Equity One's CEO Discusses Q1 2013 Results - Earnings Call Transcript

May. 2.13 | About: Equity One (EQY)

Equity One Inc. (NYSE:EQY)

Q1 2013 Earnings Conference Call

May 02, 2013 9:00 am ET

Executives

Jeffrey S. Olson - Chief Executive Officer

Mark Langer - EVP and Chief Financial Officer

Thomas Caputo - President

Laura Devlin - Director of Marketing and Tenant Relations

Analysts

Paul Morgan - Morgan Stanley

Vincent Chao - Deutsche Bank

Jeffrey Donnelly - Wells Fargo

Samit Parikh - ISI

Cedrik Lachance - Green Street Advisors

Michael Mueller - JPMorgan

Michael Bilerman - Citi

Ross Nussbaum - UBS

Benjamin Yang - Evercore Partners

Operator

Good morning and welcome to the Q1 2013 Equity One Earnings Conference Call and Webcast. 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 Laura Devlin, Director of Marketing. Please go ahead.

Laura Devlin

Thank you, Joe. 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 would 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 that 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.

Jeffrey S. Olson

Great. Thank you, Laura, and good morning everyone. We are very pleased with our first quarter results. Recurring FFO came in higher than our expectations at $0.32 a share versus $0.28 a share last year, a 14% increase. There were four primary drivers and each driver provided approximately $0.01 a share in growth, and they are as follows. One, same property NOI growth was 3%, which is on the upper end of our guidance range for the full year; two, accretive returns on our development and redevelopment projects, notably The Gallery at Westbury Plaza; number three, lower interest cost due to our $250 million bond refinancing last October; and then number four, lower G&A. As a result of our better than expected earnings, we have increased our 2013 guidance by $0.01 a share at the midpoint to $1.21 a share. We considered increasing guidance further but we are leaving a little bit of room for the impact of further dispositions.

On our last call, we indicated that we have targeted $450 million in dispositions to take place between the end of 2012 and mid 2014. We are close to completing the first $150 million of our targeted dispositions at an average cap rate in the low 7s. We expect to sell another $150 million later this year at a cap rate in the 7.5% to 8% range. We originally modelled this next tranche to be completed towards the latter part of this year, but we may accelerate some of the disposition activity considering the strength of the investment sales market. The final $150 million in asset sales are slated to occur in 2014.

I'd like to take this opportunity to peel back four of our most important earnings growth drivers for 2013 and beyond. First, same property cash net operating income growth. This is the third quarter in a row where we have posted NOI growth of 3% or higher. It should also be noted that our first quarter 2013 growth was on top of 4.5% growth recorded in the first quarter of last year. While we can't promise repeat performance, we do expect our long term NOI growth will be in the 3% range. We believe 3% is a realistic long-term target, primarily due to a select but impactful group of 15 anchored leases which are well below market rates and have near-term visibility through lease expirations for early termination. In addition, we believe our core occupancy should improve from our current rate of 92% to 96%, including the impact of dispositions over the next several years. About half of this occupancy gain is expected to come from organic lease-up and the other half will come from dispositions.

Second, development and redevelopment deliveries. Our goal is to deliver $150 million of development and redevelopment projects each year, at unleveraged returns between 8% to 10%. Currently, our largest projects are Westbury and Long Island, Broadway in the Bronx, and Serramonte and San Francisco. At Westbury, we have opened nearly 70% of the gross leasable area. Another 16% is leased or under letter of intent. This leaves us with approximately 48,000 square feet available or 14% of the total GLA, most of which is currently under discussion with a number of exciting retailers. We expect to be 95% to 100% leased by year-end.

Sales reports from existing tenants are exceptionally strong, with many a retailers reporting sales in the top 10 of their chain. We are making good progress at Broadway Plaza in the Bronx. We have signed letters of intent on three spaces with national retailers, which account for approximately 65% of the total square footage, including the majority of the top floor. This project was recently featured in the Wall Street Journal as an example of bringing quality, value retailers to this important, underserved urban community. We expect to open this 115,000 square foot center in the fourth quarter of 2014 at a cost of approximately $53 million.

Looking further out, we have identified additional redevelopment opportunities within our portfolio that could amount to at least $300 million, including future phases at Serramonte center and Daly City, California and projects at Potrero and San Francisco, California, the Willows in Concord, California, Westwood in Bethesda, Maryland, and South Beach Regional and Pablo Plaza in Jacksonville Florida.

Third, acquisitions. We have two transactions pending for our core portfolio. The $140 million purchase of the Westwood Complex in Bethesda, Maryland and the $19 million purchase of our minority partners' interest at Danbury and Southbury. We expect to acquire two Westwood parcels in May for $37 million and purchase the balance of the parcels by January 2014. We are very pleased to report that the seller has resolved all legal issues associated with delivering us clean title to the complex. The outstanding lawsuit between the seller and its joint venture partner was the biggest concern during the sale process and eliminated most potential investors. We were fortunate to have a talented deal team who structured the transaction in a way that protected us to the extent the owner was unable to settle the litigation. In addition, there were few companies who had the capital, flexibility, and creativity to enter into the structure we created. Our development team is very excited about the possibilities to improve this site.

