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Equity One Inc. (NYSE:EQY)

Q3 2009 Earnings Call

November 5, 2009 9:00 am ET

Executives

Michelle Villano – Investor Relations

Jeffery S. Olson – Chief Executive Officer

Thomas A. Caputo – President

Mark Langer – Chief Financial Officer

Arthur Gallagher – General Counsel

Analysts

Richard Milligan – Raymond James

Craig Schmidt – Bank of America Merrill Lynch

Paul Morgan – Morgan Stanley

Paul Adornato – BMO Capital Markets

Michael Mueller – JP Morgan

David Wigginton – Macquarie Research Equities

Quentin Velleley – Citi

Michael Bilerman – Citi

Richard Moore – RBC Capital Markets

Jim Sullivan – Greet Street Advisors

David Fick – Stifel Nicolaus & Company

Alex Barron – Agency Trading Group

Neil Vanhorn – Guyasuta Investment Advisors

Operator

Welcome to the Third Quarter 2009 Equity One Earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's conference Michelle Villano, Investor Relations.

Michelle Villano

With me on today's call are Jeffery S. Olson, Chief Executive Officer, Tom Caputo our President, Mark Langer, Chief Financial Officer, and Arthur Gallagher, General Counsel.

Before we get started I'd like to remind everyone that some of our statements today may be forward-looking in nature. Although we believe that such statements are based upon reasonable assumptions, you should assume that those statements are subject to risk and uncertainties and actual results may differ materially from the forward-looking statements. Additional information about such factors and uncertainties that could actual results to differ may be found in our earnings release and in our filings with the Securities and Exchange Commission.

Finally, please note that on today's 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 the earnings release. Both the earnings release and our quarterly financial supplement are available on our website at www.equityone.net.

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

Jeffery S. Olson

Thank you for joining us for our Third Quarter 2009 Earnings Call. We're very pleased with how we performed this quarter and we're excited about the opportunities that lie ahead. Our third quarter results were consistent with our expectations and we are seeing signs of a healthier leasing market. The financing market has dramatically improved and we have plenty of access to capital. We are excited about our new investment in Long Island and we are looking at a number of ways to create value at this site. We will tell you more about this investment later in our call.

I will address three topics this morning, operations, external growth, and financing. On operations our same property NOI and occupancy declines were in line with our internal expectations. As Tom will discuss in more detail, we have seen resilience in our anchor tenants as demonstrated by our 95% occupancy rate for our anchor spaces. This rate is the same level we experienced in 2007 when the market was at its peak.

While the downward pressure in occupancy since 2007 has primarily come from our shops, we are starting to see some signs of stabilization. For example, during the quarter we signed nearly 200,000 square feet in new leases versus 123,000 square feet in the second quarter and a 101,000 square feet in the first quarter. The bulk of our increases came from small stores.

Active tenants include Panera Bread, TD Bank, Anytime Fitness, Edible Arrangements, Dunkin Donuts, Subway, along with many local restaurants, nail salons, and medical services providers. The summer is typically the toughest season for our Florida retailers as tourism is low. Now that we are headed back into high season, we expect most of those retailers that made it through the summer to stay.

Turning to our external growth, our plan will continue to be focused on acquiring high quality centers containing below market rent that have some opportunity for value creation. While there are a limited number of centers that have these characteristics and are available for purchase, we are starting to identify and probably more importantly create some unique opportunities.

One such opportunity was Westbury Plaza located in the heart of Nassau County, Long Island. We put Westbury under letter of intent in early August when the financial markets were tight for many. We closed on it last week. We are very excited about this property. There is enormous demand for retail in this region as the demographics are strong and barriers to entry are high. It is one of the most productive retail corridors in the entire country, and our center is the dominant center in this market.

Our tenants generate sales of nearly $500 million per year. We paid an eight cap on this property. And while we are still evaluating our financing options, should we decide to place a long-term mortgage on it, our initial cash-on-cash returns would be in excess of 10.5% based on the most recent quotes we have received from potential lenders.

During our due diligence period, we also tied up a large development parcel in close proximity to Westbury Plaza. And this site may allow us to expand some of our undersized retailers and recapture some of our below market leases. It is a bit early to get into much detail, but we look forward to discussing this opportunity in the coming weeks.

The Westbury investment leads to my third topic, financing. It's amazing how much has changed in just a short period of time. It was only six months ago when we were repurchasing our public bonds for $0.60 to $0.70 on the dollar, implying yields to maturity of 13% to 15%. Now we are receiving daily loan quotes from the banks on issuing ten-year bonds in the unsecured market in the mid 7% rate range, and we have also received ten-year mortgage quotes on Westbury in the low 6% rate range.

In addition, we have received expressions of interest on Westbury from several potential joint venture partners. Our ultimate financing decision on Westbury will be made in conjunction with our redevelopment plans and our desire to provide our shareholders with any benefits from the value that is created.

As tough as it is to find A quality assets, we continue to diligently look to source and create opportunities within our targeted markets. We are confident that we will find more acquisitions as billions of dollars of debt maturities are on the horizon and many landlords do not have the capital to invest in leasing or redeveloping their shopping centers.

