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Equity One Inc. (NYSE:EQY)

Q1 2008 Earnings Call

April 30, 2008 9:00 am ET

Executives

Feryal Akin - Director, IR

Jeff Olson - CEO

Tom Caputo - President

Greg Andrews - CFO

Tom McDonough - CIO

Arthur Gallagher - General Counsel

Bob Malagon - VP of Development.

Analysts

Joe Dazzio - JPMorgan

Paul Adornato - BMO Capital Markets

David Fick - Stifel Nicolaus

Nick Vedder - Green Street Advisors

Tom - SBR

West Holiday - RBC Capital Markets

Chen Lindman - Excellence Nessuah Securities

Operator

Good day ladies and gentlemen, and welcome to the First Quarter 2008 Equity One Earnings Call. My name is Katie and I'll be your coordinator for today. (Operator Instructions)

I would like to now turn the call over to your host for today Feryal Akin, Director of Investor Relations. Ma'am, you may proceed.

Feryal Akin

Thank you, Katie. Good morning ladies and gentlemen. Thank you all for joining the Equity One first quarter 2008 earnings call. With me on the call this morning are Jeff Olson, Chief Executive Officer; Tom Caputo, President; Greg Andrews, Chief Financial Officer; Tom McDonough, Chief Investment Officer; Arthur Gallagher, General Counsel; and Bob Malagon, VP of Development.

Before we start I would like to address forward-looking statements that may be addressed on the call. Forward-looking statements involve risks and uncertainties. Actual future performance outcomes and results may differ materially from those expressed in forward-looking statements. Please refer to the documents filed by Equity One with the SEC. Specifically the most recent reports on Forms 10-K and 10-Q, which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements.

We will open the conference up for Q&A after the presentation. I will now turn the call over to Jeff Olson.

Jeff Olson

Thank you, Feryal and good morning. Thank you for joining us for our first quarter 2008 earnings call. Consistent with last quarter I'd like to share with you the positives and negatives of the quarter as seen from our vantage point. On the positive side, we are very excited Tom Caputo has joined Equity One as our President. He will provide some commentary on his first 45 days in a minute. We are thrilled to be working with each other again. I can't think of a better person and more qualified individual to help Equity One manage and grow our business.

We announced a $234 million joint venture with global retail investors. This is a joint venture between an affiliate, First Washington Realty, and CalPERS. We seeded the joint venture with $197 million of Equity One properties. In addition, the joint venture purchased Airpark Plaza for $37 million. Airpark is situated a quarter mile South of Miami International Airport in a densely populated supply constrained market. It is anchored by high-volume Publix, Home Depot Expo and Office Depot.

Equity One owns a 10% interest in the joint venture. We will earn market rate fees and a back end promote. We are pleased with the structure and economics of our joint venture, however due to confidentiality restrictions. We do not plan to disclose specific details. We expect to use the proceeds to fund our development and redevelopment projects, decrease leverage, and keep some dry capital available for opportunistic purchases.

Our leasing spreads continue to show strength. Our cash rent spreads were 18% for new leases and 8% on renewals. Our pipeline of leases under negotiation reflects similar levels of growth.

We are executing well on our redevelopment program. During the quarter we delivered a pad to Kohls at Sheraton Plaza in Hollywood, Florida. Kohls is constructing a two storey department store to replace an underperforming AMC theater. Kohls is expecting to open this fall. We also delivered a pad to Whole Foods at Mandarin Landing. They hope to open their store late this year. The addition of Whole Foods will expand our trade area from approximately 3 miles to over 10 miles.

Our leasing team is obviously excited about remerchandising the 80,000 square feet of retail space adjacent to Whole Foods. At Chestnut Square in Brevard, North Carolina, we delivered a new building to Walgreens. And finally at Boca Village Square, Publix is making good progress on upgrading and converting its store to GreenWise. This is their new high-end organic prototype. They are planning to open in June of this year. We are also working with Publix on a number of other expansion and redevelopment opportunities.

Our balance sheet is in great shape. We have limited maturities remaining this year totaling $31 million out of $1.1 billion in total debt as of March 31st. We have reduced our leverage by approximately $80 million at a weighted-average yield of 6.4% since year's end.