We expect to purchase the 40% minority interest in Danbury Green and Southbury Green in May of this year for $19 million. Danbury Green is located just off I-84 and Danbury, Connecticut and is anchored by high volume Trader Joe's. Southbury Green is also located off I-84 and Southbury, Connecticut and is anchored by Shop Rite and a number of lifestyle tenants including The Gap and Victoria's Secret. Our incremental purchase price represents a cap rate of approximately 6.25%. And more importantly, both properties have opportunities to create value through modest expansions and rolling anchor leases to [Morgan] (ph). Over the next several years, we expect to acquire $100 million to $200 million annually for our core portfolio and $100 million to $200 million annually for our joint venture platform.

And then finally expense management. Over the next several years, we expect to bring our G&A down to 85 basis points of our total asset value, down approximately 15 basis points as compared to our 2012 results. Mark will address G&A in more detail but we were pleased to see that our focused efforts on cost reductions were partially realized during the first quarter.

Overall, we are very pleased with our results this quarter and I'd like to thank our team for staying focused on executing our mission of improving retail real estate and our urban communities. Tom will now cover operations and redevelopment.

Thomas Caputo

Thanks Jeff. We're very pleased with how our portfolio is performing on most metrics, including same property NOI, leasing spreads, and tenant sales. Same property NOI was up 3%, driven by a 5.3% increase in the Western region, 4.3% in the Northeast, 2.5% in Florida, and 0.2% in the Southeast. Our pricing power is becoming more evident in our upgraded portfolio. We currently have executed leases with 60 tenants who were in the process of building out approximately 250,000 square feet of space, which will generate approximately $5 million in annual income when the tenants open for business. These figures do not include any income from leases in our development or redevelopment pipeline.

Our leasing activity continues to be very strong across most of the portfolio. During the quarter, we executed 74 new leases, renewals and options for approximately 332,000 square feet at a positive rent spread of 10%. Spreads have been very strong over the past three quarters, averaging 8% each quarter. Our leasing pipeline also remained strong with a total of 81 new leases and renewals under negotiation for over 200,000 square feet at a double-digit rent spread. Most of the leases with very high rent spreads are for space and centers which have been acquired over the past three years. These centers are older properties located in infill markets with tenants paying rent significantly below market. As these leases rollover, our leasing team is able to increase rent to market. Demand for this space is strongest from restaurants, health and fitness tenants and various franchise operators.

During the first quarter, occupancy in our core portfolio increased by 20 basis points over prior year and declined by 60 basis points over the fourth quarter of 2012. The majority of the decline in occupancy was due to the loss of three junior anchored tenants and three of our lower-tier assets. The loss of these tenants was anticipated and all three of these assets are on our disposition list.

In addition, as we expected, a 60,000 square foot medical tenant vacated space in one of our North Florida assets after the end of the quarter. Our guidance assumed this property would be sold prior to June 30. We are in active discussions with investors interested in purchasing the property as well as replacement tenants for the facility. There is a strong possibility that property will be sold or leased by the end of the quarter but it is also possible negotiations may continue past June 30.

We are maintaining our 2013 guidance to increase same property occupancy by 50 basis points to 100 basis points. The loss of occupancy in the first quarter was expected and our occupancy increases will be back-ended in the third and fourth quarters of the year.

To put our occupancy in perspective, if we remove the 15 centers with the lowest occupancy from the portfolio, our occupancy would increase to 94.2%. These 15 centers have a total of 1.4 million square feet or 9% of our total gross leasable area. The properties are 67% leased and are valued at approximately $114 million or less than 3% of our asset value. All of these centers are on our disposition list.

As Jeff noted, our redevelopment pipeline is gaining momentum and will create significant value and improve the quality of our asset base. We continue to make good progress on the redevelopment of Lake Mary shopping center in Orlando. As we noted on our call last quarter, we have executed a lease with Ross to occupy about half of the former Albertsons spots and we are within a few weeks of finalizing a lease with a national supermarket for the balance of this space. We are also in negotiations with multiple junior anchors for the Kmart box. We are convinced Lake Mary will be transformed from a center on our watch-list to a high-quality market dominant asset.

We are also making good progress on the redevelopment of Kirkman Shoppes, a 107,000 square foot center located in Orlando. This unanchored property is very well located but was only 58% leased when our redevelopment team began to work on salvaging this asset. We have executed a lease for our 41,000 square foot LA Fitness Club. In addition, we are under contract to purchase an adjacent gas station and we are finalizing a lease with a 15,000 square foot drugstore. The addition of two anchored tenants to Kirkman will revitalize the property and create significant value.

