XNYS:IRC Inland Real Estate Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 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 August 8, 2012, there were 89,220,686 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 June 30, 2012 (unaudited) and December 31, 2011

2

 

 

 

 

Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2012 and 2011 (unaudited)

4

 

 

 

 

Consolidated Statements of Equity for the six months ended June 30, 2012 (unaudited)

5

 

 

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 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

27

 

 

 

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

47

 

 

 

 

Exhibit Index

48

 

1



Table of Contents

 

Part I - Financial Information

 

Item 1.  Financial Statements

 

INLAND REAL ESTATE CORPORATION

Consolidated Balance Sheets

June 30, 2012 and December 31, 2011

(In thousands, except per share data)

 

 

 

June 30, 2012
(unaudited)

 

December 31, 2011

 

Assets:

 

 

 

 

 

Investment properties:

 

 

 

 

 

Land

 

$

329,110

 

314,384

 

Construction in progress

 

10,411

 

1,669

 

Building and improvements

 

1,001,158

 

950,421

 

 

 

 

 

 

 

 

 

1,340,679

 

1,266,474

 

Less accumulated depreciation

 

321,778

 

323,839

 

 

 

 

 

 

 

Net investment properties

 

1,018,901

 

942,635

 

 

 

 

 

 

 

Cash and cash equivalents

 

12,729

 

7,751

 

Investment in securities

 

12,480

 

12,075

 

Accounts receivable, net

 

28,890

 

29,582

 

Mortgages receivable

 

9,511

 

515

 

Investment in and advances to unconsolidated joint ventures

 

117,180

 

101,670

 

Acquired lease intangibles, net

 

53,487

 

31,948

 

Deferred costs, net

 

17,482

 

18,760

 

Other assets

 

19,335

 

14,970

 

 

 

 

 

 

 

Total assets

 

$

1,289,995

 

1,159,906

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

37,082

 

33,165

 

Acquired below market lease intangibles, net

 

22,645

 

11,147

 

Distributions payable

 

4,630

 

4,397

 

Mortgages payable

 

449,160

 

391,202

 

Unsecured credit facilities

 

300,000

 

280,000

 

Convertible notes

 

28,095

 

27,863

 

Other liabilities

 

23,368

 

21,719

 

 

 

 

 

 

 

Total liabilities

 

864,980

 

769,493

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Preferred stock, $0.01 par value, 12,000 Shares authorized; 4,400 and 2,000 Series A shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively

 

110,000

 

50,000

 

Common stock, $0.01 par value, 500,000 Shares authorized; 89,106 and 88,992 Shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively

 

891

 

890

 

Additional paid-in capital (net of offering costs of $70,036 and $67,753 at June 30, 2012 and December 31, 2011, respectively)

 

782,957

 

783,211

 

Accumulated distributions in excess of net income

 

(458,424

)

(435,201

)

Accumulated comprehensive loss

 

(8,995

)

(7,400

)

 

 

 

 

 

 

Total stockholders’ equity

 

426,429

 

391,500

 

 

 

 

 

 

 

Noncontrolling interest

 

(1,414

)

(1,087

)

 

 

 

 

 

 

Total equity

 

425,015

 

390,413

 

 

 

 

 

 

 

Total liabilities and equity

 

$

1,289,995

 

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)

June 30, 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 June 30, 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.

 

 

 

June 30, 2012
(unaudited)

 

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

 

 

 

 

 

 

 

Investment properties:

 

 

 

Land

 

$

14,428

 

Building and improvements

 

43,364

 

 

 

 

 

 

 

57,792

 

Less accumulated depreciation

 

423

 

 

 

 

 

Net investment properties

 

57,369

 

 

 

 

 

Accounts receivable, net

 

33

 

Acquired lease intangibles, net

 

10,448

 

Other assets

 

501

 

 

 

 

 

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

 

$

68,351

 

 

 

 

 

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

 

$

135

 

Acquired below market lease intangibles, net

 

3,187

 

Mortgages payable

 

35,402

 

Other liabilities

 

665

 

 

 

 

 

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

 

$

39,389

 

 

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 and six months ended June 30, 2012 and 2011 (unaudited)

(In thousands except per share data)

 

 

 

Three months
ended
June 30, 2012

 

Three months
ended
June 30, 2011

 

Six months
ended
June 30, 2012

 

Six months
ended
June 30, 2011

 

Revenues:

 

 

 

 

 

 

 

 

 

Rental income

 

