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Equity One, Inc. (NYSE:EQY)

Q3 2013 Earnings Call

October 31, 2013 09:00 AM ET

Executives

Laura Devlin - Director of Marketing and Tenant Relations

Jeff Olson - CEO

Tom Caputo - President

Mark Langer - EVP and CFO

Analysts

Brandon Cheatham - SunTrust Robinson Humphrey

Ross Nussbaum - UBS

Jeff Donnelly - Wells Fargo

Vincent Chao - Deutsche Bank

Cedrik Lachance - Green Street Advisors

Michael Bilerman - Citi

Michael Mueller - JP Morgan

Samit Parikh - ISI

Chris Lucas - Capital One Securities, Inc.

James Sullivan - Cowen and Company

Neil Van Horn - Guyasuta Investment Advisors

Operator

Good morning and welcome to the Equity One Third Quarter 2013 Earnings Conference Call. All participants will be in listen only mode, (Operator Instructions). After today’s presentation, there will be an opportunity to ask questions (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Laura Devlin, please go ahead, ma'am.

Laura Devlin

Thank you, Maureen. 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 or 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 projections 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.

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

Jeff Olson

Good morning and thank you for joining us for our Third Quarter 2013 Earnings Call, we are very pleased with our performance, recurring FFO came in at $0.30 a share slightly ahead of our internal expectation. As a result, we raised our 2013 recurring FFO guidance to a $1.22 to a $1.23 per share. This implies a 7% increase over prior year consistent with our 7% long-term growth rate goal. Operating fundamentals continued to accelerate, led by 3.7% increase in same property NOI, higher occupancy and strong leasing spreads. Equally impressive is the quality of the new retailers behind many of these numbers including Trader Joes, Olta, Soul-Cycle two deals with Uniqlo and the Jets' Grill an NFL sponsored restaurant themed after the New York Jets, which also happens to be my son's favorite football team.

Leasing activity is the strongest we have seen in a long time, during the quarter we signed over 800,000 square feet of new leases, renewals and options, nearly double the volume of a typical quarter. We now over $5 million in annual future revenue from leases that are signed but for which the tenants had not yet opened for business, excluding leases from new development and redevelopment projects, to put this in perspective $5 million represents almost 3% of our same property NOI pool. A multi-year disposition program is almost complete, year-to-date we have closed or committed to close approximately $300 million of sales and pricing in the low 7% cap rate range, most of the property sales have been concentrated in smaller markets throughout the southeast. We expect to sell another $150 million next year, this would leave us with less than $100 million remaining in our noncore portfolio, the disposition these assets will be dependent on market conditions and our ability to redeploy the capital at attractive returns.

Core acquisition activity has increased, with three shopping centers acquired or under contract, or with significant redevelopment opportunities, Westwood shopping center in Bethesda, Maryland for a $140 million; The Village Center in Westport, Connecticut for $54 million and Pleasanton Plaza in Pleasanton, California for $31 million. We are excited about the value added possibilities on all three assets which Tom will review in more detail.

Our development and redevelopment pipeline is advancing and expanding. We currently have $267 million of properties under construction with about $85 million of cost yet to be incurred, lead by the Gallery at Westbury Plaza in Long Island, Broadway Plaza in the Bronx, and Serramonte Center in Daly City California are three of which are running on time and on budget.

We also have over $500 million of additional redevelopment opportunities in our shadow pipeline which we are busy evaluating. These opportunities can be broken out into five buckets. One larger scale expansions at Serramonte, Bethesda and Potrero. These three projects could amount to $250 million to $300 million in additional investment.

Two, consolidated shop space to make room for bigger boxes [indiscernible] Kirkland shops and Pablo, we are planning to demolish nearly 100,000 square feet of shop space to make room for four national retailers.

Three, replacing underperforming Anchor stores with stronger operators. For instance at Lake Mary, we are replacing Albertson's and Kmart with five new retailers including Fresh Market in Ross.

Four, anchor expansions. We have several grocery stores with new leases under negotiation to accommodate their larger newer prototypes.

And five, outparcel and other building expansions, we have identified a dozen sites with opportunities to add outparcels and or building expansions for tenants like Starbucks, Dunkin Donuts, Chipotle and McDonalds especially in our Northeastern portfolio.

Our strategic plan that commenced in 2009 is nearly complete. As seen on page 36 of our supplemental package. Since then we have acquired 37 properties for approximately $2 billion. These assets are located in exceptional trade areas with a weighted average three mile population density of 278,000 people, with an average household income of $110,000. Grocers generate $854 of foot in annual sales and annualized base rent is approximately $22 a foot.

During that same time period we have sold 80 properties for approximately $1 billion. These properties are predominantly located in smaller markets throughout the southeast with a three mile population density of 54,000 people, with an average household income of $73,000. Grocers generated sales of approximately $440 a foot and the annualized base rent is approximately $11 a foot.

As a result our current portfolio is stronger, more diversified and more efficient to operate, with just a few pieces remaining to complete our plan, mainly selling off the remainder of our lower tier assets, redeploying that capital back into our development, redevelopment and acquisition pipeline and rationalizing our G&A. We believe our portfolio is now positioned for 3% annual net operating income growth and it contains enough opportunities to deploy a $150 million each year into development and redevelopment activity at 8% to 10% unleveraged returns. It should provide us with 7% annual FFO and NAV growth on a per share basis.

Tom will now provide an overview of operations and investment activity, Tom?

Tom Caputo

Thanks Jeff. This morning I will focus my remarks on leasing, redevelopments, dispositions and acquisitions. As Jeff noted leasing activities in the quarter was very impressive. We executed in excess of 800,000 square feet of new leases, renewal and options during the quarter at an overall positive rent spread of 9.3%. Core occupancy increased 90 basis points in the quarter to 92.4% and same property occupancy increased 30 basis points to 92.1%.

