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Equity One Inc. (NYSE:EQY)

Q2 2008 Earnings Call

July 30, 2008 9:00 am ET

Executives

Feryal Akin - Director IR

Jeff Olson - CEO

Tom Caputo - President

Greg Andrews - CFO

Analysts

Paul Adornato - BMO Capital Markets

Craig Schmidt - Merrill Lynch

Paul Morgan - FBR

Lou Taylor - Deutsche Bank

Joe Dazio - JPMorgan

Nathan Isbee - Stifel Nicolaus

RJ Milligan - Raymond James

Richard Moore - RBC Capital Markets

Jim Sullivan - Green Street Advisors

Operator

Good day ladies and gentlemen and welcome to the Second Quarter 2008 Equity One Earnings Call. My name is Eric, and I'll be your coordinator for today. Now at this time all participants are in a listen-only mode. We will facilitate a question-and-answer session at the end of the conference. (Operator Instructions).

I will now like to turn your presentation over to host Ms. Feryal Akin, Director of Investor Relations. Please proceed.

Feryal Akin

Thank you Eric, good morning ladies and gentlemen, thank you all for joining the Equity One second quarter 2008 earnings call. With me on the call this morning are Jeff Olson, Chief Executive Officer; Tom Caputo, President; Greg Andrew, Chief Financial Officer; Tom McDonough, Chief Investment Officer; Arthur Gallagher, General Counsel, and Lauren Holden, VP of Portfolio Management.

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 report 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 statement. We will open the conference up for Q&A after the presentation.

I will turn the call over to Jeff Olson.

Jeff Olson

Great. Thank you Feryal and good morning. Thank you for joining us for our second quarter 2008 earnings call. Consistent with our previous calls, I'd like to share with you the positives and negatives of the quarter as seen from our vantage point, and then discuss how we are responding to the recent changes in the economy.

For the quarter on the positive side, first we are pleased to have increased our same-property occupancy by 40 basis points, when compared to March 31st, 2008. For the quarter, we signed 256,000 square feet of new leases driven by national credit tenants including Office Depo, Tractor Supply, Corinthian College, AT&T, UPS, GameStop, Big Lots and Dollar Tree.

Most of our second quarter leasing activity is not included in our same-property cash NOI results, as the leasing was done late in the quarter and many of the leases do not start paying rent until their stores open later this year and early 2009.

Second, our leasing spreads continue to show strength. For the quarter our cash rent spreads were up 18% on new leases and 9% on renewals. Third, our leasing pipeline is active with over 100,000 square feet of new leases under negotiation at very healthy rent spreads.

Fourth, we closed on the contribution of $177 million of property to our new joint venture with Global Retail Investors. We are closing on the remaining $24 million this quarter. We are working on adding existing and new properties to this venture.

Fifth, our redevelopment and development projects are progressing well. Publix opened its second Green Wise Store in our center in Boca Raton, and as a result our leasing activity has recently picked up on this center, where we have some very expensive vacancies.

Kohl's is on track to open it's store in our center in Hollywood this October, and Whole Foods is expected to open its store in one of our Jacksonville shopping centers in the fourth quarter. And finally Publix is expected to open its store at our Sunlake Development this December.

Sixth; we sold our last property in Texas, Rosemeade for $2.8 million. This property was shadow anchored by a closed supermarket and was 76.5% occupied at the time of sale. And seventh, our balance sheet is in great shape. Since year-end, we have reduced our leverage by approximately $130 million. As of June 30th, 2008, we have $20 million of cash; $63 million invested in short-term investment grade debt securities; and nothing drawn under our $275 million line of credit. Our debt-to-total capitalization ratio stands at less than 40%.

On the negative side, our same-property NOI growth, a negative 3% was lower than expected. This was a result of several factors including lower year-over-year occupancy, lower [CAM] and tax reimbursements, and the timing of percentage rents.

You may recall; we came up against a tough comp as our 2Q '07 NOI was up 4.6%, and second and related to our first point; we are bringing our 2008 FFO guidance down by $0.045 a share. This is principally due to our revised expectation of 2008 annual same property NOI growth of 0% to 1% as compared to our previous estimate of 2% to 3%.