$

29,357

 

30,401

 

57,350

 

59,857

 

Tenant recoveries

 

9,109

 

9,647

 

19,273

 

23,381

 

Other property income

 

900

 

493

 

1,297

 

954

 

Fee income from unconsolidated joint ventures

 

1,030

 

1,338

 

2,067

 

2,500

 

Total revenues

 

40,396

 

41,879

 

79,987

 

86,692

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Property operating expenses

 

5,119

 

6,271

 

12,206

 

16,320

 

Real estate tax expense

 

7,470

 

7,770

 

14,686

 

16,553

 

Depreciation and amortization

 

13,827

 

12,771

 

29,066

 

25,014

 

Provision for asset impairment

 

479

 

5,223

 

479

 

5,223

 

General and administrative expenses

 

4,452

 

3,757

 

8,959

 

7,474

 

Total expenses

 

31,347

 

35,792

 

65,396

 

70,584

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

9,049

 

6,087

 

14,591

 

16,108

 

 

 

 

 

 

 

 

 

 

 

Other income

 

942

 

1,055

 

2,464

 

1,761

 

Gain (loss) from change in control of investment properties

 

1,043

 

 

1,043

 

(1,400

)

Gain on sale of joint venture interest

 

12

 

240

 

64

 

553

 

Interest expense

 

(9,323

)

(11,042

)

(18,038

)

(21,946

)

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

 

1,723

 

(3,660

)

124

 

(4,924

)

 

 

 

 

 

 

 

 

 

 

Income tax benefit of taxable REIT subsidiaries

 

4,560

 

1,067

 

4,680

 

946

 

Equity in earnings (loss) of unconsolidated joint ventures

 

756

 

(7,975

)

789

 

(8,334

)

Income (loss) from continuing operations

 

7,039

 

(10,568

)

5,593

 

(12,312

)

Income (loss) from discontinued operations

 

28

 

280

 

(32

)

689

 

Net income (loss)

 

7,067

 

(10,288

)

5,561

 

(11,623

)

 

 

 

 

 

 

 

 

 

 

Net (income) loss attributable to the noncontrolling interest

 

79

 

(30

)

76

 

(66

)

Net income (loss) attributable to Inland Real Estate Corporation

 

7,146

 

(10,318

)

5,637

 

(11,689

)

 

 

 

 

 

 

 

 

 

 

Dividends on preferred shares

 

(2,223

)

 

(3,478

)

 

Net income (loss) attributable to common stockholders

 

$

4,923

 

(10,318

)

2,159

 

(11,689

)

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

0.06

 

(0.12

)

0.02

 

(0.14

)

Income (loss) from discontinued operations

 

 

 

 

0.01

 

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

 

$

0.06

 

(0.12

)

0.02

 

(0.13

)

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding — basic

 

88,962

 

88,656

 

88,934

 

88,259

 

Weighted average number of common shares outstanding — diluted

 

89,077

 

88,656

 

89,049

 

88,259

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to common stockholders

 

$

4,923

 

(10,318

)

2,159

 

(11,689

)

Unrealized gain (loss) on investment securities

 

(139

)

(178

)

710

 

216

 

Reversal of unrealized gain to realized gain on investment securities

 

(448

)

(779

)

(1,038

)

(1,162

)

Unrealized loss on derivative instruments

 

(2,266

)

(1,592

)

(1,267

)

(655

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

2,070

 

(12,867

)

564

 

(13,290

)

 

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 six months ended June 30, 2012 (unaudited)

(Dollars in thousands, except per share data)

 

 

 

Six months ended
June 30, 2012

 

Number of shares

 

 

 

Balance at beginning of period

 

88,992

 

Shares issued from DRP

 

113

 

Exercise of stock options

 

1

 

Balance at end of period

 

89,106

 

 

 

 

 

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

 

1

 

Balance at end of period

 

891

 

 

 

 

 

Additional Paid-in capital

 

 

 

Balance at beginning of period

 

783,211

 

Proceeds from DRP

 

942

 

Deferred stock compensation

 

126

 

Amortization of debt issue costs

 

16

 

Exercise of stock options

 

7

 

Issuance of preferred shares

 

938

 

Offering costs

 

(2,283

)

Balance at end of period

 

782,957

 

 

 

 

 

Accumulated distributions in excess of net income

 

 

 

Balance at beginning of period

 

(435,201

)

Net income attributable to Inland Real Estate Corporation

 

5,637

 

