferred shares

 

(1,255

)

 

Net loss attributable to common stockholders

 

(2,764

)

(1,371

)

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

Unrealized gain on investment securities

 

849

 

394

 

Reversal of unrealized gain to realized gain on investment securities

 

(590

)

(383

)

Unrealized gain on derivative instruments

 

999

 

937

 

 

 

 

 

 

 

Comprehensive loss

 

$

(1,506

)

(423

)

 

 

 

 

 

 

Basic and diluted earnings attributable to common shares per weighted average common share:

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(0.03

)

(0.02

)

Income from discontinued operations

 

 

 

Net loss attributable to common stockholders per weighted average common share — basic and diluted

 

$

(0.03

)

(0.02

)

 

 

 

 

 

 

Weighted average number of common shares outstanding — basic

 

88,906

 

87,858

 

Weighted average number of common shares outstanding — diluted

 

88,906

 

87,858

 

 

The accompanying notes are an integral part of these financial statements.

 

4



Table of Contents

 

INLAND REAL ESTATE CORPORATION

Consolidated Statements of Equity

For the three months ended March 31, 2012 (unaudited)

(Dollars in thousands, except per share data)

 

 

 

Three months ended
March 31, 2012

 

Number of shares

 

 

 

Balance at beginning of period

 

88,992

 

Shares issued from DRP

 

57

 

Balance at end of period

 

89,049

 

 

 

 

 

Preferred Stock

 

 

 

Balance at beginning of period

 

$

50,000

 

Issuance of shares

 

60,000

 

Balance at end of period

 

110,000

 

 

 

 

 

Common Stock

 

 

 

Balance at beginning of period

 

890

 

Proceeds from DRP

 

 

Balance at end of period

 

890

 

 

 

 

 

Additional Paid-in capital

 

 

 

Balance at beginning of period

 

783,211

 

Proceeds from DRP

 

476

 

Deferred stock compensation

 

63

 

Amortization of debt issue costs

 

8

 

Issuance of preferred shares

 

938

 

Offering costs

 

(2,130

)

Balance at end of period

 

782,566

 

 

 

 

 

Accumulated distributions in excess of net income

 

 

 

Balance at beginning of period

 

(435,201

)

Net loss attributable to Inland Real Estate Corporation

 

(1,509

)

Dividends on preferred shares

 

(1,255

)

Distributions declared, common

 

(12,687

)

Balance at end of period

 

(450,652

)

 

 

 

 

Accumulated comprehensive loss

 

 

 

Balance at beginning of period

 

(7,400

)

Unrealized gain on investment securities, net

 

849

 

Reversal of unrealized gain to realized gain on investment securities

 

(590

)

Unrealized gain on derivative instruments

 

999

 

Balance at end of period

 

(6,142

)

 

 

 

 

Noncontrolling interest

 

 

 

Balance at beginning of period

 

(1,087

)

Net income attributable to noncontrolling interest

 

3

 

Contributions to noncontrolling interest

 

50

 

Distributions to noncontrolling interest

 

(150

)

Balance at end of period

 

(1,184

)

 

 

 

 

Total equity

 

$

435,478

 

 

The accompanying notes are an integral part of these financial statements

 

5



Table of Contents

 

INLAND REAL ESTATE CORPORATION

Consolidated Statements of Cash Flows

For the three months ended March 31, 2012 and 2011 (unaudited)

(In thousands)

 

 

 

Three months
ended
March 31, 2012

 

Three months
ended
March 31, 2011

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(1,506

)

(1,335

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

15,453

 

12,523

 

Amortization of deferred stock compensation

 

63

 

66

 

Amortization on acquired above/below market leases and lease inducements

 

(2

)

(5

)

Gain on sale of investment properties

 

 

(197

)

Loss from change in control of investment properties

 

 

1,400

 

Realized gain on investment securities, net

 

(652

)

(455

)

Equity in (earnings) loss of unconsolidated joint ventures

 

(32

)

359

 

Gain on sale of joint venture interest

 

(52

)

(313

)

Straight line rent

 

(258

)

(480

)

Amortization of loan fees

 

805

 

922

 

Amortization of convertible note discount

 

116

 

363

 

Distributions from unconsolidated joint ventures

 

38

 

52

 

Changes in assets and liabilities:

 

 

 

 

 

Restricted cash

 

(154

)

194

 

Accounts receivable and other assets, net

 

(1,522

)

(2,476

)

Accounts payable and accrued expenses

 

4,300

 

3,702

 

Prepaid rents and other liabilities

 

(509

)

(1,172

)

Net cash provided by operating activities

 

16,088

 

13,148

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Restricted cash

 

2,948

 

(24

)

Proceeds from sale of interest in joint venture, net

 

972

 

14,240

 

(Purchase) sale of investment securities, net

 

987

 

(471

)

Purchase of investment properties

 

(157,149

)

(20,800

)

Additions to investment properties, net of accounts payable

 

(6,097

)

(5,915

)

Proceeds from sale of investment properties, net

 

 

2,124

 

Proceeds from change in control of investment properties

 

 

343

 

Distributions from unconsolidated joint ventures

 

17,410

 

2,154

 

Investment in unconsolidated joint ventures

 

(78

)

(1,088

)

Leasing fees

 

(861

)

(1,473

)

Net cash used in investing activities

 

(141,868

)

(10,910

)

 

The accompanying notes are an integral part of these financial statements.

 

6



Table of Contents

 

INLAND REAL ESTATE CORPORATION

Consolidated Statements of Cash Flows

For the three months ended March 31, 2012 and 2011 (unaudited)

(In thousands)

 

 

 

Three months
ended
March 31, 2012

 

Three months
ended
March 31, 2011

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from the DRP

 

$

476

 

638

 

Issuance of shares, net of offering costs

 

58,808

 

7,171

 

Purchase of noncontrolling interest, net

 

 

(710

)

Loan proceeds

 

70,965

 

5,200

 

Payoff of debt

 

(648

)

(663

)

Proceeds from the unsecured line of credit facility

 

65,000

 

20,000

 

Repayments on the unsecured line of credit facility

 

(50,000

)

(25,000

)

Loan fees

 

(622

)

(918

)

Distributions paid

 

(13,700

)

(12,520

)

Distributions to noncontrolling interest partners

 

(150

)

(162

)

Contributions to noncontrolling interest

 

50

 

 

Margin Loan Payable

 

(1,188

)

 

Net cash provided by (used in) financing activities

 

128,991

 

(6,964

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

3,211

 

(4,726

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

7,751

 

13,566

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

10,962

 

8,840

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

 

 

 

Cash paid for interest, net of capitalized interest

 

$

6,980

 

7,830

 

 

The accompanying notes are an integral part of these financial statements

 

7



Table of Contents

 

INLAND REAL ESTATE CORPORATION

Notes to Consolidated Financial Statements

March 31, 2012 (unaudited)

 

The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  Readers of this Quarterly Report should refer to the audited financial statements of Inland Real Estate Corporation (the “Company”) for the year ended December 31, 2011, which are included in the Company’s 2011 Annual Report, as certain footnote disclosures contained in such audited financial statements have been omitted from this Report on Form 10-Q.  In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included in this Quarterly Report.

