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EQY > SEC Filings for EQY > Form 10-Q on 7-May-2013All Recent SEC Filings

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Form 10-Q for EQUITY ONE, INC.


7-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the condensed consolidated interim financial statements and notes thereto appearing in "Item
1. Financial Statements" of this report and the more detailed information contained in our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on February 28, 2013. Overview
We are a real estate investment trust, or REIT, that owns, manages, acquires, develops and redevelops shopping centers and retail properties primarily located in supply constrained suburban and urban communities. Our principal business objective is to maximize long-term stockholder value by generating sustainable cash flow growth and increasing the long-term value of our real estate assets. To achieve our objective, we lease and manage our shopping centers primarily with experienced, in-house personnel. We acquire shopping centers that either have leading anchor tenants or contain a mix of tenants that reflect the shopping needs of the communities they serve. We also develop and redevelop shopping centers, leveraging existing tenant relationships and geographic and demographic knowledge while seeking to minimize risks associated with land development.
As of March 31, 2013, our consolidated property portfolio comprised 156 properties, including 132 retail properties and six non-retail properties totaling approximately 16.0 million square feet of gross leasable area, or GLA, 11 development or redevelopment properties with approximately 2.1 million square feet of GLA upon completion, and seven land parcels. As of March 31, 2013, our core portfolio was 91.8% leased and included national, regional and local tenants. Additionally, we had joint venture interests in 18 retail properties and two office buildings totaling approximately 3.3 million square feet of GLA. Although the economic challenges of the past several years have affected our business, especially in leasing space to smaller shop tenants located in less densely populated areas, we continued to see increasing interest from prospective small shop tenants in the first quarter of 2013 and are cautiously optimistic that this trend will continue in line with general economic conditions. The majority of our shopping centers are anchored by supermarkets, drug stores or other necessity-oriented retailers, which are less susceptible to economic cycles. As of March 31, 2013, approximately 61% of our shopping centers were supermarket-anchored, which we believe is a competitive advantage because supermarket sales have not been as affected as the sales of many other classes of retailers, and our supermarkets continue to draw traffic to these centers. We also believe the continued diversification of our portfolio, including the reinvestment of proceeds from dispositions into higher quality assets in urban markets, has made us less susceptible to economic downturns and positions us to enjoy the benefits of an improving economy.
We continue to seek opportunities to invest in our primary target markets of California, the northeastern United States, the Washington D.C. metropolitan area, South Florida and Atlanta, Georgia. We also actively seek opportunities to develop or redevelop centers in urban markets with strong demographic characteristics and high barriers to entry. We expect to acquire additional assets in our target markets through the use of both joint venture arrangements and our own capital resources, and we expect to finance development and redevelopment activity primarily with our own capital resources or by issuing debt or equity.
While we expect to see continued gradual improvement in general economic conditions during 2013, the rate of economic recovery has varied across the regions in which we operate. Volatile consumer confidence, increasing competition from larger retailers, internet sales and limited access to capital have continued to pose challenges for small shop tenants, particularly in the Southeast and North and Central Florida. We believe the continued diversification of our portfolio, including the reinvestment of proceeds from dispositions into higher quality assets, should continue to help to mitigate the impact on our business of these challenges and we anticipate that our same-property portfolio occupancy will increase by 50 to 100 basis points in 2013 and our same-property net operating income (as defined in results of operations below) for 2013 will experience an increase as compared to 2012, ranging from 2% to 3%.
The execution of our business strategy during the first quarter of 2013 resulted in:

         the sale of twelve non-core assets for aggregate gross proceeds of
          approximately $100.6 million, resulting in a net gain of $11.2 million;


         the funding of a $12.0 million mezzanine loan to an entity that
          indirectly owns a portion of the Westwood Complex, bringing our total
          financing on the complex to $107.0 million as of March 31, 2013;


