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Equity One, Inc. (NYSE:EQY)

Q1 2009 Earnings Call

May 7, 2009 9:00 am ET

Executives

Jeffery S. Olson – Chief Executive Officer & Director

Thomas A. Caputo – President

Mark Langer – Chief Financial Officer, Executive Vice President & Chief Administrative Officer

Analysts

Craig Schmidt – Bank of America Merrill Lynch

Paul Morgan – Morgan Stanley

Michael Mueller – J.P. Morgan

Paul Adornato – BMO Capital Markets

David Wigginton – Macquarie Research Equities

Richard Moore – RBC Capital Markets

David Fick – Stifel Nicolaus & Company

Alex Barron – Agency Trading Group

Operator

Welcome to the first quarter 2009 Equity One earnings conference call. My name is Francine and I will be your coordinator for today. At this time all participants are in listen only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator Instructions) Before we begin the company has asked me to read the following statement.

Certain information contained in this earnings call constitutes forward-looking statements within the meaning of the federal securities laws. Although Equity One believes that there is expectations reflected in such forward-looking statements and are based upon reasonable assumptions it can give no assurance that these expectations will be achieved.

Factors that can cause actual results to differ materially from current expectations include changes in the macroeconomic conditions and the demand for retail space in Florida, Georgia, Massachusetts and the other states in which Equity One owns properties, the continuing financial success of Equity One current and perspective tenants, continuing supply constraints in its geographic markets, the availability of properties for acquisition, the success of its leased up vacant space and the effects of natural and other disasters, the ability of Equity One to successfully integrate the operations and systems of acquired companies and properties and other risks which are described in Equity One’s filings with the Securities & Exchange Commission.

I would now like to turn the presentation over to the host for today’s call Mr. Jeff Olson, Chief Executive Officer.

Jeffery S. Olson

Thank you for joining us for our first quarter 2009 earnings call. Consistent with prior quarters let me review the pros and cons of the quarter and then I’ll turn it over to Tom Caputo who will discuss our operations and then Mark Langer who will cover our financial results.

Now, let’s start with the pros and there are eight of them. First, our FFO for the quarter was $0.31 after excluding $0.44 in non-recurring items such as the bargain purchase gain on DIM, gains on early extinguishment of debt, out parcel sales, insurance proceeds on a property claim and management restructuring costs. Our core results were slightly ahead of our internal projections and likewise I believe consensus FFO estimates average $0.33 a share and included $0.05 a share in previously disclosed debt repurchase gains. On that measure we were $0.03 a share ahead.

Second, on the operations front our occupancy ended the quarter at 91.5% down 60 basis points as compared to 12/31 and also in line with our internal expectations. As our occupancy was flat last quarter we are only down 60 basis points over a six month time period which is probably among the most stable in our sector.

Third, we acquired a control interest in DIM Vastgoed in a stock-for-stock exchange. DIM owns a portfolio of 21 shopping centers primarily located in Florida and Georgia. Tom Caputo has recently been nominated to the supervisory board. What we like about the transaction was that we were able to issue our equity at an implied cap rate of 50 to 75 basis point below what we paid for the controlling interest.

Fourth, during the quarter we repurchased $30.5 million of our own debt at an average price of $0.70 on the dollar. The total cost was $21.4 million for a yield to maturity of 11.3% and a gain of $8.7 million. Since quarter end we have repurchased an additional $6.5 million of our 2016 and 2017 debt at an average price of $0.63 on the dollar. This will result in a $2.3 million gain in our second quarter numbers. Give all of our investment opportunities, we saw this one as the best on a risk adjusted basis as it was accretive to cash flow, net asset value and at the same time lowered our leverage.

Fifth, we are actively reducing property and G&A expenses on a forward basis. We have rebid every major contract including landscaping, sweeping, telephone, painting, trash, etc. We expect to start seeing expense savings starting in April. We also downsized our executive team down to four people from six people in light of the current economic landscape. We are very excited about Mark Langer’s promotion to Chief Financial Officer and which Greg Andrews and Tom McDonough our very best in their future endeavors.

Sixth, we purchased a 9.6% interest in Ramco-Gershenson for approximately $9 million. Due to the sensitive nature of this investment and our proposed board nominations we are not in a position to offer any more information than what is contained in our public filings and we will not take any questions related to Ramco on this call.