 

(1)           Organization and Basis of Accounting

 

Inland Real Estate Corporation (the “Company”), a Maryland corporation, was formed on May 12, 1994.  The Company is a publicly held real estate investment trust (“REIT”) that owns, operates and develops (directly or through its unconsolidated entities) open-air neighborhood, community and power shopping centers and single tenant retail properties located primarily in Midwest markets.

 

All amounts in these footnotes to the consolidated financial statements are stated in thousands with the exception of per share amounts, square foot amounts, and number of properties.

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ from those estimates.

 

Certain reclassifications were made to the 2011 financial statements to conform to the 2012 presentation but have not changed the results of prior year.

 

The accompanying consolidated financial statements of the Company include the accounts of its wholly-owned subsidiaries and consolidated joint ventures.  These entities are consolidated because the Company is the primary beneficiary of a variable interest entity (“VIE”).  The primary beneficiary is the party that has a controlling financial interest in the VIE, which is defined by the entity having both of the following characteristics: 1) the power to direct the activities that, when taken together, most significantly impact the VIE’s performance, and 2) the obligation to absorb losses and right to receive the returns from the VIE that would be significant to the VIE.  The third parties’ interests in these consolidated entities are reflected as noncontrolling interest in the accompanying consolidated financial statements.  All inter-company balances and transactions have been eliminated in consolidation.

 

The consolidated results of the Company include the accounts of Inland Ryan LLC, Inland Ryan Cliff Lake LLC, IRC—IREX Venture, LLC, and IRC-IREX Venture II, LLC.  The Company has determined that these interests are noncontrolling interests to be included in permanent equity, separate from the Company’s shareholders’ equity, in the consolidated balance sheets and statements of equity. Net income or loss related to these noncontrolling interests is included in net income or loss in the consolidated statements of operations and comprehensive income.

 

Recent Accounting Principles

 

The Financial Accounting Standards Board (“FASB”“) issued ASU 2011-05 (“the ASU”) aimed at increasing the prominence of comprehensive income in financial statements by requiring comprehensive income to be reported in either a single statement or in two consecutive statements reporting net income and comprehensive income.  The ASU eliminates the option to report comprehensive income and its components in the statement of changes in stockholder’s equity.  However, the ASU does not change the U.S. GAAP reporting requirements to report reclassification of items from comprehensive income to net income on the face of the financial statements.  The ASU requires retrospective application.  This guidance was required to be implemented by the Company beginning January 1, 2012.  The impact of the pronouncement did not have a significant impact on the Company’s consolidated financial statements as the Company has always disclosed the components of comprehensive income in a single statement along with net income.

 

8



Table of Contents

 

INLAND REAL ESTATE CORPORATION

Notes to Consolidated Financial Statements

March 31, 2012 (unaudited)

 

(2)           Investment Securities

 

At March 31, 2012 and December 31, 2011, investment in securities includes $10,998 and $11,075, respectively, of perpetual preferred securities and common securities classified as available-for-sale securities, which are recorded at fair value and $1,000 in each period of preferred securities that are recorded at cost.  The Company determined that these securities should be held at cost because the fair value is not readily determinable and there is no active market for these securities.

 

Unrealized holding gains and losses on available-for-sale securities are excluded from earnings and reported as a separate component of comprehensive income until realized.  The Company has recorded a net unrealized gain of $1,255 and $996 on the accompanying consolidated balances sheets as of March 31, 2012 and December 31, 2011, respectively.  Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis.  Sales of investment securities available-for-sale during the three months ended March 31, 2012 and 2011 resulted in gains on sale of $652 and $455, respectively, which are included in other income in the accompanying consolidated statements of operations and comprehensive income.  Dividend income is recognized when received.

 

The Company evaluates its investments for impairment quarterly.  The Company’s policy for assessing near term recoverability of its available for sale securities is to record a charge against net earnings when the Company determines that a decline in the fair value of a security drops below the cost basis and it believes it to be other than temporary.  No impairment losses were required or recorded for the three months ended March 31, 2012 and 2011.

 

Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2012 were as follows:

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

Description of Securities

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REIT Stock

 

$

4,176

 

(180

)

 

 

4,176

 

(180

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-REIT Stock

 

$

181

 

(17

)

 

 

181

 

(17

)

 

(3)           Unconsolidated Joint Ventures

 

Unconsolidated joint ventures are those where the Company does not have a controlling financial interest in the joint venture or is not the primary beneficiary of a variable interest entity.  The Company accounts for its interest in these ventures using the equity method of accounting.  The Company’s profit/loss allocation percentage and related investment in each joint venture is summarized in the following table.

 

Joint Venture Entity

 

Company’s
Profit/Loss
Allocation
Percentage at
March 31, 2012

 

Investment in and
advances to
unconsolidated joint
ventures at
March 31, 2012

 

Investment in and
advances to
unconsolidated joint
ventures at
December 31, 2011

 

 

 

 

 

 

 

 

 

IN Retail Fund LLC (a)

 

50

%

$

16,023

 

18,304

 

Oak Property and Casualty

 

25

%

1,317

 

1,464

 

TMK/Inland Aurora Venture LLC (b)

 

40

%

2,307

 

2,320

 

PTI Boise LLC, PTI Westfield, LLC (c) 

 

85

%

11,195

 

11,100

 

INP Retail LP (d)

 

55

%

64,221

 

67,715

 

IRC/IREX Venture II LLC (e)

 

(f

)

 

767

 

 

 

 

 

 

 

 

 

Investment in and advances to unconsolidated joint ventures

 

 

 

$

95,063

 

101,670

 

 

9



Table of Contents

 

INLAND REAL ESTATE CORPORATION

Notes to Consolidated Financial Statements

March 31, 2012 (unaudited)

 


(a)         Joint venture with New York State Teachers Retirement System (“NYSTRS”)

(b)         The profit/loss allocation percentage is allocated after the calculation of the Company’s preferred return.

(c)          Joint venture with Pine Tree Institutional Realty, LLC (“Pine Tree”)

(d)         Joint venture with PGGM Private Real Estate Fund (“PGGM”)

(e)          Joint venture with Inland Private Capital Corporation (“IPCC”).  Investment in balance represents our share of the tenant in common (“TIC”) or Delaware Statutory Trust (“DST”) interests.

(f)           The Company’s profit/loss allocation percentage varies based on the ownership interest it holds in the entity that owns a particular property that is in the process of selling ownership interest to outside investors.

 

Effective June 7, 2010, the Company formed a joint venture with PGGM, a leading Dutch pension fund administrator and asset manager.  In conjunction with the formation, the joint venture established two separate REIT entities to hold title to the properties included in the joint venture.  The joint venture agreement contemplates that, subject to the satisfaction of the conditions described in the governing joint venture documents, the Company will contribute assets from its consolidated portfolio and PGGM will contribute their share of the equity of the properties contributed by the Company and equity for new acquisitions that are identified.  This joint venture may acquire up to $270,000 of grocery-anchored and community retail centers located in Midwestern U.S. markets.  The equity contributed by PGGM, related to properties contributed by the Company, is held in the joint venture and used as the Company’s equity contribution towards future acquisitions.  Under the terms of the agreement, PGGM’s potential equity contribution to the venture may total up to $130,000 and the Company’s maximum equity contribution may total up to $156,000, comprised of net asset contributions.  As of March 31, 2012, PGGM’s remaining commitment is approximately $23,000 and the Company’s is $26,000.  The table below presents investment property contributions to and acquisitions by the joint venture during the three months ended March 31, 2012 and the years ended December 31, 2011 and 2010.

