Equity One' CEO Presents at the Citi Global Property Conference (Transcript)

| About: Equity One (EQY)

Equity One, Inc. (NYSE:EQY)

Citi Global Property Conference

March 04, 2014 04:50 PM ET

Executives

Jeff Olson - CEO

Mark Langer - EVP And CFO

Analysts

Christy McElroy - Citigroup

….who are on the line, please disconnect now. Disclosures are available up here and on the webcast on the disclosures tab. We are pleased to have with us Equity One, Jeff Olson, Mark Langer. Jeff I'll turn it over to you to introduce, you don’t need to introduce, I keep messing up on that, I am like reading the script and it’s not even on there. If you want to provide a couple of minutes of opening remarks, that’s fine and then turn it back over to me for Q&A.

Jeff Olson

I think my wife might be on the line, so I might have to tell her to disconnect. So a couple of highlights on Equity One. Since 2009, this Company has been through a very significant transformation. We are now really focusing on three markets in particular which include Hilltop, Florida, New York Metro and San Francisco. We also have four other markets aside from those; Washington DC, Boston, Los Angeles and Atlanta where we have a significant presence.

So, if you put this in context, over the last five years we have acquired 39 properties for about $2 billion. So call it $50 million apiece. During the same time period, we have sold 85 of our smaller properties for about a $1 billion and these are properties that are located in smaller markets, mostly in secondary locations throughout the southeast. So considering that our portfolio is $4 billion in size, $2 billion in acquisition and a $1 billion in dispositions, this really is a different company than it was many years ago.

The most tenant statistic, as you look at the new Equity One, would include the following four facts. Number one, our average asset value has increased from $16 million to $31 million. Our average base rent on the portfolio has gone from $12 a foot to $17 a foot.

Today our average supermarket is generating about $600 a foot in annual sales, as compared to $470 before. And then finally and probably most telling of all is our average three-mile population density has gone from 81,000 people within a three-mile range to 206,000 people. And that’s how open we have become.

The largest investment that we made during the prime period was the acquisition of Capital & Counties which is a $600 million deal. This primarily consisted of assets that were in the San Francisco Bay area. The largest property within Capital & Counties was Serramonte Center which is in Daly City. We have recently completed an expansion of that center. We have added a fourth anchored exporting goods which opens up in about a month.

On this $600 million investment today we are yielding about 8% on an unleveraged basis. And then the second largest investment that we made was on Old Country Road in Long Island. And there we bought a $104 million asset that was anchored by Costco and Wal-Mart for an eight cap. In the fall of 2009 we bought an adjacent land parcel where we recently have developed a $133 million center called The Gallery at Westbury Plaza. That’s yielding about 11% on total cost of $133 million. It really does have an all-star lineup as well. The Container Store, Trader Joe's, Saks Off Fifth, Nordstrom Rack and many others, Shake Shack happens to be one that many people like going to there as well.

So blended on Old Country, we are earning about 9.5%. We have also made a lot of investments in the New York City metropolitan region, six in New York City alone, including the Loehmann's Building in Chelsea where we have recently announced that Barneys would be taking over that place in 2016, really reopening their flagship there. We also own The Food Emporium on 68th and Third Avenue. I think that was a really good example of an investment that we made that had a below market lease with the troubled retailer where if you underwrite the deal and assume that it went, the lease went into expiration, it was 49 years, the return wasn’t that great but we bought it because we felt like we might be able to get to it earlier because they were only paying us $40 a foot in rent and we thought market was about a $106.

So earlier this year we restructured that lease and we are now earning about a 15% internal rate of return on that investment. Our building in the Bronx, our last New York City asset that I'll touch on, $67 million big box shopping center that’s anchored by TJ Maxx Sports Authority, Aldi's and Party City, they will deliver that at about 8.5% return. I'm really delighted with what we've been able to do on New York City. I think we've made a real impact on certain communities in that city.