Value-added acquisitions will require capital and this led to our decision to decrease our dividend. We want to find more transactions like Westbury. The new payout ratio is more appropriate for our industry specter and our capital structure. It better aligns capital allocation with our growth objectives while still maintaining an attractive dividend yield.

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

Thomas A. Caputo

This morning I will discuss our third quarter operational highlights with regards to leasing and property management, and I will add some color to our recent Westbury acquisition. Our tenant relation's team continues to actively meet with national and regional retailers to assess opportunities and strengthen our relationships with new and existing tenants.

We have conducted over 70 portfolio reviews year-to-date and we scheduled approximately 15 additional meetings prior to the end of the year. These reviews enable us to better understand retailer performance at EQY centers and explore possibilities for expansion at other EQY sites. Needless to say, we schedule multiple portfolio reviews with our largest tenants during the course of each year.

Leasing continues to be our highest corporate priority. Our leasing team remains very focused on leasing existing vacancies and retaining tenants in our portfolio. We're in good shape with our anchor occupancy, which ended the quarter at 95.4%. Our small star occupancy has been more of a challenge during the economic downturn with over 1.1 million square feet of shop space vacant at the end of the quarter.

Our leasing agents continue to spend two or three days a week canvassing competing centers for new tenants. During the quarter we added two new junior agents who have one responsibility, canvas competing centers for our senior leasing agents. At the end of the day, the key to leasing local shop space is basic blocking and tackling until the job is done.

Our same side occupancy declined 60 basis points from 90.7% to 90.1%. The decline in occupancy included the loss of a 32,000 square foot Ingles at Wesley Chapel and a 32,000 square foot Ingles at Corp Commerce Crossing. Both stores have been dark in paying for several years.

We had a very productive third quarter on the leasing front with 131 lease transactions totaling 564,000 square feet. We executed 43 new leases totaling 198,700 square feet at an average rental rate of $13.18 per foot, 36 of the 43 new leases were with a combination of national, regional and local shop tenants occupying less than 5,000 square feet. The new tenants include nine restaurants, several mobile phone stores, a variety of service uses and most interestingly given the economy, two real estate offices.

As Jeff mentioned, we leased almost twice as much space in the third quarter as we did in each of the first two quarters of the year. We also renewed 81 leases totaling 224,300 square feet at an average rental rate of $12.82 a foot, and seven other tenants exercised contractual renewal options for leases totaling 141,100 feet at an average rental rate of $4.75 a foot.

Our leasing team completed a number of significant leases in the quarter. We executed a lease with LA Fitness for 50,795 square feet currently occupied by Publix at our pavilion center in Naples. Publix will be relocating next door in 2010 to a larger store formerly occupied by Albertsons. We are disappointed to lose Publix, but delighted we've been able to backfill their box a year before the supermarket vacates.

We also executed a lease with Little Giant supermarket for the 32,000 square feet at Wesley Chapel formerly leased to Ingles, which had been dark in paying for over four years. You may recall last quarter we mentioned the addition of a 50,000 square foot vocational college at Wesley Chapel. The addition of the Everest Institute has significantly increased traffic with approximately 800 to 1,000 students visiting the school each day. The combination of the school and the new supermarket has generated significant tenant interest in the property.

Our leasing team is in serious discussions with several national tenants who are now interested in a total of approximately 35,000 square feet of space in the center. At Skylake, we are under contract to purchase an adjacent parcel currently occupied by a gas station. We executed a lease during the quarter with TD Bank to replace the current fuel station operator.

Cash leasing spreads for new leases in the second quarter were positive 24.4%. Excluding the lease with LA Fitness, cash leasing spreads were slightly negative at 2.41%. Cash leasing spreads for our negotiated renewals were negative 3.2%. It is important to note that the negative spreads are highly concentrated in 24 leases, which were renewed for two years or less.

These leases, which will rollover over the next two years, have a negative rent spread of 17% as compared to the remaining 57 leases, which were renewed for more than two years and have a positive rent spread of 2.1%. We are making a concentrated effort to limit the duration of leases with lower rents. Rent spreads for contractual renewal options increased 2.2%.

Tenant improvements for new leases during the quarter were $32 per foot. Excluding the new lease with LA Fitness which includes a very expensive renovation of an old supermarket, same store TI's for new leases were slightly less than $12 a foot.

Overall, our leasing pipeline is healthy. We have executed leases with tenants under construction, which will generate in excess of $3 million in annual rent when the tenants open for business. Approximately two-thirds of this rent will commence in the first half of 2010. In addition, we have new leases currently under negotiation for approximately 100,000 square feet at slightly positive rent spreads and renewals currently under negotiation for approximately 100,000 feet at slightly negative rent spreads.

Occupancy in the DIM Vastgoed portfolio declined 80 basis points from 91.9% on June 30 to 91.1% at the end of the third quarter. EQY assumed the leasing responsibilities for the DIM portfolio on June 1 and we expect to assume responsibility for renewals within the next few weeks. We should have full control of the leasing, property management and accounting for DIM by March 31.