Seventh, we sold two out parcels during the quarter for $1.7 million. This included a free standing McDonalds in Huntsville Alabama for a 5.875% cap rate and a free standing Pollo Tropical in Homestead Florida for a 6.3% cap rate. We anticipate selling approximately $20 million of our parcels during the balance of the year as pricing is still very attractive. We currently have two additional out parcels under contract for a 6.9% cap rate.

Eighth, subsequent to quarter end we were able to issue approximately $126 million of our stock at an add on equity financing at $14.30 a share. We have used this capital to further decrease our leverage levels. In April we paid off our $172 million in unsecured notes that matured. As of today, we have approximately $250 million in cash, marketable securities and availability under our line of credit. This compares to approximately $200 million of upcoming debt maturities over the next three years.

On the negative side, first our operating fundamentals are under some pressure. Our same site NOI of -2.7% was on the lower end of our expectations. In addition, our releasing spreads were lower than historical levels and our bad debt is trending up. Tom Caputo and Mark Langer will go through these numbers in detailed. Second, our unleveraged development return on Sun has compressed from 8% to 7% as a result of lower rents and a slower lease up schedule. Overall, we were very pleased with our results year-to-date.

Before turning the call over to Tom and Mark I’d like to summarize the last several years and address our long term strategy. The easiest way to recap the last three years is to use a quote from a recent Credit Suisse report stating, “Equity One has done a good job zigging while the sector has zagged.” Our strong balance sheet position coupled with an upgraded portfolio and a downsized development pipeline was the result of a conscious effort on our end to reduce the risk premium on our stock over an extended time period.

We felt this strategy would result in a higher multiple and would provide us access to lower cost equity capital in the future. This would be one of our competitive advantages. This is exactly where we are today. We were able to access the equity markets at relatively attractive pricing compared to others and have used that capital to reduce leverage even further.

Looking ahead over the next three years, we will continue to focus on strengthening our balance sheet, building our institutional joint venture business and being on the hunt for distressed value plays. Ultimately, our competitive advantage resides in the strength of our people and we are fortunate to have some of the best real estate minds and deal makers in the sector.

With that, I’d like to turn the call over to Tom Caputo who will review our operations and investment activity.

Thomas A. Caputo

The current economic environment continues to present a real challenge for retailers and shopping center owners. We are fortunate to own a strong portfolio dominated by shopping centers anchored by highly productive supermarkets. As Jeff noted, our portfolio expanded in the fourth quarter with the acquisition of a controlling interest in the DIM Vastgoed portfolio which includes 21 shopping centers located in the southeast.

Our defensive portfolio of neighborhood centers now includes 66 centers anchored by Publix, 16 anchored by Kroger and seven centers in New England anchored by Super Value concepts, Shaws and Star Markets. Equity One has not been materially impacted by the carnage in the big box sector. However, we are not entirely immune to some big box fall out.

During the first quarter we loss a 32,000 foot Goodies in North Caroline. Home Depot announced the closing of their Home Depot Expo concept in January. We own two centers anchored by Home Depot Expo, one in our joint venture with GRI and one in our core portfolio. Both centers are well located, the Expo leases have five to seven years of remaining term and the rents are well below market. In addition, Circuit City vacated their store in a center we own in our joint venture with GRI.

Our tenant relations team continues to actively meet with regional and national retailers to access opportunities and strengthen our relationships with new and existing tenants. Since the beginning of October, this group has conducted over 50 portfolio reviews to better understand retailer performance at existing EQY locations and explore possibilities for expansion at other Equity One sites. We have scheduled a number of portfolio reviews at the upcoming ICSC REcon convention in Las Vegas. Our tenant relations program will be in integral part of our operations going forward.

Our leasing team remains focused on leasing existing vacancies and retaining tenants in our portfolio. Our agents no longer have the luxury of waiting for the phone to ring to make deals, they are all on the street two or three days a week canvassing competitive centers for new tenants. During the first quarter our same site occupancy declined 60 basis points from 92.1% to 91.5%. The decline in occupancy included the loss of a 32,000 square foot Goodies and two gyms which were both over 10,000 square feet.

During the quarter we executed 30 new leases totaling approximately 100,000 square feet at an average rental rate of $14.20 per foot. It’s important to note that 27 of the 30 leases were with a combination of national, regional and local shop tenants under 5,000 square feet. In addition, we renewed 79 leases totaling approximately 188,000 square feet at an average rental rate of $15 per foot and seven other tenants exercised contractual renewal options for leases totaling approximately 10,000 square feet at an average rental rate of $19.40 a foot.