 

Date

 

Property

 

City

 

State

 

Gross
Value

 

PGGM’s
Contributed
Equity

 

Company’s
Contributed
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

02/29/12

 

Stone Creek Towne Center (a)

 

Cincinnati

 

OH

 

$

36,000

 

$

7,445

 

$

8,555

 

02/24/12

 

Silver Lake Village (a)

 

St. Anthony

 

MN

 

36,300

 

7,932

 

9,695

 

02/22/12

 

Riverdale Commons (b)

 

Coon Rapids

 

MN

 

31,970

 

10,184

 

12,448

 

12/15/11

 

Turfway Commons (a)

 

Florence

 

KY

 

12,980

 

2,606

 

3,185

 

12/07/11

 

Elston Plaza (a)

 

Chicago

 

IL

 

18,900

 

4,309

 

5,266

 

11/29/11

 

Brownstones Shopping Center (a)

 

Brookfield

 

WI

 

24,100

 

4,989

 

6,098

 

11/18/11

 

Woodfield Plaza (b)

 

Schaumburg

 

IL

 

26,966

 

6,430

 

7,859

 

11/15/11

 

Caton Crossing (b)

 

Plainfield

 

IL

 

12,269

 

2,060

 

2,517

 

11/09/11

 

Quarry Retail (b)

 

Minneapolis

 

MN

 

36,206

 

9,198

 

11,242

 

09/21/11

 

Champlin Marketplace (a)

 

Champlin

 

MN

 

12,950

 

2,773

 

3,390

 

09/19/11

 

Stuart’s Crossing (b)

 

St. Charles

 

IL

 

12,294

 

2,390

 

2,922

 

06/02/11

 

Village Ten Center (b)

 

Coon Rapids

 

MN

 

14,569

 

2,921

 

3,570

 

06/02/11

 

Red Top Plaza (a)

 

Libertyville

 

IL

 

19,762

 

3,728

 

4,544

 

03/08/11

 

The Shops of Plymouth (b)

 

Plymouth

 

MN

 

9,489

 

1,937

 

2,368

 

03/01/11

 

Byerly’s Burnsville (b)

 

Burnsville

 

MN

 

8,170

 

3,685

 

4,504

 

01/11/11

 

Joffco Square (a)

 

Chicago

 

IL

 

23,800

 

4,896

 

5,996

 

10/25/10

 

Diffley Marketplace (a)

 

Eagan

 

MN

 

11,861

 

2,712

 

3,315

 

08/31/10

 

The Point at Clark (a)

 

Chicago

 

IL

 

28,816

 

6,464

 

7,905

 

07/01/10

 

Cub Foods (b)

 

Arden Hills

 

MN

 

10,358

 

4,664

 

5,701

 

07/01/10

 

Shannon Square Shoppes (b)

 

Arden Hills

 

MN

 

5,465

 

2,464

 

3,011

 

07/01/10

 

Woodland Commons (b)

 

Buffalo Grove

 

IL

 

23,340

 

10,405

 

12,717

 

07/01/10

 

Mallard Crossing (b)

 

Elk Grove Village

 

IL

 

6,163

 

2,727

 

3,333

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

422,728

 

$

106,919

 

$

130,141

 

 


(a)                                 These properties were acquired by the joint venture.

(b)                                 These properties were contributed to the joint venture by the Company.

 

10



Table of Contents

 

INLAND REAL ESTATE CORPORATION

Notes to Consolidated Financial Statements

March 31, 2012 (unaudited)

 

As properties are contributed to the Company’s joint venture with PGGM, the net assets are removed from the consolidated financial statements. The table below reflects those properties that became unconsolidated during the three months ended March 31, 2012 and 2011.

 

 

 

March 31, 2012

 

March 31, 2011

 

 

 

 

 

 

 

Net investment properties

 

$

(20,571

)

(11,862

)

Acquired lease intangibles, net

 

(150

)

 

Deferred costs, net

 

(157

)

(256

)

Other assets

 

(636

)

(295

)

Mortgages payable

 

9,850

 

5,200

 

Other liabilities

 

170

 

 

Net assets contributed

 

$

(11,494

)

(7,213

)

 

PGGM owns a forty-five percent equity ownership interest and the Company owns a fifty-five percent interest in the venture.  The Company is the managing partner of the venture, responsible for the day-to-day activities and earns fees for asset management, property management, leasing and other services provided to the venture.  The Company determined that this joint venture was not a VIE because it did not meet the VIE criteria.  Both partners have the ability to participate in major decisions, as detailed in the joint venture agreement, and therefore, neither partner is deemed to have control of the joint venture.  Therefore, this joint venture is unconsolidated and accounted for using the equity method of accounting.

 

During the three months ended March 31, 2011, the Company took control of Orchard Crossing, a property previously held through its joint venture with Pine Tree.  Prior to the change in control, the Company accounted for its investment in this property as an unconsolidated entity.

 

The change in control transaction of Orchard Crossing was accounted for as a business combination, which required the Company to record the assets and liabilities of the property at fair value, which was derived using level three inputs.  The Company valued Orchard Crossing using a third party appraisal.  The consolidation resulted in a loss to the Company of $1,400.  The Company estimated fair value of the debt by discounting the future cash flows of the instrument at a rate currently offered for similar debt instruments.  The loss from Orchard Crossing is reflected as loss from change in control of investment properties on the accompanying consolidated statements of operations and comprehensive income.

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

 

Investment properties 

 

$

19,800

 

Other assets

 

299

 

Total assets acquired

 

$

20,099

 

 

 

 

 

Mortgages payable

 

14,800

 

Other liabilities

 

294

 

 

 

 

 

Net assets acquired

 

$

5,005

 

 

The following table summarizes the investment in Orchard Crossing.

 

Investments in and advances to unconsolidated joint ventures prior to change in control transaction

 

$

6,597

 

Investments in and advances to unconsolidated joint ventures activity

 

282

 

Loss from change in control of investment properties

 

(1,400

)

Cash received

 

(499

)

Closing credits

 

25

 

Net assets acquired

 

$

5,005

 

 

11



Table of Contents

 

INLAND REAL ESTATE CORPORATION

Notes to Consolidated Financial Statements

March 31, 2012 (unaudited)

 

In April 2009, Inland Exchange Venture Corporation (“IEVC”), a taxable REIT subsidiary (“TRS”) of the Company, entered into a limited liability company agreement with IPCC, a wholly-owned subsidiary of The Inland Group, Inc. (“TIGI”) that was formerly known as Inland Real Estate Exchange Corporation.  The resulting joint venture was formed to continue the Company’s joint venture relationship with IPCC that began in 2006 and to provide replacement properties for investors wishing to complete a tax-deferred exchange through private placement offerings, using properties made available to the joint venture by IEVC.  These offerings are structured to sell TIC interests or DST interests, together the “ownership interest,” in the identified property.  IEVC coordinates the joint venture’s acquisition, property management and leasing functions, and earns fees for providing these services to the joint venture.  The Company will continue to earn property management and leasing fees on all properties acquired for this venture, including after all ownership interests have been sold to the investors.

