Description
Equity One, Inc. Director, 10% Owner CHAIM KATZMAN bought 500,000 shares on 8-14-2012 at $ 21.2
BUSINESS OVERVIEW
he Company
We are a real estate investment trust, or REIT, that owns, manages, acquires, develops and redevelops shopping centers primarily located in supply constrained suburban and urban communities. We were organized as a Maryland corporation in 1992, completed our initial public offering in May 1998, and have elected to be taxed as a REIT since 1995.
As of December 31, 2011, our consolidated property portfolio comprised 165 properties totaling approximately 17.2 million square feet of gross leasable area, or GLA, and included 144 shopping centers, nine development or redevelopment properties, six non-retail properties and six land parcels. As of December 31, 2011, our core portfolio was 90.7% leased and included national, regional and local tenants. Additionally, we had joint venture interests in 17 shopping centers and two office buildings totaling approximately 2.8 million square feet. For a listing of the properties in our core portfolio, refer to Item 2 - Properties.
In this annual report, references to “we,” “us” or “our” or similar terms refer to Equity One, Inc. and our consolidated subsidiaries, including DIM Vastgoed, N.V., which we refer to as DIM, a Dutch company in which we acquired a controlling interest in the first quarter of 2009, and C&C (US) No. 1, Inc., which we refer to as CapCo, in which we acquired a controlling interest through a joint venture with Liberty International Holdings Limited, or LIH, in the first quarter of 2011.
Change in Policies
Our board of directors establishes the policies that govern our operating, investment and capital strategies, including, among others, the development and acquisition of shopping centers, tenant and market focus, debt and equity financing policies, and quarterly distributions to our stockholders. The board may amend these policies at any time without a vote of our stockholders.
Segment Information
We review operating and financial data for each property on an individual basis; therefore, each of our individual properties is a separate operating segment. We have aggregated our operating segments in five 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: (1) South Florida – including Miami-Dade, Broward and Palm Beach Counties; (2) North Florida and the Southeast – including all of Florida north of Palm Beach County, Georgia, Louisiana, Alabama, Mississippi, North Carolina, South Carolina and Tennessee; (3) Northeast – including Connecticut, Maryland, Massachusetts, New York and Virginia; (4) West Coast – including California and Arizona; and (5) Other/Non-Retail – which is comprised of our non-retail assets. See Note 20 in the consolidated financial statements of this annual report for more information about our business segments and the geographic diversification of our portfolio of properties.
Tax Status
We elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with our taxable year ended December 31, 1995. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we currently distribute at least 90% of our REIT taxable income to our stockholders. The difference between net income available to common stockholders for financial reporting purposes and taxable income before dividend deductions relates primarily to temporary differences, such as real estate depreciation and amortization, deduction of deferred compensation and deferral of gains on sold properties utilizing like kind exchanges. Also, at least 95% of our gross income in any year must be derived from qualifying sources. It is our intention to adhere to these requirements and maintain our REIT status. As a REIT, we generally will not be subject to corporate level federal income tax, provided that distributions to our stockholders equal at least the amount of our REIT taxable income as defined under the Code. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if we qualify for taxation as a REIT, we may be subject to state income or franchise taxes in certain states in which our properties are located and excise taxes on our undistributed taxable income.
We have elected to treat certain of our subsidiaries as taxable REIT subsidiaries, each of which we refer to as a (“TRS”). In general, a TRS may engage in any real estate business and certain non-real estate businesses, subject to certain limitations under the Code. A TRS is subject to federal and state income taxes. Our investment in certain land parcels, our investment in DIM and certain other real estate and other activities are being conducted through our TRS entities. Our current TRS activities are limited and they have not incurred any significant income taxes to date.
We own a controlling interest in DIM, which is not a REIT. DIM is not consolidated with us for tax purposes and is subject to U.S. corporate income tax. However, it did not pay any U.S. federal income tax for the previous four years as a result of its taxable operating losses, but is subject to the alternative minimum tax for the 2011 fiscal year.
Governmental Regulations Affecting Our Properties
We and our properties are subject to a variety of federal, state and local environmental, health, safety and similar laws.
