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Equity One, Inc. (NYSE:EQY)

Q4 2012 Earnings Call

February 21, 2013 9:00 am ET

Executives

Laura Devlin - Director of Marketing & Executive Administration

Jeff Olson - CEO

Tom Caputo - President

Mark Langer - CFO

Analysts

Paul Morgan - Morgan Stanley

Christy McElroy - UBS

Samit Parikh - ISI

Vincent Chao - Deutsche Bank

Cedrik Lachance - Green Street Advisors

Michael Mueller - JPMorgan

Rich Moore - RBC

Quentin Velleley - Citigroup

Michael Bilerman - Citigroup

Operator

Good morning and welcome to the Equity One Q4 2012 Earnings Call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Ms. Laura Devlin, Director of Marketing and Executive Administration. Please go ahead, ma'am.

Laura Devlin

Thank you, Marin. Good morning everyone, and thank you for joining us. With me on today's call are Jeff Olson, Chief Executive Officer; Tom Caputo, our President; and Mark Langer, Chief Financial Officer.

Before we get started I'd like to remind everyone that some of our statements today may be forward-looking in nature. Although we believe that such statements are based upon reasonable assumptions, you should assume that those statements are subject to risks and uncertainties, and actual results may differ materially from the forward-looking statements.

Statements made during the call are made as of the date of this call. Facts and circumstances may change subsequent to this date, which may limit the relevance and accuracy of certain information that is discussed. Additional information about factors and uncertainties that could cause actual results to differ from projection may be found in our earnings release and our filings with the Securities and Exchange Commission.

Finally, please note that on today's call, we will be discussing non-GAAP financial measures including FFO. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can also be found in our earnings release. Both the earnings release and our quarterly financial supplement are available on our website at www.equityone.net.

At this time, I would like to turn the call over to our CEO, Jeff Olson.

Jeff Olson

Great. Thank you, Laura, and good morning everyone. Thank you for joining us for our 2012 year-end conference call. We had a very productive year, posting better than expected earnings growth and strong operating results.

Our recurring FFO amounted to $1.14 a share as compared to $1.12 a share last year, and exceeding our original guidance of $1.04 to $1.12 a share. This growth was primarily driven by improved operating fundamentals, accretive returns on our acquisitions, development and redevelopment projects, offset by the dilutive impact of selling approximately $800 million of our non-core assets since 2011.

Same property NOI increased 3.3% for the year fueled by higher occupancy and rents and lower bad debt. Occupancy ended the year at 92.1% up 140 basis points over prior year and up 50 basis points on a same property basis.

During 2012, we signed almost 500 new leases, renewals, and options, at an average rent spread of 7%. We anticipate our positive rent spreads will continue, as many of our properties contain anchored leases that are well below market with short-term lease expirations.

Our development and redevelopment program continues to create significant value. We have 12 projects in our pipeline totaling $262 million in cost, with an expected unleverage yield of approximately 10%. Our largest project is The Gallery at Westbury Plaza, our flagship shopping center located at Nassau County, New York, which opened last August. We are now 75% leased, with about 60% of the stores opened for business including The Container Store, Trader Joe's, Saks Off Fifth, Bloomingdale's Outlet, Nordstrom Rack, Old Navy, Ulta, and Shake Shack.

We expect to open Gap Outlet, Banana Republic Outlet, Lane Bryant, Orvis, and a number of small shop tenants later this winter. Many of our retailers are reporting sales that are at or near the top of their respective chains, an incredible feet for a brand new shopping center.

Other projects in our pipeline include Serramonte Center, where we are building a new 83,000 square foot store for Dick's Sporting Goods. Broadway Plaza, a ground up 131,000 square foot big box center in the Bronx, and a number of smaller scale expansions. We continue to purify our portfolio through capital recycling.

During the year, we acquired or placed under contract to acquire 11 properties for $570 million, including two properties in San Francisco, two properties in New York City, one property in Boston, through our New York common joint venture, three properties in Fairfield County, Connecticut, and a major redevelopment site in Bethesda, Maryland.

We also sold or placed under contract to sell 19 properties for $191 million of our non-core assets, including the announced transactions in our press release.

Our balance sheet is in great shape. We ended the year with a debt to total capitalization ratio of 37%, and a weighted average term to maturity of approximately six years, conservative by almost any standard. Moody's recognized our balance sheet improvements with an upgrade of our unsecured credit rating to Baa2.

And while 2012 was a great year in many respects, it was the result of bold decisions made in 2008, 2009, and 2010, to transform our company from a southeastern owner of commodity type shopping centers, to become a major owner, a dominant location in New York City, San Francisco, Boston, Los Angeles, and Washington DC, in addition to our already strong presence in South Florida and Atlanta. Our properties in the DC to Boston corridor now represent 28% of our fair value, up from 7% in 2008. South Florida accounts for 28% of our value, and San Francisco and Los Angeles represent 22% of our value.