We are in the initial stages of redeveloping the Willows Shopping Center in Concord, California. The Willows is exceptionally well located with significant signage on the 680 Freeway across from Tallman Sunvalley Mall. This center was originally designed with an interior open courtyard which long ago was abandoned in favor of facing the majority of the retail space towards the parking lot. The redevelopment will right-size Old Navy which in turn will provide space for an exciting 10,000 square foot national tenant who is new to the market. In addition, the redevelopment will improve circulation within the property, eliminate some awkwardly configured space and create a new outdoor plaza which will become a gathering place for future special events. We continue to mind our existing portfolio for additional redevelopment opportunities. We are optimistic we will add a few more properties to the redevelopment pipeline in the near future.

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

Mark Langer

Good morning. Today, I will address our earnings for the quarter, our liquidity and balance sheet and our updated outlook for the year. One theme you have probably noticed from the comments shared by Jeff and Tom is a real emphasis on fundamentals and redevelopment. Given the significant portfolio repositioning we have undertaken during the past three years, we are increasingly focusing our attention to ensure we maximize the value of the great assets we have assembled in some of the most relevant retail markets in the country. We were very pleased to realize 3% same property cash NOI growth this quarter. This growth helped fuel our earnings for the quarter in which we generated recurring FFO of $0.32 a share, ahead of our internal plan and significantly ahead of the $0.28 a share we earned at this time last year.

Same property cash NOI growth contributed about $0.01 to year-over-year FFO growth and it is worth noting that the bulk of this increased NOI came from top line growth, as minimum rents increased approximately $1.2 million due to rent commencements and contractual rent increases and an additional $200,000 came from increases in percentage rents. Our overall expense recovery ratio increased to 84.5% from 79.3% in Q1 of last year driven by higher occupancy and higher recoverable expenses as well as the addition of a number of new properties in the Northeast which are yielding higher than average recovery ratios. We expect our full year recovery ratio to be in the range of 82% to 84% as certain seasonal deferred maintenance and repair items will normalize during the remainder of the year.

In terms of our development and redevelopment contribution, we realized $0.01 per share of accretion year-over-year this quarter, primarily extending from the The Gallery at Westbury. The Gallery's NOI contribution was almost $1.8 million this quarter and remains on track to get to our previously stated 2013 forecast of $8.5 million to $9 million for the full year.

As Jeff mentioned, another key component helping our results this quarter was a reduction in our G&A expense. This reduction was partially due to lower than expected actual costs as well as timing, as certain infrastructure related project costs will still be incurred later this year. As you may remember from our earnings call last quarter, we described the comprehensive review process we performed during the 2013 budgeting cycle related to G&A expenses. We looked at ways we could increase efficiency and limit unnecessary spending. While we are focused on cost, we are still willing to invest in new technologies and applications that can automate many of the manual processes we have in place today. This should reduce G&A in the future but will require an upfront investment in order to get there.

Overall, when adjusting for the timing of expenses we believe will still be incurred later in the year, and considering the absolute savings generated from our increased focus on G&A costs, we believe it is possible for our recurring G&A to come in at the low end of our previously stated range of $38 million to $39 million.

Turning to our balance sheet, we remained focus on ensuring we have plenty of liquidity and access to low-cost capital. The capital markets continue to show strong demand for REIT debt and equity and we are pleased that our balance sheet is well-positioned to attract both forms of capital, should the need arise. Looking at our capital sources and uses, we remain on plan with our disposition program, which has generated $126 million of proceeds to date, with another $174 million expected later this year. Given the incredibly low levels of maturing debt we have for the next two years, with only $30 million of mortgage debt maturing this year and less than $7 million maturing next year, our disposition proceeds will be used to pay down debt including draws on our revolving credit facilities to fund our development and redevelopment programs, and if attractive opportunities are identified, to fund new acquisitions.

During the first quarter, our net debt declined by $70 million, leaving our net debt to adjusted EBITDA at 6.7 times at quarter end versus 7 times at year-end. Also for the first quarter, our adjusted EBITDA to fixed charge ratio was 2.9 times compared to 2.6 times for the fourth quarter of 2012. We expect further improvement in our net debt to EBITDA ratio as well as our coverage ratios as we further pay down debt and realize the growth in EBITDA from both our core portfolio and the added income from the development and redevelopment pipeline.

Our progress and ongoing commitment to improving our credit metrics was recognized by the S&P this quarter as our outlook was raised to positive from stable. Our strategy to pay down mortgage debt over the past two years has yielded many benefits. We now have a very liquid pool of assets that affords us great flexibility from both the redevelopment standpoint, and in the case of our non-core assets, a pool of properties that is very attractive to a wide range of buyers who are able to source favorable market-rate financing on these assets. Over 70% of our total cash NOI is now generated from unencumbered properties.

Turning to guidance, we have increased our expectations for full year recurring FFO to $1.19 to $1.23 per diluted share. The guidance revision considered the better than expected first-quarter results but still provides flexibility in the event we accelerate our disposition timing for the remaining targeted non-core assets. It is a bit early to tell whether NOI growth will remain at the high end of our guidance range, and as Tom has described, much of our occupancy growth is expected to occur in the later portion of the year. Due to these factors, we have not changed any of our underlying assumptions embedded in guidance but expect to do so after we assess Q2 results.