There were two significant new leases completed during the quarter. [Leads] Theater Group has executed a lease for a 27,000 square foot theater currently occupied by AMC at our Ridge Plaza in Davie Florida. [Lead] intends to invest approximately $1 million in this property and replace the sloped floors in several of the theaters with stadium seating. We were delighted to back fill this older theater space with a new operator before the AMC lease expires later this year.

Petsmart has executed a lease to occupy almost 18,000 square feet in our shopping center in Enfield Connecticut. Petsmart’s space includes a combination of a vacant box and a 4,000 square foot expansion. Cash sweeping spreads for new leases in the first quarter were -8.69%. The negative leasing spread was largely driven by the [Lead] theater lease which includes a rent significantly less than the existing AMC lease and a very small tenant improvement allowance.

Excluding the theater lease, the cash leasing spreads were almost flat at -1%. TIs for new leases were $5.38 per foot. Cash leasing spreads for our negotiated renewals were slightly positive at .27% and spreads for our contractual renewals were 6.6%. Our current leasing pipeline is very active and includes 35 leases for approximately 105,000 square feet.

On or before June 1st Equity One will take over the leasing responsibilities for the DIM Vastgoed portfolio. The DIM portfolio includes 21 shopping centers comprising approximately 2.6 million square feet. The DIM properties fight very nicely in to the Equity One footprint with 10 properties located in Georgia, five properties located in Florida and three in North Carolina. We are excited about taking over the leasing of this portfolio now that we own a controlling stake in the company.

In 2009, our property management team has been focused on property expense controls combined with enhanced quality and service standards. We have rebid our major third party contracts and will release cost savings of approximately $2 million this year. The reductions in the cost of third party services will help reduce occupancy costs for our tenants and a portion of the savings will drop to our bottom line. We have also reduced the number of vendors providing services to our portfolio which we believe will help us control the quality of the services provided to the tenants.

We continue to receive rent relief requests from our tenants. We evaluate all requests for rent relief on a case-by-case basis. Before we consider any requests we require the tenant to provide supporting documentation including historical sales, tax returns and a business plan. If we decide to grant rent relief rent relief our goal is to defer rent rather than to forgive the obligation, insist on the right to market and recapture the tenants space, eliminate future renewal options and eliminate any exclusives. Total rent relief and referrals granted to date is less than $600,000.

The acquisitions market for institutional quality assets continues to be extremely difficult primarily due to the credit markets which are operating with a fraction of the capacity available a few years ago. Investment sales activity is off by approximately 75%. We continue to explore various opportunities on and off the market. We believe there will be an opportunity to purchase assets in distress this year. We are fortunate to have a strong balance sheet and relationships with institutional partners which will allow us to be active in this market when opportunities arise.

Now, I’d like to turn the call over to our CFO Mark Langer for his comments about our financial results.

Mark Langer

It is my pleasure to assume the role of chief financial officer. It really is a privilege to be a part of this great organization and I look forward to meeting with many of you at the upcoming NREI conference. First I would like to acknowledge Greg Andrews who was an excellent fiduciary for Equity One. Greg was instrumental in helping shape our strong balance sheet. I can assure that I intend to maintain the stability and liquidity that we have today.

I would like to review three items: our balance sheet; the key drivers of our first quarter earnings; and our forecast for the balance of the year. You will note that our financial statements include the consolidation of DIM Vastgoed this quarter. As a result of our January 14th transaction with Hamburg whereby we acquired an additional 25% interest in the company taking our voting control up to 75% we are required to consolidate DIM in to our financials now that we have acquired that additional interest in the company and control 75% of the voting shares.

I should point out that 65% of DIM’s results are included in income attributable to Equity One as this level of consolidation is tied to our economic interest. I also want to note that we have added a few items to our supplement this quarter. One, we have added the weighted average interest rates to our consolidated debt maturity schedule and two, we’ve listed the top 20 tenants that comprise our greatest concentration of annual minimal rent. As you know we previously disclosed the top 10.

Now, let’s start with the balance sheet, as compared to December 31, 2008 the major changes that are noted are as follows: our income producing assets increased by $390 million due to the consolidation of DIM these assets were recorded at estimated fair value as part of our consolidation. Our investment in securities decreased by $87 million to $74 million as of March 31st. This reflects the reclassification of our DIM [inaudible] in addition to the maturity of many of our shorter term bond investments.