We realized that we are sending somewhat conflicting signals today. On the one hand, fundamentals are improving on a sequential quarter-over-quarter basis, and leasing velocity is strong. Yet on the other hand, our year-over-year same property NOI was negative, and we are bringing down our operating expectations for the balance of the year.

While the data is seemingly conflicting, it is very much consistent with the reality of today's operating environment. We are experiencing more tenant turnovers than we have in recent years. This is not necessarily a bad thing. In many cases, we’re getting back valuable space that was leased to weaker retailers at below market rents.

Tom Caputo will provide many examples of this later. However in the short term, this tenant turnover creates more volatility in same-property NOI. It is also the primary explanation for why our leasing velocity is higher than in previous quarters. Simply put, we have more vacancy and better vacancy to lease than we have had in the past. Our leasing pipeline remains full with 118,000 square feet of leases under negotiation and rent spreads averaging 41%.

To be fair, some of these leases will require some capital. But on a net effective basis, the spreads are still in excess of 20%. We can't guarantee that all of these leases will be executed, but the data provide some sense as to the environment we are facing. Many of our recent leases do not commence until later this year or early 2009, and to be realistic, we may still experience more tenant turnover as the year progresses. Therefore we brought down our same property NOI expectations for the balance of the year.

Now, let's discuss how we are responding to this downturn. First and foremost, we are protecting our balance sheet. In the past 12 months, we have been net sellers by a margin of $220 million, using those proceeds to strengthen our balance sheet. Our debt ratios and future capital commitments are conservative by almost any standard, and are increasingly improving.

Second, we have established joint venture relationships with First Washington, CalPERS and DRA Advisors to take advantage of external growth opportunities without the need to issue our own equity. And finally, we have hired additional leasing staff to help market and fill our vacancies.

In short, we remain highly disciplined and patient in this environment, with a focus on remerchandising our centers to top tier tenants that will benefit us in the years to come.

At this point, I'd like to turn the call over to Tom Caputo, who will discuss operations and acquisitions, and then Greg Andrews, who will summarize our financial results.

Tom Caputo

Thanks Jeff and good morning. I have now been at Equity One for almost five months and have had an opportunity to visit almost all of our assets with members of our leasing team. The current economic environment presents a real challenge to owners of retail properties. Shopping patterns have changed as consumers have become more price-sensitive and reduced non-discretionary purchases. Weaker retailers will be under pressure for the foreseeable future, and we expect additional store closings during the balance of 2008.

So far Equity One has not been materially affected by most of the troubled retailers in the news, including Linens 'n Things, [Steve & Barry's], Mervyn's, Shoe Pavilion, and Starbucks. Goody's did reject a 28,000 square foot lease in our Ambassador Rose center in suburban New Orleans. Goody's continues to operate a 32,000 square foot store in our Centre Point property in Smithfield North Carolina.

Equity One has been shielded from the fallout of most big bucks tenants because of the defensive nature of our portfolio, which is dominated by supermarket anchorage centers. However, we have lost our fair share of small store tenants.

In many cases the loss of a weak retailer provides and excellent opportunity to re-lease space to a stronger operator at significantly higher rents. For instance, we recently evicted a weak restaurant operator from a pad at Sheraton Plaza in Hollywood. We currently are negotiating an LOI with a new tenant at a rent three times the amount paid by the former restaurant.

At Coral Reef we lost an 8,000 square foot local liquor store and have an executed LOI with a national drug store, who will pay almost twice the rent as the former tenant.

In the first quarter Hollywood Video rejected seven leases in our portfolio. Hollywood occupied some of the best space in our centers, and we are well on our way to re-leasing these spaces to solid operators at higher rents.

We are very disappointed in the decrease in occupancy in our portfolio over the past year. We have been very focused on reversing this trend. Last quarter, we hired five additional leasing reps and may hire additional resources in the near term.