In summary, we were very pleased with our first-quarter results and the execution that is occurring at the asset level, to push rents and to ensure development and redevelopment projects are executed on time and on budget. We have assembled an outstanding team of highly motivated professionals who are driving NOI growth in each of our target markets while we remain focused on financial discipline and prudent capital allocation.

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

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions) The first question comes from Paul Morgan of Morgan Stanley. Please go ahead.

Paul Morgan - Morgan Stanley

As you think about your – you're having some success in terms of the asset sales and as you think about the pace going forward, I mean to what extent do you think it is being constrained or limited by what you're able to source in the acquisitions market either from a 1031 perspective or just in terms of the way you see your earnings dilution?

Jeffrey S. Olson

I mean our plan continues to be based on selling approximately $300 million this year and $150 million next year. I think based on our pipeline of redevelopment and our expectation that we will be able to modestly transact in the acquisition market, we feel fine about it. I mean the good news is that we're selling our properties at much lower cap rates than what we had anticipated. The bad news is that at least on the acquisition side of the business, it is more competitive, so the cap rates are lower, which is the sole reason why we're looking inward much more than we have in the past, because we think there are some great opportunities to put more capital into our existing projects and achieve very high returns in the 8% to 10% range while we are improving those existing assets. So, I'd say it's created more of a push-pull on our end to find more opportunities internally.

Paul Morgan - Morgan Stanley

And you mentioned the cap rate on the sales, I mean how much is that just a reflection of compression for those types of assets, or is it maybe a shift in the mix, a little bit higher-quality, I mean kind of what's the cap rate compression to those assets on a same kind of property basis are you seeing over the past six or nine months?

Jeffrey S. Olson

Probably say 50 to 75 basis points.

Paul Morgan - Morgan Stanley

And that's probably in terms of the spread relative to 'A's or have you seen a similar compression in the 'A's?

Jeffrey S. Olson

'A's are low, I mean there aren't many out there, so it's just not a liquid market, but we are starting to see some 'A's and very, very low 5s and maybe even sub-5s as compared to maybe 6 or just slightly sub-6 a year to a year and a half ago.

Paul Morgan - Morgan Stanley

Just last question on your urban initiatives, I mean a lot of retailers have been aggressive in trying to go into more infill locations than kind of more traditional where they would go into newbuild, suburban developments, but not everybody has gone that way, I mean are you seeing, as you're having discussions with folks about redevelopment projects or development in infill sites, that more and more retailers are kind of getting creative about the way they can configure their space and the way they think about kind of stepping out of the box to the more traditional suburban community or power center?

Jeffrey S. Olson

Yes, absolutely we are, and we are really catering towards those types of retailers. We generally have very good credit and just want to penetrate these urban markets in a big way. And I'd say T.J. Maxx is probably the prime example of one that's looking to enter these urban markets and be very creative including taking second-storey space, including taking spaces just not part of their original prototype.

Operator

The next question comes from Vincent Chao, Deutsche Bank. Please go ahead.

Vincent Chao - Deutsche Bank

Just wanted to follow up on the disposition discussion here. Just as you're thinking about the potential acceleration of some of these sales, how much of a factor is the cap rate compression on that decision? I guess if you were to think that cap rates might come in another 50 or 75 basis points over the next year or so, would that cause you to maybe pause on these stores or is it more about meeting the capital plan and the investment plan and just getting the sales done and not so worried about capturing another 50 basis points?

Jeffrey S. Olson

Yes, it's really hard for us to make a market call on cap rates and interest rates, it's more of taking advantage of the lower cap rate environment that we are in today, there are periods of time when cap rates have been much higher on these types of assets where to some extent they have been unsalable. So, our goal now is to balance that with redeploying that capital into redevelopment primarily and then other acquisitions secondarily. But I would expect that we'll do $300 million this year in total and then we'll finish off the last $150 million next year. That $300 million may be sooner rather than later.

Vincent Chao - Deutsche Bank

Right, right, and I guess, just I think we touched on it before, but I mean for the next bucket of $150 million, I mean if the market conditions continue to be strong, and there is a bid for it, I mean would you just take care of that visitor too if the opportunity presents to yourself or would you try to time it a little better?

Jeffrey S. Olson

Don't know, it's too early to answer that question. I think much of it would depend on what we would also do with that remaining capital.

Vincent Chao - Deutsche Bank

And just the last question from me, just Tom, just want to go back, you had mentioned sort of the reasons (indiscernible) good across most portfolios and most metrics you were happy with but wondering if you could provide a little bit more color on what you meant by that. It just sounded like you were emphasizing the most, some things that are maybe not quite where you wanted them, obviously this Southeast wasn't particularly strong but I'm just wondering if you could add a little bit more color to that comment.

