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Equity One, Inc. (NYSE:EQY)

Q1 2014 Results Earnings Conference Call

May 01, 2014 09:00 AM ET

Executives

Laura Devlin, - Director of Marketing and Executive Administration

Jeff Olson - Chief Executive Officer

Tom Caputo - President

Mark Langer - Chief Financial Officer

Mike Berfield - EVP of Development

Analysts

Jay Arlington - Green Street Advisors

Craig Schmidt - Bank of America

Paul Morgan - MLV

Brandon Cheatham - SunTrust

Samir Khanal - ISI Group

Vincent Chao - Deutsche Bank

Ben Yang - Evercore

Jim Sullivan - Cowen Group

Linda Tsai - Barclays

Michael Mueller - JP Morgan

Operator

Good morning and welcome to the EQY First Quarter 2014 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 Ms. Laura Devlin, Director of Marketing and Executive Administration. Please go ahead.

Laura Devlin

Thank you, Amie. 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 & 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 supplements 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

Great, thank you Laura, and good morning everyone. Thank you for joining us for our [fourth] quarter 2014 earnings call. Overall, we were pleased with our results. On the positive side, and there are four of them: First, our FFO was $0.35 a share, which is up 9% over prior year, slightly ahead of our internal projections. Mark will cover the details in a few minutes.

Second, core occupancy increased to 93.9% which is up a 150 basis points over the prior quarter and also up 80 basis points on a same-property basis. These increases should start to impact net operating income throughout the balance of the year as our new tenants open for business and rent commences.

Third, development and redevelopment pipeline continues to advance and grow. We expect to open Phase I of Broadway Plaza for $67 million development in the Bronx, in the fourth quarter on time and on budget. We also added another $22 million of redevelopment projects to our pipeline on top of $20 million last quarter.

And fourth and finally disposition activity remains strong with nearly $60 million of assets sold to-date at our pro rata share. We feel confident in reaching our goal of selling $125 million to $175 million of our lower tier properties this year.

On the negative side, new lease spreads were down, primarily due to one lease at Park Promenade, one of our lower tier properties in Orlando Florida. We decided to proceed with this lease to a national discount chain to stabilize the property and to accelerate new leasing activity at this center, which we have already seen.

While, we were disappointed with the spread on this lease, this asset is one we do not intend to hold for the long-term and the lease required minimal capital. Excluding this lease, our new lease spreads increased by 8%.

Another challenge for us and also for so many others is the tight acquisition market. A quality asset seem to be commanding unleveraged IRRs in the low 6% range, imply mid 4% cap rates for assets with 3% annual growth. Given our cost of capital, it’s hard to justify paying those counter prices. We are better off earning 8% to 10% unlevered returns on our development and redevelopment initiatives especially in places like New York City, San Francisco and Bethesda, Maryland.

Summing up the quarter, we are slightly ahead of plan. As previously announced, I will be leaving the company later this year, most likely this summer after a brief transition period with David Lukes, our incoming Chief Executive Officer.

David will start on May 12, I have known David for nearly 20 years and believe he will do an exceptional job and taking Equity One to the next level, it’s been an honor and privilege to have led Equity One for the past eight years. I especially want to thank Chaim Katzman our Board Chairman for providing me the opportunity, support, wise counsel and encouragement along the way.

And I also want to thank Tom Caputo and Mark Langer for their partnership, friendship and unwavering commitment in leading the transformation of our company, and of course to all of the Equity One employees who made it happen. David, will inherit a terrific team, a strong balance sheet and a portfolio of irreplaceable assets that contain many opportunities for growth.

Thank for your support over the years and I really look forward to staying in touch, Tom?

Tom Caputo

Thanks Jeff. This morning I will focus my remarks on leasing, occupancy, dispositions and our development redevelopment pipeline. Our leasing team was very active during the quarter executing 127 new leases, renewals and options totaling close to 700,000 square feet. Rent spreads were essentially flat at 0.9%. As Jeff noted the low rent spread is primarily attributable to a new 58,000 square foot lease with Rose's Department Store, which backfilled our local and poorly run beauty supply store at Park Promenade in Orlando.

Our local and poorly run beauty supply store at Park Promenade in Orlando. Our beauty supply tenant vacated in December after filing for bankruptcy. Our capital investment in the Rose’s lease is limited to approximately $200,000 and we are pleased to add a department store to the tenant mix. If Rose’s is remove from the rent spread calculation, spreads for the quarter were positive 5.2% with new leases at 8.2% and renewals at 4.4%.

Leasing highlights for the quarter include a new 25,000 foot lease with Aldi's to replace Office Depot at Coral Reef when their lease expires in 2015 and a 15,000 square foot lease with Planet Fitness at Ft. Caroline, which will allow us to eliminate approximately 12,000 square feet of shop space, which has been vacant on average for 6.5 years.

Subsequent to the end of the quarter, we executed a 63,000 square foot lease with Academy Sports at Alafaya Commons. Academy will replace Publix, who vacated last quarter.

Our leasing pipeline continues to be active with a total of 73 new leases and renewals under negotiation for close to 200,000 square feet. Demand for retail space continues to be very strong from junior anchors, restaurants, health and fitness users, and franchise operators.