Florida was one of the hardest hit states in the country during the economic downturn. Today, Florida is in full recovery mode with an unemployment rate 30 basis points lower than the national average and improving housing market and a steady increase in tourism. Leasing activity in Florida was very strong in the quarter and same store occupancy increased 40 basis points, our leasing pipeline in Florida is more active than it has been in over five years creating opportunities to reposition or redevelop 10 centers across the state. We're optimistic the demand for retail space in Florida and the balance of our portfolio will translate into continued occupancy gains with a goal of reaching portfolio wide occupancy of 95% by year end 2014 through a combination of lease up, redevelopment and dispositions.

We completed number of important non-comparable leases during the quarter including a 12,500 square foot lease with Trader Joe's to kick start our redevelopment of South Beach regional and Jacksonville, a 10,000 square foot lease with Alta as part of our redevelopment of the Willows in Concord, California and a 24,000 square foot lease with HomeGoods to occupy the last large box at the gallery. HomeGoods fast track the lease and construction and their store will open to the public tomorrow morning.

Our leasing pipeline continues to be very active with a total of 76 new leases and renewals under negotiation for close to 400,000 square feet at double digit rent spreads. Demand for new space continues to be strong from junior anchors restaurants, health and fitness users and franchise operators. We currently have executed leases with 56 tenants who were in the process of building out approximately 275,000 square feet of space which will generate over $5 million in annual revenue when the tenants open for business. These figures do not include any income from executed leases and our development or redevelopment pipeline which now amounts to almost $8 million in annual revenue.

We're very pleased with the results of our dispositions in 2013, year-to-date we have sold 26 shopping centers and three pads which contain a total of 2.2 million square feet for $236 million at a cap rate of approximately 7.2%. The purchasers for these properties include listed but non-traded rates relatively small funds, high net worth individuals and two multifamily developers. Our disposition pipeline continues to be active with seven additional properties committed or under contract for $66 million and several other properties in the market for sale.

We're very comfortable; we will achieve our goal to sell $300 million of our non-core assets in 2013 an additional $150 million in 2014. Our redevelopment pipeline continues to expand. The new lease with Trader Joe's will be a catalyst for the redevelopment and remerchandising of South Beach regional. We hope to add another junior anchor to the mix as well as finalize leases with several tenants who have been waiting for Trader Joe's to commit to the center.

The redevelopment of Kirkland shops in Orlando is progressing nicely. This center was originally anchored by a supermarket and a drug store. Both anchors left and their space was cut up into very deep and poorly configured shop space. Occupancy dropped below 65% in spite of the excellent location of the property.

Most of the vacancy will be absorbed by a new 41,000 square foot LA Fitness Club, and the property is now 95% leased. Shortly after we began to redevelop the center, we were able to execute a contract to purchase a gas station adjacent to our property and during the quarter we executed a lease with Walgreens to occupy this parcel.

The redevelopments of Boca Village is progressing, we increased the budget due to added scope, time and materials. Tenant demand for the 43,000 square feet of newly created space is strong with approximately 85% of the space committed at rents 15% in excess of our initial budgets. This redevelopment will reconfigure a very core layout on some of the best stores we own in South Florida adjacent to the Boca Town center mall.

We have been active on the acquisition front since our last call; we closed on one center for our joint venture with New York Common, two centers for our core portfolio and three additional parcels in the Westwood complex in Bethesda.

We purchased Riverfront Plaza located in Hackensack, New Jersey for our New York Common joint venture for $47.8 million in an off market transaction. The 129,000 square foot center is located on South River Street and is anchored by a high volume 70,000 square foot shop right supermarket.

Demographics in the trade area are attractive with the population of 190,000 people with an average household income of $83,000 living within three miles of the center. We believe this property will provide a reliable income stream for the joint venture. We now own five of the seven parcels in the Westwood complex. We will close on the last two parcels Westwood 1 and Westwood 2 no later than January 15, 2014. Our redevelopment team has been meeting with elected officials and other municipal agencies to better understand the concerns the community and elected officials may have with potential plans to improve the site which may include additional square footage. We are very excited about the potential redevelopment opportunities into Bethesda.

Last week we purchased Pleasanton Plaza in Pleasanton, California for $30.9 million in an off-market transaction. The property contains a total of 160,000 square feet and is anchored by a 67,000 square foot JCPenny home-store, a 24,000 square foot OfficeMax and an 18,000 square foot Cost Plus. The property is located near the intersection of Interstates 580 and 680 adjacent to Simon’s Stoneridge Mall and adjacent to approximately 1 million square feet of office space. The center is the only retail space located on the mall Ring Road which is very rare anywhere let alone in the East Bay of San Francisco. We look forward to the opportunity to re-mechanize this property with higher quality tenants as the low market leases roll over we intend to complete a cosmetic upgrade to the property in the near future.

Last week we also purchase a 90,000 square foot Village Center on the Post Road in Westport Connecticut. The 40-year old property is anchored by a 22,000 square foot fresh market and is located approximately a third of a mile east of our Trader Joe’s anchored Compo Acres. We have been tracking the Village centers since we closed on Compo Acres a few years ago. We believe there is a significant opportunity to upgrade the tenant mix with high quality retailers who would like a presence in the Westport market but would prefer to avoid Main Street where rents range from a $100 a foot to over a $150 a foot.

The Village center is book ended on the east by a 30,000 square foot Mitchells, a very high-end men’s and women specialty store and on the west by Terrain an upscale gardening supply and equipment store owned by Urban Outfitters. Terrain features a very successful farm-to-table restaurant which is very popular year around and requires valet attendance to handle the volumes most of the day. We believe rents in the Village Center are significantly below market approximately 25% of the space in the center close to market over the next five years which should allow us to upgrade the tenant mix and increase the NOI.