Dividends on preferred shares

 

(3,478

)

Distributions declared, common

 

(25,382

)

Balance at end of period

 

(458,424

)

 

 

 

 

Accumulated comprehensive loss

 

 

 

Balance at beginning of period

 

(7,400

)

Unrealized gain on investment securities, net

 

710

 

Reversal of unrealized gain to realized gain on investment securities

 

(1,038

)

Unrealized loss on derivative instruments

 

(1,267

)

Balance at end of period

 

(8,995

)

 

 

 

 

Noncontrolling interest

 

 

 

Balance at beginning of period

 

(1,087

)

Net loss attributable to noncontrolling interest

 

(76

)

Contributions to noncontrolling interest

 

50

 

Distributions to noncontrolling interest

 

(301

)

Balance at end of period

 

(1,414

)

 

 

 

 

Total equity

 

$

425,015

 

 

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 six months ended June 30, 2012 and 2011 (unaudited)

(In thousands)

 

 

 

Six months ended
June 30,2012

 

Six months ended
June 30, 2011

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

 

$

5,561

 

(11,623

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

Provision for asset impairment

 

479

 

5,223

 

Depreciation and amortization

 

29,466

 

25,586

 

Amortization of deferred stock compensation

 

126

 

(231

)

Amortization on acquired above/below market leases and lease inducements

 

(46

)

(257

)

Gain on sale of investment properties

 

 

(197

)

Gain (loss) from change in control of investment properties

 

(1,043

)

1,400

 

Realized gain on investment securities, net

 

(1,091

)

(1,234

)

Equity in (earnings) loss of unconsolidated ventures

 

(789

)

8,334

 

Gain on sale of joint venture interest

 

(64

)

(553

)

Straight line rent

 

(510

)

(846

)

Amortization of loan fees

 

1,615

 

1,904

 

Amortization of convertible note discount

 

232

 

726

 

Distributions from unconsolidated joint ventures

 

71

 

680

 

Changes in assets and liabilities:

 

 

 

 

 

Restricted cash

 

886

 

1,157

 

Accounts receivable and other assets, net

 

(6,314

)

(1,793

)

Accounts payable and accrued expenses

 

4,067

 

(135

)

Prepaid rents and other liabilities

 

(186

)

(1,637

)

Net cash provided by operating activities

 

32,460

 

26,504

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Restricted cash

 

2,591

 

 

Proceeds from sale of interest in joint venture, net

 

2,289

 

28,334

 

Purchase of investment securities

 

(2,614

)

(5,397

)

Sale of investment securities

 

2,972

 

2,447

 

Purchase of investment properties

 

(168,603

)

(99,756

)

Additions to investment properties, net of accounts payable

 

(10,212

)

(16,066

)

Proceeds from sale of investment properties, net

 

15,385

 

2,124

 

Proceeds from change in control of investment properties

 

 

499

 

Distributions from unconsolidated joint ventures

 

22,545

 

3,577

 

Investment in unconsolidated joint ventures

 

(11,174

)

(1,914

)

Mortgages receivable

 

(8,996

)

 

Leasing fees

 

(1,447

)

(2,451

)

Net cash used in investing activities

 

(157,264

)

(88,603

)

 

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

 

6



Table of Contents

 

INLAND REAL ESTATE CORPORATION

Consolidated Statements of Cash Flows (continued)

For the six months ended June 30, 2012 and 2011 (unaudited)

(In thousands)

 

 

 

Six months ended
June 30, 2012

 

Six months ended
June 30, 2011

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from the DRP

 

$

942

 

1,272

 

Proceeds from exercise of options

 

7

 

9

 

Issuance of shares, net of offering costs

 

58,655

 

7,546

 

Purchase of noncontrolling interest, net

 

 

(710

)

Loan proceeds

 

89,787

 

78,991

 

Payoff of debt

 

(9,388

)

(34,542

)

Proceeds from the unsecured line of credit facility

 

105,000

 

71,425

 

Repayments on the unsecured line of credit facility

 

(85,000

)

(41,425

)

Loan fees

 

(628

)

(2,466

)

Distributions paid

 

(28,627

)

(25,164

)

Distributions to noncontrolling interest partners

 

(301

)

(307

)

Contributions to noncontrolling interest

 

50

 

 

Margin loan payable

 

(715

)

 

Other current liabilities

 

 

1,771

 

Net cash provided by financing activities

 

129,782

 

56,400

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

4,978

 

(5,699

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

7,751

 

13,566

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

12,729

 

7,867

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

 

 

 

Cash paid for interest, net of capitalized interest

 

$

14,788

 

18,445

 

 

The accompanying notes are an integral part of these financial statements

 

7



Table of Contents

 

INLAND REAL ESTATE CORPORATION

Notes to Consolidated Financial Statements

June 30, 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.