Our transformation has materially improved our portfolio metrics, most notably demographics and tenant sales. Our average population density within a 3-mile ring of our centers has more than doubled since 2008 to a 175,000 people. According to Green Street Advisors, this ranks us first, among the seven largest REITs in our sector. The average household income of our centers is $93,000 per annum, also a very strong number.

But most telling of all is the sales performance of our tenants. Our average grocery store is generating sales in excess of $550 a foot, which I believe also places us first among our peers at least for those who report. Post our plan dispositions; we have visibility to increase this number to $600 a foot. Taking together, these statistics demonstrate how much our portfolio quality has improved in a relatively short time period, and without incurring significant dilution.

While the quality of our real estate and the strength of our balance sheet are certainly important measures, ultimately, our report card comes from the long-term growth in our stock price. And over the past 15 years, which is our life as a public company, Equity One stock has generated an average annual return of 13%, as compared to the S&P 500 of 4% in our five most closely comparable peers of 10%. This is the most important statistic of all and one we hope to continue.

We appreciate your interest in our company. We have a number of employees dialed into the call today. I'd like to thank them for their hard work and dedication, and also congratulate them for a great year.

Tom and Mark will now walk you through more details on our operations, investments and financial results. Tom?

Tom Caputo

Thank, Jeff. This morning I will focus my remarks on operating fundamentals and our development and investment activities. We are very pleased with how our portfolio is performing on our most important metrics same property NOI, leasing spreads, and tenant sales.

Same property NOI increased by 3.5% in the quarter and 3.3% for the year. NOI growth has been driven by increases in rents, occupancy, and lower expenses. The West Coast continues to generate the highest NOI growth for the company.

Our largest asset Serramonte Center continues to exceed our expectations. In 2012, Serramonte generated $16.6 million in net operating income, up 5% over 2011, and up 24% since we announced the CapCo acquisition in 2010.

Comparable store sales increased 5.5% during 2012 to $460 per square foot for space under 10,000 square feet. We expect NOI and tenant sales at Serramonte will continue to increase as we upgrade the tenant mix and redevelop the property.

Phase one of our redevelopment plan, which includes the addition of Dick's Sporting Goods should be completed in the second quarter of 2014. We are already working on phases two and three, which we expect will include approximately 100,000 square feet of additional retail space and a residential component.

2012 was a very strong year for our leasing team. During the year, we executed almost 500 new leases and renewals at an average positive rent spread of 7%. Big box demand is strong as only 10% of the 339 boxes in our core portfolio were vacant at the end of 2012.

We have recently executed leases or negotiating leases with tenants including Ross, Trader Joe's, Fresh Market, Publix, HomeGoods, LA Fitness, and Academy Sports for various boxes in our core and redevelopment portfolios.

Shop demand is also picking up as evidenced by our shop occupancy level, which increased to 81% up 210 basis points as compared to prior year. The increase is shop occupancy is attributable to both improving fundamentals, and the impact of our portfolio upgrade. Demand is the strongest from restaurants, health and fitness users, beauty salons, and financial services tenants.

The good news is the quality of our new shop tenants is higher since many of the tenants are either national, regional, or franchise operators. Our current leasing pipeline is strong and includes over 70 new leases and renewals for approximately 250,000 square feet with double-digit average positive rent spreads.

Overall, occupancy increased 20 basis points during the quarter to 92.1% and increased 140 basis points year-over-year. We currently have signed leases with 34 tenants who are in the process of building out of approximately 150,000 square feet of space, which will generate approximately $2.6 million in minimum rent when the tenants open for business. These figures do not include any income from the leases in our development or redevelopment pipeline.

Tenant sales for the majority of our portfolio continue to improve. We believe the improved sales are a reflection of an improving economy and our upgraded portfolio. As Jeff noted in his remarks, our supermarket anchors are exceptionally productive with average sales in excess of $550 per square foot.

Our development and redevelopment program continues to gain momentum and is beginning to create significant value in terms of returns and improving the quality of our asset base.

We have approximately $260 million in our pipeline, which we expect will yield approximately 10% on an unleveraged basis. We're making good progress on the redevelopment of Lake Mary Shopping Center in Orlando. This 340,000 square foot community center was formally anchored by Albertsons and K-Mart, both anchors vacated in the third quarter of 2012.

We have executed a lease with Ross Dress for Less to back to approximately half the Albertsons stocks and we're finalizing negotiations with a national supermarket for the balance of the box.

We have strong interest for multiple tenants to occupy the K-Mart box, which is dark and paying. We are close to finishing the first of three phases of the redevelopment of Boca Village Square. This redevelopment was initiated to reconfigure a very difficult layout and relocate CDS from an in line store to a freestanding facility. Demand for space in the reconfigured center has been very strong at rents, which exceed our initial pro forma.

