UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended September 30, 1996
or
[ ] Transition Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File #33-79012
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 Number)
of incorporation or organization)
2901 Butterfield Road, Oak Brook, Illinois 60521
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: 630-218-8000
Inland Monthly Income Fund III, Inc.
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
6,890,909 shares of common stock outstanding at November 12, 1996.
-1-
Part 1 - Financial Statements
Item 1. Financial Statements
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)
Balance Sheets
September 30, 1996 and December 31, 1995
(unaudited)
Assets
------
1996 1995
---- ----
Investment properties (Notes 1, 4 and 5):
Land............................................ $14,695,748 5,437,948
Building and improvements....................... 36,782,378 12,074,484
------------ ------------
51,478,126 17,512,432
Less accumulated depreciation................... 731,877 169,894
------------ ------------
Net investment properties....................... 50,746,249 17,342,538
Cash and cash equivalents including amounts
held by property manager (Note 1)............... 19,250,977 738,931
Restricted funds.................................. - 150,000
Accounts and rents receivable (Note 5)............ 1,087,810 333,823
Deposits and other assets......................... 236,854 158,123
Deferred organization costs (net of accumulated
amortization of $4,119 at September 30, 1996)
(Note 1)........................................ 23,343 27,462
Loan fees......................................... 186,828 -
------------ ------------
Total assets.................................. $71,532,061 18,750,877
============ ============
See accompanying notes to financial statements.
-2-
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)
Balance Sheets
(continued)
September 30, 1996 and December 31, 1995
(unaudited)
Liabilities and Stockholders' Equity
------------------------------------
1996 1995
---- ----
Liabilities:
Accounts payable................................ $ 105,062 6,875
Accrued offering costs to Affiliates............ 646,121 222,353
Accrued offering costs to non-affiliates........ 89,235 6,444
Accrued interest payable to Affiliates.......... - 5,242
Accrued real estate taxes....................... 981,687 374,180
Distributions payable (Note 7).................. 372,337 129,532
Security deposits............................... 112,374 54,483
Note payable to Affiliate (Note 6).............. - 360,000
Mortgages payable (Note 6)...................... 18,003,626 750,727
Unearned income................................. 62,650 39,846
Other liabilities............................... 28,852 178,852
Due to Affiliates (Note 2)...................... 244,040 7,277
------------ ------------
Total liabilities............................. 20,645,984 2,135,811
------------ ------------
Stockholders' Equity (Notes 1 and 2):
Common stock, $.01 par value, 24,000,000 Shares
authorized; 6,038,144 and 6,031,826 issued
and outstanding at September 30, 1996, and
2,003,073 and 2,000,073 Shares issued and
outstanding at December 31, 1995,
respectively.................................. 59,824 19,996
Additional paid-in capital (net of offering
costs of $8,197,358 at September 30, 1996, of
which $6,282,497 was paid to Affiliates)...... 51,965,431 16,835,183
Accumulated distributions in excess of
net income.................................... (1,139,178) (240,113)
------------ ------------
Total stockholders' equity.................... 50,886,077 16,615,066
------------ ------------
Total liabilities and stockholders' equity........ $71,532,061 18,750,877
============ ============
See accompanying notes to financial statements.
-3-
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)
Statements of Operations
For the three and nine months ended September 30, 1996 and 1995
(unaudited)
Three months Nine months
ended ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
Income:
Rental income (Notes 1 and 5).... $1,258,317 216,155 2,578,953 469,568
Additional rental income......... 396,095 222,234 785,719 260,193
Interest income.................. 87,474 42,167 212,063 73,747
Other income..................... 12,064 - 64,870 -
---------- ---------- ---------- ----------
1,753,950 480,556 3,641,605 803,508
---------- ---------- ---------- ----------
Expenses:
Professional services to
Affiliates..................... 5,780 - 16,434 -
Professional services to
non-affiliates................. 4,723 - 40,951 1,615
General and administrative
expenses to Affiliates......... (9,319) - 42,116 -
General and administrative
expenses to non-affiliates..... 15,424 263 21,418 1,084
Advisor asset management fee..... 116,809 - 242,341 -
Property operating expenses
to Affiliates.................. 67,501 9,463 139,597 21,917
Property operating expenses
to non-affiliates.............. 560,438 243,067 1,007,064 297,946
Mortgage interest to Affiliates.. 20,670 36,815 49,993 82,992
Mortgage interest to
non-affiliates................. 82,335 - 160,139 17,340
Depreciation..................... 284,483 33,909 561,983 82,262
Amortization..................... 1,373 - 4,119 -
Acquisition costs expensed....... 5,361 - 22,511 315
---------- ---------- ---------- ----------
1,155,578 323,517 2,308,666 505,471
---------- ---------- ---------- ----------
Net income..................... $ 598,372 157,039 1,332,939 298,037
========== ========== ========== ==========
Net income per weighted average
common stock shares outstanding
(5,166,900 and 1,065,503 for the
three months ended September 30,
1996 and 1995, respectively and
3,688,310 and 707,779 for the
nine months ended September 30,
1996 and 1995, respectively)..... $ .11 .15 .36 .42
========== ========== ========== ==========
See accompanying notes to financial statements.