We are very pleased with our new acquisitions and continue to search for additional investment opportunities in a very competitive market. And now I’d like to turn the call over to our CFO Mark Langer.

Mark Langer

Thank you, Tom. This morning I will walk through the primary drivers of our earnings for the quarter, explain some of the fluctuations in our balance sheet and discuss our liquidity and outlook for the remainder of the year. Before I get into details of the quarter, let me point out some changes we have made to expand the level of disclosure and our quarterly supplement to provide even more transparency about our same property NOI results. In the past, we have noted the amount of revenue and expense generated by our same property pool as well as the individual assets that comprise the pool. Beginning this quarter, we have expanded the disclosure to include the specific components of revenue and expense as well as the physical and economic occupancy that pertains to the same property pool.

Turning to our earnings for the quarter, we were pleased to report recurring FFO of $0.30 a share for the quarter and $0.93 a share for the nine months ended September 30th. Our recurring FFO for the first nine months was up 11% compared to the same period in 2012 and is noteworthy considering the manner in which we have been recycling capital and disposing of non-core assets. We have achieved this growth while simultaneously selling over $230 million of assets in the first nine months of the year and $70 million of assets during 2012.

We have successfully redeployed much of this capital into development and redevelopment projects and selective acquisition opportunities that have generated attractive returns. Our year-over-year growth was also helped by lower interest expense and lower G&A.

Our operating results this quarter were primarily driven by 3.7% year-over-year increase in same property cash NOI. The biggest driver of improved NOI performance came from contractual and minimum rent increases which were generated across all regions with the strongest performance coming from our North East and West Coast portfolios.

Our balance sheet reflects the trends for this quarter of approximately $29 million of cost related to the gallery at Westbury from CIP to income producing now that the project is substantially complete and has been open for a year. The gallery continues to perform on plan and contributed approximately $2.8 million of NOI this quarter and is on track to contribute approximately $13 million during 2014. Our September 30th balance sheet included approximately $40 million of cash and 1031 escrow that has since been used to partially fund the acquisition activity we announced in our press release. Based on the dispositions we have in the pipeline for the reminder of the year we currently expect that we will be able to differ all that $5 million to $10 million of the taxable gains from our 2013 asset sales via 1031 exchanges.

Our focus on the maintaining a flexible conservative and liquid balance sheet remains in place as we only had $90 million drawn on our $575 million credit facility and have increased the amount of unencumbered cash NOI we generate from our same side portfolio to more than 77%.

We have only one small $6.7 million mortgage coming due in 2014 and no unsecured debt due until October 2015. Our debt structure continues to be weighted towards fixed rate facilities and the only variable upraised variable rate debt we have had place pertains to our line of credit which represented 6% of our total indebtedness as of September 30.

Our results for the first nine months in 2013 reflecting tenant improvement in our coverage metrics over a comparable period in 2012 with net debt to adjusted EBITDA declined from 7 times to 6.5 times and adjusted EBITDA to fixed charges increasing from 2.5 times to 2.8 times.

We have updated our 2013 full year recurring FFO guidance by raising the low end of the range $0.02 based on our results to date and the better than expected same property NOI performance and lower G&A cost.

We now expect full year same property NOI growth of 3% to 3.5% up from previously provided guidance of 2.5% to 3.25%. We’ve had made good progress managing our G&A this year. Originally, we provided guidance that recurring G&A excluding transaction in one-time cost would be in the range of 38 million to 39 million. We now believe our recurring G&A will come in below 37 million. This savings has been generated from departmental efforts across the board from managing headcount and employment related cost to lower levels of expense recognized on systems, consulting, travel and third party consultancy.

We remain committed to managing our G&A based on our current capital recycling plans and the resources needed to execute our operating plan and our development and redevelopment pipeline. Our guidance for the reminder of the year also assumes dilution from the $300 million in asset sales along with the repayment of the $45 million and 9.2% mezzanine loan which was repaid to us in August.

In conclusion, I think it is important to step back and assess the portfolio transformation Jeff highlighted in his comments. Prudent capital allocation remains at the heart of our strategic planning. Our ability to aggressively acquire core properties in 2009 to 2011 was grounded in our belief that the market dislocation provided buying opportunities and a positive spread to our cost of capital. We maintained a strong balance sheet and had access to capital that enabled us to transact in a market when there were few buyers.

In the last two years, we are seeing intense competition in the acquisition market and have found the conditions favorable to sell lower quality non-core assets. These market conditions have allowed us to nearly complete our five-year capital recycling plan. Going forward we will increasingly turn our attention to invest in capital and redevelopment and expansion opportunities within our existing assets. Our plan is to continue to carefully evaluate market conditions to ensure we deploy capital wisely while remaining very disciplined in our management of the balance sheet. We are currently going through our detail budgeting process and capital recycling plans for 2014 and we’ll provide guidance regarding our full year expectations on our next earnings call.

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

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is Brandon Cheatham of SunTrust Robinson Humphrey. Please go ahead sir.

Brandon Cheatham - SunTrust Robinson Humphrey

Just couple of questions on occupancy for the quarter very small shop occupancy is been on the same store basis and then for 2014 you mentioned total portfolio occupancy of 95%. Can you break that out for smaller shops and how much of that is organic lease-up versus dispositions?

Jeff Olson

Sure. In terms of next year’s guidance, we’re projecting to go up to 95%, I think what you’re going to see is you’ll see approximately 75 to a 100 basis points of that will be derived from what will cost same property occupancy growth for the core with the balance of that coming from both dispositions and also redevelopment because we’re so well leased on the acreage side, the book of increase Brandon is going to come from small stores space and a lot of that is coming in the State of Florida. I don’t have the small shop occupancy numbers on your first question handy, Mark do you have that.