In the Bronx, we are in active discussions with a number of big box users, including supermarkets, off-price retailers, sporting goods retailers, and fitness operators. We remain focused on maintaining a development pipeline, which should ultimately deliver approximately $150 million per year in activity at 8% to 10% unlevered yields.

We had a relatively quiet quarter on the acquisition front for the core portfolio. We acquired our fifth New York City property located at 1225-1239 2nd Avenue. The property spans the entire block front between 64th and 65th street on the Westside of 2nd Avenue. EVs in 07/11 occupy over 90% of the property. Both tenants have recently executed long-term leases, which include very attractive rent increases over each tenant's term.

We acquired two small properties adjacent to two of our existing properties, which we believe will enhance the value of our existing sites. 200 Potrero Avenue is a 30,000 square foot building located immediately adjacent to our Potrero Shopping Center in San Francisco. We purchased this property to expand our existing footprint and believe the addition of this building has the potential to help us advance our long-term redevelopment plans for the site and at worst provides us the opportunity to expand our existing center with a complimentary use.

We also purchased a small 7,500 square foot parcel of land adjacent to our Broadway Development site. The parcel is located on the hard corner of 230th Street in Broadway. This highly visible parcel will be incorporated into the overall project.

During the quarter, our joint venture with New York Common acquired Northborough Crossing a 583,000 square foot shopping center located west of Boston and Northborough, Massachusetts. The purchase price was $128.4 million. The center is anchored by New England's first Wegmans supermarket as well as Kohl's, BJ's, TJ Maxx, PetSmart and Michaels. Seven of the tenants in the shopping center including BJ's and TJ Maxx relocated from inferior sites in the market to Northborough Crossing. Our investment in Northborough was sourced off market. We expect to grow our joint venture platform with New York Common and are actively assessing new acquisition opportunities.

As Jeff noted, our disposition activity accelerated over the past few months. Since our last call, we sold nine shopping centers, which contain a total of 725,000 square feet for a total price of $90.3 million at an approximate cap rate of 7%. We are under contract to sell five additional properties for $38.6 million at a cap rate in the mid 7% range. We are currently marketing for sale approximately $150 million of our non-core assets. We have divided the assets into pools ranging from one to five properties to achieve maximum pricing. The sale of smaller assets in secondary and tertiary markets will materially increase the quality of our remaining portfolio, which is located in gateway cities with high demand for retail space.

And now I'd like to turn the call over to our CFO Mark Langer for his comments about our financial results.

Mark Langer

Thank you, Tom. Good morning. As Jeff mentioned in his remarks 2012 was a year in which fundamental progress was seen across the board, as our focus on capital recycling initiatives produced better than expected results.

Our full year recurring FFO increased from $1.12 per diluted share to $1.14 per diluted share despite divesting over $700 million of non-core assets in 2011, and additional $70 million during 2012, and issuing 4.1 million new shares of common equity during the third quarter. These results were driven by the improved leasing trends Tom just described, as well as the substantially improved asset base that is better diversified, better located with more favorable demographics, and that has higher barriers to entry making rent growth more achievable.

This morning I will focus on three topics. First, our results for the quarter, second, our balance sheet, and third, some comments regarding our guidance for 2013.

Starting with our results for the quarter. Our recurring FFO this quarter was $0.30 per diluted share. This adjust reported FFO for approximately $30 million of debt extinguishment charges, $1.4 million of transaction costs on acquisitions and dispositions, and $1.3 million of non-cash impairments pertaining to goodwill and two land parcels. Because the debt extinguishment charges reduced the reported level of FFO to $0.03 per diluted share, the dividend equivalent and share adjustment applicable to units held by Liberty International were anti dilutive for purposes of computing core FFO, and are therefore shown separately as an add back within the recurring FFO computation. Debt extinguishment charges of $29.5 million were recognized on the redemption of our $250 million 6.25% bonds and included approximately $1.75 million for the write-off of unamortized debt issue and debt discount costs. We also recognized approximately $730,000 of extinguishment costs pertaining to the early defeasance of the mortgage on Grassland Crossing, which was sold in January.

We've recorded impairments on income producing properties of approximately $18.3 million, which pertained to certain lower tier assets that we no longer expect to hold on a long-term basis.

Our same property NOI increased 3.5% or about $1.4 million for the quarter as compared to 2011. About $1 million of the net improvement came from the revenue side and was primarily due to increases in minimum rents from commencements and contractual bonds. The remaining $450,000 was due to lower landlord costs, primarily due to reduced legal fees associated with lower levels of tenant fallout, lower levels of repairs and maintenance costs, and from the timing of certain property level marketing expenses.