 

The joint venture was determined to be a VIE under ASC Topic 810 and is consolidated by the Company.  Prior to the sale of any ownership interests, the joint venture owns 100% of the ownership interests in the property and controls the major decisions that affect the underlying property; and therefore upon initial acquisition, the joint venture consolidates the property.  At the time of first sale of an ownership interest, the joint venture no longer controls the underlying property as the activities and decisions that most significantly impact the property’s economic performance are now subject to joint control among the co-owners or lender; and therefore, at such time, the property is deconsolidated and accounted for under the equity method (unconsolidated).  Once the operations are unconsolidated, the income is included in equity in earnings (loss) of unconsolidated joint ventures until all ownership interests have been sold.  The table below reflects those properties that became unconsolidated during the three months ended March31, 2011, and therefore no longer represent the consolidated assets and liabilities of the VIE.  There were no properties that became unconsolidated during the three months ended March 31, 2012.

 

 

 

March 31, 2011

 

 

 

 

 

Investment properties

 

$

(18,990

)

Acquired lease intangibles

 

(3,960

)

Mortgages payable

 

12,622

 

Net change to investment in and advances to unconsolidated joint ventures

 

$

(10,328

)

 

During the three months ended March 31, 2012, the joint venture with IPCC acquired nine investment properties.  During the three months ended March 31, 2012 and 2011, the Company earned acquisition and management fees from this venture which are included in fee income from unconsolidated joint ventures on the accompanying consolidated statements of operations and comprehensive income.  Additionally, in conjunction with the sales, the Company recorded gains of approximately $52 and $313 for the three months ended March 31, 2012 and 2011, respectively, which are included in gain on sale of joint venture interests on the accompanying consolidated statements of operations and comprehensive income.

 

The Company’s proportionate share of the earnings or losses related to its unconsolidated joint ventures is reflected as equity in earnings (loss) of unconsolidated joint ventures on the accompanying consolidated statements of operations and comprehensive income.  Additionally, the Company earns fees for providing property management, leasing and acquisition activities to these ventures.  The Company recognizes fee income equal to the Company’s joint venture partner’s share of the expense or commission in the accompanying consolidated statements of operations and comprehensive income.  During the three months ended March 31, 2012 and 2011, the Company earned $1,038 and $1,163, respectively, in fee income from its unconsolidated joint ventures.  This fee income decreased mostly due to acquisition fees related to sales on properties sold through the Company’s joint venture with IPCC.  Acquisition fees are earned on the IPCC joint venture properties as the interests are sold to the investors.  Partially offsetting this decrease was an increase in management fees on an increased number of properties in unconsolidated joint ventures.  These fees are reflected on the accompanying consolidated statements of operations and comprehensive income as fee income from unconsolidated joint ventures.

 

12



Table of Contents

 

INLAND REAL ESTATE CORPORATION

Notes to Consolidated Financial Statements

March 31, 2012 (unaudited)

 

The operations of properties contributed to the joint ventures by the Company are not recorded as discontinued operations because of the Company’s continuing involvement with these investment properties.  Differences between the Company’s investment in the joint ventures and the amount of the underlying equity in net assets of the joint ventures are due to basis differences resulting from the Company’s equity investment recorded at its historical basis versus the fair value of certain of the Company’s contributions to the joint venture.  Such differences are amortized over depreciable lives of the joint venture’s property assets.  During the three months ended March 31, 2012 and 2011, the Company recorded $815 and $466, respectively, of amortization of this basis difference.

 

The unconsolidated joint ventures had total outstanding debt in the amount of $440,711 (total debt, not the Company’s pro rata share) at March 31, 2012 that matures as follows:

 

Joint Venture Entity

 

2012 (a)

 

2013

 

2014

 

2015

 

2016

 

Thereafter

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IN Retail Fund LLC

 

$

32,300

 

32,989

 

11,651

 

22,000

 

8,000

 

76,780

 

183,720

 

NARE/Inland North Aurora I (b)(c)

 

17,469

 

 

 

 

 

 

17,469

 

NARE/Inland North Aurora II (c)

 

3,549

 

 

 

 

 

 

3,549

 

NARE/Inland North Aurora III (c)

 

13,819

 

 

 

 

 

 

13,819

 

PTI Boise LLC (d)

 

2,700

 

 

 

 

 

 

2,700

 

PTI Westfield LLC (e)

 

7,250

 

 

 

 

 

 

7,250

 

TDC Inland Lakemoor LLC (f)

 

22,105

 

 

 

 

 

 

22,105

 

INP Retail LP

 

32,650

 

 

 

5,800

 

 

151,649

 

190,099

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total unconsolidated joint venture debt

 

$

131,842

 

32,989

 

11,651

 

27,800

 

8,000

 

228,429

 

440,711

 

 


(a)         The joint ventures will soon be in discussions with various lenders to extend or restructure this joint venture debt although there is no assurance that the Company, or its joint venture partners, will be able to restructure this debt on terms and conditions the Company find acceptable, if at all.

(b)         The Company has guaranteed approximately $1,100 of one loan included in the 2012 column.

(c)          This loan matured in July 2011.  Subsequent to the end of the quarter, the joint venture negotiated a discounted payoff, which was funded in the second quarter.

(d)        This loan matures in October 2012.  In September 2009, the Company purchased the mortgage from the lender at a discount and became a lender to the joint venture.

(e)          This loan matures in December 2012.  The Company has guaranteed approximately $1,100 of this outstanding loan.

(f)           This loan matures in October 2012.  The Company has guaranteed approximately $9,000 of this outstanding loan.

 

The Company has guaranteed approximately $11,200 of unconsolidated joint venture debt as of March 31, 2012. The guarantees on three mortgage loans are in effect for the entire term of the respective loan as set forth in the loan documents.  The Company is required to pay on a guarantee upon the default of any of the provisions in the respective loan documents, unless the default is otherwise waived.  The Company is required to estimate the fair value of these guarantees and, if material, record a corresponding liability.  The Company has determined that the fair value of such guarantees are immaterial as of March 31, 2012 and accordingly has not recorded a liability related to these guarantees on the accompanying consolidated balance sheets.

 

When circumstances indicate there may have been a loss in value of an equity method investment, the Company evaluates the investment for impairment by estimating its ability to recover its investments from future expected cash flows. If the Company determines the loss in value is other than temporary, the Company will recognize an impairment charge to reflect the investment at its fair value, which was derived using level three inputs.  The total impairment loss is recorded at the joint venture level.  The Company’s pro rata share of the loss is included in equity in earnings (loss) of unconsolidated joint ventures on the accompanying consolidated statements of operations and comprehensive income.  No impairment adjustments were required or recorded during the three months ended March 31, 2012 and 2011.

