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Equity One, Inc. (NYSE:EQY)

Q4 2013 Results Earnings Conference Call

February 20, 2014 9:00 am ET

Executives

Laura Devlin – Director of Marketing & Tenant Relations

Jeffrey S. Olson – Chief Executive Officer & Director

Thomas A. Caputo – President

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

Analyst

Christy McElroy – Citi

Paul Morgan – MLV & Co.

Jay Carlington – Green Street Advisors

Brandon Cheatham – SunTrust Robinson Humphrey

Craig Schmidt – Bank of America

[Jim Sullivan] – Cohen & Group

Ross Nussbaum – UBS

Michael Mueller – JP Morgan

Vincent Chao – Deutsche Bank

Christ Lucas – Capital One Securities

Welcome to the Equity One fourth quarter 2013 earnings conference call. All participants will be in a 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 and I would now like to turn the conference over to Laura Devlin, Director of Marketing.

Laura Devlin

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 uncertainty 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 10K and our other periodic filings with the Securities & 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 in 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.

Jeffrey S. Olson

Thank you for joining us for our fourth quarter 2013 earnings call. Overall, we are pleased with our performance in 2013. Recurring FFO came in at $0.30 per share for the quarter, slightly ahead of our internal expectation. For the year recurring FFO amounted to $1.23 a share which was up 8% as compared to the prior year. This was on the high end of our previous guidance range of $1.22 to $1.23 per share and exceeded our initial guidance range of $1.18 to $1.22 a share.

Our earnings growth was driven by higher same property NOI, accretion from our development and redevelopment program, lower G&A, and lower financing costs offset by dilution from the sale of approximately $400 million of our lower tier assets completed since January 2012. Our 2014 recurring FFO guidance range of $1.23 to $1.28 per share reflects some dilution from the sale of these assets coupled with another $150 million in sales scheduled for this year. We anticipated this will be the last significant traunch of dispositions that will complete our transformation as outlined on page 36 of our supplemental package.

Same property NOI increased by 2.9% for the quarter and was up 3.1% for the year. These numbers are consistent with our long term expectations for our portfolio and were achieved despite a downtick in same property occupancy. Occupancy ended the year at 92.4% down 130 basis points on a same property basis as compared to last year. We expect our portfolio occupancy will increase to 95% by the end of the year. Tom will walk you through the details shortly. Florida is the key state behind this growth. Increases in occupancy will become an important driver to our growth in net operating income over the next two years in addition to harvesting a number of below market anchor leases.

Rent spreads continue to be exceptionally strong and are the primary factor behind our 2013 same property NOI growth. For the year we executed 414 new leases, renewals, and options totaling 2.1 million square feet at a spread of 23% on a same spread basis and 11% when excluding the Barneys lease in Chelsey. Barneys is a big win for the community and also another win for our New York City investment program. In December we signed a lease with Barneys who will reclaim its original location where it first opened in 1923.

When we acquired the Loehmann’s building in May 2011 our investment thesis was focused on the below market lease that matured in March 2016 with no options remaining. We’re delighted that our thesis was realized. We increased the rent from $25 a foot to $80 a foot and expect to recapture the space earlier than projected as a result of the Loehmann’s bankruptcy filing. We believe the value of this asset is not $80 to $85 million as compared to our total basis of $62 million.

This follows a similar story to our Food Emporium building on 68th and 3rd Avenue where we restructured a long term lease that allowed us to increase our current yield and bring the lease to fair market value much sooner than its original term. Bottom line is that our total investment of $46 million is now worth in excess of $65 million.

In addition to the Barneys and Food Emporium buildings, we have 13 other properties in the New York Metropolitan region including Westbury Plaza, and The Gallery at Westbury Plaza in Long Island, Broadway Plaza in the Bronx, two grocery anchored centers in Queens, the city block between 64th and 65th Streets on 2nd Avenue, and seven centers in southern Connecticut including four on the post road between Westport and Darien. These assets are not just significant in size as they represent approximately $900 billion in value, but they are also significant in terms of strategic importance to our company.

They provide a concentrated platform that allows us to expand relations with key national retailers like TJ Maxx, Trader Joes, The Container Store, and Nordstrom Rack. Additionally, many of these assets offer real growth opportunities in the form of below market leases, upgrade in the tenant mix and expansion opportunities. Bloomberg Business Week recently featured an article on big box retail and cited the urban markets as, “The last American frontier for big box retailers.”

Retailers like Target, Wal-Mart, and other large discounters, grocers, and drug stores in targeted urban areas as they seek to serve the most densely populated under retailed markets of the country. I’ve always said New York has the best high end shopping in the US but has a very limited supply of quality necessity and value oriented retailers. Our mission is to upgrade the quality of retail real estate in urban areas especially in places like New York, San Francisco, Miami, and now Washington DC.

We are pleased with the progress we have made on transforming our portfolio and positioning our company for the long term. The tireless efforts of our employees has made this possible and we are grateful for their commitment and dedication. Tom?

Thomas A. Caputo

This morning I will focus my remarks on leasing, occupancy, dispositions, and our development and redevelopment pipeline. As Jeff noted, leasing activity in the quarter and for the year was very impressive. We executed 105 new leases, renewals, and options totaling in excess of 550,000 square feet during the quarter at an overall positive rent spread of 9.5% and over 400 new leases, renewals, and options totaling just under 2.1 million square feet for the year at an overall positive rent spread of 11.1%. The rent spread noted for the quarter and the year do not include the new lease with Barneys which generated an individually significant spread since the rent on this space will go from $1.4 million to $4.5 million a year when Barneys opens for business.

