Equity One's (EQY) CEO David Lukes on Q2 2014 Results - Earnings Call Transcript

Jul.31.14 | About: Equity One (EQY)

Equity One, Inc. (NYSE:EQY)

Q2 2014 Earnings Conference Call

July 31, 2014 09:00 ET

Executives

Andreas Spitzer - Vice President, Finance

David Lukes - Chief Executive Officer

Tom Caputo - President

Mike Makinen - Chief Operating Officer

Mark Langer - Chief Financial Officer

Analysts

Jay Arlington - Green Street Advisors

Paul Morgan - MLV

Juan Sanabria - Bank of America

Vincent Chao - Deutsche Bank

Jeff Donnelly - Wells Fargo

Ki Bin Kim - SunTrust Robinson Humphrey

Nathan Isbee - Stifel

Ross Nussbaum - UBS Securities

Operator

Good day, and welcome to the Equity One Incorporated Second Quarter 2014 Earnings Conference Call and Webcast. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference call over to Mr. Andreas Spitzer, Vice President of Finance. Please go ahead, sir.

Andreas Spitzer - Vice President, Finance

Thank you, Mike. Good morning, everyone and thank you for joining us. With me on today’s call are David Lukes, our Chief Executive Officer; Tom Caputo, our President; Mike Makinen, our Chief Operating Officer; 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. These statements are subject to risks and uncertainties and actual results may differ materially from our 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 other periodic filings with the Securities and Exchange Commission.

Please note that on today’s call we will be discussing non-GAAP financial measures, including FFO and NOI. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release and on our quarterly financial supplement, which are available on our website at www.equityone.net.

Finally, during the Q&A portion of the call, we request that you respect the limit of one question, so that all of our callers have an opportunity to speak with management. If you have an additional question, you are welcomed to rejoin the queue.

I would now like to turn the call over to our CEO, David Lukes.

David Lukes - Chief Executive Officer

Thank you, Andreas. Good morning and welcome to our second quarter earnings call. I am excited to speak with you this morning about our company and our future. I would also like to thank our Chairman, Chaim Katzman and the rest of the Board for the opportunity to lead Equity One as well as our employees for sharing their knowledge and insights during the last two months.

Given the incredible transformation that Equity One has gone through over the past few years, including the assembly of a wonderful portfolio of properties, I want to especially thank Jeff Olson for his dedicated 8-year leadership and most recently his assistance and guidance has began my transition in May. Tom Caputo, our President and my long time friend has been instrumental in helping me understand the operating history of our assets and I look forward to our years ahead working side-by-side. And finally, Mark Langer, who has been a diligent partner in educating me in the details of our financial structure and the quality of our balance sheet.

When I first met Mark, he asked me what compelled me to make this decision and accept this position. In fact, it was not a difficult one. I have carefully watched Equity One’s portfolio transformation over the past few years and I know that the company has a competitive advantage at this point in its lifecycle. Low-quality assets have been sold. High-quality assets have been acquired and large urban infill properties with near-term lease expirations will allow for a significant redevelopment program to move into an execution phase. The table has been set for Equity One to attract and extract the full value of our transformed portfolio through operational excellence and redevelopment. This is the portion of our future that I am most excited about.

This morning, I would like to share with you the details of where we see the opportunities and what we intend to accomplish. For the past 80 days, our team has been primarily focused on three subjects: our people, our properties and our future growth. All of these subjects influence our day-to-day management, but most importantly they dictate our capital allocation strategy. We want to see leading earnings and NAV growth on a per share basis and we will do so by focusing on asset by asset value creation.

Let me start with our people, it’s clear to me that our team includes some of the best and the most experienced leasing property management, finance, accounting and development professionals in the business. The time I have spent in parking lots in conference rooms and driving trade areas with our staff has been particularly satisfying, because I have a great confidence that the team we have in place today can push forward our strategic plan. We now we are entering an execution phase within our business and we know our portfolio contains some great value creation opportunities.

I feel strongly that the execution of these asset plans is directly related to our operational focus. I am enthusiastic to introduce Mike Makinen, our new Chief Operating Officer. Mike and I first met 10 years ago and he impressed me then with his background and economic geography with a focus on retail. He developed a very unique skill set as he transitioned his career from a research mathematician to a leasing site selection and operations expert. Mike and I worked together for several years and I am convinced that he has what we need now, a passionate operator of shopping centers with a strong understanding of how our business works. Mike joined this month and spent time focusing on our processes, our leasing functions and our property management platform. We know that the centralization of these functions will allow us to enhance our decision making and facilitate deal execution.

As part of our emphasis on leasing we have also been pleased to add four experienced leasing members to our company led by Tim Havener. Both Tim and our proving existing Florida leader Tom Meredith are focused on the opportunities within our Southern assets. From a redevelopment standpoint we have also placed a leadership of our active projects under Mike Berfield. Many of you have met Mike in the past as he was responsible for the success at the gallery at Westbury and our Bronx development projects. And he is a formidable manager with attention to detail and a flair for creative problem solving.

We issued a press release last month outlining our reorganization plan that eliminated 14 positions, while included the recruitment of six new positions related to leasing and redevelopment. The announced changes have provided us with a flatter organization and the talent that will directly influence our ability to execute our asset plans at a reduction in total cost of the company. I am excited about our new organization and especially the talent we have in our operating, finance and accounting departments. Culture is so vital to an organization and we have a great one. I truly enjoyed challenging learning from and laughing with our employees and look forward to working with them all for years to come.