 

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 the interests in these entities 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

June 30, 2012 (unaudited)

 

(2)           Investment Securities

 

At June 30, 2012 and December 31, 2011, investment in securities includes $11,480 and $11,075, respectively, of perpetual preferred securities and common securities classified as available-for-sale securities, which are recorded at fair value plus $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 $668 and $996 on the accompanying consolidated balances sheets as of June 30, 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 and six months ended June 30, 2012 resulted in gains on sale of $439 and $1,091, respectively, and during the three and six months ended June 30, 2011, these gains were $779 and $1,234, respectively.  These gains 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 and six months ended June 30, 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 June 30, 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

 

$

391

 

(37

)

2,761

 

(174

)

3,152

 

(211

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-REIT Stock

 

$

119

 

(121

)

 

 

119

 

(121

)

 

(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
June 30, 2012

 

Investment in and
advances to
unconsolidated joint
ventures at
June 30, 2012

 

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

 

 

 

 

 

 

 

 

 

IN Retail Fund LLC (a)

 

50

%

$

15,775

 

18,304

 

Oak Property and Casualty

 

25

%

1,481

 

1,464

 

TMK/Inland Aurora Venture LLC (b)

 

40

%

2,400

 

2,320

 

PTI Boise LLC, PTI Westfield, LLC (c)

 

85

%

11,277

 

11,100

 

INP Retail LP (d)

 

55

%

81,915

 

67,715

 

IRC/IREX Venture II LLC (e)

 

 

(f)

4,332

 

767

 

 

 

 

 

 

 

 

 

Investment in and advances to unconsolidated joint ventures

 

 

 

$

117,180

 

101,670

 

 

9



Table of Contents

 

INLAND REAL ESTATE CORPORATION

Notes to Consolidated Financial Statements

June 30, 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 the Company’s 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 interests to outside investors.

 

On 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.  In April 2012, the Company substantially completed the overall acquisition goals of this joint venture.  Pursuant to the joint venture agreement, the Company has contributed assets from its consolidated portfolio and PGGM has contributed their share of the equity of the properties contributed by the Company and equity for new acquisitions that were identified.  This joint venture agreement allowed for the acquisition of 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, was held in the joint venture and used as the Company’s equity contribution towards new 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 June 30, 2012, PGGM’s remaining commitment is approximately $3,336 and the Company’s is $1,009.  The table below presents investment property contributions to and acquisitions by the joint venture during the six months ended June 30, 2012 and the years ended December 31, 2011 and 2010.

 

Date

 

Property

 

City

 

State

 

Gross
Value

 

PGGM’s
Contributed
Equity

 

Company’s
Contributed
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

04/13/12

 

Woodbury Commons (a)

 

Woodbury

 

MN

 

$

10,300

 

$

5,818

 

$

7,111

 

04/11/12

 

Four Flaggs (b)

 

Niles

 

IL

 

33,690

 

10,439

 

12,759

 

02/29/12

 

Stone Creek Towne Center (a)

 

Cincinnati

 

OH

 

36,000

 

7,255

 

8,867

 

02/24/12

 

Silver Lake Village (a)

 

St. Anthony

 

MN

 

36,300

 

7,966

 

9,737

 

02/22/12

 

Riverdale Commons (b)

 

Coon Rapids

 

MN

 

31,970

 

10,189

 

12,453

 

12/15/11

 

Turfway Commons (a)

 

Florence

 

KY

 

12,980

 

2,605

 

3,185

 

12/07/11

 

Elston Plaza (a)

 

Chicago

 

IL

 

18,900

 

4,411

 

5,391

 

11/29/11

 

Brownstones Shopping Center (a)

 

Brookfield

 

WI

 

24,100

 

5,048

 

6,169

 

11/18/11

 

Woodfield Plaza (b)

 

Schaumburg

 

IL

 

26,966

 

6,863

 

8,388

 

11/15/11

 

Caton Crossing (b)

 

Plainfield

 

IL

 

12,269

 

2,089

 

2,553

 

11/09/11

 

Quarry Retail (b)

 

Minneapolis

 