Mark Langer

You’re asking about if we look at the shop occupancy as reported the 81.5 versus last quarter of 80.2 and what the breakout was, it’s about half of that growth Brandon is coming from organic lease-up and half is due to changes in the pool from dispositions.

Brandon Cheatham - SunTrust Robinson Humphrey

Okay that’s correct. And on the Westwood Complex, you are in talks with local government that are on getting the approvals you need, are you concerned about any push backs there and I guess what’s the overall timing on that redevelopment?

Jeff Olson

I mean, we’re always concerned about any development that we do for push back and we plan accordingly. So, we’re spending a lot of our time listening to the community right now, understanding their needs. We do believe that the community wants to see something better there and we believe we will be able to feel their needs, but it is going to take a little bit of time.

Brandon Cheatham - SunTrust Robinson Humphrey

Okay and then on the October acquisitions, what was your going yield and then what are your expectations after redevelopment or releasing there?

Mark Langer

I mean in January, we do not disclose our cap rates on an individual asset basis, but I will tell you that our unleveraged IRR expectations for all three of the major transactions to somewhere around 9%.

Brandon Cheatham - SunTrust Robinson Humphrey

Thank you very much.

Operator

Our next question is from Ross Nussbaum, UBS. Please go head.

Ross Nussbaum - UBS

A couple of questions on the occupancy front, Jeff, I think you identified that certainly there is upside in Florida from the 92.3% level, can you talk a little about Georgia which was about 85% occupied and in particular I guess there is one asset in Georgia, Spalding Village, which is one of your bigger asset at 57% and what the game plan in Georgia and for that asset as specific?

Jeff Olson

Many of those assets have been placed on our disposition list including Spalding, which is one of reasons we feel pretty confident that we can get through some 95% next year. And handful about the assets throughout Georgia and throughout some other secondary markets that are also part of that pool.

Ross Nussbaum - UBS

Okay great and then second question just relates to the G&A of the Company and I guess the question would be this, which is, I know you guys have made some great strides this year, your coming in under you original guidance, but if I look back to 2008 when the Company had a 171 properties and dial it forward to today when you have 128 give or take on your way potentially to under 100, so we’re talking the property count getting cut almost in half when all sudden done yet the G&A has gone up since 2008 by over 15%, so I am trying reconcile how much G&A is still left that can be cut here given the smaller portfolio size?

Jeff Olson

Your question is exactly the same question I have been asking Mark for the last three months and we’re going through it and really peeling it back. I think we are not really to commit to a number at this point, but you have identified an issue that really is an opportunity now that we have transformed this portfolio. And Ross we will be providing a pretty detailed guidance on this when we provide 2014 FFO guidance.

Ross Nussbaum - UBS

Sure, do you have a ballpark of what sort of management, senior management comp is in total versus sort of everything else, I mean I guess, I am trying to figure out what can’t go away, I am assuming you guys can’t and what can -- how much we really dealing without your 37 million really can be targeted?

Jeff Olson

I feel more comfortable presenting that when we give our 2014 guidance, Ross. So I’d rather defer that till then.

Operator

Our next question is from Michael Bilerman, Citi. Please go head.

Michael Bilerman - Citi

Thank you, good morning. I guess you could take $1 in salary and that would get it down?

Jeff Olson

Yes and Mark could take $0.50 and Tom could take $0.25.

Michael Bilerman - Citi

How much -- is there part of the G&A just a classification issues and I am sure you’ve gone through some benchmarking relative to peers, is it just a fact that you are maybe classifying more G&A that you could push up effectively to the property level which would reduce NOI, but your G&A would show better. In terms of the investigation, have you been able to get things out there because it does still screen high even though you’ve done a good job at getting it down over past year, is there just some methodology that is different than your peer set?

Mark Langer

Yes, I think Michael; this is Mark, that’s certainly part of it. I mean, I know from questions that have come up in past calls. We identified what some other reporters do, we reflect our cost except for direct property management cost all in G&A line and don’t allocate. So, there is some of that but quite frankly on Ross’ earlier point there is also some further rationalization that I think we can execute on once the portfolio, when you're going through all the activity and churning $3 billion, 2 billion of acquisitions, 1 billion in dispositions, a lot of the efficiencies come a year or so after all of that is done so I think there is still some more to go, but I think your point is fair, some of it is classification, I don't have the details under the hood of all of our peers, nor from our perspective, we just focus on what we can do to control and we've made great progress this year, we've never spent more time dissecting it which led to the progress that we reported through the first nine months, and I can tell you we're laser focused on it as we go forward.

Michael Bilerman - Citi

That's helpful, Jeff, in your opening comments you talked about $600 million of identified redevelopment expansion, combination and all sorts of things leading up to about a $150 million a year of potential redevelopment, as we think towards 2014, what will be added I guess in the fourth quarter in 2014 to start that right you got $85 million left to spend on the current projects, what is sort of keyed up, ready to go as we start to think about 2014.

Jeff Olson

That's a good question, first of all the number was $500 million not $600 million although I'd like to increase that. But I think what we're going to see heading 2014 will largely be the 10 centers that Tom referenced throughout the state of Florida, where there is a lot of anchor positioning happening. So in Orlando, we have two sites where we're looking, on a fairly large scale redevelopment, one is Crookman Shops the other is at Ellefair Commons. In Jacksonville we have two sites, one is we're putting the first Trader Joe's in Jacksonville at Southbeach regional, we also plan to redevelop Pablo and also in Orlando at Lake Mary we're converting two dark anchors into five national big box stores, so I think you'll see those hit in 2014, I don't have the dollars off the top of my head on those but I've got to imagine that they're probably you know $60 million, $75 million just in total, and we will again provide more detailed guidance on that front when we provide our 2014 FFO guidance.