-4-
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)
Statements of Stockholders' Equity
September 30, 1996 and December 31, 1995
(unaudited)
Accumulated
Additional Distributions
Common Paid-in in excess of
Stock Capital net income Total
----------- ----------- ----------- ------------
Balance January 1, 1995..... $ 200 199,800 - 200,000
Net income.................. - - 496,514 496,514
Distributions declared
($.78 per weighted average
common stock shares
outstanding).............. - - (736,627) (736,627)
Proceeds from Offering (net
of Offering costs of
$3,121,175).............. 19,826 16,662,162 - 16,681,988
Repurchases of Shares....... (30) (26,779) - (26,809)
----------- ----------- ----------- ------------
Balance December 31, 1995... 19,996 16,835,183 (240,113) 16,615,066
Net income.................. - - 1,332,939 1,332,939
Distributions declared
($.60 per weighted average
common stock shares
outstanding).............. - - (2,232,004) (2,232,004)
Proceeds from Offering (net
of Offering costs of
$5,076,183)............... 39,861 35,166,172 - 35,206,033
Repurchases of Shares....... (33) (35,924) - (35,957)
----------- ----------- ----------- ------------
Balance September 30, 1996.. $ 59,824 51,965,431 (1,139,178) 50,886,077
=========== =========== =========== ============
See accompanying notes to financial statements.
-5-
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)
Statement of Cash Flows
For the nine months ended September 30, 1996 and 1995
(unaudited)
1996 1995
---- ----
Cash flows from operating activities:
Net income...................................... $ 1,332,939 298,037
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation.................................. 561,983 82,262
Amortization.................................. 4,119 -
Deferred rent receivable...................... (63,007) (3,656)
Rental income under master lease.............. 305,054 66,990
Changes in assets and liabilities:
Accounts and rents receivable............... (690,980) (232,992)
Other assets................................ (78,731) (198,848)
Accounts payable............................ 98,187 69,942
Accrued interest payable.................... (5,242) 27,186
Accrued real estate taxes................... 607,507 368,202
Security deposits........................... 57,891 49,983
Unearned income............................. 22,804 -
Due to Affiliates........................... 236,763 -
------------ -------------
Net cash provided by operating activities......... 2,389,287 527,106
------------ -------------
Cash flows from investing activities:
Additions to investment properties.............. (168,035) -
Purchase of investment properties............... (26,729,537) (5,286,038)
------------ -------------
Net cash used in investing activities............. (26,897,572) (5,286,038)
------------ -------------
Cash flows from financing activities:
Repayment of loan from Advisor.................. - (193,300)
Proceeds from offering.......................... 40,246,259 13,012,136
Payments of offering costs...................... (4,569,624) (1,762,295)
Loan proceeds................................... 12,820,000 -
Loan fees....................................... (186,828) -
Distributions paid.............................. (1,989,199) (188,958)
Repayment of note from Affiliate................ (360,000) -
Principal payments of debt...................... (2,940,277) (5,454,211)
------------ -------------
Net cash provided by financing activities......... 43,020,331 5,413,372
------------ -------------
Net increase in cash and cash equivalents......... 18,512,046 654,440
Cash and cash equivalents at beginning of period.. 738,931 10,934
------------ -------------
Cash and cash equivalents at end of period........ $19,250,977 665,374
============ =============
See accompanying notes to financial statements.
-6-
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)
Statement of Cash Flows
(continued)
For the nine months ended September 30, 1996 and 1995
(unaudited)
Supplemental schedule of noncash investing and financing activities:
1996 1995
---- ----
Purchase of investment property................... $(34,102,713) (15,843,643)
Assumption of debt................................ 4,473,176 4,595,178
Note payable...................................... 2,900,000 5,962,427
------------- -------------
$(26,729,537) (5,286,038)
============= =============
Distributions payable............................. $ 372,337 214,852
============= =============
Cash paid for interest............................ $ 243,326 107,454
============= =============
See accompanying notes to financial statements.
-7-
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)
Notes to Financial Statements
September 30, 1996
(unaudited)
Readers of this Quarterly Report should refer to the Company's audited
financial statements for the fiscal year ended December 31, 1995, which are
included in the Company's 1995 Annual Report, as certain footnote disclosures
which would substantially duplicate those contained in such audited financial
statements have been omitted from this Report.
(1) Organization and Basis of Accounting
Inland Real Estate Corporation (the "Company") was formed on May 12, 1994 to
invest in neighborhood retail centers located within an approximate 150-mile
radius of its headquarters in Oak Brook, Illinois. The Company may also
acquire single-user retail properties in locations throughout the United
States, certain of which may be sale and leaseback transactions, net leased to
creditworthy tenants. On October 14, 1994, the Company commenced an initial
public offering (the "Offering") of 5,000,000 shares of common stock (the
"Shares") at a price of $10 per Share and the issuance of 1,000,000 Shares at a
price of $9.05 per Share for distribution pursuant to the Company's
distribution reinvestment program (the "DRP"). Inland Real Estate Advisory
Services, Inc. (the "Advisor"), an Affiliate of the Company, is the advisor to
the Company. Subscriber funds were held in an interest-bearing escrow account
with the Company's unaffiliated escrow agent until January 3, 1995. Offering
proceeds were released from escrow on January 3, 1995 when subscriptions were
accepted and Shares issued by the Company. Subscribers received their pro rata
share of interest income earned on their subscriptions while in escrow. As of
July 24, 1996, the Company had received subscriptions for a total of 5,000,000
Shares, resulting in Gross Offering Proceeds of $50,000,000, thereby completing
the initial Offering. On July 24, 1996, the Company commenced a follow-on
Offering of 10,000,000 shares plus an additional 1,000,000 shares available for
distribution through the DRP. As of September 30, 1996, the Company had
received subscriptions for a total of 931,147 Shares of the follow-on Offering,
resulting in $9,311,472 in Gross Offering Proceeds. In addition, the Company
has received $968,320 in Gross Offering Proceeds from 106,997 Shares purchased
through the DRP. As of September 30, 1996, the Company has repurchased 6,318
Shares from Stockholders for an aggregate price of $57,179 through the Shares
Repurchase Program.
