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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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


For the quarterly period ended September 30, 2004

or

q        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

INLAND REAL ESTATE CORPORATION
(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 
Q No  q


Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes  Q No q


As of November 8, 2004, there were 66,984,826 shares of common stock outstanding.



INLAND REAL ESTATE CORPORATION
(a Maryland corporation)


TABLE OF CONTENTS


 

Part I – Financial Information

 

 

 

 

 

 

Page

Item 1.

Financial Statements


 

 

 

 

Consolidated Balance Sheets at September 30, 2004 (unaudited) and December 31, 2003 (audited)

2

 

 

 

 

Consolidated Statements of Operations for the three and nine months ended
    September 30, 2004 and 2003 (unaudited)

4

 

 

 

 

Consolidated Statement of Stockholders' Equity for the nine months ended
    September 30, 2004 (unaudited)

6

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003 (unaudited)

7

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

10

 

 

 

Item 2.

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

25

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

44

 

 

 

Item 4.

Controls and Procedures

45

 

 

 

 

 

 

 

Part II – Other Information

 

 

 

 

Item 1.

Legal Proceedings

46

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

46

 

 

 

Item 3.

Defaults upon Senior Securities

46

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

46

 

 

 

Item 5.

Other Information

46

 

 

 

Item 6.

Exhibits and Reports on Form 8-K

 

 

 

 

 

          (a) Exhibits

46

 

 

 

Signatures

 

48

 

 

 

 



Part I - Financial Information

Item 1.  Financial Statements

INLAND REAL ESTATE CORPORATION
Consolidated Balance Sheets
September 30, 2004 (unaudited) and December 31, 2003 (audited)
(In thousands, except per share data)


Assets

 

 

September 30, 2004
(unaudited)

 

December 31, 2003
(audited)

Investment properties:

 


 


  Land

$

354,855

 

346,088

  Construction in progress

 

1,619

 

-

  Building and improvements

 

948,767

 

920,543

 

 


 


 

 

1,305,241

 

1,266,631

  Less accumulated depreciation

 

169,535

 

147,342

 

 


 


Net investment properties

 

1,135,706

 

1,119,289

 

 

 

 

 

Cash and cash equivalents

 

39,067

 

58,388

Investment in securities (net of an unrealized gain of $229 and
  $1,502 at September 30, 2004 and December 31, 2003, respectively)

 

6,828

 

12,041

Assets held for sale (net of accumulated depreciation of $4,252
  and $2,835 at September 30, 2004 and December 31, 2003,
  respectively)

 

20,898

 

14,444

Restricted cash

 

5,668

 

13,329

Accounts and rents receivable (net of provision for doubtful accounts
  of $2,595 and $2,966 at September 30, 2004 and December 31, 2003, respectively)

 

34,381

 

30,021

Investment in and advances to joint venture

 

1,785

 

8,392

Deposits and other assets

 

2,816

 

1,942

Acquired above market lease intangibles (net of accumulated
  amortization of $1,555 and $934 at September 30, 2004 and
  December 31, 2003, respectively)

 

6,053

 

5,773

Acquired in-place lease intangibles (net of accumulated amortization
  of $1,795 and $741 at September 30, 2004 and December 31, 2003, respectively)

 

18,747

 

10,414

Leasing fees (net of accumulated amortization of $1,799 and
  $1,368 at September 30, 2004 and December 31, 2003, respectively)

 

2,308

 

1,991

Loan fees (net of accumulated amortization of $6,796 and
  $5,096 at September 30, 2004 and December 31, 2003, respectively)

 

4,071

 

4,632

 

 


 


Total assets

$

1,278,328

 

1,280,656

 

 


 


 

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

 



 

INLAND REAL ESTATE CORPORATION
Consolidated Balance Sheets (continued)
September 30, 2004 (unaudited) and December 31, 2003 (audited)
(In thousands, except per share data)


Liabilities and Stockholders' Equity

 

 

September 30, 2004
(unaudited)

 

December 31, 2003
(audited)

Liabilities:

 


 


  Accounts payable and accrued expenses

$

2,964

 

1,994

  Acquired below market lease intangibles (net of accumulated
    amortization of $2,558 and $1,459 at September 30, 2004 and
    December 31, 2003, respectively)

 

8,220

 

8,155

  Accrued interest

 

2,074

 

1,810

  Accrued real estate taxes

 

27,312

 

25,493

  Dividends payable

 

5,311

 

5,406

  Security and other deposits

 

2,568

 

2,485

  Mortgages payable

 

631,528

 

615,512

  Line of credit

 

110,000

 

135,000

  Prepaid rents and unearned income

 

3,009

 

3,151

  Liabilities associated with assets held for sale, including mortgages
    payable

 

10,419

 

7,742

  Other liabilities

 

1,223

 

2,440

 

 


 


Total liabilities

 

804,628

 

809,188

 

 


 


Minority interest

 

20,174

 

20,973

 

 


 


Redeemable common stock relating to Put Agreement at December 31, 2003 (3,932  Shares)

 

-

 

35,000

 

 


 


Stockholders' Equity:

 

 

 

 

Preferred stock, $.01 par value, 6,000 Shares authorized; none
   issued and outstanding at September 30, 2004 and December 31,
   2003

 

-

 

-

  Common stock, $.01 par value, 100,000 Shares authorized;
    66,903 and 61,660 Shares issued and outstanding at
    September 30, 2004 and December 31, 2003, respectively

 

669

 

617

  Additional paid-in capital (net of offering costs of $58,816 and
    redeemable common stock relating to Put Agreement of
    $35,000 at December 31, 2003)

 

641,683

 

592,169

  Deferred stock compensation

 

(610)

 

(48)

  Accumulated distributions in excess of net income

 

(188,445)

 

(178,745)

  Accumulated other comprehensive income

 

229

 

1,502

 

 


 


Total stockholders' equity

 

453,526

 

415,495

 

 


 


Commitments and contingencies

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

$

1,278,328

 

1,280,656

 

 


 


 

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


 

INLAND REAL ESTATE CORPORATION
Consolidated Statements of Operations
For the three and nine months ended September 30, 2004 and 2003
(In thousands, except per share data)

(unaudited)

 

 

Three months
ended
September
30, 2004

 

Three months
ended
September
30, 2003

 

Nine months
ended
September
30, 2004

 

Nine months
ended
September
30, 2003

Revenues

 


 


 


 


  Rental income

$

34,475

 

31,003

 

100,470

 

91,550

  Tenant recoveries

 

12,162

 

10,503

 

38,387

 

34,287

  Lease termination income

 

90

 

-

 

708

 

369

  Other property income

 

166

 

116

 

543

 

435

 

 


 


 


 


Total revenues

 

46,893

 

41,622

 

140,108

 

126,641

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

  Property operating expenses

 

5,847

 

4,736

 

18,354

 

15,169

  Real estate tax expense

 

8,324

 

6,766

 

24,421

 

22,884

  Bad debt expense

 

200

 

200

 

509

 

1,434

  Depreciation and amortization expense

 

9,945

 

8,751

 

28,747

 

25,151

  Stock exchange listing expenses

 

83

 

-

 

823

 

-

  General and administrative expenses

 

1,979

 

1,474

 

5,936

 

4,285

 

 


 


 


 


Total expenses

 

26,378

 

21,927

 

78,790

 

68,923

 

 


 


 


 


Operating income

 

20,515

 

19,695

 

61,318

 

57,718

 

 

 

 

 

 

 

 

 

  Other income

 

583

 

373

 

2,241

 

1,087

  Interest expense

 

(10,507)

 

(9,884)

 

(31,819)

 

(29,119)

  Gain from continuing operations

 

76

 

-

 

76

 

-

  Minority interest

 

(206)

 

(34)

 

(641)

 

(392)

  Equity in earnings of unconsolidated joint ventures

 

(328)

 

(56)

 

(328)

 

(188)

 

 


 


 


 


Income from continuing operations

 

10,133

 

10,094

 

30,847

 

29,106

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

  Income from discontinued operations (including gain on sale
    of investment properties of $3,426 for the three months
    ended September 30, 2004 and $4,465 and $3 for the nine
    months ended September 30, 2004 and 2003, respectively)

 

3,741

 

837

 

6,188

 

1,911

 

 


 


 


 


Net income available to common stockholders

 

13,874

 

10,931

 

37,035

 

31,017

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

  Unrealized gain (loss) on investment securities

 

112

 

(64)

 

(1,273)

 

329

 

 


 


 


 


Comprehensive income

$

13,986

 

10,867

 

35,762

 

31,346

 

 


 


 


 


 

The accompanying notes are an integral part of these financial statements


 

INLAND REAL ESTATE CORPORATION
Consolidated Statements of Operations
For the three and nine months ended September 30, 2004 and 2003
(Dollars in thousands, except per share data)
(unaudited)

 

 

Three months
ended
September 30, 2004

 

Three months
ended
September 30, 2003

 

Nine months
ended
September 30, 2004

 

Nine months
ended
September  30, 2003

Basic and diluted earnings available to common shares per
  weighted-average common shares:

 


 


 


 


 

 

 

 

 

 

 

 

 

Income from continuing operations

$

0.15

 

0.16

 

0.47

 

0.45

Discontinued operations

 

0.06

 

0.01

 

0.09

 

0.03

 

 


 


 


 


Net income available to common stockholders per weighted
  average common shares – basic and diluted

$

0.21

 

0.17

 

0.56

 

0.48

 

 


 


 


 


Weighted average number of common shares outstanding –
  basic

 

66,770

 

65,197

 

66,285

 

64,921

 

 


 


 


 


Weighted average number of common shares outstanding –
  diluted

 

66,820

 

65,201

 

66,335

 

64,925

 

 


 


 


 


 

The accompanying notes are an integral part of these financial statements



 

INLAND REAL ESTATE CORPORATION
Consolidated Statement of Stockholders' Equity
For the nine months ended September 30, 2004
(Dollars in thousands, except per share data)
(unaudited)

 

 

2004

Number of shares

 


Balance at beginning of period

$

61,660

Shares issued from DRP

 

1,479

Stock compensation

 

47

Reclassification of redeemable common stock relating to Put Agreement

 

3,932

Repurchase of shares

 

(215)

 

 


Balance at end of period

 

66,903

 

 


Common Stock

 

 

Balance at beginning of period

 

617

Proceeds from DRP

 

15

Stock compensation

 

-

Reclassification of redeemable common stock relating to Put Agreement

 

39

Repurchase of shares

 

(2)

 

 


Balance at end of period

 

669

 

 


Additional Paid-in capital

 

 

Balance at beginning of period

 

592,169

Proceeds from DRP

 

16,070

Stock compensation

 

605

Reclassification of redeemable common stock relating to Put Agreement

 

34,960

Repurchase of shares

 

(2,121)

 

 


Balance at end of period

 

641,683

 

 


Deferred stock compensation

 

 

Balance at beginning of period

 

(48)

Stock compensation

 

(604)

Amortization of stock compensation

 

42

 

 


Balance at end of period

 

(610)

 

 


Accumulated distributions in excess of net income

 

 

Balance at beginning of period

 

(178,745)

Net income available to common stockholders

 

37,035

Distributions declared ($0.71, in the aggregate for the nine months ended
   September 30, 2004 per basic and diluted weighted average common share
   outstanding

 

(46,735)

 

 


Balance at end of period

 

(188,445)

 

 


Accumulated other comprehensive income

 

 

Balance at beginning of period

 

1,502

Other comprehensive loss

 

(1,273)

 

 


Balance at end of period

 

229

 

 


Total stockholders' equity

$

453,526

 

 


 

The accompanying notes are an integral part of these financial statements


 

INLAND REAL ESTATE CORPORATION
Consolidated Statements of Cash Flows
For the nine months ended September 30, 2004 and 2003
(Dollars in thousands)
(unaudited)


 

 

 

Nine months ended
September 30, 2004

 

Nine months ended
September 30, 2003

Cash flows from operating activities:

 

 


 


  Net income

 

$

37,035

 

31,017

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

 

 

 

 

 

    Depreciation

 

 

26,946

 

25,069

    Amortization

 

 

1,801

 

889

    Non-cash charges associated with discontinued operations

 

 

406

 

403

    Amortization of deferred stock compensation

 

 

42

 

12

    Amortization on acquired above market lease intangibles

 

 

622

 

551

    Amortization on acquired below market lease intangibles

 

 

(1,098)

 

(866)

    Gain on sale of investment properties

 

 

(4,541)

 

(3)

    Minority interest

 

 

641

 

392

    Loss from operations of unconsolidated ventures

 

 

328

 

677

    Rental income under master lease agreements

 

 

486

 

235

    Straight line rental income

 

 

(1,690)

 

(1,030)

    Provision for doubtful accounts

 

 

(316)

 

393

    Interest on unamortized loan fees

 

 

1,816

 

1,146

    Changes in assets and liabilities:

 

 

 

 

 

      Restricted cash

 

 

1,305

 

539

      Accounts and rents receivable

 

 

(2,822)

 

(1,065)

      Deposits and other assets

 

 

(852)

 

(1,140)

      Accounts payable and accrued expenses

 

 

806

 

110

      Accrued interest payable

 

 

268

 

381

      Accrued real estate taxes

 

 

1,449

 

(2,542)

      Security and other deposits

 

 

76

 

(420)

      Other liabilities

 

 

(2)

 

2

      Prepaid rents and unearned income

 

 

(557)

 

810

 

 

 


 


Net cash provided by operating activities

 

 

62,149

 

55,560

 

 

 


 


 

 

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



 

INLAND REAL ESTATE CORPORATION
Consolidated Statements of Cash Flows
For the nine months ended September 30, 2004 and 2003
(Dollars in thousands)
(unaudited)


 

 

 

 

Nine months ended
September 30, 2004

 

Nine months ended
September 30, 2003

Cash flows from investing activities:

 

 


 


 

  Restricted cash

 

$

6,356

 

784

 

  Escrows held for others

 

 

(1,215)

 

(678)

 

  Purchase of investment securities

 

 

(5,045)

 

-

 

  Sale of investment securities

 

 

8,985

 

850

 

  Purchase of marketable securities

 

 

-

 

(1)

 

  Additions to investment properties, net of amounts payable

 

 

(7,253)

 

(11,035)

 

  Purchase of investment properties

 

 

(64,747)

 

(62,321)

 

  Acquired above market lease intangibles

 

 

(901)

 

-

 

  Acquired in-place lease intangibles

 

 

(9,491)

 

-

 

  Acquired below market lease intangibles

 

 

1,164

 

-

 

  Proceeds from sale of investment property

 

 

27,671

 

494

 

  Investment in and advances to joint venture

 

 

(2,113)

 

-

 

  Mortgage receivable

 

 

-

 

(2,132)

 

  Construction in progress

 

 

(3)

 

-

 

  Leasing fees

 

 

(972)

 

(735)

 

 

 

 


 


 

Net cash used in investing activities

 

 

(47,564)

 

(74,774)

 

 

 

 

 


 


 

Cash flows from financing activities:

 

 

 

 

 

 

  Proceeds from DRP

 

 

16,085

 

16,715

 

  Repurchase of shares

 

 

(2,123)

 

(7,482)

 

  Loan fees

 

 

(1,381)

 

(1,255)

 

  Proceeds from (pay downs on) the unsecured line of credit

 

 

(25,000)

 

45,000

 

  Distributions paid

 

 

(48,271)

 

(47,201)

 

  Payoff of debt

 

 

(61,963)

 

-

 

  Loan proceeds

 

 

89,030

 

19,880

 

  Principal payments of debt

 

 

(283)

 

(271)

 

 

 