We are encouraged by the results during the second quarter. Leasing velocity in the quarter increased to 58 new leases for 256,000 square feet. This compares favorably to a production in the first quarter when we executed 38 leases for 99,000 square feet and for all of 2007 when we averaged 50 leases for 189,000 square feet per quarter. Our current leasing pipeline is strong with over 100,000 square feet of new leases under negotiation.

As Jeff noted, our cash leasing spreads in the second quarter were strong at 18% for new leases and 9% on renewals. We will continue to negotiate the highest rent possible. However, our emphasis is and will continue to be focused on increased occupancy with strong operators.

Our joint venture with Global Retail Investors now includes eight shopping centers which contain approximately 1.4 million square feet acquired by the venture at a total cost of $234 million. We are in active discussions with GRI about additional contributions from the Equity One portfolio as well as several opportunities we are exploring in the market. We expect to significantly increase the size of the GRI venture over the next few years.

Our new joint venture with DRA Advisors is expected to close by mid-August with the acquisition of a value-added portfolio located in South Florida. The initial acquisition includes two shopping centers, which contain approximately 386,000 square feet. Equity One will have a 20% stake in the portfolio which is being acquired for $53 million.

We continue to have productive discussions with several other potential institutional partners, who are interested in joint venture opportunities with Equity One. The acquisition market for institutional quality properties continues to be difficult due to the credit markets, and the gap between seller and buyer expectations. Sellers of Class A properties are encouraged each time a strong center sells for a cap rate in the 6% range.

We are working on a few transactions which has some promise, including $23.5 million transaction which we have under letter of intent. This property is an excellent candidate for our Joint Venture program. While we do not expect the acquisition market to pick up significantly in the near-term, we are well positioned to take advantage of any opportunity which may arise through our network of contacts which include owners, lenders and brokers.

And now I'd like to turn the call over to Greg Andrews for his comments about our financial results.

Greg Andrews

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

First, the balance sheet. Given the challenges in the credit markets, our focus has been on reducing our debt and strengthening our balance sheet. During the quarter, we used $174 million in gross proceeds from the sale of properties to the GRI joint venture as follows. Approximately $90 million was used to pay down debt, including $56 million in mortgage debt with a weighted average interest rate of 7.25%; $10.5 million of unsecured senior notes, purchased at a discount for $9.7 million for a yield to maturity of 7.4%; and $24.5 million of borrowings that were outstanding under our unsecured line of credit at March 31st, 2008.

Approximately $63 million from the GRI transaction was invested in the portfolio of short-term corporate debt securities. The balance contributed to our quarter-end cash of $20 million. Year-to-date we have used proceeds from the GRI joint venture transaction and prior non-core asset sales, to reduce our debt by more than $130 million.

At quarter-end, we had no amounts outstanding under our $275 million line of credit. Subsequent to quarter-end, we used some of our cash balances to repurchase $14.4 million or our own shorter maturity debt, that is debt that comes due next year and end 2012, also purchased at a discount.

Following these purchases, we have $192 million in unsecured bonds that mature next April. Our preparation for this maturity includes three components. First, as I just mentioned, we have approximately $63 million in short maturity, investment grade, corporate debt securities that we are holding as a source of repayment for our debt.

Second, we expect to place a new non-recourse mortgage of approximately $60 million to $70 million before year-end. We've had positive reception from various non-recourse vendors that we have talked to, due to our high quality properties and solid sponsorship.

For the third part of our repayment plan, we expect to avail ourselves of any of variety of sources of capital including proceeds from asset sales, borrowings under our line of credit, term debt, additional mortgage debt in the bond market.

Our investment in shares of DIM Vastgoed, a publicly traded Dutch company that owns 21 shopping centers in the US is recorded at a fair value of $56.2 million on our balance sheet as of June 30th, 2008. Changes in the fair value are taken directly to equity. The market value of our investment in DIM declined approximately $4.6 million during the quarter based upon DIM's quarter-end closing price, and has declined $15.1 million year-to-date. This decline has occurred despite the fact that DIM has reported healthy financial results for the first six months of 2008.