MN

 

36,206

 

9,614

 

11,751

 

09/21/11

 

Champlin Marketplace (a)

 

Champlin

 

MN

 

12,950

 

2,789

 

3,409

 

09/19/11

 

Stuart’s Crossing (b)

 

St. Charles

 

IL

 

12,294

 

2,418

 

2,955

 

06/02/11

 

Village Ten Center (b)

 

Coon Rapids

 

MN

 

14,569

 

2,999

 

3,665

 

06/02/11

 

Red Top Plaza (a)

 

Libertyville

 

IL

 

19,762

 

4,497

 

5,484

 

03/08/11

 

The Shops of Plymouth (b)

 

Plymouth

 

MN

 

9,489

 

1,954

 

2,389

 

03/01/11

 

Byerly’s Burnsville (b)

 

Burnsville

 

MN

 

8,170

 

3,702

 

4,525

 

01/11/11

 

Joffco Square (a)

 

Chicago

 

IL

 

23,800

 

5,093

 

6,236

 

10/25/10

 

Diffley Marketplace (a)

 

Eagan

 

MN

 

11,861

 

3,424

 

4,185

 

08/31/10

 

The Point at Clark (a)

 

Chicago

 

IL

 

28,816

 

6,583

 

8,052

 

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

 

2,498

 

3,053

 

07/01/10

 

Woodland Commons (b)

 

Buffalo Grove

 

IL

 

23,340

 

10,643

 

13,007

 

07/01/10

 

Mallard Crossing (b)

 

Elk Grove Village

 

IL

 

6,163

 

3,103

 

3,966

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

466,718

 

$

126,664

 

$

154,991

 

 


(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

June 30, 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 six months ended June 30, 2012 and 2011.

 

 

 

June 30, 2012

 

June 30, 2011

 

 

 

 

 

 

 

Net investment properties

 

$

(50,845

)

(24,137

)

Acquired lease intangibles, net

 

(149

)

(606

)

Deferred costs, net

 

(1,120

)

(367

)

Other assets

 

(1,675

)

(695

)

Mortgages payable

 

20,891

 

13,500

 

Acquired below market lease intangibles, net

 

 

294

 

Other liabilities

 

193

 

2

 

Net assets contributed

 

$

(32,705

)

(12,009

)

 

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.

 

In June 2012, the Company and NYSTRS entered into an amendment to their joint venture agreement dated as of October 8, 2004.  The amendment extends the joint venture for a ten-year term through June 30, 2022.  No other changes were made to the original joint venture agreement.

 

During the three months ended June 30, 2012, the Company, on behalf of the joint venture, negotiated with the lender of the North Aurora Town Center development properties to repay the mortgage payable, which matured in July 2011, at a discount.  The Company contributed $10,000 to repay the entire $30,537 outstanding mortgage, resulting in a gain on the extinguishment of debt in the amount of $20,537.  In conjunction with this debt repayment, the joint ventures previously established to develop these properties were dissolved and the development properties and remaining indebtedness were consolidated by the Company.  The Company valued these properties utilizing information obtained from third party sources and internal valuation calculations, comprised of a discounted cash flow model, including discount rates and capitalization rates applied to the expected future cash flows of the property.  The consolidation resulted in a gain to the Company of $1,043 for the three and six months ended June 30, 2012. The Company estimated the fair value of the remaining debt by discounting the future cash flows of the instrument at rates currently offered for similar debt instruments. The gain from the change in control transaction is reflected as gain (loss) from change in control of investment properties on the accompanying consolidated statements of operations and comprehensive income.

 

During the six months ended June 30, 2011, the Company took control of Orchard Crossing, a property previously held through its joint venture with Pine Tree.  The Company valued the property utilizing information obtained from third party sources and internal valuation calculations, comprised of a discounted cash flow model, including discount rates and capitalization rates applied to the expected future cash flows of the property. The consolidation resulted in a net loss to the Company of $1,400 for the six months ended June 30, 2011. The Company estimated the fair value of debt by discounting the future cash flows of the instrument at rates currently offered for similar debt instruments. The loss from the change in control transaction is reflected as gain (loss) from change in control of investment properties on the accompanying consolidated statements of operations and comprehensive income.

 

Prior to these change in control transactions, the Company accounted for its investment in these properties as equity method investees.

 

The change in control transactions of North Aurora Town Center and Orchard Crossing were accounted for as business combinations, which required the Company to record the assets and liabilities of each the property at their fair values, which were derived using Level 3 inputs.