 


 


 

Net cash provided by (used in) financing activities

 

 

(33,906)

 

25,386

 

 

 

 


 


 

Net increase (decrease) in cash and cash equivalents

 

 

(19,321)

 

6,172

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

58,388

 

21,434

 

 

 

 


 


 

Cash and cash equivalents at end of period

 

 

39,067

 

27,606

 

 

 

 


 


 

 

 

 

 

 

 

 

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



 

INLAND REAL ESTATE CORPORATION
Consolidated Statements of Cash Flows (continued)
For the nine months ended September 30, 2004 and 2003
(Dollars in thousands)
(unaudited)


 

 

 

 

Nine months ended
September 30, 2004

 

Nine months ended
September 30, 2003

 

 

 


 


 

Supplemental schedule of noncash investing and financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from sale of investment properties

 

$

36,241

 

-

 

Transfer of mortgage debt

 

 

(8,570)

 

-

 

 

 

 


 


 

 

 

$

27,671

 

-

 

 

 

 


 


 

Reclassification of common stock related to Put Agreement

 

$

(35,000)

 

35,000

 

 

 

 


 


 

Distributions payable

 

$

5,311

 

5,197

 

 

 

 


 


 

Cash paid for interest

 

$

30,537

 

28,666

 

 

 

 


 


 

 

 

 

 

 

 

 

Impact of adoption of FIN 46 (consolidation of joint venture)

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

  Land, building and improvements and construction in progress
     (net of accumulated depreciation of $343,237)

 

$

9,538

 

-

 

  Other assets

 

 

282

 

-

 

 

 

 


 


 

Total assets

 

$

9,820

 

-

 

 

 

 


 


 

Total liabilities

 

$

1,428

 

-

 

 

 

 


 


 

Investment in and advances to joint venture at January 1, 2004

 

$

8,392

 

-

 

 

 

 


 


 

 

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

 



INLAND REAL ESTATE CORPORATION
Notes to Consolidated Financial Statements
September 30, 2004
(In thousands, except per share data and square footage amounts)
(unaudited)



The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("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 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 fiscal year ended December 31, 2003,  as certain footnote disclosures contained in such audited financial statements have been omitted from this Quarterly Report.  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 was formed on May 12, 1994.  The Company is an owner/operator of Neighborhood Retail Centers and Community Centers located primarily within an approximate 400-mile radius of its headquarters in Oak Brook, Illinois.  The Company owns, and acquires, single-user retail properties located throughout the United States.  The Company is also permitted to construct or develop properties, or render services in connection with such development or construction, subject to the Company's compliance with the rules governing real estate investment trusts under the Internal Revenue Code of 1986, as amended (the "Code").  As of September 30, 2004, the Company had ownership interests in 139 investment properties, comprised of:

 

Eighty-six Neighborhood Retail Centers totaling approximately 5,700,000 gross leasable square feet;

Twenty-four Community Centers totaling approximately 5,200,000 gross leasable square feet; and

Twenty-nine single-user retail properties totaling approximately 1,400,000 gross leasable square feet.

The Company qualified as a real estate investment trust ("REIT") under the Code for federal income tax purposes commencing with the tax year ending December 31, 1995.  So long as the Company qualifies for treatment as a REIT, the Company generally will not be subject to federal income tax to the extent it distributes at least 90% its REIT taxable income to its stockholders.  If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal 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 and property and federal income and excise taxes on its undistributed income.


The Company has elected to be taxed, for federal income tax purposes, as a REIT.  This election has important consequences because it requires the Company to satisfy certain tests regarding the nature of the revenues it can generate and the distributions that it pays to stockholders.  To ensure that the Company qualifies to be taxed as a REIT, the Company determines, on a quarterly basis, that the gross income, asset and distribution tests imposed by the Code are met.  On an ongoing basis, as due diligence is performed by the Company on potential real estate purchases or temporary investment of uninvested capital, the Company determines that the income from the new assets qualifies for REIT purposes.


The preparation of consolidated financial statements in conformity with 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.

 



INLAND REAL ESTATE CORPORATION
Notes to Consolidated Financial Statements
September 30, 2004
(In thousands, except per share data and square footage amounts)
(unaudited)



In the opinion of management, the financial statements contain all the adjustments necessary, which are of a normal recurring nature, to present fairly the financial position and results of operations for the periods presented herein.  Results of interim periods are not necessarily indicative of results to be expected for the year.


Certain reclassifications were made to the 2003 financial statements to conform to the 2004 presentation.


The accompanying consolidated financial statements of the Company include, in addition to the accounts of its wholly-owned subsidiaries, the accounts of Inland Ryan, LLC, Inland Ryan Cliff Lake, LLC and the joint venture with Tri-Land Properties, Inc ("consolidated entities").  These entities are consolidated because the Company is either the primary beneficiary of a variable interest entity or has substantial influence and controls the entity.  The primary beneficiary is the party that absorbs a majority of the entity's expected residual returns and losses.  The third parties' interests in these consolidated entities are reflected as minority interest in the accompanying consolidated financial statements.


Depreciation expense is computed using the straight-line method.  Buildings and improvements are depreciated based upon estimated useful lives of 30 years for buildings and improvements, 15 years for site improvements and the remaining life of the related lease for tenant improvements.


Acquired above and below market leases are amortized on a straight-line basis over the life of the related leases as an adjustment to rental income.  Acquired in-place leases are amortized over the average lease term as a component of amortization expense.


The Company allocates the purchase price of each acquired investment property between land, building and improvements, other intangibles (including acquired above market leases, acquired below market leases, customer relationships and acquired in-place leases) and any assumed financing that is determined to be above or below market terms.  The Company uses the information contained in the third party appraisals as the primary basis for allocating the purchase price between land, building and site improvements.  The aggregate value of other intangibles is measured based on the difference between the purchase price and the property valued as if vacant.


On a quarterly basis, in accordance with Statement of Financial Accounting Standards No. 144, the Company reviews impairment indicators and if necessary conducts an impairment analysis to ensure that the carrying value of the property does not exceed its estimated fair value.  The Company evaluates its investment properties to assess whether any impairment indicators are present, including recurring operating losses and significant adverse changes in legal factors or business climate.  If an investment property is considered impaired, a loss is recorded to reduce the carrying value of the property to its estimated fair value.  No such losses have been required or recorded in the accompanying financial statements as of and for the three and nine months ended September 30, 2004 and 2003.


Leasing fees are amortized on a straight-line basis over the life of the related lease.


Loan fees are amortized on a straight-line basis over the life of the related loan.


The fair value of mortgages payable is the amount at which the instrument could be exchanged in a current transaction between willing parties.  The fair value of the Company's mortgages is estimated to be $96,945 for mortgages which bear interest at variable rates and $545,729 for mortgages which bear interest at fixed rates.  The Company estimates the fair value of its mortgages payable by discounting the future cash flows of each instrument at rates currently offered to the Company for similar debt instruments of comparable maturities by the Company's lenders.


Offering costs are offset against the Stockholder's equity accounts.  Offering costs consist principally of printing, selling and registration costs.

 



INLAND REAL ESTATE CORPORATION
Notes to Consolidated Financial Statements
September 30, 2004
(In thousands, except per share data and square footage amounts)
(unaudited)



Tenants required to pay a security deposit under their lease with the Company have paid either in cash or by posting letters of credit.  The letters of credit are not recorded in the accompanying consolidated financial statements.  As of September 30, 2004 and December 31, 2003, the Company held letters of credit for tenant security deposits totaling approximately $449 and $414, respectively.


Rental income is recognized on a straight-line basis over the term of each lease.  The difference between rental income earned on a straight-line basis and the cash rent due under provisions of the lease agreements is recorded as deferred rent receivable and is included as a component of accounts and rents receivable in the accompanying consolidated balance sheets.


The Company accrues lease termination income if there is a signed termination agreement, all of the conditions of the agreement have been met and the tenant is no longer occupying the property.


On December 2, 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin 101 "Revenue Recognition in Financial Statements."  The staff determined that a lessor should defer recognition of contingent rental income, such as percentage/excess rent, until the specified target that triggers the contingent rental income is achieved.  The Company has recorded percentage rental revenue in accordance with SAB 101 for all periods presented.


As of September 30, 2004 and 2003, the Company had no material derivative instruments.  The Company may enter into derivative financial instrument transactions in order to mitigate its interest rate risk on a related financial instrument.  The Company may designate these derivative financial instruments as hedges and apply hedge accounting, as the instrument to be hedged will expose the Company to interest rate risk, and the derivative financial instrument will reduce that exposure. Gains and losses related to the derivative financial instrument would be deferred and amortized over the terms of the hedged instrument.  If a derivative terminates or is sold, the gain or loss is recognized.  The Company will generally enter into derivative transactions that satisfy the aforementioned criteria only.


(2)     Investment Securities


The Company classifies its investment in securities in one of three categories: trading; available-for-sale; or held-to-maturity.  Trading securities are bought and held principally for the purpose of selling them in the near term.  Held-to-maturity securities are those securities in which the Company has the ability and intent to hold the security until maturity.  All securities not included in trading or held-to-maturity are classified as available-for-sale.


Investment in securities at September 30, 2004 and 2003 are classified as available-for-sale securities.  Available-for-sale securities are recorded at fair value.  Unrealized holding gains and losses on available-for-sale securities are excluded from earnings and reported as a separate component of other comprehensive income until realized.  Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis.  Dividend income is recognized when received.


A decline in the market value of any available-for-sale security below cost that is deemed to be other than temporary results in a reduction in the carrying amount to fair value.  The impairment is charged to earnings and a new cost basis for the security is established.  To determine whether an impairment is other than temporary, the Company considers whether it has the ability and intent to hold the investment until a market price recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary.  Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to the end of the period and forecasted performance of the investee.

 



INLAND REAL ESTATE CORPORATION
Notes to Consolidated Financial Statements
September 30, 2004
(In thousands, except per share data and square footage amounts)
(unaudited)



Sales of investment securities available-for-sale during the nine months ended September 30, 2004 and 2003 resulted in gains on sale of $1,069 and $38, respectively.  These gains are included in other income in the accompanying Consolidated Statements of Operations.


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 September 30, 2004 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 Common Stock

$

2,080

 

36

 

-

 

-

 

2,080

 

36

 

 

 


 


 


 


 


 


 

Non REIT Common Stock

$

318

 

7

 

-

 

-

 

318

 

7

 

 

 


 


 


 


 


 



(3)     Joint Ventures


On February 1, 2001, a wholly-owned subsidiary of the Company entered into an LLC agreement with a wholly-owned subsidiary of Tri-Land Properties, Inc. for the acquisition and redevelopment of the Century Consumer Mall in Merrillville, Indiana.  The first phase of new construction commenced in January 2003 for an 18,000 square foot retail building fronting U.S. Route 30.  This building is anchored by a 4,800 square foot Panera Bread store pursuant to an executed ten-year lease.  Construction was completed during 2003 and an additional 2,400 square feet was leased.  It is anticipated that lease up of this building will occur during 2004.  Each partner's initial equity contribution was $500.


Through December 31, 2003, the Company had accounted for its investment in this joint venture under the equity method of accounting because the Company was not the managing member and did not have the ability to control the joint venture.  The Company adopted FASB Interpretation No. 46 ("FIN 46") on January 1, 2004.  In accordance with FIN 46, the Company has evaluated this joint venture and determined that it is the principal beneficiary in this variable interest entity.  As a result, the accounts of the joint venture have been consolidated with the Company's financial statements for financial reporting purposes.  In conjunction with this consolidation, the Company consolidated approximately $10,000 in assets held by the joint venture.


In addition, the Company has committed to lend the LLC up to $17,800.  Draws on the loan bear interest at a rate of 9% per annum, with interest only paid monthly on average outstanding balances.  The loan is secured by the property and matures on January 31, 2006.  As of September 30, 2004, the principal balance of this mortgage receivable was $9,704.  Tri-Land Properties, Inc. has guaranteed $2,500 of this mortgage receivable.  During the consolidation process, this amount and the mortgage payable in the joint venture partner's accounts were eliminated.


Effective September 23, 2004, the Company formed a strategic joint venture with an affiliate of Crow Holdings Managers, LLC to each acquire a 50% ownership interest in the 97,535 square-foot Hastings Marketplace, which is located in Hastings, Minnesota.  The venture acquired Hastings Marketplace from the Company for $13,200.  The Company is the managing member of the venture and earns fees for providing property management and leasing services to the venture.

 



INLAND REAL ESTATE CORPORATION
Notes to Consolidated Financial Statements
September 30, 2004
(In thousands, except per share data and square footage amounts)
(unaudited)



In connection with the sale of Hastings Marketplace to the venture, the Company recognized a gain of approximately $76.  The gain and operations are not recorded as discontinued operations because of the Company's continuing involvement in this shopping center.  The Company accounts for its interest in the venture using the equity method of accounting.


Summarized financial information for the unconsolidated investments is as follows:


 

 

September 30, 2004

 

December 31, 2003

Balance Sheet:

 


 


 

 

 

 

 

Investment in real estate, net

$

11,557

 

-

Acquired lease intangibles, net

 

1,578

 

-

Accounts and rents receivable

 

113

 

-

Restricted cash

 

175

 

-

Loan fees, net

 

101

 

-

Other assets

 

20

 

-

 

 


 


Total assets

$

13,544

 

-

 

 


 


Accounts payable and accrued expenses

 

11

 

-

Security Deposits

 

7

 

-

Mortgage payable

 

9,780

 

-

Other liabilities

 

175

 

-

 

 

 

 

 

Equity and partner's capital

 

3,571

 

-

 

 


 


Total liabilities and equity

$

13,544

 

-

 

 


 


 

 

 

 

Nine months ended
September 30, 2004

 

Nine months ended
September 30, 2003

Statement of Operations

 


 


 

 

 

 

 

Rental income

$

72

 

-

Tenant recoveries

 

4

 

-

 

 


 


Total revenues

 

76

 

-

 

 

 

 

 

Property operating expenses

 

4

 

-

Real estate tax expense

 

56

 

-

Interest expense

 

22

 

-

Start up expenses

 

650

 

-

 

 


 


Total expenses

 

732

 

-

 

 

 

 

 

Net loss

$

(656)

 

-

 

 


 


 



INLAND REAL ESTATE CORPORATION
Notes to Consolidated Financial Statements
September 30, 2004
(In thousands, except per share data and square footage amounts)
(unaudited)



(4)     Transactions with Related Parties


During the nine months ended September 30, 2004 and 2003, the Company purchased various administrative services, such as payroll preparation and management, data processing, insurance consultation and placement, investor relations, property tax reduction services and mail processing from affiliates of The Inland Group, Inc.  The Company pays for these services on an hourly basis.  The hourly rate is based on the salary of the individual rendering the services, plus a pro rata allocation of overhead including, but not limited to, employee benefits, rent, materials, fees, taxes and operating expenses incurred by each entity in operating their respective businesses.  Computer services were purchased at a contract rate of $50 per hour.  The Company continues to purchase these services from The Inland Group, Inc. affiliates and these expenses, totaling $193 and $645, for the three and nine months ended September 30, 2004, respectively, and $84 and $532, for the three and nine months ended September 30, 2003, respectively, are included in general and administrative expenses and property operating expenses.  Additionally, the Company leases its corporate office space from an affiliate of The Inland Group, Inc.  Payments under this lease were $62 and $187 for the three and nine months ended September 30, 2004, respectively and $61 and $177 for the three and nine months ended September 30, 2003, respectively, and are also included in general and administrative expenses.  The Inland Group, Inc., itself and through affiliates, owns approximately 9.6% of the Company's outstanding common stock.  For accounting purposes however, the Company is not directly affiliated with The Inland Group, Inc., or its affiliates.