TIs were higher than usual for the quarter at $30.60 a foot and for the year at $24.51 a foot. Removing Barneys from the equation reduces TIs to $6.30 for the quarter and $14.06 a foot for the year. By all accounts 2013 was a very good year for our leasing team who executed leases with a number of top tier anchor tenants including Barneys, Uniglo, Fresh Market, Trader Joes, Homegoods, Ross, Wal-Mart Neighborhood Market, and ULTA. Our leasing pipeline continues to be active with a total of 95 new releases and renewals under negotiation for close to 350,000 square feet. Demand for retail space continues to be very strong from junior anchors, restaurants, health and fitness users, and franchise operators.

We currently have executed leases with 60 tenants who are in the process of building out approximately 280,000 square feet of space which will generate approximately $4.9 million in annual revenue when the tenants open for business. We currently projected approximately two-thirds of this income will be in place prior to the end of the second quarter and the balance of the income will be in place before the end of the year. These figures do not include any income from executed leases in our development and redevelopment pipelines which now amounts to approximately $8 million in annual revenue.

While our same property occupancy declined by 110 basis points to 92.3% during the quarter, the decline can be largely attributed to the loss of three anchor tenants who occupied 143,000 square feet at three of our lower tier assets. The aggregate annual rent for the three lost anchors was approximately $1 million. The lost anchors include KW Furniture who occupied 30,500 square feet at Ambassador Row at Lafayette, Louisiana before they filed for bankruptcy, Beauty Depot who occupied 58,000 square feet at Park Promenade in Orlando before they filed for bankruptcy, and Publix who occupied 54,000 square feet at Alafaya Commons in Orlando before they relocated to a new shopping center located in the immediate vicinity. KW and Beauty Depot were weak tenants and on our watch list.

The good news is we expect to execute leases to replace all three anchor tenants by the end of the second quarter 2014. We have executed LOIs with national retailers for two of the three losses totaling 85,000 square feet and we are trading LOIs on the remaining 58,000 square foot loss with a regional tenant. Excluding these three anchor losses, same store NOI for the quarter would have been 3.4% as compared to the 2.9% we reported. In addition, if we account for the bad debt expenses related to the Loehmann’s bankruptcy in December, same store NOI would have improved to 3.7%.

Our stated goal for 2014 is to increase occupancy to 95% by the end of the year. Our path forward is as follows. At year end 2013 our portfolio was 92.4% leased. We expect occupancy will increase to 94% through a combination of dispositions and moving a few assets into redevelopment. We expect to increase occupancy by 100 basis points from organic lease up which is heavily weighted towards shop lease up.

Anchor occupancy at the 2013 was 97.8% a decrease of 28 basis points over the prior quarter. We expect anchor occupancy will increase to 99% by the end of 2014. Our expectation is the three boxes we lost during the fourth quarter will be re-leased. We expect one of these properties will be sold in 2014, one will go into the redevelopment pool when the anchor lease is executed and the third property will remain in our same site pool.

We have spent a considerable amount of time reviewing our path to 95% occupancy with our regional presidents and our leasing team and believe the goal is achievable by the end of 2014. As Jeff noted, we are very pleased with the results of our dispositions in 2013. During the year we sold 36 properties, including 33 shopping centers and three pads which contain a total of almost three million square feet for $295 million at a cap rate of approximately 7%. The characteristics of the shopping centers sold in 2013 include smaller properties with an average size of 92,000 square feet, smaller markets with a population within three miles of 53,800 people, and low occupancy at 81.3%.

We are off to a good start with our dispositions in 2014 with the sale of three properties which contain 343,000 square feet for a gross sales price of $59.7 million. We have three additional properties either committed or under contract which contain approximately 400,000 square feet at a price of $21.8 million. The properties already sold in 2014 and the properties which are committed or under contract have an average weighted cap rate of approximately 7%. We are very comfortable we will meet our goal to sell $150 million in non-core assets in 2014.

We are making good progress with both our development and redevelopment pipelines. On the development front the Gallery at Westbury is substainally complete and the project is 95% leased and 85% open. Initial sales volumes generated by the majority of the tenants who are opened are well above planned and in many cases rank in the top [inaudible] of the tenant’s chains. We believe the property will be close to 100% leased and occupied by the end of the second quarter.

Demand for space in our Broadway Plaza development in the Bronx has been strong and we decided to acquire two adjacent parcels to expand the size of the project. The initial phase of the project will include approximately 115,000 square foot of space. We have executed leases with TJ Maxx, Aldis, and Sports Authority who will occupy approximately 73,000 and we are finalizing a lease with another major tenant for approximately 10,000 square feet which will take the project to 72% leased.

We expect the first stores in the initial phase of the project will open in the fall of 2014. Phase II fronts directly on Broadway and will include an additional 33,000 square foot of space. We have strong interest in this space from food operators, mobile phone stores, and health clubs. The second phase of the project should open in the second quarter of 2015. Both phases of the project will stabilize in late 2015.