 

11



Table of Contents

 

INLAND REAL ESTATE CORPORATION

Notes to Consolidated Financial Statements

June 30, 2012 (unaudited)

 

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

 

 

 

North Aurora
Town Center
June 30, 2012

 

Orchard Crossing
June 30, 2011

 

 

 

 

 

 

 

Investment properties

 

$

7,515

 

19,800

 

Construction in progress

 

7,970

 

 

 

Other assets

 

74

 

299

 

Total assets acquired

 

15,559

 

20,099

 

 

 

 

 

 

 

Mortgages payable

 

4,300

 

14,800

 

Other liabilities

 

85

 

294

 

 

 

 

 

 

 

Net assets acquired

 

$

11,174

 

5,005

 

 

The following table summarizes the investment in North Aurora Town Center and Orchard Crossing:

 

 

 

North Aurora
Town Center

 

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

 

10,131

 

282

 

Gain (loss) from change in control of investment properties

 

1,043

 

(1,400

)

Cash received

 

 

(499

)

Closing credits

 

 

25

 

Net assets acquired

 

$

11,174

 

5,005

 

 

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.  IPCC was formerly known as Inland Real Estate Exchange Corporation and is a wholly-owned subsidiary of The Inland Group, Inc. (“TIGI”).  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 interests,” 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 six months ended June 30, 2012 and 2011, and therefore no longer represent the consolidated assets and liabilities of the VIE.

 

 

 

June 30, 2012

 

June 30, 2011

 

 

 

 

 

 

 

Investment properties

 

$

(10,629

)

(38,107

)

Acquired lease intangibles

 

(1,762

)

(5,643

)

Below market lease intangibles

 

691

 

 

Mortgages payable

 

5,850

 

24,062

 

Net change to investment in and advances to    unconsolidated joint ventures

 

$

(5,850

)

(19,688

)

 

12



Table of Contents

 

INLAND REAL ESTATE CORPORATION

Notes to Consolidated Financial Statements

June 30, 2012 (unaudited)

 

During the six months ended June 30, 2012, the joint venture with IPCC acquired ten investment properties.  During the three and six months ended June 30, 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 $12 and $64 for the three and six months ended June 30, 2012, respectively, as compared to $240 and $553 for the three and six months ended June 30, 2011.  These gains 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.  Acquisition fees are earned on the IPCC joint venture properties as the interests are sold to the investors.  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 and six months ended June 30, 2012, the Company earned $1,030 and $2,067, respectively, in fee income from its unconsolidated joint ventures, as compared to $1,338 and $2,500 for the three and six months ended June 30, 2011, respectively.

 

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 and six months ended June 30, 2012, the Company recorded $887 and $1,702 respectively, of amortization of this basis difference, as compared to $500 and $967 during the three and six months ended June 30, 2011, respectively.

 

The unconsolidated joint ventures had total outstanding debt in the amount of $422,192 (total debt, not the Company’s pro rata share) at June 30, 2012 that matures as follows:

 

Joint Venture Entity

 

2012 (a)

 

2013

 

2014

 

2015

 

2016

 

Thereafter

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IN Retail Fund LLC

 

$

6,600

 

32,813

 

11,615

 

22,000

 

8,000

 

100,582

 

181,610

 

PTI Boise LLC (b)

 

2,700

 

 

 

 

 

 

2,700

 

PTI Westfield LLC (c)

 

7,150

 

 

 

 

 

 

7,150

 

TDC Inland Lakemoor LLC (d)

 

22,105

 

 

 

 

 

 

22,105

 

INP Retail LP

 

32,650

 

 

 

5,800

 

 

164,327

 

202,777

 

IRC/IREX Venture II LLC

 

 

 

 

 

 

5,850

 

5,850

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total unconsolidated joint venture debt

 

$

71,205

 

32,813

 

11,615

 

27,800

 

8,000

 

270,759

 

422,192

 

 


(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)         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.

(c)          This loan matures in December 2012.  The Company has guaranteed approximately $1,000 of this outstanding loan.

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

 

The Company has guaranteed approximately $10,000 of unconsolidated joint venture debt as of June 30, 2012. The guarantees on two 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 June 30, 2012 and accordingly has not recorded a liability related to these guarantees on the accompanying consolidated balance sheets.

