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Equity One, Inc. (NYSE:EQY)

Q2 2013 Earnings Call

August 1, 2013 9:00 AM ET

Executives

Jeff Olson – CEO

Tom Caputo – President

Mark Langer – EVP and CFO

Analysts

Vincent Chao – Deutsche Bank

Ross Nussbaum – UBS

Michael Bilerman – Citi

Jeff Donnelly – Wells Fargo

Michael Mueller – JPMorgan

Cedrik Lachance – Green Street Advisors

Samit Parikh – ISI

Operator

Good morning and welcome to the Equity One Second Quarter 2013 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 (indiscernible) Vice President of Finance. Please go ahead.

Unidentified Company Speaker

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

Before we get started, I would like to remind everyone that some of our statements today may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements include annualized and projected information as well as statements referring to expected and anticipated events or results. 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 risks and uncertainties that could cause actual results to differ from projection may be found in our most recent Form 10-K and our other periodic filings with the Securities and Exchange Commission.

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

Finally please note that our call today will include a discussion of specific properties and projects and that pictures to accompany this discussion can be found on our website under the heading of about us investors presentations second quarter earnings call property images.

I would now like to turn the call over to our CEO, Jeff Olson.

Jeff Olson

Thank you, (inaudible). And good morning everyone. Thank you for joining us for our second quarter earnings call. So our operating fundamentals continue to generate result that one should expect from our upgraded portfolio. Same property NOI was up 3.1% for the quarter similar to our first quarter result of 3%. Leasing spreads were up 13% following a 10% spread last quarter. Average base rents increased to $15.35 a foot up 8% as compared to the second quarter of last year and also similar to last quarter FFO was a $0.01 per share above our expectation. As a result we increased the lower end of our 2013 FFO guidance taking it from a $1.19 to $1.23 per share to $1.20 to $1.23 of share.

Recurring FFO was $0.31 of share which was a 11% higher than the second quarter of 2012. This increase is due to a variety of factors including higher same property NOI lower interest costs lower G&A and accretion from acquisitions, development and redevelopment projects.

These increases were offset by some dilution from the $188 million in dispositions completed since the beginning of the year. Our disposition program is well underway. Earlier this year we set a disposition goal of $300 million for 2013 and another $150 million in 2014. We are on track to meet those goals with approximately $250 million sold or under executed contracts at a capitalization rate of approximately 7%.

It is clear that our strategic plan to upgrade our portfolio that we begin in 2009 is having a positive impact on our results. Today we have a much similar company with fewer but larger and more dominant assets. Our core portfolio contains 82 properties with an appraised value of approximately $3.2 billion or $40 million each. These assets are the engine behind our future growth and represent over 90% of our total portfolio value. They’re concentrated in the most sort after retail markets in the United States San Francisco, Los Angeles, Miami, New York, Boston, Bethesda, Maryland and Buckhead in Atlanta, Georgia.

Portfolio demographics are quite impressive with an average three mile population density of nearly 200,000 people and an average household income of approximately $100,000 dollars. Our average rent on this portfolio blended between anchors and shops is approximately $19 a foot. Tenant sales are exceptionally high with our average grocer generating $620 a foot in annual sales.

Our company’s top priority is extracting value from our existing assets through lease up raising rents and expansions in redevelopments. For those of you that have accessed our second quarter 2013 earnings call property images on our website please turn to page two and flip a few pages with us as we take a closer look at some of the biggest opportunities across our portfolio.

Starting in the New York metropolitan region first stabilizing The Gallery at Westbury Plaza our flagship development in Nassau County Long Island we are thrilled with our results on this project so far. Tenants are already reporting strong sales volumes even though we still have another 30% of the space to open. Future upside will come from l3easing up the balance of the space. Of the 30% of the center’s GLA that is yet to open we have executed leases with 70 retailers accounting for 14% of GLA that we expect will open later this year including HomeGoods, Paper Source, Ruby & Jenna and several restaurants.

We have another 7% of the space under letter of intent with great names and we are in active discussions on most of the remaining space. We are forecasting our net operating income at this property will grow from approximately $9,213 million to $12.5 to $13 million in 2014 and $14 to $14.5 million in 2015 reflecting an un-leveraged 11% return on our net development cost of $129 million. Second, Broadway Plaza in the Bronx we have commenced construction on this 115,000 square foot center located on 230th street in Broadway. We are finalizing leases on over 70% of the total square footage that will include a national grocer discount apparel retailer and sporting goods store.

We expect the earning 8% to 9% un-leverage return on total cost of $53 million. We purchased a land from the New York Economic Development Corporation and we enjoy a terrific relationship with the EDC and hope to work with them on future development opportunities. And third Food Emporium building at 1175 Third Avenue between 86 and 69th streets this investment is a great testament to our strategy of purchasing New York street retail with below market rents.

During the quarter we agreed to provide $25 million to Food Emporium in exchange from significant economic modifications to its lease that included more rent and most importantly a fair market value adjustment in 10 years, instead of leading 45 years as stipulated in the original lease to adjust to a market rent the modified lease will adjust to market on May the 1st 2023. In addition the current rent was adjusted to $105 a foot with a 12% bump in five years still well below market which we currently estimate as in the $160 foot range but above the $42 a foot we were previously receiving. We will earn a 6.2% incremental return on our capital and in our estimate and IRR in excess of 15% once the rent resets to market in 2023.