Other assets increased by $49 million primarily as a result of the appraised values of identified intangible assets associated with DIM. On the liability side our mortgage debt increased by $258 million again, because of the DIM consolidation. This debt carries an average interest rate of 6.2% with a weighted average term to maturity of 4.9 years. For accounting purposes we had to fair value this debt which resulted in a discount of approximately $30 million. This discount is presented on a separate line item on our balance sheet, the total notes payable section. It is listed in the unamortized discount on notes payable.

We will amortize this amount in to interest expense over the respected remaining term of each loan for which the discount applies. It should be noted that this incremental expense is a non-cash item. Our line of credit balance decreased by $25.5 million to $10 million as we paid down our line in part with proceeds from the maturities on our short term debt assessments. Our unsecured bonds decreased by $31 million due to the early extinguishment of debt which Jeff previously mentioned.

Now, turning to our income statement, our FFO for the quarter was $0.75 a share as compared to $0.44 last year. We had a number of onetime items in our first quarter numbers which I’d like to explain. First, we recognized $27 million or $0.35 a share in a bargain purchase gain from DIM. Essentially this amount can be viewed as the opposite of goodwill and represents the difference between fair value of the net assets we acquired as compared to the carrying value of our investment plus the additional consideration we paid to acquire additional shares in January.

Based on discussions with NREI, we concluded that this amount should be included in FFO since it is not considered an extraordinary item as defined by GAAP. Other items include a $0.11 share gain on debt extinguishment, $0.04 a share in severance related costs, $0.01 a share in gains from land sales and $0.01 a share for insurance proceeds. When backing out all of these items, our core FFO was $0.31 a share. Our same property NOI decreased by 2.7% largely due to an occupancy decline of 90 basis points year-over-year, lower percentage rent resulting from lower tenant sales volumes in 2009 and higher bad debt expense.

Our bad debt expense for the first quarter was approximately $940,000 or 1.4% of rental revenues. This is higher than our two year average of .8% and is being driven by more at risk tenants and tenant bankruptcies. Our accounts receivables balance is $7.7 million as of March 31, 2009 which compares to $12.2 million as of December 31, 2008 and $6.6 million as of March 31st last year.

G&A costs increased $5.4 million compared to the prior quarter primarily due to the following: one, the $3.2 million charge for severance related costs due to our executive team realignment; two, $850,000 of direct acquisitions costs associated with DIM; three, approximately $500,000 of direct G&A costs incurred by DIM that are now consolidated in our results; approximately $400,000 of additional costs related to leasing salaries and benefits; and approximately $400,000 of costs associated with legal, banking and accounting fees.

For the remainder of the year we estimate additional G&A costs to be approximately $22 to $23 million. The increase in interest expense this quarter of $3.6 million reflects $4.9 million of interest from DIM including $900,000 of non-cash amortization of the discount on debt. Offsetting these items is the reduced effect of interest from our loan prepayments and the reduced effect of interest costs from mortgage debt on assets that were sold to our GRI joint venture last year.

Now, turning to our guidance for the balance of the year, we project our 2009 FFO will be $1.55 to $1.63 per share. We have gone through a detailed process revisiting every leasing assumption in our portfolio in light of today’s difficult environment. After completing that process, we have revised our same property NOI guidance to -2% to -4% as compared to our previous guidance of -1% to -3%. In addition, we consider the impact of our recent equity offering of 9.1 million shares. We also included gains on early extinguishments of debt that have been completed to date in the second quarter which equate to $2.3 million or $0.03 a share. Finally, we also estimate that we will complete and additional $3 million or $0.03 a share in gains from out parcel sales during the remainder of 2009.

Our guidance does not assume any additional investment activity. As I noted in my opening remarks I am thrilled to come in to this job knowing we have such a strong balance sheet and talented finance and accounting team. I was fortunate to build a good working relationship with all of our various departments in my previous role as chief administrative officer and I look forward to building even deeper relationships with the many outstanding and talented people we have throughout this organization.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Craig Schmidt – Bank of America Merrill Lynch.

Craig Schmidt – Bank of America Merrill Lynch

I noticed in [Gazets] annual report that given some of the loans that they have an operating covenant that you need to operate at a ratio of EBITDA to interest expense of 1.9. I’m wondering where you would be following your equity offering and does that leave you enough wiggle room to be let’s say more aggressive in terms of acquisitions as you look for some of these distressed value plays.