The Company qualified as a real estate investment trust ("REIT") under the
Internal Revenue Code of 1986, as amended, for federal income tax purposes
commencing with the tax year ending December 31, 1995. Since the Company
qualified for taxation as a REIT, the Company generally is not subject to
federal income tax to the extent it distributes 95% of 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.
-8-
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)
Notes to Financial Statements
(continued)
September 30, 1996
(unaudited)
The preparation of financial statements in conformity with generally accepted
accounting principles 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 financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
The Company considers all highly liquid investments purchased with a maturity
of three months or less to be cash equivalents and are carried at cost, which
approximates fair value. Included in cash and cash equivalents is $655,905
held by the Company's affiliated property manager which is unrestricted and
held in the Company's name.
Deferred organization costs are amortized over a 60-month period.
Offering costs were offset against the Stockholders' equity accounts once the
Shares sold exceeded the Minimum Offering and Gross Offering Proceeds were
released from escrow. Offering costs consist principally of printing, selling
and registration costs.
The investment properties are carried at the lower of aggregate cost or net
realizable value. Periodically, the Company will review its real estate
portfolio and if investment properties suffer an impairment in value which is
deemed to be other than temporary, the investment in properties would be
reduced to the net realizable value of the properties. As of September 30,
1996, there have been no such impairments. Depreciation expense is computed
using the straight-line method. Buildings and improvements are based upon
estimated useful lives of 30 years. Tenant improvements will be depreciated
over the related lease period.
Rental income is recognized on a straight-line basis over the term of each
lease. The difference between rental income earned and the cash rent due under
the provisions of the lease agreements is recorded as deferred rent receivable.
The Company believes that the interest rate associated with the mortgages
payable approximates the market interest rates for these types of debt
instruments, and as such, the carrying amount of the mortgages payable
approximates their fair value.
-9-
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)
Notes to Financial Statements
(continued)
September 30, 1996
(unaudited)
The carrying amount of cash and cash equivalents, restricted cash, accounts and
rents receivable, accounts payable and other liabilities, accrued offering
costs to Affiliates, accrued offering costs to non-Affiliates, accrued interest
payable to Affiliates, accrued real estate taxes, and distributions payable
approximate fair value because of the relative short maturity of these
instruments.
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
the results to be expected for the year.
(2) Transactions with Affiliates
As of September 30, 1996, the Company had incurred $8,197,358 of organization
and offering costs. Pursuant to the terms of the Offering, the Advisor is
required to pay organization and offering expenses (excluding sales
commissions, the marketing contribution and the due diligence expense allowance
fee) in excess of 5.5% of the gross proceeds of the Offering (the "Gross
Offering Proceeds") or all organization and offering expenses (including such
selling expenses) which together exceed 15% of Gross Offering Proceeds. As of
September 30, 1996, organizational and offering costs did not exceed the 5.5%
and 15% limitations. The Company anticipates that these costs will not exceed
these limitations upon completion of the Offering, however, any excess amounts
will be reimbursed by the Advisor.
The Advisor and its Affiliates are entitled to reimbursement for salaries and
expenses of employees of the Advisor and its Affiliates relating to the
Offering and to the administration of the Company. Such costs to Affiliates
incurred relating to the Offering were $645,669 and $409,858 as of September
30, 1996 and December 31, 1995, respectively, of which $8,339 and $120,269 were
unpaid as of September 30, 1996 and December 31, 1995, respectively. In
addition, an Affiliate of the Advisor serves as dealer manager of the Offering
and is entitled to receive selling commissions, a marketing contribution and a
due diligence expense allowance fee from the Company in connection with the
Offering. Such amounts incurred were $5,636,828 and $1,719,406 as of September
30, 1996 and December 31, 1995, respectively, of which $637,782 and $102,084
were unpaid as of September 30, 1996 and December 31, 1995, respectively. As
of September 30, 1996, approximately $4,955,000 of these commissions has been
reallowed to soliciting broker/dealers.
-10-
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)
Notes to Financial Statements
(continued)
September 30, 1996
(unaudited)
The Advisor and its Affiliates are entitled to reimbursement for salaries and
expenses of employees of the Advisor and its Affiliates relating to the
administration of the Company. Such costs are included in professional
services to Affiliates, general and administrative expenses to Affiliates and
acquisition costs expensed of which $1,699 remained unpaid at September 30,
1996.
As of September 30, 1996, the Advisor has contributed $200,000 to the capital
of the Company for which it received 20,000 Shares.
During 1994, the Advisor advanced $193,300 to the Company for costs incurred
with the Offering. These advances were repaid with a market rate of interest
to the Advisor in January 1995 with interest ranging from 7.75% to 9.50%. The
principal of $193,300 and interest totaling $3,162 were paid from Gross
Offering Proceeds.