Let me turn now to our properties. Tom Caputo and I spent the last 10 weeks touring assets, walk-in vacancies, studying trade areas and discussing our rent roles as they relate to current market conditions. I have been pleasantly surprised by the quality of the vast majority of our portfolio. They exhibit characteristics that allow for pricing power with respect of rent and are located within supply constrained trade areas. Our average grocery sales are over $620 a square foot and indicate that we are currently driving significant foot traffic to these sites and therefore they remain desirable locations for many retailers seeking access to our portfolio demographics.

I can summarize our operational strategy in two simple themes, sales volume and sales growth. We are currently benefiting from strong sales volumes from our anchors, but it’s our job to produce strong sales growth for the remainder of the site. Tenant sales growth is the future and the fuel that drives our rent growth and in this light we indeed have a market advantage if we can correctly merchandise our properties with a superior tenant mix that produces the highest possible aggregate site sales volume.

Our redevelopment pipeline is currently being expanded with the fundamental desire to increase site sales volumes, often times through traditional remerchandising, but also through identification. Our team has been actively underwriting opportunities and while there has been a lot of discussion about the quality of our recently acquired properties in the West Coast and the New York metro area I was pleasantly surprised to also see the redevelopment and growth opportunities within Florida.

With respect to our dispositions program, we are nearing completion of our stated goals and expect additional asset sales totaling $50 million to $75 million by the end of the year. These sales represent the last of our risky and low-quality assets and moving out of our ownership position will allow us to focus our time on value creation in our better assets. We have a remarkable collection of properties. And while our most urgent work is strengthening the core, we will be looking to prune our portfolio when appropriate recycling opportunities are available.

So, let me turn now to our future. Our long-term plan for the company and our strategic vision going forward will be focused on four simple goals. Number one, generating long-term same-site NOI growth of 2.5% to 3.5% within the core portfolio; number two, allocating an annual target of $100 million to $150 million in capital towards redevelopment and development with average returns in excess of 8% on an un-leveraged basis; number three, opportunistically acquire additional properties with below market rents or additional redevelopment potential that provide us attractive risk-adjusted returns; and lastly, maintain a strong capital structure with low leverage that maintains our flexibility to transact.

Mike Makinen will be responsible for our core growth; Mike Berfield for our development and redevelopment execution; Tom Caputo for our external acquisitions and dispositions, including our joint venture program; and Mark Langer for our balance sheet. These four executives are excellent leaders and share a passion for our business that’s contagious. I spent a lot of time with each to ensure that we have a roadmap that supports our growth targets and I am confident that we will execute at a high level to achieve our goals together.

And with that, I believe I have shared with you our focus, our people, our properties and our future growth. I intend to ensure that Equity One successfully moves into an execution phase of its lifecycle. Our goal is to grow our net asset value and our recurring FFO by 5% to 7% a year. We have recognized that the best way to do this is through exceptional execution within our core operations combined with growth from development, redevelopment, and the sourcing of external acquisitions. The foundational structure, through which all of our investment decisions will be made, will remain grounded within our capital allocation principles. This considers our cost of capital and the risk-adjusted returns we can generate in an accretive manner. The past 80 days have been extremely busy and I will conclude by saying again how proud I am to be part of this team. I am confident in the quality and growth profile of our assets and I am even more confident that our team can execute on our strategic plan.

And with that, I will turn the call over to Tom Caputo for his remarks on our second quarter performance.

Tom Caputo - President

Thanks, David. This morning, I will focus my remarks on leasing, occupancy, dispositions and our development and redevelopment pipeline. Our leasing team continued to be active during the second quarter executing 125 new leases, renewals and options totaling just over 600,000 square feet. Overall, rent spreads were 5% with new leases at 10.8% and renewals at 4.1%. TIs for the new same space leases came in higher than usual at $21.75 per foot. The higher TIs primarily are a result of the need to renovate a 700,000 square foot freestanding restaurant, which had been vacant for seven years to accommodate MD now at Point Royale, as well as the cost to build out Chipotle at (indiscernible) and an Orange Theory at Chastain.

Our leasing pipeline continues to be active with a total of 77 new leases and renewals under negotiation for approximately 230,000 square feet at attractive rent spreads. Demand for retail space continues to be very strong across the majority of our portfolio. As of June 30, we have executed leases with (indiscernible) square feet of space, which will generate approximately $5 million in annual revenue when the tenants open for business. These figures do not include any income from executed leases in our development and redevelopment pipelines, which now amounts to approximately $10.2 million in future annual revenue, including $4.5 million for Barneys.

We continue to make good progress towards our goal to increase occupancy to 95% by the end of the year. As David noted, we recently added Four Seasons Leasing professionals to our team, which will enhance our ongoing effort to improve occupancy. During the quarter, our consolidated shopping center portfolio occupancy increased 30 basis points from 93.9% to 94.2%. Approximately one-third of the occupancy pick up can be attributed to organic lease up and two-thirds is due to sale of four lower tier assets. We are very pleased with the pick up in shop leasing particularly in Florida. Overall, shop occupancy during the quarter increased to 120 basis points from 83.6% to 84.8% with 80 basis points of the pick up coming from organic lease up.

Our success with shop leasing during the quarter was somewhat tempered by the loss of a 30,000 square foot second run movie theater at marketplace in Atlanta. We are optimistic we will re-tenant this box later this year. Our portfolio quality has improved dramatically over the past few years as a result of our new acquisitions and the sale of over 80 non-core assets since December 2011. Investor appetite for B and C assets continues to be strong due to the availability of attractive debt.