That in other way we believe the asset is work approximately $65 million today based on the modified lease which is a 41% gain over our adjusted basis. Considering we have only owned the asset for three years and it was our first acquisition in New York city we are obviously pleased with the value creation from this property. And then fourth the Loehmann’s building in Chelsea New York two years ago we acquired 101 7th Avenue a 55,000 square foot retail condo anchored by one of the most productive Loehmann’s in its chain. The property is located in one of the most dynamic retail markets in New York city with a very limited amount of available space especially in the 50,000 square foot range. Loehmann’s 20 year lease is coming to an end in March 2016, its current rent of $25 a foot is a fraction of market. We are optimistic that we will create significant value upon releasing the space.

In Bethesda, Maryland we are planning for the redevelopment of the Westwood Complex a 22 acre property located just off River Road. The center was built in 1959 and has remained relatively unchanged since then while the area around it has seen tremendous growth. The demographics are compelling with 142,000 people living within three miles of the site and average household incomes of $163,000. The center is anchored by one of the top Giant Food stores in its chain with a 60 year lease that expires in 2019 with no auctions remaining. Giant’s rent is currently $2 a foot obviously well below market. In addition to that below market lease there is a 3.3 acre parcel that has never been developed. We expect to close on all the Bethesda parcels by January 2014. Our going in yield will be approximately 4% but we expect that it will be significantly higher as below market leases roll and the site is redeveloped.

In California we have four projects to highlight. First at Serramonte Center in Daly City we are completing phase one of a multi-phase plan to re-brand and expand this property. Phase one includes a two story 84,000 square foot Dick’s Sporting Goods that will become the mall’s fourth anchor joining Target, JCPenney and Macy’s. Dick’s is scheduled to open in 2014 we anticipate earning a 10% un-leveraged return on $19 million of cost. Future phases will likely add 150 to 200,000 square feet of additional GLA including a grocery store, pharmacy, discounters, a theater, more restaurants, entertainment and possibly a residential component. We think it is reasonable to assume that we can invest as much as $100 million into this project over the next four years although it will be done in a measured process whereby risks are managed through pre-leasing anchor space prior to the start of construction.

Second we recently initiated a $12 million redevelopment project at the Willows in Concord, California. We are creating a new access road to improve circulation visibility. We are also creating a community plaza with play areas and green space. As part of the redevelopment we anticipate the expansion of one existing tenant the addition of another junior anchor tenant and several new life style and restaurant uses at the property. Our expected return is approximately 8%.

And third Potrero Center in San Francisco, California we’ve been working with our existing retailers and the city of San Francisco on plans to densify the site with additional retail and residential units. While we are still working through all of the challenges we believe we may be able to invest $75 million over the next several years excluding the residential component. We have already seen incredible pent up demand from retailers to be at this property. We recently opened a Vitamin Shoppe in Smashburger in a former blockbuster space at more than double the prior rent.

In addition to earlier this year we acquired 200 Potrero Avenue and adjacent 30,000 square foot building at a price below replacement cost. This acquisition will provide us even more flexibility to relocate tenants and improve Potrero Center over time. In the meantime we are earning closed to a 6% unleverage return on Potrero Center while we wait. Four, the Circle Centers in Long Beach California.

Since acquiring these three properties we have improved occupancy and replaced several local tenants with national retailers. There are three anchored tenants who we believe are paying less than 50% of market rent. These leases expire in 2016, 2018 and 2022 all without options.

And then finally in Florida our focus is on lease up and redevelopment. We have approximately 700,000 square feet of vacant space throughout our Florida portfolio which has a market value of approximately $8 million in additional annual rental income. This is real upside for us as we believe we can increase our Florida occupancy rate by a 100 to 200 basis points over the next two years.

We have also seven redevelopments in process for an incremental cost of approximately $50 million including Boca, Boynton Beach, South Beach Regional, Pablo, Lake Mary, Kirkland shops and Country Side. These redevelopments include anchor expansions in additions for retailers such as Publix, Ross, LA Fitness, Fresh Market and others. Returns should be in the 8% to 10% range.

In summary we expect to generate a lot of growth from our existing assets. Our long-term strategic plan continues to be focused on generating 3% growth in same property NOI and $150 million in annual development and redevelopment completions at returns between 8% to 10%.

Assuming we maintain a modest leverage ratio this strategy has the potential to generate cash flow growth of approximately 7% per year. Tom and Mark will now run you through more details of the quarter. Tom.

Tom Caputo

Thanks Jeff. This morning I will focus my remarks on operating fundamentals, dispositions and acquisitions. We continue to be very pleased with how our portfolio is performing on most metrics including same property NOI and leasing spreads. Same property NOI was up 3.1% driven by a 6.4% increase in the Northeast, 4.4% in the West, 2.6% in Florida offset by a decrease of 0.6% in the Southeast.