Future projects for our company on a larger scale basis include Westwood Shopping Center in Bethesda, Maryland; Serramonte center, there are so many phases left of that shopping center. So we are excited about adding more retail there and probably some other uses too and that also in Potrero we have big plans for that center in San Francisco.

But at the same time we also have a lot of smaller scale redevelopments that we're working on that might be a $1 million to $5 million investment in an existing center where we may be consolidating some shop space to make room for Trader Joe's and expanded Publix, Ross among others. And in general I think that we can probably do between $60 million to $75 million of that type of activity within our portfolio.

So, big, big picture, I’ll close on this. Our expectation is that our portfolio would generate about 3% growth on a same property basis. When you layer in $100 million to $150 million of development and redevelopment spending at an 8% to 10% return, we think that can get us to 6% to 7% growth in FFO and in NAV on a per share basis.

So with that Mark and I would be delighted to take any questions.

Question-And-Answer Session

Christy McElroy - Citigroup

Great, I’ll open it up the question that we’re asking at the beginning of each panel. What do you think is the most misunderstood thing about your company specifically and what are you doing to address it?

Jeff Olson

I think it’s our development and redevelopment pipeline and our ability to continue to add this type of value creation through the system. What are we doing to make it happen? We’re doing it -- we’re building these projects to returns that are meeting our hurdles and we really are building a track record and I think that’s the most important thing that we can do is execute.

Christy McElroy - Citigroup

What are you doing to address sort of the misperceptions of the valuation of that part of your growth profile, part of your business? And do you think that when you look at the NAVs, that the investment community builds on your company, do you think that we’re undervaluing or not valuing it appropriately?

Jeff Olson

I do think that we are not giving full credit for the development and redevelopment capabilities within the company. But I can tell you that there is a proactive method that we’re using to communicate that to everyone, because I think the best way that we can prove it is to actually deliver it and it’s going to take some time but that’s fine. We’re in this for the long run and we are building a long run track record here.

Christy McElroy - Citigroup

You obviously have a big -- and you talked about some of the projects that are in the current pipeline in the future pipeline. What sort of the overall redevelopment and so within your portfolio and is that $100 million to $150 million annual spend that you talked about sort of an ongoing -- and I think that included the ground up development as well. Is that sort of an ongoing sustainable annual spend level given the opportunities you see within your portfolio?

Jeff Olson

I think we probably have about $500 million of opportunities that we have identified inside of our portfolio. It’s not all going to happen over the next year or two or even three years, but certainly over a five to seven year time period, I think that’s a reasonable expectation. And then I think you will continue to find -- we will continue to find other opportunities like we did in the Bronx, like we did in Westbury, if we do -- like we have in Bethesda. And if we do one or two of those every other year, I think that will contribute to it. So we feel very good about our $100 million to $150 million investment plan that we have on an annual basis.

Christy McElroy - Citigroup

And as you are starting a new project, what sort of criteria has to be met? What sort of return hurdles are you underwriting?

Jeff Olson

We’re looking at 8% to 10% unleveraged yields at the [indiscernible].

Christy McElroy - Citigroup

Any other sort of -- aside from returns, any other sort of criteria? I mean you looking at lease role and things that kind of open up the opportunity to?

Jeff Olson

I mean we’ll look at IRRs. I think the best example of that was when we bought the Loehmann’s building, which we paid 2% cap rate for and it sort of seems absurd that you pay 2 cap on a property but we view that more as a development opportunity without the development and construction risk because it basically was re-leasing a box in March of 2016 when that lease came due.