During the second quarter, we closed down the sale of four non-core properties which contained 337,000 square feet for a gross sales price of $32.3 million. Since the end of the quarter, we sold five non-core properties which contain 494,000 square feet for $48.3 million. We have eight additional non-core properties under contract, which contain approximately 550,000 square feet at a price of $35.3 million. Year-to-date, the total value of non-core assets sold or are under contract is $142.3 million. The average weighted cap rate for the properties which have been sold or are under contract is 7.7%. We are on track to beat our goal to sell $150 million to $175 million in non-core assets in 2014.

Turning to development, Phase 1 of Broadway Plaza is nearing completion. We expect our four anchor tenants, Aldi, TJ Maxx, Sports Authority and Party City will be opened for business between late-August and mid-October. Phase 1 is 72% leased and we are in discussions with two retailers for most of the remaining space. Phase 2 of the project which will include 33,000 square feet on two floors is now under construction. We have just signed a lease with Blink for 16,000 square feet for the entire second floor of the project. We have also singed 1400 square foot lease with Starbucks for the ground floor. Phase 2 of the project will be delivered in the second quarter of 2015 and both phases should be stabilized in the late-2015.

Turning to our redevelopments as we announced on our call, Dick’s Sporting Goods and Uniglo both opened at Serramonte in early April. Both tenants are performing well about plan and traffic in the mall increased in average of 10% during the quarter. At Kirkman Shoppes, LA Fitness is under construction with their 40,000 square foot club which is expected to open in the first quarter of 2015. We are well underway with the new Walgreens, which we expect to deliver to the tenant in the fourth quarter. At Lake Mary, Ross and Fresh Market are both opened in the former Albertson’s box, and subsequent to the end of the quarter we executed a 63,000 square foot lease with Academy Sports for the majority of the former Kmart box. The tenant is expected to open in the first quarter of 2015. We are in discussions with two junior anchors for the balance of the box. Leasing activity for the shop space in the center has picked up significant as a result of the traffic generated by Ross and Fresh Market.

South Beach Regional Center is another property enjoying a terrific transformation. As a result of the new Trader Joe’s Store, which is under construction will open later this year. Leasing activity at South Beach Regional has increased dramatically. During the quarter, we signed a lease with Alta for 10,000 feet which combines four existing shop spaces. And we are close to finalizing lease with another 10,000 square foot tenant, which will combine two shop spaces. We also are working with a number of smaller tenants for most of our vacant shop space. I am delighted Mike Makinen has recently joined Equity One as Chief Operating Officer. Mike has a passion for the business and has already demonstrated he will be a terrific leader for our leasing and property management teams. I look forward to working with David, Mike and Mark as we continue to transform our portfolio.

And now, I would like to turn the call over to our new COO, Mike Makinen.

Mike Makinen - Chief Operating Officer

Thank you, Tom. I would like to start by saying that I am very excited to be with Equity One. What I am looking forward with in this team as I lead our on operational excellence. As David had mentioned, I come from a unique background that has given me a strong foundation in operations and a passion for the nuts and bolts of our business. Throughout the 1990s, our focus is on providing real estate guidance to retailers built around national store expansion strategies and site feasibility analysis. During the phase of my carrier, my primary role was to perform quantitative sales forecast and then convert that study to the qualitative aspect of site selection.

My major clients included the Home Depot, all of the Gap brands, Sports Authority, Charming Shoppes and Chick Fil A among others. The knowledge I gained from this experience led me to work for many years on the retail side leading the expansion and development of various script center oriented brands. My shift then to the landlord side of the business several years ago and my partnership with David and now with Tom and Mark is anchored in our shared belief that our job is to increase total site sales volumes at our properties and subsequently to sharing that success through increased trends. Having a positive influence of site productivity can be challenging and the inherent quality of the real estate is critical. To that end, when I was presented with the opportunity to join Equity One, I took a long hard look at the portfolio through the eyes of a retailer.

My conclusion was encouraging. Specifically, the Equity One portfolio, was clearly well positioned from both the tenant mix standpoint and more importantly from the market position standpoint. The primary markets, specifically the Bay Area, Southern California, South Florida and the Greater New York area represent the markets from which national and local retailers have consistently and historically generated their greater sales. The resilience of the retail performance of these markets has been exceptional. And I believe we will continue to represent the strongest markets in the country. This is both our advantage and our opportunity.

I would like to conclude by saying that in the few weeks that I have been with the company, I have been impressed with both our leasing team and our property management team. The creativity, energy and attention to detail evident in both of these areas is invigorating. We are consistent in our goals and I am committed to seeing this achieve them.

And with, I will turn it over to Mark to discuss our quarter’s financial results.

Mark Langer - Chief Financial Officer

Thanks Mike. Good morning. Today, I will cover our results for the quarter, provide an update on our balance sheet and liquidity and discuss our outlook for the remainder of the year. We are pleased to report that our recurring FFO this quarter was $0.32 per diluted share and was $0.67 per diluted share for the six months ended June 30, which represents a 6% increase over the first six months of last year. We reported same property cash NOI growth of 2.6% for the quarter, which was driven primarily by an improvement in minimum rents from contractual increases as well as rent commencements from recent lease up at a number of our Florida properties, including the shops at Skylake, Pavilion, Unigold and Bird Ludlam.

Our reported same-store NOI growth does not include the $530,000 NOI contribution we earned from Dick’s at Serramonte this quarter, as we will not include the contribution from Dick’s until the third quarter of next year after 12 full months of stabilization of the new rents. Other items impacting our results this quarter include $1.5 million of one-time transition costs associated with the hiring of our new CEO and COO and the reorganization announcement we made on June 30. These costs were more than offset by a $1.7 million reversal of previously accrued non-cash stock-based compensation expense pertaining to Jeff Olson’s 2011 long-term incentive award, which was required by the accounting rules to be revalued in connection with this departure in August.