For example DIM same property NOI increased 2.2% in the first half, and the companies direct results, a measure similar to FFO increased 5.7%. Historically, DIM has paid an annual dividend equal to 8% of the net asset value of the company as of the beginning of the year. In early 2008, the company changed its dividend policy. The company now intends to pay off substantially all of its direct results, again a measure similar to FFO.

Based upon the current 2008 guidance provided by DIM's management, this change in dividend policy is expected to result in a $2.1 million decrease in the dividend we receive from DIM next year. From $5.9 million paid in 2008 to $3.8 million expected in 2009. As DIM's largest shareholder, we've been engaged in conversations with DIM's supervisory and management boards regarding the strategic direction of the company.

The outcome of these conversations remains uncertain, but may result in changes in the degree of influence or control we have on DIM, the method by which we account for investment in DIM and whether we report an impairment on our investment.

Turning to the income statement, we reported FFO of $0.32 per diluted share for the second quarter of 2008, as compared to $0.34 per diluted share for the second quarter of 2007. In the current quarter, FFO included approximately $1.3 million or $0.02 a share of income related to lease rejection damages due by a tenant formerly in bankruptcy. FFO this quarter also included $696,000 or about $0.01 per share of gains on debt extinguishment related to the previously mentioned repurchase of bonds at a discount.

Finally we recognized fees from our joint venture with GRI of approximately $711,000, which includes acquisition fees related to the properties placed into the joint venture. There were no gains on land sales this quarter in contrast with the second quarter last year, when we recorded $518,000 or approximately $0.01 per share of such gains.

Our same property NOI decreased 2.9% for the quarter, compared to an increase of 4.6% for the same quarter last year. Drilling down, same property revenue declined 0.2%, while same property operating expenses increased 6.5%.

Our year-to-date same-property NOI declined 0.6%. 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 includes 146 of our 162 properties or approximately 85% of our total NOI.

The quarter and year-to-date declines in NOI reflect primarily, lower occupancy and lower common area maintenance, tax, and insurance recovery rates. In addition, in the second quarter we recorded lower percentage rent than a year ago because of a shift in timing of the receipt of these sums to primarily the first quarter.

As noted earlier our aggressive leasing efforts are taking hold, and we ended the quarter with a rent roll that was approximately 0.3% higher than at the beginning of the quarter. Not all the rents on the new leases will kick in right away, but the growth in contractual rent bodes well for the future.

Our G&A for the second quarter was $7.6 million or about $750,000 higher than the $6.8 million, we reported last quarter. Roughly half this increase reflects the timing of certain expenses namely, our ICSC convention costs and certain directors' fees. The other half reflects increased staffing and related office costs. On a go-forward basis we expect G&A to be in the low $7 million range per quarter for the balance of the year.

Turning to our outlook, we are reducing our FFO guidance for the year from our prior guidance of $1.40 to $1.45 per share to our new guidance of $1.36 to $1.40 per share. The primary reason for the lower guidance is that we now expect full year 2008 same property NOI growth to be 0% to 1% compared to our earlier guidance of 2% to 3%.

In addition, we are positioning our balance sheet for substantial liquidity as compared to last year. Holding cash and short-term securities has a modestly dilutive effect on FFO, although we believe it to be a prudent response to current conditions in the capital markets.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question comes from the line of Paul Adornato with BMO Capital Markets. Please proceed.

Paul Adornato - BMO Capital Markets

Hi, good morning. I was wondering if you could provide a little bit more color on the lower CAM and expense reimbursements this quarter. Is that a trend that we should expect to continue going forward?

Greg Andrews

Paul this is Greg. As you know, last year we recorded CAM and tax and insurance recoveries throughout the year that proved that by the end of the year when we trued everything up to be a little bit on the aggressive side, and this year we really want to make sure that we are booking that income in a manner where it will be consistent quarter-to-quarter. So I do think that you will see that continue for the year, but I think when we get to the fourth quarter you'll see that our recovery rate will be consistent with the product orders of the year and better than it was last year.

Paul Adornato - BMO Capital Markets

Okay, thank you.

Operator

Your next question comes from the line of Craig Schmidt with Merrill Lynch. Please proceed.