The Advisor may receive an annual Advisor Asset Management Fee of not more than
1% of the Average Invested Assets, paid quarterly. For any year in which the
Company qualifies as a REIT, the Advisor must reimburse the Company: (i) to
the extent that the Advisor Asset Management Fee plus Other Operating Expenses
paid during the previous calendar year exceed 2% of the Company's Average
Invested Assets for that calendar year or 25% of the Company's Net Income for
that calendar year; and (ii) to the extent that Stockholders have not received
an annual Distribution equal to or greater than the 8% Current Return. As of
September 30, 1996, the Company has incurred $242,341 of such fees, all of
which remains unpaid at September 30, 1996. (Defined terms in this paragraph
have the same definitions from the prospectus dated July 24, 1996.)
An Affiliate of the Advisor is entitled to receive Property Management Fees for
management and leasing services. The Company incurred and paid property
management fees of $139,597 and $21,917 for the nine months ended September 30,
1996 and 1995, respectively, all of which has been paid.
-11-
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)
Notes to Financial Statements
(continued)
September 30, 1996
(unaudited)
(3) Commitments and Contingencies
The Company adopted an Independent Director Stock Option Plan which granted
each Independent Director an option to acquire 3,000 Shares as of October 14,
1994 and an additional 500 Shares on the date of each annual stockholders'
meeting commencing with the annual meeting in 1995 if the Independent Director
is a member of the Board on such date. The options for the initial 3,000 Share
grant are exercisable as follows: 1,000 Shares on the date of grant and 1,000
Shares on each of the first and second anniversaries of the date of grant. The
succeeding options are exercisable on the second anniversary of the date of
grant. No options have been exercised.
In addition to sales commissions, certain Soliciting Dealers may receive one
Soliciting Dealer Warrant for each 40 Shares sold by such Soliciting Dealer
during the Offering. The holder of a Soliciting Dealer Warrant will be
entitled to purchase one Share from the Company at a price of $12 during the
period commencing with the first date upon which the Soliciting Dealer Warrants
are issued and ending upon the first to occur of: (i) October 14, 1999; or (ii)
the closing date of an offering of the Shares by the Company. Notwithstanding
the foregoing, no Soliciting Dealer Warrant will be exercisable until one year
from the date of issuance.
On the behalf of the Company, the Advisor is currently exploring the purchase
of additional shopping centers from unaffiliated third parties.
-12-
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)
Notes to Financial Statements
(continued)
September 30, 1996
(unaudited)
(4) Investment Properties
Initial Cost (A)
Net
Buildings Adjustments
Date and to
Acq Land improvements Basis (B)
Single-user Retail
Walgreens/Decatur
Decatur, IL............. 01/95 $ 78,330 1,130,723 -
Zany Brainy
Wheaton, IL............. 07/96 838,000 1,625,202 -
Neighborhood Retail Centers
Eagle Crest Shopping Center
Naperville, IL.......... 03/95 1,878,618 2,938,352 -
Montgomery-Goodyear
Montgomery, IL.......... 09/95 315,000 834,659 (12,692)
Hartford/Naperville Plaza
Naperville, IL.......... 09/95 990,000 3,427,961 (7,847)
Nantucket Square
Schaumburg, IL.......... 09/95 1,908,000 2,354,583 (47,276)
Antioch Plaza
Antioch, IL............. 12/95 268,000 1,488,122 (110,198)
Mundelein Plaza
Mundelein, IL........... 03/96 1,803,000 3,857,560 (17,682)
Regency Point
Lockport, IL............ 04/96 1,000,000 4,720,800 (16,709)
Prospect Heights
Prospect Heights, IL.... 06/96 494,300 1,683,755 (11,989)
Montgomery-Sears
Montgomery, IL.......... 06/96 768,000 2,666,646 (10,817)
------------ ------------ --
- ---------
Subtotal $10,341,248 26,728,363 (235,210)
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)
Notes to Financial Statements
(continued)
September 30, 1996
(unaudited)
(4) Investment Properties Gross amount at which carried
at end of period
Land Buildings
and and
improvements improvements Total
Single-user Retail
Walgreens/Decatur
Decatur, IL............. 78,330 1,130,723 1,209,053
Zany Brainy
Wheaton, IL............. 838,000 1,625,202 2,463,202
Neighborhood Retail Centers
Eagle Crest Shopping Center
Naperville, IL.......... 1,878,618 2,938,352 4,816,970
Montgomery-Goodyear
Montgomery, IL.......... 315,000 821,967 1,136,967
Hartford/Naperville Plaza
Naperville, IL.......... 990,000 3,420,114 4,410,114
Nantucket Square
Schaumburg, IL.......... 1,908,000 2,307,307 4,215,307
Antioch Plaza
Antioch, IL............. 268,000 1,377,924 1,645,924
Mundelein Plaza
Mundelein, IL........... 1,803,000 3,839,878 5,642,878
Regency Point
Lockport, IL............ 1,000,000 4,704,091 5,704,091
Prospect Heights
Prospect Heights, IL.... 494,300 1,671,766 2,166,066
Montgomery-Sears
Montgomery, IL.......... 768,000 2,655,829 3,423,829
------------ ------------ ------------
Subtotal 10,341,248 26,493,153 36,834,401
-13-
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)
Notes to Financial Statements
(continued)
September 30, 1996
(unaudited)
(4) Investment Properties (continued)
Initial Cost (A)
Net
Buildings Adjustments
Date and to
Acq Land improvements Basis (B)
Subtotal $10,341,248 26,728,363 (235,210)
Neighborhood Retail Centers
Salem Square
Countryside, IL......... 08/96 1,735,000 4,446,874 (1,725)
Hawthorn Village
Vernon Hills, IL........ 08/96 2,619,500 5,844,076 -
------------ ------------ --
- ---------
$14,695,748 37,019,313 (236,935)
============ ============ ===
========
(4) Investment Properties (continued)
Gross amount at which carried
at end of period
Land Buildings
and and
improvements improvements Total
Subtotal 10,341,248 26,493,153 36,834,401
Neighborhood Retail Centers
Salem Square
Countryside, IL......... 1,735,000 4,445,149 6,180,149
Hawthorn Village
Vernon Hills, IL........ 2,619,500 5,844,076 8,463,576
------------ ------------ ------------
14,695,748 36,782,378 51,478,126
============ ============ ============
(A) The initial cost to the Company, represents the original purchase price of
the property, including amounts incurred subsequent to acquisition, which
were contemplated at the time the property was acquired.