Turning to our redevelopments, at Serramonte we have delivered the new 80,000 square foot Dick’s Sporting Goods store to the tenant a few weeks earlier than anticipated and under budget. Dick’s is planning a grand opening in early April which will be followed shortly thereafter with Uniglo’s grand opening in the mall. Our west coast team is busy planning the next phase of redevelopment for Serramonte.

We expect to begin our redevelopment of The Willow sometime in the spring. This redevelopment will include the addition of a new 10,000 square foot ULTA store adjacent to an existing Old Navy store which has been right sized. In addition, we plan to revamp traffic circulation in the center to provide easier access to the tenants who face the 680 freeway.

At Kirkman Shoppes we’re preparing a pad for LA Fitness which we expect to deliver to the tenant in April. The tenant will construct a 40,000 square foot club to replace an existing facility located across the street. We expect to start pad prep work on the recently acquired gas station we purchased to accommodate a new freestanding Walgreens. We expect the new Walgreens will open in November and the new LA Fitness will open in January 2015.

At Lake Mary Ross and Fresh Market are both under construction in the old Albertsons box. Ross plans to open their store in early March and Fresh Market plans to open in July. We have approved LOIs with two tenants for the vacant Kmart box. We are working through the logistics of fitting both tenants in the box on a timely basis. Demand for shop space in the center have increased significantly since the two new junior anchors will open soon and additional anchors will open in the next 12 months.

At South Beach Regional Trader Joes is now under construction and is expected to open in October. Demand for shop space in South Beach has also increased dramatically in view of the pending opening of Trader Joes. We now own 100% of the West Wood Complex in Bethesda. Our redevelopment team continues to meet with elected officials and municipal agencies as we explore potential redevelopment plans for the property. We’ve also conducted two town hall meetings with the community to better understand what new tenants may be attractive to our neighbors. We are very excited about the opportunity to redevelop this 55 year old property in the heart of one of the most affluent areas in the DC area.

Now, I’d like to turn the call over to our CFO Mark Langer.

Mark Langer

This morning I will focus on three topics: first, our results including the improvement in the quality of our earnings; second, our balance sheet; and third, some details regarding our guidance for 2014. Our recurring FFO this quarter was $0.30 per diluted share which contributed to our full year 2013 recurring FFO of $1.23 per share, an 8% increase over 2012. We continue to execute in accordance with our long term strategy to upgrade and diversify our portfolio which we have highlighted once again in our supplemental information package on page 36.

Over the last three years the quality of our earnings has dramatically improved due to our portfolio transformation. We have reduced our exposure to lower quality assets and increased our concentration of rents in supply constrained markets which contain superior demographics as measured by population density and average household incomes. Some statistics will help put this into perspective.

Our average annual base rents have increased more than 15% since the fourth quarter 2011 and 30% since the end of 2010. Over this same period we have increased the average base rents from our top 25 tenants by 41% since 2011 and by 58% since 2010. Simply put, our top 25 tenants today are a better diversified mix of leading retailers like Trader Joes, The Container Store, Nordstrom, and the TJX companies who are playing rents commensurate with the high quality of the real estate we own now.

We have significantly reduced our exposure to any one tenant whereas at year end 2010 our top tenant Publix accounted for 11% of our annual minimum rent and at year end 2013 Publix remained our largest tenant but represented less than 4% of our annual minimum rent. During 2013, 46% of our NOI was generated from properties in our northeast and west coast markets compared to 15% in 2010. Our capital recycling has reduced our NOI exposure generated from Florida and the Southeast markets from 85% in 2010 to 54% in 2013. These are a few of the compelling statistics that we believe tell the store of our transformation over the last three years. $1.00 of Equity One’s earnings today has far less risk and better growth potential than it did three years ago.

Turning to our earnings for the quarter, we were pleased to see strong growth in same property NOI which increased 2.9% from a year earlier. The NOI improvement was driven by increases in minimum rents stemming from contractual rent increases and new rent commencements. These same factors contributed to our 3.1% same store NOI growth for the full year.

Recurring FFO per diluted share for the full year increased 8% versus 2012. Nearly half of this growth was driven by increase in NOI and much of the rest came from lower recurring G&A expense and lower interest expense largely driven by the 2012 refinancing of our $250 million unsecured notes.

In terms of our balance sheet, we remain focused on all aspects of our leverage and credit profile and have continued to be disciplined with our capital allocation decisions. Specifically, our net debt to adjusted EBITDA ended the year at 6.5 times down significantly from 7.2 times at year end 2012. Our adjusted EBITDA to fixed charges has increase to three times up from 2.7 times at the end of last year.

We have continued to pay off mortgage debt as it comes due using proceeds from asset sales and despite selling $300 million or largely unencumbered assets during the year, we still generate more than 77% of our cash NOI from unencumbered assets. Our investments in mortgage notes receivables declined by approximately $11.5 million as compared to the third quarter as two seller financing notes we had outstanding were repaid to us. The $60.7 million mortgage receivable balance at year end pertained to our financing on the remaining Westwood Shopping Center assets in Bethesda Maryland which we recently acquired in January of this year for $80 million. This included the two main retail shopping center parcels at the center. At closing we funded the remaining net equity required of approximately $19.5 million and no longer have any mortgage loans receivable.