Craig Schmidt - Merrill Lynch

Yeah, in regard to the increased turnover of the tenancy, I assume that is focused on local and regional tenants.

Jeff Olson

Yes, that's correct Craig.

Craig Schmidt - Merrill Lynch

To what extent do you think you'll be able to re-tenant those with national tenants, sort of on a percentage basis, you know, half or more?

Tom Caputo

Craig, its Tom Caputo. I think that what we are doing is we're re-leasing the space to stronger regionals. I think the tenants that we've lost are primarily, one-offs or maybe two store operators, and we're replacing them more with regional chains, a few nationals but mostly regional chains.

Craig Schmidt - Merrill Lynch

And typically isn't it the locals that pay the higher rent, but it sounds like you think you can actually increase the rents here even though you're sort of making that shift to the stronger regionals.

Tom Caputo

Well one of the things that has occurred is, we have lost of some of the very best space in our portfolio using the example of Hollywood Video, and that space usually on an [encap] could be a free standing pad, and those spaces are very attractive to strong operators because they are in very productive centers usually anchored by a productive supermarket, and so the centers are very active in the spaces attractive to stronger operators.

Craig Schmidt - Merrill Lynch

Thank you.

Operator

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

Paul Morgan - FBR

Morning. If I look at the same store, the components of the same store NOI and I try to project those forward, you talked about Greg I guess that the expense line. Is it correct to say that it will be like this and then in the fourth quarter your change will anniversary and we should get kind of a more normalized number there, just a clarity?

Greg Andrews

Yeah, I think our recovery ratio in the fourth quarter of last year was somewhere in the 70, mid-70% range. I think we're now running in the 80's, and we expect that to be consistent in each quarter.

Paul Morgan - FBR

And then on the revenue side of the equation, given the 40% spreads on the leases you have under negotiation. I mean, how do you expect that to impact the same store revenue number over the next few quarters, assuming that most of those that are under negotiation get signed.

Greg Andrews

Yeah, Paul we do you expect a lot of benefit from that, but just due to the fact that it takes time to execute a lease to them, to turn possession of the space over to the tenant and then for the tenant to get open for business, the impact of leasing activity probably from here forward will primarily benefit us in 2009, not in 2008.

Paul Morgan - FBR

Right. So that 0% to 1% that you're giving for 2008, I mean that's getting hit by both the deals that you have done, not really hitting the numbers until next year as well as the change, and the way you're looking at CAM, both of those should be more positive I guess as you look out into 2009. Is that one way of looking at it?

Greg Andrews

Yes, I think that's correct. I mean the revenue growth was for this quarter, was slightly negative. Once some of that leasing activity that we've undertaken and are continuing to do, kicks in we hope we'll see revenue growth be a positive number as you would normally expect it to be.

Paul Morgan - FBR

Thanks.

Operator

Your next question comes from the line of Lou Taylor with Deutsche Bank. Please proceed.

Lou Taylor - Deutsche Bank

Hi, thanks good morning guys. Greg is it fair to say that in terms of the driver of the same store NOI, is it primarily occupancy?

Greg Andrews

Correct. I mean on a same-property basis year-over-year our occupancy was down 110 basis points and a good proportion of that Lou was in the shop space category. So that carried over into the recovery income line, but yes it's primarily occupancy.

Lou Taylor - Deutsche Bank

Okay. Second question just pertains to DIM. I mean in your comments you seemed to reference a possible impairment in that investment there. Can you just expand on that a little bit, is that just given the lower NAV's or appraised values, flowing through the DIM valuation.

Greg Andrews

As is stands today based on our view of the underlying value of the real estate, we do not believe that there is an impairment. But that's something that needs to be tested each and every quarter going forward. So I can't predict where valuations might go in the future.

Lou Taylor - Deutsche Bank

But do you think that there might be some risk that based on higher cap rates there could be impairment in your (inaudible).

Greg Andrews

Well, certainly higher cap rates equate to lower property values and so that would impact the NAV assessment for DIM.