We currently have executed leases with 51 tenants who are in the process of building out approximately 200,000 square feet of space which will generate approximately $4 million in annual rent when the tenants opened 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 120 new leases, renewals and options totaling approximately 486,000 square feet at a positive rent spread of 12.5%. Same-store rent spreads have been very strong over the past four quarters, averaging 10% each quarter.

An important theme during the quarter was increasing momentum for new non-comparable leases. During the quarter we executed 18 new leases for just 100,000 square feet at an average rent of $26 of foot. The new non-comparable leases include a 20,400 square foot lease with Fresh Market to backfill the remainder of the Albertsons spots at Lake Mary, a 20,000 square foot lease for a reconfigured Old Navy at the Willows, a 9500 square foot lease with Ulta to consolidate two large shops basis at Treasure Coast and numerous shop leases at our various development and redevelopment projects.

Our leasing pipeline also remained strong with a total of 87 new leases and renewals under negotiation for over 400,000 square feet at double-digit rent spread. As you would expect many of the leases in the pipeline with high spreads are for space and centers which have been acquired over the past three years. However for the first time in several years our current pipeline also includes a number of high spread leases in our non-core portfolio.

We are at active lease negotiations with many top retailers including Wal-Mart, TJX, Bed Bath, Publix, Trader Joe’s and Ulta. Demand for new space is strongest from Junior Boxes, Restaurants, Health and Fitness tenants and various franchise operators. During the quarter occupancy in our core portfolio decreased by 30 basis points over prior year and declined by 30 basis points as compared to March 31, 2013. The majority of our occupancy loss was from low rent paying tenants in our lower tier portfolio.

The largest five losses in 2013 include a 27,000 square foot back office for St. Joseph Health Care Healthcare at Daniel Village in Augusta a 13,000 square foot those at News Myrtle Beach, a 12,000 square foot for Seasons Trading Company at Brawley and 8000 square foot lease with Schumacher Homes at Ambassador Row and an 8000 square foot lease with M&S Menswear at Mickleton.

These five tenants occupied a total of 68,000 square feet and represent 45 basis points of loss occupancy. The loss rent totaled slightly more than $500,000 or $7.60 a foot. We are actively negotiating with replacement tenants on four of the five vacancies. We are optimistic occupancy will increase this quarter based on leases which already have been executed the volume of leases in our pipeline and the volume of leases in our shadow leasing pipeline.

The good news is the current and shadow leasing pipelines include a significant number of new leases for space which has been vacant for several years in our non-core portfolio. Given this activity we expect occupancy to increase by approximately 50 basis points from Q2 levels by year end. We would like to reiterate a comment we made last quarter about occupancy.

If we remove the 15 centers with the lowest occupancy from the portfolio our occupancy would increase to 94.1% and shop occupancy would increase almost 400 basis points to 84.1%. These 15 centers have a total of just over a million square feet or 6.5% of our total gross lease of area. The properties are 69% leased and are valued at approximately a $120 million or approximately 3% of our asset value. All of these centers are scheduled to be sold over the next few years.

We are very pleased with the results of our dispositions in 2013. Today we have sold

24 properties with a total of 1.7 million square feet for a $196 million at a cap rate of approximately 7%. The characteristics of the majority of the properties sold have been smaller properties average size 71,000 square feet small markets population within three miles 61,000 people and low occupancy. Average occupancy was 83%.

The purchasers for these properties include lifted but non-traded rates relatively small funds, high net worth individuals and multi-family developers. Our disposition pipeline continues to be active with seven additional properties committed are under contract for $57 million and several other properties in the market for sale.

We are very comfortable with our goal to sell 300 million of our non-core assets in 2013. During the quarter we closed on $81 million of investments in the Northeast. The investments include two of the seven parcels in the Westwood Complex for $37 million. Our partners 40% interest in Southbury Green and Danbury Green shopping centers for $19 million and the $25 million investment in a 1175 Third Avenue which Jeff noted in his remarks.

The acquisition market is very competitive across the country. Very few institutional quality assets have been sold in our target markets over the past year. We have been actively seeking acquisition opportunities both for our core portfolio as well as the New York common joint venture.

We currently have two properties under contract for approximately a $100 million and we are in the late stages of due diligence on both transactions. One of the assets is a value add property in the San Francisco market and the other asset is a stable center in the New York City Metropolitan area. Both of these properties were sourced off market. We hope to provide more color on these properties on our next call.

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

Mark Langer

Thanks Tom. Good morning. We are pleased to report that our recurring FFO this quarter was $0.31 per diluted share up 11% compared to the same period of 2012. For the six months ended June 30th, our recurring FFO was $0.63 per diluted share which represent the 15% increase over the first six months of last year. While these headline metrics are very positive, we are equally pleased with the qualitative improvements that have occurred within our portfolio.

After I discuss our results for the quarter in our balance sheet, I will elaborate on some of the more meaningful changes in our tenant concentration, geographic location of our rental stream and the improved stability of our cash flows. I will conclude with an update on our revised 2013 outlook.