Thomas Caputo

I think if you look at the assets we have acquired over the last three years in the Northeast and the West and selectively in South Florida, those metrics have been exceptional, very, very, very strong demand, and if you go to some of our legacy assets, in South Florida or in the bucket area, Georgia, very, very, very strong but if you go to our legacy assets that we are in the process of selling in secondary and tertiary markets, it is much better than it was a year ago by far but it's still tough sledding.

Vincent Chao - Deutsche Bank

Okay, so it was specific to just those assets. Okay, thank you.

Operator

The next question comes from Jeff Donnelly of Wells Fargo. Please go ahead.

Jeffrey Donnelly - Wells Fargo

Jeff, I wanted to drill in a little bit I guess on your long-term objective for the 3% same-store NOI growth, is that inclusive of the benefit of redevelopment capital or excluding that?

Jeffrey S. Olson

No, it's excluding redevelopment capital.

Jeffrey Donnelly - Wells Fargo

And what sort of internal growth I guess is needed to drive that view and are you able to I don't know maybe talk about whether that's from just existing in place rent bumps or is that more of a mark to market opportunity as your portfolio leases roll?

Jeffrey S. Olson

It is more of a mark to market. I mean we have identified 15 anchored leases that are significantly below market, and have near-term visibility in terms of their expiration either because they've run out of options or perhaps leased to a tenant that is in trouble and likely will need to realize the value of that lease at some point. So, those 15 leases drive the majority of getting us to that 3%. In addition to that, we'll also have some improvement in occupancy as I indicated in my prepared remarks, and that also we have contractual rent increases embedded in many of our leases. I think the prime example is our Loehmann's lease in Chelsea where they're paying a fraction of the market. The lease expires in March of 2016 with no options remaining. I think we are earning maybe 2% on that capital today but we are fully expecting to bring that up to a pretty high cap rate when we lease that space upon its expiration. And that lease alone I think could account for somewhere around 150 basis point in our total NOI for the Company when that's done.

Jeffrey Donnelly - Wells Fargo

That's great, thank you. And switching gears, let's talk about the trends that you're seeing in small shop occupancy or leasing in Florida, have you guys seen continued improvement there, what's been going on?

Jeffrey S. Olson

I think the trend is that the mom-and-pop tenants have pretty much disappeared and what you are finding now are more sophisticated franchise operators and people who have been downsized out of corporations who have gone into business for themselves. So that's what's very, very different and that is – there is a huge demand for restaurant tenants. Probably 25% to 30% or 35% of our quarterly leasing is to restaurants, whether they'd be quick serves, sit-down restaurants, so there's a lot of demand for restaurants, so that's what we see.

Jeffrey Donnelly - Wells Fargo

And just the last question actually on dispositions, I apologize if I missed them in the comments because of just when the operator cut in on my line, but Jeff you are talking about just a very robust disposition environment today, do you think there is better interest in sort of disposing those single smaller deals or is there more appetite for portfolios?

Jeffrey S. Olson

I'd say there's a lot of demand for these single smaller deals which comprise the majority of what's left in our non-core portfolio, and it might be $3 million to $10 million centers. And the real reason behind it is the debt markets. So, it just made it much more compelling for individuals to come in with a very modest amount of equity capital and earn a nice cash return, considering what kind of interest rates they can get.

Jeffrey Donnelly - Wells Fargo

Does that lead you to think that maybe there's been more compression in B cap rates if you will than A cap rates over the last few quarters because I got to say I got the impression maybe it's reverse from your remarks?

Jeffrey S. Olson

It's hard to tell and it is very asset specific. The problem with 'A' quality assets is there are so few that are trading today, almost no one is giving up on their 'A's, so we have seen trades that are in the very low 5% to even sub-5% cap rate range and that may have been 6% or slightly below 6% last year. I do think that you have seen comparable compression within the 'B's but I do think within the 'B's, the buyer pool has expanded as well.

Operator

The next question comes from Samit Parikh of ISI. Please go ahead.

Samit Parikh - ISI

Jeff, looking at sort of your funding needs, where you are in your line of credit and expectations for assets sales and development funding needs, given the market today, hypothetically maybe, you can do more than just the $150 million next year, $135 million at the end of the year, given that kind of liquidity position you're in, what sort of prevents you here from maybe accelerating your shadow redevelopment pipeline beyond the call it $150 million to $200 million a year you have been talking about?

Jeffrey S. Olson

I think there are a couple of things. One is it takes a lot of time and work to do a redevelopment correctly. So, we are as quickly as we can and as thoughtful as we can looking at every single property of ours with an eye towards what can be done. I spent a lot of time in Florida just inside of the last couple of weeks and I have a sunburned face not because I've been on the beach but because I've been standing in parking lots with our team just thinking and literally been there for two hours, three hours about what can be done. So, I'd say we're doing everything that we can on our existing assets to invest more capital and make them stronger.

If possible that we could do more ground-up development, but ground-up development is pretty risky and what I love about our model is we own few large assets that this whole team around this table can know every nuance behind them and ensure that we are keeping our risk to an appropriate level.