Turning to guidance, we introduced recurring FFO guidance of $1.23 to $1.28 per diluted share which excludes debt extinguishment gains and losses, impairment charges, transactions costs, severance costs, and other onetime items. The key assumptions underlying our guidance is as follows. Same property NOI growth of 2.5% to 3.5%. Same property occupancy growth of approximately 100 basis points which we expect to be weighted more towards the latter portion of the year and which we expect will result in yearend same property occupancy of approximately 95. Core acquisition activity of $100 to $200 million in addition to the $103 million of activity we announced in our press release. We expect this additional activity to occur towards the middle to second half of the year and we assume acquired assets of 50% leverage.

JV acquisition of activity of $100 to $200 million at an assumed 30% level of ownership and with 50% leverage. Total disposition activity of $125 million to $175 million which includes the activity referenced in our press release for first quarter sales and assets under contract. Other key assumptions to note include financing and investment projections. I noted that we no longer have any mortgage loan receivables and therefore the level of investment income we expect in 2014 will be negligible as compared to the nearly $7 million we recorded in 2013.

In addition, we only have one $6.7 million mortgage maturing in 2014 and considering recent mortgage assumptions pertaining to assets we acquired in Q4, we expect interest expense in 2014 to be slightly higher than 2013. We have assumed that proceeds from asset sales will be used to fund developments, redevelopments, and acquisitions. In terms of development and redevelopment activities we currently expect to spend between $60 to $80 million during 2014 much of which relates to Broadway Plaza, Kirkman, Lake Mary, and The Willows.

Turning to G&A we were very pleased with our cost reduction efforts in 2013 and will look to continue to carefully manage internal and administrative costs in 2014. Our expectation for 2014 is that recurring G&A which excludes onetime items for transactional activity and severance costs will be within the range of $35.5 million to $37 million. A good way to understand our 2014 guidance of $1.23 to $1.28 per diluted share is to start with our Q4 2013 actual recurring FFO of $0.30 per share.

Annualizing this gets to $1.20 a share and the assumptions I’ve previously described would result in the following: $0.02 to $0.03 added from same store NOI growth; $0.02 to $0.03 added from the growth within our development and redevelopment properties; and $0.01 for percentage rents which are primarily earned in Q1 partially offset by up to $0.02 of dilution from dispositions net of acquisitions. The low end of each of these assumptions would get to the $1.23 of the guidance range. The high end of the range is based on the upper end of each of these assumptions plus some possible upside should acquisition occur sooner than planned and dispositions occur later in the year, and considering potential increases in below market and straight line rents.

In summary, favorable market conditions and our capital allocation principles aligned to allow us to make tremendous progress in disposing non-core assets during 2013. Our strategy to use this part of the market cycle to significantly upgrade our portfolio and reduce our exposure to riskier assets has put some pressure on short term earnings growth as reflected in our guidance as we expect to sell another $150 million of assets in 2014 which would get us to approximately $525 million of dispositions over a three year period.

However, we believe the portfolio changes position us to achieve our longer term objective of growing both earnings and NAV 7% per year as our development and redevelopment pipeline grows closer to our internal target of $150 million per year in annual deliveries. Our focus today remains centered on maximizing the income growth within the high quality assets we have assembled and growing our development and redevelopment pipeline where we believe our capital can be deployed at attractive risk adjusted returns.

We will continue to assess all aspects of our cost structure and manage our balance sheet metrics to ensure leverage is maintained within targeted levels and that we have abundant sources of liquidity. I would now like to turn the call over to the operator for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Christy McElroy – Citi.

Christy McElroy – Citi

Given the 7.6% increase in same store expense growth in Q4, in the context of your 2.5% to 3.5% same store NOI growth guidance in ’14 how should we be thinking about sort of revenue growth versus expense growth and assuming that snow removal and utility cost placed a little bit of a roll in Q1, to what extent is some of that recoverable and what should sort of the progression of same store NOI growth look like throughout the year?

Mark Langer

I think most of the NOI growth is coming from the top line. You mentioned the snow removal which clearly drove some of the gross level of expense even in Q4 but fortunately the bulk of it is recoverable so it will be offset through recovery income so as we look at the growth in 2014, I think you should assume that the overall margins will remain relatively constant with what you saw for the full year in 2013 and that the growth is coming from rents and contractual bumps.

Christy McElroy – Citi

Just with regard to Barneys what are you expecting in terms of timing of taking occupancy and paying rent? Just to clarify, has some of mark-to-market on [inaudible] already been running through FFO in [5141] beyond the $1.4 million or is that [guess] number?

Jeffrey S. Olson

First, we’re assuming that the lease is rejected because we have signed a lease termination agreement with the party that acquired the lease designation rights. This agreement is subject to Bankruptcy Court approval which we are expecting shortly, maybe even as soon as next week. Therefore, we expect to take possession sometime in early March and then we expect Barneys will take possession no later than March of 2015. They have 12 months to build out their space. They’re putting a lot of money into the space and then rent would commence the earlier of March 2016 when they open for business.

As far as the numbers are concerned, in 2014 we’ll recognize about $5 million in FFO that relates to the write off of the below market lease liability. We would have accrued about $3.7 million a year had Loehmann’s continued to operate in that location. Then in future years our FFO is going to be based on the new lease and commencement date.

Christy McElroy – Citi

How much incremental capital are you putting into the space beyond what you originally bought it for?