Starting with our operating results, we reported same property cash NOI growth of 3.1% for the quarter as well as for the first six months of this year. The major factor driving NOI growth was an improvement in minimum rents from contractual increases, including the amendment to the Food Emporium lease Jeff described.

From an earnings perspective this lease modification will add about $1.6 million a year to cash NOI and to recurring FFO. Excluding the additional $230,000 of rents that we received from Food Emporium for the second quarter, same property NOI growth would have been 2.6% over the second quarter of 2012.

In terms of charges to earnings this quarter, we recognized an impairment of approximately $2.5 million which pertained to one piece of undeveloped land that we acquired as part of our Capital and Counties acquisition. The land parcel is currently being marketed for sale and was written down to estimated fair market value based on a recent appraisal. In addition, we recorded an $800,000 non-cash charge to reserve, a straight-line rent receivable balance from an anchor tenant in our North Florida portfolio.

Turning to our balance sheet, our net debt to adjusted EBITDA was 6.7 times for the second quarter and our coverage levels continue to show improvement. Our adjusted EBITDA to fixed charge was 2.9 times and our adjusted EBITDA to interest expense was 3.3 times for the second quarter.

We continue to reduce secured indebtedness as we repay the $24 million mortgage on bucket station that board interest at 6.9%. The percentage of our cash NOI that is unencumbered now exceeds 75% and for this great flexibility as we have ability to redevelop many of our best properties without going through lender consents.

While our leverage in coverage metrics have clearly improved as a result of our portfolio transformation, there are a few other items to highlight that are not evident nearly from skimming the balance sheet and income statement. The quality and stability of our cash flows has been greatly enhanced based on the capital recycling we have executed and the target markets intendancy embedded in our portfolio.

Going back to the second quarter of 2008, we had a portfolio were more than 65% of our asset value was located in Florida, and were our top ten tenants represented approximately 29% of our AMR with publics accounting for 10.2% of our total AMR. Today our portfolio is geographically diversified, such that Florida comprises about 38% of total fair value, the northeast comprises almost 30% and the west coast a market where we had no exposure in 2008, now comprises 23%.

Our top 10 tenants now account for 22% of AMR down from 29% in 2008 and the AMR derived from publics has declined to approximately 4% of our total. These rents have increased 31% to $15.35, previous top 10 tenants like Blockbuster have been replaced with COSCO and new tenants like Trader Joes or Whole Foods, Nordstrom, and the Container Store are becoming a bigger part of our income stream.

The diversified mix of high credit quality tenants operating in some of the best retail markets in the country is a significant benefit of our strategic plan and we expect to see further improvements to these statistics as we continue to execute our capital recycling plans over the next 18 months.

Turning to our outlook. We have increased the lower end of our previous 2013 recurring FFO guidance by a penny, such that our new guidance range is $1.20 to $1.23 per diluted share. The underlying components of the guidance assume the following, an increase in same property NOI of 2.5% to 3.25% core on balance sheet acquisitions of a $100 million to $200 million including acquisitions that have closed year-to-date.

Joint venture acquisition activity of $50 million to $75 million, the repayment of our $45 million mezzanine loan receivable in the third quarter and total disposition activity of $300 million. In terms of our updated guidance, it is important to recall some of our original assumptions pertaining to dispositions.

We targeted $300 million in disposition activity and originally projected that we would dispose of a $165 million of assets during Q1 through Q3 and then sell the remaining a $135 million during Q4. We mentioned on our last call that we would consider accelerating some of the dispositions if market pricing was favorable.

As you can see from our update in the current release, we did accelerate our activity as we have closed on the sale of a $196 million of assets and have another $57 million of assets under contract. The increase in the lower end of guidance reflects the better than expected operating results we have achieved year-to-date with same-store NOI tracking higher than originally planned.

We expect our fundamental performance to remain strong during the last two quarters of the year and have raised our expectations of annual same property NOI growth to a range of 2.5% to 3.25% compared to the prior range of 2% to 3%. We have continued to make progress focusing on G&A cost reduction efforts and expect our annual level of recurring G&A to be around $38 million, which is at the low end of our original guidance.

Jeff highlighted the emphasis we are placing on all aspects of our internal growth, as we focus on lease up and redevelopment opportunities. We are committed to insure that our capital allocation principles remain disciplined and that we continue to intensively manage our portfolio to increase the net asset value of our real estate.

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

Question-and-Answer Session

Operator

(Operator Instructions). And our first question is from Brandon (indiscernible) of SunTrust.

Unidentified Analyst

Hey, good morning.

Jeff Olson

Good morning, Brandon.

Unidentified Analyst

Sorry, if I missed this. But on the Food Emporium deal, can you just walk me through the economics on that the $25 million for the 1.6 increase and then I guess expectations for what the market increase would be in 2023 versus what it is now?

Jeff Olson

We did get through it into tail, but basically we invested $25 million where we’ve received a 6.2% return on that capital that pumps up another 12% in five years. So the market rent went to a $105 a foot relative to the prior rent which was about $42 a foot and we believe market is closer to a $160 a foot. But I think the most important thing on that transaction is that the lease and bumps to fair market value in ten years.