Turning to the balance sheet. The most significant activity that occurred during the quarter was our previously announced redemption of our 2014 bonds that carried interest at 6.25%. We issued $300 million of 10-year unsecured senior bonds with a coupon of 3.75% to redeem these and to cover the defeasance cost.

In addition to improving our coverage levels moving forward, this financing improved our year-end weighted average maturity on total debt to 5.7 years up from 4.4 years at the end of 2011. As a result of the new bond issue, our weighted average interest rate on total debt dropped significantly, declining from 6.1% at December 31st, 2011 to 5.1% at the end of 2012.

Our net debt to adjusted EBITDA was up slightly from Q3 of this year to 7.0 times as our line of credit balance increased $110 million, primarily due to the acquisition activity we had during the quarter. We expect this number to get back down to 6.5 times by year-end as disposition proceeds are realized and the revolver is paid down.

During the quarter, we transferred approximately $53 million of CIP costs to income producing assets, which represented the portion of construction costs for the gallery at Westbury, based on the amount of square footage for which rents had commenced.

During the fourth quarter, the gallery's cash NOI contribution was approximately $1.8 million. Our 2013 budget assumes that this will grow to approximately $8.5 million to $9 million of cash NOI for the year. We expect to complete the balance of our leasing over the next six months on this asset, with tenants opening later this year and into 2014. From a cash standpoint, we expect stabilization will occur in mid 2014.

We were very pleased to see the upgrade in our unsecured credit rating from Moody's to Baa2, as the execution of our strategic plan has produced meaningful improvements in the quality and stability of our cash flows. More than 78% of our cash NOI is now unencumbered. And our adjusted EBITDA to interest expense has improved to 2.8 times versus 2.6 times during 2011. We will continue to remain focused on all of our balance sheet metrics and intent to keep our total leverage below 40%.

Turning to guidance. We introduced recurring FFO guidance of $1.18 to $1.22 per diluted share, which excludes debt extinguishment gains and losses, impartment charges, transaction costs, and other one-time items.

The assumptions underlying our guidance are as follows. Same property NOI growth is 2% to 3%. Same property occupancy growth of 50 to 100 basis points, which we expect to be weighted more towards the lighter portion of the year. Core acquisition activity of $100 million to $200 million, which we expect to occur primarily in the second half of the year, and for which we assume 40% leverage. JV acquisition activity of $100 million to $200 million, and total disposition activity of $300 million, which includes the activity referenced in our press release for Q1 sales, as well as assets under contract.

Our budget assumes we will close approximately $165 million of dispositions in Q1 and through Q3, and the remaining $135 million in Q4. Of course it is possible that the actual activity varies from this assumption, as we will execute as market conditions, pricing, and buyer interest align.

Other assumptions to note include financing activities. We've assumed that our $45 million mezzanine loan investment is repaid in July on its stated maturity date, although the borrower has the option to renew for three successive one-year periods. In addition, we only have $30 million of mortgage debt maturating in 2013, which we have assumed will be retired rather than refinanced. There is very little mortgage debt on properties that we intent to sell during the year, currently estimated of less than $15 million. So, there will likely be no material impact on mortgage debt attributable to these sales.

In terms of development and redevelopment activities, we currently expect to spend between $50 million to $60 million during 2013, the bulk of which relates to Broadway Plaza and Serramonte. Proceeds from assets sales are assumed to be used to fund developments and redevelopments, as well as to pay down debt.

In terms of G&A, we've taken a hard look at all elements of our cost structure, with a goal of making long-term adjustments to ensure that our operating costs are more efficiently in line with our asset base.

It is a bit early to provide specifics beyond 2013. But I can assure you we're assessing all aspects of our operating platform and the associated costs of running it. For 2013, we expect our recurring G&A, excluding transaction costs to be in the range of $38 million to $39 million.

In summary, our strategic plan remains grounded in our belief that long-term growth and earnings and NEV is best achieved by maintaining a prudent capital allocation philosophy that preserves a conservative balance sheet and that takes advantage of opportunistic cycles that occur in both exuberant and depressed times of asset level pricing. This means maintaining a lot of liquidity and having access to low cost capital, so that we can opportunistically buy, develop, and redevelop assets in an accretive manner, while exposing the non-core asset that do not fit our longer-term ownership objectives.

We are pleased to see that the successful execution of this strategy has yielded significant benefits as evidenced by our 2012 results. We expect continued improvement in the years ahead, as many of the acquisitions we have made during the past three years will continue to give back to us in the form of increasing rents and redevelopment opportunities.

I'd now like to turn the call over to the operator for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question is Paul Morgan from Morgan Stanley. Please go ahead.

Jeff Olson

Okay, Paul, we're having a hard time hearing you.

Paul Morgan - Morgan Stanley

You hear me better now?

Jeff Olson

Yeah. I'm sorry, Paul, we can't hear you.