Environmental Regulations. The application of these laws to a specific property depends on a variety of property-specific circumstances, including the current and former uses of the property, the building materials used at the property and the physical layout of the property. Under certain environmental laws, we, as the owner or operator of properties currently or previously owned, may be required to investigate and clean up certain hazardous or toxic substances, asbestos-containing materials, or petroleum product releases at the property. We may also be held liable to a federal, state or local governmental entity or third parties for property damage, injuries resulting from the contamination and for investigation and clean up costs incurred in connection with the contamination, whether or not we knew of, or were responsible for, the contamination. Such costs or liabilities could exceed the value of the affected real estate. The presence of contamination or the failure to remediate contamination may adversely affect our ability to sell or lease real estate or to borrow using the real estate as collateral. We have several properties that will require or are currently undergoing varying levels of environmental remediation as a result of contamination from on-site uses by current or former owners or tenants, such as gas stations or dry cleaners.
Americans with Disabilities Act . Our properties are subject to the Americans with Disabilities Act, or ADA. Under this act, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The act has separate compliance requirements for “public accommodations” and “commercial facilities” that generally require that buildings and services, including restaurants and retail stores, be made accessible and available to people with disabilities. The Act’s requirements could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties or, in some cases, an award of damages.
Although we believe that we are in substantial compliance with existing regulations, including environmental and ADA regulations, we cannot predict the impact of new or changed laws or regulations on properties we currently own or may acquire in the future. Other than as part of our development or redevelopment projects, we have no current plans for substantial capital expenditures with respect to compliance with environmental, health, safety and similar laws, and we carry environmental insurance which covers a number of environmental risks for most of our properties.
Competition
There are numerous commercial developers, real estate companies, REITs and other owners of real estate in the areas in which our properties are located that compete with us with respect to the leasing of our properties and in seeking land for development or properties for acquisition. Some of these competitors have substantially greater resources than we have, although we do not believe that any single competitor or group of competitors in any of the primary markets where our properties are located is dominant in that market. This level of competition may reduce the number of properties available for development or acquisition, increase the cost of development or acquisition or interfere with our ability to attract and retain tenants.
All of our existing properties are located in developed areas that include other shopping centers and other retail properties. The number of retail properties in a particular area could materially adversely affect our ability to lease vacant space and maintain the rents charged at our existing properties. We believe that the principal competitive factors in attracting tenants in our market areas are location, price, anchor tenants and maintenance of properties. Our retail tenants also face competition from other retailers (including internet retailers), outlet stores, super centers and discount shopping clubs. This competition could contribute to lease defaults and insolvency of our tenants.
Tenants
Publix Super Markets is our largest tenant and accounted for approximately 1.8 million square feet, or approximately 10.6% of our gross leasable area, at December 31, 2011, and approximately $14.5 million, or 6.9%, of our annual minimum rent in 2011.
Employees
Our headquarters are located at 1600 N.E. Miami Gardens Drive, North Miami Beach, Florida 33179. At December 31, 2011, we had 185 full-time employees and we believe that our relationships with our employees are good.
Available Information
The internet address of our website is www.equityone.net . In the investors section of our website you can obtain, free of charge, a copy of our annual report on Form 10-K, our quarterly reports on Form 10-Q, our Supplemental Information Packages, our current reports on Form 8-K, and any amendments to those or other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file or furnish such reports or amendments with the SEC. Also available in the corporate governance section of our website, free of charge, are copies of our Corporate Governance Guidelines, Code of Conduct and Ethics and the charters for our audit committee, compensation committee and nominating and corporate governance committee. We intend to provide any amendments or waivers to our Code of Conduct and Ethics that apply to any of our executive officers or our senior financial officers on our website within four business days following the date of the amendment or waiver. The reference to our website address does not constitute incorporation by reference of the information contained on our website and should not be considered a part of this report.