So, I think we are going to cap ourselves out on the redevelopment side at this $150 million a year for now until we have more success behind us and then maybe it's possible that we could add beyond that but we want to get it done right and we know the value of getting 'A's on every single one of our redevelopment versus having one that did not go well.

Samit Parikh - ISI

Okay that's helpful. And then a question I guess on Equity One's broader strategy going forward as a company, you had a transformational acquisition with Capital and Counties a few years back and now you're working on basically pruning the company, it looks like down to something like 100 assets or lower, but if there was call it a very strong what we would consider 'A' quality large $1 billion, $2 billion portfolio on the market today, is that something Equity One would pursue or are you not in the market to really largely increasing the size of the company?

Jeffrey S. Olson

It would have to be done so in a very accretive manner. So for example, if we use our equity capital to finance the transaction, and if you assume that we are trading in the mid-5% today in terms of the cap rate and we feel confident that we can generate 3% NOI growth consistently over the next 10 years, then we better be acquiring that $1 billion or $2 billion portfolio in an accretive manner relative to that 5.5% and 3% growth that we're getting on our current portfolio.

Samit Parikh - ISI

Okay got it, thanks.

Jeffrey S. Olson

And at the same time, we would want the quality of that portfolio to upgrade what we already have, which is hard to do now that things have changed so much because we really do think that our quality now is at the very top of the industry.

Operator

The next question comes from Cedrik Lachance of Green Street Advisors. Please go ahead.

Cedrik Lachance - Green Street Advisors

Just going to your purchase of your partner's interest in two joint venture properties, what were the circumstances that led to that and did it put an end to relationship with this partner or were just those two of the many properties you have with a partner?

Jeffrey S. Olson

These are the only two properties we have with the partner. The gentleman who was our minority partner set up a structure for estate planning purposes, he was 87 years old, and it was purely for estate planning purposes, and unfortunately he passed away and his family has indicated they'd like to execute their puts to us to buy their share and we are delighted.

Cedrik Lachance - Green Street Advisors

And the pricing on it had been predetermined?

Jeffrey S. Olson

That is correct, that is correct, so that's why it's much higher cap rate than what would occur in this market if it were taken to market today.

Cedrik Lachance - Green Street Advisors

And Jeff, you talked about the piecemeal sale, some of the remaining properties in the non-core portfolio, are you talking or are you seeing a greater ability of selling really the properties that are at the very low end of your portfolio, those that were probably unsalable three years ago and might be saleable today?

Jeffrey S. Olson

I do, I do, the market is strong, it's not easy, Cedrik. I mean we have a fairly large department now that's working on those, it has almost become Tom's full-time job, but it is getting done and you're right, there are areas where those properties were probably unsalable.

Cedrik Lachance - Green Street Advisors

And finally on G&A, where are those areas where you can cut costs, where you can reach your return goal of 15 basis point cut and what else do you think you can do over time to further reduce the G&A of the Company?

Mark Langer

It's really across the board, Cedrik, so at the highest level, if you just look from a personnel perspective as the company call it right-sizes or downsizes to 100 assets that are high-value, we think we can manage that portfolio more efficiently. The time and sweat to lease and property manage a 98% or 95% occupied center, even if it's $100 million in value, is as you know often times less than having the $10 million headache in a tertiary market, and it runs again, but internally from the way we do our reporting, all the way across the board to our technology. So it's really kind of a line by line from headcount to all the infrastructure items you would think of.

And then at the same time, on your question of how do you get to the 85, a big part of it is just the asset base. So as we look out where we were at 12/31 of last year, where our recurring G&A call it was $38 million, our gross asset value and total assets was $3.8 billion, that's the 100 bps that Jeff mentioned, and as you play out our strategy and take that asset base rolling in what we've identified in our development, redevelopment pipeline, and then assume an acquisition activity, $150 million to $200 million, you can get to $4.5 billion asset base. You take 85 basis points of that, and you are at $38 million. So it's really going to come from us basically holding the line on where we are. So, there'll be some absolute reductions and cutbacks that can accommodate for the growth in the asset value.

Thomas Caputo

Cedrik, we are watching every expense carefully. I personally approve every invoice that's $5000 and above, and there's a culture that we're developing inside of this Company where every dollar is being watched carefully, and I really do think that on its own is making an impact.

Operator

The next question comes from Mike Mueller of JPMorgan. Please go ahead.

Michael Mueller - JPMorgan

Just a couple of things. On the dispositions what could close in the balance of the year, how the cap rate trends looking compared to the 7.1% that you've acquired or sold out so far?

Jeffrey S. Olson

It's a good question. In my prepared remarks, I guided at 7.5% to 8% Mike.

Michael Mueller - JPMorgan

Okay, sorry, I missed that out.

Jeffrey S. Olson

That's okay, and I think that's a fair number. I hope we can do better but much of it will depend upon which of the assets end up going, but I would use that for modeling purposes.