The DIM portfolio includes 21 shopping centers, 16 of which are anchored by supermarkets. This portfolio fits very nicely into the Equity One footprint with ten properties located in Georgia, five properties located in Florida, and three in North Carolina.

Our property management team is focused on collections and property expense controls. We anticipated bad debt would be a challenge and we incorporated a higher reserve into our 2009 budget. We have increased resources in our accounting group to maximize the recovery of our accounts receivable. We now have a dedicated team focused on national and regional tenants and we have increased our oversight of monthly collection results for small shop tenants.

Our goal on the property expense controls front is to reduce costs while at the same time enhancing the quality of the services we deliver to the tenants. We continue to explore opportunities to bundle services in every category and are constantly talking to multi-regional and national service providers. The reductions in the cost of third-party services will help reduce occupancy costs for our tenants, and a portion of the savings will drop to our bottom line.

During the quarter, we launched what we anticipate will be a profitable solar program. We installed solar panels on the roof of the Shaw supermarket at Webster Square in Massachusetts. Shaw's will purchase 100% of the entity generated by the solar panels. Our initial investment will be reduced by substantial rebates from the federal and state governments and EQY will earn an attractive return on our net investment. We intend to expand this roof top solar program throughout our Massachusetts portfolio and then explore options in the balance of our portfolio.

EQY entered into another revenue enhancing venture this quarter with Capital Telecom. We executed a master agreement with Capital Telecom to develop cell towers throughout the EQY portfolio. Capital Telecom will provide the equipment and construct the cell towers on EQY properties identified by multiple mobile carriers. EQY and Capital Telecom will split the revenues from this program.

The acquisition of Westbury Plaza clearly was a very important event for Equity One. We are delighted we had the opportunity to purchase such a high quality asset as we entered the New York market. The property is extremely well located and arguably one of the best retail markets in the Northeast.

The productivity of the tenants at Westbury Plaza is higher than any center I have seen in over 25 years in the acquisitions business. We are confident there will be ways to add value to Westbury Plaza as we work through plans for the nearby development site, which we will purchase within the next few weeks.

Unsolicited retailer demand for this location has been incredibly strong and we have not even begun to market the site. We believe the acquisition of Westbury Plaza and the development site will lead to the opportunities for EQY to expand our presents in the Northeast with other high quality assets in supply constrain markets.

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

Mark Langer

We're pleased to be here today to provide a detailed look at our third quarter earnings, which I note include minimal non-recurring items. In fact, our goal is to provide both simplicity and transparency around our reported results. We believe that as a natural consequence of our straight forward capital structure, the ownership structure of our assets, and the limited nature of our development pipeline.

Prior to discussing our results, I thought I would reflect on a few themes that came to mind as we were preparing for our recent board meetings. In the last several weeks at big portion of my time has been spent evaluating our long-term financing strategy especially as we gain clarity on our acquisition activity.

Our financing goals moving forward are designed to meet the following five objectives. One, maintain overall leverage ratios in the low to mid 40% range. Two, reduce the percentage of encumbered NOI in our portfolio relative to unencumbered NOI. Three, maintain a well laddered debt maturity schedule. Four, use longer term financing and maintain an average term to maturity of at least six years. And five, we want to maintain credit facilities and sufficient amounts that provide adequate liquidity both for acquisition opportunities and for unexpected shocks in the market when traditional financing options may be less attractive.

In terms of recent financing activity, we used our line to fund $52 million of mortgage debt which matured in October on the loan for Carolina Pavilion. We also used our line for the $104 million purchase of Westbury. We are currently in discussions to term this out during the quarter in an effort to keep our line balanced at lower levels.

We are currently evaluating all of our alternatives in this regard, including the unsecured bond market, longer term mortgage financing and joint venture financing. We are encouraged by the quotes we are receiving for mortgage debt on Westbury, which are in the low 6% range, as well as the favorable move in unsecured bond pricing and which our costs on ten-year notes may be in the mid 7% range.

We are also in discussion with institutional investors who are very interested in forming joint ventures, particularly on high quality assets. We are considering each of these options in light of the broader objectives I just outlined.

I highlighted debt laddering being a key objective and it is one area where we feel we have shown real differentiation among many of our peers. To add more color on this, it is helpful to know that in 2010 we have approximately $72 million of maturing mortgage debt with a weighted average interest rate of approximately 8.2%. In 2011 we have approximately $69 million of maturing mortgage debt with an average rate of approximately 7.3%.

The overall LTVs on this debt are estimated to be 45% to 50%, providing good indication as to our ability to refinance at attractive pricing. Our in place interest rate of 7% to 8% are also closer to or slightly higher than current market rates, which will help avoid an unfavorable trend and interest expense moving forward.

You heard Tom talk about our main focus, which is on leasing and operations. We also continue to search for ways to take costs out of our platform and to identify new ancillary income to help enhance property level NOI. The new solar power purchase agreement with Shaw's that Tom described is one example. A real focus on property level quality, costs, and revenue generation will always be at the heart of our ultimate strategy as we believe it will provide us with a competitive advantage.

I will now walk you through our third quarter results focusing on three areas. One, changes in our balance sheet versus the second quarter. Two, the key drivers of our third quarter earnings. And three, our expectations for the balance of the year.