Thomas A. Caputo

I can’t specifically comment on [Gazets] covenants Craig but they’re obviously a public company and you can evaluate their financial position much like you do ours. I mean, we drive our business based on what we think is the best thing for Equity One and going forward I mean our strategy is to maintain a company with relatively low leverage levels but I would not at all that any of their covenants would have any impact on our business strategy whatsoever.

Craig Schmidt – Bank of America Merrill Lynch

I guess my reading in to it and it may be wrong, because they gave you some loans you were held to a covenant, you meaning Equity One, of a level of EBITA to interest expense of 1.9.

Thomas A. Caputo

Because they gave us some loans?

Craig Schmidt – Bank of America Merrill Lynch

Yes, some of loans and credit facilities granted to Equity One and its wholly owned subsidiary require compliance with covenants.

Thomas A. Caputo

They have not granted us any loans Craig.

Craig Schmidt – Bank of America Merrill Lynch

I guess the bigger issue is following the equity offering do you feel like you have enough room now to be more aggressive on the acquisitions.

Jeffery S. Olson

We do Craig if we find an attractive enough opportunity.

Operator

Your next question comes from Paul Morgan – Morgan Stanley.

Paul Morgan – Morgan Stanley

Now that you’re consolidating the DIM portfolio I just wanted to maybe get a little bit of color about how you see the relative NOI growth in that portfolio? I mean you had commented kind of in prior quarters that there was upside there. Do you think it can outperform the rest of the portfolio over the next year or so? Or, is it kind of just flat or down side or what?

Thomas A. Caputo

There’s a fair amount of vacancy in the DIM portfolio which is by in large a supermarket portfolio as I think you know. We think that replacing third party agents who have for the last couple of years relied on signs on the property as opposed to actively leasing the property with your own agents, that should make a difference. It will take us a while to get traction but we have been shadow leasing if you will, this portfolio for the last six months and our agents have been watching the properties and they have a game plan and they are ready to go. We think there’s going to be upside simply by leasing the vacant space that’s in the portfolio now.

Paul Morgan – Morgan Stanley

So you expect it to be at or above where the rest of your portfolio is?

Thomas A. Caputo

Yes.

Paul Morgan – Morgan Stanley

Can you give me a little color about the rent relief? You said less than $600,000 to date, is that $600,000 in ’09? These are typically relative short term reliefs I guess and I’m trying to gage what the impact is you said would roll in to 2010 would be from what you’ve done currently?

Thomas A. Caputo

I think the majority of the $600,000 is in ’09. It’s a combination as I mentioned of rent deferral as well as rent relief. You are correct, most of these are for periods that are approximately six months.

Paul Morgan – Morgan Stanley

Are these mostly for small shops?

Thomas A. Caputo

Yes.

Paul Morgan – Morgan Stanley

So their average lease life remaining is a couple of years or two so it wouldn’t be made up in 2010 or 2011?

Thomas A. Caputo

Well, it does depend. As part of this rent relief package we do have the right to market their space. So, if it’s a center where there is high demand we will begin marketing immediately, we’ll put our sign in their window. So, generally they’re smaller shop tenants so they’ll have leases that range from three to five years, they might have anywhere from a year to three or four years remaining on the lease.

Paul Morgan – Morgan Stanley

Are they starting to wane or is it still at a very high level? Do you think for the rest of the year you’ll see quite a bit more?

Thomas A. Caputo

Until the economy shows signs of a strong recovery I think that rent relief requests will be there. Quite frankly, even when times are great there are requests for rent relief. So, I think on a portfolio of 20 million square feet to have granted $600,000 in rent relief, it’s pretty small.

Paul Morgan – Morgan Stanley

Kind of going to your change in same store NOIs guidance, is it based on expectations for more vacancy fall out or kind of where market rents are moving or was there any particular catalyst or just a combination of everything?

Thomas A. Caputo

I think it’s a combination of everything Paul. But, we’re still anticipating that our occupancy will decline by 150 to 250 basis points for the year. But, we do expect that bad debt will be higher than historical averages.

Operator

Your next question comes from Michael Mueller – J.P. Morgan.