CEO BACKGROUND
James S. Cassel
Mr. Cassel was elected as a director in April 2005. Since 2010, Mr. Cassel has served as Co-founder and Chairman of Cassel Salpeter & Co., LLC, a middle market investment banking firm. From 2006 until December 2009, Mr. Cassel served as Vice Chairman and Head of Investment Banking of Ladenburg Thalmann & Co. Inc., an investment banking company that in 2006 purchased Capitalink, L.C., a South Florida based investment banking company founded by Mr. Cassel in 1998 and where he served as its president from 1998 to 2006. From 1996 to 1998, he served as president of Catalyst Financial, an investment banking company. Mr. Cassel received a B.S. from American University and a Juris Doctorate from the University of Miami. Mr. Cassel is 56 years old. Our board of directors has concluded that Mr. Cassel’s qualifications to serve on our board include his background as an investment banker and as a real estate and corporate securities attorney and his experience and familiarity with capital market activities in general.
Cynthia R. Cohen
Ms. Cohen was elected as a director in 2006. She founded Strategic Mindshare, a strategic management consulting firm serving retailers and consumer product manufacturers, in 1990 and, since that time, has served as its president. Ms. Cohen is a director of bebe stores, inc., a specialty apparel retailer, and Steiner Leisure Limited, a spa operator, both of which are public companies. Ms. Cohen also serves on the executive advisory board for the Center for Retailing Education and Research at the University of Florida. Ms. Cohen previously served as a director of Hot Topic, Inc. and The Sports Authority. She is a graduate of Boston University. Ms. Cohen is 59 years old. Our board of directors has concluded that Ms. Cohen’s qualifications to serve on our board include her extensive experience in the retail industry, as a retail consultant and as a board member of several public retail companies.
David Fischel
Mr. Fischel was appointed as a director in January 2011 in connection with our joint venture acquisition of Capital & Counties USA, Inc. from Liberty International Holdings Limited (“LIH”). We and several of our stockholders have agreed, pursuant to a stockholders agreement, that until January 4, 2020 (or until such agreement is earlier terminated), as long as LIH or its affiliates beneficially own (including shares issuable upon redemption of joint venture units), in the aggregate, (i) prior to February 3, 2015, 50% of the shares of our common stock held by LIH at the closing of the transaction and (ii) thereafter, three percent or more of the total outstanding shares of our common stock, it may designate one nominee for election to our board of directors. LIH has chosen Mr. Fischel as its nominee pursuant to this agreement. Since 2001, Mr. Fischel has served as the chief executive officer of Capital Shopping Centres Group PLC (“CSC”), a FTSE 100 listed UK REIT and the parent company of LIH. Mr. Fischel joined CSC in 1985 and previously served as its finance director and managing director. He has served as a director of CSC since 1998 and served as a director of Capital & Counties Properties PLC, a UK listed REIT that demergered from CSC in 2010, from February 2010 to February 2011. Mr. Fischel is a chartered accountant in the United Kingdom and is 53 years old. Mr. Fischel’s qualifications to serve on our board include his experience as a real estate executive, having served as an executive of CSC for many years, and his experience as a chartered accountant.
Neil Flanzraich
Mr. Flanzraich was elected as a director in April 2005. Mr. Flanzraich is currently the Executive Chairman of Tigris Pharmaceuticals, Inc. and the Executive Chairman of ParinGenix, Inc., both privately-owned biotech companies. Mr. Flanzraich is also a founder and principal of Leviathan Biopharma Group, LLC, a venture capital firm. From May 1998 to 2006, he served as a director, vice chairman and president of IVAX Corporation, a company specializing in the discovery, development, manufacturing and marketing of branded and generic pharmaceuticals and veterinary products, and as a director of IVAX Diagnostics, Inc. IVAX was acquired by Teva Pharmaceuticals in January 2006. From 1995 to 1998, Mr. Flanzraich was a shareholder and served as chairman of the life sciences legal practice group of Heller Ehrman White & McAuliffe, formerly a San Francisco-based law firm. From 1981 to 1995, he served in various capacities at Syntex Corporation, a pharmaceutical company, most recently as its senior vice president, general counsel and a member of the corporate executive committee. In addition to our board of directors, he is also a director of BELLUS Health Inc. (formerly known as Neurochem Inc.), a biotechnology company, and Chipotle Mexican Grill, Inc., a chain of Mexican restaurants. Both of these are public companies. Mr. Flanzraich served as a director of Rae Systems, Inc. from December 2000 until March 2009, of Javelin Pharmaceuticals, Inc. from June 2006 until its merger with Hospira, Inc. in July 2010, and of Continucare Corporation from March 2002 until its acquisition by Metropolitan Health Network in October 2011. Additionally, he was a member of the Board of Directors of privately-owned Outcomes Health Information Solutions, LLC, a provider of healthcare data retrieval, analytics and management services, until his resignation in January 2012. Mr. Flanzraich is also a member of the Advisory Board of The Wolfsonian-FIU, a museum of art, design and communication. Mr. Flanzraich received an A.B. degree from Harvard College (phi beta kappa, magna cum laude) and a Juris Doctorate from Harvard Law School (magna cum laude). Mr. Flanzraich is 68 years old. Our board of directors has concluded that Mr. Flanzraich’s qualifications to serve on our board include his experience as a senior corporate executive for public companies for over 25 years and his experience as an investor in, and member of the boards of directors of, numerous publicly-traded companies.