Starting with the balance sheet. As compared to June 30 the significant changes of note include the following. Our marketable securities declined $47.4 million, which stems from the expected sales and maturities of our investment and debt securities, which accounted for $29.5 million of the decline and the sale of our Invesco and Ramco stock, which account for the remaining $17.9 million.

Our investment and debt securities is now fully liquidated and we do not expect any similar investment for the foreseeable future. In terms of the Ramco stock sale, we recognized the gain of approximately $6.3 million during the third quarter, which represents a 68% total return on our investment net of the legal and professional fees incurred.

Our accounts receivable increased approximately $950,000 or about 10% and we continue to feel the effects of small shop tenant hardships. Our bad debt expense in the quarter was approximately $1.3 million, which is comparable to the amount recorded in Q2 but our ratio of the expense to rental and recovery income increased from 1.8% to 2%.

The bad debt expense recognized in the third quarter was in line with our expectations as outlined in our last call. On prior calls I have mentioned that our reserve is applied on a tenant-by-tenant analyses of risk and it is not set based on broad estimated percentages. Having said that, it is interesting to note that the actual level of the reserve at September 30 fully accounts for all receivables greater than 60 days past due and covers a small portion of receivable balance that is 30 to 60 days old.

We expect our reserve levels will moderate somewhat in the next two quarters as our Florida tenants generally have the most trouble in summer months and their cash flow improves as they benefit from seasonality. Our total liabilities declined by approximately $24.6 million. Primarily attributable to the $20.7 million reduction in our line of credit balance and the $3.8 million decline in our mortgage debt.

The line reduction was made possible through the maturities and sales of our investment securities that I previously mentioned. Our capital structure in increased and diluted shares outstanding reflects the full weighting of our April issuance of common stock, in which we generated approximately $126 million of proceeds from the sale of $9.1 million shares of stock.

Now turning to our incomes statement. Our FFO for the quarter was $0.36 per share. The key items impacting this result were as follows. One, the $6.3 million gain on the sale of the Ramco investment I just mentioned. Two, a gain of $2.3 million from our sale of two out parcels. Three, our same property NOI decline of 4.5%.

In addition to occupancy related factors, the variance was impacted by the year-over-year increase in bad debt expense, which was about $677,000, the impact from rent relief]and abatements, which amounted to approximately $350,000, and the year-over-year implications of real estate tax accruals, which amounted to approximately $340,000.

G&A expenses in the quarter included direct G&A costs incurred by DIM, which were approximately $180,000 greater than expected as a result of legal, management and professional fees primarily attributable to our negotiations to take over additional operating functions.

We are pleased to be making progress to take responsibility for the additional leasing and property management functions that Tom described. The integration of all accounting functions is still on tract to occur during the first quarter of 2010.

I'll now turn to our FFO guidance for the year, which we are revising to $1.65 to $1.70, up from previous estimates of $1.55 to $1.63. This new guidance incorporates the gains recognized to date on our out-parcels, our RAMCO stock sale and the impact of the Westbury acquisition. Note that we still have some uncertainty regarding our final financing plan for Westbury and the pending purchase accounting adjustments, which may move the needle slightly within the guidance range.

This new guidance also includes additional gains from the sales of out-parcels in the fourth quarter of $0.02 a share. This guidance does not assume any additional investment activity beyond what we have described today. With this guidance we are also reaffirming our full-year same-property NOI forecast, which is minus 3% to minus 4% based on our updated leasing assumptions and our projected property level expenses. My focus for the remainder of the year will be centered on three main areas.

One, executing a financing strategy that provides additional liquidity to address the acquisition activity we announced today while giving us added flexibility for the future, two, finalizing our 2010 budget and implementing added discipline to our ongoing monitoring and management of property level NOI and three, building a team of employees who are focused and excited to build value for our shareholders and our tenants.

I continue to be impressed by the dedication our employees show while they address the many challenges our tenants are facing. Watching the team of people go the extra mile to finalize leases, implement new systems and solve problems in creative ways is invigorating. Our senior executive team has recently spent a lot of time developing a strategic plan that can help us take advantage of our liquidity and balance sheet in ways that will provide future growth. I am excited to have a roadmap that will allow us to work collectively toward that goal.

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

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from R.J. Milligan – Raymond James.

Richard Milligan – Raymond James

You guys had previously mentioned that you thought occupancy might bottom out around 90%. Do you guys still believe that to be true?

Thomas A. Caputo

I think, R.J., what we said is that we expected that we could lose 250 basis points of occupancy during the course of the year. Part of it is with some [inaudible] paying tenants, which vacated during the quarter, so we still have 30 basis points to go, perhaps, in our guidance.

We are fighting the good fight and working as hard as we can to hold our occupancy at 90%, but we might slip a little bit more.

Richard Milligan – Raymond James

And when do you think that slippage might come? Do you think that's going to be after the holiday season? At what point do you think it's going to bottom out?

Thomas A. Caputo

It's really hard to tell. As we noted on our call, the anchors are in really good shape at 94% plus leased, and it's the battle with the shop tenants that's an ongoing battle. But I think we're making progress. I think that the fact that we leased to so many new tenants, small tenants, especially restaurants during the quarter is a very good indicator. And as we've said, we have a very healthy pipeline going forward, so our goal is to keep our occupancy above 90%.