During the nine months ended September 30, 2004 and 2003, the Company purchased legal services from attorneys employed by The Inland Real Estate Group, Inc., a wholly-owned subsidiary of The Inland Group, Inc.  The fees for these services were based on costs incurred by The Inland Real Estate Group, Inc. equal to $220 per hour.  For the three and nine months ended September 30, 2004 the Company paid $1 and $2, respectively, and for the three and nine months September 30, 2003, the Company paid $6 and $95, respectively, for these legal services.


An affiliate of The Inland Group, Inc. was the mortgagee on the Walgreens property, located in Decatur, Illinois.  The loan secured by this mortgage matured on May 31, 2004 and the principal of approximately $624 was repaid.  For the nine months ended September 30, 2004   the Company paid principal and interest payments totaling $28 and during the three and nine months ended September 30, 2003, the Company paid $17 and $51, respectively.


On February 1, 2001, a wholly-owned subsidiary of the Company entered into an LLC agreement with a wholly-owned subsidiary of Tri-Land Properties, Inc. to acquire and develop the Century Consumer Mall in Merrillville, Indiana.  Richard Dube, the brother-in-law of Mr. Daniel Goodwin, the Company's chairman of the board, is the president and a principal owner of Tri-Land.  Reference is made to Note 3 for more information on the Company's joint venture.


On August 12, 2003, the Company entered into an agreement with Inland Investment Advisors, Inc., an affiliate of The Inland Group, Inc. to manage its investment in securities.  The Company pays a fee equal to three quarters of one percent (0.75%) per annum on the net asset value under management.  The Company paid approximately $18 and $63 for these services during the three and nine months ended September 30, 2004, respectively.  The Company paid no such fees during the three and nine months ended September 30, 2003.




INLAND REAL ESTATE CORPORATION
Notes to Consolidated Financial Statements
September 30, 2004
(In thousands, except per share data and square footage amounts)
(unaudited)



During the year ended December 31, 2003, the Company entered into an agreement with Inland Real Estate Investment Corporation, Partnership Ownership Corporation (a wholly owned subsidiary of Inland Real Estate Investment Corporation) and Fleet National Bank.  Inland Real Estate Investment Corporation and Partnership Ownership Corporation are both owned or controlled by The Inland Group, Inc.  Three of the Company's directors, Messrs. Goodwin, Cosenza and Parks are directors and shareholders of The Inland Group, Inc.  Mr. Goodwin owns a controlling interest in The Inland Group, Inc.  Inland Real Estate Investment Corporation and Partnership Ownership Corporation have collectively pledged 6,166 shares of the Company's common stock, which they own, to secure draws under a $35,000 line of credit obtained by them from Fleet National Bank.  Under the agreement, Inland Real Estate Investment Corporation paid the Company $100 in return for its agreement to repurchase a portion of these pledged shares, at a price of $8.90 per share, from Fleet National Bank if Inland Real Estate Investment Corporation defaults on the line of credit agreement and Fleet National Bank exercises its right under the pledge agreement to obtain ownership of the shares.  Although Inland Real Estate Investment Corporation and Partnership Ownership Corporation have pledged shares, the Company is only required to repurchase that number of shares multiplied by $8.90 needed to satisfy any of Inland Real Estate Investment Corporation's or Partnership Ownership Corporation's obligations, including principal, accrued interest and other costs and expenses under the line of credit agreement.  Further, the Company is not required to repurchase more than $15,000 worth of shares during any six month period.  The maximum amount the Company is required to repurchase is approximately 4,000 shares or $35,000 of stock based on a price of $8.90 per share.  In accordance with FIN 45, the Company has recorded this premium of $100 paid by Inland Real Estate Investment Corporation as a liability related to its obligation to stand ready to perform on its guarantee.  The Company will recognize the premium received as income upon the termination date of this agreement.  In addition, the Company has classified the potential amount to be redeemed under this agreement as temporary equity in the accompanying Consolidated Balance Sheets.  This agreement was approved by the Company's independent directors who, among other things, determined the fairness of the fee received by the Company from Inland Real Estate Investment Corporation.  In determining that the fee was fair, the independent directors obtained a fairness opinion, the cost of which was paid for by Inland Real Estate Investment Corporation.


On August 2, 2004, as a result of an amendment and restatement of the line of credit agreement between the lender and Inland Real Estate Investment Corporation as borrower, the lender delivered to the Company a termination and release of the Put Agreement.  The Company reclassified the liability recorded for its obligation under the Put Agreement and recognized the $100 premium received as earned income on the termination date of August 2, 2004.  Additionally, the Company reclassified the amount of temporary equity previously recorded on the Consolidated Balance Sheets at September 30, 2004.

 



INLAND REAL ESTATE CORPORATION
Notes to Consolidated Financial Statements
September 30, 2004
(In thousands, except per share data and square footage amounts)
(unaudited)



(5)     Investment Properties


The Company, from time to time, receives payments under master lease agreements covering spaces vacant at the time of acquisition.  The payments range from one to two years from the date of acquisition of the property or until the space is leased and tenants begin paying rent.  GAAP requires the Company to treat these payments as a reduction to the purchase price of the investment properties upon receipt of the payment, rather than as rental income.  As of September 30, 2004, the Company had the following six investment properties subject to master lease agreements:

 

The cumulative amounts of such payments were $7,839 and $7,353 as of September 30, 2004 and December 31, 2003, respectively.


(6)     Discontinued Operations


During the nine months ended September 30, 2004, the Company sold four investment properties.  During the year ended December 31, 2003, the Company sold three investment properties.  Additionally, during the year ended December 31, 2003, the Company sold a 2,280 square foot free-standing restaurant building, leased to Popeye's, which was part of one of our existing investment properties.  For federal and state income tax purposes, certain of the Company's sales qualified as part of tax deferred exchanges and, as a result, the tax gains are deferred until the replacement properties are disposed of in subsequent taxable transactions.  The proceeds from these sales were deposited with a qualified tax deferred exchange agent with the intent of using these proceeds for future acquisitions.  The following table summarizes the properties sold, date of sale, indebtedness repaid, approximate sales proceeds, net of closing costs and after repayment of debt, gain on sale and whether the sale qualified as part of a tax deferred exchange:

 

Property Name

 

Date of Sale

 

Indebtedness
repaid

 

Approximate Net
Sales Proceeds
(after repayment
of debt)

 

Gain on
Sale

 

Tax
Deferred
Exchange


 


 


 


 


 


Popeye's

 

April 8, 2003

$

-

$

340

$

3

 

No

Summit of Park Ridge

 

December 24, 2003

 

1,600

 

1,600

 

721

 

Yes

Eagle Country Market

 

December 24, 2003

 

1,450

 

1,700

 

587

 

Yes

Eagle Ridge Center

 

December 30, 2003

 

3,000

 

2,000

 

4

 

Yes

Zany Brainy

 

January 20, 2004

 

1,245

 

1,600

 

873

 

Yes

Prospect Heights

 

April 23, 2004

 

1,095

 

1,200

 

166

 

Yes

Fairview Heights

 

August 5, 2004

 

8,570

 

5,600

 

2,639

 

Yes

Prairie Square

 

September 23, 2004

 

1,550

 

1,800

 

787

 

Yes

 



INLAND REAL ESTATE CORPORATION
Notes to Consolidated Financial Statements
September 30, 2004
(In thousands, except per share data and square footage amounts)
(unaudited)


From time to time, the Company decides to dispose of certain assets or receives unsolicited offers to purchase its investment properties, at prices in excess of book value.  Upon receipt of a valid offer or the signing of a listing agreement, the Company classifies the asset as held for sale and suspends depreciation.  As of September 30, 2004, the following investment properties were held for sale and depreciation was suspended as of the date noted:

 

June 1, 2003 – Dominick's, located in Highland Park, Illinois;

November 1, 2003 – Walgreens, located in Woodstock, Illinois;

April 19, 2004 – Wauconda Shopping Center, located in Wauconda, Illinois;

April 19, 2004 – Sequoia Shopping Center, located in Milwaukee, Wisconsin;

May 17, 2004 – Calumet Square, located in Calumet City, Illinois; and

 

If the current unsolicited offers do not result in the sale of these properties, the Company will continue to actively market them for sale.  Listing agreements were signed for Wauconda Shopping Center, Sequoia Shopping Center, Calumet Square and Crestwood Plaza.  These properties will continue to be marketed until they are sold.


Results of operations for the investment properties sold, or held for sale, during the three and nine months ended September 30, 2004 and 2003 (unaudited), are presented in the table below:

 

 

 

Three months
ended
September 30,
2004

 

Three months
ended
September 30,
2003

 

Nine months
ended
September 30,
2004

 

Nine months
ended
September 30,
2003

Income:

 


 


 


 


  Rental income

$

868

 

1,557

 

3,109

 

4,602

  Tenant recoveries

 

91

 

441

 

721

 

1,321

 

 


 


 


 


 

 

959

 

1,998

 

3,830

 

5,923

Expenses:

 

 

 

 

 

 

 

 

  Property operating expense

 

102

 

290

 

455

 

1,319

  Bad debt expense

 

26

 

(57)

 

35

 

23

  Real estate expense

 

71

 

227

 

408

 

387

  Interest expense

 

284

 

362

 

803

 

1,075

  Depreciation and amortization

 

161

 

339

 

406

 

1,211

 

 


 


 


 


 

 

644

 

1,161

 

2,107

 

4,015

 

 


 


 


 


Income from operations

 

315

 

837

 

1,723

 

1,908

 

 

 

 

 

 

 

 

 

Gain on sale of investment property

 

3,426

 

-

 

4,465

 

3

 

 


 


 


 


Income from discontinued operations

$

3,741

 

837

 

6,188

 

1,911

 

 


 


 


 


 



INLAND REAL ESTATE CORPORATION
Notes to Consolidated Financial Statements
September 30, 2004
(In thousands, except per share data and square footage amounts)
(unaudited)



The following assets and liabilities relating to the investment properties sold, or held for sale, as of September 30, 2004 and December 31, 2003, are presented in the table below:

 

 

 

September 30, 2004
(unaudited)

 

December 31, 2003
(audited)

Assets:

 


 


  Accounts and rents receivable, net of provision
    for doubtful accounts

$

1,292

 

831

  Land

 

6,020

 

4,433

  Building

 

17,776

 

12,002

  Accumulated depreciation

 

(4,252)

 

(2,835)

  Loan fees, net of accumulated amortization

 

8

 

13

  Leasing fees, net of accumulated amortization

 

54

 

-

 

 


 


Total assets held for sale

$

20,898

 

14,444

 

 


 


Liabilities:

 

 

 

 

  Accounts payable and accrued expenses

$

11

 

1

  Accrued interest

 

51

 

47

  Accrued real estate taxes

 

440

 

40

  Prepaid rents and unearned income

 

66

 

9

  Security and other deposits

 

9

 

-

  Mortgage payable

 

9,842

 

7,645

 

 


 


Total liabilities associated with assets held for sale

$

10,419

 

7,742

 

 


 



(7)     Operating Leases


Certain tenant leases contain provisions providing for "stepped" rent increases.  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 $1,690 and $1,031 for the nine months ended September 30, 2004 and 2003, respectively, of rental income for the period of occupancy for which stepped rent increases apply and $18,224 and $16,534 in related accounts and rents receivable as of September 30, 2004 and December 31, 2003, respectively.  The Company anticipates collecting these amounts over the terms of the leases as scheduled rent payments are made.

 



INLAND REAL ESTATE CORPORATION
Notes to Consolidated Financial Statements
September 30, 2004
(In thousands, except per share data and square footage amounts)
(unaudited)



(8)     Mortgages Payable

 

The Company's mortgages payable are secured by certain of its investment properties and consist of the following at September 30, 2004 and December 31, 2003:

Mortgagee

 

Interest Rate at
September 30, 2004

 

Interest Rate at
December 31, 2003

 

Maturity
Date

 

Current
Monthly
Payment

 

Balance at
September 30,
2004

 

Balance at
December 31,
2003


 


 


 


 


 


 


  Allstate (a) (b)

 

7.21%

 

7.21%

 

12/2004

$

38

$

6,400

$

6,400

  Allstate

 

7.00%

 

7.00%

 

01/2005

 

24

 

4,100

 

4,100

  Allstate

 

7.15%

 

7.15%

 

01/2005

 

18

 

3,050

 

3,050

  Allstate

 

7.00%

 

7.00%

 

02/2005

 

32

 

5,477

 

5,477

  Allstate

 

6.65%

 

6.65%

 

05/2005

 

53

 

9,600

 

9,600

  Allstate

 

6.82%

 

6.82%

 

08/2005

 

60

 

10,600

 

10,600

  Allstate

 

7.40%

 

7.40%

 

09/2005

 

221

 

35,787

 

35,787

  Allstate

 

7.38%

 

7.38%

 

02/2006

 

133

 

21,600

 

21,600

  Allstate

 

5.87%

 

5.87%

 

09/2009

 

29

 

6,000

 

6,000

  Allstate

 

4.65%

 

4.65%

 

01/2010

 

87

 

22,500

 

22,500

  Allstate

 

9.25%

 

9.25%

 

12/2009

 

39

 

3,908

 

3,908

  Allstate

 

4.84%

 

4.84%

 

12/2009

 

48

 

11,800

 

11,800

  Allstate

 

4.70%

 

4.70%

 

10/2010

 

48

 

12,380

 

12,380

  Archon Financial

 

4.35%

 

4.35%

 

12/2007

 

24

 

6,589

 

6,589

  Archon Financial

 

4.88%

 

4.88%

 

01/2011

 

125

 

30,720

 

30,720

  Bear, Stearns Funding, Inc. (c)

 

-

 

6.86%

 

06/2004

 

-

 

-

 

57,450

  Bear, Stearns Funding, Inc.

 

6.50%

 

6.50%

 

09/2006

 

73

 

13,530

 

13,530

  Bear, Stearns Funding, Inc.

 

6.03%

 

6.03%

 

07/2007

 

68

 

13,600

 

13,600

  Bear, Stearns Funding, Inc.

 

6.60%

 

6.60%

 

02/2009

 

44

 

8,000

 

8,000

  Bear, Stearns Funding, Inc. (c)

 

4.11%

 

-

 

07/2011

 

133

 

38,730

 

-

  Berkshire Mortgage (d)

 

7.79%

 

7.79%

 

10/2007

 

89

 

13,722

 

13,853

  Column Financial, Inc (e)

 

7.00%

 

7.00%

 

11/2008

 

146

 

25,000

 

25,000

  Inland Mortgage Serv. Corp.

 

-

 

7.65%

 

05/2004

 

-

 

-

 

632

  John Hancock Life Insurance (d)

 

7.65%

 

7.65%

 

01/2018

 

89

 

12,304

 

12,395

  Key Bank

 

5.00%

 

5.00%

 

10/2010

 

31

 

7,500

 

7,500

  LaSalle Bank N.A. (b) (f)

 

2.95%

 

2.42%

 

10/2004

 

16

 

6,468

 

6,468

  LaSalle Bank N.A. (b)

 

3.07%

 

3.07%

 

10/2004

 

19

 

7,445

 

7,445

  LaSalle Bank N.A. (b)

 

7.25%

 

7.25%

 

10/2004

 

63

 

10,654

 

10,654

  LaSalle Bank N.A .(b)

 

7.26%

 

7.26%

 

10/2004

 

56

 

9,450

 

9,450

  LaSalle Bank N.A. (b)

 

7.26%

 

7.26%

 

12/2004

 

35

 

5,910

 

5,910

  LaSalle Bank N.A. (b)

 

7.36%

 

7.36%

 

12/2004

 

58

 

9,650

 

9,650

  LaSalle Bank N.A.