As of March 31, we have executed leases with 67 tenants, who are in the process of building out approximately 270,000 square feet of space, which will generate approximately $4.8 million in annual revenue when the tenants open for business. These figures do not include any income from executed leases on our development and redevelopment pipelines, which now amounts to approximately $13.2 million in future annual revenue, including $4.5 million for Barney’s and $2.25 million for Dick’s.

We made good progress on our goal to increase occupancy to 95% by the end of the year. During the quarter occupancy increased 150 basis points from 92.4% to 93.9%, approximately 50% of the occupancy pickup can be attributed to organic lease up, 30% due to moving Barney’s and Alafaya Commons into redevelopment and the remaining 20% is due to the sale of two lower tier assets.

Leasing activity for small shops is improving especially in Florida. Overall shop occupancy increased 150 basis points from 82.1% to 83.6% during the quarter. The recent bankruptcies of [Dots and Coldwater Creek’s have renewed concerns of our tenants in several merchandise categories, including book stores, office supply stores and electronic stores.

Fortunately our exposure to these categories is minimal. We only have two large format book stores in our entire portfolio. One Barnes & Noble we’ve been trying to recapture and one Books A Million in a potential redevelopment project.

The two book stores occupy less than 50,000 square feet. We own three Best Buy stores and would be delighted to recapture all of them. The three stores occupy approximately 140,000 square feet. Our largest exposure to commodity type retailers is the office supply sector, we own nine Office Depot, OfficeMax stores, which occupy 233,000 square feet and seven Staple stores, which occupy a 145,000 square feet.

Most of our office supply stores are either right sized or so well located we would welcome the opportunity to recapture the space.

During the first quarter we closed on the sale of 4 non-core properties which contained 420,000 square feet for a gross sales price of $26.3 million. Since the end of the quarter we sold one additional non-core property for $8.6 million. We have 7 non-core properties under contract which contain approximately 600,000 square feet at a price of $38.7 million. The properties sold so far in 2014 and the properties which are under contract have an average weighted cap rate of approximately 8%. We are very comfortable we will meet our goals to sale $125 million to a $175 million in non-core assets in 2014.

We are making good progress with our development and redevelopment pipelines. Demand for space in Broadway Plaza development in the Bronx has been strong. Phase 1 which will account for a 115,000 square feet of the total 148,000 square foot project is now 72% leased. TJ Maxx, Sports Authority and Party City will occupy a 100% of the second floor and all these lying for the first floor. We will begin turning over the space to the anchor tenants this month in fact we’re turning over the space to all these, this morning.

We expect the four anchor tenants will open in the fall of 2014. Phase 2 of the project will include an additional 33,000 square feet of space fronting directly on Broadway. We have strong interest in this Phase from food operators, mobile phone stores and health clubs. We’re negotiating leases for a little more than 50% of the space in Phase 2. The second phase of the project should open in the second quarter of 2015 and both phases of the projects will stabilize in late 2015.

Turning to our redevelopments, at Serramonte the new 84,000 square foot Dick's Sporting Goods store opened ahead of schedule and with project costs below budget. Dick's grand opening at early April was very well received and Uniglo also had a very successful grand opening a week after Dick's opened. Initial sales volumes for both tenants were well above tenant plan. At the Willows, the 10,000 square foot ULTA is under construction and we have received permits for the 5,000 square foot expansion of the UFC Gym. We expense to break ground on the reconfiguration of the interior courtyard and road later in the quarter. We plan to add a few more restaurants to the tenant mix since our existing restaurants are all extremely request full.

At Kirkland shops, we will be delivery a pad to LA Fitness in June. The tenant will construct a 40,000 square foot club to replace an existing facility located across the street. In addition, we have begun work on the gas station had we acquired to accommodate a new freestanding Walgreens. We expect the new Walgreens will open in November of this year and the new LA Fitness will open in the first quarter of 2015.

At Lake Mary Ross opened their store in early March and Fresh Market plans to open later this month. Ross and Fresh Market backfilled the former Albertsons box. We are close to finalizing leases with two tenants to backfill the vacant Kmart box. As we expected when we embarked on this redevelopment the addition of four new anchor tenets at Lake Mary have significantly increased demand for shop space in the center.

Since announcing the redevelopment, we have completed six new leases of the center for a total of 11,600 square feet at an average rent spread of over 10%. In addition we have completed seven renewals at this center for 11,700 square feet at an average rent spread of 9%. During the quarter, we added Alafaya Commons in Orlando to the redevelopment pipeline, with an estimated project cost of $7.5 million this 126,000 foot center was previously anchored by a 54,000 square foot Publix until the tenant vacated last November.

Publix will be replaced by a new 63,000 square foot Academy Sports. We are in discussions with several small anchors who maybe part of the final redevelopment plan. At Boynton Plaza we expect to begin demolition of the existing 37,000 square foot Publix store later in this quarter.

Once the existing Publix has been demolished, we will construct a new 54,000 square foot Publix and complete a façade renovation for the balance of the property. We are now working on phase three of the Boca Village Square redevelopment. The final phase includes the relocation of CDS from their temporary quarters and newly constructed shops space to a freestanding pad. The relocation of CDS will allow us to lead the small amount of remaining shops space in this center.