Lou Taylor - Deutsche Bank

Okay and then the last question just for Tom or for Jeff. This year has been a little unusual in terms of the bankruptcies mid-year whether that's (inaudible) or Steve & Barry's. As you look at your portfolio are you concerned that you might have some surprises between now and the end of the year for tenants who just may decide they're just not going to survive the next six months or so?

Jeff Olson

I think in terms of the change we are pretty well protected with the exception of Goody's. We've lost one Goody's already and we will see what happens with the second one. But in terms of other national chains, so far we have no exposure to the names we mentioned before at all and I think we do have perhaps some exposure to local tenants or regional tenants. We just don't know it yet.

Lou Taylor - Deutsche Bank

Okay. Any sense of magnitude there in terms of concerns about locals?

Jeff Olson

Well I think that in this economy local tenants are having a tough time everywhere, and if you think about it, probably some small businesses, probably got their seed money from a subprime mortgage or a line of credit or something like that. So a little mom-and-pop operator when the economy contracts the way this economy has contracted suffers, and so I think a lot of our turnover has been a result of that. But other than that, we don't see anything out there, other than it's a tough economy.

Lou Taylor - Deutsche Bank

Okay, thank you.

Operator

Your next question comes from the line of Michael Mueller with JPMorgan. Please proceed.

Joe Dazio - JPMorgan

Good morning guys, Joe Dazio here with Mike. A couple of questions for Greg. The $14.4 million of short-term debt that was repurchased, was that subsequent to 3Q or 2Q I'm sorry?

Greg Andrews

Correct, that was subsequent to, that was in the third quarter.

Joe Dazio - JPMorgan

So was that not related to the debt gain booked in the second quarter?

Greg Andrews

Correct. So there'll be an incremental debt gain in the third quarter that right now we estimate will be about, at about a penny.

Joe Dazio - JPMorgan

Okay. And then, last thing, can you just kind of remind me how the fees from the joint ventures work again.

Greg Andrews

Well we haven't disclosed in any detail the fee structure. What we've disclosed is that we earn all usual fees that you would expect in these kind of arrangements, including acquisition, management and [net] leasing fees.

Joe Dazio - JPMorgan

Okay, thanks.

Greg Andrews

But my point with respect to the second quarter is that included acquisition fees, so just for the purpose of modeling you wouldn’t expect a portion of that to be recurring, although we will be selling another $24 million into the joint venture in the third quarter.

Joe Dazio - JPMorgan

Great thank you.

Operator

Your next question comes from the line of Nathan Isbee with Stifel Nicolaus.

Nathan Isbee - Stifel Nicolaus

Hi, good morning. Just following up on those occupancy questions, how many more store closures are included in your updated guidance for '08?

Jeff Olson

In general, we're expecting relatively flat occupancy from here for the balance of the year.

Nathan Isbee - Stifel Nicolaus

Okay. And that includes flat store closure, it's not just that you are going to keep maintaining occupancy with new tenants on some other space.

Jeff Olson

That would be a net number.

Nathan Isbee - Stifel Nicolaus

Okay. Alright, thank you very much.

Operator

Your next question is a follow-up question from the line of Paul Adornato with BMO Capital Markets. Please proceed.

Paul Adornato - BMO Capital Markets

Yes, can you tell us the cap rate at which the properties were contributed or sold to the JV?

Jeff Olson

We have not disclosed the cap rate on that purchase for confidentiality reasons associated with the buyer.

Paul Adornato - BMO Capital Markets

Okay. And I guess related to that, you do have a strong balance sheet, and I know you've been kind of looking to perhaps diversify out of region. Can you talk about the cap rate trends that you see in the market overall, and if we're getting close to something that might be attractive on the acquisition side?

Greg Andrews

I think that the difficulty in commenting on that is that the number of transactions that have occurred over the last 12 months is miniscule compared to the years prior. And I think we get a little bit of anecdotal information here and there, but there is really not a trend line. What is very clear is that properties that are in infill markets that are well-anchored with strong sales still are hanging around the 6% range, might be 6% to 6.5%.