Operator

Our next question comes from Craig Schmidt – Bank of America Merrill Lynch.

Craig Schmidt – Bank of America Merrill Lynch

This can be either for Jeff or Tom. The cap rate of 8% at Westbury Plaza, what is that telling you where cap rates may have moved over the last two years and I guess for future acquisitions?

Jeffrey S. Olson

Look, I think at its peak a center like that probably would have been in the fives and sixes, so I mean you can gauge it on that basis. But I think it's also important to note and I said this in the prepared remarks, when we really put this under LOI, before the financing markets came back again, and so my sense is that it would probably more attractive pricing in today's market.

Thomas A. Caputo

And as a follow up to that, Craig, I've been in the acquisition side of the business for a very long time and this is the first time I ever remember getting cold-called by life companies who wanted to finance the property.

And sort of hearing an echo of what we used to say in the go-go days what does it take to make the deal. That's what the life companies are saying to us. They're very, very interested in this property because it's so well located and the tenants are so good and the sales productivity is so high.

Craig Schmidt – Bank of America Merrill Lynch

And I guess as the follow-up, just how close are the Westbury Plaza and your development site?

Jeffrey S. Olson

We really can't disclose that now. We're under a confidentiality agreement with the seller of the development site, so we just can't disclose it.

Craig Schmidt – Bank of America Merrill Lynch

But I guess it's close enough that it's an adequate substitute for your strategy?

Jeffrey S. Olson

It's on the same road and you can see the property from it. How's that?

Operator

Our next question comes from Paul Morgan – Morgan Stanley.

Paul Morgan – Morgan Stanley

Just looking at the leasing velocity in the third quarter and how it was up, could you just comment? Are you seeing this reflecting any changes in traffic for small-shop space or success at poaching other tenants like you suggested? I mean what's kind of driving it as we look into next year?

Jeffrey S. Olson

Everything that you read and hear about in the financial press is that the green shoots are starting to go. If you look at consumer confidence, that isn't so great, if you look at those studies. But I think that we have really developed a terrific team of leasing agents who are determined to hold our occupancy, increase our occupancy and they've rolled up their sleeves and they're managing to get it done.

And we have a very health pipeline and I think the roster of tenants that we were able to land over the last quarter to last two quarters has been pretty good and we have more good names on the list in our pipeline.

And just taking a look at Wesley Chapel, for instance, we might add 35,000 feet at Wesley Chapel this quarter alone just because we've managed to turn around a center that was probably 75% physically vacant. And by adding this vocational school and supermarket, now we have a number of nationals who are very interested in being in the center because it's now a high traffic center.

Paul Morgan – Morgan Stanley

And then if you look at the anchor, you've got about 1 million square feet of anchor leases expiring next year and it's at $6 a foot. I mean how are you feeling about those anchor expirations and where market rents are with respect to that $6 number?

Jeffrey S. Olson

Well most of those anchors, as you would guess, have contractual renewal options and we are actually in pretty good shape on most of those tenants going forward. We have a number of them well underway in terms of negotiations or early renewals, so I think we'll do well with that next year. I wouldn't look for a big pop in rent, but I think we will do well with retaining those tenants.

Operator

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

Paul Adornato – BMO Capital Markets

Back to Westbury, was wondering if you could characterize the seller and the seller's circumstances. Why did property – why was this property on the market or was it on the market?

Unidentified Corporate Participant

The property was actually marketed by Estelle, so it was widely marketed and we liked the property an awful lot and we did our best to acquire it and we were fortunate enough to do so.

Paul Adornato – BMO Capital Markets

Can you say if it was a bidding process?

Jeffrey S. Olson

Clearly there was a bidding process.

Operator

Our next question comes from Michael Mueller – JP Morgan.

Michael Mueller – JP Morgan

Tom, the comments about sequential leasing activity picking up from Q1 to Q2 to 3, can you put that in the context of what may be a more normalized year? How much seasonality is there typically in a Q3 coming out of ICSC, etc.? How would you attribute this to seasonality versus just overall business activity really picking up?

Thomas A. Caputo

I guess my first response would be I don't think very much of this came from the ICSC because most of the tenants were either local tenants or nationals that we were working on, supermarket chains that we were working on. I think that clearly from the perspective of South Florida in particular, there is certainly a seasonality to South Florida. And I think we picked up some local tenants who are interested in being here for high season, as Jeff mentioned in his remarks.

So I think that it works two ways, one is that the tenants who have made it through the summer are very likely to survive as high season arrives and in a similar fashion, new tenants who want to take advantage of the influx of snow birds lease space as well.

Michael Mueller – JP Morgan

Okay. Do I still get a follow-up?

Jeffrey S. Olson

Sure, Mike

Michael Mueller – JP Morgan

The rent relief that was mentioned before, I think it was $350,000, I think that was year-over-year. Can you talk about what form that takes? And just how we could expect that to burn off over the next several quarters or a year or two?