We have deducted this net credit of approximately $250,000 to derive recurring FFO. Other items impacting our year-over-year recurring FFO growth include lower investment income as we no longer have any mortgage or mezzanine investments and increase in equity income from our joint ventures and lower interest expense. Our equity income from joint ventures this quarter includes $600,000 of benefit from recognized below market rents due to the early recapture of two tenant spaces.

Interest expense for the first six months of this year is down approximately $1 million compared to the prior year. About half of this reduction is due to lower mortgage interest due to the reduction in mortgage indebtedness from pay offs over the past year and the other half is due to increased capitalized interest for construction projects including the Barney’s work at 101 7th Avenue, the ground-up development at Broadway Plaza and the other redevelopment projects we have in Florida including Lake Mary in South Beach region. We believe the interest expense recognized in Q2 will be a good run rate for the remainder of the year.

Turning to our balance sheet, the net value of income producing properties declined approximately $160 million since March 31, primarily due to asset sales and the transfer of approximately $70 million of properties from income producing to CIP. The largest of which was about $60 million pertaining to the transfer of 101 7th Avenue in conjunction with the construction related to Barney’s. We currently expect to turn this space over to Barney’s no later than the first quarter of 2015 so that they can complete their build out in anticipation of a grand opening in the first quarter of 2016. We will not recognize any rents or income on this space until the earlier of March 2016 or the date they open for business.

We had $133 million drawn on our line as of June 30 which has been reduced to current balance of $55 million based on the asset dispositions that are closed in July. Our net debt to adjusted EBITDA was 6.1 times for the six months ended June 30 and our coverage levels continue to show improvement. Our adjusted EBITDA to fixed charges in the first six months of this year was 3.2 times compared to 3 times a year ago and adjusted EBITDA to interest expense was 3.6 times compared to 3.3 times a year ago. Our unencumbered asset pool continues to grow as we repaid one additional mortgage at South Point for $6.6 million that bore interest at 5.7% helping our secured debt to gross assets stay at only 11%. Our balance sheet continues to strengthen and our access to attractive capital sources remains very strong.

Turning to our outlook, we have increased the lower end of our previous 2014 recurring FFO guidance by $0.02 such that our new guidance range is $1.25 to $1.28 per diluted share. The new guidance range reflects better than planned year-to-date results. The underlying components of our new guidance range are based on the following assumptions. First, an increase in same property NOI of 2.5% to 3.25%. We have lowered the high end of this range a bit down from 3.5% based on updated rent commencement dates at several properties. Second, we are expecting both core and JV acquisitions to be in the range of zero to $100 million for the remainder of the year, down from $100 million to $200 million previously. Third, non-core disposition activity of $150 million to $175 million for the full year including the sales activity announced in our earnings release. And fourth, increasing our same property occupancy by 100 basis points with the goal of reaching 95% consolidated shopping center occupancy by year end.

While we remain focused on reducing G&A and streamlining our organization, we have found the accounting rules are not always friendly to the economics of certain agreements. On that note we will accrue approximately $1 million of non-cash stock-based compensation expense during the second half of 2014 pertaining to the renewal of our Chairman’s compensation agreement. Even though the award of restricted stock inherent in this agreement is not effective until the year-end expiration of the existing contract and provides no economic benefits prior to January 1, 2015, the accounting rules require that the fair value of the award be recognized ratably starting on the date the agreement was executed in June of this year. Therefore we now expect full year recurring G&A costs to come in towards the higher end of our original guidance range of $35 million to $37 million. This projection excludes the upfront and transition costs associated with the hiring of our new senior executives and the reorganization costs pertaining to eliminating our regional leaders.

In addition, this projection excludes non-recurring expenses we will incur in the third quarter for our departing CEO, which we currently estimate to be $2.2 million, which primarily consist of non-cash cost associated with previously granted stock awards. Our updated guidance reflects an ongoing quarterly run-rate that is slightly lower than the actual level realized in the second quarter. This decline is due to the continued execution of our disposition program and our decreased acquisition assumptions, including the timing of when such activity will occur. While we know it is exciting to talk about new asset acquisitions, we have found it hard to transact in an environment, in which we have seen premium assets in our target markets trading at un-leveraged IRRs in the low 6s with going in cap rates in the mid 4% range.

We are actively looking at a few deals today and hope to make progress getting to the finish line, but will pursue acquisitions while remaining committed to our capital allocation principles and ensuring that our balance sheet remains strong. Tom mentioned our leasing progress this quarter and I share his excitement particularly seeing our shop occupancy reach 84.8%. This is the highest level we have obtained since the fourth quarter of 2008. We are encouraged by these trends and look for continued improvement as we focus on the lease up of shop space throughout our Southeast and Florida portfolios.

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

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question comes from Jay Arlington of Green Street Advisors. Please go ahead.

Jay Arlington - Green Street Advisors

Hey, good morning guys and thanks for that intro David and Mike. Welcome to the party.

David Lukes

Thank you.

Mark Langer

Thank you.

Jay Arlington - Green Street Advisors

I guess my first question, the overview is very helpful. The exception I guess to the organizational changes you have already made, what do you kind of think are the biggest tweaks or changes you want to make to the current strategy? And maybe related to that, what’s the biggest opportunity that you think the company can do better?