Jeffrey S. Olson

We have about $6 million that we’ve allocated in incremental capital.

Christy McElroy – Citi

Lastly, you talked about timing of acquisitions you expect them to be later in the year, can you talk about timing of dispositions? Is that more ratably throughout the year? Then on cap rates, you talked about 7% is that just based on the dispositions that you’ve done or is that sort of an assumption for your dispositions throughout the year? Can you also talk about cap rates [inaudible]?

Jeffrey S. Olson

Because we’ve already sold so much in the first quarter I think it’s fair to assume that it’s going to occur throughout the balance of the year. The 7% cap rate that we’ve executed the deals on so far is pretty good. Our expectation that it will be slightly higher than that on the future dispositions, that includes much of the Louisiana portfolio so I think it’s fair to say that will probably be closer to 8%.

Christy McElroy – Citi

Then on acquisitions?

Jeffrey S. Olson

Acquisitions I think will be ratably throughout the year. The reality is on acquisitions it doesn’t move the needle that much from an FFO perspective but I would expect that that would take place throughout the balance of the year as well so call it weighted towards the latter part of the second quarter, third quarter, and even fourth quarter.

Operator

Your next question comes from Paul Morgan – MLV & Co.

Paul Morgan – MLV & Co.

You talked about your target of $150 million per year in development deliveries and maybe what your thought is on how long it would take you to get there from where you are now? Then kind of sticking with the development, maybe any color about the timing of the next phases at Serramonte? I didn’t hear you mention that in terms of expenditures this year on development so is this something that you’re going to finish the Dick’s and Uniglo and then basically [inaudible] 2015?

Jeffrey S. Olson

If you look at our shadow pipeline, I think you probably have somewhere around $500 million when you add everything up, and this is the shadow so it is going to take a little bit of time. The most significant projects that will probably amount to up to $300 million of it will include future phases at Serramonte, and we are in the entitlement phase right now and it’s going along very well. We have a lot of support from the community there. It would also include Bethesda, and it would also include an expansion at Potrero.

Those are not 2015 events, those are likely 2016, ’17, and even ’18 in terms of openings. There are also a lot of projects that we have specifically throughout Florida that probably amount to another $75 million in redevelopment costs that include the reanchoring of certain spaces like at Alafaya Commons where we’ll tear down a box and build a new box, at South Beach Regional in Jacksonville we’re putting in a new Trader Joes there, we’re redeveloping Lake Mary in Orlando, we’re doing a couple new Publix stores here and there. I think that’s a pretty good recurring rate of what you can expect in our portfolio just in terms of bread and butter redevelopment so call that $75 million a year. Then you’re going to have some lumpiness as far as the bigger projects are concerned.

Paul Morgan – MLV & Co.

Then you mentioned some impact to get your 95% occupancy and some shifting of assets into redevelopment. Is there anything that’s lumpy there or is it just a few smaller assets that will drive that?

Jeffrey S. Olson

It’s a few smaller assets that will drive it.

Paul Morgan – MLV & Co.

Then just lastly do you have any color on line depth of the Vestar JV? They basically held those assets for about three years and I knew there weren’t as many of the distressed type of acquisitions that everybody thought there would be but what kind of returns on a look back basis did you achieve?

Jeffrey S. Olson

Just back of the envelope, it was three projects that we bought with them Vernola and Goodyear we sold 100% of the interest. Our basis I believe, was $67 million and we ended up getting out for $80 million so that’s about 20% higher than what was paid. Then on Talega and San Clemente we bought it for $19, we bought back our partner’s interest which I believe was a 51% interest for a total value of $23 million and we have visibility on that asset to take that up to an 8% to 9% yield so we’re very happy with how that joint venture worked out.

Operator

Your next question comes from Jay Carlington – Green Street Advisors.

Jay Carlington – Green Street Advisors

I guess we haven’t really talked about your JV platform in a while and with the acquisition pace of $100 to $200 million you have in guidance you’re growing with New York Common so I guess what’s the update with the company’s MO with respect to JVs as we kind of reach the end of the non-core dispositions that we’re going through?

Jeffrey S. Olson

We’ve always liked to have at least one active joint venture partner just because it’s hard for us to rely on the equity markets at all times to access capital and having pension funds like New York Common or CalPERS backing us in addition to our own capital we think is a very good thing to preserve optionality. I would expect that that joint venture, the New York Common joint venture will grow to $500 million in size which is its stated goal and I’m hoping that we’ll be able to increase it from there as well.

Jay Carlington – Green Street Advisors

Your other JVs, are those going to stay in place, shrink, grow, how are you thinking about that?

Jeffrey S. Olson

The other ones are relatively in material compared to the New York Common one. I would expect our focus will be placed on New York Common.

Jay Carlington – Green Street Advisors

Maybe lastly just on the non-core dispositions you have, how are you thinking about I guess, investing TIs to lease up the properties in order to sell them at a higher price? I think you have talked about that strategy verses maybe your ability to sell it without the incremental investment?

Jeffrey S. Olson

I think you have to be real careful with that. We are not incentivizing any of our leasing agents to try and get higher rent by giving them more TI. I think it’s a dangerous game to play.