Jeffrey S. Olson

Sure, Mike. It is a combination of abated rent as well as pure relief. The trending on it that I described, it is year-over-year, so the 300 and almost 30,000 to 50,000 we had in the third quarter, when I look at what we see today, the fourth quarter amount will be approximate to that, maybe slightly lower.

And then it does burn off quite a bit as you head into '10. The first quarter of '10 should be less than half of that and it continues to dissipate because this is the obvious culmination of these requests that were largely coming in the first part of this year.

Operator

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

David Wigginton – Macquarie Research Equities

Can you maybe elaborate a little more on your acquisition strategy going forward just for maybe an amount standpoint and how your JVs fit into there?

Jeffrey S. Olson

Well, we don't have a stated amount. But in this environment, we very much are looking for value added plays in infill markets. And we think because there have been many owners of properties that have been stretched that have not been able to put in some of the basic capital for leasing and redevelopment, that we'll be able to find some opportunities like that.

And that is a bit different from what the environment was like a year or two ago. And those are the opportunities we're looking to unearth. We don't have a stated goal in terms of volume. We very much are going to be looking at this on a one-off basis.

And to the extent we find those opportunities, we very much would like to capture the upside within our existing shareholder base. So we will look for ways to finance those on balance sheet, having options of bringing in joint venture partners on more stabilized properties, whether that comes from some of our existing core assets or else.

David Wigginton – Macquarie Research Equities

So there aren't any constraints then from your JV partners with doing on balance sheet acquisitions?

Jeffrey S. Olson

No.

David Wigginton – Macquarie Research Equities

Okay. And then I guess just as a follow-up then, with respect to the Westbury acquisition, can you just maybe elaborate a little bit more on what the upside is there, if there is any, apart from the development site?

Jeffrey S. Olson

Well, as I stated in my prepared remarks, our site has below market rent opportunities, most of our retailers are undersized as well. And so we think there may be an opportunity for us to either expand some of those retailers or perhaps relocate some of those retailers to accommodate their expansion needs, so that would be the play.

Operator

Your next question comes from Quentin Velleley - Citi.

Quentin Velleley – Citi

I'm here with Michael Bilerman. My questions are just on leasing. And you commented on the short-term less than two year leasing that you're doing on weaker spreads. Are you expecting that trend to continue into 2010?

Jeffrey S. Olson

Quentin, it's really hard to tell how long it will last. But we have sort of a cardinal rule, which is if somebody's looking for a low rent deal or looking to renew at a lower rent, we try and keep the term as short as we can possibly keep it. We try not to give any renewal options. On a very rare occasion we'll do it if we absolutely need to retain the tenant, but just try and negotiate the shortest possible term that we can and it's just hard to know when that'll go away.

Quentin Velleley - Citi

And then you commented on [invest cord] being fully integrated by March and I know that there was a view that there could be some upside on the leasing side in terms of occupancy, but also the rent. When could we expect to see some of that upside starting to come through those assets?

Jeffrey S. Olson

I think that's a tough question. Several of the DIM properties are in fairly green markets and that's where the occupancy was lost during the quarter and that's where it's been lost over the last 12 months.

So I think that it takes a while when you get your leasing team on the ground to get some traction, number one.

Number two, the fact that we're taking over the renewals momentarily should be helpful. And number three, we expect this quarter to have some very, very good news on the largest asset, which is Carolina Pavilion. We have an empty Circuit City box there and we are pretty far down the road with a tenant that will make everyone at Equity One smile and hopefully the investors.

Michael Bilerman – Citi

Jeff, it's Michael Bilerman, I had just a question as a separate individual on the call. You, in your opening comments talked about obviously looking at opportunities, but you made mention of creating opportunities.

Jeffery S. Olson

Yes.

Michael Bilerman – Citi

And when you look at the Westbury Plaza acquisition and clearly it came from the DRA KIMCO partnership, they also had Pentagon Row on the market and then with the announcement last night of KIMCO effectively buying out DRA out of the priced assets.

I'm just curious as you looked at Westbury whether you had the desire to buyout the rest of those assets and whether you made a play there, number one? And number, two, if you didn't was it a size issue? Was it a pricing issue, just to sort of walk through the mindset of how you move forward.

Jeffery S. Olson

Let me address the creating part first because I do think it's an important distinction because as we looked at Westbury and as many, many other people did as well, I think most people had no idea that there was an opportunity to do something to create value on that property. And as far as I know, I think we were the only ones that really created this opportunity from something that the rest of the world had viewed as being a stabilized property.

And I think a major point of differentiation is at least in this transaction is our ability to create something that others perhaps did not see and that's the beauty of our business. We look at a lot of portfolios out there. And Tom and I both ironically bought that dairy portfolio when we were both at KIMCO. And we do think it's a very good portfolio. And at a certain price, I think we would have certainly been interested. But that opportunity did not happen.

Michael Bilerman – Citi

And how do you, and just because it is public information, can you reconcile if you were to look at KIMCO's disclosure on Westbury Plaza, you'd get NOI numbers sort of in a $7.8 million and based on your quoted 8%, you'd get like an $8.3 million number? And so I'm just curious, how do you bridge that gap?