David Lukes

Well, with respect to strategy, in my prepared remarks, it’s awfully difficult to come up with meaningful differences to selling stuff that we find risky, acquiring things that have upside in the demographics to support good stable growth in the future. So, I think your word tweak is probably more important than it is structural shifts in our strategy. We will absolutely convert a lot of our time towards redevelopment and investing in assets that we currently own. And part of that is simply because the acquisition to market right now is very difficult. The second half is that we have a lot of things we can work on. It’s been almost difficult to get through the amount of inventory and potential upside in the portfolio, but from what I have been able to see to-date, I am excited about it. And from a G&A perspective, I think you will continue to see us allocate those G&A dollars to try and capture the upside in the portfolio that we see. With respect to changes operationally, I think that it’s really mostly about speed and focus.

Jay Arlington - Green Street Advisors

Okay. And maybe just secondly just can you talk about your relationships with the retailers and kind of how you think about your leasing philosophy? And I guess broadly, how you balance occupancy gains in your ability to push rent increases?

David Lukes

I am trying to reconcile your second part to the relationship question. You mean how we approaching retailers with respect to the portfolio?

Jay Arlington - Green Street Advisors

Right. What does your past experience kind of taught you and kind of how you are going to bring that to Equity One?

David Lukes

Well, if you really look at what we have, in my mind, there is two portfolios. One portfolio, which is a very consistent grocery-anchored portfolio on Florida, in many ways, a lot of those properties have very similar characteristics. And so one of the biggest opportunities we have is to start sharing our tenant roster with ourselves and starting to replicate successful franchisees, successful operators, and successful tenant mixes between different properties to have the same anchor. A lot of the relationships we built over time and a lot of it’s around the stable can definitely be converted to help the shop occupancy in the State of Florida.

The other part of the portfolio is what I would call highly desirable with a huge backlog of potentially interested tenants. And so to a certain extent, it’s a delicate balance between being a sales person and trying to convince people to come to our properties in one portfolio. And the other portfolio, delicately balancing how many people want to be at a desirable property and how we’re able to push rents and you had keep relationships strong.

Jay Arlington - Green Street Advisors

Okay, great. Thank you.

Operator

Next, we have Christy McElroy of Citi.

Unidentified Analyst

Good morning. This is (indiscernible) on for Christy. If you look at your portfolio today adjusted for recent dispositions, what percentage of assets do you still consider non-core that you would like to sell over time?

David Lukes

I would say over time as we have called through and look pretty diligently at the remaining Rooster once we get through this current round of dispositions. I think there is around 5% in terms of fair market value that overtime, we’d like to cycle out off. I wouldn’t call it inherently risky. But I would just say it’s the kind of solid properties and solid markets, with a missing is the long-term growth. In the short-term, they’ve got lease up potential. So, Mike and his team are inherently focused on trying to capture that last bit of occupancy before we’re trying to cycle out of it. But the reality is once the property stabilizes in the submarket that we think the NOI is going to be somewhat flat than that’s a better time for us to pass off to an investor they want to stable more flat cash flow and we can focus our time on internal growth.

Unidentified Analyst

Okay, great. Thank you.

Operator

The next question we have comes from Paul Morgan of MLV.

Paul Morgan - MLV

Hi, good morning. Just on the asset tour that you did over the past quarter. A couple of questions, one about how you’re thinking street retail incremental investments there and whether New York is the only place should be interested in doing that and than in terms of the Florida portfolio, clearly we have been very focused on South Florida, it’s always felt like, markets like Jacksonville, Orlando and Tampa have been a little bit less so kind of somewhere between non-core and core. How are you thinking about the place of those assets within the portfolio and incremental investments in those markets?

David Lukes

It’s funny. One of the concerns, Paul, is that we keep talking about South Florida, because demographically it’s easier to measure entire counties and how they do and it’s fairly consistent across the board. Tom and I spent a lot of time in North Florida and the reality is that some properties like Lake Mary in Orlando are in extremely wealthy trade areas with a very good market position and yet something on the South side of Orlando maybe less so. So, the reason we are just being generalistic about Florida is it – it’s easy to measure South Florida, North Florida, it depends on the property itself. When I mentioned to Katie, that there is probably 5%ish that over time, we would like to cycle out of, it’s those properties that don’t have a dominant market position, but it would not be cycling completely out of North Florida because we do have some properties there, particularly in Orlando and Jacksonville that I think are going to be dominant in their smaller trade areas for a long period of time.

Mark Langer

Your question about street retail is interesting, because one of the aspects of our better properties whether they are truly urban or there are more quasi urban is that the supply constrained nature of the better properties is clearly showing a higher tenant sales volume. The street retail component of our portfolio, I think anyone would have to acknowledge that the company is done a pretty good job to-date on acquiring street retail and part of the reason as that we’ve been able to combine our severe lack of supply for our tenant base and our tenant base is primarily discount and necessity retailers. When you have a severe supply constrain with those two components and then you combined that with aging leases that have a below market rent well, it gives us a lot of stability and security to go into a property even at a pretty low cap rate knowing that there is a likelihood that we can bring that up over time. So, I’m a big fan of street retail, but I am the biggest fan when it applies to our tenant base and it has a rent roll that we think can roll up over time.

Paul Morgan - MLV

And so going back to the non-core markets, I mean, sorry the North Florida markets, does this mean you are focused on the assets that you have as you like or would you actually pursue acquisitions or ground up development in those markets?

David Lukes

In the North Florida market?

Paul Morgan - MLV

Yes.