Michael Mueller - JPMorgan

Got it. And then you mentioned the medical tenant. To the extent that that building is not sold at this point, it takes a lot really, I mean how significant is that rent that was referenced at the beginning of the call?

Jeffrey S. Olson

I think it's about $1 million a year.

Michael Mueller - JPMorgan

Okay, great. And then last question, I guess $100 million to $200 million of JV acquisitions, $100 million to $200 million in your balance sheet acquisitions, anything that clearly differentiates what goes into each bucket when you're looking at properties?

Jeffrey S. Olson

I think in general, what the JVs are looking for are stable cash flows that may not have the same type of NOI growth rate that we are looking for which is at that 3% or greater, and also the JV program is a grocery anchored program. I think what you'll see more from us is more redevelopment opportunities, there are maybe transactions that have more complexity to them, just like Bethesda, those would be the type of transactions we'll look for, for our core.

Michael Mueller - JPMorgan

Got it, okay, thank you.

Operator

The next question comes from Michael of Citi. Please go ahead.

Michael Bilerman - Citi

It's Michael Bilerman. Quentin is on the phone with me as well. Jeff, I just want to hone in a little bit, when you talked about the 15 anchored leases, you gave the Loehmann's example and you focused on cash same-store NOI, and I'm just curious, as you start to come in, are you going to focus the street more on sort of cash for AFFO growth or FAD growth rather than FFO growth because you are already carrying a very high FAS 141 adjustment, almost $12 million a year, almost $0.09, it's like 8% of your FFO, where you have marked to market a number of these under-market leases that you bought in acquisitions, and so I am just curious, we're not going to see this in FFO growth that much relative to AFFO or FAD growth, and I am just wondering how you are going to sort of think about it as we move through the years?

Jeffrey S. Olson

I think we have been very transparent about everything through our disclosures, especially in the supplemental package, so we'll be guiding the street to both measures. And at the end of the day, I mean what we're looking to do more than anything else Michael is to improve our NAV on a per-share basis. That is the single most important proxy and FFO will follow, AFFO will follow, but NAV per share is our primary proxy.

Michael Bilerman - Citi

Right, but at a certain point, if people think that there is going to be this massive FFO growth, the reality is you already have $12 million or almost $0.09 a share in your current FFO related to the unrealized upside from a number of these leases, put aside the massive redevelopment from that spend which is NAV enhancing but I don't want the street to get ahead of themselves in terms of thinking there's going to be this massive FFO growth, and it sounds like you produced AFFO or FAD per-share, and I just didn't know if that's something that you're thinking about highlights or look, this is where we are today on a per-share basis and we are going to grow, and that's where you're going to see the growth, you're not going to see it in headline FFO.

Jeffrey S. Olson

I don't think it is as material over the next three to five years as what you are describing as it relates to sort of the difference between the FFO growth and AFFO group, but Mark, I don't know if you want to…

Mark Langer

And part of it will depend Michael obviously. As you know in the accounting, there are value rules when those assets are purchased. You are making assumptions on market rents. To the extent the market rents in these urban communities has improved beyond what we originally modelled, there is a good potential for some upside. But you're right, it's not the pure accretion because there was some mark to market already which is reflected in the number, but I also think there is ability to capture beyond what is in the 141 adjustment currently, if market rents grew at a pretty good clip between the time we purchase the assets and when the lease renews.

Thomas Caputo

And the numbers are disclosed, Michael, so you can put them into your model and you can calculate it quite easily.

Michael Bilerman - Citi

I know that, I just I don't want the markets to get surprised when if FFO growth is lower than AFFO growth and it is not shown there, so just wanted to see how you're thinking about it. In terms of just on the G&A, Mark, was there anything in geography that's going to change as you sort of think about that 100 basis points to 85 basis points in terms of where you are allocating G&A?

Mark Langer

I think as we've built each of these regional businesses, in California, in the Northeast, in Florida, I think it will shift some out to the Southeast and move to where our development and redevelopment efforts are to some extent, but I don't see anything that material, just a small – our bigger asset base on a relatively flat or slightly declining overall G&A level.

Michael Bilerman - Citi

And then you had mentioned to Cedrik's question, it was going from $3.8 billion to $4.5 billion, so call it $700 million rise in gross asset value. I guess with selling from this point forward, another $300 million of assets that would be $1 billion gross of investment, is that the way…?

Mark Langer

That's combining all the incremental value of development, redevelopment and acquisitions for core and the pro-rata piece for joint ventures, that's right.

Michael Bilerman - Citi

So that's $1 billion of spend of which you will fund $300 million through asset sales and then the balance $700 million will come from debt and new equity?

Mark Langer

Presumably.

Michael Bilerman - Citi

And then when do you get to that $4.5 billion in terms of gross asset value, in terms of when does that $1 billion of spend occur?

Mark Langer

It's really hard to tell Michael because so much is driven by what is happening in the market, A, with the timing, just look at the market cycle, we talked about on dispositions today. So it's really going to be a function of when there are opportunities throughout the cycle over the next few years, when we become more aggressive on external acquisition activity versus what we are doing now focused internally. So it's really partly going to be a function of what we see as market conditions, and whether a portfolio deal comes up or whether we chip away on a single asset basis

Thomas Caputo

Or add more to our development and redevelopment.