This relatively small redevelopment took several years to complete, but was well worth the time, cost and effort. Our team was able to reconfigure a difficult way out which included a dark interior courtyard occupied by a revolving cast of low quality merchants.

The reconfigure shops space has been leased to a number of successful restaurants boutiques and high end beauty service providers. At the end of the day the redeveloped portion of the property will include a new 13,000 square foot freestanding CDS at approximately 20,000 square feet of new shops space. Rents for the reconfigured shop space are in the mid $30 per square foot range as compared to rents in the $10 to $15 per square foot range in the original layout.

We are encouraged by our progress with several of our centers along the Post Road in Fairfield County. At Compo Acres in Westport we are well on our way to receiving approvals for a façade renovation and a major reconfiguration as a parking lot. At the nearby Village Center, we are working on re-merchandizing plan for the north side of the Post Road and expect to finalize the commitment for a significant amount space with a major apparel tenant.

And in Norwalk, we have created a new pad and executed a lease with Starbucks for a prestanding restaurant with a drive through. Starbucks has been trying to build a prestanding building on this section of the Post Road for over a decade and we are delighted to add them to our project.

We are also encouraged that the timing of the approval process for the Westwood project in Bethesda maybe accelerated. Prior to our purchase of the property, the county plan to review the sector plan for the Westwood area in the summer of 2016.

The Montgomery County counsel recently granted preliminary approval to begin the sector plan review for the Westwood area in the summer of 2014. The council will hold a final vote on this matter later this month.

I'm delighted David Lukes will be joining Equity One in a few weeks. David and I first met almost 12 years ago, when we both worked together at Kimco. David is one of the most talented and creative real estate professionals I have worked with in my career. I'm looking forward to working with David as we continue to transform our portfolio into one of the highest quality platforms in the strip center space.

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

Mark Langer

Thank you Tom. Good morning, today I will address some of the key drivers pertaining to our earnings for the quarter and I will provide an update on our liquidity and balance sheet as well as outlook for the year.

Starting with our earnings for the quarter. We reported recurring FFO of $0.35 for the quarter which did include some significant items. As we talked about on our last call, we expected to recapture development space on Seventh Avenue in New York City. This lease was terminated in February and as a result, we recognized $4.4 million of the remaining unamortized below market lease liability which rolls up to the minimum rent line in our financial statements.

We do not expect to record any further NOI or below market rents on this space for the remainder of the year. This property has been moved into redevelopment as we start to perform our demolition work so that we can turn the space over to Barneys, which will likely occur in the first quarter of 2015. Given the terms of the new lease with Barneys, we do not expect to recognize any rents on the new lease until the first quarter of 2016, consistent with the planned opening date announced by Barneys.

In addition to the allotments below market adjustment our first quarter recurring FFO also included approximately $1.1 million of a reversal of bad debt expense associated with two national tenants pertaining to real estate tax adjustments that related to historical periods spending seven years.

We conservatively reserve for these amount when the dispute arose but we are very pleased to have fully resolved and settle this matter in our favor. We reported an increase in same property cash NOI of 2.4% compared to the same period in 2013. The bulk of this increase came from top-line growth, as minimum rents increased approximately $1.1 million due to rent commencements and contractual rent increases, including new tenants at Bird Ludlum, Potrero, and Westbury Plaza and additional $140,000 came from increases in percentage rents.

We were pleased with our NOI growth as it exceeded our budget for the quarter. Recall that when we provided full year same-store NOI guidance of positive 2.5% to 3.5% we noted that much of a growth was going to be weighted to the latter portion of the year given the occupancy decline we reported in Q4.

In addition, our NOI growth this quarter was impacted by snow removal costs, while the language in our leases provides us with a very high recovery rate for snow removal cost, the methodology utilized by our automated expense recovery billing system uses the expected full year recovery rate of overall expenses based on our property budgets.

Therefore, while we incurred more than $1 million of snow removal cost in Q1, approximately $250,000 of such cost were not built in our first quarter recovery process, but we expect will be recognized ratably during the second through fourth quarters. If we have recorded additional $250,000 of expected snow related recoveries in the first quarter, our same-store NOI growth rate would have been 2.7%, or 30 basis points higher than the reported level of 2.4%.

In terms of other significant P&L activity, I will note that we recognized a $2.3 million non-cash gain as part of our acquisition of the remaining interest in Talega Village Center. Prior to our additional investment in the first quarter we accounted for Talega under the equity method and the accounting rules require that such investments be remeasured using the estimated fair value immediately prior to a purchase transaction.

Based on the increasing values since our original investment, we recognized a $2.8 million gain, which has been classified that other income and our financial statements with approximately $560,000 attributable to non-controlling interests and recognized in that line item.

Finally, I will note that the equity income of unconsolidated joint venture this quarter included a $7.4 million gain due to the sale of [Renova] with approximately 1.6 million of that amount attributable to non-controlling interests. Both of these gains related to joint venture activity net of the non-controlling interests were excluded from FFO and recurring FFO.