 

7.26%

 

7.26%

 

01/2005

 

58

 

9,738

 

9,738

  LaSalle Bank N.A.

 

3.59%

 

3.59%

 

03/2005

 

7

 

2,400

 

2,400

  LaSalle Bank N.A. (f)

 

3.05%

 

2.52%

 

04/2005

 

6

 

2,468

 

2,468

  LaSalle Bank N.A. (f)

 

3.05%

 

2.52%

 

06/2005

 

14

 

5,599

 

5,599

  LaSalle Bank N.A. (f)

 

2.95%

 

2.42%

 

11/2005

 

9

 

3,650

 

3,650

  LaSalle Bank N.A.

 

6.81%

 

6.81%

 

12/2005

 

44

 

7,833

 

7,833

  LaSalle Bank N.A.

 

4.86%

 

4.86%

 

12/2006

 

73

 

18,216

 

19,461

  LaSalle Bank N.A. (f) (g)

 

3.45%

 

2.92%

 

12/2006

 

125

 

44,165

 

45,260

  LaSalle Bank N.A. (f)

 

3.45%

 

2.92%

 

12/2007

 

81

 

28,398

 

29,948

  LaSalle Bank N.A. (h)

 

2.08%

 

1.63%

 

12/2014

 

8

 

6,200

 

6,200

  Lehman Brothers Holding, Inc. (i)

 

6.36%

 

6.36%

 

10/2008

 

299

 

54,600

 

54,600

  Midland Loan Serv. (d)

 

7.86%

 

7.86%

 

01/2008

 

32

 

4,824

 

4,877

  Nomura Credit & Capital

 

5.02%

 

-

 

08/2011

 

25

 

8,800

 

-

  Principal Life Insurance

 

5.96%

 

5.96%

 

12/2008

 

55

 

11,000

 

11,000

  Principal Life Insurance

 

5.25%

 

5.25%

 

10/2009

 

32

 

7,400

 

7,400

  Principal Life Insurance (c)

 

3.99%

 

-

 

06/2010

 

109

 

32,930

 

-

  Principal Life Insurance

 

8.27%

 

8.27%

 

09/2010

 

40

 

5,850

 

5,850

  Principal Life Insurance

 

5.57%

 

5.57%

 

10/2012

 

47

 

10,200

 

10,200

  Woodmen of the World

 

6.75%

 

6.75%

 

06/2008

 

26

 

4,625

 

4,625

 

 

 

 

 

 

 

 

 

 


 


Mortgages Payable

 

 

 

 

 

 

 

 

$

641,370

 

623,157

 

 

 

 

 

 

 

 

 

 


 


 



INLAND REAL ESTATE CORPORATION
Notes to Consolidated Financial Statements
September 30, 2004
(In thousands, except per share data and square footage amounts)
(unaudited)


In conjunction with the potential sale of Dominick's in Highland Park, the Company has classified this amount as liabilities of assets held for sale on the accompanying Consolidated Balance Sheet as of September 30, 2004 and December 31, 2003.

 

Approximately $56,000 of the Company's mortgages payable mature during 2004.  The Company intends to replace the remaining debt with new loans for terms of five years or longer at the market interest rate at the time the existing debt matures.  On October 25 and 27, 2004, the Company replaced approximately $18,255 of this debt with $29,650 in new date with a term of 7 years and a fixed interest rate of 4.88%.

 

In May 2004, the Company refinanced this debt.  It was replaced with total debt of $80,230 for terms ranging from six to seven years with fixed interest rates lower than the original loan.   In August 2004, $8,570 of this new debt was transferred in conjunction with the sale of Fairview Heights, located in Fairview Heights, Illinois.

 

These loans require payments of principal and interest monthly; all other loans listed are interest only.

 

Approximately $570 of this loan is secured by Walgreens, located in Woodstock, Illinois.  At September 30, 2004 and December 31, 2003, the Company has classified this property as held for sale.  Upon sale of this property, the Company will substitute an alternate property as collateral for this loan.

 

Payments on these mortgages are calculated using a floating rate of interest based on LIBOR.

 

In conjunction with the potential sales of Crestwood Plaza, Calumet Square and Sequoia Plaza, the Company has classified $3,442 of this amount as liabilities of assets held for sale on the accompanying Consolidated Balance Sheet as of September 30, 2004.

 

As part of the purchase of the property securing this loan, the Company assumed the existing mortgage-backed Economic Development Revenue Bonds, Series 1994 issued by the Village of Skokie, Illinois.  The interest rate on these bonds floats and is reset weekly by a re-marketing agent.  The rate at September 30, 2004 was 2.08%.  The bonds are further secured by an Irrevocable Letter of Credit, issued by LaSalle Bank at a fee of 1.25% of the principal amount outstanding, paid annually.  In addition, the Company is required to pay a re-marketing fee of .125% per annum of the principal amount outstanding, paid quarterly and a trustee fee of $500 also paid quarterly.

 

Approximately $1,334 of this loan is secured by Wauconda Shopping Center, located in Wauconda, Illinois.  At September 30, 2004, the Company has classified this property as held for sale.  Upon sale of this property, the Company will substitute an alternate property as collateral for this loan.

 

(9)     Line of Credit


On June 28, 2002, the Company entered into a $100,000 unsecured line of credit arrangement with KeyBank N.A. for a period of three years.  The funds from this line of credit are used to purchase additional investment properties.  The Company is required to pay interest only on draws under the line at the rate equal to LIBOR plus 375 basis points.  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.  The line of credit requires compliance with certain covenants, such as debt service ratios, minimum net worth requirements, distribution limitations and investment restrictions.  As of September 30, 2004, the Company was in compliance with such covenants.


On May 2, 2003, the Company amended its line of credit agreement with KeyBank N.A.  This amendment reduces the interest rate charged on the outstanding balance by 1.25% and extends the maturity to May 2, 2006.  In addition, the aggregate commitment of the Company's line was increased by $50,000, to a total of $150,000.  In conjunction with this amendment, the Company paid approximately $750 in fees and costs.  The outstanding balance on this line of credit was $110,000 as of September 30, 2004 with a weighted average interest rate of 4.29% per annum.

 



INLAND REAL ESTATE CORPORATION
Notes to Consolidated Financial Statements
September 30, 2004
(In thousands, except per share data and square footage amounts)
(unaudited)



(10)     Earnings per Share


Basic earnings per share ("EPS") is computed by dividing net income by the basic weighted average number of common shares outstanding for the period (the "common shares").  Diluted EPS is computed by dividing net income by the "common shares" plus shares issuable upon exercise of existing option or other contracts.  As of September 30, 2004 and December 31, 2003, options to purchase 40 and 32 shares of common stock, respectively, at exercise prices ranging from $9.05 to $10.45 per share were outstanding.  These options were not included in the computation of basic or diluted EPS as the effect would be immaterial.


As of September 30, 2004, 37 shares of common stock issued pursuant to employment agreements were outstanding, of which 2 have vested.  Additionally, the Company issued 15 shares pursuant to employment incentives of which none have vested.  The unvested shares are excluded from the computation of basic EPS but reflected in diluted EPS by application of the treasury stock method.


On September 4, 2003, the Company entered into a Put Agreement with Inland Real Estate Investment Corporation, Partnership Ownership Corporation (a wholly owned subsidiary of Inland Real Estate Investment Corporation) and Fleet National Bank.  On August 2, 2004, as a result of an amendment and restatement of the line of credit agreement between the lender and Inland Real Estate Investment Corporation as borrower, the lender delivered to the Company a termination and release of the Put Agreement.  The Company reclassified the liability recorded for its obligation under the Put Agreement and recognized the $100 premium received as earned income on the termination date of August 2, 2004. 


The basic weighted average number of common shares outstanding were 66,285 and 64,921 for the nine months ended September 30, 2004 and 2003, respectively.  The diluted weighted average number of common shares outstanding were 66,335 and 64,925 for the nine months ended September 30, 2004 and 2003, respectively.  Additionally, the Company reclassified the amount of temporary equity previously recorded on the Consolidated Balance Sheet at September 30, 2004.


(11)     Deferred Stock Compensation


The Company has agreed to issue common stock to certain officers of the Company pursuant to employment agreements entered into with these officers.  These agreements became effective January 1, 2002.


As of September 30, 2004, an aggregate of 37 shares of the Company's common stock, were issued pursuant to these agreements.  Of the total shares issued, 5 were issued at a value of $11 per share.  During the nine months ended September 30, 2004, the Company issued 32 additional shares at a value of $12.93 per share, which was the average of the high and low selling price on the date of issue, as reported by the New York Stock Exchange.  These 37 shares have an aggregate value of $471.  Additionally, the Company issued 15 shares pursuant to employment incentives for certain Company officers.  These shares were also issued at a value of $12.93 per share, which was the average of the high and low selling price on the date of issue, as reported by the New York Stock Exchange.  Each officer vests an equal portion of shares over a five-year vesting period beginning one year from the date of issuance of the award.  Compensation cost of $42 and $12 were recorded in connection with the issuance of these shares for the nine months ended September 30, 2004 and 2003, respectively.


The officers may also receive additional restricted shares of the Company's common stock, which are also subject to a five-year vesting period.  The number of these shares is to be determined based upon the future performance of the Company beginning January 1, 2003.



INLAND REAL ESTATE CORPORATION
Notes to Consolidated Financial Statements
September 30, 2004
(In thousands, except per share data and square footage amounts)
(unaudited)



(12)     Segment Reporting


The Company owns and acquires Neighborhood Retail Centers and Community Centers located primarily within an approximate 400-mile radius of its headquarters in Oak Brook, Illinois, as well as single-user properties located throughout the United States.  The Company currently owns investment properties within the States of Florida, Illinois, Indiana, Michigan, Minnesota, Missouri, Ohio, Tennessee and Wisconsin.  These properties are typically anchored by grocery and drug stores, complemented with additional stores providing a wide range of other goods and services.


The Company assesses and measures operating results on an individual property basis for each of its investment properties based on property net operating income.  Because all of the Company's investment properties exhibit highly similar economic characteristics, generally have tenants that offer products catering to the day-to-day living needs of individuals, and offer similar degrees of risk and opportunities for growth, the shopping centers have been aggregated and reported as one operating segment.


The property net operating income is summarized in the following table for the three and nine months ended September 30, 2004 and 2003, along with reconciliation to income from continuing operations.  Net investment properties and other related segment assets, non-segment assets and total assets are also presented as of September 30, 2004 and 2003:

 

 

 

Three months
ended
September 30, 2004

 

Three months
ended
September 30, 2003

 

Nine months
ended
September 30, 2004

 

Nine months
ended
September 30, 2003

 

 


 


 


 


Rental income and tenant recoveries

$

46,637

 

41,506

 

138,857

 

125,837

Property operating expenses

 

(5,847)

 

(4,736)

 

(18,354)

 

(15,169)

Real estate tax expense

 

(8,324)

 

(6,766)

 

(24,421)

 

(22,884)

 

 


 


 


 


Property net operating income

 

32,466

 

30,004

 

96,082

 

87,784

 

 

 

 

 

 

 

 

 

Other income:

 

 

 

 

 

 

 

 

  Lease termination income

 

90

 

-

 

708

 

369

  Other income

 

583

 

373

 

2,241

 

1,087

  Other property income

 

166

 

116

 

543

 

435

  Gain on continuing operations

 

76

 

-

 

76

 

-

 

 

 

 

 

 

 

 

 

Other expenses:

 

 

 

 

 

 

 

 

  Bad debt expense

 

(200)

 

(200)

 

(509)

 

(1,434)

  Depreciation and amortization expense

 

(9,945)

 

(8,751)

 

(28,747)

 

(25,151)

  Stock exchange listing expenses

 

(83)

 

-

 

(823)

 

-

  General and administrative expenses

 

(1,979)

 

(1,474)

 

(5,936)

 

(4,285)

  Interest expense

 

(10,507)

 

(9,884)

 

(31,819)

 

(29,119)

  Minority interest

 

(206)

 

(34)

 

(641)

 

(392)

  Equity in earnings of unconsolidated joint ventures

 

(328)

 

(56)

 

(328)

 

(188)

 

 


 


 


 


Income from continuing operations

$

10,133

 

10,094

 

30,847

 

29,106

 

 


 


 


 


Net investment properties and other related segment assets

 

1,201,796

 

1,161,003

 

1,201,796

 

1,161,003

Non-segment assets

 

76,532

 

85,927

 

76,532

 

85,927

 

 


 


 


 


Total assets

$

1,278,328

 

1,246,930

 

1,278,328

 

1,246,930

 

 


 


 


 


 



INLAND REAL ESTATE CORPORATION
Notes to Consolidated Financial Statements
September 30, 2004
(In thousands, except per share data and square footage amounts)
(unaudited)



(13)     Commitments and Contingencies


The Company is subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business.  While the resolution of these matters cannot be predicted with certainty, management believes, based on currently available information, that the final outcome of such matters will not have a material adverse effect on the financial statements of the Company.


(14)     Subsequent Events

 

On October 8, 2004 the Company entered into a strategic joint venture with the New York State Teachers' Retirement System (NYSTRS"). Pursuant to on operating agreement signed on October 8, 2004, the joint venture was formed to acquire up to $400,000 of neighborhood and community retail centers located in the Company's targeted markets throughout the Midwest.  


Upon the initial closing, the Company will contribute eight retail centers with an approximate net equity value of $100,000, and NYSTRS will contribute approximately $50,000 of equity capital.  In addition, NYSTRS has committed to contribute, subject to satisfying certain conditions, an additional $100,000 for future acquisitions, for a total contribution of approximately $150,000.  The Company has also agreed to invest, subject to satisfying certain conditions, an additional $100,000 in the joint venture.


On October 18, 2004 the Company paid an aggregate cash dividend of $5,152 to stockholders of record at the close of business on September 30, 2004.


On October 19, 2004 the Company announced that it had declared a cash dividend of $0.08 per share on the outstanding shares of its common stock.   This dividend will be paid on November 17, 2004 to stockholders of record at the close of business on November 1, 2004.

 

On October 25, 2004, the Company refinanced the debt on Hickory Creek Market, Spring Hill Fashion Center and Maple Park Place.  The loans refinanced had a principal amount of $15,448, in the aggregate and had variable interest rates.  The new loans have a principal amount of $26,150, in the aggregate, an interest rate of 4.88% and a 7-year term.


On October 27, 2004, the Company refinanced the debt on West River Crossing.  The loan refinanced had a principal amount of $2,807 and had a variable interest rate.  The new loan has a principal amount of $3,500, an interest rate of 4.88% and a 7-year term.

 



Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations


Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report on Form 10-Q constitute "forward-looking statements" within the meaning of the Federal Private Securities Litigation Reform Act of 1995.  Forward-looking statements are statements that are not historical, including statements regarding management's intentions, beliefs, expectations, representations, plans or predictions of the future and are typically identified by  such words  as "believe," "expect," "anticipate," "intend," "estimate," "may," "will," "should" and "could."  The Company intends that such forward-looking statements be subject to the safe harbors created by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  These forward-looking statements involve numerous risks and uncertainties that could cause our actual results to be materially different from those set forth in the forward-looking statements.  Examples of factors which could affect our performance are set forth in our Annual Report on Form 10-K for the year ended December 31, 2003, as filed with the Securities and Exchange Commission on March 15, 2004 under the heading "Investment Considerations."  The Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.