(B) Adjustments to basis includes additions to investment properties and
payments received under master lease agreements. As part of several
purchases, the Company will receive rent under master lease agreements on
the spaces currently vacant for periods ranging from one to two years or
until the spaces are leased. Generally accepted accounting principles
require that as these payments are received, they be recorded as a
reduction in the purchase price of the properties rather than as rental
income. As of September 30, 1996, the cumulative amount of such
payments was $438,070. (Note 5)
-14-
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)
Notes to Financial Statements
(continued)
September 30, 1996
(unaudited)
(5) Operating Leases
Master Lease Agreements
As part of the purchases of several of the properties, the Company will receive
rent under master lease agreements on some of the spaces currently vacant for
periods ranging from one to two years or until the spaces are leased and
tenants begin paying rent. Generally Accepted Accounting Principles require
that as these payments are received, they be recorded as a reduction in the
purchase price of the properties rather than as rental income.
Master Lease
Square Feet Payments
Covered by Received for
Master Master Lease Nine Months
Lease as of Rate per Ended
Property Expires Sept 30,1996 Square Foot Sept 30,1996
Montgomery-Goodyear 09/96 3,010 $ 4.03 (A) $ 9,090
Hartford/Naperville 09/96 2,200 15.00 59,043
Nantucket Square 09/96 4,500(B) 15.00 69,518
Antioch Plaza 06/97 11,810 12.00 108,481
Mundelein Plaza 12/97 1,686 14.90 17,682
Regency Point 04/97 3,115 14.00 16,709
Prospect Heights 08/96 - - 11,989
Montgomery-Sears 06/98 3,600 12.00
1,500 10.20 10,817
Salem Square 07/97 3,742 5.53 1,725
-----------
$ 305,054
===========
(A) The seller has master leased this space for $12.00 per square foot, which
was the rental rate required under the prior lease. Rent collected from
the current tenant is credited against the master lease.
(B) The Company also received a credit at closing for rent abatement
agreements under current leases.
-15-
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)
Notes to Financial Statements
(continued)
September 30, 1996
(unaudited)
Certain tenant leases contain provisions providing for stepped rent increases.
Generally accepted accounting principles require that rental income be recorded
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 financial statements include $63,007 and $3,656 for
the nine months ended September 30, 1996 and 1995, respectively, of rental
income for the period of occupancy for which stepped rent increases apply and
$75,420 and $12,413 in related accounts receivable as of September 30, 1996
and December 31, 1995, respectively. These amounts will be collected over the
terms of the related leases as scheduled rent payments are made.
(6) Mortgages Payable and Note Payable to Affiliates
Mortgages payable and note payable to Affiliates consist of the following at
September 30, 1996 and December 31, 1995:
1996 1995
---- ----
7.655% first mortgage secured by Walgreens,
Decatur, Illinois, monthly principal and
interest payments of $5,689, with the
remaining balance due May 2004.................. $ 741,467 750,727
First mortgage secured by Regency Point with a
floating interest rate of 180 basis points over
the 30-day LIBOR rate, which rate adjusts
monthly, amortizing over 25 years with remaining
balance due August 2000......................... 4,442,159 -
7.85% first mortgage secured by Eagle Crest,
Naperville, IL, monthly interest only payments
of $15,373, with the balance due October 2003... 2,350,000 -
7.85% first mortgage secured by Nantucket Square,
Schaumburg, IL, monthly interest only payments
of $14,392, with the balance due October 2003... 2,200,000 -
7.85% first mortgage secured by Antioch Plaza,
Antioch, IL, monthly interest only payments
of $5,724, with the balance due October 2003.... 875,000 -
7.85% first mortgage secured by Mundelein Plaza,
Mundelein, IL, monthly interest only payments
of $18,382, with the balance due October 2003... 2,810,000 -
-16-
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)
Notes to Financial Statements
(continued)
September 30, 1996
(unaudited)
1996 1995
---- ----
7.85% first mortgage secured by Montgomery-Goodyear,
Montgomery, IL, monthly interest only payments
of $4,121, with the balance due October 2003.... $ 630,000 -
7.85% first mortgage secured by Montgomery-Sears,
Montgomery, IL, monthly interest only payments
of $10,761, with the balance due August 2003.... 1,645,000 -
7.85% first mortgage secured by Hartford/Naperville
Plaza, Naperville, IL, monthly interest only
payments of $15,111, with the balance due August
2003............................................ 2,310,000 -
------------ ------------
Mortgages payable................................. $18,003,626 750,727
============ ============
9.5% promissory note payable to Inland
Real Estate Investment Corporation, paid
in full on January 9, 1996...................... $ - 360,000
------------ ------------
Note payable to Affiliate......................... $ - 360,000
============ ============
(7) Subsequent Events
During October 1996, the Company paid distributions of $372,337 to the
Stockholders of record at September 30, 1996 on a weighted average basis for
the month.