Michael Bilerman - Citi

Right, and I guess over the next 12 months, so likelihood is that the G&A number as a percentage goes up as you sell the $300 million, but don't have as much redevelopment spend that is currently identified in the nearly about $100 million left to spend on the current pipeline?

Mark Langer

We are managing it very carefully, I'm not willing to say that's the case yet or not, but every dollar is being looked at carefully Michael.

Operator

The next question comes from Ross Nussbaum of UBS. Please go ahead.

Ross Nussbaum - UBS

First question is on tax. With respect to the capital gains on the assets that you are selling, just can you give me a sense of how are capital gains taxes being avoided, is there enough cushion in the dividend, the 1031, any of it?

Mark Langer

Ross, most of it has been able to be accommodated through 1031. You look at the visibility we've had with the Clocktower acquisition last year plus the [FAS] (ph) coming on, so we really haven't had to have any big risk on that front, and as you said, we certainly have some cushion between taxable income based on the levels we have today but 1031s have given us good visibility for what we have sold so far.

Thomas Caputo

And Ross, not that we are proud of this, but on many of the remaining lower tier assets, there aren't huge gains embedded in those properties.

Ross Nussbaum - UBS

Okay, I guess for once that's a good problem to have. Okay next question on Serramonte, two questions there, one is, now that you've got the Dick's coming on, are you looking at doing the apartments that you had talked about before, are you pursuing the entitlements there, and the second question is, at what point do you pursue a sale of Serramonte since realistically you're not in the regional mall business?

Jeffrey S. Olson

I think there's a lot more to do at Serramonte and I think we're the right owner of that property. For starters, our first phase was putting in a big-box tenant which was Dick's, who we have a very good relationship with. The second phase likely is going to intrude another 100,000 square feet of expansions on the peripheral of the mall that would likely include a grocery store, other big boxes, probably a theatre and more entertainment and more restaurants, and we have every capability to do those deals and we feel that we know that market better than anyone.

In addition to that, we have a guy leading that project, Jeff Mooallem, who is a mall guy, he ran Aventura Mall for a number of years among other projects, and really have a lot of passion for Serramonte in particular. In terms of the third part of the expansion, which is the residential piece, yes we are working on it, we intend to entitle that piece along with the rest of the site. So I think we have a good three to five years worth of work to do on this project before it becomes stabilized. Once it's stabilized, then I think we'll have to re-evaluate what we're going to do with them.

Ross Nussbaum - UBS

Okay that's helpful. And the final question is, your friend, Federal Realty, just announced an acquisition of a center in Darien Connecticut which is a market that you have been active in recently, did that one slip through your fingers or was there something about it that you didn't like in terms of pursuing it?

Jeffrey S. Olson

No, we think it's a good property, we think it's a great market. We're much more focused today on allocating our capital in an accretive manner and for us that was a more difficult thing to do. So, we ended up passing on that opportunity.

Ross Nussbaum - UBS

Do you have a sense of where that traded from a cap rate perspective?

Jeffrey S. Olson

I know exactly where it traded but this conference call is not the forum to go through that, but yes.

Operator

And due to time constraints, the last question will come from Ben Yang of Evercore Partners. Please go ahead.

Benjamin Yang - Evercore Partners

Maybe for Jeff, you talked about being about seven years into your eight-year repositioning plan, obviously the portfolio is much higher quality today, but at the same time, your shop occupancy seems is stuck in that 80% range, and obviously mom-and-pops aren't quite back yet but is there anything else holding your shop occupancy back, I mean is it that maybe you are doing more restaurant type deals and that increase not shows up in the (indiscernible) occupancy and maybe shop occupancy is a less relevant metric today than it was in the past, just kind of curious what's going on with that metric and what's the takeaway?

Jeffrey S. Olson

I mean occupancy is an interesting number because it's based on total GLA and our GLA is much different for our higher-quality assets than our lower quality assets. So if you simply look at the shop occupancy rate on our core assets, we're in the 85% range. By way of comparison we are close to the 74% on the lower tier. So I think you're going to see shop occupancy go up a lot just as a result of our disposition program, but we think that there is room to improve our shop occupancy on our core assets as well that ultimately we'll get us to a 96% occupancy rate blended between anchors and shops over the next three years.

Benjamin Yang - Evercore Partners

So what does that work out for shop occupancy, 96% total for the portfolio, I mean does that mean shop occupancy can actually get back up to that 90% level that it was in the past?

Jeffrey S. Olson

I think it's probably closer to the 88%, 89%, but this is on a much smaller grouping of assets obviously.

Benjamin Yang - Evercore Partners

Got it. Okay, helpful. Thanks guys

Jeffrey S. Olson

So, like you said, it ends the session, and operator, thank you very much and we look forward to talking to everyone next quarter. Thank you.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!