Michael Bilerman - Citi

Okay just last question, page 36 the supplemental, this new disclosure in terms of where you've been to where you are going to, the remaining noncore, the 33 assets, what is the current occupancy of those assets number one, and number two based on the 242 million valuation what cap rate is that effectively valuing those assets at under IFRS and how do you think about being able to attain that value in the marketplace.

Jeff Olson

I think the occupancy rate is somewhere in the low to mid seventies Michael, I don't have the exact number on me but I'm pretty close because I have a older number on it, I don't have the IFRS cap rate, but I do believe based on a prior transactions that IFRS was a pretty good gauge for what we'll be able to get in the private market and so we’re hopeful that we're going to be able to get that 242 million, but again out of the 242 we've targeted about a 150 for next year and there's 90 that would come after that assuming market conditions hold.

Michael Bilerman - Citi

And you think that's at the same 7 cap rate that you've been selling all this other stuff at.

Jeff Olson

You know, I think it's a little bit higher than that Michael.

Michael Bilerman - Citi

50 basis points, 75 basis points.

Jeff Olson

Maybe even 100.

Operator

Our next question is from Jeff Donnelly - Wells Fargo, please go ahead.

Jeff Donnelly - Wells Fargo

Good morning guys, I guess related to that, I think Jeff you had mentioned you were talking about driving portfolio occupancy to about 95% by year end 2014, how much of the increment from present levels is from incremental leasing versus disposing the weaker assets.

Jeff Olson

It's a good question, I think it's about 75 to a 100 basis points incremental same property leasing and I think the balance is from a combination of dispositions and also from redevelopment. I referenced earlier how we're going to be taking off a 100,000 square feet of small shop space at three of our centers in Florida, and once that's put back into the pool when it's leased close to a 100% that's when you'll see the occupancy increase there. I think it's a blend of all three of those, but pure same property co-leasing again I think it’s 75 to 100 basis points.

Jeff Donnelly - Wells Fargo

I'm not trying to draw guidance out of you per se but how do you think about the NOI lift that you’re going to get from those properties versus the cost of leasing that incremental space, do you those as spaces that make you a little tougher than your existing spaces to lease.

Jeff Olson

I think it's fair to say that they're probably a little bit tougher, but you can make some back of the envelope calculations that I think based on our prior leasing activity that can get you pretty close.

Jeff Donnelly - Wells Fargo

And just a question, I guess I'd like your opinion on it, it seems like it’s been fairly popular of late among retail REITs to acquire these sort of low cap rate assets you know, so the five cap asset that might ultimately have significant future growth down the road on rollover REIT development but that can often times be five to ten years down the road at a cost of a low initial yield, I guess and they may take many different forms, some are very large in scale, some are single tenant, I guess I'm curious what's your attitude towards pursuing those sorts of opportunities when it's more of the single tenant opportunity and less about maybe densification redevelopment and more just part of re-leasing story. Do you see there is this maybe easier executions and has lower risk, or do you see whether that actually is less appealing or there is less call optionality in the investment?

Jeff Olson

It depends, I do think you need to take a balanced approach and can't make a big bet in one particularly area. I mean if you look at a single tenant, we repurchased the Loehmann's building in Chelsea where the tenant was paying a fraction of market rent, so this is an extreme where we bought it at like a 2% cap rate, that we had a lot of confidence that we could increase that yield significantly when the lease expires in March of 2016. And I think I think we were pleased to see what we were able to do there. I think that’s an example and that was like a $55 million investment. So I think it made a lot of sense. Had it been a $400 million, and that’s then I think it would have been a much more difficult decision for us to make.

On the other hand buying a center in Bethesda where the lease goes out a little bit longer, remember giant (Ph) is paying $2 a foot in rent, that lease goes up to a 2019, so a little bit longer, but 2019 still has a lot of visibility for us. And the probability of removing some of these anchor leasers before their lease expiration is pretty high. So I think if we had a pool of assets with the low market leasers, I think that spread out throughout the entire portfolio, I think it’s a pretty good pool where you will be able to capture value every single year from something that was unexpected.

And the third example is the Food Emporium example, the lease was well below market, I think it was at about $40 a foot and we were at last quarter able to negotiate an increase of the rent to a $100 a foot in exchange for a payment that also allowed us to bring that rental fair market value in 10 years which is significantly more than the $100 a foot today.

Jeff Donnelly - Wells Fargo

How financeable do you find those types of opportunities in the current environment with often times the value that one is paying that will necessarily correlate with the current cash flows. Do lender take a skeptical eye of those?

Jeff Olson

Probably, and it is one of the advantages of having this root structured because almost every case where we want to buy those without putting any mortgage debt on those properties. And Bethesda was even more pronounced because there were some legal issues associated with that property when we bought it which would not have allowed anyone to come and to put a mortgage on that property at that time. Those legal issues had since been resolved, but I think the advantage of our root structure is our ability to go out and purchase some of these assets without putting mortgage financing on them.

Operator

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

Vincent Chao - Deutsche Bank

Just wanted to go back to the lease expiration schedule for next year. Just looking at the - I know you’ve provided the 95% number out there, but just looking at the 47 greater than 10,000 square foot leases that are rolling, do you have any color or sense of how many of those you expect to keep and are there any known move outs that might skew sort of numbers on a periodic basis?

Jeff Olson

There is nothing material over that on that we’re expecting at this point

Vincent Chao - Deutsche Bank

Okay, and then just looking at the small shop side of it I think you’ve been running around 80% or so retention rate, is that something you can sustain next year in this small shop side of things?

Jeff Olson

I think it would probably between 70% to 80%.

Vincent Chao - Deutsche Bank

70% to 80%.