Unidentified Analyst

Right.

Jeff Olson

So, from an IRR standpoint, we believe we’re in excess of 15% on that deal.

Unidentified Analyst

Okay, thank you. And then on the occupancy loss about $65,000 was from, I guess low paying rents at $760 a square foot, do you have any expectations as to why you shouldn’t lease that out to that?

Jeff Olson

I think it’s going to be comparable to that level.

Unidentified Analyst

Okay. And then my last question on occupancy increase for the end of the year the 50 basis points from Q2 levels, can you break that out versus small shops and large tenants?

Jeff Olson

I think this could be a blend between the two.

Unidentified Analyst

Above 50-50?

Jeff Olson

Yes, probably. I can’t be too exact on it but it’s going to be a blend.

Unidentified Analyst

Okay. Thank you very much.

Jeff Olson

Okay. Thank you, Brandon.

Operator

Our next question comes from Vincent Chao of Deutsche Bank.

Vincent Chao – Deutsche Bank

Hey good morning everyone. It sounds like the disposition plans are moving right along, just curious though just from a maybe qualitative perspective, have you noticed any real change here in buyer behavior as a result of the rate increase I mean just basing what you’ve been able to execute seems like not but just curious if you have any other color to add there?

Jeff Olson

Yeah, Vincent, not material so far I think things have more or less stabilized so we have not seen a material change in buyer behavior. Across all asset quality A, B and C.

Vincent Chao – Deutsche Bank

Okay, okay. And then just curious on the sales that you did in the quarter the PlazaAlegre in Meadows just wondering what the rationale behind that was I mean it seems like Miami well leased pretty good to EBR and public anchored just curious what the rational was for those two particular assets?

Jeff Olson

Yeah in those two cases they were relatively small assets that had minimal growth and we found pricing to be very attractive on those I mean basically in the mid 5s in terms of the cap rate.

Vincent Chao – Deutsche Bank

Okay.

Jeff Olson

So we did have some unexpected investment activity that happened during the quarter I mean at 1175 was not planned nor did we plan to buyback the 40% interest at Southbury and Danbury. So we thought it was a great trade essentially to take some mid five cap assets off the table and replace them with higher yielding and higher growth assets going forward.

Vincent Chao – Deutsche Bank

Okay. Great that’s all I have thanks.

Jeff Olson

Okay. Thank you.

Operator

And the next question comes from Ross Nussbaum of UBS.

Ross Nussbaum – UBS

Hey guys good morning.

Jeff Olson

Good morning, Ross.

Ross Nussbaum – UBS

I got a couple of questions. Back to the Food Emporium deal I completely understand why you guys wanted to do that deal, why did Food Emporium want to do it, did they need a cash injection?

Jeff Olson

I don’t know the answer to that question Ross.

Ross Nussbaum – UBS

Did you approach them with this deal or did they come to you and ask for some kind of a restructuring?

Jeff Olson

We’ve been approaching them it seems like every week since we brought that property we really wanted to do something with that asset and we’re not necessarily expecting that this would be the result we’re very satisfied with it.

Jeff Olson

And their company was put up for sale last week you probably saw that in the press so they obviously need to recapitalize one way or the other.

Ross Nussbaum – UBS

Yeah I mean that’s sort of I was thinking was clearly you have to think about the credit of Food Emporium in terms of injecting $25 million so you’re comfortable that from credit perspective that was okay.

Jeff Olson

Yeah I mean the most important thing because we’ve been out looking for users for the space because that’s really what we were trying to do and we have real conviction behind our market rental rate estimate which is far in excess of what they’re paying today at $105 a foot. So in other words we’d be delighted to get the space back to the hit process at the current rent.

Ross Nussbaum – UBS

All right. On the small shop leasing front it looks like it slipped a little bit in terms of the occupancy there was there anything specific behind it and are you expecting some improvement in the second half?

Jeff Olson

Well, the answer to your second question is we do expect improvement in the second half, the first question is mostly in our lower tier assets where we’ve had the occupancy losses and it’s frustrating our goal is obviously to increase shop occupancy as quickly as we can but fortunately it’s in the lower tier assets they’re paying very low rents as suppose to the properties we bought over the last three years or the assets that are in our legacy portfolio that are much stronger in South Florida and in stronger markets.

Ross Nussbaum – UBS

Okay. If I think about the 3.1% same-store NOI growth you did this quarter and I break that out between core and non-core. I know in the first quarter it was something like 4% on the core and 1% growth on the non-core, was it a similar kind of break out this quarter?

Jeff Olson

Yes, I mean, if you look at it by region which Tom discussed in this remarks I mean we were up 6.4% in the north east, 4.4% in the west so obviously really cranking it up in those market. Florida was at 2.6% and then the balance of the south east was down 0.6% and that’s where most of the non-core resides.

Ross Nussbaum – UBS

Okay. Final question from me on the Westwood mezz loan was that a modification to the original terms or was that originally contemplated I guess that’s part one and then part two is the 5% rate if I got that correctly looked a little light for a mezzanine can you talk about that a little more?