On the negative side, same-store NOI for the quarter was lower than expected at 1.3%. This was primarily a result of lower occupancy and higher credit loss reserves, a non-cash item. Our occupancy ended the quarter at 92.7%, down 50 basis points as compared to December 31, 2007. We are under negotiation on several larger leases that we hope to secure during the second quarter. In fact, we have over 250,000 square feet of new leases under letter of intent with retailers such as PetSmart, Staples, Office Depot and Walgreens.

Despite the tougher retail environment, the stability and durability of our shopping centers and income stream is sound. Our largest tenant category supermarkets remain strong, even in the face of a challenging economy. By way of example, our average Publix store generated $25.5 million in gross sales, where $576 of foot during 2007, up 2.5% over prior year. Our other supermarkets most notably, Supervalu, Kroger, and Winn-Dixie are also doing well.

Overall, I am pleased with our progress. We plan to use this time period to build our team, improve our systems, diversify our portfolio, forge deeper relationships with retail community, and enter into new joint ventures with various sources of institutional capital. On this last point, we just entered into a new joint venture with DRA Advisors with a focus on value-add properties. We are under contract with them on a portfolio of three properties in South Florida for approximately $50 million.

At this point, I would like to turn the call over to Tom Caputo, and then Greg Andrews will summarize our financial results.

Tom Caputo

Thanks, Jeff. I am delighted to be part of the Equity One team. I am particularly pleased to be reunited with my good friend and former colleague Jeff Olson. Jeff and I worked closely together at our former company for almost five years. During our time together we were able to significantly increase assets under managements and also complete three mergers with public companies, Mid-Atlantic Realty Trust, Price Legacy and Pan Pacific.

Over the past 45 days I had the opportunity to tour a majority of the portfolio with our leasing reps and property managers. So far, I have visited almost 100 properties, including all of the centers in South Florida, most of the centers in Central Florida, all of the centers in Atlanta, and most of the larger properties in North Carolina and South Carolina. The properties I have visited are predominantly well-located supermarket-anchored centers. The majority of our anchors are generally one of the top two supermarkets in the trade area.

Overall, the portfolio is defensive in nature. It is dominated by centers which provide everyday necessities. We do have our share of leasing challenges and we still own a handful of the centers we intend to sell when the time is right. Touring the portfolio with our leasing reps and property managers was an excellent opportunity for me to learn about each asset from the professionals running them on a day-to-day basis. It was also a great way for me to get to know our professionals personally since most of our tours began at 6:00 am and usually ended after dark.

Everyone I toured with was enthusiastic about their responsibilities and dedicated to our goals of maintaining high occupancy and well-run properties. In addition to learning about our portfolio, I have spent a significant amount of time with Jeff and Tom McDonough discussing how we can expand our geographic footprint and our investment management platform. We are proud of our new ventures with Global Retail Investors and DRA Advisors and we look forward to growing these portfolios in the near future. We also have an ongoing dialogue with several other potential institutional partners. Our discussions have been very productive, but it is too soon to comment on any specific new ventures at this time.

In connection with our joint venture activity, we are pleased to announce Lauren Holden will be joining Equity One in early May as Vice President in charge of Portfolio Management. Jeff and I had the pleasure of working with Lauren at Kimco over the past five years. Lauren's responsibilities at Kimco included major joint ventures with New York Common, GE Capital and Prudential Real Estate Investors. She is an exceptionally talented portfolio manager and will assume responsibility for the GRI and DRA joint ventures.

Our goals for the future are clear. We will continue to enhance the value of our core real estate portfolio. We intend to grow our investment management platform with multiple institutional partners and we intend to expand our portfolio from the Southeast across the country with particular emphasis on the East and West Coasts. We believe that we have assembled an experienced team which is capable of executing on this strategy once the capital markets return to some sense of normalcy. Now I'd like to turn the call over to Greg Andrews for his comments about our financial results.

Greg Andrews - Chief Financial Officer

Thanks, Tom. Good morning everyone. I'd like to run through the highlights from our balance sheet, then discuss our income statement and outlook then finally turn the call over for Q&A.

First I want to discuss the balance sheet. Given the challenges in the credit markets, our focus has been on reducing our debt and strengthening our already solid balance sheet. During the quarter, we used cash proceeds from fourth quarter dispositions to pay down $39 million in debt. The largest portion of this debt pay-down was the repurchase of $28 million of unsecured bonds on an opportunistic basis that is at less than $0.90 on the dollar.