Jeff Olson

And then remember, I mean there were some properties that we bought, we purposely looked to upgrade our tenants within those shopping center, so I am happy with a lower rate on that particularly in some of the newer assets that we bought that are older assets that need to be upgraded.

Vincent Chao - Deutsche Bank

So it’s just more purposely turning some of those guys out.

Jeff Olson

Yes.

Vincent Chao - Deutsche Bank

Just on speaking to that, on the JCPenney and OfficeMax leases in the Pleasanton acquisition. I don’t know if I missed it, did you say when say when those leases do roll.

Jeff Olson

No we did not.

Vincent Chao - Deutsche Bank

I guess you don’t care too.

Jeff Olson

No, not at this point, we do think there is opportunity there and we would love to get back all of our anchor tenants at those properties given the rents that they are currently paying.

Vincent Chao - Deutsche Bank

Just one last from me, just on the -- appreciate all those color on the redevelopment and set of pipeline that’s brought here, on the acquisition side we’ve been hearing from you guys as well as others that it’s been very difficult to source these, it’s a tough market, very competitive. But that’s not that you are looking for. But you continue to sort of get these one offs here and there every quarter and I am just curious, I mean do you think being able to do a 100 million or so of acquisition a year is a reasonable outlook. I am not saying that you’d put into your guidance or anything but just do you think that’s a sustainable level?

Jeff Olson

I think it’s a reasonable outlook. I think a $100 m to $200 million for a quarter is very reasonable.

Operator

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

Cedrik Lachance - Green Street Advisors

Just looking at the number here in page 36, the new and improved portfolio disclosure; when I look at the grocer serves; you got a very impressive number in terms of the sales, gross properties that you have acquired. Is it because you have targeted a lot of specialty grocers or do you have traditional grocers that happen to be in denser areas?

Jeff Olson

It's a blend but let me just pull out my list here just to give you some sense here. So I am looking at the sales here, there are one, two, three -- three specialty grocers in the area that are doing anywhere between $2,000 to $4,000 a foot but everyone else traditional wise I am looking one at $1,200 a foot, I am looking at 60,000 square foot traditional grocer, $900 a foot, stop and shop at $850 a foot, a safe area at $960 a foot, at giant $843 a foot. So it's a blend but I would say that the specialty grocers are not increasing materially Cedrik.

Cedrik Lachance - Green Street Advisors

How important were those grocers’ sales in the acquisition strategy here. Was that the driver when you looked at these properties? Or was it just an outcome of what you did?

Jeff Olson

I will tell you, the one thing Tom Caputo has talked -- maybe even anyone in the world is how important sales are they trump everything including demographics. And so when you have a center that produces exceptionally high sales, not just with the grocer, because a lot of our centers especially these newer ones have stores in addition to a grocer. So it might be one of the highest volume bed bath and beyond stores in the country or might be one of the higher volume TJX concept stores in the country.

And the magic really occurs when you blend those high sales with below market rents with lease explorations that have near-term maturities and that's the formula that we have been looking for.

Cedrik Lachance - Green Street Advisors

Going back to the anchor renewal schedules from previous questions, you do have quite a bit of anchors due over the next few years. Is it a function that just basically the list here doesn't provide for options? Do you have the ability…?

Jeff Olson

It does not provide for options.

Cedrik Lachance - Green Street Advisors

I mean in terms of share better to recapture over the next few years, is it dramatically lower than what might be here?

Jeff Olson

Sure it is, as it would be for every single shopping center REIT that has anchored leases, because most of the anchor leases have options. I think we’ve identified in the past that 20 of our anchor leases that do not have options that expire within a reasonable timeframe and those 20, we think will meaningfully move our NOI, but that's 20 out of 300 leases in total.

Cedrik Lachance - Green Street Advisors

That's also over a several year period; it's not all 20 happening within one year.

Jeff Olson

That's correct.

Cedrik Lachance - Green Street Advisors

Final question, just in terms of how you will finance acquisitions and redevelopment and development starting perhaps in 2015. By that time you won't have -- you readily identified non-core asset pool. What do you think will be the main source of financing and how many properties do you recall right now, you might think about selling?

Jeff Olson

It's a great question, my guess is that our core portfolio will still be a source of capital because there will be some properties that we have redeveloped that may not allow us to get 3% growth in perpetuity. And I think those would be wipe assets for sale at that point, or to put into a joint venture if that made sense and I think we would evaluate that against our cost of capital in the overall equity and debt markets and the one with the lowest cost to capital would be the path that we would take.

Operator

Our next question is from Michael Mueller from JPMorgan. Please go ahead.

Michael Mueller - JP Morgan

I was just wondering, just thinking about the development redevelopment pipeline, if you are looking down the road are you evaluating any other new ground of development and opportunities?

Jeff Olson

We are, especially in the New York Metro region we have nothing to announce at this point but yes Michael.

Michael Mueller - JP Morgan

And just as a follow up to that, I mean is that more just a one-off opportunity or is it something that you are thinking the next five years or 10 years that's going to be a little more recurring?

Jeff Olson

We're hoping that will be a little more recurring, I mean the site that we’re developing in the Bronx is a perfect example of what it is we’re looking for. Manageable at $50 million to $60 million, the tenant demand is there, the returns are there, the relationship is there with the seller who owns more properties like that all over the New York Metro market. So yes we would love to do more of that.

Operator

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

Samit Parikh - ISI

I had sort of a follow up question to Cedrik’s comment. Jeff one of the things I think we talked about is that sort of the pricing of some of these Publix centers in South Florida call it the Dade Broward County that check all the boxes and could be trading at call it around 5% cap rates today even in today’s environment. Is this something when you have a significant amount of these centers I was just curious is this something that you’re evaluating right now and maybe testing in the market as potentially used to fundraising for call it the redevelopment and acquisition pipeline going forward?