Jay Carlington – Green Street Advisors

Lastly, as you look at those properties you’re selling in Louisiana and Georgia, what’s the weakness in the leasing? Maybe this is just a read through on some of these areas, is it just weak anchors or anchors vacancies, or are there more kind of structural challenges that you’re seeing with some of the small shop spaces out there?

Jeffrey S. Olson

I think for starters they are in thin markets so the trade areas might be 30,000 to 40,000 people. I think one trade area might be 8,000 people. I think it’s called Cut Off Louisiana and there’s no reason we should own that property. There are some weak anchors as well. It really is a tale of two portfolios, I mean, you look at our occupancy rate in the west coast and the northeast and we’re running at 98% and 99% occupancy levels and we’re able to drive our rents much, much higher so our same property NOI even at those occupancy levels is outpacing the rest of the company. I just think it has to do with the quality of the assets.

Operator

Your next question comes from Brandon Cheatham – SunTrust Robinson Humphrey.

Brandon Cheatham – SunTrust Robinson Humphrey

Just focusing on occupancy real quick, small shop occupancy on a same store basis what does that look like for the fourth quarter this year compared to last year?

Jeffrey S. Olson

I am going to ask you to go to the next question while we’re looking it up and we’ll come back to that one.

Brandon Cheatham – SunTrust Robinson Humphrey

Kind of sticking with that vein, are there any other tenants that are on your watch list that might provide some occupancy noise in 2014? Any expectations there?

Thomas A. Caputo

I don’t believe that we have anybody that’s immediately on our radar screen. Obviously, we’re keep a close watch on people like Kmart and the office guys that are trying to downsize, but we don’t have anybody immediately on our radar screen that we expect may go this year.

Brandon Cheatham – SunTrust Robinson Humphrey

Just a couple of quick follow ups, your yearend occupancy guidance of 95%, how much of that increase from today to there stems from selling a low occupancy asset?

Jeffrey S. Olson

What we said was we think 100 basis points of growth is going to come organically so that is true sort of same property lease up and the balance is going to come from a combination of putting some properties into our redevelopment pipeline and then also dispositions.

Mark Langer

In terms of the follow up, we are shop occupancy 4Q12 was 81% versus the 82.1% today.

Brandon Cheatham – SunTrust Robinson Humphrey

Sticking with the same kind of questioning I’m looking at the disclosure on the last page of your productivity, your grocery anchor center, and your demographics and even the way we view it you do [scream] pretty high in quality from a locational standpoint but there does seem to be a lasting disconnect between your small shop occupancy levels versus the quality of your overall portfolio. I’m just trying to figure out what that discrepancy is and is it structural meaning do your assets just have too much small shop space where the occupancy levels stay at these levels or that cause these occupancy levels to be at these levels or is there something else going on?

Thomas A. Caputo

I think if you look at what we refer to as our legacy portfolio, a lot of that is concentrated in Florida and Florida is notorious for building way more shop space, developers in Florida build way more shop space than developers in other markets do. If 20,000 to 25,000 feet is the appropriate amount of shop space for a grocery anchored center across the country, in Florida you might see 50,000 feet, you might see 60,000 and sometimes you’ll see 70,000 feet of shop space. At the end of the day there are only so many uses you can lease to and if you have that many square feet that’s hard to lease.

What we have been doing, as I think you know if you’ve been following the company, is we’ve been consolidating shops in Florida wherever we have the opportunity to do so to create 10,000, 15,000, 25,000 foot boxes and reduce the amount of shop space. It takes a while to do it and you have to have demand from anchors to do it but I think largely I’d say Florida is probably the poster child for high shop vacancy.

Jeffrey S. Olson

There are a handful of properties in Florida, really just a handful, that make up the majority of that vacancy. Specifically, we have five assets in our portfolio that have a value of about $50 million and if we sold those assets our occupancy rate overall as a company would go up to 94.1%.

Brandon Cheatham – SunTrust Robinson Humphrey

Just a last quick modeling question give that Westbury is in the lease up period, how much yield is currently in the run rate at the fourth quarter or asked differently how much NOI are we missing or should we model in specifically for 2014?

Mark Langer

Just to give you an apples-to-apples, in ’13 The Gallery contributed about $9.5 million of NOI and in ’14 you should assume $12.5 million to $13 million.

Operator

Your next question comes from Craig Schmidt – Bank of America.

Craig Schmidt – Bank of America

Just given your success in the urban retailer arena, I’m assuming that you’re looking to do more acquisitions at market. I’m just wondering where have cap rates moved in the last six to nine months for urban properties and maybe compare that to the movement in traditional shopping centers?

Jeffrey S. Olson

It’s hard in that there aren’t that many trades that have occurred. Buying in New York City stabilized product with credit in good neighborhoods you’re going to be in the fours and we are not a buyer at market of a stabilized urban retail site. What we want to do is find a site like we did with either Food Emporium or with the Loehmann’s building where there’s a play there where we can actually add value, substantial value. I would compare those four cap rates to good quality assets in suburban markets that are in the fives.

Craig Schmidt – Bank of America

Just out of curiosity in the Barneys situation did they approach you or did you approach them when pursuing the transaction?

Jeffrey S. Olson

We took their call Craig

Operator

Your next question comes from [Jim Sullivan] – Cohen & Group.