So the IRR in that was in the double-digits and we felt very comfortable proceeding with that. I don’t think you can do too many 2% cap rate deals, but certainly we’re on the hunt for more below market rent opportunities. It’s kind of funny. I went to a large retailer about three weeks ago, one of the largest in the country I met the head of real estate and she saw me, I don’t know her well and she said so you’re the guy that’s buying our most productive stores with the cheapest rents and the shortest term duration on the leases. She says I know what you’re up to. And she was right, because that’s exactly what we have done with many of their locations and those are the types of investments that we feel are the best for our company and we’re willing to wait it out, it might be three years it might be five years it might be 10 years even. Because generally we will underwrite deals when the leases expire, but anchors rarely want to take those leases to full term, because they're scared they’re going to lose that store. So I think the upside potential is greater for those opportunities when you find them.

Christy McElroy - Citigroup

There are 17 publicly traded center REITs today. How do you differentiate Equity One? How do you -- when you’re talking to investment community, you're talking to new investors, how do you differentiate your story?

Jeff Olson

I mean we’re all about playing the urban theme right now. And there was a great article in Bloomberg Business Week that I cited on our last earnings call that talks about how the urban markets are the last frontier for big box retailers. And we really do see it. We feel it from these retailers. We are becoming specialist and experts inside of these markets. In particular New York City and San Francisco right now we’re doing a lot of new creative development and redevelopment for these big boxes. We’re not renting into the REITs as much as would think. So that’s the differentiator that we see within Equity One.

Unidentified company representative

[indiscernible]

Unidentified analyst

Jeff, an asset like the one you’re building in the Bronx; is that one you would hold for a long time or is that one you would look to sell sooner because it’s by definition at market rents I would assume when you open it.

Jeff Olson

Once it’s stabilized and if the growth rate is closer to 2% than 3%, I could see us redeploying that elsewhere Lisa. Same thing for some of our Publix anchors -- Publix anchored centers here in Florida as well, and if you can get a five cap on those assets, which I think is a very reasonable cap rate and redeploy that into the 8% to 10% yields and the development and redevelopment pipeline I think that’s fine. One of the questions we do get a lot, at least during this conference is how important is size. Because I think it has been relevant for some of our brethren within the strip shopping center community. But for us I don’t think it’s that relevant right now. Because we can go see any retailer we want in the country, we have relationships with all of them. I don’t think it hits in that material as a way and it’s probably because we’re at the $4 billion mark which I think is a great size to be. We’re not too big where you have to do a lot of transactions to move the needle, but you’re big enough to be relevant and important to these retailers, especially when you own their top locations. They come to rather than you going to them.

Unidentified analyst

You guys have one of the premium evaluations within the space. From install growth standpoint you probably do about 3% same store NOI plus or minus. I think that’s the consensus based on the questions that Christy has been asking most of the shopping center companies. You have the benefit of leverage; you have a $100 million to $150 million of development and redevelopment so forth. Do you think that 5% to 6% bogey is kind of setting the bar a little low, given what you have to do and giving your evaluation and what market expectations are.

Jeff Olson

I mean I think we have been spoiled over the last year or two with sort of the new run rate for same property NOI within the strip center space. I’ve been in this for 20 years or so and generally speaking 2% is about the number you get from a stabilized strip shopping center. You have occupancy lifted house [ph], but that doesn’t go on in to perpetuity. So we think 3% on our stabilized portfolios is a very attainable number and it’s in part driven by the below market anchor leases that we have. We have so many of them through the acquisitions. So I think it’s a reasonable expectation for us. When you add 3% plus the $100 million to $150 million dollars a year, you’re at a 6% to 7% growth rate in NAV or FFO and I think that’s a reasonable expectation.

Unidentified analyst

You talked about selling another sort of $150 million of assets this year. Does that take care of sort of the bottom percentage that you consider noncore or that’s sort of what you’re able to….

Jeff Olson

Now we would have $50 million left after that and then we think we’re done.

Unidentified analyst

$50 million left so.

Jeff Olson

50 million left of noncore.

Unidentified analyst

$50 million and.

Jeff Olson

So $200 million in total.

Unidentified analyst

Is there any specific reason, any technical reason why you wouldn’t do the full $200 million this year or I mean is it redeployment?