What's also clear is that a lot of the property that's on the market now is what we would describe as Bs and Cs, it might be just lower quality assets or might be lower quality locations. There are plenty of those out there and the Cap rates there definitely have moved fairly significantly. And what used to be maybe 6.5% to 7% could be 8 plus or whatever at this moment in time. But this is a very difficult market to comment on cap rates because there's just not enough trends.

Paul Adornato - BMO Capital Markets

And a follow-up based on the DIM question. And that is, will the impairment decision be based on DIM's stock price or on your evaluation of the, value of the underlying assets.

Jeff Olson

It's a good question Paul. And in our 10-K and 10-Q we list a whole host of factors that we evaluate in considering whether there is an impairment that is other than temporary, and so I would refer you to our public filings that refer to a whole host of issues that we consider in making that assessment.

Paul Adornato - BMO Capital Markets

Okay, thank you.

Operator

Your next question comes from the line of [RJ Milligan] with Raymond James. Please proceed.

RJ Milligan - Raymond James

Good morning, for the quarter have you guys seen any varying trends in your individual markets, or could you probably, possibly comment further on what you're seeing in some of the larger markets in South Florida, Atlanta or Orlando?.

Jeff Olson

I'd say for the quarter, South Florida probably impacted our numbers more than any other region. Our occupancy was down 250 basis points year-over-year, and I think it's really important to note that occupancy loss was also one of our highest priced rents, because the space was in some of our best shopping centers.

It's also where we have a high percentage of our leasing activity, going on, on these vacancies. So we did experience more tenant turnover in South Florida, primarily in some of the local shops have gone out of business. But we have looked at this as an opportunity to back-fill these vacancies with stronger operators.

RJ Milligan - Raymond James

Okay, thank you.

Operator

Your next question comes from the line of Richard Moore with RBC Capital Markets. Please proceed.

Richard Moore - RBC Capital Markets

Hi good morning guys. With what is apparently a dividend cut by DIM, and what seems to be the view on you're guys [plan] at least we got some concern that there is going to be an impairment, Jeff could you tell a little bit what your strategy is with this investment?

Jeff Olson

First and foremost we think the stock does not reflect the current value of their real estate, and we think it's a good investment on that basis alone. We have taken an increased profile with both the management board and the supervisory board to evaluate all of the alternatives, and I would say we are more engaged in discussions now than we have been in the past.

Richard Moore - RBC Capital Markets

Are these - these appraisals, I assume these are sort of independent appraisals. Is that right of DIM?

Greg Andrews

DIM reports under the International Financial Reporting Standards or IFRS. So yes they have their properties appraised on a routine basis.

Richard Moore - RBC Capital Markets

Okay. I mean there seems to be some diminution in the value of this thing. And I'm a little concerned that, I was just going to sort of linger and we're going to watch it kind of disappear into the ground or it sounds like your being more proactive, I guess it's positive. But I guess I'm not really sure where this is going.

Greg Andrews

Well what I tried to point out Rich, just to make a distinction that I do think it is important, is that, the companies fundamentals have not really changed. In terms of the underlying cash flow that the portfolio is generating, it has been very stable over time.

What happened was the company set a dividend policy a while back that was based on NAVTEQ, and as you know, with cap rates decreasing over the last three, four, five years, they ended up setting a dividend that was effectively too high, and this year they recognized that that policy needed to be changed and so they reset the dividend at the appropriate level. But it doesn’t reflect any deterioration in the underlying fundamentals of the properties.

Richard Moore - RBC Capital Markets

Okay, fair enough Greg. And then if I could on this non-recourse debt your talking about, that you mentioned on the call. I assume that some sort of cross collateralized loan that you're thinking about, is that right?

Greg Andrews

No actually it's just one of our several mortgages on properties but not cross collateral [line].

Richard Moore - RBC Capital Markets

Okay. And on that, what's the, how would you access the lender environment. I mean who would the interested parties be do you think in these mortgages, and would there be any changes or you sense any changes in what they're demanding in terms?

Greg Andrews

I think the primary lender environment is the life insurance companies, and I think as they look at their book of business they are increasingly interested in working with companies with good sponsorship, and so while there is a limited amount of capital for them to (inaudible) in the mortgage market, they're seeking to place it with companies that have good standing, and so we've had good reception from that market.