Michael Mueller – J.P. Morgan

Jeff, in your comments I think you were talking a little bit about positioning for distressed opportunities. I was just wondering if you could describe a little more what distressed means to you? Is it busted developments, is it buying real estate from banks when it gets taken back and maybe what you’re seeing today?

Jeffery S. Olson

Tom and I have been spending a fair amount of time meeting with the banks in anticipation that they will be taking back properties. That clearly is on the horizon and there are a couple that we’re working on in that regard. Certainly, I mean as refinancing risks are much higher for many existing owners, our ability to close in cash and close quickly, we have been evaluating opportunities where there is really a gun to someone’s head in terms of their need to close. So, we’re looking at everything but again we’re being very disciplined in our approach but at this point I would expect that there will be some distressed transactions that we’ll be able to take advantage of this year.

Michael Mueller – J.P. Morgan

I think it was Tom who mentioned leasing agents kind of going from center to center and essentially trying to take tenants from other centers to fill yours. But, when you start to actually see organic demand come back from tenants, what is your sense as to what segments or types of tenants you’ll actually start to see it happen in first?

Thomas A. Caputo

We have a supermarket anchored center so we have a combination of service uses, like hair salons, dry cleaners, nail salons, etc. as well as regular retailers so I think that in this environment people are getting their haircut less and they’re having their nails done less and I think that we have seen better traction over the last month with tenants, our leasing agents are saying that people are calling them back and they seem more engaged but it’s very, very hard to predict when there’s going to be organic demand for space other than just going out there and pounding out every single day and keep cold calling and canvassing to keep your centers as well occupied as possible.

Michael Mueller – J.P. Morgan

Jeff, on the last call you kind of walked through the rational with dividend, of sustaining the dividend, I’m just wondering with the increased number of shares that came out because of the equity offering did the board reevaluate changing that policy, did you give that a lot consideration or is the thought keep it where it is and you’ll grow in to it over the near term because you have a leveraged balance sheet?

Jeffery S. Olson

I mean that is our thought. I mean we revisit it all the time and when you look at our balance sheet today relative to many of the companies that have cut back on their dividend we really don’t have those similar issues. We don’t have any material debt maturities in the near term. Likewise, we don’t have any significant capital commitments on developments or redevelopments. Our leverage is relatively low, among the lowest and when you look at our tenant profile, we really are not facing the tenants that have gone bankrupt.

Then lastly, we do not have very much cash flow that’s derived from unpredictable sources. We feel very good about our positioning right now number one. Number two, since we are taking a number of steps to grow our cash flow, this includes reducing G&A which is the reason why we’re going with a downsized executive team. Like we mentioned earlier we’re rebidding every single contract that is out there. We’ve been buying our bonds back at a pretty hefty discount which is good for cash flow among other things.

Finally, we are investing in opportunities like DIM and Ramco at very accretive levels and I guess the last thing I would point out is if you look at the value of all of our vacancies today which is well in excess of $20 million, at some point we hope to narrow that gap. So, yes over time I would expect that we would be able to grow in to a more comfortable dividend coverage ratio.

Operator

Your next question comes from Paul Adornato – BMO Capital Markets.

Paul Adornato – BMO Capital Markets

I was wondering if you could tell us steps necessary and the timeline for potentially unwinding the DIM management structure?

Thomas A. Caputo

Well, we now control almost 75% of the company, 74.6% of the company so we’re just getting our arms around it. The management contract with the sponsor has been terminated. They do have a tail on the contract which runs until April 30, 2010. We literally have just gotten our arms around the financials over the last few weeks from DIM. So, I think as Jeff mentioned I’m’ going on the supervisory board so we’ll have a whole lot more input in to the operations of the properties, plus we’re leasing the properties which is probably the most important thing to drive revenue. So, I think that one step at a time and I think we need to digest where we are now and then figure it out from there.

Paul Adornato – BMO Capital Markets

Can you tell us what the G&A is at the DIM level?

Mark Langer

DIM’s standalone G&A all in is about $2 million a year.

Operator

Your next question comes from David Wigginton – Macquarie Research Equities.

David Wigginton – Macquarie Research Equities

Can you guys just maybe provide a little more color on the property expense and G&A savings initiative. I think you mentioned that you expect to save about $2 million. How much of that do you expect to hit your bottom line? And, is that based off the 2008 expense amount?