On October 18, 1996, the Company acquired the Six Corners Plaza Shopping Center
from an unaffiliated third party for a purchase price of $6,000,000 on an all
cash basis.
On November 13, 1996, the Company acquired the Spring Hill Fashion Corner from
an unaffiliated third party for a purchase price of approximately $9,200,000 on
an all cash basis.
-17-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources
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. These forward-
looking statements involve known and unknown risks, uncertainties and other
factors which may cause the Company's actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by these forward-looking statements. These
factors include, among other things, limitations on the area in which the
Company may acquire properties; risks associated with borrowings secured by the
Company's properties; competition for tenants and customers; federal, state or
local regulations; adverse changes in general economic or local conditions;
competition for property acquisitions with third parties that have greater
financial resources than the Company; inability of lessees to meet financial
obligations; uninsured losses; risks of failing to qualify as a REIT; and
potential conflicts of interest between the Company and its affiliates
including the Advisor.
As of December 31, 1994, subscriptions for a total of 189,938.145 Shares had
been received resulting in $1,899,381 in gross offering proceeds, which
includes $200,000 received from the Advisor for 20,000 Shares. Subscriber
funds were held in an interest-bearing escrow account with the Company's
unaffiliated escrow agent until January 3, 1995 when the subscriptions were
accepted and Shares issued by the Company. As of July 24, 1996, the Company
had received subscriptions for a total of 5,000,000 Shares, resulting in Gross
Offering Proceeds of $50,000,000, thereby completing the initial Offering. On
July 24, 1996, the Company commenced a follow-on Offering of 10,000,000 shares
plus an additional 1,000,000 shares available for distribution through the DRP.
As of September 30, 1996, the Company had received subscriptions for a total of
931,147 Shares of the follow-on Offering, resulting in $9,311,472 in Gross
Offering Proceeds. In addition, the Company has received $968,320 in Gross
Offering Proceeds from 106,997 Shares purchased through the DRP. As of
September 30, 1996, the Company has repurchased 6,318 Shares from Stockholders
for an aggregate price of $57,179 through the Shares Repurchase Program.
The Company's capital needs and resources are expected to undergo changes as a
result of the completion of the initial public offering of Shares, the
commencement of the follow-on Offering and the acquisition of properties.
Operating cash flow is expected to increase as these additional properties are
added to the portfolio. Distributions to Stockholders are determined by the
Company's Board of Directors and are dependent on a number of factors,
including the amount of funds available for distribution, the Company's
financial condition, capital expenditures, and the annual distribution required
to maintain REIT status under the Code.
-18-
Management of the Company monitors the various qualification tests the Company
must meet to maintain its status as a real estate investment trust. Large
ownership of the Company's stock is tested upon purchase to determine that no
more than 50% in value of the outstanding stock is owned directly, or
indirectly, by five or fewer persons or entities at any time. Management of
the Company also determines, on a quarterly basis, that the Gross Income, Asset
and Distribution Tests as described in the section of the Prospectus entitled
"Federal Income Tax Considerations--Taxation of the Company--REIT Qualification
Tests" are met. On an ongoing basis, as due diligence is performed by
management of both the Company and the Advisor on potential real estate
purchases or temporary investment of uninvested capital, management of both
entities determines that the income from the new asset will qualify for REIT
purposes. For the year ended December 31, 1995, the Company qualified as a
REIT.
As of September 30, 1996, the Company had acquired thirteen properties
utilizing approximately $33,100,000 of cash and cash equivalents. Cash and
cash equivalents consists of cash and short-term investments. Cash and cash
equivalents at September 30, 1996 and December 31, 1995 were $19,250,977 and
$738,931, respectively. This increase was due to the additional sales proceeds
raised and $12,820,000 in loan proceeds from financing the properties.
Partially offsetting the increase in cash and cash equivalents was the purchase
of seven additional properties in 1996 and the payment of Offering costs.
The Company intends to use cash and cash equivalents to purchase additional
properties, to pay distributions and to pay offering costs. To the extent that
these sources are insufficient to meet the Company's short and long-term
liquidity requirements the Company may rely on financing of one or more of the
properties.
The properties owned by the Company are currently generating sufficient cash
flow to cover operating expenses of the Company plus pay a monthly distribution
of 8% per annum on weighted average shares. Commencing with the fourth quarter
of 1996, the Company intends to pay monthly distributions of 8.3% per annum on
weighted average shares. Distributions declared for the nine months ended
September 30, 1996 were $2,232,004, a portion of which represents a return of
capital for federal income tax purposes. The return of capital portion of the
distributions cannot be determined at this time and will be calculated at year
end.