Nathan Hetz
Mr. Hetz was elected as a director in November 2000. Since November 1990, Mr. Hetz has served as the chief executive officer, director and principal shareholder of Alony Hetz Properties & Investments, Ltd., an Israeli corporation that specializes in real estate investments in Israel, Switzerland, Great Britain, Canada and the United States, the shares of which are publicly traded on the Tel-Aviv Stock Exchange. Mr. Hetz currently serves as a director of First Capital Realty Inc., an Ontario-based real estate company, the common stock of which is listed on the Toronto Stock Exchange and which may be deemed to be controlled by Gazit-Globe, Ltd., one of our principal, indirect stockholders, Amot Investments Ltd., a real estate company, the shares of which are publicly traded on the Tel-Aviv Stock Exchange, and PSP Swiss Property, a real estate company, the shares of which are publicly traded on the Swiss Stock Exchange. Mr. Hetz received a B.A. in accounting from Tel-Aviv University in Israel and is a certified public accountant in Israel. Mr. Hetz is 59 years old. Our board of directors has concluded that Mr. Hetz’ qualifications to serve on our board include his experience as an international real estate executive, board member and investor, having investments in, and serving as an executive and board member of, numerous publicly-traded real estate companies.
Chaim Katzman
Mr. Katzman has served as the chairman of our board since he founded Equity One in 1992. He also served as our chief executive officer until December 2006 and president until November 2000. Mr. Katzman has been involved in the purchase, development and management of commercial and residential real estate in the United States since 1980. Mr. Katzman purchased the controlling interest of Norstar Holdings Inc. (formerly known as Gazit Inc.), a publicly-traded company listed on the Tel-Aviv Stock Exchange, and one of our principal, indirect stockholders, in May 1991, has served as the chairman of its board and chief executive officer since that time, and remains its largest stockholder. Shulamit Katzman, Mr. Katzman’s wife, is the vice chairman of the board of directors of Norstar Holdings Inc. Mr. Katzman has served as a director of Gazit-Globe Ltd., a publicly-traded real estate investment company listed on the Tel-Aviv Stock Exchange and New York Stock Exchange and one of our principal, indirect stockholders, since 1994 and as its chairman since 1995. Mr. Katzman also serves as non-executive chairman of the board of First Capital Realty Inc. In 2008, Mr. Katzman was named chairman of the board of Atrium European Real Estate Ltd., a leading real estate company that owns, operates and develops shopping centers in Central and Eastern Europe, the shares of which are listed on the Vienna Stock Exchange, and which is an affiliate of Gazit-Globe, Ltd., one of our principal, indirect stockholders, and in 2010 he was elected to the board of Citycon Oyj, a Finnish real estate company, the shares of which are traded on the Helsinki Stock Exchange, and currently serves as its chairman of the board. Mr. Katzman received an LL.B. from Tel Aviv University Law School in 1973. Mr. Katzman is 62 years old. Our board of directors has concluded that Mr. Katzman’s qualifications to serve on our board include his experience as our chairman and founder, his real estate and financial expertise as well as his experience as an investor, owner and executive of multiple international real estate companies.
Peter Linneman, Ph.D.