Jeffery S. Olson

On the property expense side literally what we’ve done is we’ve rebid every single contract. The majority of those savings will get passed along to the tenant because ultimately what it is doing is reducing their CAM charges. The leakage will fall to the bottom line on our end but ultimately as those leases are renewed we should be able to recapture some of those savings in the form of higher rents.

David Wigginton – Macquarie Research Equities

Then I guess just the savings that you expect to incur, is that based on the 2008 total or is that based on the first quarter as a run rate for the rest of the year amount?

Jeffery S. Olson

I mean, most of the savings will start in April as that is when most of these new contracts were started. So, the savings will really begin in the second quarter.

David Wigginton – Macquarie Research Equities

I noticed your TI jumped up quite a bit versus the previous year. I don’t know if you mentioned that in your comments, I was a little late to the call but, can you maybe talk a little bit about what happened there?

Thomas A. Caputo

Well, out of the 100,000 square feet of new leases, we had two unusual leases. One was an Advanced Auto at our Milestone Plaza which was converting an old Hollywood Video in to an automotive shop so the TIs there were quite high on a 6,000 square foot space. Then, we put a spa in to one of our other centers and the TI allowance there was also higher. If you back out those two you are down to $3.46 a square foot for the rest of the leases.

David Wigginton – Macquarie Research Equities

So should we expect more of a normal run rate for the rest of the year then at this point for the TIs?

Thomas A. Caputo

I would think so. We do have one lease working that will require a lot of tenant improvements that will be a very nice addition to our portfolio and it’s a fairly large tenant. But, other than that I think you should expect it to be more normalized.

David Wigginton – Macquarie Research Equities

Then with respect to the new and renewal leases that you’re signing excluding the deferrals and forgiveness are lease terms still pretty standard still three to five years? Or, are you having to reduce those to accommodate tenants?

Thomas A. Caputo

I think it’s a little bit of all of the above. Most of our leases are three to five years for the shop tenants, occasionally on a renewal a tenant will renew for one year. In other cases where the tenant is looking to reduce their rent, we’re not really looking to extend the term very far so in that case we’ll go one or two years. So, it’s a combination of everything you mentioned.

Operator

Your next question comes from Richard Moore – RBC Capital Markets.

Richard Moore – RBC Capital Markets

I just wanted to go back to DIM for a second, is it correct to say that you guys are now in charge of everything important with regard to DIM in terms of financing the assets, leasing the assets, etc?

Thomas A. Caputo

I don’t think that’s quite correct yet. I’m going on the supervisory board and certainly we have input on any major decisions and that would certainly include sale, financing, major tenants, major capital expenditures. We expect that we will be in full control probably by spring time of 2010.

Richard Moore – RBC Capital Markets

As far as the accounting systems go have you integrated what DIM has in to you guys’ systems? So, I guess we know that there are no major CAM issues or those kinds of things that often creep up in acquisitions.

Jeffery S. Olson

No, we have not integrated the accounting records in to our systems yet. We do know through standard reporting packages and do our analysis kind of like it was a parent sub type of relationship, get a reporting package from them and review it but they have not yet been fully integrated in to the accounting system.

Richard Moore – RBC Capital Markets

But you feel good that you’ve been through those and there won’t be any unusual surprises?

Jeffery S. Olson

So far nothing has indicated otherwise.

Richard Moore – RBC Capital Markets

I guess one of the big questions always is what’s going to happen to small shops in Florida because there seems to be concern out there that with the housing crisis, Florida is going to be additionally impacted. How would you guys assess overall just the Florida environment for small shops? Is that getting better, or worse, or are we just kind of where we have been or what do you see?

Jeffery S. Olson

Let me start and then I’ll have Tom chime in but, over a six month time period Rich our occupancy level has dropped by 60 basis points and when you consider the overall economy in Florida specifically, I think that’s pretty stable overall and there are a lot of entrepreneurs in Florida that are almost at all time looking to open up new businesses so I think given where we are the stability has been there and I would anticipate going forward that you will continue to see some stability especially in our properties which are pretty much highly sought after within their respective markets. Having said that, we are not immune from everything and I don’t know Tom if you want to add?

Thomas A. Caputo

I think that one of the very important things is that we have retooled our leasing team and we’ve added several agents. We have also replaced about 40% of our initial leasing team over the last six or eight months and I think that’s made a huge difference because they are out there pounding away every single day trying to canvass tenants and convince them to come to our properties. Since most of our properties in Florida are better than the competition I think we’re winning more than our fair share.