Jeffery S. Olson

I don't know what numbers you're referring to and so I really, we did ours on a lease-by-lease basis. I can't reconcile your numbers.

Michael Bilerman – Citi

But this is your 8% yield's a current in place $8.3 million of NOI.

Thomas A. Caputo

Correct. And Michael, it's Tom, there are only eight tenants. So this isn't real complicated in terms of adding them up.

Jeffery S. Olson

And it includes a very hefty management fee.

Thomas A. Caputo

Yes, and we have a $400,000 management fee built into our NOI, which is probably way overdone for eight tenants. So we can only tell you the numbers that we have from the leases that we bought. And maybe the question's better asked to KIMCO.

Michael Bilerman – Citi

Yes, no, and that's why I asked. I mean, there clearly is some differential between the way they're reporting this asset's NOI, again using just the three months annualized, you get to $7.8 million. So there clearly is some differences in the way it's looked. So that's great.

Operator

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

Richard Moore – RBC Capital Markets

I actually have four questions, but I'm going to try to work them all into the one and a half. First, Jeff, if I could, why New York exactly, I mean obviously the asset is a stunning asset, I get that. But from a geographic standpoint, are you going to focus on New York in the future or is it sort of a departure from where you had geographically intended to be looking for assets?

Jeffery S. Olson

No, I think since the day I joined three years ago I identified New York as a market that we would love to own properties in. The New York metro area is probably the most severely undersupplied market in the country. And many, many of the big box retailers, especially on Long Island that have a need for expansion opportunities.

So we are very excited about it, and in addition to that, now we'd love to own properties in the Mid Atlantic as well, particularly in the DC area. But we will be opportunistic and we think that this entrance into the New York metro market is opportunistic with what we believe may be the best retail trade area in that market. We'd love to own 20 of these, Rich.

Richard Moore – RBC Capital Markets

Are you working, as you had mentioned previously on previous calls, with special servicers and all, is that part of the strategy to, or obviously this probably wasn't something like that clearly, but is that something that you're still doing?

Jeffery S. Olson

We absolutely are. We have regular meetings. It's taking a little longer than what we had expected, but that's the nature of the beast we're working with, and we are optimistic that something will come out of those relationships that have been developed with the servicers.

Richard Moore – RBC Capital Markets

You guys balance sheet seems to be in real good shape. Why look for joint venture partners for the stabilized assets? I mean, is there really any value to that anymore? I understand that during the credit crunch times that wouldn't have been a great thing to do but, I don't know, do you need to do that still?

Jeffery S. Olson

I think it depends on what the acquisition pipeline looks like and to the extent there are more value-added acquisitions out there and we need to finance them, I think we would be happy trading a stabilized asset that may go into a pension fund at a very low cap rate with a value-added plague and we would make that trade if we had to.

Richard Moore – RBC Capital Markets

Then last follow up on the Capital Telecom thing. What's the revenue potential do you think, I mean, your rough order of magnitude?

Jeffery S. Olson

I think it's small for the foreseeable future. It could grow as time goes on, but at the moment it's a master agreement. But we have detail rights on any center if we decide we don't a tower there we don't have to have it there. So it's very small for the foreseeable future.

Operator

Your next question comes from Jim Sullivan – Green Street Advisors.

Nick Vedder for Jim Sullivan – Green Street Advisors

It's Nick Vedder here. I was just curious just in terms of the shop space leasing obviously a lot of tenants have a lot of alternatives today when we have vacant shop space to move into. Can you just talk a little bit about how far market rents have fallen from their peaks for that product type in your markets?

Jeffrey S. Olson

It's difficult to come up with that calculation off the top of my head. We can get back to you on that one, Jim, I don't have that information with me, but I think it's fair to say that it's probably been in the 20% range on shop space, probably pretty fair. I think the edge that we have is that we have a portfolio that's primarily supermarket anchored and most of our supermarkets are the dominant supermarkets in the trade area, and so that helps you an awful lot.

And if you think about where some of the excess capacity came from in our business, it came from an unanchored strips and unfortunately the country and the southeast is littered with 10,000 to 20,000 or 30,000 foot unanchored strips that are sitting on 2 or 3, 4 acres of land. And those centers are very fertile hunting grounds for our leasing agents because there is a reason to come into our centers because they're anchored and there really is no reason, other than convenience, to go into those unanchored strips.

Unidentified Corporate Participant

Jim, if you put into context let's say market rents have gone down, call it 15% to 20% from their peak and we thought three years ago that our shop rents were 15% to 20% under market, now I think we're coming up against a rent roll where the shop rents are obviously much closer to market. But I think that's probably a fair representation.

Nick Vedder for Jim Sullivan – Green Street Advisors

Just one follow up question to that, I know you have a fair amount of shops base rolling over next year, can you talk about any traction that you're getting on that front in terms of the leasing?

Jeffrey S. Olson

Well the notice requirements for the shop tenants are a lot shorter than it is for the anchors. We have a pretty good handle on where we are with the anchors for next year, at least for the first half of the year, and in some cases later. On the shop tenants, sometimes you'll go right up to the termination date before you know what's going to happen. And as we mentioned before, we're doing our very, very best to limit ugly leases and ugly rental rates. And if someone wants to propose a lower rent, we decide we want to keep the tenant, we try to do it for year, or worse case two years if we can do that.