Turning to our balance sheet. The most significant activity that occurred during the quarter retain to our active capital recycling program. We closed on the two remaining parcels within the Bethesda Westwood complex for an aggregate purchase price that $80 million, which was funded by our prior investment in a mortgage note and a $19.5 million cash payment that we made in January upon closing.

With the closing of these remaining parcels our initial $95 million mortgage and $12 million mezzanine loan are now fully repay. And all income generated from these sites will full through NOI. We continue evaluate and refine or redevelopment efforts on this site. Our disposition program remain active and on track with our 2014 plan. So far this year, we have closed on the sale of $35 million of non-core assets included 26 million, which we closed in the first quarter.

We continue to use proceeds from asset sales to fund our acquisition and development projects as well as the payoff select mortgage debt. During the first quarter we prepaid the $16 million mortgage on marketplace shopping center that has stated maturity of February 2015, given the 6.25% coupon on this debt we were pleased to unencumbered this asset, which has a fair market value of approximately $43 million.

In April, we prepaid the $6.6 million mortgage on South Point centre without penalty, this mortgage carry a 5.72% coupon and was set to mature on July 10 of this year, we have no other debt maturities either secured or unsecured until 2015. We have continue to maintain a very large pool of unencumbered asset and still generate over 75% of our NOI from unencumbered properties.

Our secured debt to gross assets as measured in our rating agency computations was approximately 11% at the end of the first quarter. We remained focus on ensuring we have plenty of liquidity and access to low cost capital, the capital markets continue to show strong demand for REIT debt and we are pleased that our balance sheet is well position to attract capital should the need arise. Such need will likely be dependent on our ability to identify and close on acquisitions in our target markets, which have been hard to come by of late as Jeff noted.

Turning to guidance, we have maintained our recurring FFO guidance of $1.23 to $1.28 per sale, excluding the onetime cost associated with our CEO transition. We are in the process of quantifying those costs now and we’ll have a full update during our second quarter reporting and earnings call.

Our guidance range incorporates the gain from the termination of the Loehmann’s lease and is based on the same underline assumptions for fundamentals and dispositions that we noted in our previous press release including the assumption for an additional $100 million to $200 million of acquisitions beyond our first quarter activity. We are monitoring the acquisition market carefully, and we’ll determine if we need to revisit our acquisition guidance next quarter, based on our pipeline at that time.

Our full year guidance range can be thought of based on our adjusted run rate using Q1 recurring FFO. After excluding the impact from the Loehmann’s below market adjustment and the bad debt expense reversal, as well as percentage rents that are primarily recognized in the first quarter, our recurring FFO was $0.29 a share in Q1, add $0.01 to $0.02 for NOI growth and the impact of developments and redevelopments, net of disposition activity in the second half of the year and you’ll get to the midpoint of our full year guidance range.

In summary, we were very pleased with our first quarter results and the improved occupancy gains Jeff and Tom described. Based on our leasing pipeline and disposition plans, we are confident in our ability to meet our 95% occupancy goal by year-end.

In terms of leadership transition, I was excited to spend Tuesday night with David Lukes, our incoming CEO. We had a great discussion about our business, the industry and some of initial priorities he wants to focus on when he starts. On that point, he let me know that he would like to spend his first 30 days on most in all aspects of our operations, including spending time getting to know all our team members and performing site visits at our properties.

He asked that Tom and I join him in this process, which we are happy to do. Given the timing, this means that we will not be participating in NAREIT Investor Meetings in early June. But I will be eager to introduce David to our investors and sales side analysts after he has had ample time to get assimilated to the company. I’m confident that David will a great fit for our organization and the culture we have established.

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

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Michael Bilerman with Citi. Go ahead please.

Unidentified Analyst

Good morning, this is Kitty Makhano on for Michael. Regarding the non-core sales year-to-date, can you characterize the assets sold to buyers and what the cap rates may have been on the same assets a year ago?

Jeff Olson

I think that the assets that we sold so far this year have been on the lowest tier of the spectrum that we own. The cap rates for those properties as we noted were in the 8% ranges, I think the properties that we sold in the first quarter of 2013 were higher and those cap rates were in the high 6s to the low 7% cap rate range.

The buyers on the lower tier assets as you would expect are generally private investors.

Unidentified Analyst

Okay. Great thank you.

Operator

The next question is from Jay Arlington with Green Street Advisors. Go ahead please.

Jay Arlington - Green Street Advisors

Hey great thanks. So I guess, you guys are kind of suggesting there is a limited amount of quality properties out there. So as you look at kind of your acquisition pipeline and maybe just to follow-up on that previous question, have you seen any kind of cap rate compression over the last couple of months between those high quality and low quality assets as people are maybe finding limited opportunities out there?

Mark Langer

I think I would respond to that if there are properties that check off all the boxes that there probably has been cap rate compression over the last one to two quarters. And there have been very, very few of those that have come to market, one recently came to market in the Washington DC area that attracted 25 qualified bidders and the unleveraged IRR clearly was closer to 5% than 6% on that transaction. So when that checks all the boxes in a market that has huge barriers to entry, then clearly there has been some cap compression. I think if you get to smaller market, that may not be the case, but certainly in the high barrier to entry markets, there has been cap rate compression.