Jeff Olson

We have and during the year we said two Publix anchored centers in South Florida at cap rates that were in the very low 5% range, so we actually put the trigger on those earlier this year. And yes I think we’ll continue to look at those but I do want to limit our disposition activity so that we can match it with redevelopment activity at higher yields so much of that will depend upon what the market looks like when we’re ready to ramp up our development a little bit more.

Samit Parikh - ISI

Okay, and then thinking about how you said about you said you could sustain 100-200 million of acquisitions annually going forward, so on that front what level are you guys are willing to take your sort of credit facility where it’s out right now up to and then when your credit facilities sort of gets that point where you think you need to terming out at this point are you more willing to look at sort of increasing your amount of unsecured long-term notes or would you use the combination of that and common equity?

Mark Langer

Yes, I mean as Jeff said it would really depend at the time with what other capital sources we could identify so I don’t like to see the line get at a sustained level above the 2 to 250 range. And so if we were at that point we would have to look at all sources unsecured notes as well as the equity market but would depend on what our cost of equity was at that time and whether or not the scenario that Cedrik and you maybe just paint it would come into play if in 2015 we had existing core product that had a very low growth profile that maybe in fact the best option. So I think we would really look at the trade off of all three, the debt, the equity and the sale of assets. But we don’t want to leverage your point about how much we would ramp up. We absolutely would not want the leverage profile of the company to be negatively impacted on a sustained basis just coming solely from buying assets.

Jeff Olson

And all things being equal you’d rather unsecured debt and secure…

Mark Langer

Sure, I mean, it gets close to 10 year money at about 190-200.

Samit Parikh - ISI

Okay, and I guess lastly is there any update on sort of conversations that may or may not maybe they’re not occurring sort of with you guys news for value ownership regarding the centers and that private equity ownership that owns the box within your portfolio?

Jeff Olson

We do have lots of conversations with them but there is no incremental update and in general we’d love the opportunity to take back those boxes.

Operator

Our next question is from Chris Lucas, Capital One. Please go ahead.

Chris Lucas - Capital One Securities, Inc.

Good morning guys. Jeff, thanks for the scope of the redevelopment program that you guys are looking at I guess I was just looking for some sense as to the time frame that those projects would potentially revolve and how long would it take to get those things done is that a three year [multiple speakers].

Jeff Olson

I think it’s a three to five year plan Chris.

Chris Lucas - Capital One Securities, Inc.

Okay, and then just the follow up on the tenant retention issue on the small shop talk to little bit about what was maybe some plan, some un-plan of the 20% to 30% sort of fall out. How would you think about the breakdown of that small shop between what you think is sort of planned and what would be more unplanned fall out?

Jeff Olson

I guess I’d probably say 60% planned 40% unplanned but it’s a guess.

Chris Lucas - Capital One Securities, Inc.

Okay and then just another question just on the small shop environment. Has there been any shift at all in the last 6-12 months as it relates to the composition of what that small shop demand looks like between sort of corporate franchisees and the mom and pops?

Jeff Olson

Well, I think the shift clearly has been across the board from our best centers to our lesser quality centers that there is more demand. There is just enormous amount of demand across the spectrum and I think you are seeing a lot of franchise operators coming in maybe people that were and corporate jobs before decided they may have been write-off or whatever who have balance sheets and business sense and are coming in and opening franchises. So there’s clearly been that shift so higher quality tenants less of what you would think of is old moms and pops but the demand has clearly increased dramatically over the last 12 months.

Chris Lucas - Capital One Securities, Inc.

Thanks a lot.

Operator

Our next question is from Michael Bilerman, Citi. Please go ahead.

Michael Bilerman - Citi

Quick follow up Jeff you talked about deals being underwritten to a 9% unleveraged yield. What assumptions are you putting into that 9?

Jeff Olson

Well, it varies per property but generally we use an exit cap rate that said about 50 basis point premium to what we believe market cap rates are today. And then it incorporates of course I don’t mean the order in our growth expectations from there.

Michael Bilerman - Citi

So, even though a lot of these assets you probably some five, you talking about the low mid single being even at a 2, you’re able to get that 9% amount of growth?

Jeff Olson

Yes, I have the schedule here in front of me that I’m working on. So, that’s what compels us to pull the trigger.

Michael Bilerman - Citi

And what is it about you think about a lot of your peers want great assets with below market rates and redevelopment expansion opportunities and great markets with great demos and great grosser sales. Why do you think you are sort of willing the winning bid other than paying the highest price? What is it about that you see differently in these assets but you don’t think other are?

Jeff Olson

I think when we take a view on a property and it’s not like we’ve brought that many, I mean there are three properties this year and then fourth in the joint venture we think below these markets very well and we have a specific plan and a very talented team that happens to be sitting here with me right now that has the capability to redevelop these assets and I think that’s part of our core franchise having this redevelopment team that can identify and visualize a plan, execute on it and really make it happen and success would have been there with both Broadway Plaza n the Bronx and Serramonte Center, sort of the two that really come off the charts but also now Serramonte Center in Daly City.

Michael Bilerman - Citi

And just last question in terms of you think about potentially just doing these one off single acquisitions versus larger scale deals you think back to what you did with capital shopping centers 3.7 billion in size after selling off these other remaining noncore, one way to get the G&A level down is just be a larger entity I mean more assets. Does a corporate transaction or a large portfolio transaction is that a, what is that rank in your thought process?

Jeff Olson

It’s really tough to do Michael because in the past portfolio dealer may have allowed us to upgrade the quality of our portfolio but I am not aware are there any portfolios that are out there with the exception of one big company that would allow us upgrade the quality of our assets through a larger deal like that. We spend so much time purifying the company, I think it was just, it would be difficult to do, we’re not oppose to doing it if we found something that had a lot of value creation opportunities out there but we have not been out there looking as hard as we use to.