Cash Flows From Operating Activities
Net cash provided by operating activities increased by approximately $1,862,181
for the nine months ended September 30, 1996 to $2,389,287 from $527,106 for
the same period in 1995. This increase is due primarily to an increase in net
income for the nine months ended September 30, 1996, as compared to the net
income for the nine months ended September 30, 1995. This increase in net
income is due to the purchase of additional properties. As of September 30,
1996, the Company had acquired thirteen properties, as compared to five
properties as of September 30, 1995. This increase is also due to $305,054 of
rental income received under master lease agreements for the nine months ended
September 30, 1996, as compared to no rental income received under master lease
agreements for the nine months ended September 30, 1995.
-19-
Cash Flows From Investing Activities
During the nine months ended September 30, 1996, the Company utilized
$26,729,537 in investing activities for the purchase of seven properties, as
compared to the $5,286,038 utilized in the nine months ended September 30, 1995
for the purchase of five properties.
Cash Flows From Financing Activities
For the nine months ended September 30, 1996, the Company generated $43,020,331
of cash flows from financing activities as compared to $5,413,372 of cash flows
generated from financing activities for the nine months ended September 30,
1995. This increase is due primarily to the increase in proceeds raised from
the Offering of $40,246,259 for the nine months ended September 30, 1996, as
compared to $13,012,136 of Offering proceeds raised for the nine months ended
September 30, 1995. This increase is partially offset by an increase in the
cash used for the payment of Offering costs for the nine months ended September
30, 1996. The increase is also partially offset by an increase in the amount
of distributions paid for the nine months ended September 30, 1996 of
$1,989,199 as compared to the distributions paid for the nine months ended
September 30, 1995 of $188,958. In the third quarter of 1996, the Company
placed financing on seven of the Company's properties and received $12,633,172
in loan proceeds, net of loan costs.
The Advisor has guaranteed payment of all public offering expenses (excluding
selling commissions, the marketing contribution and the due diligence expense
allowance fee) in excess of 5.5% of the Gross Offering Proceeds of the Offering
(the "Gross Offering Proceeds") or all organization and offering expenses
(including such selling expenses) which together exceed 15% of the Gross
Offering Proceeds. As of September 30, 1996, organizational and offering costs
did not exceed this limitation.
The Company provides the following programs to facilitate investment in the
Shares and to provide limited liquidity for Stockholders until such time as a
market for the Shares develops:
The Distribution Reinvestment Program allows Stockholders who purchase Shares
pursuant to the Offering to automatically reinvest distributions by purchasing
additional Shares from the Company. Such purchases will not be subject to
selling commissions or the Marketing Contribution and Due Diligence Expense
Allowance Fee and will be sold at a price of $9.05 per Share. As of September
30, 1996, the Company had received $968,320 through the DRP and had repurchased
6,318 Shares from Stockholders for an aggregate price of $57,179, pursuant to
the terms of the Share Repurchase Program. The remaining $911,141 is available
to the Company for investment in additional properties, maintenance of existing
properties or the repurchase of additional Shares pursuant to the terms of the
Share Repurchase Program.
The Share Repurchase Program will, subject to certain restrictions, provide
existing Stockholders with limited, interim liquidity by enabling them to sell
Shares back to the Company at a price of $9.05 per Share. Shares purchased by
the Company will not be available for resale. As of September 30, 1996, the
Company has repurchased 6,318 Shares.
-20-
Results of Operations
As of September 30, 1996, subscriptions for a total of 6,038,144 Shares were
received from the public resulting in $60,279,792 in Gross Offering Proceeds,
which includes the Advisor's capital contribution of $200,000. As of September
30, 1996, the Company has repurchased 6,318 Shares from Stockholders for an
aggregate price of $57,179 through the Share Repurchase Program.
Funds from operations ("FFO") means net income (computed in accordance with
generally accepted accounting principles), excluding gains (or losses) from
debt restructuring and sales of property, plus depreciation and other non-cash
items. FFO and funds available for distribution for the nine months ended
September 30, 1996 and 1995 are calculated as follows:
1996 1995
---- ----
Net income................................... $ 1,332,939 157,039
Depreciation................................. 561,983 33,909
------------ ------------
Funds from operations(1)................... 1,894,922 190,948
Deferred rent receivable (2)................. (63,007) (3,656)
Rental income received under
Master lease agreements (3)................. 305,054 -
------------ ------------
Funds available for distribution............. $ 2,136,969 187,292
============ ============
(1) FFO does not represent cash generated from operating activities in
accordance with generally accepted accounting principles and is not
necessarily indicative of cash available to fund cash needs. FFO should
not be considered as an alternative to net income as an indicator of the
Company's operating performance or as an alternative to cash flow as a
measure of liquidity. FFO as reported by the Company may not be
comparable to other similarly titled measures of other real estate
companies.
(2) Reference is made to Note (5) of the Notes to Financial Statements of the
Company.
(3) As part of the purchase of some of the properties, the Company will
receive rent under master lease agreements on some of the spaces currently
vacant for periods ranging from one to two years or until the spaces are
leased. Generally accepted accounting principles require that as these
payments are received, they be recorded as a reduction in the purchase
price of the properties rather than as rental income. For the nine months
ended September 30, 1996, the Company has recorded $305,054 of such
payments. Reference is made to Note (5) of the Notes to Financial
Statements of the Company.