[Jim Sullivan] – Cohen & Group

Just to follow on the previous questions about what’s happening in New York City and you talked about this obviously in your prepared comments Jeff, I’m just curious in terms of pursuing these value creation opportunities in this market which have been pretty special over the last couple of years for a number of companies including yourself, are you working with third-party brokers or do you tend to do most of the leasing totally in house?

Jeffrey S. Olson

It’s a combination but we do have a third-party broker that we use quite a bit and they are very good.

[Jim Sullivan] – Cohen & Group

Just curious, commission rates on those deals in New York City is it comparable to other markets?

Mark Langer

Yes, it’s a negotiated amount so it really depends whether you’re talking about Manhattan or the outer boroughs it can vary dramatically. I can’t really speak as to what they are in other markets outside of the five boroughs but most of our situations are co-brokerage so you’re negotiating both sides of the deal.

[Jim Sullivan] – Cohen & Group

I’m just curious as you grow this business I’m curious about the opportunities for scale. There’s been obviously in prior conference calls a lot of Q&A about the SG&A level and the desire to bring it down but at the same time the value creation opportunity in New York does seem to be pretty impressive. To what extent do you consider it a competitive advantage if you will, to try to internalize more of that leasing and do you think as you continue to invest in this market you’ll have the opportunity to do that?

Jeffrey S. Olson

I’m not sure. I mean, the brokers have access to so much out there that they feed us product and deals and we want to continue to incentivize them to come to us so my guess is you’re not going to see a whole lot of savings to the extent that we internalize leasing. If you look at the returns that we’ve been able to generate and the numbers that I shared with you on Food Emporium and on Loehmann’s I included all leasing commissions as well, we think it pays for itself.

[Jim Sullivan] – Cohen & Group

Another question on Barneys, I know they’ve gone through a recap over the last year with Perry Capital coming in and some financing, I just wondered did you feel the need to get any credit enhancement on this lease?

Thomas A. Caputo

No, not at all. We thoroughly reviewed their financial statements. They have great credit at this point because of Perry Capital and we’re delighted to have them as a credit.

[Jim Sullivan] – Cohen & Group

A question in modeling the same store NOI, the percentage of the total NOI that’s in the same store pool is obviously changing as you complete the kind of repositioning of the portfolio so a question for Mark, as we look forward to 2014 what percentage of overall NOI should we assume is in the same store pool?

Mark Langer

It’s a little bit north of 80%.

[Jim Sullivan] – Cohen & Group

Then final question, on the Westwood acquisition, I think before Jeff you’ve talked about kind of a going in yield in the four to five range and obviously a much higher yield when you complete the redevelopment as that takes shape over time. Is there a FASB adjustment for 2014 on the two parcel acquisition you just completed in the first quarter?

Jeffrey S. Olson

Yes, there will be and it was just acquired in January, we’re going through the process right now with the final appraisals and the valuation team to determine the amount but there will be an adjustment for it.

[Jim Sullivan] – Cohen & Group

Is it fair to kind of assume maybe between half way between that projected long term yield and what the previously advised going in yields will be, cash yield?

Mark Langer

That’s probably not far off. We’ve commented the big adjustments obviously coming from the [Giant Food] lease where they’re paying $2 and depending on where the market shakes out anywhere between $30 and $40. We would probably point to the more conservative end of the range, you would take that adjustment times the square footage and that would be amortized over the remaining term of the lease which is until 2019.

Operator

Your next question comes from Ross Nussbaum – UBS.

Ross Nussbaum – UBS

Just a follow up on the Barneys and even the Food Emporium deals you did. Clearly, there’s been a lot of valuation creation. The leases you’ve entered into are there bumps or are these generally flat deals?

Jeffrey S. Olson

There are bumps in both of them.

Ross Nussbaum – UBS

I guess the question is at what point does it or does it make any sense to take the money and run? I mean, clearly you’ve gotten the mark-to-market –

Jeffrey S. Olson

That’s a good question. Not yet, not yet, nope. There is a percentage rent built into the lease and our expectation is that they’re going to do very well so that could provide further upside from the numbers that I disclosed earlier today. Food Emporium now that we can get to it in 9.5 years, I’d rather play that out and who knows there may be an opportunity to get it back sooner.

Ross Nussbaum – UBS

The other question I had is I understand the need to redeploy the capital from the remaining dispositions but just high level as you think about where cap rates have gone for the types of assets you’re trying to acquire whether it’s from call it the DC to the Boston corridor and you think about where we may be at this point in the cycle, whether that’s from a rental rate perspective or an interest rate perspective, do you think things perhaps are getting a little frothy when you see some of these prices that are being paid these days?

Jeffrey S. Olson

I do. I do and that’s why when you look at what we’re buying and what we will buy in the future we think first, the best opportunities are those properties that are adjacent to our existing centers where we’ll be able to add value just by combining the parcels and then hopefully finding some expansion opportunities. That’s happening and I think you’ll hear more about that on our next call. In fact, I think we signed an agreement yesterday on a smaller deal but a very important one.

Secondly, we will look for off market transactions like the one we found in Pleasanton, California where the existing income and yield is pretty high but there’s a real opportunity to increase it through repositioning that asset and we now have real visibility. It’s still a fairly fragmented market out there and I think we can find a few deals like this each year even though it’s a frothy market that will allow our redevelopment and leasing teams to find excess value because the assets perhaps just weren’t looked at the same way we would look at them. But, we’re not making an aggressive call like we did in 2009 and ’10 where we’re saying, “Let’s back up the truck and let’s use equity to finance a billion worth of acquisitions,” which is what we did. We don’t think we’re in that part of the cycle right no.