Michael Bilerman - Citi

And just lastly Mark, you’ve done seven equity offerings generally small in size in last five and half years any reason why we shouldn’t expect that to continue?

Mark Langer

Well, I think as we talked about in our capital recycling initiative it’s really depend on how we need to match any proceeds to acquisition opportunities in given that this position success we’ve had to date with a $300 million and what we foresee next year. I don’t know that we have a compelling need to issue any equity. So it really depends on whether any of the acquisition opportunities are a scale that you’re mentioning on a larger portfolio basis comes our way, perhaps than that we don’t see any compelling need to issue.

Michael Bilerman - Citi

So if ’13 will go down means a no equity year?

Mark Langer

That’s our current expectation.

Operator

(Operator Instructions). Our next question is James Sullivan from Cowen. Please go ahead.

James Sullivan - Cowen and Company

Jeff and Tom, looking at the detail provided on page 36 in the press release is a question about -- couple of questions I guess about asset size. What you’ve acquired has tended to be about 60% larger than what you’ve sold an I’m curious how you think about asset size, do you think that a larger asset is generally have some advantages or is this sort of a coincidence of what you’ve liked and what you’ve found so you wanted to buy versus what you wanted to sell.

Kind of a second question to that is can you update us on how your banker small shop space mix has shifted over this five year period and then finally in connection with that do you think that more small shop space can lead to more sustained same property NOI growth issue going through this cycle.

Jeff Olson

There is lot imbedded in there Jim, let me take step out of it. Yes, is the answer in terms of do we favor larger assets? Yes, for so many different reasons one of which is that they’re more efficient that’s not the only reason, two was generally the larger assets that we’ve been buying are in these major trade areas so they’re so dominant in their respected markets and in many cases the land size is a lot more. So, a traditional grocery anchor neighborhood center might have 7 acres of land but there is not a lot that can be done because it’s a grocer that might have shops space next to it with a couple out parcels.

With these larger assets, we found that we’ve been able to be much more creative in terms of the design and also the demand for big boxes to come into these urban markets has been pretty significant so big portion of what we’ve been doing is finding these older assets that have a lot of land. Serramonte is the extreme which is on 80 acres. So, to gateway to San Francisco that only has about 850,000 square feet on 80 acres, there are many malls in this country including Roosevelt Field and Aventura that are on the same size plot that have three times the amount of GLA.

So we absolutely favor these larger sites and we’re on hunt for more of them. In terms of small shops space, I think there is some juice left in our small shop leasing, but I think the real value creation that we have been able to identify over the last several years has been more intensifying these large sites in urban trade areas with big box stores. Tom, do you want to add anything to that?

Tom Caputo

No, that was good.

Jeff Olson

Okay.

James Sullivan - Cowen and Company

The only other question I have with that is, you would see, I mean correct me if I am wrong that when you buying these properties you’re typically addressing as just mentioned in the close of comment, the acreage space changing at a densifying end and it would seem that the small shop releasing tends to be spared by that, followed by that and we just seen that on the multiyear basis kind of phase one, fix your anchor get that right, phase two kind of increased and improved the quality of the small shop space, which sometimes is very significant right growth, is that how you see this playing out on a center by center basis?

Jeff Olson

Absolutely and I think Lake Mary is probably the best example of that in addition to South Beach Regional, at Lake Mary we replacing the two big anchors, one was Key Mar one Albertsons. We are putting our Fresh Market and a Ross in there and then three other stores that will be identified shortly, that will significantly upgrade the anchor mix within that center and there is a lot of shop space. We think that will benefit us as a result of having these new anchors.

James Sullivan - Cowen and Company

Then kind of final question for me, in terms of your small shop leasing, how you handle that, I know a couple of your centers I think were actually third party managed and maybe leased, but I am not sure if that still the case, and I am just curious maybe this is more for us Tom, do have kind of key relationship leasing people who manage the relationships with these retails on a national basis or is it tend to be local?

Tom Caputo

We certainly have certain people in origination have key relationships with supermarkets and boxes and its spread around the country in terms of where those relationships are located. We have gone to sort of a dual plan where we have our own leasing agents looking over the shopping centers work along with the third party.

My feeling there is, two lives are better than one in terms of getting shop space leased and we have found it to be very, very helpful in North and Central Florida where employing down the Southeast and it’s been very helpful and has helped us with our leasing efforts.

James Sullivan - Cowen and Company

Okay, great thanks guys.

Operator

Our next question is from Neil Van Horn, Guyasuta Investment Advisors. Please go ahead.

Neil Van Horn - Guyasuta Investment Advisors

Thanks. I had a question on your dividend policy. I am a long term holder along with my firm going back to IRT property days. And I remember back in ’08 and early ’09 when you dividend was $1.20 and your balance sheet, that was in good shape and you could maintain that dividend and then one too long after that you cut it the current rate, and the time you said the reasoning was that there are a lot of good opportunities to put the money to work and that seemed to be a better bet.

So my question is today kind of what is your divided policy going forward specially sense of kind of reposition the company now and things look pretty good, how would you kind of take a look at the dividend in the future and with all these good news and everything maybe an increase?

Jeff Olson

I mean what we’re hoping for that with time, we never want to back to what happened earlier in terms of decreasing the dividends. We want to keep it at a nice healthy rate, it’s currently paying $0.22 a quarter. We think it’s a very safe level given today’s environment and we certainly want to keep ourselves positioned to the extent another down term. So I am hoping there will be something in the future, but I can’t say that it’s imminent at this point.

Neil Van Horn - Guyasuta Investment Advisors

Thank you.

Operator

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

Jeff Olson

Okay, thank you very much. Happy Halloween and we look forward to talking to you in next conference call. Thank you.

Operator

Conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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