-21-
Total income for the three and nine months ended September 30, 1996 and 1995 was
$3,706,605 and $803,508, respectively. This increase was due to the purchase of
additional properties. As of September 30, 1996, the Company had acquired
thirteen properties, as compared to five properties as of September 30, 1995.
The purchase of additional properties also resulted in increases in property
operating expenses to Affiliates and non-affiliates and depreciation expense.
The decrease in mortgage interest expense to Affiliates for the three and nine
months ended September 30, 1996, as compared to the three and nine months ended
September 30, 1995, is due to the payoff of the acquisition financing. The
Company continues to have a mortgage in the principal amount of $741,467, which
bears interest at 7.655%, collateralized by the Walgreens, Decatur property
payable to an Affiliate.
The increase in mortgage interest to non-affiliates for the three and nine
months ended September 30, 1996, as compared to the three and nine months ended
September 30, 1995, is due to the mortgage which was assumed as part of the
purchase of Regency Point. During the third quarter of 1996, the Company
obtained $12,820,000 of financing from an unaffiliated lender, on seven
properties previously acquired.
For the nine months ended September 30, 1995, the Company had not paid an annual
distribution equal to or greater than the 8% Current Return, and accordingly, no
advisor asset management fee was accrued. For the nine months ended September
30, 1996, the Company has paid an annual distribution equal to the 8% Current
Return and therefore has accrued the advisor asset management fee.
During 1994, the Advisor advanced $193,300 to the Company for costs incurred
with the Offering. These advances were repaid with a market rate of interest to
the Advisor in January 1995 with interest ranging from 7.75% to 9.50%.
Interest income is the result of cash and cash equivalents being invested in
short-term investments until a property is purchased.
The increases in professional services to Affiliates and non-affiliates and
general and administrative expenses to Affiliates and non-affiliates for the
three and nine months ended September 30, 1996, as compared to the three and
nine months ended September 30, 1995, is due to the Company entering the
operational stage.
-22-
The following is a list of approximate physical occupancy levels for the
Company's investment properties as of the end of each quarter during 1995 and
1996. N/A indicates the property was not owned by the Company at the end of the
quarter.
1995 1996
at at at at at at at at
Properties 03/31 06/30 09/30 12/31 03/31 06/30 09/30 12/31
Walgreens 100% 100% 100% 100% 100% 100% 100%
Decatur, Illinois
Eagle Crest 100% 100% 100% 100% 100% 100% 100%
Naperville, Illinois
Montgomery-Goodyear N/A N/A 100% 100% 100% 100% 100%
Montgomery, Illinois
Hartford/Naperville Plaza N/A N/A 48% 90% 100% 100% 100%
Naperville, Illinois
Nantucket Square N/A N/A 92% 81% 81% 81% 94% *
Schaumburg, Illinois
Antioch Plaza N/A N/A N/A 33% 49% 49% 49% *
Antioch, Illinois
Mundelein Plaza N/A N/A N/A N/A N/A 100% 100%
Mundelein, IL
Regency Point N/A N/A N/A N/A N/A 97% 97%
Lockport, IL
Prospect Heights N/A N/A N/A N/A N/A 78% 100%
Prospect Heights, IL
Montgomery-Sears N/A N/A N/A N/A N/A 85% 85% *
Montgomery, IL
Zany Brainy N/A N/A N/A N/A N/A N/A 100%
Wheaton, IL
Salem Square N/A N/A N/A N/A N/A N/A 97% *
Countryside, IL
Hawthorn Village N/A N/A N/A N/A N/A N/A 99%
Vernon Hills, IL
* As part of the purchase of these properties the Company receives rent under
master lease agreements on the space which was vacant at the time of the
purchase, resulting in 100% economical occupancy at September 30, 1996 for
Nantucket Square and Antioch Plaza and 98% economic occupancy for Salem
Square. See footnote (5) to the Company's financial statement.
As of September 30, 1996 two leases totaling 3,447 square feet were executed at
Antioch Plaza. Tenants are expected to begin occupancy in the fourth quarter
1996.
-23-
Subsequent Events
On October 18,1996, the Company acquired the Six Corners Plaza Shopping Center
from an unaffiliated third party for a purchase price of $6,000,000 on an all
cash basis.
On November 13, 1996, the Company acquired the Spring Hill Fashion Corner from
an unaffiliated third party for a purchase price of approximately $9,200,000 on
an all cash basis.
On the behalf of the Company, the Advisor is currently exploring the purchase of
additional shopping centers from unaffiliated third parties.
PART II - Other Information
Items 1 through 5 are omitted because of the absence of conditions under which
they are required.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: Required by the Securities and Exchange Commission
Regulations S-K. Item 601. The following documents are incorporated by
reference:
Registration Statement on Form S-11 and related exhibits, as amended,
File No. 33-79012, filed under the Securities Act of 1933.
(b) Report on Form 8-K dated August 2, 1996
Item 2. Acquisition or Disposition of Assets
Item 5. Other Events
Item 7. Financial Statements and Exhibits
Report on Form 8-K dated August 15, 1996
Item 2. Acquisition or Disposition of Assets
Item 5. Other Events
Item 7. Financial Statements and Exhibits
-24-
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
Chief Executive Officer
Date: November 13, 1996
/S/ KELLY TUCEK
By: Kelly Tucek
Chief Financial and Accounting Officer
Date: November 13, 1996
-25-
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