From an accounting standpoint, the debt buyback resulted in a gain of $2.4 million or $0.03 per share in the first quarter. From an economic standpoint it meant we have reduced our debt while achieving a 7.6% yield on our costs.

Subsequent to quarter end, we used cash proceeds from the contribution of properties to our joint venture with GRI to pay down a further $45 million in debt, including $12.5 million of the balance on our line of credit where the remaining balance is just $12 million, $23million in 6.9% mortgage debt, the repayment of which is unencumbered roughly $75 million of asset value, and $9 million of bonds. These were purchased at a discount. The total effect on a year-to-date basis is reduction in debt of over $80 million at an average rate of approximately 6.4%. In addition, we currently have cash and marketable securities excluding our investment in DIM of approximately $20 million.

Recently we initiated conversations with our lead banks about renewing our $275 million line of credit which matures in January 2009. We also have been evaluating a number of alternatives for refinancing $200 million of bonds that come due in April of 2009. While there is nothing specific to report on either front at this time, I would make two general observations.

First, the bank market has remained a bright spot in the credit markets with numerous refinancing completed over the last six to nine months. Second, the new issue market for re-bond has now reopened. Two companys have now tapped the unsecured bond market this year with bond investor showing a strong interest in both fields. We expect to report more on our refinancing plans over the next couple of quarters. Turning to the income statement, we reported FFO of $0.44 per diluted share for the first quarter of 2008 as compared to $0.40 per diluted share for the first quarter of 2007. In the current quarter, FFO included $0.03 per share of gains on debt extinguishment related to the previously mentioned repurchase of bonds at a discount.

Our same property NOI increased 1.3% for the quarter. As shown on page 13 of our supplemental package, we calculate same property NOI on a cash basis, excluding redevelopment and excluding lease termination fees. Our computation included 150 of our 169 properties or 88% of our total NOI. While our first quarter same property NOI growth was below the 2% to 3% range that we set out expecting for the full year, same property revenue increased 2.4% reflecting the solid leasing spreads that we have been reporting over the last year as well as contractual rent escalation. Same-property expenses however, increased 5.3%, which was related to our decline in occupancy as well as an incremental provision for credit loss.

Our ability to drive same-property NOI growth at a higher level will be a function of aggressive leaving, focused collections and disciplined expense management. I am confident that our excellent team of leasing agents, property managers and property accountants will, as always, give 110% effort to deliver superior results. During the quarter, we recorded approximately $5. 9 million or $0.08 per diluted share in dividend income related to our 48% stake in DIM Vastgoed. DIM is a Dutch company that owns exclusively U.S. shopping centers and that declares its dividend annually in the first quarter.

We continue to explore various scenarios for investment in DIM, but have nothing to report at present. Our G&A expense came in on target for the quarter and significantly below last year's level. Last year, we had $3 million of nonrecurring write offs and management transition costs in G&A.

For the remainder of the year, our G&A run rate is expected to be moderately above the current quarter's pace due primarily to increased staffing related to our new joint venture and development businesses. Turning to our outlook, we are maintaining our FFO guidance for the year of $1.40 to $1.45 per share. Please note that in our reconciliation of FFO to net income in our press release, our guidance for net income excludes any gain on sale of property, including our contribution of properties to our joint venture with GRI.

We are still midstream in the process of this contribution, and will be reporting the gain in net income once the transaction is complete. We feel positive about maintaining our FFO guidance in light of our sale of $197 million in property into our joint venture with GRI, as well as the de-leveraging of our balance sheet by more than $80 million so far and first quarter NOI growth that was slightly below the rate we are targeting for the year.

Now, I'd like to turn the call over for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Michael Mueller from JPMorgan. Please proceed.

Joe Dazzio - JPMorgan

First question-- Was the $0.03 debt extinguishment gain considered in the prior guidance?

Greg Andrews

It was not explicitly considered in the prior guidance although we knew that we were going to have proceeds from our dispositions. We knew that we would be applying those in some form of investment in the current year.

Joe Dazzio - JPMorgan

Would you look at that as offsetting some of the dilution from the asset sales? Is it some sort of reinvestment?