Jay Arlington - Green Street Advisors

Okay. And maybe just shifting to redevelopment, the pipeline seems to be grown a little bit. And can you just kind of remind us what the threshold or differences on some of these projects versus traditional tenant improvements and the redevs and just how are you thinking about those two different legs? There is a lot of individual retailers are kind of call out,, seems like one-off projects but I guess I want a little color how it’s a little bit more broader but maybe just reminder us what was the difference there?

Jeff Olson

Yes. This is Jeff. I am going to have Mike Berfield to address that question because he’s the one that’s handling most of our redevelopment and development projects.

Mike Berfield

I am sorry, could you repeat the question?

Jay Arlington - Green Street Advisors

Yes. Just the $53 million in active redevelopment that is growing there, just trying to get the difference of how; a lot of it sounds like kind of tenant improvements versus more broader redevelopment, so just trying to understand how are thinking about those two differently.

Mike Berfield

No, I think most of the time when we have the type of redevelopment that it may be driven by a single tenant but I think we normally will take the opportunity then to try and do overall improvements at the center. Kirkman is a good example where while we’re bringing the LA Fitness, we’re looking at doing other improvements to the center as part of the development that will sort of support the small shop leasing that remains there. And we’ll look to do the same like Lake Mary, Alafaya Commons. So, I think you're right that it does sort of driven by single tenant but the overall result is that becomes a general improvement to the overall center.

Mark Langer

The other thing Jay, this is Mark, is that in terms of what you see hit and supplement is usually our projects that have to have at least $1 million spend and involve an anchor. So they have to be substantive enough. And as Mike said, usually, when we're talking about an anchor, it again involves in often cases the tear down or facade work throughout the center. So we roll all of that into one budget. But in terms of what hits versus just a single tenant replacement, the development, redevelopment is, those projects where the spend relative to the value of this asset is more substantial.

Jay Arlington - Green Street Advisors

Okay. And I think Tom mentioned that the, some of that 100 basis points from same-store occupancy improvement about 30% of it is kind of the redev. Is that a fair assumption for the rest of the year or is that gets bigger with this pipeline growing a little bit?

Tom Caputo

I think, it's just going to vary quarter-by-quarter. It depends how we do -- that how our leasing team does on the core portfolio, same-store portfolio and what we bring into redevelopment; it’s going to vary every quarter.

Jay Arlington - Green Street Advisors

Okay. Thank you.

Jeff Olson

Thank you.

Operator

Your next question is from Craig Schmidt with Bank of America. Go ahead please.

Craig Schmidt - Bank of America

Yes, thank you. Just given the change of CEOs, I know there is a focus on what is the next phase and that doesn't sound like it's going to be acquisition. I'm just wondering what is going to get the most attention going forward, is it dispositions; the continued lease up of the small subs or your development and redevelopment pipeline?

Jeff Olson

Yes, hi Craig, it's Jeff. Obviously we've all spent a lot of time with David talking through this, and David will be on the call, so he will addresses his plans in detail. But my sense is that its focus is going to be concentrated on leasing, on redevelopment and on operating efficiencies.

Craig Schmidt - Bank of America

And are you going to put more bodies to that or is just a highly focused?

Jeff Olson

I am going to refer to David on the next call to give at more detail, but I think he is going to be laser focused in particular on leasing and redevelopment.

Craig Schmidt - Bank of America

Okay, thanks a lot.

Operator

Our next question is from Paul Morgan with MLV. Go ahead please.

Paul Morgan - MLV

Hi, good morning. So I just want to verify that the Loehmann’s benefited termination fee was in the guidance that you had last quarter, is that right?

Jeff Olson

That’s correct.

Tom Caputo

Yes. Paul, essentially it’s Loehmann’s decision. Remember in last call, we talked about it, it was influx and we hadn’t yet recaptured it. But if you look at what would have happened in this year had Loehmann’s stayed in place, we would have been at FFO level recognized about $3.7 million and now what it was is all timing, it just got accelerated in the Q1 when we did recapture it and had a write off that below market lease liability.

Paul Morgan - MLV

Okay, and then G&A, I mean I know the guidance you gave excludes some items but the number was little bit higher than we expected. Was your G&A in line with your budget for the year and you are still on track with the guidance that you had excluding acquisition costs?

Mark Langer

Yes, excluding one-time cost Paul. Yes we are on track and believe we’d stay within the guidance range excluding the CEO transition cost.

Paul Morgan - MLV

Okay. At Serramonte, you’ve got -- I know there is definitely future phases that are in the works, it’s kind of falling off the stuff in terms of active pipeline but I mean is there any update there in terms of when we could see a pop back on from the stuff that you got going on there?

Jeff Olson

Yes, we're working on two additional phases that just are not far enough along to add to the redevelopment pipeline, but we are actively working on two and possibly three phases that we'll be talking more about later in the year.

Paul Morgan - MLV

Okay, great. Well, Jeff, that sounded like it might be your farewell call comments, so I just wanted to wish you the best of luck. It's been a pleasure.

Jeff Olson

Great. Thank you Paul. I appreciate it.

Operator

Our next question is from Brandon Cheatham with SunTrust. Go ahead.

Brandon Cheatham - SunTrust

Hi. Good morning. Just real quick on the potential Westwood development in Montgomery County's review. Are they looking to rezone that, is that potentially on the table? And then is there an opportunity that you may actually expand the footprint there?