 

13



Table of Contents

 

INLAND REAL ESTATE CORPORATION

Notes to Consolidated Financial Statements

March 31, 2012 (unaudited)

 

Summarized financial information for the unconsolidated joint ventures is as follows:

 

Balance Sheet:

 

March 31, 2012

 

December 31, 2011

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

Investment in real estate, net

 

$

772,512

 

702,178

 

Other assets

 

67,944

 

92,271

 

 

 

 

 

 

 

Total assets

 

$

840,456

 

794,449

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Mortgage payable

 

$

440,711

 

394,481

 

Other liabilities

 

62,740

 

59,171

 

 

 

 

 

 

 

Total liabilities

 

503,451

 

453,652

 

 

 

 

 

 

 

Total equity

 

337,005

 

340,797

 

 

 

 

 

 

 

Total liabilities and equity

 

$

840,456

 

794,449

 

 

 

 

 

 

 

Investment in and advances to unconsolidated joint ventures

 

$

95,063

 

101,670

 

 

Statement of Operations:

 

Three months ended
March 31, 2012

 

Three months ended
March 31, 2011

 

 

 

 

 

 

 

Total revenues

 

$

23,839

 

16,843

 

Total expenses

 

(25,667

)

(17,553

)

 

 

 

 

 

 

Loss from continuing operations

 

$

(1,828

)

(710

)

 

 

 

 

 

 

Inland’s pro rata share of loss from continuing operations (a)

 

$

32

 

(359

)

 


(a)                             IRC’s pro rata share includes the amortization of certain basis differences and an elimination of IRC’s pro rata share of the management fee expense.

 

(4)           Acquisitions

 

Date
Acquired

 

Property

 

City

 

State

 

GLA Sq.
Ft.

 

Approximate
Purchase Price

 

 

 

 

 

 

 

 

 

 

 

 

 

02/24/12

 

Woodbury Commons

 

Woodbury

 

MN

 

116,196

 

$

10,300

 

03/06/12

 

Westgate

 

Fairview Park

 

OH

 

241,901

 

73,405

 

03/13/12

 

Mt. Pleasant Shopping Center

 

Mt. Pleasant

 

WI

 

83,334

 

21,320

 

03/16/12

 

Pick N Save

 

Sheboygan

 

WI

 

62,138

 

11,700

 

03/19/12

 

Walgreens/CVS Portfolio (a)

 

Various

 

NY, TX, VA

 

40,113

 

17,059

 

03/27/12

 

Walgreens/CVS Portfolio (b)

 

Various

 

KS, MO, UT, ID

 

55,465

 

23,711

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

599,147

 

$

157,495

 

 


(a)         The portfolio includes two CVS and one Walgreens.

(b)         The portfolio includes one CVS and three Walgreens.

 

During the three months ended March 31, 2012, in connection with the Company’s growth initiative, the Company acquired the investment properties listed above for its consolidated portfolio.  The Company acquired 100% of the voting rights of each property for an aggregate purchase price of $157,495.

 

14



Table of Contents

 

INLAND REAL ESTATE CORPORATION

Notes to Consolidated Financial Statements

March 31, 2012 (unaudited)

 

The following table presents certain additional information regarding the Company’s acquisitions during the three months ended March 31, 2012. The amounts recognized for major assets acquired and liabilities assumed as of the acquisition date were as follows:

 

Property

 

Land

 

Building and
Improvements

 

Acquired
Lease
Intangibles

 

Other Assets

 

Acquired Below
Market Lease
Intangibles

 

 

 

 

 

 

 

 

 

 

 

 

 

Woodbury Commons

 

$

4,866

 

2,774

 

3,044

 

 

384

 

Westgate

 

17,479

 

53,391

 

10,804

 

346

 

8,615

 

Mt. Pleasant Shopping Center

 

7,268

 

13,452

 

3,433

 

 

2,833

 

Pick N Save

 

1,309

 

9,320

 

1,762

 

 

691

 

Walgreens/CVS Portfolio (a)

 

3,902

 

9,894

 

3,263

 

 

 

Walgreens/CVS Portfolio (b)

 

2,873

 

17,864

 

3,047

 

 

73

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

37,697

 

106,695

 

25,353

 

346

 

12,596

 

 

(5)           Fair Value Disclosures

 

In some instances, certain of the Company’s assets and liabilities are required to be measured or disclosed at fair value according to a fair value hierarchy pursuant to relevant accounting literature.  This hierarchy ranks the quality and reliability of the inputs used to determine fair values, which are then classified and disclosed in one of three categories.  The three levels of the fair value hierarchy are:

 

·                  Level 1 — quoted prices in active markets for identical assets or liabilities.

·                  Level 2 — quoted prices in active markets for similar assets or liabilities; quoted prices in markets that are not active; and model-derived valuations whose inputs are observable.

·                  Level 3 — model-derived valuations with unobservable inputs that are supported by little or no market activity

 

Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement.  The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their classifications within the fair value hierarchy levels.

 

For assets and liabilities measured at fair value on a recurring basis, quantitative disclosure of the fair value for each major category of assets and liabilities is presented below:

 

 

 

Fair value measurements at March 31, 2012 using

 

Description

 

Quoted Prices in Active
Markets for Identical Assets
(Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

Significant
Unobservable Inputs
(Level 3)

 

 

 

 

 

 

 

 

 

Available for sale securities

 

$

10,998

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

10,998

 

 

 

 

 

 

 

 

 

 

 

Derivative interest rate instruments liabilities (a)

 

$

 

7,397

 

 

Variable rate debt (b)

 

 

 

357,214

 

Fixed rate debt (b)

 

 

 

452,718

 

 

 

 

 

 

 

 

 

Total liabilities

 

$

 

7,397

 

809,932

 

 

15



Table of Contents

 

INLAND REAL ESTATE CORPORATION

Notes to Consolidated Financial Statements

March 31, 2012 (unaudited)

 

 

 

Fair value measurements at December 31, 2011 using

 

Description

 

Quoted Prices in Active
Markets for Identical Assets
(Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

Significant
Unobservable Inputs
(Level 3)

 

 

 

 

 

 

 

 

 

Available for sale securities

 

$

11,075

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

11,075

 

 

 

 

 

 

 

 

 

 

 

Derivative interest rate instruments liabilities (a)

 

$

 

8,396

 

 

Variable rate debt (b)

 

 

 

317,737

 

Fixed rate debt (b)

 

 

 

380,456

 

 

 

 

 

 

 

 

 

Total liabilities

 

$

 

8,396

 

698,193

 

 


(a)         The Company entered into this interest rate swap as a requirement under a mortgage loan closed in 2010.

(b)         The disclosure is included to provide information regarding the inputs used to determine the fair value of the outstanding debt, in accordance with existing accounting guidance and is not presented in the accompanying consolidated balance sheets at fair value.

 

The fair value of debt is the amount at which the instrument could be exchanged in a current transaction between willing parties.  The Company estimates the fair value of its total debt by discounting the future cash flows of each instrument at rates currently offered for similar debt instruments of comparable maturities by the Company’s lenders.  The Company has not elected the fair value option with respect to its debt.  The Company’s financial instruments, principally escrow deposits, accounts payable and accrued expenses, and working capital items, are short term in nature and their carrying amounts approximate their fair value at March 31, 2012 and December 31, 2011.

 

(6)           Transactions with Related Parties

 

The Company pays affiliates of TIGI for various administrative services, including, but not limited to, payroll preparation and management, data processing, insurance consultation and placement, property tax reduction services and mail processing.  These TIGI affiliates provide these services at cost.  TIGI, through its affiliates, beneficially owns approximately 12.8% of the Company’s outstanding common stock.  For accounting purposes however, the Company is not directly affiliated with TIGI or its affiliates.