Greg Andrews

Well, there was a presumption in your question, Joe, about dilution. The way I would say it is that the joint venture that we've entered into is going to free up significant amount of cash that we're applying in a variety of areas in our business. This includes our development pipeline, our redevelopment pipeline, as well as some investments in new assets perhaps in other joint ventures, as well as de-leveraging of our balance sheet. It's a mix of all of that activity and the timing of that activity that will result in what kind of return that we get on the proceeds generated from the contribution to the joint venture.

Joe Dazzio - JPMorgan

Okay. I guess on a similar theme, I believe you said you've paid down $45 million of debt this quarter or I guess in second quarter follow the GRI JV. Is there any other investments that you've either done or any other uses of cash you've already identified or have put to work that you can speak of at this point?

Greg Andrews

No, there's nothing else to comment on at this point.

Joe Dazzio - JPMorgan

Okay. And last question-- Given the new JV's, is there any update on the likelihood of using that as a form of a way to slowly move into other markets?

Jeff Olson

I think we absolutely would use it to enter into other markets, most notably, the Northeast, the West Coast, and the Mid-Atlantic region.

Joe Dazzio - JPMorgan

Okay. Thank you.

Operator

Ladies and gentlemen, please, as a reminder, please limit your question to one with one follow-up and you can please get back in the queue if you have additional questions. Your next question comes from the line of Paul Adornato from BMO Capital Markets. Please proceed.

Paul Adornato - BMO Capital Markets

Hi, good morning. I was wondering if you can tell us what prompted the increase in credit loss reserves this quarter.

Jeff Olson

In general, I think we're seeing this in every industry and across the economy, it's a tougher time. Certainly there are some tenants in our portfolio who are experiencing little more difficulty with their businesses. It's appropriate and prudent to reserve in anticipation of potential credit losses. In addition, I think we reported last quarter that we had some fallout from video stores, Hollywood Video in particular, and there were some balances there that we've also reserved. But we will pursue every right we have to collect that money from their bankruptcy.

Paul Adornato - BMO Capital Markets

Okay. And as a follow-up, could you perhaps comment on the credit quality of the local restaurants, given what everyone is hearing about food inflation?

Tom Caputo

I think it varies across the board. But I would say the restaurant category is a tougher category now. During the quarter, I think we lost about seven restaurants in our portfolio, totaling about 25,000 square feet. Our general observation has been that is a category that we need to watch carefully.

Paul Adornato - BMO Capital Markets

Okay. Thank you

Jeff Olson

Thanks, Paul.

Operator

Your next question comes from the line of David Fick from Stifel Nicolaus. Please proceed.

David Fick - Stifel Nicolaus

Good morning. I want to just following up on that question. Do you know what your percentage of local tenant NOI and GLA is compared to your national tenants? And, I guess it would include in national tenant, [five regional retail chain].

Jeff Olson

Hope we will have exactly that way. In the supplemental there's a breakout of tenants by anchor and by shop tenant, and if you look at the annual minimum rent it's about half from each.

David Fick - Stifel Nicolaus

Okay. And would you would categorize…

Jeff Olson

Which ones are nationals and which are locals or regionals. It's a tough definitional question too because many have national names but are actually local franchises.

David Fick - Stifel Nicolaus

Exactly, okay. DIM any impairment considering the shares are way down in Europe and what is your original investment there?

Jeff Olson

The original investment is, I think, $79 million and the share price is down. We view our investment there as a means to consummate a real estate transaction that we continue to be actively pursuing, and for that reason we are not taking any impairment.

David Fick - Stifel Nicolaus

The current market value is?

Jeff Olson

The current market value of DIM, I think its trading in the $15 range.

David Fick - Stifel Nicolaus

All right, okay. Thanks.

Operator

Your next question comes from the line of Jim Sullivan from Green Street Advisors. Please proceed.

Nick Vedder - Green Street Advisors

Hi, good morning. It’s Nick Vedder with Jim. Last quarter you mentioned that occupancy was going to be fairly stable in '08 versus '07. Given the recent debt, do you forecast a lower occupancy level in '08?

Jeff Olson

We think in the second quarter, just given the pipeline that's the in place, we're going to see a slight increase in occupancy. And then our sense for the third and fourth quarter, it's still little further away out there, but I think we will have some stability, when you balance it out through the year.