David Lukes

I would probably say that our focus right now is very clearly on our highly desirable core markets, which is South Florida, California, Metro New York, simply because if we are going to be stewards of our capital, we should put that capital to work in areas that we are most self-confident about. And those three that I just named we are most confident of. So, hopefully, we can find targets to place that capital where we really don’t have to worry as much about the specific positioning within a smaller trade area. So, our focus I think is going to be for now in those markets that we are most confident of.

Paul Morgan - MLV

Okay, thanks.

Operator

The next question we have comes from Juan Sanabria of Bank of America.

Juan Sanabria - Bank of America

Hi, good morning. Just hoping you could talk a little bit about your same-store NOI guidance implying sort of a ramp up in the second half and how occupancy fits into that and where that increase in occupancy is coming from? It sounds like some of it is coming from the shop space in South Florida and what kind of tenants maybe driving that whether it’s mom-and-pop or if it’s more sort of international and regional franchisees?

David Lukes

Well, several of us can probably comment on this. When you look through the potential inventory of how we can increase our same-site NOI, shop occupancy is the primary driver in the short-term. There is just no question. The reality is that we had a tenant go out of 30,000 square foot theater that made a blip in the radar and it takes a lot of shops to make up a 30,000 square foot theater, but we have had a lot of – we have had a lot of uplift in the shop occupancy and that’s a very encouraging sign for a company like ours that has a number of small vacancies spread throughout several trade areas. Tom, I don’t know if you have any thoughts on that and then certainly, Mike, you can talk about what you have seen so far with the amount of leases that have been signed this quarter.

Tom Caputo

Right. When I look at the leases that we are working on now as well as reflect back on the second quarter and just look at the aggregate list of leases and renewals, new leases as well as renewals, it’s very evenly divided between what I would call a group of chains and franchisees against what I would call mom-and-pops. It’s almost right down the middle, which I think is fairly encouraging, because what we are seeing is a lot of the mom-and-pops are passing the credit test pretty effectively and it looks like it’s moving in that direction. As far as the composition of the leases, what we are seeing in the shop space is a wide range of different uses, very diverse ranging from salons, fair number of restaurants. Right now, as far as new leases, we are looking at about 9 salons, 7 restaurants, coffee shops and 7 various service uses, all new leases executed in the second quarter. And that’s the type of pattern we are seeing as well as we go forward.

Juan Sanabria - Bank of America

And is there any geography where this demand is focused on, is it fair to say it’s mainly in Florida, I think you have kind of alluded to that, but just wanted to get some clarification?

David Lukes

Yes, most of our vacancies are in Florida. So, that’s where the most shop leasing is going on at the moment. If you look at the Northeast and the West, we are 98% leased. So, most of the opportunities are in Florida.

Juan Sanabria - Bank of America

Thank you.

Operator

Next we have Vincent Chao of Deutsche Bank. Please go ahead.

Vincent Chao - Deutsche Bank

Hey, good morning, everyone. Just you talked a lot about sales productivity and driving that higher as it means to driving rental rates, but historically the space hasn’t really provided the tenant sales per square foot data, just curious if that’s something you would be willing or able to provide going forward, so we can sort of track progress?

David Lukes

We would absolutely be willing. We unfortunately aren’t able. I mean, it is an unfortunate part of this industry. When you look at the mall industry, it’s a lot easier to figure out who has the upper hand, the landlord or the tenant. The scripts is little more difficult, the older leases we do have sales volumes that are in them, but that the newer leases and many of the shop leases, it’s very difficult to tell. And that’s one of the benefits of having Mike Makinen here is that, he spent a decade doing gravity analyses and trying to figure out sales volumes of retailers. It’s probably the dark pool of how a landlord negotiates a rent because there are no facts that you have to figure it out, you can only use anecdotal information. So, over time, I wish we could give you empirical data that you could start to see how well we are producing on that. And the only thing I can say is that we can coach and rely on the retail community as renewals come up to use competitive retailers to come in and do their own sales forecast. And then we can measure that against an in place retailer, because the vast majority of the upside in our highest quality portfolios is in the renewals. And that’s a very different strategy than trying to lease up vacant shops that have been vacant for a few years. They are both achievable, but they are different strategies. So, I’d love to give you more color on that and will try and produce something over time, they can give you some feeling of how we are doing.

Mike Makinen

The only thing I would add, Vin, this is Mark, is that as you know from our investor deck supplement, where we have reliable grocery sales data, I think we have been very transparent in breaking down the grocery sales productivity, where we have it. I think David alludes to the challenge, where leases don’t always require it, but where we have had it, we have tried to be pretty transparent in publishing it.

Vincent Chao - Deutsche Bank

Thanks guys.

Operator

The next question we have comes from Jeff Donnelly of Wells Fargo.

Jeff Donnelly - Wells Fargo

Good morning guys. David, are there specific redevelopment projects that you might take in a different direction or maybe different timeframe, when was last communicated or conversely existing assets that are going to enter the redeveloped pipeline?

David Lukes

Let me start with the second. For me, the most salient question for this company is two components. Number one, how big is the total redevelopment potential of the assets that have been bought so far? And number two, how quickly can that be realized? Some properties have a huge amount of value available, but it’s unclear as to how fast it can be executed. Other properties, I think have both. We have some visibility short-term. We have got the ability to enact it. And so really for the last 80 days, I have really been focused on trying to build up the short-term momentum and so trying to figure out which properties can be added to the redevelopment pipeline. To-date, I have got a lot of conviction that we can add $50 million to $75 million in spend over the next year and a half or so. And that buys a little bit of time then to look at the larger projects, which would more fall into your favorite category. And without question the favorite ones are Bethesda, Potrero, and Serramonte. I think between those three, we have all been arguing as to which one is our favorite. Mike Berfield is the strong one in the room, so he gets to take this pick and then we all get to pick our seconds and thirds. But in terms of taking them in a different direction, that’s hard to say. It’s just hard to say right now. I think those three are such large projects that we will absolutely communicate with the investment community over time what we are thinking, but I really want to study the available density to understand really what is the best value.