         the signing of 29 new leases totaling approximately 128,056 square feet
          at an average rental rate of $16.12(1) per square foot in 2013 as
          compared to the prior in-place average rent of $13.15 per square foot,
          on a same space(2) basis, a 22.6% average rent spread;


         the renewal and extension of 45 leases totaling 203,939 square feet at
          an average rental rate of $16.27(1) per square foot in 2013 as compared
          to the prior in-place average rent of $15.51 per square foot, on a same
          space(2) basis, a 4.9% average rent spread;


         an increase in core occupancy(3) to 91.8% at March 31, 2013 from 91.2%
          at March 31, 2012, and a decrease of 30 basis points as compared to
          92.1% at December 31, 2012; and


         an increase in occupancy on a same property basis(4) to 91.7% at
          March 31, 2013 from 91.5% at March 31, 2012, and a decrease of 60 basis
          points as compared to December 31, 2012.


___________________________
(1)       Amount reflects the impact of tenant concessions and work to be
          performed by us prior to delivery of the space to the tenant.


(2)       The "same space" designation is used to compare leasing terms
          (principally cash leasing spreads) from the prior tenant to the
          new/current tenant. In some cases, leases and/or premises are excluded
          from "same space" because the gross leasable area of the prior premises
          is combined or divided to form a larger or smaller, non-comparable
          space. Also excluded from the "same space" designation are those leases
          for which a comparable prior rent is not available due to the
          acquisition or development of a new center.


(3)       Our core portfolio excludes non-retail properties, properties held in
          unconsolidated joint ventures and development and redevelopment
          properties.


(4)       Information provided on a same-property basis includes the results of
          properties that we consolidated, owned and operated for the entirety of
          both periods being compared except for properties for which significant
          redevelopment or expansion occurred during either of the periods being
          compared.

Results of Operations
We derive substantially all of our revenue from rents received from tenants under existing leases on each of our properties. This revenue includes fixed base rents, recoveries of expenses that we have incurred and that we pass through to the individual tenants and percentage rents that are based on specified percentages of tenants' revenue, in each case as provided in the particular leases.
Our primary cash expenses consist of our property operating expenses, which include: real estate taxes; repairs and maintenance; management expenses; insurance; utilities; general and administrative expenses, which include payroll, office expenses, professional fees, acquisition costs and other administrative expenses; and interest expense, primarily on mortgage debt, unsecured senior debt, term loans and revolving credit facilities. In addition, we incur substantial non-cash charges for depreciation and amortization on our properties. We also capitalize certain expenses, such as taxes, interest and salaries related to properties under development or redevelopment until the property is ready for its intended use.
Our consolidated results of operations often are not comparable from period to period due to the impact of property acquisitions, dispositions, developments and redevelopments. The results of operations of any acquired property are included in our financial statements as of the date of its acquisition. A large portion of the changes in our statement of income line items is related to these changes in our property portfolio. In addition, non-cash impairment charges may also affect comparability.
Throughout this section, we have provided certain information on a "same-property" basis. Information provided on a same-property basis includes the results of properties that we consolidated, owned and operated for the entirety of both periods being compared except for properties for which significant redevelopment or expansion occurred during either of the periods being compared. For the three months ended March 31, 2013, we moved one property totaling approximately 89,000 square feet out of the same property pool. Net operating income ("NOI") is a non-GAAP financial measure. The most directly comparable GAAP financial measure is income from continuing operations before tax and discontinued operations, which, to calculate NOI, is adjusted to add back depreciation and amortization, general and administrative expense, interest expense, amortization of deferred financing fees, impairment losses, and loss on extinguishment of debt, and to exclude straight line rent adjustments, accretion of below market lease intangibles (net), revenue earned from management and leasing services, investment income, gain (loss) on sale of real estate, equity in income (loss) of unconsolidated joint ventures, and other income. We use NOI internally as a performance measure and believe NOI provides useful information to investors regarding our financial condition and results of operations because it reflects only those income and expense items that are incurred at the property level. Our management also uses NOI to evaluate regional property level performance and to make decisions about resource allocations. Further, we believe NOI is useful to investors as a performance measure because, when compared across periods, NOI reflects the impact on operations from trends in occupancy rates, rental rates, operating costs and acquisition and disposition activity on an unleveraged basis, providing perspective not immediately apparent from income from continuing operations before tax and before discontinued operations. NOI excludes certain components from net income attributable to Equity One, Inc. in order to provide results that are more closely related to a property's results of operations. For example, interest expense is not necessarily linked to the operating performance of a real estate asset and is often incurred at the corporate level as opposed to the property level. In addition, depreciation and amortization, because of historical