Nick Vedder - Green Street Advisors

Okay. And specifically with the occupancy gets, were there any markets out there that seem particularly challenging?

Jeff Olson

Yeah, the West Coast of Florida is still a tough market. We did have a little bit of fallout in Palm Beach and Broward this past quarter, too. And I really would characterize it in two categories. One would be more of the video stores. There were four that we lost during the quarter, which in almost every case is either an end-cap or L parcel. It's more a consideration of downtime than anything else. We also lost seven restaurants during the quarter, and so I’d say those are the two specific DIMs.

Nick Vedder - Green Street Advisors

Okay. And then my second question is in regards to the bond repurchase. It seems like the bond market is efficient in the sense that you have multiple buyers and sellers setting what they think is the appropriate price. What attracted you to this investment over other capital allocation decisions?

Jeff Olson

Well, markets are generally efficient, not necessarily always efficient, Nick. In this instance however, credit spreads for re-debt in general. This includes Equity One's REIT bonds have widened out significantly compared to where they were a year ago. And so it affects the ability to de-lever the company on a basis. We're effectively paying down debt with an interest of 7.6% or looked at the other way, paying $0.90 on the dollar for money that we borrowed. Its pretty compelling opportunity given that we have the cash and given that we wanted to de-lever in order to be well-prepared for potentially ongoing turmoil in the credit markets.

Nick Vedder - Green Street Advisors

Okay. Thank you.

Operator

Your next question comes from the line of Paul Morgan from SBR. Please proceed.

Tom - SBR

Hi, good morning. This is actually Tom. In light of the new JV's, can you share with us what you've seen in the market in the past quarter and give us some insight on what you're expecting going forward in terms of acquisition opportunities and pricing?

Jeff Olson

Tom?

Tom Caputo

I think that there's still a very big spread between the bid and ask in the property markets. We are not seeing a lot of high-quality properties in the market. We are seeing tons of B's and C's that are out there that are properties that maybe are too broken to pursue. So, we are pursuing on a number of fronts on both the West Coast and East Coast certain opportunities, but so far we have nothing to report.

Tom - SBR

Got you and following up on that, in sourcing acquisitions, you guys have been talking with lenders about projects that are in trouble?

Tom Caputo

Yes, we have.

Tom - SBR

Can you give any insight on that?

Jeff Olson

Really can't comment at this time, but we are pursuing a number of opportunities.

Tom - SBR

All right, thanks.

Operator

Your next question comes from the line [West Holiday] from RBC Capital Markets. Please proceed.

West Holiday - RBC Capital Markets

Hey, this is West Holiday. Can you give us an update on the Pine Ridge financing that's due in July?

Jeff Olson

Yeah, Wes, that was the mortgage I refered to in my prepared remarks that we paid off already. We were able to pay it off a little bit early without penalty. So that's done.

West Holiday - RBC Capital Markets

Okay and one quick follow-up to the debt. What kind of buyback gains do you have embedded in your current guidance?

Jeff Olson

We had the $0.03 in the first quarter, and as I mentioned, bought back a little bit more so far in the second quarter, which would equate to a gain of less than a penny.

West Holiday - RBC Capital Markets

Okay. Do you see anymore going up throughout the rest of the year in the current guidance?

Jeff Olson

As I mentioned, we have done this strictly on an opportunistic basis, so would depend on conditions in the market, but it's not something that we've baked into our forecast.

West Holiday - RBC Capital Markets

Okay. Thanks a lot.

Operator

(Operator Instructions) Your next question comes from the line of Chen Lindman from Excellence.

Chen Lindman - Excellence Nessuah Securities

Hi, question about the joint ventures. How do you decide on a certain property, which joint venture will it go to? How do you avoid conflict of interests between the different joint ventures?

Tom Caputo

That's a very good question. So far, we have two joint ventures. We have one core investor and we have one value-added investor. So it's going easy between those two. Going forward, we will have a rotation policy that will be dictated by the executives of the company and the portfolio managers to determine which opportunity is best for each of our potential investors.

Chen Lindman - Excellence Nessuah Securities

Okay. Thank you.

Operator

At this time, I'm showing you have no further questions. I would like to now turn the call back over to management for closing remarks.

Jeff Olson

Great. We thank you for your attendance and look forward to next quarter's call.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a wonderful day.

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