Mike Berfield

Hi, it's Mike Berfield, I'll answer that. In terms of the rezoning, Tom has mentioned earlier that what the Montgomery County does is they do review of an area of the county. So they won't do a project specific rezoning. So what Tom had referenced earlier that they had voted to start was in area rezoning review, I'll call it for the sector that includes our Westwood shopping center.

And that has been something we have been antiquating for obviously to allow us to do exactly that, which is to reexamine the shopping center and the other six parcels that we acquired. So, as part of that rezoning, we'll be working on our own plans for improving the shopping center, which I think as we've said before, will probably include some additional density. We're looking at a lot of different options for it. But yes, that's the purpose of the rezoning to give us that flexibility.

Brandon Cheatham - SunTrust

Okay. But I guess you don't have a preliminary plan in place and idea of how much you are going to expand the footprint, if you do get the rezoning that you would like?

Mike Berfield

Yes, we are working on that. So at this point, we don’t have anything fixed, but that’s our goal to come up with that plan.

Brandon Cheatham - SunTrust

Okay. And then small shop occupancy, can you give me that on a same-store basis versus last quarter? It’s okay if you don’t…

Tom Caputo

47, I’m sorry 93.9 versus -- that’s overall.

Jeff Olson

It went from 82.8% in the fourth quarter of ‘13 to 83.5% in the first quarter of ‘14.

Brandon Cheatham - SunTrust

Okay. Thank you. That’s all I have.

Operator

The next question is from Samir Khanal with ISI Group. Go ahead.

Samir Khanal - ISI Group

Good morning guys. Just we’ve got [ICSC] in kind of about couple of weeks here and just wanted kind of get your view on the, what the folks will be -- I mean considering that supply is so limited for some of the good products out there, do you think there will be some talk on kind of new construction or is it sort of the focused on redevelopment at this point?

Jeff Olson

I think there has certainly been a lot of discussion amongst the REITs and private developers about new development since we’ve come out of that great recession. So far in most places, developers are having a hard time justifying development based on what the tenants are willing to pay. I would tell you that that gap is narrowing because the junior boxes and larger tenants are having a very, very difficult time expanding their own footprint.

So I think it’s getting closer and closer. I don’t think we're quite there yet for a lot -- a ton of new development.

Samir Khanal - ISI Group

And what is the process of entitlement, is that still difficult to get until the new construction?

Tom Caputo

It depends on where you are, we’re developing, it’s very, very, very difficult to in places like Montgomery County and Fairfield County, and places like that. It is a lot easier to do if you’re out in what we would describe as the Greenfield and in places where we’re not spending a lot of time.

Samir Khanal - ISI Group

Okay, great. Thanks.

Operator

Our next question is from Vincent Chao with Deutsche Bank. Go ahead please.

Vincent Chao - Deutsche Bank

Hey good morning everyone. Just want to go back to the occupancy gain, the same-store occupancy gain. Just curious if you could comment on move out trends as well and maybe how move outs have contributed to the fairly large gain during the first quarter?

Jeff Olson

The move outs and it’s been spread kind of across board, it is mostly as you would expect then from the shop rotation excluding what we noted last quarter, right, that was the anomaly when the 3 anchors. But as you can see from our anchor occupancy as to where it is now I think we only have is 4 vacant anchors in the portfolio. So most of that churn win has all been in shops and our focus as you know has been to really emphasize and push Florida and the Southeast.

Vincent Chao - Deutsche Bank

Yes. I think my question is more around, are you seeing that churn rate slowdown and is that contributing to sort of the upsized occupancy gains in addition to the leasing activity which sounds like it’s also picking up?

Jeff Olson

One quarter or a year does not make as we all know, but certainly our fall out in the first quarter and the trends we’ve seen so far into the second quarter there’ve been a lot to move out than we’ve had in the past.

Vincent Chao - Deutsche Bank

Okay thanks. And then on the renewal side of things I mean the spread there 4.5% or 4.4% still pretty good but it has come down over the last couple of quarters and I am just curious as the focus shifts to the small shop vacancy which spread most of the vacancy is, do you think we should expect the renewal spread to stay in that sort of low to mid-single-digit range just given where the occupancy is there?

Jeff Olson

I think, it's going to vary quarter-by-quarter and in this particular quarter, we have a lot of contractual renewals, but large box tenants that were much lower than we have experience recently and I think it was more of an anomaly this quarter, when you have a number of folks with very, very low increases in their contractual renewal options that obviously is going to effect our overall spreads.

Vincent Chao - Deutsche Bank

Got it. Do you have split spread was on the small shop side of things for renewals?

Jeff Olson

Do not.

Vincent Chao - Deutsche Bank

Don't, okay. And then just last question from me. I mean we talked a lot about the difficulty of buying assets in this market and what people are paying, but obviously there was a large portfolio sold recently in Boston. I was just curious if you looked at that portfolio and if you had any thoughts on that?

Jeff Olson

We are very familiar with the portfolio, we looked at it. It was not for us, it didn't fit for what we are looking for and so we didn't bid on it.