Jeff Donnelly - Wells Fargo

And just to clarify on those three big projects, I mean, do you guys think of it as that you really only attempt them in sort of a linear fashion or do you overlap their work? I am just trying to think of how you manage the risk on that?

David Lukes

Well, let’s take Serramonte as an example. And I know that one probably better than most, because when I lived in San Francisco, my office was about a mile and a half away. There is 80 acres that’s been between Silicon Valley and San Francisco. We are right on the freeway. There is a lot of market potential for that property. But I think what you are getting at and I would agree is that you need to come up with an overall dense master plan, but then figure out which pieces can be executed more quickly. And based on the environmental impact report that we have been working on for the past six months, I think we will have clarity pretty quickly on being able to execute Phase 1 and then communicate what that Phase 1 is going to contain knowing for well that there is probably future phases along the way, because it’s such a large asset.

Jeff Donnelly - Wells Fargo

And just maybe one last question is are the staffing changes you announced in late June are they completed and I guess is the goal there to push decision-making down in the organization or in fact to sort of bring it up in their organizational structure?

David Lukes

If I had to generalize I would say that changes we made on the G&A front, on the organizational front, we are really to recognize that we have two fundamental goals. One is just the blocking and tackling of a down and dirty shopping center business, which is a lot of leasing and property management and billing and collections and we want to make that organization is flat as we possibly can so, the speed can increase. And the second is to recognize that most of our shareholder value coming up that we have visibility on is our redevelopment pipeline and we needed to make sure that we were focusing on that in a way that to be done most quickly, I mean, speed right now is probably my fundamental focus.

Jeff Donnelly - Wells Fargo

Okay, great. Thank you.

Operator

The next question comes from Ki Bin Kim of SunTrust Robinson Humphrey.

Ki Bin Kim - SunTrust Robinson Humphrey

Thanks. Just a couple of quick follow-ups. On lease spreads, I’m not sure if you’re already talked about it, but kind of 4% cash renewal spread. Could you talk a little bit about what your expectations are for that just 12 months out and was there a certain mix issue that kept at this level.

David Lukes

So, I think it all depends on what leases are coming up each quarter. It all varies. I think that some of the older properties that we purchased over the last four years. There are some incredible opportunities to increase rent as those leases role to market. But there are also is a pretty good mix of supermarkets they’re going to roll in the next 12 months that may have flat lease, flat renewals going out. So, when you look at the mixture, it’s going to vary from quarter-to-quarter. And we said 5% to 10% is the spread that you should expect to say.

Ki Bin Kim - SunTrust Robinson Humphrey

I see. And just on the following the same lines, 2015 your small shop rent that’s expiring is about $24, I mean, it looks pretty just superficially attractive. Is there a vintage issue or a mix issue with that or could we expect, I would say, 2015 to be kind of a very good year?

David Lukes

I think the answer there is once again is it did all depends because at some of our shopping centers that we purchased since 2009, $24 would be at the very, very low end of the spectrum and in some of the centers that are in our older centers that we own for a long time that are in Florida with a Publix-anchored growing up relatively small market. Those 24 would be very high. So, it’s just a mix, it’s all going to depend on what’s in the queue quarter-to-quarter.

Ki Bin Kim - SunTrust Robinson Humphrey

Okay. And just one last question on capital deployment, if I heard you correctly, it seems like in the past on Equity One, I would say was in the past strategy of upgrading the quality by part of it’s buying better stuff, but also selling lower quality assets. And with that sometimes giving up, I would say, occupancy upside from a upper moving environment. If I understand your comments correctly, should we expect maybe a slowdown in the dollar value, dollar amount of dispositions as we go forward and maybe…

David Lukes

I don’t think – if there is a slowdown in the dollars put towards acquisition, it’s not because of strategy, it’s simply because of the reality of a market. Could you say acquisition or dispositions?

Ki Bin Kim - SunTrust Robinson Humphrey

Dispositions.

David Lukes

Oh, disposition, disposition.

Ki Bin Kim - SunTrust Robinson Humphrey

Yes, I think absolutely, absolutely, I think that we all have spent a lot of time and are very comfortable – meet certainly very comfortable that we are darn near the end of rating ourselves of things that we find risky. And what we have left is simply a tier that over time we are always going to cycle out of the bottom tier of our portfolio. But right now, there is nothing that’s more imminent and so, yes our program is absolutely going to slow down by year end.

David Lukes

Okay, thank you.

Operator

The next question we have comes from Nathan Isbee of Stifel.

Nathan Isbee - Stifel

Hi, good morning, welcome David and Mike. As you have ramped up the leasing step in Florida for a stronger focus on the shop space there and trying to bring up the overall small shop levels in the portfolio more closer to peers. Is there anything else aside from focus and staff perhaps on the pricing or TI side that you think you might have to tweak?

David Lukes

You mean in terms of – what you are really asking is how much are we going to have to incent tenants to go to those properties.

Nathan Isbee - Stifel

Correct. I mean, just traveling through the portfolio, there is – there are some of your higher quality properties in Florida that still have vacancy.

David Lukes

Right.

Nathan Isbee - Stifel

And just curious if it was something more than just focused in staff.