Jeff Olson

I mean it’s really more of a mortgaging loan and that was negotiated when we initially structured this transaction from the on-set. And basically what it did is that allow the seller sometime to find an exchange property because he is going to consummate a 1031 transaction.

Mark Langer

So the pricing reflecting Ross the clear ability intend for us there – we knew we were going to capture the asset within a year so it wasn’t from our standpoint any undue risk the intend of it was to acquire the asset.

Ross Nussbaum – UBS

Is there any contingency in the acquisition to their finding another property or not?

Mark Langer

No.

Jeff Olson

No.

Ross Nussbaum – UBS

Okay. Thanks guys.

Jeff Olson

Contractually by I think its January 15th of next year contractually…

Mark Langer

There is a hard stop.

Jeff Olson

He is obligated to sell to us.

Ross Nussbaum – UBS

Appreciate it, thank you.

Jeff Olson

Thank you.

Operator

And our next question will come from Quentin Velleley of Citi.

Michael Bilerman – Citi

Yes Michael Bilerman. Just sticking with the disposition plan is there any the $60 million its under contract is there any contingencies to those closing at all that those can move or those are pretty hard at this point?

Jeff Olson

Michael it’s a mix of properties that are committed versus those that are under contract so a bulk of them are still in due diligence it’s the break out is roughly about $13 million is hard and the balance is under due diligence.

Michael Bilerman – Citi

And then you’ve I think you talked a little bit about having 150 for next year and to hit the 300 another 40 to go for this year I guess as you think about that bucket of $200 million how much of that 120 those weakest 15 assets that you’re talking about are included in that $200 million or I don’t know some of them are included in the 57 that’s already pending, but just how much of that stuff are you clearing out?

Jeff Olson

It’s a great question because some of that stuff is stuff that were in the process of leasing up which we’d rather lease up prior to selling it because we’ll get more money obviously. So I would say a good estimate is about half of that is expected to move over the next 18 months.

Michael Bilerman – Citi

Okay. And then how much money overall as you put money in these to get paid for on the back end how should we think about incremental CapEx and I guess are you going to sort of break out how much of CapEx you’re spending on the core versus on stuff you’re going to sell?

Jeff Olson

Yes, I wouldn’t expect it’s going to be a material amount of CapEx there will be some TI associated with some of the anchor leasing but I would not expect it’s going to be that material in the grand scheme of things these are not sort of high valued, high rent assets Michael.

Michael Bilerman – Citi

And then once we get pass the 150 next year and the 50 left to go in the fourth quarter and I guess 16 more out of the – weaker stuff. How much more of the portfolio would you seek to clear out is it $200 million, $300 million, $500 million just to give some goal post around how much more asset sale activity we can expect?

Jeff Olson

I don’t think there will be a whole lot more from there unless we find opportunities like we found this past quarter where we were able to invest about $80 million at a very attractive going in yield with good growth and we exchange that with flatter assets that we are able to sell in the mid five. So I think we’ll always sort of look opportunistically to see what the long term growth rate is on some of our assets and if we can exchange so as for higher once we’d be willing to do that trade. But that equation I mean that – that would need to be satisfied in order to compel us to sell more property.

Michael Bilerman – Citi

Right but I guess from this, if we think about what’s left to go in the back half of the year what you’re targeted for next year and then the balance of those weaker assets you’re talking somewhere called $325 million of asset sales that, once we get through that more effectively almost done?

Jeff Olson

I think we’re getting pretty close.

Michael Bilerman – Citi

Okay. Just going back to the Food Emporium and hit the term on one deal but you did spend some time talking about it. The $42 rent that was there before and then the 105 that is going to are those in place cash or are those straight line GAAP numbers?

Jeff Olson

They’re cash numbers.

Michael Bilerman – Citi

And so how from an FFO perspective I guess with the re-straight lining of rents what’s going to happen from an FFO perspective versus an AFFO perspective?

Jeff Olson

It was all incremental but Mark if you want to add.

Mark Langer

Yes, Michael as – in my comments I highlighted the $1.6 million that I said would flow through from a cash perspective as well as on a recurring FFO basis it flows through essentially what happened is the prior market-to-market amortization in straight line, in straight line component kind of offsetting this equation because now they are being amortized the new amounts are obviously much lower but they are being amortized over 10 years instead of the 45 year period. So there is net FFO accretion of about $1.6 which happens to approximate the cash impact.

Michael Bilerman – Citi

And then, you mentioned that you are going to have $65 million into the project. The 10-K had your balance at 50 million at year end.

Jeff Olson

65 is our estimates fair market value of that property.

Michael Bilerman – Citi

So thinking about it from you had 50 million in you put another 25 so you are in the asset today at 75 is that?

Jeff Olson

No, n, no.

Mark Langer

No.

Michael Bilerman – Citi

Your 10-K has an accumulated balance of 50 I don’t know.

Jeff Olson

I think that must include.

Mark Langer

It includes.

Jeff Olson

Market value adjustment to it but our base I mean we are 41% at end of our adjusted basis. So back into that math. So our basis would be in the 40s.

Michael Bilerman – Citi

Including the $25 million that you spend.

Mark Langer

That’s right.