Richard Moore - RBC Capital Markets

Okay. And as far as terms go anything to highlight there?

Greg Andrews

No. I mean the only thing I would say is, the ability to get interest only for extended periods as it's now, pretty much gone.

Richard Moore - RBC Capital Markets

Okay, great. Thanks guys.

Operator

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

Paul Morgan - FBR

Is there any color you could provide about the $53 million value added deal that you're closing next month? What kind of centers are they and what the value-add component you expect to be?

Jeff Olson

There are two shopping centers, one in (inaudible) and one in Palm Beach County. They have been owned by a family and the family has done little in the way of encouraging new tenants to come in, in any way, shape or form. They've been very under-managed and there is significant vacancy in both of them.

This is a rather unusual situation and that I think the family recognizes that they're probably not the best people to the operating the properties, and we've actually been leasing the properties for the last two or three months, and we have some traction some new leases which will, so we got a little head start before we close.

But they're clearly, they're both supermarket anchored, one is a national chain and one is very much of a regional chain. The regional chain does exceptionally well in that center is about 60% leased and the other one is probably about 70% leased with the national chain, and it needs a little bit of cosmetic work. Both centers need some cosmetics, and they need a lot of hands on leasing to make them successful.

Paul Morgan - FBR

Thanks.

Operator

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

Jim Sullivan - Green Street Advisors

Thanks. Question on your new leases. You talked a bit about the rent spread on your new leases, but according to page 18 of your supplemental the TIs associated with those leases has grown considerably for the quarter in 1949 per square foot versus $2 to $3 a square foot in the first half of last year. Can you talk about the TIs that you have in offer and how they impact the overall lease economic?

Jeff Olson

Hey Jim, this is Jeff. I'd be happy to. During the quarter we had a number of leases that were not part of the same space pool, because they're not occupying the same box dimensions as the prior tenant. So our TI in the supplemental reflects those higher costs. If you stripped out the TI on the non-comparable pool, it would be closer to $13 a foot rather than the $19.49. And $13 is still higher than normal, but that $13 includes three anchor leases, Office Depo, Tractor Supply and Dollar Tree that are all back filling vacant anchors and really are helping stabilize some of these centers. So it was a little higher than normal, reflective of those anchor tenants.

Jim Sullivan - Green Street Advisors

Has you average lease term changed at all?

Jeff Olson

I would say no.

Jim Sullivan - Green Street Advisors

The cost per foot is, per year is considerably higher now than it was a year ago. Is that fair to say?

Jeff Olson

Well, again it pertains to those three leases. And when you throw anchor leases in small store leases, certainly we have more lease term of those anchor leases than we would get on the small stores.

Jim Sullivan - Green Street Advisors

Okay. And then Greg switching to the mortgage financing, your decision to not provide recourse, can you just touch on that and do you think you could get considerably better pricing if you were to provide recourse versus non?

Greg Andrews

I don't know, I don't think that would be the case Jim. In other words, non-recourse mortgage market is still very much active as it always has been.

Jim Sullivan - Green Street Advisors

Okay, thanks.

Operator

Your next question is a follow-up question from the line of Nathan Isbee with Stifel Nicolaus.

Nathan Isbee - Stifel Nicolaus

Yeah, hi. Just trying to get a sense on the potential for more store closures; how many small shop tenants would you say are on your current watch list now?

Jeff Olson

Now I don't have an exact number for you. We do keep a -- what should I do. We do keep a study of average tenants, and there are about 100 tenants in our portfolio that we have our eyes on, that account for about 600,000 square feet.

Nathan Isbee - Stifel Nicolaus

Okay, that's helpful. Thank you.

Operator

We're showing no more questions in queue at this time. I would like to turn the call over to Mr. Jeff Olson for closing remarks.

Jeff Olson

Well thank you for your attendance on the call, and we look forward to talking to you next quarter.

Operator

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect. Have a good day.

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Source: Equity One Inc. Q2 2008 Earnings Call Transcript
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