Jeff Olson

I mean its timing, it’s allocating resources, because selling each property, even if it’s a $5 million asset, the process is exactly the same as selling a $50 million asset and we want to make sure that we are negotiating these deals carefully and getting the right price. At one point at this conference we talked about selling everything all at once, the benefits of doing that versus not doing it and looking back I'm delighted that we did not do it just because the pricing has been that much better than what we were able to receive a couple of years ago so. So we’re going to continue pursuing it the way we have.

Christy McElroy - Citigroup

Okay. Go ahead Lisa.

Unidentified analyst

Jeff, one of the things you guys have talked about that I haven’t heard you talk about it as much recently is rationalizing the G&A. Is that still a priority and is that still something we should expect to impact your growth rate maybe next year in ’15?

Jeff Olson

It’s a big priority. It’s obviously very sensitive matter. So discussing G&A in a forum like this is not something that I’m prepared to be very specific on, but we’ve gone from 170 assets down to 125 on our way to a 100. So it certainly takes less people to manage and operate those properties at every level throughout the organization and we have over time decreased our G&A. Our current G&A was down 6% last year so we definitely made some progress; at least I think there’s more.

Unidentified analyst

It’s a pretty tough acquisitions environment out there. I think there’s a lot more -- a lot more of your peers lot more capital competing for the types of assets that you’re trying to buy. How do you think about the pricing that you’re willing to pay relative to your cost of capital?

Jeff Olson

It’s a great question. I think it’s all about where your cost of capital is. We were the most aggressive acquirer in 2009 and '10 and into ‘11 we decided to go the other way. And the reason we were the most aggressive is because it was ironically the most conservative thing this company could have ever done, because we used our equity and our equity was priced at probably on average 50 basis point cap rate less than the assets that we were purchasing. And the assets that we were purchasing were of a higher quality and had a higher growth rate. So it’s one of those prime periods where stars were just aligned perfectly, and so it became more conservative to be the most aggressive acquirer in this space.

Today we don’t see that’s the case. The assets that we would look to buy are probably priced in the 4.5% to 5.5% cap rate range and our equity is priced well above that. Our growth plan to get to that 6% to 7% hurdle that we mentioned earlier isn’t predicated on any acquisition activity; it is core growth of 2% and $100 to $150 million of development. So that’s a game plan. We would change the game plan if we traded at an implied cap rate of four and could go out and purchase centers at FI.

Unidentified Analyst

So that’s really the deterrent, is the pricing in the 4.5% to 5.5% range that's not a -- given your cost of capital, but when you think about kind of the growth that you could achieve from those assets, do you think -- it’s just the underwriting just doesn’t make sense at those levels?

Jeff Olson

I think for us it’s difficult because we're judging it against our existing portfolio that we feel pretty strongly we can generate 3% plus NOI growth. So if you’re buying it at 4.5% to 5% it better have NOI growth, that’s probably in the 5% to 6% range which is unlikely in order to justify us pulling the trigger.

Unidentified Analyst

And thinking about your occupancy trajectory, you’ve talked about an expected kind of big impact from the lease up of small shop space in 2014. Where is the demand coming from to fill up that space?

Jeff Olson

From a variety of users; restaurant users are probably one of our most active category today, and that’s been going on for the last 12 to 18 months. There are also a lot of medical users particularly here in Florida that we’re doing business with, and then also we are consolidating some of our shop space to make room for anchor boxes, for tenants like Trader Joe's, who happens to be one of our favorite tenants in the country, in addition to accommodating expansions for supermarkets like Publix and then also doing more big box retail for likes of TJ Maxx and Ross and some others.

Christy McElroy - Citigroup

As the composition of restaurants within your portfolio increases, and I think that’s the trend, across the industry, how does that change the risk profile of your tenancy, in terms of, rest goes short bookings as well as how does that change the composition of your rent?