Jeff Olson

It’s correct.

Michael Bilerman – Citi

So the 50 million much include some your fair market value.

Mark Langer

It includes all the intangibles as part of the purchased price allocations.

Michael Bilerman – Citi

Right. Okay, all right. Thank you.

Mark Langer

Yeah.

Jeff Olson

You’re welcome.

Operator

And our next question is from Jeff Donnelly of Wells Fargo.

Jeff Donnelly – Wells Fargo

Good morning guys. And thanks for the color on the disposition market earlier. I just want to drill back into that and how are buyers financing these transactions and these find to be a fairly price sensitive market?

Jeff Olson

I think what we are finding is on the tougher assets the buyer pools not very deep. There might be two or three or four people that are interested and one emergence is the winner. Some are financing with CMBS financing we are doing two deals right now with one buyer and one of them with the light company and one of the them with the CMBS. So it’s a mixture of some of them are just taking them down to all cash. And some are taking them down online to credit this small funds are the listed but non-traded REITs it’s a variety but we are seeing a mixture of banks, cash, lines of credit, CMBS and light companies.

Jeff Donnelly – Wells Fargo

Is it your sense that they are using fairly high leverage on them or is that maybe not available for them.

Jeff Olson

My sense is that if it’s not cash it’s generally that the non-traded REITs are doing 50% and the rest are doing probably 60% to 70%.

Jeff Donnelly – Wells Fargo

Okay and just to switch gears on the leasing side we’ve just seen TI Dollars on new leases across the shopping center just kick up a little bit this quarter across many of the companies. Is that coincidental or is that a function do you think of companies and be cutting a little deeper into the tougher lease basis or as you move further end of the cycle or do you think tenants are out there are just looking for more support from landlords?

Jeff Olson

I think in our case it’s a combination if you look at our same-store which was about $13 a square foot above what we would say 10 would be in the norm it was a number of restaurants to some salons etcetera that require a fair amount of plumbing. So they get a little more expensive and on the development, redevelopment completely reconfiguring spaces are building from cold dark shells when that’s why those are higher.

Jeff Donnelly – Wells Fargo

And just one last question in your remarks you did talk a little bit about the junior anchored demand is there an opportunity for you guys to continue to combine small shop space on an economic basis to meet that demand like how do you think about those opportunities?

Jeff Olson

Oh absolutely we absolutely if you think about the amount of development that’s occurred over the last five years which is very, very, very little. The juniors boxes have very few places to go and so we are doing an awful a lot in our development so taking large blocks of shop space and either demoing it and putting in a junior box or combining it to put in a junior box. So that’s really the main product of most of our redevelopments is consolidating shops space and putting in junior anchors.

Jeff Donnelly – Wells Fargo

And but I guess how do you weigh the rent potential of a junior box versus what you are potentially giving up by the small shop space that you may or may not release the day?

Jeff Olson

Well if you take a center that has a lot of shop space and a lot of the vacant and we have more than our shares. If you add one or two junior anchors you can change the dynamics of a center instantly and all of a sudden you have the enormous tenant demand for the vacant shop space that’s left. And I think that’s the way we look at it. We can figure something and take a center that might be at any locations the configuration and turn it into a shopping center because you have the right tenant mix.

Jeff Donnelly – Wells Fargo

Okay. Thanks.

Operator

And the next question is from Michael Mueller of JPMorgan.

Michael Mueller – JPMorgan

Hi couple of quick ones. First of all the two properties you mentioned that were under contract for I think it was a $100 million are those on balance sheet purchases or for the joint venture?

Jeff Olson

One is on balance sheet and one is for the joint venture.

Michael Mueller – JPMorgan

Okay. And then I guess when you think of the leasing spreads we typically is to seeing high new leasing spread and a renewal spread that’s significantly below that because of options and everything else. It looks like this quarter your renewal spread was a far and excess of the new leasing spread. So wondering if you could just talk about what’s happening with the renewal spreads this a bit of an anomaly or do you see it’s sticking there?

Jeff Olson

Sure let me speak to a couple of things. One on new leases recalled at that in our new lease reporting irrespective of the time period we are comparing the new rent of the prior rent. And I believe they are some inconsistency in the space on those. And on the renewals we tend to have each quarter a handful of well below market leases that really helped to bring our numbers higher and this is really going to recurring theme over the past three quarters. There were a couple of leases this quarter that also sort of help bring that number up and as we look at the pipeline I think Tom described what’s in the pipeline in his comments we continue to see these kinds of numbers on a go forward basis line. So I think it’s really a product of the portfolio that we have recently bought where there are a number of large leases that are well below market.

Michael Mueller – JPMorgan

Got it. Okay that was it. Thanks.

Jeff Olson

Okay. Thanks, Mike.

Operator

And the next question will come from Cedrik Lachance of Green Street Advisors.

Cedrik Lachance – Green Street Advisors

Yeah.

Jeff Olson

Hi, good morning, Cedrik.

Cedrik Lachance – Green Street Advisors

Thanks for correcting it Jeff. It happens, a big picture question on investing in urban properties versus suburban properties. How do you think about both sides of the client. How do you think about the right cap rate differential between the two?