 

Amounts paid to TIGI and/or its affiliates for services and office space provided to the Company are set forth below.

 

 

 

Three months ended
March 31, 2012

 

Three months ended
March 31, 2011

 

 

 

 

 

 

 

Investment advisor

 

$

17

 

15

 

Loan servicing

 

32

 

28

 

Property tax payment/reduction work

 

25

 

59

 

Computer services

 

179

 

200

 

Other service agreements

 

57

 

103

 

Broker commissions

 

208

 

88

 

Office rent and reimbursements

 

105

 

102

 

 

 

 

 

 

 

Total

 

$

623

 

595

 

 

In April 2009, Inland Exchange Venture Corporation (“IEVC”), a TRS of the Company, entered into a limited liability company agreement with IPCC, a wholly-owned subsidiary of TIGI.  The resulting joint venture was formed to facilitate IEVC’s participation in tax-deferred exchange transactions pursuant to Section 1031 of the Internal Revenue Code using properties made available to the joint venture by IEVC.  IEVC coordinates the joint venture’s acquisition, property management and leasing functions, and earns fees for providing these services to the joint venture.  The Company will continue to earn property management and leasing fees on all properties acquired for this venture, including after all interests have been sold to the investors.

 

16



Table of Contents

 

INLAND REAL ESTATE CORPORATION

Notes to Consolidated Financial Statements

March 31, 2012 (unaudited)

 

During the three months ended March 31, 2012, the Company paid a total of $260 in mortgage brokerage fees to Grubb & Ellis Company (“Grubb & Ellis”).  Thomas P. D’Arcy, one of the Company’s independent directors, served as the president, chief executive officer and a member of the board of directors of Grubb & Ellis until April 2012.  Mr. D’Arcy did not participate in these transactions and does not have a material interest in them.  Joel Simmons, one of the Company’s directors, had an indirect personal interest as a broker in these transactions.  Mr. Simmons served as an executive vice president of Grubb & Ellis until April 2012.  Mr. Simmons also owns a non-material amount of shares of Grubb & Ellis common stock.  Currently, Mr. Simmons is the Executive Managing Director of BGC Partners, a global provider of real estate services.  The Company may incur mortgage brokerage fees through BGC Partners in the future.  No mortgage brokerage fees were paid to Grubb & Ellis during the three months ended March 31, 2011.

 

(7)               Discontinued Operations

 

During the three months ended March 31, 2011, the Company sold one investment property.  No investment properties were sold during the three months ended March 31, 2012.  The following table summarizes the property sold, date of sale, indebtedness repaid, if any, approximate sales proceeds (net of closing costs), gain on sale and whether the sale qualified as part of a tax deferred exchange.

 

Property Name

 

Date of Sale

 

Indebtedness
repaid

 

Sales Proceeds (net
of closing costs)

 

Gain (loss)
on Sale

 

Tax Deferred
Exchange

 

 

 

 

 

 

 

 

 

 

 

 

 

Schaumburg Golf Road Retail

 

February 14, 2011

 

 

2,090

 

197

 

No

 

 

If the Company determines that an investment property meets the criteria to be classified as held for sale, it suspends depreciation on the assets held for sale, including depreciation for tenant improvements and additions, as well as on the amortization of acquired in-place leases and customer relationship values.  The assets and liabilities associated with those assets would be classified separately on the consolidated balance sheets for the most recent reporting period.  As of March 31, 2012, there were no properties classified as held for sale.

 

(8)               Operating Leases

 

Certain tenant leases contain provisions providing for “stepped” rent increases.  U.S. GAAP requires the Company to record rental income for the period of occupancy using the effective monthly rent, which is the average monthly rent for the entire period of occupancy during the term of the lease.  The accompanying consolidated financial statements include increases of $258 and $480 for the three months ended March 31, 2012 and 2011, respectively of rental income for the period of occupancy for which stepped rent increases apply and $19,891 and $19,633 in related accounts receivable as of March 31, 2012 and December 31, 2011, respectively.  The Company anticipates collecting these amounts over the terms of the leases as scheduled rent payments are made.

 

(9)               Income Taxes

 

The Company is qualified and has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (“the Code”), for federal income tax purposes commencing with the tax year ended December 31, 1995.  Since the Company qualifies for taxation as a REIT, the Company generally is not subject to federal income tax on taxable income that is distributed to stockholders.  A REIT is subject to a number of organizational and operational requirements, including a requirement that it distribute at least 90% of its taxable income to stockholders, subject to certain adjustments.  If the Company fails to qualify as a REIT in any taxable year, without the benefit of certain relief provisions, the Company will be subject to federal and state income tax on its taxable income at regular corporate tax rates.  Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income, property or net worth and federal income and excise taxes on its undistributed income.

 

17



Table of Contents

 

INLAND REAL ESTATE CORPORATION

Notes to Consolidated Financial Statements

March 31, 2012 (unaudited)

 

The Company engages in certain activities through Inland Venture Corporation (“IVC”) and IEVC, wholly-owned TRS entities.  These entities engage in activities that would otherwise produce income that would not be REIT qualifying income.  The TRS entities are subject to federal and state income and franchise taxes from these activities.

 

The Company had no uncertain tax positions as of March 31, 2012.  The Company expects no significant increases or decreases in uncertain tax positions due to changes in tax positions within one year of March 31, 2012. The Company has no material interest or penalties relating to income taxes recognized in the consolidated statements of operations and comprehensive income for the three months ended March 31, 2012 and 2011 or in the consolidated balance sheets as of March 31, 2012 and December 31, 2011. As of March 31, 2012, returns for the calendar years 2008 through 2011 remain subject to examination by U.S. and various state and local tax jurisdictions.

 

Income taxes have been provided for on the asset and liability method, as required by existing guidance.  Under the asset and liability method, deferred income taxes are recognized for the temporary differences between the financial reporting basis and the tax basis of assets and liabilities.

 

(10)             Secured and Unsecured Debt

 

Total Debt Maturity Schedule

 

The following table presents the principal amount of total debt maturing each year, including amortization of principal, based on debt outstanding at March 31, 2012:

 

 

 

2012(a)

 

2013(a)

 

2014

 

2015

 

2016

 

Thereafter

 

Total

 

Fair Value(b)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate debt

 

$

25,484

 

12,125

 

163,746

(c) (d)

20,564

 

1,262

 

203,050

 

426,231

 

452,718

 

Weighted average interest rate

 

5.23

%

10.00

%

5.27

%

6.50

%

 

5.45

%

5.50

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable rate debt

 

$

33,653

(e)

14,800

(f)

251,200

(g)

 

 

50,000

(h)

349,653

 

357,214

 

Weighted average interest rate

 

4.35

%

3.24

%

2.74

%

 

 

3.50

%

3.02

%

 

 


(a)         Approximately $56,700 of the Company’s mortgages payable mature prior to April 2013.  The Company will soon be in discussions with the lenders to refinance the maturing debt or will use available cash and / or borrowings under its unsecured line of credit facility to repay this debt.

(b)         The fair value of debt is the amount at which the instrument could be exchanged in a current transaction between willing parties.  The Company estimates the fair value of its debt by discounting the future cash flows of each instrument at rates currently offered to the Company for similar debt instruments of comparable maturities by its lenders (Level 3).