Jeff Olson

You really have to be careful, and you have to underwrite the credit. So we prefer to do restaurants deals with national operators where there is a track record and you’re not revolving to fund one individual. There are some real benefits of having restaurants in your centers because it brings activity and excitement to a center and gives it some life. So we're big proponents of putting more food users inside of our centers because it increases traffic. But you have to be careful and you can't put too many of them as well.

Christy McElroy - Citigroup

As you get closer to the sort of peak occupancy level, both through asset sales as well as increase in occupancy, what ability will you have to push releasing spreads and push contractual rent bumps in your new leases to a greater extent than you did in 2013?

Jeff Olson

It is a tale of two portfolios because we've been having a lot of fun pushing rents on the stuff that we bought. Our rent spreads have been amongst the highest in the States for the last year or so driven by those new deals. It would be nice to have the lower tier taken care of. And I think we still will be able to push rents on our Florida portfolio, which has probably suffered more than the balance of the Equity One portfolio. But we're pushing it hardest in the North-East and San Francisco right now, and I would expect that that would continue. We're running at 98% occupancy levels in both of those markets. So when you’re running at those levels you really can’t push it pretty hard. And more important in pushing the rent is you can identify and choose which types of tenants that you want at your center. And that’s probably more important to us than simply just getting a good re-leasing spread, because if you have the right merchandise mix, you’re going to be able to increase the rents on everyone else over the long run.

Christy McElroy - Citigroup

How do you think about your tenant watch list, potential for store closings over the next year or two? And translate that into expectations for bad debt expense.

Jeff Olson

I’ll let Mark address the bad debt. But as I'm looking through these tenant lists right now, I mean SUPERVALU has been on our list from the very beginning. We have six of them. There is really one that we’re concerned about. We’d be happy to take back all of the others. It’s funny, I mean AMP is the top tenant for us but that’s a great example of having a troubled tenant that you’re excited to have on the list because they pay below market rents and you’d be delighted to take those spaces back. So I'm not concerned about that one.

And today you have the office supply stores. I do think that in the office supply market you’re going to see some consolidation. I was told that there are 430 stores that overlap between office depot and office max within a two mile ring from each other and I would expect that you’re going to start to see a lot of closings there. We have eight office depots inside our portfolio. We know all of them quite well, we want most of them back to the extent we can. So I think overall we’re in pretty good shape. Mark do you want to add anything to that?

Mark Langer

Yes, I think on the bad debt side Christy we have seen generally moderation call it 0.5% maybe 60 bps of bad debt relative to rent recovery income, which is in line with our expectation. As you know the fourth quarter was noisy in that regard because we had the three bankruptcies, which elevated the bad debt levels, but I think you’d see that moderate. So to answer your question on a go forward basis we don’t expect to see that. It’s also part of the benefit of the strategy. It's not surprising totally that those three bankruptcies occurred in, one in Louisiana, one in a weaker part of Orlando and then the third one was also Orlando but in a little bit better market. So part of this capital recycling has helped to moderate the bad debt level just as the tenancy in the core plus type product is better. So we’ve seen favorable trends, notwithstanding what we saw in fourth quarter.

Christy McElroy - Citigroup

This is probably also a question for you Mark and given your exposure to the Northeast. Can you -- you break out your same-store NOI growth by same-store revenue, same-store expense? I think that’s great and we’ll be able to see it. But what sort of impact would you expect in terms of same-store expense growth from -- given all the weather issues that we have been?

Mark Langer

Clearly the Northeast, I don’t have the numbers in front of me but I know our Northeast portfolio. Every week there is a snow storm, our property manager knows how cheap I am. So he warns me right off the bad debt we know we’re having to haul out the snow and not just plough it, because it’s the right thing to do for the tenants, it’s the right thing to do for the center. The only good thing I will say which I said on the call is the recovery rate A, given the occupancy levels of Northeast at 98% plus are very high, and secondly the tenants don’t have carve outs generally for that, because they want the center to be ploughed. So while I do think you’ll see a clear elevation in expense I think on the NOI line we’re going to recover the vast majority. So I'm keeping my fingers crossed there won’t be a big net hit.