Data in this section is presented in thousands, except per share data and square footage data.


This section provides the following:

 

an executive summary and our strategies and objectives;

the critical accounting policies that impact the treatment, for financial statement purposes, of certain items such as how we value our investment properties, recognize rental income and depreciate our assets;

a discussion of our Consolidated Balance Sheets and Consolidated Statements of Cash Flows and how the changes in balance sheet and cash flow items from period to period impact our liquidity and capital resources; and

a discussion of our results of operations, including changes in Funds From Operations from period to period.


We have elected to be taxed, for federal income tax purposes, as a real estate investment trust ("REIT").  This election has important consequences for it requires us to satisfy certain tests regarding the nature of the revenues we can generate and the distributions that we pay to our stockholders.  To ensure that we continue to qualify to be taxed as a REIT, we determine, on a quarterly basis, that the gross income, asset and distribution tests imposed by the Internal Revenue Code are satisfied.  On an ongoing basis, as due diligence is performed on potential real estate purchases or temporary investment of uninvested capital, we determine that the income from the new assets qualifies for REIT purposes.  To maintain our qualification as a REIT, we must distribute at least 90% of our "REIT taxable income" to our stockholders.  We generate capital from financings on unencumbered properties, draws on our line of credit and proceeds from our Dividend Reinvestment Plan.


We have qualified to be taxed as a REIT since the year ending December 31, 1995.  As a REIT, we generally will not be subject to federal income tax to the extent we satisfy the various requirements set forth in the Internal Revenue Code.  If we fail to qualify as a REIT in any taxable year, our income will be subject to federal income tax at regular corporate tax rates.  Even if we qualify for taxation as a REIT, our income may be subject to certain state and local taxes and property and federal income and excise taxes on our undistributed income.


Executive Summary


We are in the business of owning and operating Neighborhood Retail Centers (gross leasable areas ranging from 5,000 to 150,000 square feet) and Community Centers (gross leasable areas in excess of 150,000 square feet).  We are a self-administered real estate investment trust formed under Maryland law.  Our investment properties are located primarily within an approximate 400-mile radius of our headquarters in Oak Brook, Illinois.  Additionally, we own and acquire single-user retail properties located throughout the United States.  We are also permitted to construct or develop properties, or render services in connection with such development or construction.  As of September 30, 2004, we owned interests in 139 investment properties.

 



Essentially all of our revenues and cash flows are generated by collecting rental payments from our tenants.  We intend to continue to grow our revenues by acquiring additional investment properties and re-leasing those spaces that are vacant, or may become vacant, at more favorable rental rates.  We believe we have significant acquisition opportunities due to our reputation and our concentration in the Chicago and Minneapolis-St. Paul metropolitan areas.


Our largest expenses relate to the operation of our properties as well as the interest expense on our mortgages payable.  Our property operating expenses include, but are not limited to, real estate taxes, regular maintenance, landscaping, snow removal and periodic renovations to meet tenant needs.  


We will use cash received from our "Dividend Reinvestment Plan," proceeds from financings on previously unencumbered properties and earnings we retain that are not distributed to our stockholders to continue purchasing additional investment properties.


We consider "Funds From Operations" ("FFO") a widely accepted and appropriate measure of performance for a REIT that provides a supplemental measure of a REIT's operating performance because along with cash flows from operating, investing and financing activities it provides a measure of a REIT's ability to incur and service debt and make capital expenditures and acquisitions.  As defined by NAREIT, FFO means net income computed in accordance with GAAP, excluding gains (or losses) from sales of property, plus depreciation and amortization and after adjustments for unconsolidated partnership and joint ventures in which the REIT holds an interest.  We have adopted the NAREIT definition for computing FFO.  Management uses the calculation of FFO for several reasons.  FFO is used in certain employment agreements to determine incentives received based on our performance.  We also use FFO to compare our performance to that of other REITs in our peer group.  Additionally, we use FFO in conjunction with our acquisition policy to determine investment capitalization strategy.


EBITDA is defined as earnings (losses) from continuing operations excluding: (1) interest expense; (2) income tax benefit or expenses; (3) depreciation and amortization.  We believe EBITDA is useful to us and to an investor as a supplemental measure in evaluating our financial performance because it excludes expenses that we believe may not be indicative of our operating performance.  By excluding interest expense, EBITDA measures our financial performance regardless of how we finance our operations and capital structure.  By excluding depreciation and amortization expense, we believe we can more accurately assess the performance of our portfolio.  Because EBITDA is calculated before recurring cash charges such as interest expense and taxes and is not adjusted for capital expenditures or other recurring cash requirements, it does not reflect the amount of capital needed to maintain our properties nor does it reflect trends in interest costs due to changes in interest rates or increases in borrowing.  EBITDA should be considered only as a supplement to net earnings and may be calculated differently by other equity REITs.


We look at several factors to measure our operating performance:


To measure our operating results to those of other retail real estate owners/operators in our area, we compare:

 

To measure our operating results to those of other REITS, we compare:



There are risks associated with the re-tenanting of our properties.  Such risks include:


Strategies and Objectives


Our primary business objective is to enhance the performance and value of our investment properties through management strategies that address the needs of an evolving retail marketplace.  Our strong commitment to operating our centers efficiently and effectively is, we believe, a direct result of our expertise in the acquisition, management and leasing of our properties.  We focus on the following areas in order to achieve our objectives:


Acquisitions:

Operations:


During the nine months ended September 30, 2004, we acquired five additional investment properties totaling approximately 559,607 square feet.  The purchase price for these properties was $71,700, in the aggregate.  Additionally, during the nine months ended September 30, 2004, we sold four investment properties and transferred one into a joint venture.  Total proceeds from these sales and the transfer were $36,241, net of closing costs.




Critical Accounting Policies

General

On December 12, 2001, the Securities and Exchange Commission issued Financial Reporting Release ("FRR") No. 60 "Cautionary Advice Regarding Disclosure About Critical Accounting Policies."  A critical accounting policy is one that would materially effect our operations or financial condition, and requires management to make estimates or judgments in certain circumstances.  We believe that our most critical accounting policies relate to how we value our investment properties and determine whether assets are held for sale, recognize rental income and lease termination income, our cost capitalization and depreciation policies and consolidation/equity accounting policies.  These judgments often result from the need to make estimates about the effect of matters that are inherently uncertain.  The purpose of FRR 60 is to provide stockholders with an understanding of how management forms these policies.  Critical accounting policies discussed in this section are not to be confused with accounting principles and methods disclosed in accordance with accounting principles generally accepted in the United States of America ("GAAP").  GAAP requires information in financial statements about accounting principles, methods used and disclosures pertaining to significant estimates.  The following disclosure discusses judgments known to management pertaining to trends, events or uncertainties known which were taken into consideration upon the application of those policies and the likelihood that materially different amounts would be reported upon taking into consideration different conditions and assumptions.


Valuation and Allocation of Investment Properties. 
On a quarterly basis, in accordance with Statement of Financial Accounting Standards No. 144, we review impairment indicators and if necessary we conduct an impairment analysis to ensure that the carrying value the investment property does not exceed its estimated fair value.  We evaluate our investment properties to assess whether any impairment indicators are present, including recurring operating losses and significant adverse changes in legal factors or business climate.  If an investment property is considered impaired, a loss is recorded to reduce the carrying value of the property to its estimated fair value.  No such losses have been required or recorded in the accompanying financial statements as of and for the nine months ended September 30, 2004 and 2003.


In determining the value of an investment property and whether the property is impaired, management considers several factors such as projected rental and vacancy rates, property operating expenses, capital expenditures and interest rates.  The capitalization rate used to determine property valuation is based on the market in which the property is located, length of leases, tenant financial strength, the economy in general, demographics, environment, property location, visibility, age, physical condition and investor return requirements among others.  Market capitalization rates fluctuate based on factors such as interest rates.  An increase in capitalization rates might result in a market valuation lower than our original purchase price.  Additionally, we obtain an appraisal prepared by a third party at the time we purchase the investment property.  All of the aforementioned factors are considered by management in determining the value of any particular property.  The value of any particular property is sensitive to the actual results of any of these uncertain factors, either individually or taken as a whole.  Should the actual results differ from management's judgment, the valuation could be negatively or positively affected.


We allocate the purchase price of each acquired investment property between land, building and site improvements, other intangibles (including acquired above market leases, acquired below market leases, customer relationships and acquired in-place leases) and any assumed financing that is determined to be above or below market terms.  The allocation of the purchase price is an area that requires complex judgments and significant estimates.  The value allocated to land as opposed to building affects the amount of depreciation expense we record.  If more value is attributed to land, depreciation expense would be lower than if more value is attributed to building.  We use the information contained in the third party appraisals as the primary basis for allocating the purchase price between land, building and site improvements.  We determine whether any financing assumed is above or below market based upon comparison to similar financing terms for similar investment properties.


The aggregate value of other intangibles is measured based on the difference between the purchase price and the property valued as if vacant.  We utilize independent appraisals and management's estimates to determine the respective as if vacant property values.  Factors considered by management in our analysis of determining the as if vacant property value include an estimate of carrying costs during the expected lease-up periods considering current market conditions, and costs to execute similar leases and the risk adjusted cost of capital.  In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, up to 24 months.  Management also estimates costs to execute similar leases including leasing commissions, tenant improvements, legal and other related expenses. 

 



We allocate the difference between the purchase price of the property and the as if vacant value first to acquired above and below market leases.  We evaluate each acquired lease based upon current market rates at the acquisition date and consider various factors including geographic location, size and location of leased space within the investment property, tenant profile and the credit risk of the tenant in determining whether the acquired lease is above or below market.  After an acquired lease is determined to be above or below market, we allocate a portion of the purchase price to the acquired above or below market lease based upon the present value of the difference between the contractual lease rate and the estimated market rate.  The determination of the discount rate used in the present value calculation is based upon a rate for each individual lease and primarily based upon the credit worthiness of each individual tenant.  The value of the acquired above and below market leases is amortized over the life of the related leases as an adjustment to rental income. 


We then allocate the remaining difference to the value of acquired in-place leases and customer relationships based on management's evaluation of specific leases and our overall relationship with the respective tenants.  The evaluation of acquired in-place leases consists of a variety of components including the cost avoidance associated with originating the acquired in-place lease, including but not limited to, leasing commissions, tenant improvement costs and legal costs.  We also consider the value associated with lost revenue related to tenant reimbursable operating costs and rental income estimated to be incurred during the assumed re-leasing period.  The value of the acquired in-place lease is amortized over the average lease term to amortization expense.  We also consider whether any customer relationship value exists related to the property acquisition.  As of September 30, 2004, we had not allocated any amounts to customer relationships because we already have customer relationships with significant tenants at the properties we have acquired. 


The valuation and possible subsequent impairment of investment properties is a significant estimate that can and does change based on management's continuous process of analyzing each property.


We review all expenditures and capitalize any item exceeding $5 that is deemed to be an upgrade or a tenant improvement.  If we capitalize more expenditures, current depreciation expense would be higher; however, total current expenses would be lower.  Depreciation expense is computed using the straight-line method.  Buildings and improvements are depreciated based upon estimated useful lives of 30 years for buildings and improvements, 15 years for site improvements and the remaining life of the related lease for tenant improvements. 


Assets Held for Sale.  When determining whether to classify an asset as held for sale, we consider the following criteria, whether: (i) management has committed to a plan to sell the asset; (ii) the asset is available for immediate sale, in its present condition; (iii) we have initiated a program to locate a buyer; (iv) we believe that the sale of the asset is probable; (v) we are actively marketing the asset for sale at a price that is reasonable in relation to its current value; and (vi) actions required for us to complete the plan indicate that it is unlikely that any significant changes will be made to the plan.


When all of the above criteria are met, we hold the asset for sale.  On the day that these criteria are met, we suspend 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 that are held for sale are classified separately on the Consolidated Balance Sheets for the most recent reporting period.  Additionally, the operations for the periods presented are classified on the Consolidated Statements of Operations as discontinued operations for all periods presented.


Once a property is held for sale, we are committed to selling the property.  If the current offers that exist on properties held for sale do not result in the sale of these properties, we generally will continue to actively market them for sale.

 



Recognition of Rental Income and Tenant Recoveries.  Under GAAP, we are required to recognize rental income based on the effective monthly rent for each lease.  The effective monthly rent is equal to the average monthly rent during the term of the lease, not the stated rent for any particular month.  The process, known as "straight-lining" rent generally has the effect of increasing rental revenues during the early phases of a lease and decreasing rental revenues in the later phases of a lease.  Due to the impact of "straight-lining," rental income exceeded the cash collected for such rent by $1,690 and $1,031 for the nine months ended September 30, 2004 and 2003, respectively.  If rental income calculated on a straight-line basis exceeds the cash rent due under the lease, the difference is recorded as an increase in deferred rent receivable and included as a component of rental income in the accompanying Consolidated Statements of Operations.  If the cash rent due under the lease exceeds rental income calculated on a straight-line basis, the difference is recorded as a decrease in deferred rent receivable and is also included as a component of rental income in the accompanying Consolidated Statements of Operations.  In accordance with Staff Accounting Bulletin 101, we defer recognition of contingent rental income, such as percentage/excess rent, until the specified target that triggers the contingent rental income is achieved.  We periodically review the collectability of outstanding receivables.  Allowances are taken for those balances that we deem to be uncollectible, including any amounts relating to straight-line rent receivables. 


Tenant recoveries are primarily comprised of real estate tax and common area maintenance reimbursement income.  Real estate tax income is based on an accrual reimbursement calculation by tenant, based on an estimate of current year real estate taxes.  As actual real estate tax bills are received, we reconcile with our tenants and adjust prior year income estimates accordingly.  Common area maintenance income is accrued on actual common area maintenance expenses as incurred.  Annually, we reconcile with the tenants for their share of the expenses per their lease and we adjust prior year income estimates accordingly.


Recognition of Lease Termination Income.  We accrue lease termination income if there is a signed termination agreement, all of the conditions of the agreement have been met and the tenant is no longer occupying the property.


Consolidation/Equity Accounting Policies.  We consolidate the operations of a joint venture if we determine that we are the primary beneficiary or have substantial influence and control the entity.  The primary beneficiary is the party that absorbs a majority of the entity's expected losses or residual returns, or both.  There are significant judgments and estimates involved in determining who is the primary beneficiary.  In accordance with FASB Interpretation No. 46R ("FIN 46"), the assets, liabilities and results of operations of a variable interest entity should be included in the consolidated financial statements of the primary beneficiary.  In addition, we consolidate the operations of a joint venture when we determine the joint venture is not a variable interest entity, however we exercise significant influence and have the ability to control the joint venture.  The third party's interest in these consolidated entities is reflected as minority interest in our consolidated financial statements. 


In instances where we do not control the joint venture, we use the equity method of accounting.  Under the equity method, the operations of a joint venture are not consolidated with our operations but instead are reflected as equity in earnings of unconsolidated joint ventures on our Consolidated Statement of Operations.  Additionally, our net investment in the joint venture is reflected as investment in and advances to joint venture as an asset on the Consolidated Balance Sheets.

 

Liquidity and Capital Resources


This section describes our balance sheet and discusses our liquidity and capital commitments.  Our most liquid asset is cash and cash equivalents, which consists of cash and short-term investments.  Cash and cash equivalents at September 30, 2004 and December 31, 2003 were $39,067 and $58,388, respectively.  Income generated from our investment properties is the primary source from which we generate cash.  The table below presents lease payments to be received in the future.  Other sources of cash include amounts raised from the sale of securities under our Dividend Reinvestment Plan ("DRP"), our draws on the line of credit with KeyBank N.A. and proceeds from financings secured by our investment properties.  When it is necessary, such as for new acquisitions, we can generate cash flow by entering into financing arrangements or possible joint venture agreements with institutional investors.  We use our cash primarily to pay distributions to our stockholders, for operating expenses at our investment properties and for purchasing additional investment properties.