It’s still tough but I think as people often note I think Florida got in to this mess a little sooner than others and I think its probably stabilizing somewhat more quickly than parts of the rest of the country. Every day is a battle and our leasing team, as I think most of you know, meets every Friday morning for a total of three hours, an hour for each region and we go through everybody’s pipeline and everybody’s new deals, keeping track of where they are on the deals that they’re working on. So, it’s very intensive and we’re going to continue that pressure as long as we have occupancy issues.

Richard Moore – RBC Capital Markets

Last thing from me is you guys said Jeff that you’re spending time with the banks looking for distressed and that kind of thing but how would you characterize what the bankers are saying right now with regard to new debt issuance, new mortgages, new credit lines versus maybe where we were three months ago?

Jeffery S. Olson

Fortunately, we’re not in the market for any new mortgages right now or new credit lines because we took care of all of that before. But, what I am hearing is there is a little more liquidity than what was there three months ago but it’s still very hard and they’re very selective in who they are going to provide that capital to.

Operator

Your next question comes from David Fick – Stifel Nicolaus & Company.

David Fick – Stifel Nicolaus & Company

If we could go back to the occupancy question for a moment, you lost only bips, I think a total of 60 bips in the last two quarters, do you have specific visibility to the 150 to 250 or are you just generally assuming that things can’t hold as strong as they have been?

Jeffery S. Olson

We have some visibility Dave, we do go through a lease by lease process. I would say that we have a lot of visibility of what’s going to happen between now and the next three months and then after that there are some underlying assumptions that we’ve put in to play but I think that’s a fair estimate based on what we know today.

David Fick – Stifel Nicolaus & Company

Then without specifically getting in to the Ramco situation, you’ve made a lot of points about owning grocery anchored centers and that would be a strategic shift more in to a big box focus and medium and junior box focused, why would you have an interest in that space considering it has been a lot less defensive?

Jeffery S. Olson

There may be times Dave where we see an opportunistic play that would really compel us to invest some capital provided that we had both a plan to mitigate risk and also clear visibility as to make a profit. So, we are not going to restrict ourselves if we find attractive investment opportunities out there.

David Fick – Stifel Nicolaus & Company

Lastly, you are splitting your time now between north Miami and New York City and given your focus on being closer to the properties and more involved in direct asset management activities as Tom was outlining, can you just describe how that is working for you and Tom?

Jeffery S. Olson

It’s working quite well. Tom and I basically live on airplanes, we spend by far the majority of the time on the road split between Miami, New York and our dozen other offices throughout the east coast and then we also spend a fair amount of time visiting tenants and evaluating investment opportunities up and down the east coast. We feel very good about how this company is operating.

Operator

Your next question comes from Alex Barron – Agency Trading Group.

Alex Barron – Agency Trading Group

I wanted to ask a little bit about Ramco. I guess you’ve discussed this a little bit in your filings but generally I wanted to see that given that they have a third of their properties in Michigan where the situation seems a little bit difficult due to what’s happening with the auto industry and in Florida where you guys already have a pretty significant presence, I’m just trying to understand a little bit what you guys find attractive about that deal in particular or that footprint?

Jeffery S. Olson

As I stated in the beginning we are not taking any calls on Ramco given the sensitive nature of the investment. So, I am not in a position to answer your question.

Alex Barron – Agency Trading Group

My other question has to do with occupancy. I guess as I’ve spoken to different companies it seems like there is a little bit of differentiation on how each company defines occupancy so I was hoping you would let me know how you guys do it and what difference there might be in what you report and physical if any, and why that might be?

Jeffery S. Olson

The occupancy that is reported is the economic occupancy meaning the space is leased. So, that’s how we report it.

Alex Barron – Agency Trading Group

Should there generally be any reason why it might be different than physical? Is there any instance?

Jeffery S. Olson

The difference would be if you have tenants who are dark and paying. We have a few of those as everyone else does. So, there are a few tenants that we have that are dark and paying.

Alex Barron – Agency Trading Group

Would the difference be more than say 100 basis points or anything like that in general?

Jeffery S. Olson

It’s approximately 100 basis points.

Operator

We have no further questions. I would like to turn the call over to Mr. Jeff Olson.

Jeffery S. Olson

We appreciate everyone’s participation in this call and we look forward to our second quarter call in the future. Take care.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a good day.

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Source: Equity One, Inc. Q1 2009 Earnings Call Transcript
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