 

13



Table of Contents

 

INLAND REAL ESTATE CORPORATION

Notes to Consolidated Financial Statements

June 30, 2012 (unaudited)

 

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 3 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 and six months ended June 30, 2012.  The following impairment losses were recorded at the joint venture entity level during the three and six months ended June 30, 2011:

 

Joint Venture Entity

 

Three months
ended
June 30, 2011

 

Six months
ended
June 30, 2011

 

 

 

 

 

 

 

NARE/Inland North Aurora I

 

$

7,371

 

7,371

 

NARE/Inland North Aurora II

 

1,200

 

1,200

 

NARE/Inland North Aurora III

 

8,816

 

8,816

 

 

 

 

 

 

 

 

 

$

17,387

(a)

17,387

(a)

 


(a)                                 The Company’s pro rata share of this loss, equal to $7,824, is included in equity in loss of unconsolidated joint ventures on the accompanying consolidated statements of operations and comprehensive income.

 

Additionally, during the three and six months ended June 30, 2011, the Company determined that, based on the fair value of the related properties, the investments in certain development joint ventures were not recoverable.  Therefore, the following impairment losses were recorded to reflect the investments at fair value, which were derived using Level 3 inputs and are included in provision for asset impairment for the three and six months ended June 30, 2011 on the accompanying consolidated statements of operations and comprehensive income.

 

Joint Venture Entity

 

Three months ended
June 30, 2011

 

Six months ended
June 30, 2011

 

 

 

 

 

 

 

NARE/Inland North Aurora I

 

$

382

 

382

 

NARE/Inland North Aurora II

 

1,535

 

1,535

 

NARE/Inland North Aurora III

 

3,306

 

3,306

 

 

 

 

 

 

 

 

 

$

5,223

 

5,223

 

 

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

 

Balance Sheet:

 

June 30, 2012

 

December 31, 2011

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

Investment in real estate, net

 

$

792,418

 

702,178

 

Other assets

 

78,062

 

92,271

 

 

 

 

 

 

 

Total assets

 

$

870,480

 

794,449

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Mortgage payable

 

$

422,192

 

394,481

 

Other liabilities

 

67,489

 

59,171

 

 

 

 

 

 

 

Total liabilities

 

489,681

 

453,652

 

 

 

 

 

 

 

Total equity

 

380,799

 

340,797

 

 

 

 

 

 

 

Total liabilities and equity

 

$

870,480

 

794,449

 

 

 

 

 

 

 

Investment in and advances to unconsolidated joint ventures

 

$

117,180

 

101,670

 

 

14



Table of Contents

 

INLAND REAL ESTATE CORPORATION

Notes to Consolidated Financial Statements

June 30, 2012 (unaudited)

 

Statement of Operations:

 

Three months
ended
June 30, 2012

 

Three months
ended
June 30, 2011

 

Six months
ended
June 30, 2012

 

Six months
ended
June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

26,300

 

16,718

 

50,139

 

33,561

 

Total expenses (a)

 

(27,105

)

(35,420

)

(52,772

)

(52,973

)

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(805

)

(18,702

)

(2,633

)

(19,412

)

 

 

 

 

 

 

 

 

 

 

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

 

$

756

 

(7,975

)

789

 

(8,334

)

 


(a)                                 Total expenses include impairment charges in the amount of $17,387 for the three and six months ended June 30, 2011.  No impairment charges were required or recorded during the three and six months ended June 30, 2012.

 

(b)                                 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

 

04/18/12

 

Orland Park Place Outlots II

 

Orland Park

 

IL

 

22,966

 

8,750

 

06/13/12

 

Walgreens

 

Milwaukee

 

WI

 

13,905

 

3,025

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

636,018

 

$

169,270

 

 


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

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

 

During the six months ended June 30, 2012, in connection with the Company’s growth initiative, the Company acquired the investment properties listed above, which were initially consolidated on the Company’s consolidated financial statements.  The Company acquired 100% of the voting rights of each property for an aggregate purchase price of $169,270.  Woodbury Commons was sold to the Company’s joint venture with PGGM in April 2012 and the Pick N Save property became unconsolidated during the three months ended June 30, 2012 as a result of sales of ownership interests to investors.