Operator

Your next question comes from Michael Mueller – JP Morgan.

Michael Mueller – JP Morgan

Just a couple of quick ones, Jeff first you were talking about the bulk of the asset sales being done with this round, if we’re looking to ’15, ’16, ’17, what do you think is a realistic level of normal churn on the sales side?

Jeffrey S. Olson

I think it’s probably $25 to $50 million unless cap rates compress or stay compressed even where relative to our stock if we can sell a Publix anchor center in Florida for a five cap versus selling equity in our company at a 5.5% cap rate, we’ll sell the Publix anchor center in Florida that might only offer 2% growth instead of our weighted average portfolio growth rate that might be 3%.

Michael Mueller – JP Morgan

I guess Tom in your comments you were talking about the 100 basis points of same store lease up this year a lot of it coming from small shops. Can you kind of give us some numbers as to the same store occupancy increase on that small shop so how much do you think you’ll get this year?

Thomas A. Caputo

About 4%.

Michael Mueller – JP Morgan

About 400 basis point pick up?

Thomas A. Caputo

Yes.

Operator

(Operator Instructions) Your next question comes from Vincent Chao – Deutsche Bank.

Vincent Chao – Deutsche Bank

Just a couple of quick questions on the development side of things, I heard from one of your competitors or peers that said they’re starting to see some increase in competition on development projects and I was just wondering if you guys are experiencing something similar or seeing that?

Jeffrey S. Olson

There’s not a whole lot of it taking place but there is some. I mean, we lost an anchor earlier this quarter, the Publix, to a new development but it’s not material overall.

Vincent Chao – Deutsche Bank

Then just going back to the Barneys lease and just sort of thinking about the next couple of years and leases like that where they’re sitting at below market rents and no options left, how many of those are in the portfolio say the next two years or so?

Jeffrey S. Olson

We have quite a bit. I don’t have the number off the top of my head but I think probably a dozen leases like this that mature over the next five years. I think we’ve pretty consistently made the case that even if the expiration is in five years, the probability of that going to full term is pretty low just because tenants never like to take the lease to full term, they want to negotiate early. In fact, we have one major tenant of ours whose lease expires in 2020 and we’re negotiating an extension there on one of their more productive stores. Anyway, we have quite a few of them throughout our portfolio and the ones that would come just off the top of my head would include the Giant Food in Bethesda which as Mark said is a 2019 expiration, we have three anchor leases in Long Beach: Marshalls; Ross; and Rite Aid that are all coming due relatively soon. The same thing at Aventura Square with DSW there. That’s just a small list.

Operator

Your next question comes from Christy McElroy – Citi.

Christy McElroy – Citi

Just quickly I wanted to make sure in terms of the accounting of the Barneys and the Loehmann’s I think you said $5 million of effective FFO recognition in ’14 relative to $3.7 so that’s a $0.01 additional relative to ’13?

Jeffrey S. Olson

That’s correct.

Christy McElroy – Citi

Then the $4.5 million of rent that you quoted that is a gap over the life of their lease or that’s initial cash?

Jeffrey S. Olson

First year initial cash.

Christy McElroy – Citi

What is the term of the lease and what is the gap rent so as we start to think about ’16 the impact of that lease?

Jeffrey S. Olson

What I’ll tell you is it’s a 20 year lease but I’m not going to get into every detail on the lease. You can assume there’s growth, it’s decent growth but I’m not going to disclose every nuance behind that lease.

Christy McElroy – Citi

That’s the upfront, the $4.5 million?

Jeffrey S. Olson

That is correct. It does not include any percentage rent as well.

Christy McElroy – Citi

Then on the TI, if you do the back of the envelope sort of TIs relative to the [inaudible] because you disclosed it with and without, you get just under $5 million, you talked about investing $6 million I just want to make sure the $6 million is the $5 million –

Jeffrey S. Olson

There are leasing commission built into that number, into our basis as well so when I disclosed –

Mark Langer

Jeff took the $5.1 plus some commission.

Jeffrey S. Olson

I disclosed our total basis, I included all costs associated with this building.

Christy McElroy – Citi

Then outside of the $55 million you bought it for upfront had you invested any capital between the $55 million plus the $6 million? How should we think about you’re effectively yielding 7.4 in that case for a prime New York City asset?

Jeffrey S. Olson

That may be just a little bit high but you’re not materially off.

Operator

Your next question comes from Christ Lucas – Capital One Securities.

Christ Lucas – Capital One Securities

Just a bigger picture question on the market environment as it relates to the acquisitions and dispositions and that is are you seeing the competitiveness being driven by a lack of product on the market or is it being driven by an increasing volume of interested buyers?

Thomas A. Caputo

I think there are very, very few good assets on the market. There are tons of Bs and Cs out there that are available but very, very few institutional quality assets and most of our success, which has been fairly limited over the last 12 months, has been off market deals.

Operator

This concludes our question and answer session. I’d like to turn the conference back over to Jeff Olson for any closing remarks.

Jeffrey S. Olson

Thank you all for your time and we look forward to discussing our next quarter’s call soon.

Operator

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

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