Nick Vedder for Jim Sullivan – Green Street Advisors

Is there any TI associated with those new leases when they're one, two years?

Jeffery S. Olson

If you're talking about a renewal, generally the answer is no. The only TI's that we're giving on renewals right now have to do with HVAC units, which in the go-go days we didn't have to give and these days we are having to give that in some cases.

Operator

Your next question comes from David Fick – Stifel Nicolaus.

David Fick – Stifel Nicolaus

I just had one conceptual question I guess for Jeff. In the context of being aggressive and getting out there with some external growth objectives right now, how are you looking at your cost of capital and are you a current yield investor or an IRR investor?

Jeffery S. Olson

Clearly we're more of an IRR investor, David. And generally speaking, we think that our investors want somewhere between a 10% to 12% return annually. And when we look at that and adjust for a risk, we really want to hit those hurdles or higher on new investment activity. And when we pull the trigger on Westbury we felt very comfortable that we could hit the high end of those hurdles, and that's really how we're looking at placing more capital.

But the current yield to us is much less important than the value creation process. I mean we would be very happy taking a 2% yield for three years if we knew a lease was burning off and it was going from $2 to $20 and had produced an IRR of 15%.

David Fick – Stifel Nicolaus

Well in that context then given that this is all happening on balance sheets, how do you view coming back to the equity markets what would your timeframe be in size?

Jeffery S. Olson

I don't think we need to, but I think that decision would very much depend upon what our capital needs are outside of this. And if there are more opportunities out there that would create a higher return, I think that would be an option that we would consider. But I wish I could tell you that our pipeline was full of opportunities like Long Island it's just not at this point, but we would love to find more opportunities like that.

David Fick – Stifel Nicolaus

The rating agencies don't have any concerns with what you've announced so far? You've had conversations with them?

Jeffery S. Olson

We have had conversations with them, that's correct.

David Fick – Stifel Nicolaus

And they're fine with it?

Jeffery S. Olson

I mean, you'll have to ask them. I mean, but we're in constant –

David Fick – Stifel Nicolaus

You're talking to them, we're not. So we're looking for your view of their response.

Jeffery S. Olson

And our rating is very, very important because we think at the end of the day one of our competitive advantages is our cost of capital, and so that rating is something that is critical for us.

Operator

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

Paul Adornato – BMO Capital Markets

Just looking out at the potential transaction market, do you see any regional differences? Do you think more properties might become available in the south than in the north or any geographic differences?

Jeffery S. Olson

There are a ton of properties that are out there and most of them we have absolutely no interest in. In terms of A assets, which we're interested in, they're very, very few and far between and I think that we're doing our best to go generate off-market opportunities. We're working on a few that may or may not come to fruition. But all of us on the acquisition side get tons of deals come in every week and they're for B's, C's, D's and F's as opposed to A's. So we're concentrating on the A's.

Paul Adornato – BMO Capital Markets

Finally, with respect to outparcel sales, what's your outlook for the next two years on outparcels? Do you expect an increase in outparcel sales?

Jeffrey S. Olson

I wouldn't say a significant increase, but we have been selling outparcels every quarter. In fact last week I think we just closed on another McDonalds at around a six cap in Jacksonville. So, yes, we'll be opportunistic with that and I think that we'll have a modest level of activity in 2010.

Operator

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

Alex Barron – Agency Trading Group

Sorry if I missed it, but of the 60 basis point decrease in occupancy how much of that was related to the dark paying tenants that fell out versus just other tenants moving out?

Jeffrey S. Olson

About a third.

Alex Barron – Agency Trading Group

In terms of dark paying tenants all together, how many basis points do they comprise of your overall number?

Jeffrey S. Olson

It's somewhere between 1% and 2%.

Operator

Your next question comes from Neil Vanhorn – Guyasuta Investment Advisors.

Neil Vanhorn – Guyasuta Investment Advisors

I have a question on the dividend. Going back in your previous quarterly calls this year you've been pretty strong in terms of your comments on maintaining the dividend given your balance sheet and your development pipeline and so forth. So does one assume that in the last three months on the acquisition front and what's out there that the environment's changed that much such that this led you to cut the dividend, or did you just look at other stocks and how much they yield and say we might as well join the crowd?

Jeffrey S. Olson

That's a great question. We had a lot of debate internally on this issue and overall when we came out with our outlook it was about nine months ago with respect to growing into the dividend. We really felt that there would be accretive transactions out there and a lot of them because the financing markets had dried up.

And we were not able to execute on a material accretive transaction throughout the year, and at the same time the fundamentals came down a bit and we felt that our decision really struck an appropriate balance between our desire for retaining capital to do more Westbury's and then also our shareholders desire for current yield. So that was the ultimate outcome of the debate that our board undertook.

Neil Vanhorn – Guyasuta Investment Advisors

Thank you.

Jeffrey S. Olson

Thank you very much and we look forward to talking to everyone next quarter.

Operator

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect.

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