cost accounting and useful life estimates, may distort operating performance at the property level. NOI presented by us may not be comparable to NOI reported by other REITs that define NOI differently. We believe that in order to facilitate a clear understanding of our operating results, NOI should be examined in conjunction with income from continuing operations before tax and before discontinued operations as presented in our condensed consolidated financial statements. NOI should not be considered as an alternative to income from continuing operations before tax and before discontinued operations as an indication of our performance or to cash flows as a measure of liquidity or our ability to make distributions.
We review operating and financial data, primarily NOI, for each property on an individual basis; therefore each of our individual properties is a separate operating segment. We have aggregated our operating segments into six reportable segments based primarily upon our method of internal reporting which classifies our operations by geographical area. Our reportable segments by geographical area are as follows: South Florida, North Florida, Southeast, Northeast, West Coast and Other/Non-retail. See Note 15 in the condensed consolidated financial statements of this report, which is incorporated in this Item 2 by reference, for more information about our business segments and the geographic diversification of our portfolio of properties, and for a reconciliation of NOI to income from continuing operations before tax and discontinued operations for the three months ended March 31, 2013 and 2012. Same Property NOI and Occupancy Information Same-property NOI increased by $1.3 million, or 3.0%, for the three months ended March 31, 2013. The increase in same-property NOI for the three months ended March 31, 2013 was primarily driven by a net increase in minimum rent due to rent commencements (net of concessions and abatements) and contractual rent increases and percentage rent increases related to higher tenant sales. Same-property net operating income is reconciled to net operating income as follows:

                                                                Three Months Ended
                                                                    March 31,
                                                               2013            2012
                                                                  (In thousands)
Same-property net operating income                         $    46,646     $   45,305
Adjustments (1)                                                    (54 )         (237 )
Same-property net operating income before adjustments      $    46,592     $   45,068
Non same-property net operating income                          10,190          5,146
Less: Properties included in the same property pool but
shown as discontinued operations
in the condensed consolidated statement of income                 (595 )         (617 )
Net operating income (2)                                   $    56,187     $   49,597


___________________________________________________


(1) Includes adjustments for items that affect the comparability of the same property results. Such adjustments include: common area maintenance costs related to a prior period, revenue and expenses associated with outparcels sold, settlement of tenant disputes, lease termination costs, or other similar matters that affect comparability.
(2) A reconciliation of net operating income to income from continuing operations before tax and discontinued operations is provided in Note 15 to the condensed consolidated financial statements included in this report. Same-property net operating income by geographical segment is as follows:
                                      Three Months Ended
                                          March 31,
                                       2013         2012
                                        (In thousands)
South Florida                      $    15,633    $ 15,061
North Florida                            6,605       6,625
Southeast                                7,898       7,884
Northeast                                6,222       5,963
West Coast                              10,288       9,772
Same-property net operating income $    46,646    $ 45,305


The following table reflects our same-property occupancy and same-property GLA (in square feet) information by segment as of March 31:

                                                 Occupancy                    GLA as of
                                      2013         2012       % Change      March 31, 2013
                                                                            (In thousands)
South Florida                          92.4 %       92.0 %        0.4  %            4,761
North Florida                          87.2 %       87.2 %          -  %            2,941
Southeast                              90.1 %       90.6 %       (0.5 )%            3,920
Northeast                              98.1 %       98.0 %        0.1  %            1,459
West Coast                             94.4 %       93.3 %        1.1  %            2,246
Same-property shopping center
portfolio occupancy                    91.7 %       91.5 %        0.2  %           15,327
Non-retail                             74.6 %       78.3 %       (3.7 )%              385
                                                                                   15,712

Comparison of the Three Months Ended March 31, 2013 to 2012 The following summarizes certain line items from our unaudited condensed consolidated statements of income that we believe are important in understanding our operations and/or those items which significantly changed in the three months ended March 31, 2013 as compared to the same period in 2012:

                                                    Three Months Ended March 31,
                                              2013                 2012            % Change
                                                  (In thousands)
Total revenue                         $        86,440        $       77,593             11.4  %
Property operating expenses                    23,348                21,006             11.1  %
Depreciation and amortization                  23,021                21,045              9.4  %
General and administrative expenses             8,897                11,382            (21.8 )%
Investment income                               2,204                 1,445             52.5  %
Equity in income (loss) of
unconsolidated joint ventures                     435                  (188 )            NM*
Interest expense                               17,445                17,080              2.1  %
Income from discontinued operations            11,624                13,951            (16.7 )%
Net income                                     27,291                21,695             25.8  %
Net income attributable to Equity
One, Inc.                                      24,593                18,982             29.6  %


___________


* NM = Not meaningful Total revenue increased by $8.8 million, or 11.4%, to $86.4 million in 2013 from $77.6 million in 2012. The increase was primarily attributable to the following:
an increase of approximately $5.2 million associated with properties acquired in 2012;

         an increase of approximately $3.0 million primarily related to rent
          commencements associated with the opening of The Gallery at Westbury,
          as well as revenue related to redevelopment projects that were under
          construction in the 2012 period but were income producing in the 2013
          period; and


         an increase of approximately $990,000 in same-property revenue due to
          an increase in expense recovery income primarily due to higher
          recoverable expenses and higher percentage rent; partially offset by


         a decrease of approximately $390,000 attributable to management and
          leasing fees primarily due to an acquisition fee charged to our New
          York Common Retirement Fund ("NYCRF") joint venture relating to its
          acquisition and financing activities in 2012.


Property operating expenses increased by $2.3 million, or 11.1%, to $23.3 million in 2013 from $21.0 million in 2012. The increase primarily consists of the following:

         an increase of approximately $1.3 million associated with properties
          acquired in 2012;


         a net increase of approximately $930,000 in same-property expenses,
          primarily attributable to higher real estate taxes, bad debt expense
          and insurance expense; and


         an increase of approximately $640,000 in operating expenses at various
          development and redevelopment project sites that were under
          construction in 2012; partially offset by


         a decrease of approximately $525,000 related to a legal settlement in
          the first quarter of 2012.

Depreciation and amortization increased by $2.0 million, or 9.4%, to $23.0 million for 2013 from $21.0 million in 2012. The increase was primarily related to the following:

         an increase of approximately $2.5 million related to new depreciable
          assets added during 2013 and 2012 and accelerated depreciation of
          assets razed as part of redevelopment projects; and


         an increase of approximately $1.5 million related to depreciation on
          properties acquired in 2012; partially offset by


         a decrease of approximately $2.0 million due to assets becoming fully
          depreciated during 2013 and 2012.

General and administrative expenses decreased by $2.5 million, or 21.8%, to $8.9 million for 2013 from $11.4 million in 2012. The decrease was primarily related to the following:

         a net decrease in professional services fees and office operational
          costs of approximately $940,000 due primarily to a decrease in
          information technology consulting expenses;


         a decrease of approximately $870,000 related to legal, consulting and
          other costs associated with acquisitions, dispositions, and the
          exploration of other potential transactions, primarily related to
          transactions completed in 2012;

a decrease of approximately $500,000 due to lower personnel related costs; and

         a decrease of approximately $185,000 in fees paid to directors as a
          result of the grant and acceleration of restricted stock awards to a
          retiring director in the first quarter of 2012 and higher stock
          compensation expense for 2012 grants to directors.