Operator

Should I proceed to the next question, sir?

Jeff Olson

Yes, please. Sorry about that, Paul. May be you dial in again.

Operator

Our next question is Christy McElroy, UBS. Please go ahead.

Christy McElroy - UBS

Just have a sort of a multipart question on small shop occupancy. I'm wondering with the rate at 81% now, can you sort of discuss how much of the 50 to 100 basis points in total occupancy outside you expect this year will come from small shop versus anchor. Where -- at what level do you expect small shop occupancy to end 2013 and how much of that upside in the small shop occupancy number will come from leasing versus non-core asset sales? Does that make sense?

Mark Langer

Yeah, that makes a lot of sense. On a same property basis, which is really what we're talking about, so let's exclude the asset sales. We think our small shop occupancy needs to go up to that 83% to 84%. And there would be no material change in terms of anchor occupancy in order to reach our overall occupancy objectives.

Christy McElroy - UBS

And is that 83% to 84%, is that by year-end 2013 or is that sort of over the next two years?

Mark Langer

Year-end '13.

Christy McElroy - UBS

Year-end '13. Okay. And then regarding your tenant sales Jeff, you talked about getting to 600 per square foot or north over there following targeted non-core asset sales, is that something that would be achieved after the 150 million that Tom spoke about or are there sort of additional non-core asset sales that would get you to that target?

Jeff Olson

I'd tell it's after our two-year program of asset sales, which is as you may recall on last quarter we talked about $300 million done in 2013 and then another $150 million to complete in 2014. So I'm really looking at it on a pro forma basis.

Christy McElroy - UBS

And then lastly Mark, wondering if you give a little bit more detail on the lease up of Westbury, sorry, if I missed this but what is the project yielding currently at the 60% commenced occupancy. How should that escalate throughout 2013 and are you expensing all of the interest as of day one or are you sort of laddering the changeover from capitalization to expensing?

Mark Langer

Yeah, the interest expense Christy, does get peeled back as the project gets put into service so it is pro-rated out. And as I said in my comments the NOI escalation that we had from Q4 where we were running closer to about $1.8 million in NOI is going to ramp up in 2013 to get to between $8 million and $9 million of NOI in '13 and then ramps up again in '14 when we expect kind of all full paying rents to kick in, call it by mid '14 so that your quarterly run rate in '14 will be around $3.5, $3.6 or so million.

Operator

Our next question is Samit Parikh from ISI. Please go ahead.

Samit Parikh - ISI

Jeff, you did a great job of talking about how the portfolio has really changed over the past two years or so. One of the questions I have is how has that been reflected in sort of the embedded lease escalator profile of your portfolio. How much of that really improved from the transformation?

Jeff Olson

You say lease escalator, are you referring to NOI growth, rent growth, Samit.

Samit Parikh - ISI

I'm implying basically rent bumps in your in place leases. So as you've stronger properties, which presumably should have better lease bumps annual escalators in the lease profile?

Jeff Olson

It's a good question. I'm certain that there are higher but I don't know the exact number Samit. But overall on our new assets I would expect that our overall NOI growth is going to be closer to 3% than our historical growth rate of 2% on more commodity oriented centers and that really is coming from a combination of contractual rent increases and then also below market leases particularly on some of the larger anchor spaces that come due over the next five years.

Samit Parikh - ISI

Are you saying 3% on the current portfolio as it is today?

Jeff Olson

I'd say I mean again we guided to 2% to 3% for '13 specifically I think for our newer assets you're going to be at the higher end of that, and for some of our legacy assets you're going to be at the lower end of that.

Samit Parikh - ISI

And then last question really has to do with Potrero Center. So now you bought some adjacent assets over there and may be something goes in your favor regarding the Office Depo. I was just seeing how do you think anything can work where you could more quickly trigger sort of a development there and I don't know if you have any comments on very preliminary, speculative what do you think? You think you can spend there?

Jeff Olson

Yeah, we certainly hope so and Jeff Mooallem is spending a lot of his time with the city and with certain tenants coming up with a redevelopment plan. But at this point we're not willing to put anything out there, but we bought the property with an intent to densify that site it's the perfect site to densify not only for retail but for also residential. So we are exploring lots of options at this point.

Operator

Our next question is Vincent Chao, Deutsche Bank. Please go ahead

Vincent Chao - Deutsche Bank

I just wanted to go back to the Northborough Crossing. Just wondering if you could provide a little bit more color on how that deal came about and if there was any what the motivation for the seller was here and I don't recall but was there any sort of any option embedded in the existing mortgage that was outstanding to that center?

Jeff Olson

The center is about a year old. We have a close relationship with the developer of the property. They were looking tax efficient transaction and we structured one by creating a mortgage for a period of time and then actually purchasing the property later.