(c)          Included in the debt maturing in 2014 are the Company’s convertible notes issued during 2010, which mature in 2029.  They are included in 2014 because that is the earliest date these notes can be redeemed or the note holders can require the Company to repurchase their notes.  The total for convertible notes above reflects the total principal amount outstanding, in the amount of $29,215.  The consolidated balance sheets reflect the value of the notes including the remaining unamortized discount of $1,236.

(d)         The Company has agreed through a guaranty and a separate indemnification agreement to be liable upon a default under the Algonquin Commons mortgage loan documents.  The maturing debt includes the Company’s total potential liability under the guaranty and the indemnity agreement, which is approximately $18,700.

(e)          The Company has guaranteed a mortgage for $2,700, included in the maturing debt and would be required to make a payment on this guarantee upon the default of any of the provisions in the loan document, unless the default is otherwise waived.

(f)           The Company has guaranteed approximately $7,400 of this mortgage and would be required to make a payment on this guarantee upon the default of any of the provision in the loan document, unless the default is otherwise waived.

(g)          Included in the debt maturing during 2014 are the Company’s unsecured line of credit facility and $150,000 term loan, totaling $245,000.  The Company pays interest only during the term of these facilities at a variable rate equal to a spread over LIBOR, in effect at the time of the borrowing, which fluctuates with the Company’s leverage ratio.  As of March 31, 2012, the weighted average interest rate on outstanding draws on the line of credit facility was 2.86%, and the interest rate on the term loan was 2.75%.  These credit facilities require compliance with certain covenants, such as debt service ratios, minimum net worth requirements, distribution limitations and investment restrictions.  As of March 31, 2012, the Company was in compliance with these financial covenants.

(h)         Included in the thereafter column is the Company’s $50,000 term loan which matures in November 2018.  The Company pays interest only during the term of this loan at a variable rate, with an interest rate floor of 3.50%.  This term loan requires compliance with certain covenants, such as debt service ratios, minimum net worth requirements, distribution limitations and investment restrictions.  As of March 31, 2012, the Company was in compliance with these financial covenants.

 

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Table of Contents

 

INLAND REAL ESTATE CORPORATION

Notes to Consolidated Financial Statements

March 31, 2012 (unaudited)

 

Mortgages Payable

 

The Company’s mortgages payable are secured by certain of the Company’s investment properties.  Mortgage loans outstanding as of March 31, 2012 were $451,669 and had a weighted average interest rate of 5.31%.  Of this amount, $397,016 had fixed rates ranging from 4.85% to 10.00% and a weighted average fixed rate of 5.54% as of March 31, 2012.  The remaining $54,653 of mortgage debt represented variable rate loans with a weighted average interest rate of 3.63% as of March 31, 2012.  As of March 31, 2012, scheduled maturities for the Company’s outstanding mortgage indebtedness had various due dates through April 2022.  The majority of the Company’s mortgage loans require monthly payments of interest only, although some loans require principal and interest payments, as well as reserves for taxes, insurance and certain other costs.

 

Derivative Instruments and Hedging Activities

 

Risk Management Objective of Using Derivatives

 

The Company is exposed to certain risks arising from both its business operations and economic conditions.  The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risk, including interest rate, liquidity and credit risk primarily by managing the amount, sources, and duration of its debt funding and, to a limited extent, the use of derivative instruments.

 

Specifically, the Company has entered into derivative instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by interest rates.  The Company’s derivative instruments, described below, are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash payments principally related to certain of the Company’s borrowings.

 

Cash Flow Hedges of Interest Rate Risk

 

The Company’s objective in using interest rate derivatives is to manage exposure to interest rate movements and add stability to interest expense.  To accomplish this objective, the Company uses interest rate swaps as part of its interest rate risk management strategy.  Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

 

The Company currently has one interest rate swap outstanding that is used to hedge the variable cash flows associated with its variable-rate debt.  The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in comprehensive income (expense) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.  The ineffective portion of the change in fair value of the derivatives, if any, is recognized directly in earnings.  The Company has entered into one interest rate swap contract as a requirement under a secured mortgage and the hedging relationship is considered to be perfectly effective as of March 31, 2012.

 

Amounts reported in comprehensive income (expense) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.  The Company estimates that an additional $2,018 will be reclassified from comprehensive income (expense) as an increase to interest expense over the next twelve months.

 

As of March 31, 2012 and December 31, 2011, the Company had the following outstanding interest rate derivative that is designated as a cash flow hedge of interest rate risk:

 

Interest Rate Derivative

 

Notional

 

 

 

 

 

Interest Rate Swap

 

$

60,000

 

 

19



Table of Contents

 

INLAND REAL ESTATE CORPORATION

Notes to Consolidated Financial Statements

March 31, 2012 (unaudited)

 

The table below presents the fair value of the Company’s derivative financial instrument as well as its classification on the consolidated balance sheets as of March 31, 2012 and December 31, 2011.

 

 

 

Liability Derivatives
As of March 31, 2012

 

Liability Derivatives
As of December 31, 2011

 

 

 

Balance Sheet
Location

 

Fair Value

 

Balance Sheet Location

 

Fair Value

 

Derivatives designated as cash flow hedges:

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

Other liabilities

 

$

7,397

 

Other liabilities

 

$

8,396

 

 

The table below presents the effect of the Company’s derivative financial instruments on comprehensive income for the three months ended March 31, 2012 and 2011.

 

 

 

Three months
ended
March 31, 2012

 

Three months
ended
March 31, 2011

 

 

 

 

 

 

 

Amount of gain recognized in comprehensive income on derivative, net

 

$

490

 

432

 

Amount of loss reclassified from accumulated comprehensive income into interest expense

 

509

 

505

 

 

 

 

 

 

 

Unrealized gain on derivative

 

$

999

 

937

 

 

Credit-risk-related Contingent Features

 

Derivative financial investments expose the Company to credit risk in the event of non-performance by the counterparties under the terms of the interest rate hedge agreements.  The Company believes it minimizes the credit risk by transacting with major creditworthy financial institutions.

 

The Company has an agreement with its derivative counterparty that contains a provision which provides that if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligation.

 

As of March 31, 2012, the fair value of derivatives in a liability position related to this agreement was $7,397. If the Company breached any of the contractual provisions of the derivative contract, it would be required to settle its obligation under the agreement at its termination value of $8,335.

 

Unsecured Credit Facilities

 

In 2011, the Company entered into amendments to its existing unsecured line of credit facility and term loan, together the “Credit Agreements.”  Under the term loan agreement, the Company borrowed, on an unsecured basis, $150,000.  The aggregate commitment of the Company’s line of credit facility is $250,000, which includes a $100,000 accordion feature.  The access to the accordion feature is at the discretion of the current lending group.  If approved, the terms for the funds borrowed under the accordion feature would be current market terms and not the terms of the existing line of credit facility.  The lending group is not obligated to approve access to the additional funds.

 

Obligations under the Credit Agreements mature on June 21, 2014.  Borrowings under the Credit Agreements bear interest at a base rate applicable to any particular borrowing (e.g., LIBOR) plus a graduated spread that varies with the Company’s leverage ratio.