 



Minimum lease payments under operating leases to be received in the future, excluding rental income under master lease agreements and assuming no expiring leases are renewed are as follows:

2004

$

132,606

2005

 

131,426

2006

 

120,881

2007

 

109,590

2008

 

96,500

Thereafter

 

526,312

 

 


Total

$

1,117,315

 

 



As of September 30, 2004, we owned interests in 139 investment properties.  Of the 139 investment properties owned, sixteen are currently unencumbered by any indebtedness.  We generally limit our indebtedness to approximately fifty- percent (50%) of the original purchase price, or current market value if higher, of the investment properties in the aggregate.  These sixteen unencumbered investment properties were purchased for an aggregate purchase price of approximately $96,684 and would therefore yield at least $48,342 in additional cash from financing, using this standard.  In the aggregate, all of our 139 investment properties are currently generating sufficient cash flow to pay our operating expenses, debt service requirements and distributions equal to $0.94 per share on an annual basis.


The following table presents the principal amount of the debt maturing each year, including monthly annual amortization of principal, through December 31, 2008 and thereafter:

 

2004

$

56,979

2005

 

100,704

2006 (a)

 

207,948

2007

 

63,799

2008

 

104,771

Thereafter

 

217,169

 

 


Total

$

751,370

 

 


 

Included in the debt maturing during 2006 is our line of credit with KeyBank N.A.  This line of credit requires compliance with certain covenants, such as debt service ratios, minimum net worth requirements, distribution limitations and investment restrictions.  As of September 30, 2004, we were in compliance with such covenants.


The following table summarizes our Consolidated Statements of Cash Flows for the three months ended September 30, 2004 and 2003:

 

 

2004

 

2003

 

 


 


Net cash provided by operating activities

$

62,149

 

55,560

 

 


 


Net cash used in investing activities

$

(47,564)

 

(74,774)

 

 


 


Net cash provided by (used in) financing activities

$

(33,906)

 

25,386

 

 


 


 



Cash Flows From Operating Activities


We received approximately $62,149 in cash from operating activities during the nine months ended September 30, 2004, as compared to receiving approximately $55,560 during the nine months ended September 30, 2003.  This increase in cash received is due to several factors:

 

 

 

Cash Flows From Investing Activities


The primary use of cash for investing activities during 2004 and 2003 was the purchase of additional investment properties and for additions to our existing investment properties.  We used approximately $47,564 in cash from investing activities during the nine months ended September 30, 2004, as compared to using approximately $74,774 during the nine months ended September 30, 2003.  This decrease in cash used is due to several factors:

We used approximately $72,000 for purchases and additions during the nine months ended September 30, 2004, as compared to approximately $73,356 during the nine months ended September 30, 2003.  We purchased five investment properties during the nine months ended September 30, 2004 and purchased four investment during the nine months ended September 30, 2003.

We received approximately $27,671 of proceeds from the sale of investment properties during the nine months ended September 30, 2004, as compared to receiving approximately $494 during the nine months ended September 30, 2003.

We received approximately $8,985 from the sale of investment securities and used approximately $5,045 to purchase investment securities during the nine months ended September 30, 2004, as compared to receiving approximately $850 from the sale of investment securities during the nine months ended September 30, 2003.  No cash was used during the nine months ended September 30, 2003 to purchase investment securities.



Cash Flows From Financing Activities


We used approximately $33,906 in cash from financing activities during the nine months ended September 30, 2004, as compared to receiving approximately $25,386 during the nine months ended September 30, 2003.  This increase in cash used is due to several factors:

We used $25,000 during the nine months ended September 30, 2004, to pay down draws taken on the unsecured line of credit, as compared to receiving $45,000 from draws on the line of credit during the nine months ended September 30, 2003.

We used approximately $62,000 for the repayment of indebtedness during the nine months ended September 30, 2004 and no indebtedness was repaid during the nine months ended September 30, 2003.

We used approximately $48,271 to pay dividends to our stockholders during the nine months ended September 30, 2004 as compared to approximately $47,201 paid during the nine months ended September 30, 2003.

We used approximately $2,123 to repurchase shares during the nine months ended September 30, 2004, as compared to approximately $7,482 during the nine months ended September 30, 2003.  On June 9, 2004, we listed our shares on the New York Stock Exchange and terminated our share repurchase program.

Partially offsetting the increase in cash used was the receipt of approximately $89,030 in loan proceeds during the nine months ended September 30, 2004, as compared to receiving approximately $19,880 in loan proceeds during the nine months ended September 30, 2003.


Results of Operations


This section describes and compares our results of operations for the three and nine months ended September 30, 2004 and 2003.  At September 30, 2004, we owned 29 single-user retail properties, 86 Neighborhood Retail Centers and 24 Community Centers.  We generate almost all of our net operating income from property operations.  In order to evaluate our overall portfolio, management analyzes the operating performance of properties that we have owned and operated for the same three and nine month periods during each year.  A total of 121 of our investment properties satisfied these criteria during the periods presented and are referred to herein as "same store" properties.  These properties comprise approximately 10.6 million square feet.  A total of ten investment properties, those that have been acquired during the three and nine months ended September 30, 2004 and the year ended December 31, 2003, are presented as "other investment properties" in the table below.  The "same store" investment properties represent approximately 89% of the square footage of our portfolio at September 30, 2004.  This analysis allows management to monitor the operations of our existing properties for comparable periods to measure the performance of our current portfolio.  In addition to "same store" income growth, we anticipate an increase in total net operating income from continued acquisition activity during 2004.  Additionally, we are able to determine the effects of our new acquisitions on net income.  Through all of these activities, we anticipate growth in total net operating income of approximately 2%-3% in 2004. 

 

Net income available to common stockholders and net income available to common stockholders per weighted average common share for the three and nine months ended September 30, 2004 and 2003 are summarized below:

 

 

Three months
ended
September 30, 2004

 

Three months
ended
September 30, 2003

 

Nine months
ended
September 30, 2004

 

Nine months
ended
September  30, 2003

 

 


 


 


 


Net income available to common stockholders

$

13,874

 

10,931

 

37,035

 

31,017

 

 


 


 


 


Net income available to common stockholders per
   weighted average common share

$

0.21

 

0.17

 

0.56

 

0.48

 

 


 


 


 


Weighted average number of common shares outstanding, basic

 

66,770

 

65,197

 

66,285

 

64,921

 

 


 


 


 


Weighted average number of common shares outstanding,
   diluted

 

66,820

 

65,201

 

66,335

 

64,925

 

 


 


 


 


 



The following table presents the operating results, broken out between "same store" and "other investment properties," prior to interest, depreciation, amortization and bad debt expense for the three and nine months ended September 30, 2004 and 2003 along with reconciliation to income from continuing operations, calculated in accordance with GAAP.

 

 

 

Three months
ended
September
30, 2004

 

Three months
ended
September
30, 2003

 

Nine months
ended
September
30, 2004

 

Nine months
ended
September 30,
2003

 

 


 


 


 


Rental income and tenant recoveries:

 

 

 

 

 

 

 

 

    "Same store" investment properties, 121 properties,
       approximately 10.6 million square feet

$

42,274

 

40,120

 

128,331

 

123,676

  "Other investment properties," Ten properties, approximately
      1.4 million square feet

 

4,363

 

1,386

 

10,526

 

2,161

 

 


 


 


 


Total rental income and tenant recoveries

$

46,637

 

41,506

 

138,857

 

125,837

 

 


 


 


 


Property operating expenses (including real estate tax expense):

 

 

 

 

 

 

 

 

    "Same store" investment properties (excluding interest,
       depreciation, amortization and bad debt expense)

 

12,834

 

11,245

 

39,746

 

37,654

    "Other investment properties" (excluding interest,
       depreciation, amortization and bad debt expense)

 

1,337

 

257

 

3,029

 

399

 

 


 


 


 


Total property operating expenses

$

14,171

 

11,502

 

42,775

 

38,053

 

 


 


 


 


Net operating income (rental income and tenant recoveries less
  property operating expenses):

 

 

 

 

 

 

 

 

    "Same store" investment properties

 

29,440

 

28,875

 

88,585

 

86,022

    "Other investment properties"

 

3,026

 

1,129

 

7,497

 

1,762

 

 


 


 


 


Total net operating income

$

32,466

 

30,004

 

96,082

 

87,784

 

 


 


 


 


Other income:

 

 

 

 

 

 

 

 

    Lease termination income

 

90

 

-

 

708

 

369

    Other property income

 

166

 

116

 

543

 

435

    Other income

 

583

 

373

 

2,241

 

1,087

    Gain from continuing operations

 

76

 

-

 

76

 

-

 

 

 

 

 

 

 

 

 

Other expenses:

 

 

 

 

 

 

 

 

    Bad debt expense

 

(200)

 

(200)

 

(509)

 

(1,434)

    Depreciation and amortization

 

(9,945)

 

(8,751)

 

(28,747)

 

(25,151)

    Stock exchange listing expenses

 

(83)

 

-

 

(823)

 

-

    General and administrative expenses

 

(1,979)

 

(1,474)

 

(5,936)

 

(4,285)

    Interest expense

 

(10,507)

 

(9,884)

 

(31,819)

 

(29,119)

    Minority interest

 

(206)

 

(34)

 

(641)

 

(392)

    Equity in earnings of unconsolidated joint ventures

 

(328)

 

(56)

 

(328)

 

(188)

 

 


 


 


 


Income from continuing operations

$

10,133

 

10,094

 

30,847

 

29,106

 

 


 


 


 


 



On a "same store" basis, (comparing the results of operations of the investment properties owned during the three and nine months ended September 30, 2004 with the results of the same investment properties during the three and nine months ended September 30, 2003), property net operating income increased by approximately $565 with total revenues increasing by approximately $2,154 and total property operating expenses increasing by approximately $1,589 for the three months ended September 30, 2004.  Property net operating income increased by approximately $2,563 with total revenues increasing by approximately $4,655 and total property operating expenses increasing by approximately $2,092 for the nine months ended September 30, 2004.  Total rental income and tenant recoveries for the three months ended September 30, 2004 and 2003 were $46,637 and $41,506, respectively, and for the nine months ended September 30, 2004 and 2003 these amounts were $138,857 and $125,837, respectively.  The primary reason for these increases was an increase in rental and additional rental income received on the properties purchased during 2004 and 2003.  Essentially all of our rental income is derived from fixed rental income charged to each tenant.  Less than one-percent of our total rental and additional rental income was derived from the collection of percentage rent.  The increase in "same store" income can be attributed to the signing of 117 new leases, in excess of 450,000 square feet, during 2003 and the signing of 83 new and renewal leases, in excess of 480,000 square feet during 2004.


Total property operating expenses, including real estate taxes, for the three and nine months ended September 30, 2004 increased approximately $2,669 and $4,720, respectively, compared to the three and nine months ended September 30, 2003.  The primary reason for these increases was an increase in expenses associated with the "other investment properties" approximately $1,080 for the three month period and $2,630 for the nine month period ended September 30, 2004 and 2003.  Other factors affecting the increase in property operating expenses are expenses on "same store" investment properties, such as:

 

Real estate tax expense increased $825 and $395 for the three and nine months ended September 30, 2004, respectively, as compared to the three and nine months ended September 30, 2003.  This is a factor of the taxes assessed by each taxing authority where our investment properties are located.  In connection with the increase in real estate taxes, professional fees for working to receive tax reductions on each property have increased $76 and $165 for the same respective periods.

Common area maintenance expenses on our "same store" investment properties, such as, landscaping, snow removal, parking lot work, roof repairs and salaries have increased for the nine months ended September 30, 2004, as compared to the nine months ended September 30, 2003.

Bad debt expense decreased for the nine months ended September 30, 2004 as compared to the nine months ended September 30, 2003 and remained consistent between the three months ended September 30, 2004 and 2003.  The provision for doubtful accounts recorded at September 30, 2004 was less than the amount recorded at September 30, 2003.  The primary reason for this decrease was a change in the status of certain tenants.  We have collected balances from tenants that were due for a period greater than ninety days that had previously been allowed for and other tenants have made arrangements to repay amounts due.


During the three and nine months ended September 30, 2004, we incurred approximately $83 and $823, respectively in expenses related to our listing on the New York Stock Exchange.  This includes travel expenses related to the road show, legal fees, approximately $333 for the engagement of an investment banking firm to assist with the listing and the initial $250 NYSE listing fee.  No such expenses were incurred during the three and nine months ended September 30, 2003.


General and administrative expenses increased for the three and nine months ended September 30, 2004 as compared to the three and nine months ended September 30, 2003.  This is due to several factors:

 

Professional fees increased approximately $150 and $342 for the three and nine months ended September 30, 2004, respectively.  This increase is due primarily to advisory and accounting fees paid in relation to the work done for our compliance with Sarbanes-Oxley.

Salaries and other payroll related expenses increased approximately $205 and $705 for the three and nine months ended September 30, 2004 and 2003, respectively.  We have increased our staff to accommodate the growth related to our acquisitions during 2004 and 2003.  The direct costs incurred with additional employees include salaries, health insurance and miscellaneous payroll items.



Data processing increased approximately $22 and $126 for the three and nine months ended September 30, 2004 and 2003, respectively.  During 2004 we subscribed to an online data storage service.  This service is used to store original documentation, such as tenant leases.

Other income increased by approximately $1,154 and $210 for the three and nine months ended September 30, 2004 and 2003, respectively.  This increase is primarily due to the sale of investment securities which resulted in gains on sale of approximately $1,069 and $165 for the three and nine months ended September 30, 2004, respectively.

 

Interest expense increased for the three and nine months ended September 30, 2004 as compared to the three and nine months ended September 30, 2003.  This is due to several factors:

 

Interest expense for the three and nine months ended September 30, 2004 includes approximately $1,246 and $3,717, respectively, of interest expense on amounts drawn on the line of credit with KeyBank N.A. and the fees paid on the unused portion of this line, as compared to approximately $1,058 and $3,138 for the three and nine months ended September 30, 2003.  The increased interest expense is due to additional draws taken against the line in 2003 that remained outstanding during 2004. 

 

Mortgage interest expense increased approximately $232 and $1,103 for the three and nine months ended September 30, 2004 and 2003, respectively, due to an increase in mortgages payable from approximately $588,197 at September 30, 2003 to approximately $631,528 at September 30, 2004, net of discontinued operations.  The increase in mortgages payable is due to indebtedness incurred on new acquisitions and the refinancing of existing debt with new loans having a larger principal balance. 


Joint Ventures


On February 1, 2001, a wholly-owned subsidiary of ours entered into an LLC agreement with a wholly-owned subsidiary of Tri-Land Properties, Inc. for the acquisition and redevelopment of the Century Consumer Mall in Merrillville, Indiana.  The first phase of new construction commenced in January 2003 for an 18,000 square foot retail building fronting U.S. Route 30.  This building is anchored by a 4,800 square foot Panera Bread store pursuant to an executed ten-year lease.  Construction was completed during 2003 and an additional 2,400 square feet was leased.  It is anticipated that lease up of this building will occur during 2004.  Each partner's initial equity contribution was $500.