Vincent Chao - Deutsche Bank

And then just may be more broadly on the JV acquisition expectation just want to clarify the $100 to $300 million, is that your pro-rata share or is that the total?

Mark Langer

It's the total, total value of acquisitions.

Vincent Chao - Deutsche Bank

Okay. And what's driving sort of the increase in activity on the JV side there is that more coming from you guys or is that more from New York Commons?

Jeff Olson

I think it's a combination of both. The venture was formed a couple of years ago when cap rates were at a different level and as cap rates compressed it became more difficult for the venture to purchase property. So we went back to the drawing boards and we did our yield totals.

Vincent Chao - Deutsche Bank

Okay. So can you discuss what the change was there?

Jeff Olson

I think the obviously if cap rates compress, the hurdles went lower that's the best answer I can give you.

Tom Caputo

We can't be specific on the hurdles for that venture for confidentiality purposes. But we believe that they're market rate hurdles at this point, which will allow us to transact currently.

Operator

Our next question Cedrik Lachance, Green Street Advisors. Please go ahead.

Cedrik Lachance - Green Street Advisors

Thank you. Looking on your property operating expenses for the same property report on page 9, the fourth quarter expenses increased quite a bit realized but for the year overall your expenses were about flat. What generated this increase in expense in the fourth quarter?

Jeff Olson

Really Cedrik on the operating expense side you've to go back in 4Q '11 you may recall we had about a $1 million, $1.3 million three downward adjustment on the property tax side from a true-up and accrual, and so it had the effect of lowering the amount in 4Q '11 that did not occur this year. The number that you're seeing in 4Q '12 is a better reflection of the run rate.

Cedrik Lachance - Green Street Advisors

And when I look at your guidance for 2013, on the same property NOI growth, what are the embedded revenue and expense growth line items there?

Mark Langer

I mean, the spreads as we've said in terms of rent spreads, they vary quite a bit from us as you know, Cedrik anywhere from flat up 10% because of the volatility on a quarter-to-quarter basis. And on the operating expense side they're very flat to small 1% or 2% for some of the cam items and very much flat across for insurance and tax.

Cedrik Lachance - Green Street Advisors

Thinking about the Office Depot OfficeMax, possible merger, what's the impact to your portfolio and what do you think you can do with some of those boxes if they come back to you?

Jeff Olson

Well, our exposure to OfficeMax and to Office Depot is pretty minimal. We have eight Office Depot stores and one OfficeMax stores for about 225,000 square feet and $3.6 million in rent. One of those stores the net average is about to -- to about $16 a foot. We have one store that's in a very, very infill market, paying a very high rent. So, if you scrape that one out, it knocks it down to about $13 a foot. The spacing between the Office Depot stores and the OfficeMax stores is very good, and our nine stores that where we have exposure. We expect there could be two to three that might get consolidated. And we're very comfortable with those two to three. In fact, we're very comfortable with all the nine stores.

Cedrik Lachance - Green Street Advisors

And then, perhaps final question in regards to cap rates and the composition of the buyer pool for the assets that you've for dispositions. Any changes in terms of who is interested in those assets, the type of buyer, and any changes in your cap rate expectations versus the six months ago?

Jeff Olson

I think the interest in our second and -- secondary and tertiary markets has been filled truly by interest rates, a lot of it's by interest rates. Interest rates continue to be very low. And I think you see a mix depending on what level of quality we're talking about. If you're in the seven cap range, you're talking about someone who probably have some fairly large portfolio and a substantial capital to invest in various funds. And when you get into the mid sevens or eights you might be talking about private investors. So it really hasn't changed. We have a pretty good idea who our buyer is going to be for each of the assets that we put out there with various intermediaries we're using. So, we don't -- we haven't seen much change in the landscape at all, although the interest is quite high and most everything that we have out there.

Mark Langer

And I'd just add, I mean your question on what's happened over the past six months. I think really we have seen some compression in cap rates across the board that's benefiting us in terms of pricing. So, I do think you've seen some compression.

Operator

Our next question is from Michael Mueller, JP Morgan. Please go ahead.

Michael Mueller - JPMorgan

Hi. Going back to the JV acquisitions, I'm wondering if you can talk a little bit about what you look at for that venture compared to what you look at for the core and how you figure out what goes where?

Jeff Olson

I think it's very clearly our venture within New York Common; we're looking for very well located properties, stabilized assets, and most importantly, reliable cash flow for New York Commons pensioners and beneficiaries.

Michael Mueller - JPMorgan

Okay. And for the core?

Jeff Olson

And in the core we're really focused on assets that will be accretive to our NOI. So we're looking at 3% to 4% growers and in order to get there you may have to assume that you're going to either expand, redevelop the center or put yourself below market rent lease that might have a maturity date within a five-year time horizon.