 

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Table of Contents

 

INLAND REAL ESTATE CORPORATION

Notes to Consolidated Financial Statements

March 31, 2012 (unaudited)

 

The Company pays interest only, on a monthly basis during the term of the Credit Agreements, with all outstanding principal and unpaid interest due upon termination of the Credit Agreements.  The Company is also required to pay, on a quarterly basis, an amount less than 1% per annum on the average daily funds remaining under this line.  As of March 31, 2012 and December 31, 2011, the outstanding balance on the line of credit facility was $95,000 and $80,000, respectively.  As of March 31, 2012, the Company had up to $55,000 available under its line of credit facility, not including the accordion feature.  Availability under the line of credit facility may be limited due to covenant compliance requirements in the Credit Agreements.

 

On November 15, 2011, the Company entered into an unsecured loan agreement with Wells Fargo Bank, National Association as lender pursuant to which the company received $50,000 of loan proceeds.  The loan matures on November 15, 2018.  The Company pays interest only, on a monthly basis, with all outstanding principal and unpaid interest due upon the maturity date.  The loan will accrue interest at an effective rate calculated in accordance with the loan documents, provided, however, that in no event will the interest rate on the outstanding principal balance be less than 3.5% per annum.  The Company may not prepay the loan in whole or in part prior to November 15, 2014.  On or after that date, the Company may prepay the loan in its entirety or in part, together with all interest accrued and may incur a prepayment penalty in conjunction with such prepayment.

 

Convertible Notes

 

In August 2010, the Company issued $29,215 in face value of 5.0% convertible senior notes due 2029 (the “Notes”), all of which remained outstanding at March 31, 2012.

 

Interest on the Notes is payable semi-annually.  The Notes mature on November 15, 2029 unless repurchased, redeemed or converted in accordance with their terms prior to that date.  The earliest date holders of the Notes may require the Company to repurchase their Notes in whole or in part is November 15, 2014.  Prior to November 21, 2014, the Company may not redeem the Notes prior to the date on which they mature except to the extent necessary to preserve its status as a REIT.  However, on or after November 21, 2014, the Company may redeem the Notes, in whole or in part, subject to the redemption terms in the Note.  Following the occurrence of certain change in control transactions, the Company may be required to repurchase the Notes in whole or in part for cash at 100% of the principal amount of the Notes to be repurchased plus accrued and unpaid interest.

 

Holders of the Notes may convert their Notes into cash or a combination of cash and common stock, at the Company’s option, at any time on or after October 15, 2029, but prior to the close of business on the second business day immediately preceding November 15, 2029, and also following the occurrence of certain events.  Subject to certain exceptions, upon a conversion of Notes the Company will deliver cash and shares of its common stock, if any, based on a daily conversion value calculated on a proportionate basis for each trading day of the relevant 30 day trading period.  The conversion rate as of March 31, 2012, for each $1 principal amount of Notes was 102.8807 shares of our common stock, subject to adjustment under certain circumstances.  This is equivalent to a conversion price of approximately $9.72 per share of common stock.

 

At March 31, 2012 and December 31, 2011, the Company has recorded $548 and $183 of accrued interest related to the convertible notes, respectively.  This amount is included in accounts payable and accrued expenses on the Company’s consolidated balance sheets.

 

The Company accounts for its convertible notes by separately accounting for the debt and equity components of the notes.  The value assigned to the debt component is the estimated fair value of a similar bond without the conversion feature, which results in the debt being recorded at a discount.  The debt is subsequently accreted to its par value over the conversion period with a rate of interest being reflected in earnings that reflects the market rate at issuance.  The Company initially recorded $9,412 to additional paid in capital on the accompanying consolidated balance sheets, to reflect the equity portion of the convertible notes.  The debt component is recorded at its fair value, which reflects an unamortized debt discount.  The following table sets forth the net carrying values of the debt and equity components included in the consolidated balance sheets at March 31, 2012 and December 31, 2011.

 

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Table of Contents

 

INLAND REAL ESTATE CORPORATION

Notes to Consolidated Financial Statements

March 31, 2012 (unaudited)

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

 

 

 

 

Equity Component (a)

 

$

9,329

 

9,321

 

 

 

 

 

 

 

Debt Component

 

$

29,215

 

29,215

 

Unamortized Discount (b)

 

(1,236

)

(1,352

)

 

 

 

 

 

 

Net Carrying Value

 

$

27,979

 

27,863

 

 


(a)         The equity component is net of unamortized equity issuance costs of $83 and $91 at March 31, 2012 and December 31, 2011, respectively.

(b)         The unamortized discount will be amortized into interest expense on a monthly basis through November 2014.

 

Total interest expense related to the convertible notes for the three months ended March 31, 2012 and 2011 was calculated as follows:

 

 

 

March 31, 2012

 

March 31, 2011

 

 

 

 

 

 

 

Interest expense at coupon rate

 

$

368

 

1,299

 

Discount amortization

 

116

 

363

 

 

 

 

 

 

 

Total interest expense

 

$

484

(a)

1,662

(b)

 


(a)         The effective interest rate of these convertible notes is 7.0%, which is the rate at which a similar instrument without the conversion feature could have been obtained in August 2010.

(b)         Included in the three months ended March 31, 2011 are the notes previously issued in 2006 with an effective interest rate of 5.875%, the rate at which a similar instrument without the conversion feature could have been obtained in November 2006.  These notes were paid in full during the year ended December 31, 2011.

 

(11)             Earnings per Share

 

Basic earnings (loss) per share (“EPS”) is computed by dividing net income (loss) by the basic weighted average number of common shares outstanding for the period (the “common shares”).  Diluted EPS is computed by dividing net income (loss) by the common shares plus shares issuable upon exercise of existing options or other contracts.  As of March 31, 2012 and December 31, 2011, options to purchase 77 shares of common stock, in each period, at exercise prices ranging from $6.85 to $19.96 per share were outstanding.  These options were not included in the computation of basic or diluted EPS as the effect would be immaterial or anti-dilutive.  Convertible notes are included in the computation of diluted EPS using the if-converted method, to the extent the impact of conversion is dilutive.

 

As of March 31, 2012, 192 shares of common stock issued pursuant to employment agreements were outstanding, of which 99 have vested.  Additionally, the Company issued 69 shares pursuant to employment incentives of which 42 have vested and six have been cancelled.  The unvested shares are excluded from the computation of basic EPS but reflected in diluted EPS by application of the treasury stock method unless the effect would be immaterial or anti-dilutive.

 

The following is reconciliation between weighted average shares used in the basic and diluted EPS calculations, excluding amounts attributable to noncontrolling interests:

 

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Table of Contents

 

INLAND REAL ESTATE CORPORATION

Notes to Consolidated Financial Statements

March 31, 2012 (unaudited)

 

 

 

Three months
ended
March 31, 2012

 

Three months
ended
March 31, 2011

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

Loss from continuing operations

 

$

(1,513

)

(1,680

)

Income from discontinued operations

 

8

 

345

 

Net loss

 

(1,505

)

(1,335

)

Net income attributable to the noncontrolling interest

 

(4

)

(36

)

Net loss attributable to Inland Real Estate Corporation

 

(1,509

)

(1,371

)

Dividends on preferred shares

 

(1,255

)

 

Net loss attributable to common stockholders

 

$

(2,764

)

(1,371

)

 

 

 

 

 

 

Denominator:

 

 

 

 

 

Denominator for net loss per common share — basic:

 <