Through December 31, 2003, we had accounted for our investment in this joint venture under the equity method of accounting because we were not the managing member and did not have the ability to control the joint venture.  We adopted FASB Interpretation No. 46 ("FIN 46") on January 1, 2004.  In accordance with FIN 46, we have evaluated this joint venture and determined that we are the principal beneficiary in this variable interest entity.  As a result, the accounts of the joint venture have been consolidated with our financial statements for financial reporting purposes.  In conjunction with this consolidation, we consolidated approximately $10,000 in assets held by the joint venture.


In addition, we have committed to lend the LLC up to $17,800.  Draws on the loan bear interest at a rate of 9% per annum, with interest only paid monthly on average outstanding balances.   The loan is secured by the property and matures on January 31, 2006.  As of September 30, 2004, the principal balance of this mortgage receivable was $9,704.  Tri-Land Properties, Inc. has guaranteed $2,500 of this mortgage receivable.  During the consolidation process, this amount was consolidated with the mortgage payable in the joint venture partner's accounts and was therefore eliminated.

 

Effective September 23, 2004, we formed a strategic joint venture with an affiliate of Crow Holdings Managers, LLC to each acquire a 50% ownership interest in the 97,535 square-foot Hastings Marketplace, which is located in Hastings, Minnesota.  The venture acquired Hastings Marketplace from us for $13,200.  We are the managing member of the venture and earn fees for providing property management and leasing services to the venture.


In connection with the sale of Hastings Marketplace to the venture, we recognized a gain of approximately $76.  The gain and operations are not recorded as discontinued operations because of our continuing involvement in this shopping center.  We account for our interest in the venture using the equity method of accounting.

 



Non-GAAP Financial Measures


We consider "Funds From Operations" ("FFO") a widely accepted and appropriate measure of performance for a REIT that provides a supplemental measure of a REIT's operating performance because along with cash flows from operating, investing and financing activities it provides a measure of a REIT's ability to incur and service debt and make capital expenditures and acquisitions.  Due to certain unique operating characteristics of real estate companies, the National Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, has promulgated a standard known as FFO, which it believes more accurately reflects the operating performance of a REIT such as us.  As defined by NAREIT, FFO means net income computed in accordance with GAAP, excluding gains (or losses) from sales of property, plus depreciation and amortization and after adjustments for unconsolidated partnership and joint ventures in which the REIT holds an interest.  We have adopted the NAREIT definition for computing FFO.  Management uses the calculation of FFO for several reasons.  FFO is used in certain employment agreements to determine incentives received based on our performance.  We also use FFO to compare our performance to that of other REIT's in our peer group.  Additionally, we use FFO in conjunction with our acquisition policy to determine investment capitalization strategy.  The calculation of FFO may vary from entity to entity since capitalization and expense policies tend to vary from entity to entity.  Items that are capitalized do not impact FFO whereas items that are expensed reduce FFO.  Consequently, our presentation of FFO may not be comparable to other similarly titled measures presented by other REITs.  FFO does not represent cash flows from operations as defined by GAAP, it is not indicative of cash available to fund all cash flow needs and liquidity, including our ability to pay distributions and should not be considered as an alternative to net income, as determined in accordance with GAAP, for purposes of evaluating our operating performance.  The following table reflects our FFO for the periods presented, reconciled to net income available to common stockholders for these periods:

 

 

 

Three months
ended
September
30, 2004

 

Three months
ended
September
30, 2003

 

Nine months
ended
September
30, 2004

 

Nine months
ended
September 30,
2003

 

 


 


 


 


Net income available to common stockholders

$

13,874

 

10,931

 

37,035

 

31,017

Gain on sale of investment properties

 

(3,502)

 

-

 

(4,541)

 

(3)

Equity in depreciation of unconsolidated joint ventures

 

-

 

66

 

-

 

107

Amortization on in-place lease intangibles

 

451

 

208

 

1,119

 

383

Amortization on leasing commissions

 

315

 

146

 

704

 

377

Depreciation, net of minority interest

 

9,028

 

8,510

 

26,516

 

24,868

 

 


 


 


 


Funds From Operations

$

20,166

 

19,861

 

60,833

 

56,749

 

 


 


 


 


Net income available to common stockholders per weighted
   average common share, basic and diluted

$

0.21

 

0.17

 

0.56

 

0.48

 

 


 


 


 


Funds From Operations, per weighted average common share,
   basic and diluted

$

0.30

 

0.30

 

0.92

 

0.87

 

 


 


 


 


Weighted average number of common shares outstanding,
   basic

 

66,770

 

65,197

 

66,285

 

64,921

 

 


 


 


 


Weighted average number of common shares outstanding,
   diluted

 

66,820

 

65,201

 

66,335

 

64,925

 

 


 


 


 


 



EBITDA is defined as earnings (losses) from continuing operations excluding: (1) interest expense; (2) income tax benefit or expenses; (3) depreciation and amortization.  We believe EBITDA is useful to us and to an investor as a supplemental measure in evaluating our financial performance because it excludes expenses that we believe may not be indicative of our operating performance.  By excluding interest expense, EBITDA measures our financial performance regardless of how we finance our operations and capital structure.  By excluding depreciation and amortization expense, we believe we can more accurately assess the performance of our portfolio.  Because EBITDA is calculated before recurring cash charges such as interest expense and taxes and is not adjusted for capital expenditures or other recurring cash requirements, it does not reflect the amount of capital needed to maintain our properties nor does it reflect trends in interest costs due to changes in interest rates or increases in borrowing.  EBITDA should be considered only as a supplement to net earnings and may be calculated differently by other equity REITs.

 

EBITDA

 

Three months ended
September 30, 2004

 

Three months ended
September 30, 2003

 

Nine months ended
September 30, 2004

 

Nine months ended
September 30, 2003

 

 


 


 


 


Income From Operations

$

10,133

 

10,094

 

30,847

 

29,106

Gain From Operations

 

(76)

 

-

 

(76)

 

-

Income From Discontinued Operations

 

315

 

837

 

1,723

 

1,909

Loss From Unconsolidated Ventures

 

(328)

 

(56)

 

(328)

 

(188)

Interest Expense

 

10,507

 

9,884

 

31,819

 

29,119

Interest Expense Associated with Discontinued Operations

 

284

 

549

 

802

 

1,075

Interest Expense Associated with Unconsolidated Ventures

 

23

 

183

 

23

 

300

Depreciation and Amortization

 

9,945

 

8,751

 

28,747

 

25,151

Depreciation and Amortization Associated with Discontinued
   Operations

 

161

 

523

 

406

 

1,211

Depreciation and Amortization Associated with
   Unconsolidated Ventures

 

-

 

40

 

-

 

107

 

 


 


 


 


EBITDA

$

30,964

 

30,805

 

93,963

 

87,790

 

 


 


 


 


Total Interest Expense

$

10,814

 

10,616

 

32,644

 

30,494

 

 


 


 


 


EBITDA: Interest Expense Coverage Ratio

 

2.9

 

2.9

 

2.9

 

2.9

 

 


 


 


 


 

 



The following table lists the approximate physical occupancy levels for the Company's properties as of the end of each quarter during 2003 and 2004.  N/A indicates the property was not owned by the Company at the end of the quarter.

 

 

Gross

 

 

 

 

 

 

 

 

 

Leasable

 

 

 

 

 

 

 

 

 

Area

03/31/03

06/30/03

09/30/03

12/31/03

03/31/04

06/30/04

09/30/04

 

Properties

(Sq Ft)

(%)

(%)

(%)

(%)

(%)

(%)

(%)

 










 

22nd St. Plaza Outlot, Oakbrook Terrace, IL

10,000

100

100

100

100

100

100

0

 

Ameritech, Joliet, IL

4,504

100

100

100

100

100

100

100

 

Aurora Commons, Aurora, IL

126,908

98

98

98

100

100

99

98(a)

 

Bakers Shoes, Chicago, IL

20,000

100

100

100

100

100

100

100

 

Bally's Total Fitness, St Paul, MN

43,000

100

100

100

100

100

100

100

 

Baytowne Square, Champaign, IL

118,842

89

88

87

88

88

88

89(a)

 

Bergen Plaza, Oakdale, MN

272,233

100

98

98

98

98

98

98

 

Berwyn Plaza, Berwyn, IL

18,138

26

26

26

26

26

26

100

 

Bohl Farm Marketplace, Crystal Lake, IL

97,287

100

100

100

100

100

100

100

 

Brunswick Market Center, Brunswick, OH

119,540

91

91

83

83

80

80

88(b)

 

Burnsville Crossing, Burnsville, MN

91,015

99

100

100

100

100

100

98

 

Byerly's Burnsville, Burnsville, MN

72,365

100

100

100

100

100

100

100

 

Calumet Square, Calumet City, IL

37,656

100

100

100

100

100

100

100

 

Carmax, Schaumburg, IL

93,333

100

100

100

100

100

100

100

 

Carmax, Tinley Park, IL

94,518

100

100

100

100

100

100

100

 

Caton Crossing

83,792

N/A

96

96

100

100

98

95

 

Century Plaza

314,647

50

50

49

49

49

49

49(c)

 

Chatham Ridge, Chicago, IL

175,774

96

100

100

100

100

100

92(a)

 

Chestnut Court, Darien, IL

170,027

96

99

99

99

99

97

87

 

Circuit City, Traverse City, MI

21,337

100

100

100

100

100

100

100

 

Cliff Lake Centre, Eagan, MN

73,582

95

88

84

97

98

100

100

 

Cobblers Crossing, Elgin, IL

102,643

100

100

100

97

99

96

96

 

Crestwood Plaza, Crestwood, IL

20,044

32

32

32

32

100

100

100

 

Crystal Point, Crystal Lake, IL

358,423

0

0

0

0

0

0

100

 

Cub Foods, Buffalo Grove, IL

56,192

0

0

0

0

100

100

100

 

Cub Foods, Hutchinson, MN

60,208

0

0

0

0

0

0

0(a)

 

Cub Foods, Indianapolis, IN

67,541

0

0

0

0

0

0

0(a)

 

Cub Foods, Plymouth, MN

67,510

100

100

100

100

100

100

100

 

Deer Trace, Kohler, WI

149,881

100

98

98

98

98

98

98

 

Deer Trace II, Kohler, WI

24,410

N/A

N/A

N/A

N/A

N/A

N/A

79(b)

 

Disney, Celebration, FL

166,131

100

100

100

100

100

100

100

 

Dominick's, Countryside, IL

62,344

100

100

100

100

100

100

100

 

Dominick's, Glendale Heights, IL

68,879

100

100

100

100

100

100

100

 

Dominick's, Hammond, IN

71,313

100

100

100

100

100

100

100

 

 

 

 

 

 

 

 

 

 

 


Gross

 

 

 

 

 

 

 

 

 

Leasable

 

 

 

 

 

 

 

 

 

Area

03/31/03

06/30/03

09/30/03

12/31/03

03/31/04

06/30/04

09/30/04

 

Properties

(Sq Ft)

(%)

(%)

(%)

(%)

(%)

(%)

(%)

 










 

Dominick's, Highland Park, IL

71,442

100

100

100

100

100

100

100

 

Dominick's, Schaumburg, IL

71,400

100

100

100

100

100

100

100

 

Dominick's, West Chicago, IL

78,158

0

0

0

0

0

0

0(a)

 

Downers Grove Mkt, Downers Grove, IL

104,449

92

99

99

99

99

99

99

 

Eagle Crest, Naperville, IL

67,632

97

97

97

97

100

100

100

 

Eastgate Shopping Center, Lombard, IL

132,145

95

96

96

93

93

92

92

 

Eckerd Drug, Chattanooga, TN

10,908

100

100

100

100

100

100

100

 

Edinburgh Festival, Brooklyn Park, MN

91,536

100

100

100

99

97

100

100

 

Elmhurst City Center, Elmhurst, IL

39,090

97

97

97

97

97

97

97

 

Fashion Square, Skokie, IL

84,580

86

92

95

95

88

88

72(a)

 

Forest Lake Marketplace, Forest Lake, MN

93,853

92

92

92

92

92

92

96(b)

 

Four Flaggs, Niles, IL

306,661

81

81

66

81

84

87

99(b)

 

Four Flaggs Annex, Niles, IL

21,425

100

100

100

100

100

100

100

 

Gateway Square, Hinsdale, IL

40,170

97

100

100

98

100

100

100

 

Goodyear, Montgomery, IL

12,903

100

100

100

100

100

100

100

 

Grand and Hunt Club, Gurnee, IL

21,222

100

100

100

100

100

100

100

 

Hartford Plaza, Naperville, IL

43,762

100

95

95

97

100

97

97(a)

 

Hastings Marketplace, Hastings, MN

97,535

N/A

N/A

N/A

N/A

88

88

94(b)(c)

 

Hawthorn Village, Vernon Hills, IL

98,806

98

100

98

100

98

100

100

 

Hickory Creek Market, Frankfort, IL

55,831

94

90

96

96

89

93

90

 

High Point Center, Madison, WI

86,004

94

85

91

89

87

87

87

 

Hollywood Video, Hammond, IN

7,488

100

100

100

100

100

100

100

 

Homewood Plaza, Homewood, IL

19,000

47

47

47

8

8

8

8

 

Iroquois Center, Naperville, IL

140,981

85

83

83

69

71

71

71(a)

 

Joliet Commons, Joliet, IL

158,922

100

100

100

100

100

100

100

 

Joliet Commons Phase II, Joliet, IL

40,395

100

100

100

100

79

79

100

 

Lake Park Plaza, Michigan City, IN

229,639

69

70

70

73

74

74

73(a)

 

Lansing Square, Lansing, IL

233,508

97

99

90

99

99

89

89(a)

 

Mallard Crossing, Elk Grove Village, IL

82,929

29

29

30

32

30

32

100

 

Mankato Heights

129,058

N/A

96

94

98

98

100

100

 

Maple Grove Retail, Maple Grove, MN

79,130

87

87

87

97

97

97

97

 

Maple Park Place, Bolingbrook, IL

220,095

50

50

71

71

71

73

91

 

Maple Plaza, Downers Grove, IL

31,298

100

100

100

100

100

100

94

 

Marketplace at Six Corners, Chicago, IL

117,000

100

98

98

100

100

100

100

 

Medina Marketplace, Medina, OH

72,781

100

100

100

100

100

100

100

 


Gross

 

 

 

 

 

 

 

 

 

Leasable

 

 

 

 

 

 

 

 

 

Area

03/31/03

06/30/03

09/30/03

12/31/03

03/31/04

06/30/04

09/30/04

 

Properties

(Sq Ft)

(%)

(%)

(%)

(%)

(%)

(%)

(%)

 










 

Michael's, Coon Rapids, MN

24,240

100

100

100

100

100

100

100

 

Mundelein Plaza, Mundelein, IL

68,056

100

92

92

100

98

95

98

 

Nantucket Square, Schaumburg, IL

56,981

94

100

94

96

96

94

94(a)

 

Naper West, Naperville, IL

164,812

67

88

84

85

85

83

88(a)

 

Naper West Ph II, Naperville, IL

50,000

0

0

0

73

73

73

73

 

Niles Shopping Center, Niles, IL

26,109

73

69

80

68

68

68

83

 

Oak Forest Commons, Oak Forest, IL

108,330

100

99

99

99

32

32

32(a)

 

Oak Forest Commons III, Oak Forest, IL

7,424

62

100

100

100

88

88

88

 

Oak Lawn Town Center, Oak Lawn, IL

12,506

80

100

100

100

100

100

100

 

Orland Greens, Orland Park, IL

45,031

73

73

100

100

100

100

94

 

Orland Park Retail, Orland Park, IL

8,500

100

100

100

100

100

100

100

 