David Lukes

Yes. I think that there is always things you can do on the fringe to make aside more desirable or to finish off can do. Some of it is the physical appearance of the property if we have been a little bit slow on CapEx and we have let the property become something it’s less desirable for a consumer that can somehow have a negative impact. But probably more meaningful and I think Mike would agree for sure and I think Tom is that the tenant base that we have attracts a certain type of adjacent tenant base. So we need to think very carefully as opposed to just spreading around trying to find anybody that will tour a site, we need to focus on what types of uses are missing and are a good mix with our other tenants. So that I think is the softer side that the tenant mix and the inherent draw that we are going to spend time focusing on.

The other half of focus is really which pieces are most leasable. I have often told people especially my kids that I was the unhappy middle child growing up that got the mow the lawn Saturday morning. And I learned pretty quickly that you should always mow the front of the lawn first, because when dad came off from work and that’s what he saw on the driveway. And when you look at our Florida portfolio, we are having a lot of shops and if you – so if I look at my roster and I see we have 500 vacancies. And I look at how many people we have to work on those vacancies and what’s the likelihood of success and I look at my over the course of my career and I say how much inventory can we move and how is that best moved. There is no question that the front yard is where we want to focus. So Mike and I and Tom and Tom Meredith in particular who knows a lot about the Florida market has simply gone through and picked out what we think the most likely spaces to lease first. And we started focusing on those because positive momentum it’s going to breed further success.

Nathan Isbee – Stifel

Okay. So then as I look at the Equity One’s story heading into 2015 and beyond and you have those large leases that are rolling but aside from those where would you say leasing spreads and rent growth will head, do you see acceleration or do you see some need to perhaps take your foot off the pedal on that side just to get some leases done?

Mark Makinen

These annual spreads decelerate as some of this occupancy is still is that the question?

Nathan Isbee – Stifel

Correct.

Mark Makinen

You are saying given the stuff that’s left to lease will it impact spreads.

David Lukes

Yes.

Mark Makinen

But simply shops overall I don’t think we would expect…

David Lukes

I think we will continue to push rents as hard as we can depending on the property and the market.

Mark Makinen

So I don’t think you should expect to see deceleration of the spreads.

Nathan Isbee – Stifel

Alright. Thank you.

Operator

The next question we have comes from Ross Nussbaum of UBS Securities.

Ross Nussbaum - UBS Securities

Hey, good morning David.

David Lukes

Good morning.

Ross Nussbaum - UBS Securities

I missed the early part of the call, so I apologize if you discussed this. Are you planning to move any of the key functions from the North Miami office up to New York?

David Lukes

First of all you didn’t miss much anyway. And secondly no we are not, we are not.

Ross Nussbaum - UBS Securities

So finance, accounting all of that is staying down in Florida?

David Lukes

Yes, everything that’s in Florida is staying in Florida. We have got a tremendous team down there and there are more employees in Florida than there are in New York. Andreas has the FP&A Group up here which has been critical because we have been trying to model different scenarios over the past – over the next couple of years. So that piece of finance up here is critical the executive team, but Mark being down in Florida and having a lot of the office especially property management, we have got a lot of leasing focus down there that office is pretty primary in our future goals.

Ross Nussbaum - UBS Securities

Okay. That’s helpful. And just a clarification the three regional presidents that are being eliminated remind me was that all of your regional presidents?

David Lukes

Yes.

Ross Nussbaum - UBS Securities

Okay. And then lastly on this topic did you know you wanted to do this heading in or did you figure out this was the right thing to do as you were prancing around the country?

David Lukes

I was going to say the latter, but when you said prancing I am not sure how to answer that. It was the latter i.e. going in it is very interesting because I – for the last couple of years I have watched this happen from a far and so I was reading a lot of analyst reports on Equity One and the other companies and so I really had an outside in view. And I was curious when the Board approached me about what was the reality inside and what I found is there is a significant amount of upside – short-term in just leasing up shops, but in the long-term from some pretty sizable redevelopment potential, but it takes a different type of infrastructure to make that happen. And what I don’t want to be doing is talking in a year about all of the upside potential and never get to the actual meat and potato. So, we have tried to really streamline things and it became pretty clearly obvious once I started, but it was not the intent going in.

Ross Nussbaum - UBS Securities

And then I guess just around that obviously the Board had been supportive of the prior structure. So, when you went to Chaim and the rest of the board and said hey, folks I want to completely change the organization of this company? Did they say, hey, Dave, that’s great, love to or was there a lot of pushback and you had to talk them into it about dynamic work?

David Lukes

Well, there is a couple of things that you have to bear in mind. And so when we speak with the Board about making changes, one of the most salient facts is our number of assets has gone down in the past five years. The value of each one of those assets has gone up, but the number of assets is down and our workload has become what I would call more concentrated than if we simply had a much larger B quality portfolio with a lot of turnover we don’t. And as it goes into the future, I think we can do more with less as long as we are more focused. So, it was a good conversation with the Board. I don’t think that there were any unsupportive comments. And I think everyone understands that execution is really what we need to be moving into.

Ross Nussbaum - UBS Securities

I appreciate it. Welcome aboard.

David Lukes

Thank you.

Operator

Well, at this time, we have no further questions. We will go ahead and conclude our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

David Lukes - Chief Executive Officer

Thank you all very much. We certainly appreciate the time. We will be out meeting with a number of you in the next few months and look forward to next quarter.

Mark Langer - Chief Financial Officer

Thank you. Bye-bye.

Operator

And we thank you sir and to the rest of the management team for your time today. Your conference call is now concluded. At this time, you may disconnect your lines. Thank you again for joining today’s presentation everyone and have a great day.

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