We recorded investment income of $2.2 million in 2013 compared to $1.4 million in 2012. The increase was due to interest income from loans made in 2012 and early 2013.
We recorded $435,000 of equity in income of unconsolidated joint ventures in 2013 compared to a loss of $188,000 in 2012. The increase was primarily related to pre-acquisition costs incurred in the first quarter of 2012 related to an acquisition by our joint venture with the NYCRF completed in the fourth quarter of 2012 and a decrease in interest expense due to the repayment of two mortgages during the third quarter of 2012.

Interest expense increased by $365,000, or 2.1%, to $17.4 million for 2013 from $17.1 million in 2012. The increase was primarily attributable to the following:

         an increase of approximately $1.2 million associated with our $250.0
          million term loan entered into in 2012;


         an increase of approximately $310,000 due to lower capitalized interest
          as a result of the completion of a major development project, partially
          offset by the initiation of two new development/redevelopment projects;
          and


         an increase of approximately $315,000 primarily associated with
          mortgage assumptions in 2012 related to acquisitions; partially offset
          by


         a decrease of approximately $1.2 million due to the redemption of our
          $250 million 6.25% unsecured senior notes in the fourth quarter of 2012
          and the maturity of $10 million of unsecured senior notes in the first
          quarter of 2012, partially offset by the issuance of $300 million of
          our 3.75% unsecured senior notes in the fourth quarter of 2012; and


a decrease of approximately $210,000 associated with lower mortgage interest due to the repayment of mortgages during 2012.

For 2013 and 2012, we recorded income from discontinued operations of $11.6 million and $14.0 million, respectively. The decrease is primarily attributable to the following:

         a decrease of approximately $3.1 million related to net gains from the
          disposition of operating properties; and


         a decrease of approximately $1.2 million in operating income from sold
          or held-for-sale properties; partially offset by


         a decrease in impairment losses of approximately $1.9 million on assets
          held for sale.

As a result of the foregoing, net income increased by $5.6 million to $27.3 million for 2013 from $21.7 million in 2012. Net income attributable to Equity One, Inc. increased by $5.6 million to $24.6 million for 2013 compared $19.0 million in 2012.
The following table sets forth the financial information relating to our operations presented by segments:

                                                     Three Months Ended
                                                         March 31,
                                                      2013         2012
                                                       (In thousands)
Revenue:
South Florida                                     $    23,930    $ 23,388
North Florida                                          10,451      10,558
Southeast                                              11,302      11,088
Northeast                                              18,074      11,426
West Coast                                             17,703      15,717
Non-retail                                                783         656
Total segment revenue                                  82,243      72,833
Add:
 Straight line rent adjustment                            716       1,005
 Accretion of below market lease intangibles, net       3,067       2,951
 Management and leasing services                          414         804
Total revenue                                     $    86,440    $ 77,593

Net operating income (NOI):
South Florida                                     $    16,455    $ 15,928
North Florida                                           6,738       7,509
Southeast                                               7,972       7,985
Northeast                                              12,709       7,399
West Coast                                             11,903      10,432
Non-retail                                                410         344
Total NOI                                         $    56,187    $ 49,597

For a reconciliation of NOI to income from continuing operations before tax and discontinued operations, see Note 15 to the condensed consolidated financial statements included in this report, which is incorporated herein by reference. Comparison of the Three Months Ended March 31, 2013 to 2012 - Segments South Florida: Revenue increased by 2.3% or $542,000 to $23.9 million for 2013 from $23.4 million for 2012. NOI for South Florida increased by 3.3% or $527,000 . . .

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