Jeff Olson

Yeah it’s a good question I mean in general what we are looking for our older properties that were built in the 50s, 60s and 70s that have some opportunity to grow that NOI substantially either through redevelopment or bringing for example but that’s this case a $2 rent to market acquiring commodity suburban centers is something that isn’t a big part of our gain plan. So I’m going to be hesitant to provide you what the cap rate differential should be but at the end of the day it all comes down to what kind of NOI growth would be embedded inside of each of those two different types of properties and what really looking to find properties that will give us an excess of 3% NOI growth on a 10 year basis which is hard to do on our space assuming that there isn’t going to be an uptick from occupancy. Tom do you want to add anything to that.

Tom Caputo

No, I’m just clear 100% our leases whether it’s urban or close into urban markets. We have the ability to drive rents on renewals our new space far more than we do when we get outside of that way 10, 15 miles where we have almost no leverage at all because we are just another center and a long line of retail whether it’s anchored or non-anchored we are just one of many as oppose to being in a market where retailers is cared and demand is high.

Cedrik Lachance – Green Street Advisors

So when you think about your portfolio and maybe five years from now what percentage of it you think will still be found in suburban locations that have minimal rent pricing power?

Jeff Olson

I don’t think it’s going to be timing. It’s going to be I mean less than 3%. And the only reason we might have some would be we have some debt on properties that maybe difficult to sell some of those assets.

Cedrik Lachance – Green Street Advisors

All right. Thank you.

Jeff Olson

Okay.

Operator

And the next question is from Samit Parikh of ISI.

Samit Parikh – ISI

Hey good morning Jeff.

Jeff Olson

Hi, Samit.

Samit Parikh – ISI

Your new rents that you are signing this quarter and for the year you know about in the mid 60s I know your portfolio smaller than some of our peers so maybe a lot large number of business and pertain for you but in terms of what you are signing in the lease and the space that expiring I mean how comparable do you think that is with the spaces that are expiring in 2014 which are in the 13s and the spaces that are expiring 2015 which is in the low $14 rents.

Jeff Olson

I mean clearly we think that there is some upside there and we do have especially starting in 2015 some anchors that are rolling that are well, well below market and I would expect anchors that may mature later in 2016, 2017 and 2018 on may be renewed early much like what happened with Food Emporium quite frankly which by the way it’s not reflected in any of our spreads. But nonetheless I – would anticipate this trend to continues to remain.

Samit Parikh – ISI

Okay. Is there any way to quantify how many of those anchor spaces that are sort of below market, you think that would potentially roll or you may be able to recapture the upside early in the next three years?

Jeff Olson

I mean – there is a way to quantify it, but we’re not prepared to stick our neck out there because in a lot of cases you just don’t know we would have not anticipated that the Food Emporium transaction would have come to us this year. But I think we’ve laid it out pretty well especially when I went to sight plants earlier in the call, sort of what some of the opportunities are and I think in the past we’ve talked about these below market leases adding about 1% to our annual NOI growth rate over time. So I would stick at them.

Samit Parikh – ISI

Okay. And then Tom you talk about 51 executed leases 200,000 square feet about $4 million of annual rents, are those leases are executed in your lease percentage number at the end of the quarter?

Tom Caputo

Yes.

Jeff Olson

Yes.

Samit Parikh – ISI

They are. Do you know what the timing of the commencement of those are as that something that will happen in the back half of this year?

Jeff Olson

I think the majority of it, majority of it will come in the back half of the year some of it might spill over to the beginning of next year depending on whether it’s new construction meaning of building torn down or something like that. But for the most part I think it’s the back half of this year.

Samit Parikh – ISI

Okay. And then sort of just a question on how you define same-store NOI growth and you excluded redevelopments but I’m curious in terms of what constitutes a redevelopment and what does not so maybe I’ll just give you an example, if you’re downsizing Old Navy and you put someone else inside that downsize space something like that which may not be a major redevelopment but does have some considerable TIs, is that something where the new lease on that space would be something you would put in same-store NOI or is that something that you would say as a redevelopment and is excluded?

Jeff Olson

Yes, I mean generally if we’re spending more than $1 million on a specific tenant that will get carved out and put it into the redevelopment pool and we specifically disclosed what the redevelopment pool is in our supplemental package finance. And I think we specifically also include which properties are included in the same property pool in our supplemental package as well.

Samit Parikh – ISI

Okay. I mean, do you have any estimate in terms of what your NOI growth may have been in the first half of this year if you included?

Jeff Olson

It’s a really, it’s a great question I plotted the same question this morning but I don’t have the answer to it. I mean it would be higher, but Mark we should figure that out and it’s a good question because I think that there is some inconsistency out there.

Samit Parikh – ISI

Okay I appreciate. Thank you.

Jeff Olson

Okay. Thank you, Samit.

Operator

And this does conclude our question-and-answer session for today. I would like to turn the conference back over to Jeff Olson for any closing remarks.

Jeff Olson

Okay. Well, thank you for joining us and we look forward to our next quarter’s call. Thank you.

Operator

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

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