Christy McElroy - Citigroup

Is there a lag or is that recovery accrued?

Mark Langer

We do our recovery trips each quarter, so obviously there is always some final -- the fourth quarter once all of the -- but once all of the final cost for the full year number. We try to each quarter -- we should have all of the expenses in and the recovery should be reflected in real time.

Christy McElroy - Citigroup

Jeff can you provide some of your views on the changing of dynamics in the grocery space, in terms of how consumers are spending their dollars on some of the market share shifts that are occurring there?

Jeff Olson

We see it. I mean I am resident of New York City and we do all of our grocery shopping online. It is happening. It’s one of the reasons we favor -- it's one of the reasons we favor going to the specialty grocers within our portfolio. So for example today we have six Trader Joe's, they weren’t on the list before, they are a top 20 tenant for us. We think they bring real value; I love their business model too. It’s probably one of my favorite business models. Because they are not selling a commodity, they have a culture that is explained in their company, that is an exciting place to work. And I think supermarkets are going to be in trouble from more competition particularly from online. I don’t see Trader Joe's having much impact. Sprouts is up and coming as well and is doing a good job.

I mean clearly we have -- this company used to be called the supermarket REIT if you remember a while ago. I would not call it the supermarket REIT anymore. We are almost indifferent as to whether or not a supermarket is there or a big box retailer is there, because we are focused on the location of the property in these urban areas and we will have plenty of demand from grocers but we’ll also have plenty of demand from other big box retailers. So I do think it’s a long-term threat. It’s going away but I just think its one more thing to add to the puzzle which is why we would prefer to own centers that are not commodity centers inside of these urban locations.

Christy McElroy - Citigroup

Sprouts unit growth projections are pretty outstanding to me. Are you talking to them on any deals at all?

Jeff Olson

We are.

Christy McElroy - Citigroup

And how do you think about their model of being sort -- of using sort of produce as a loss leader? I think it’s interesting in terms of the other grocers that they’re competing against.

Jeff Olson

Yes. I think it’s. They’re good operator and they’re certainly increasing in size. So I would not expect that you’re going to see them become a top tenant of ours but we would not mind having two or three deals done with them.

Christy McElroy - Citigroup

Can you provide an update on your longer term plans in regard to your Westwood acquisition?

Jeff Olson

It’s a little early to tell, we’ve been meeting with the community through various outreach sessions and really listening more than anything else as to what they want in that area and clearly they want an attractive center that they can go to that’s going to be good for their families, that would contain nice restaurants and good stores and necessity and convenient shopping. I think they were concerned and probably are concerned that we want to densify this like an urban location and that’s not our intention. We think that we can do a very attractive development there. I would expect in the next six to nine months we’ll be able to talk about that in more detail though, but I’m very pleased with the reception so far both from the community and also the county and it’s a very exciting redevelopment opportunity for us.

Christy McElroy - Citigroup

Okay, we have a minute or two left. So I'll end it with the rapid fire questions.

Jeff Olson

Okay.

Christy McElroy - Citigroup

What will same store NOI growth be for shopping centers in the U.S. in 2015?

Jeff Olson

3%.

Christy McElroy - Citigroup

If you could snap your fingers and sell a portion of your assets today with no strings attached in order to create your ideal portfolio, what percentage would you sell?

Jeff Olson

We’re close at this, it’s 5% remaining but I would add another 5%, maybe if I could snap my fingers at great, great pricing. But call it 10% with a caveat.

Christy McElroy - Citigroup

10%. Are cap rates for your assets higher or lower one year from today?

Jeff Olson

I think they’re lower.

Christy McElroy - Citigroup

Great, thank you guys.

Jeff Olson

Thank you very much.

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