In addition to that Mike, there had been a number of acquisitions that we've made in the core and Bethesda is probably a great example of it in addition to the two assets that we bought in Southern Connecticut that required some form of structuring. And that may have been buying a piece of the property at the beginning with an option to purchase the rest. It may be putting a mortgage on the property in the interim, with again an option to purchase it. So those types of transactions we're also looking to add to our core.

Michael Mueller - JPMorgan

Okay, and speaking of mortgage on the property. The Bethesda acquisition where you put a mortgage on the property and you can -- you're effectively going to buy it by I think its January 2014. When do you think that will actually happen? Will it be in January next year? Could it be sooner?

Jeff Olson

I mean, we hope its sooner, Mike. But at this point there's nothing incremental to add. But we're excited to buy the property. I was just out there this past weekend and I mean it's a very exciting redevelopment opportunity. In many ways Mike, this reminds me of Serramonte, because it's an old large piece of underutilized real estate with incredible demographics and severe supply constraints. But like Serramonte, its only, had one owner since the developer built it and that owner had never expanded the property.

So that's as unique in many ways. It was built in 1959 and if you look at the center today it looks like it's from 1959. I think you could do a back to the future movie there. It's anchored by a giant food with a 50-year lease that expires in 2019 and they pay $2 bucks a foot in rent. By way of comparison we've some other grocers in our portfolio that are doing similar sales volumes that are paying us in the 40s. And in addition to that below market lease there's a vacant 3.3 acre parcel that's never been developed. So there's a lot for us to do with that center.

Michael Mueller - JPMorgan

Okay. And last question shop occupancy 81%, I think you said 83% to 84% by year-end. If you would just kind of go through and think the same store and strip out all the stuff that you're selling this year and selling next year, kind of what -- how does that 81% number get reset? Is it in the mid 80s?

Mark Langer

Actually, I don't know. I can tell you that 81% to the 83% to 84% apples-to-apples. I feel good about that comparison. But I don't have the numbers post-dispositions and it really will depend on which properties we sell as well.

Operator

Our next question is Rich Moore, RBC. Please go ahead.

Rich Moore - RBC

Jeff, on the whole street retail kind of thing that has gotten very popular not just for you guys but with others as well. What are you thinking there, I mean, is that something that's going to continue kind of trend to find these kinds of properties and would you guys see beyond New York, I mean, are there interesting opportunities as well in that category?

Jeff Olson

We'd like New York a lot just because there's a lot of inventory in this market and it's old. You can purchase a lot of locations here with the low market leases as well. The retail condo that we purchased this past quarter for I think it was $27.5 million, we're expecting there on a center that's fully leased, we're expecting 4.2% NOI growth over the next 10 years simply from contractual rent increases. So we like that a lot.

I would not expect that we're going to go beyond New York in a major way for street retail. But I don't want to shut that door down either. But nonetheless at this point I'd say our focus is more on New York in that regard.

Rich Moore - RBC

So you think there's good opportunity still in New York?

Jeff Olson

We do.

Rich Moore - RBC

And then, with the lower cap rate environment are you finding it harder I guess to buy in the core and maybe that's part of the reason for the ramp up in the JV side of things?

Jeff Olson

It is harder and to us it's not as transformational as it had been in the past. So unless we can acquire properties at a much higher return than our cost of capital, I don't see a whole lot of benefit in new acquisitions at this point if they're stabilized Rich. But to the extent that we can find properties that have some type of value creation component to them like Bethesda, like Potrero among others, I think that's when you'll see us pull the trigger for the core.

Rich Moore - RBC

And the last thing I had was the land impairment. I assume that's just some miscellaneous leftover stuff that you're going to sell is that kind of what that is?

Jeff Olson

That's correct, Rich. It's either small parcels, and you could tell from just the magnitude of the impairment, nothing that was actively under development or anything just miscellaneous parcels.

Operator

(Operator Instructions) Our next question is from Quentin Velleley, Citigroup. Please go ahead.

Quentin Velleley - Citigroup

Just in terms of the same store pool which is currently less than 70% of your total NOI. Can you just give us a sense of the NOI growth that you're expecting for that 30% of the portfolio that's not in the same store pool?

Jeff Olson

We don't have those numbers off the top of our head. I mean what's not in the same store pool really would be a combination of our properties that are under redevelopment. So those are going to be very high, coupled with assets that were purchased throughout the past 12 months. And generally speaking the assets that we purchased we're looking for 3% growth there. But it's I can't quantify the redevelopment on this call right now.

Tom Caputo

I can say Quinn just, some of the stuffs that's coming on to give you a perspective. In the first quarter Aventura Square, the Danbury Southbury portfolio as well as Culver will hit the same property pool. And then in Q2 you'll get Potrero, Post Road, and Compo, and then the next big piece will be in 3Q in Westbury Plaza the main shopping center comes in. So that will give you a sense of what's going to come into the pool this year.