Park Center Plaza, Tinley Park, IL

194,599

98

100

100

95

100

99

99(a)

 

Park Place Plaza, St. Louis Park, MN

84,999

100

100

100

98

98

100

100

 

Park Square, Brooklyn Park, MN

137,116

93

94

89

54

54

54

54

 

Park St. Claire, Schaumburg, IL

11,859

100

100

100

100

100

100

100

 

Petsmart, Gurnee, IL

25,692

100

100

100

100

100

100

100

 

Pine Tree Plaza, Janesville, WI

187,413

95

95

95

95

96

96

97

 

Plymouth Collection, Plymouth, MN

45,915

94

100

100

100

100

100

100

 

Quarry Outlot, Hodgkins, IL

9,650

100

100

100

100

100

100

100

 

Quarry Retail, Minneapolis, MN

281,648

100

100

100

100

100

100

100

 

Randall Square, Geneva, IL

216,201

97

97

97

97

95

99

99

 

Regency Point, Lockport, IL

54,841

100

100

100

100

100

100

100

 

Riverdale Commons, Coon Rapids, MN

168,277

100

100

100

100

100

100

100

 

Riverdale Outlot, Coon Rapids, MN

6,566

100

100

100

100

100

100

100

 

Riverplace Center, Noblesville, IN

74,414

96

96

96

95

93

95

98

 

River Square Center, Naperville, IL

58,260

94

94

91

91

95

95

94

 

Rivertree Court, Vernon Hills, IL

298,862

93

91

97

96

97

98

99(a)

 

Rochester Marketplace, Rochester, MN

69,914

N/A

N/A

92

90

90

90

95(b)

 

Rose Naper Plaza East, Naperville, IL

11,658

100

100

100

89

89

100

100

 

Rose Naper Plaza West, Naperville, IL

14,335

100

100

100

100

100

100

89(a)

 

Rose Plaza, Elmwood Park, IL

24,204

100

100

100

100

100

100

100

 

Salem Square, Countryside, IL

112,310

97

95

95

95

95

95

100

 

Schaumburg Plaza, Schaumburg, IL

61,485

97

97

97

97

100

81

91

 

Schaumburg Promenade, Schaumburg, IL

91,831

90

100

100

100

100

100

100

 

Sears, Montgomery, IL

34,300

95

95

95

95

100

  100

100

 

Sequoia Shopping Ctr, Milwaukee, WI

35,407

72

72

68

72

81

68

68(a)

 

 

 

 

 

 

 

 

 

 

 


Gross

 

 

 

 

 

 

 

 

 

Leasable

 

 

 

 

 

 

 

 

 

Area

03/31/03

06/30/03

09/30/03

12/31/03

03/31/04

06/30/04

09/30/04

 

Properties

(Sq Ft)

(%)

(%)

(%)

(%)

(%)

(%)

(%)

 










 

Shakopee Valley, Shakopee, MN

146,430

100

100

100

100

100

99

99(a)

 

Shannon Square Cub, Arden Hills, MN

68,442

N/A

N/A

N/A

N/A

100

100

100

 

Shannon Square Shoppes, Arden Hills, MN

29,196

N/A

N/A

N/A

N/A

N/A

100

100

 

Shingle Creek, Brooklyn Center, MN

39,456

89

85

85

85

80

80

77(a)

 

Shoppes of Mill Creek, Palos Park, IL

102,422

98

98

98

100

100

100

100

 

Shops at Coopers Grove, Ctry Club Hills, IL

72,518

9

9

8

8

10

18

18

 

Shops at Orchard Place, Skokie, IL

165,141

96

96

92

92

92

84

88(b)

 

Six Corners, Chicago, IL

80,650

88

86

86

96

88

88

73

 

Spring Hill Fashion Ctr, W. Dundee, IL

125,198

95

95

100

95

95

92

100

 

Springboro Plaza, Springboro, OH

154,034

100

100

100

100

100

100

100

 

St. James Crossing, Westmont, IL

49,994

88

78

80

80

80

98

95(a)

 

Staples, Freeport, IL

24,049

100

100

100

100

100

100

100

 

Stuart's Crossing, St. Charles, IL

85,529

95

95

95

95

93

98

98

 

Terramere Plaza, Arlington Heights, IL

40,965

66

79

83

96

96

85

85

 

Thatcher Woods, River Grove, IL

193,313

98

98

98

98

98

97

99

 

Townes Crossing, Oswego, IL

105,989

86

86

93

94

99

100

100

 

Two Rivers Plaza, Bolingbrook, IL

57,900

100

100

100

100

97

78

97

 

United Audio Center, Schaumburg, IL

9,988

100

100

100

100

100

100

100

 

University Crossing, Mishawaka, IN

136,430

N/A

N/A

N/A

88

88

88

98(b)

 

V. Richard's Plaza, Brookfield, WI

107,952

81

99

83

97

98

96

98

 

Village Ten Center, Coon Rapids, MN

211,568

N/A

N/A

98

98

98

98

98

 

Walgreens, Decatur, IL

13,500

100

100

100

100

100

100

100

 

Walgreens, Jennings, MO

15,120

100

100

100

100

100

100

100

 

Walgreens, Woodstock, IL

15,856

100

100

100

100

100

100

100

 

Wauconda Shopping Ctr, Wauconda, IL

31,357

100

100

100

100

100

100

100

 

West River Crossing, Joliet, IL

32,452

91

84

84

91

83

88

91

 

Western and Howard, Chicago, IL

11,974

78

78

100

100

100

100

100

 

Wilson Plaza, Batavia, IL

11,160

100

100

100

100

100

78

78

 

Winnetka Commons, New Hope, MN

42,415

65

65

65

65

65

89

89

 

Wisner/Milwaukee Plaza, Chicago, IL

14,677

100

100

100

100

90

100

100

 

Woodfield Comm E/W, Schaumburg, IL

207,583

100

100

96

100

100

100

100

 

Woodfield Plaza, Schaumburg, IL

177,160

70

70

72

91

91

91

94

 

Woodland Commons, Buffalo Grove, IL

170,398

89

88

88

89

91

93

97

 

Woodland Heights, Streamwood, IL

120,436

87

87

87

86

87

87

87

 

 


 

 

 

 

 

 

 

 

 

12,280,750

 

 

 

 

 

 

 

 

 


 

 

 

 

 

 

 

 

 



(a)

The Company receives rent from tenants who have vacated but are still obligated under their lease terms which results in economic occupancy ranging from 72% to 100% at September 30, 2004 for each of these centers.

 

 

(b)

The Company, from time to time, receives payments under master lease agreements covering spaces vacant at the time of acquisition.  The payments range from one to two years from the date of acquisition of the property or until the space is leased and the tenants begin paying rent.  GAAP requires the Company to treat these payments as a reduction to the purchase price of the investment properties upon receipt of the payment, rather than as rental income.  As of September 30, 2004, the Company had six investment properties, Forest Lake Marketplace, located in Forest Lake, Minnesota, Shops at Orchard Place, located in Skokie, Illinois, Rochester Marketplace, located in Rochester, Minnesota, University Crossing, located in Mishawaka, Indiana, Hastings Marketplace, located in Hastings, Minnesota (this property is held through a joint venture) and Deer Trace Ph II, located in Kohler, Wisconsin, subject to master lease agreements.

 

 

(c)

These properties are owned through joint ventures.  See Footnote 3 for further information regarding our joint ventures.


Subsequent Events


On October 8, 2004 we entered into a strategic joint venture with the New York State Teachers' Retirement System (NYSTRS"). Pursuant to on operating agreement signed on October 8, 2004, the joint venture was formed to acquire up to $400,000 of neighborhood and community retail centers located in our targeted markets throughout the Midwest.


Upon the initial closing, we will contribute eight retail centers with an approximate net equity value of $100,000, and NYSTRS will contribute approximately $50,000 of equity capital.  In addition, NYSTRS has committed to contribute, subject to satisfying certain conditions, an additional $100,000 for future acquisitions, for a total contribution of approximately $150,000.  We have also agreed to invest, subject to satisfying certain conditions, an additional $100,000 in the joint venture.


On October 18, 2004 we paid an aggregate cash dividend of $5,152 to stockholders of record at the close of business on September 30, 2004.


On October 19, 2004 we announced that we had declared a cash dividend of $0.08 per share on the outstanding shares of our common stock.  This dividend will be paid on November 17, 2004 to stockholders of record at the close of business on November 1, 2004.

 

On October 25, 2004, we refinanced the debt on Hickory Creek Market, Spring Hill Fashion Center and Maple Park Place.  The loans refinanced had a principal amount of $15,448, in the aggregate and had variable interest rates.  The new loans have a principal amount of $26,150, in the aggregate, an interest rate of 4.88% and a 7-year term.


On October 27, 2004, we refinanced the debt on West River Crossing.  The loan refinanced had a principal amount of $2,807 and had a variable interest rate.  The new loan has a principal amount of $3,500, an interest rate of 4.88% and a 7-year term.

 



Item 3.  Quantitative and Qualitative Disclosures about Market Risk


As of September 30, 2004 and 2003 we had no material derivative instruments.  We may enter into derivative financial instrument transactions in order to mitigate our interest rate risk on a related financial instrument.  We will designate these derivative financial instruments as hedges and apply hedge accounting, as the instrument to be hedged will expose us to interest rate risk, and the derivative financial instrument will reduce that exposure.  Gains and losses related to the derivative financial instrument would be deferred and amortized over the terms of the hedged instrument.  If a derivative terminates or is sold, the gain or loss is recognized.  We will generally enter into derivative transactions that satisfy the aforementioned criteria only.


We are exposed to interest rate changes primarily as a result of the fact that some of our long-term debt consists of variable interest rate loans.  We seek to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs by closely monitoring our variable rate debt and converting such debt to fixed rates when we deem such conversion advantageous.


Our interest rate risk is monitored using a variety of techniques, including periodically evaluating fixed interest rate quotes on all variable rate debt and the costs associated with such conversion.  Also, existing fixed and variable rate loans which are scheduled to mature in the next year or two are evaluated for possible early refinancing and or extension due to consideration given to current interest rates.  The table below presents the principal amount of the debt maturing each year, including monthly annual amortization of principal, through December 31, 2008 and thereafter and weighted average interest rates for the debt maturing in each specified period.

 

 

 

2004

 

2005

 

2006

 

2007

 

2008

 

Thereafter

 

 


 


 


 


 


 


Fixed rate debt

$

50,512

 

88,988

 

53,783

 

35,402

 

104,771

 

210,969

Weighted average   interest rate

 

6.64%

 

7.03%

 

6.29%

 

6.42%

 

6.57%

 

4.96%

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable rate debt

 

6,467

 

11,716

 

44,165

 

28,397

 

-

 

6,200

Weighted average   interest rate

 

2.95%

 

3.02%

 

3.45%

 

3.45%

 

-

 

2.08%


The table above reflects indebtedness outstanding as of September 30, 2004, and does not reflect indebtedness incurred after that date.  Our ultimate exposure to interest rate fluctuations depends on the amount of indebtedness that bears interest at variable rates, the time at which the interest rate is adjusted, the amount of the adjustment, our ability to prepay or refinance variable rate indebtedness and hedging strategies used to reduce the impact of any increases in rates.


The fair value of mortgages payable is the amount at which the instrument could be exchanged in a current transaction between willing parties.  The fair value of our mortgages is estimated to be $96,945 for mortgages which bear interest at variable rates and $545,729 for mortgages which bear interest at fixed rates.  We estimate the fair value of our mortgages payable by discounting the future cash flows of each instrument at rates currently offered to us for similar debt instruments of comparable maturities by our lenders.


Approximately $96,945, or 15% of our mortgages payable at September 30, 2004, have variable interest rates averaging 3.28%.  An increase in the variable interest rates charged on mortgages payable containing variable interest rate terms, constitutes a market risk.  A 0.25% annualized increase in interest rates would have increased our interest expense by approximately $182.

 



Item 4.  Controls and Procedures


Evaluation of Disclosure Controls and Procedures


The Company's management, with the participation of the Company's chief executive officer and chief financial officer, has evaluated the effectiveness of the Company's disclosures and procedures (as such is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report.  Based on such evaluation, the Company's chief executive officer and chief financial officer have concluded that, as of the end of such period, the Company's disclosure and procedures are effective.


Changes in Internal Controls


There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

 



PART II - Other Information


Item 1.  Legal Proceedings

 

Not Applicable.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

Not Applicable

 

Item 3.  Defaults Upon Senior Securities


Not Applicable.


Item 4.  Submission of Matters to a Vote of Security Holders


None


Item 5.  Other Information


Not Applicable.


Item 6.    Exhibits and Reports on Form 8-K

 

(a) Exhibits:  The following exhibits are filed as part of this document or incorporated herein by reference:

 

          Item No.       Description

 

3.1           Third Articles of Amendment and Restatement of the Registrant (1)

 

3.2           Amended and Restated Bylaws of the Registrant (2)

 

4.1           Specimen Stock Certificate (3)

 

4.2           Amended and Restated Dividend Reinvestment Plan of the Registrant (4)

 

10.1         Lock-Up Agreement, dated August 4, 2004, by and between Inland Real Estate Corporation, The Inland Group, Inc., Inland Mortgage Investment Corporation, Inland Real Estate Investment Corporation, Partnership Ownership Corporation, Daniel L. Goodwin, G. Joseph Cosenza and Robert D. Parks (5)

 

10.2         Termination and release of that certain Put Agreement dated September 3, 2003 made by Inland Real Estate Corporation in favor of Fleet National Bank, as administrative agent under that certain $35 Million Revolving Line of Credit entered into between Inland Real Estate Investment Corporation, Fleet National Bank, as administrative agent and the other lenders a party thereto dated September 4, 2003. (5)

 

10.3         Property acquisition agreement between Inland Real Estate Acquisitions, Inc.  and Inland Real Estate Corporation(*)

 

31.1         Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(*)

 

31.2         Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (*)

 


32.1         Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (*)

 

32.2         Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (*)

 

Incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K dated July 1, 2000, as filed by the Registrant with the Securities and Exchange Commission on July 14, 2000 (file number 000-28382).

 

Incorporated by reference to Exhibit 31 to the Registrant's Current Report on Form 8-K dated September 29, 2004, as filed by the Registrant with the Securities and Exchange Commission on October 1, 2004 (file number 001-32185).

 

Incorporated by reference to Exhibit 4.2 to the Registrant's Post-Effective Amendment No. 1 to Form S-3 Registration Statement, as filed by the Registrant with the Securities and Exchange Commission on July 30, 2004 (file number 333-107077).

 

Incorporated by reference to the Registrant's Post-Effective Amendment No. 1 to Form S-3 Registration Statement, as filed by the Registrant with the Securities and Exchange Commission on July 30, 2004 (file number 333-107077).

 

Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004, as filed by the Registrant with the Securities and Exchange Commission on August 5, 2004 (file number 001-32185).

 

(*)        Filed as part of this document.

 

Reports on Form 8-K:

 

              (1)        Report on Form 8-K dated August 17, 2004 and filed August 19, 2004.

              (2)        Report on Form 8-K dated September 7, 2004 and filed September 8, 2004.

              (3)        Report on Form 8-K dated September 17, 2004 and filed September 20, 2004.

 



SIGNATURES




Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




                                                                                                                                INLAND REAL ESTATE CORPORATION


                      /s/ ROBERT D. PARKS


By:                Robert D. Parks

Title: President and Chief Executive Officer

Date:             November 9, 2004

 

 

                      /s/ BRETT A. BROWN


By:                Brett A. Brown

Title: Chief Financial Officer

Date:             November 9, 2004