 

The following table presents certain additional information regarding the Company’s acquisitions during the six months ended June 30, 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

 

Orland Park Place Outlots II

 

1,225

 

5,941

 

1,941

 

277

 

357

 

Walgreens

 

384

 

2,155

 

796

 

 

310

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

39,306

 

114,791

 

28,090

 

623

 

13,263

 

 

15



Table of Contents

 

INLAND REAL ESTATE CORPORATION

Notes to Consolidated Financial Statements

June 30, 2012 (unaudited)

 

(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 June 30, 2012 using

 

 

 

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

 

Significant Other
Observable Inputs
(Level 2)

 

Significant
Unobservable
Inputs (Level 3)

 

Description

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities

 

$

11,480

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

11,480

 

 

 

 

 

 

 

 

 

 

 

Derivative interest rate instruments liabilities (a)

 

$

 

9,663

 

 

Variable rate debt (b)

 

 

 

363,178

 

Fixed rate debt (b)

 

 

 

429,190

 

 

 

 

 

 

 

 

 

Total liabilities

 

$

 

9,663

 

792,368

 

 

 

 

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.

 

16



Table of Contents

 

INLAND REAL ESTATE CORPORATION

Notes to Consolidated Financial Statements

June 30, 2012 (unaudited)

 

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 June 30, 2012 and December 31, 2011.

 

(6)           Mortgages and Notes Receivable

 

In conjunction with the sale of Montgomery Plaza in Montgomery, Illinois, the Company gave a purchase money mortgage to the buyer in the amount of $515.  The buyer was required to pay interest only on a monthly basis at a rate of 6.0% per annum, as well as monthly payments for taxes and insurance.  The loan matured on May 1, 2012.  The Company received the entire balance of the mortgage receivable and accrued interest upon maturity.  During the three and six months ended June 30, 2012, the Company recorded $3 and $10, respectively, of interest income, as compared to $8 and $15 during the three and six months ended June 30, 2011, respectively.

 

In April 2012, the Company entered into a loan agreement with a developer of the Warsaw Commons Shopping Center in Warsaw, Indiana.  The loan provides construction financing to the developer to complete the development of 87,377 square feet of rentable space.  The loan accrues interest at a rate of 7.0% per annum and is added to the balance of the loan on a monthly basis.  The maximum loan amount under the agreement is $11,545.  The total outstanding balance, plus accrued interest is due upon the May 31, 2013 maturity date.  In conjunction with this loan agreement, the Company earned a fee of $115, equal to 1.0% of the maximum allowed under the loan. As of June 30, 2012, the outstanding balance on this note receivable was $5,542 and total interest income earned during the three and six months ended June 30, 2012 was $55.  Upon completion of the development, the Company has the obligation to acquire the property at a pre-determined price, expected to be approximately $13,000.

 

In May 2012, the Company, through its TRS, paid approximately $3,969 to acquire the notes on two properties which were in default.  The loans were acquired at a discount to the outstanding balance.  The TRS acquired for $1,800, the $3,720 note encumbering the Geneva Road Shopping Center, located in Winfield, Illinois and acquired for $2,169, the $4,500 note encumbering the Eola Commons Shopping Center located in Aurora, Illinois.  The TRS intends to obtain title to each of these properties through foreclosure proceedings and will then hold these properties for investment purposes or sell them to a third party at the fair market value at the time of the sale.

 

(7)           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
June 30, 2012

 

Three months
ended
June 30, 2011

 

Six months
ended
June 30, 2012

 

Six months
ended
June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

Investment advisor

 

$

26

 

24

 

44

 

40

 

Loan servicing

 

36

 

19

 

68

 

47

 

Property tax payment/reduction work

 

50

 

55

 

74

 

113

 

Computer services

 

224

 

175

 

402

 

375

 

Other service agreements

 

148

 

136

 

205

 

239

 

Broker commissions

 

153

 

74

 

362

 

161

 

Office rent and reimbursements

 

126

 

102

 

231

 

205

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

763

 

585

 

1,386

 

1,180

 

 

17



Table of Contents

 

INLAND REAL ESTATE CORPORATION

Notes to Consolidated Financial Statements

June 30, 2012 (unaudited)

 

During the three and six months ended June 30, 2012, the Company paid a total of $32 and $292 respectively, in mortgage brokerage fees to Grubb & Ellis Company (“Grubb & Ellis”), as compared to $40 in each period during the three and six months ended June 30, 2011.  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 did 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.  Currently, Mr. Simmons is the Executive Managing Director of BGC Partners, a global provider of real estate services.  The Company may pay mortgage brokerage fees to BGC Partners in the future.

 

(8)               Discontinued Operations

 

During the six months ended June 30, 2012 and 2011, the Company sold a total of three investment properties.  The following table summarizes the properties 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.