Quentin Velleley - Citigroup

And so, your 2% to 3% guidance for this year, I assume you've removed the $200 million of asset sales from that pool is that right?

Tom Caputo

That correct.

Quentin Velleley - Citigroup

And then just in terms of the impairments can you just give us a sense or I think you said it was four assets are likely to be sold. But can you give us a sense of what the impairment was $18 million what the previous book value was so what they've been marked down to?

Mark Langer

Well, what we do Quinn is really coming from the$18 million, well it was four it's just two assets primarily contributed to it, and we write them down to estimated fair values based on we've this IFRS appraisal process. So it's really just looking at the discounted cash flows and the fact that we no longer expect to sell them. So one of them the write-off was about $8 million and the other one was about $9.8 million.

Michael Bilerman - Citigroup

And Mark, its Michael Bilerman speaking. I just want to come back to your sort of comments about G&A. I think you said $38 million, $39 million. I heard you right for the year. But then you sort of had some commentary that you're going to take a hard look at sort of the G&A levels overall. And I guess I'm just curios because in the last three years you've sort of been running at this call it $9 million to $9.5 million a quarter. So you've sort of been there for a little while. You look at your G&A relative to total asset value. You're sort of running at 85 basis points or so. You look at the peer set and they're all sort of been 40 to 50 basis point. Now I don't, how much of it do you think is your size or how much of it is, there's some areas that you're just paying too much for. I mean, I guess isn't there for three years. So I don't know why now versus why before?

Mark Langer

Well, I think part of it is just this churn as we try to go through the capital recycling. We're not -- so I think the short answer to your question is I do think it's a little. But part of it is the size. We're know we're going to get efficiencies when we have, call it closer to 100 assets then 150. So the assets that we've been buying as you well know Michael are $50 million to $100 million assets that are generally 95% to 99% leased. So the leverage you get in efficiently managing those types of assets versus the $5 million to $15 million assets we're selling is noteworthy. But on your point it just takes some time to work through. And we're not selling an entire geography, if you will in these pools. So is order to right size the company quickly, it takes time to work through them which is why said, as we look at this plan of what we ended up selling, also offsetting it to some extent is what do we end up buying. So before we come out with a specific number, we want to have good clarity as to exactly where the assets are and what size.

Michael Bilerman - Citigroup

But isn't some of that up in operating expenses in terms of somewhat management and portfolio perspective versus in G&A?

Jeff Olson

Well, in our case, Michael, it's a good question because I know there is disparity in practice as to how different people classify the G&A. So let me explain how we do it. Our G&A line item essentially includes the fully burden cost of all of our personnel, expect for construction and development personnel. A portion of leasing time that our employees have it capitalized and then property managers that work directly on the assets. But we do not move to the property operating expense. We don't make an internal allocation of asset managers, property accountants, lease administrators, management, executive management. All of that fits in our G&A line.

Michael Bilerman - Citigroup

And how much are you capitalizing for the year, may be thinking about '12 and go forward to '13 for all your development and leasing personnel. What is that gross numbers, $10 million bucks, $5 million?

Mark Langer

No, it's less than $10 million I mean, just the -- I'm trying to see if I've a good number. It's probably all in around $8 million or so.

Michael Bilerman - Citigroup

$8 million of capitalization and that is you think that is primarily on new development or how much of that's split between leasing and new development?

Mark Langer

That's split between property management, leasing development. I don't have the granular break down. But all in, that's about the right number.

Michael Bilerman - Citigroup

And your thought process is you want to take that 35 to 37 down and also I guess your view is as you grow the base, as you bring in more assets G&A won't be growing at the same sort of rate? So you --

Jeff Olson

You got it. You got it.

Mark Langer

I think that's a big part. That's exactly right Michael. As we buy these bigger assets and use that metric, you looked at G&A relative to asset value. We don't need to add commensurate levels of staff when we're adding $100 million of assets. So you're exactly right.

Michael Bilerman - Citigroup

And sir, last question on G&A. What do you think the current level can support in terms of GAV. I mean where -- what size do you think you can be with management team and all the support that you've in place, right? So, if you're calling $4.5 billion today with a call it a 37, 38 plus another $8 million capitalized, what can that support or what should that be able to support?

Jeff Olson

It's a good question. I thought about it. I don't know the exact number Michael. My sense is that that we certainly could support another $500 million to $1 billion. But I haven't got into all of the details behind that.

Operator

Having no further questions this concludes our question-and-answer session. I'd like to turn the conference back over to Jeff Olson for any closing remarks.

Jeff Olson

Okay. Well, thank you for your attention. We look forward to seeing many of you at the Citi conference here soon. And we will look forward to seeing you then. Take care.

Operator

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

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