Vincent Chao - Deutsche Bank

Okay. It was a just -- I guess I mean you’ve been focused on trying to find value-add properties where you can redevelop or are there some additional taker, I mean was that sort of the lacking piece in it or is there something else about it?

Jeff Olson

We shift the portfolio we didn't think that’s for what we're trying to accomplish.

Vincent Chao - Deutsche Bank

Okay. So thank you.

Operator

The next question is from Ben Yang with Evercore. Go ahead please.

Ben Yang - Evercore

Hi, thanks. Mark I think you mentioned that moment was in redevelopment price in that $4.2 million doesn't flow through your same-store NOI. But is that bad debt reversal, did that $1.1 million flow through your same store NOI calculation for the quarter?

Mark Langer

Not in same-store NOI, just in FFO.

Ben Yang - Evercore

Okay.

Jeff Olson

It is into a sort of under reported same-store over the year.

Mark Langer

Last five to seven years, right.

Ben Yang - Evercore

Got it, got it. And then also, I think you mentioned $3.7 million of that $4.2 million was in the guidance. So that was kind of the $0.5 million was somewhat of a surprise, so was that $1.1 million did you say that was not in your FFO guidance or it was in your guidance?

Mark Langer

Let me go back to your first point, the Loehmann’s when I gave guidance in the first quarter and was asked about how to hit the high and low end of the range, within the high end of the range, I talked about the potential upside from below market leases, because I had some visibility and maybe we captured this 500,000 to 700,000 so the Loehmann’s piece was in guidance, but to your point on bad debt that was not contemplated, we did not know we are going to settle the bad debt reserves and we gave thought to the fact of whether or not it would even be classified in recurring FFO, but I try to avoid the ambiguity of deciding which items would and would not because as you know from many times in the past including last quarter when we have the bad debt expense hit we take our lumps and they are included. So the 1.1 was an anticipated, but it was classified and that’s why when I went to the recurring FFO going forward, I carved it out.

Ben Yang - Evercore

But in the release you actually include that in recurring FFO and as well as that termination benefit is it just kind of taking (inaudible) here in terms of what you define as recurring and non recurring it was little confusing just kind of thinking about that as a recurring item?

Mark Langer

Yes, well on a Loehmann’s as I said, the Loehmann’s was included because we had income coming from that tenant and what it was is more of the timing, so had we not recaptured and then required to record that below market lease , we would have had Loehmann’s paying cash NOI and we would have been accreting the below market lease viable it anyway, those are the types of things that were in guidance and recurring FFO, I agree with you that the bad debt reversal is much more judgmental.

Ben Yang - Evercore

Got it, thank you.

Mark Langer

Yes.

Operator

The next question is from Jim Sullivan with Cowen Group. Go ahead please.

Jim Sullivan - Cowen Group

Good morning, two questions from me, in your prepared comments you talked a good deal about what’s happening with cap rates and you are active on both sides as a buyer and a seller. And I’m just curious Jeff, Tom, to what extent are the spreads widening between what you’re looking for and what you’re looking to buy and what you’re looking to sell?

And kind of that's first part of the cap rate question. Second part of it is, is it when we think about the really strong high density urban locations on the one hand versus market like a really solid suburban market where you maybe have a solid center with grocer anchor center. Is there a spread between those cap rates, because of the higher proceed growth of the urban centers?

Jeff Olson

Let me take them one at a time. In terms of the higher cap rates and I think you maybe specifically referring to the fact that we sold this year so far and what we have under contract. I think you would find there, what we saw in the first quarter of last year for the most part had a supermarket anchor and those supermarkets were doing anywhere from generating sales, anywhere from high $200s, $275 a foot more likely in the $325 to $350 a foot range. And they were in greener areas with lower population you have heard us do the comparison from what we sold to what we own today.

So, those would sell today or sold last year, we'd sell in the 6s or in the very, very low 7s. If you have lost your grocery store and you back told them to somebody like a Rose’s or a goodwill or something like that. The audience is completely different audience and they are looking for yield. And so those are going to be 100 basis points, 200 basis points higher than what we sold last quarter. So that sort of answers the cap rates on dispositions. In terms of acquisitions, it’s, I think it’s just the scarcity of high quality institutional type properties that is driving the cap rates down, interest rates continue to stay low, so this cap rates are going to stay down.

What was the second question?

Jeff Olson

Sorry, Jim I missed the….

Jim Sullivan - Cowen Group

The second question is whether the from a location standpoint obviously over the last couple of years, you guys have done a great job at moving into by coastal portfolio very strong demographics, much more urban and suburban and I’m just curious whether that profile by coastal urban high density, curious whether the cap rates have moved down more in your perception over the last couple of years. And maybe especially over the last year, compared to the rest of the universe.

And just trying to understand, are we looking at a spread widening as the perception of growth opportunity is being appreciated by more investors in those urban high density locations?

Jeff Olson

Hard to speak what investors are thinking, but there are investors who invest only in urban areas or concentrate on urban areas have rotated out of a suburban focus into one that’s more urban and urban I’m going to describe is the Brows, West Chester, or Fairfield County or Buckhead in Atlanta as more urban and clearly the opportunities to have enormous NOI growth assuming you can recapture space is in those markets as opposed to the suburbs specially suburbs that don’t have barriers to entry, where you have very, very, very hard time generating NOI growth overtime because tenants keep moving out, move to new projects and its just hard to, it just basically feels like you are treading water in those more suburban markets.

Jim Sullivan - Cowen Group

And that’s precisely your target and when you talk about ticking all the boxes down, that key variable I guess about the upside for enormous NOI growth is probably the key variable?

Jeff Olson

Actually in the project that I described that was in suburban Washington DC, the enormous upside probably is limited by the leases and the renewal options in those leases. But any investor who’s not an operator, we do much, much better when there is a problem with a property that we think we can figure out than we do on one that checks all the boxes where all the anchors are in place, it’s a $75 million to a $100 million deal call it, and one can look at that and not be an operator and say you know what, my fixed income opportunities right now in the bond market are very, very limited, so I am willing to do a 4% deal with 2% NOI growth, maybe 3% NOI growth because this property is bulletproof and there is no place for anybody to go compete with. And I think in that particular instance, that’s what we saw and we’d looked at it, we’d liked it, we made an offer on it and we moved on from there.

Jim Sullivan - Cowen Group

Okay. Just one other question regarding tenants, fast fashion has been a very important variable in terms of mall leasing and I know that you guys have done a couple of important deals with H&A and Forever 21, you mentioned Uniqlo. But they haven’t been as much of a factor generally in your type of products. I am curious whether particularly with Forever 21’s, new concept, this F21 Red, whether you anticipate being able to expand your relationship with those retailers? And particularly as we think about some of the boxes and some of the categories in your centers where sales productivity has not been trending positively and you have to find an alternative views. Do you see fast fashion whether existing or new concept is being an important positive variable on the demand side?

Jeff Olson

It is certainly good to have a new player in the field to talk to, I think they are going to concentrate on a best properties, one properties that we can find to buy. They're certainly not going to go to or lesser quality assets or even some that are suburban that are perfectly fine. They're going to go for the higher volume locations, and we are certainly talking to them.

Jim Sullivan - Cowen Group

Okay. Thank you.

Operator

The next question is from Linda Tsai with Barclays. Go ahead please.

Linda Tsai - Barclays

Hi, it’s Linda Tsai. Good morning. In the context of having filled Park Promenade, can you give us an update on the other two anchors you mentioned on the last call? Are these part of the four vacant anchors you noted earlier?

Tom Caputo

Well, there we have four anchor vacancies in our home portfolio that amount to 63,000 feet. So two, we lost three anchors in the fourth quarter of 2013, one was at Alafaya Commons which was Publix now been replaced by Academy Sports; one was…

Jeff Olson

That was subsequent to the end of the quarter.

Tom Caputo

Subsequent to the end of the quarter. One was the beauty supplier store at Park Promenade that's been replace by Rose’s; and a third one for 30,000 feet we're negotiating with the tenant right now and that's in Ambassador Row in Louisiana. So I think the answer is we've been able to backfill them, we backfilled two already and we're working on backfilling the third. And in our entire portfolio, we have 63,000 square feet of tenants. We in four boxes, tenants above 10,000 square feet and we are working on two backfills of those four separately from the 30,000 feet, 30,000 feet is one of the four.

Linda Tsai - Barclays

Thanks. And then when you look at the office supply stores you're interested in taking back, what do you think are the best uses for those spaces?

Tom Caputo

Well, I think in some of the centers that we have are incredibly well located where we have office supply stores and we have demand from multiple tenants to take those boxes back. And it just integrate real estate, there is going to be a high demand. And many of the centers that we own that have office supply stores would fit into that category. In the cases of the ones that have been right sized, which means they are in fifteenish thousand square foot range, there generally are a lot of tenants to take that size box. And so we feel very comfortable with the vast majority of our office supply stores in terms of the ability to backfill those spaces.

Jeff Olson

And our favor replacement tenant to the office supply stores would be one of the TJX concepts.

Linda Tsai - Barclays

Great, thanks.

Operator

The next question is from Michael Mueller with JP Morgan. Go ahead please.

Michael Mueller - JP Morgan

Yes, hi. Just thinking of asset sales, what’s left beyond this year’s 125 to 175? And I guess based on the early discussions with David, do you get the sense that whatever is on the drawing board now for sale is you’re just going to follow through with that and continue down that path?

Jeff Olson

I think it’s a fair assumption but if you go to 36 of our supplemental package Mike, what you will see there under the remaining non-core property section is a $181 million of properties that ultimately we would like to sell And I’d say that that will be -- a good portion of that will happen this year, but that will also extend into next year, maybe a little bit into the following year to the extent that there is an opportunity for us to lease up this space prior to selling out.

Michael Mueller - JP Morgan

So is the 181, is that in addition to this year’s 125 to 175 or is there overlap between the two?

Jeff Olson

There is overlap.

Michael Mueller - JP Morgan

Okay, got it. Okay, great. Thank you.

Jeff Olson

Okay, thanks Mike.

Operator

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. Well, thank you very much for the time and attention. And we look forward to talking to you on our next call. Thank you.

Operator

The conference is now concluded. Thank you for attending today's presentation. And please disconnect your lines.

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