Dr. Linneman was elected as a director in November 2000. From 1979 to 2011, Dr. Linneman was a Professor of Real Estate, Finance and Public Policy at the University of Pennsylvania, Wharton School of Business and is currently an Emeritus Albert Sussman Professor of Real Estate there. Dr. Linneman is currently a principal of Linneman Associates, a real estate advisory firm, and a principal of American Land Funds, a private equity firm. Dr. Linneman is currently serving as a director of Atrium European Real Estate Ltd., an affiliate of Gazit-Globe, Ltd., one of our principal, indirect stockholders, by reason of Gazit-Globe’s more than 10% ownership interest in Atrium, and AG Mortgage Investment Trust, Inc. Dr. Linneman previously served as a director of Bedford Property Investors, Inc. and JER Investors Trust, Inc., a finance company that acquires real estate debt securities and loans. Dr. Linneman holds both a masters and a doctorate degree in economics from the University of Chicago. Dr. Linneman is 61 years old. Our board of directors has concluded that Mr. Linneman’s qualifications to serve on our board include his experience over many years in financial and business advisory services and investment activity and his experience as a member of numerous public and private boards, including many real estate companies.
Jeffrey S. Olson
Mr. Olson was elected to our board of directors in November 2006. Mr. Olson has served as chief executive officer of Equity One since 2006 and served as our president from 2006 to March 2008. Prior to joining Equity One, he served as president of the Eastern and Western Regions of Kimco Realty Corporation from 2002 to 2006. Mr. Olson worked on Wall Street from 1996 to 2001 as a REIT analyst with Salomon Brothers, CIBC and UBS. Spanning the five year period from 1991 to 1996, he held a variety of financial and accounting positions at The Mills Corporation. Mr. Olson also practiced public accounting at Reznick, Fedder and Silverman, CPA’s, where he worked from 1986 to 1990. Mr. Olson has a Masters of Science in Real Estate from The Johns Hopkins University, a Bachelor of Science in Accounting from the University of Maryland and was previously a Certified Public Accountant. Mr. Olson is on the board of NAREIT and also serves as a member of The Browning School’s Board of Trustees. Mr. Olson is 44 years old. Our board of directors has concluded that Mr. Olson’s qualifications to serve on our board include his experience as our chief executive officer and general expertise in real estate
operations, as well as his knowledge of the REIT industry developed as an analyst covering many U.S. REITs.
Dori Segal
Mr. Segal was elected as a director in November 2000 and our vice chairman in May 2006. Mr. Segal also serves as executive vice chairman of Gazit-Globe, Ltd., one of our principal, indirect stockholders, and previously served as its president. Since November 2000, Mr. Segal has served as chief executive officer, president and as vice chairman of the board of First Capital Realty Inc. Since 2010, he has served as Chairman of RealPac, the Real Property Association of Canada. Mr. Segal has also served since 2004 as a Director of Citycon Oyj and, since June 2009, as chairman of the board of Gazit America Inc., an Ontario-based real estate company, the shares of which are traded on the Toronto Stock Exchange, and one of our principal, indirect stockholders. Since 1995, Mr. Segal has served as the president of Gazit Israel Ltd., a real estate investment holding company. Mr. Segal is 50 years old. Our board of directors has concluded that Mr. Segal’s qualifications to serve on our board include his experience as a director and executive of a large, publicly traded real estate company and his expertise in operating, owning and managing shopping center assets in North America, in addition to his management activities in numerous international real estate companies.
MANAGEMENT DISCUSSION FROM LATEST 10K
Overview
We are a real estate investment trust, or REIT, that owns, manages, acquires, develops and redevelops shopping centers 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 on a tenant-driven basis, leveraging either existing tenant relationships or geographic and demographic knowledge while seeking to minimize risks associated with land development.
As of December 31, 2011, our consolidated property portfolio comprised 165 properties totaling approximately 17.2 million square feet of gross leasable area, or GLA, and included 144 shopping centers, nine development or redevelopment properties, six non-retail properties and six land parcels. As of December 31, 2011, our core portfolio was 90.7% leased and included national, regional and local tenants. Additionally, we had joint venture interests in 17 shopping centers and two office buildings totaling approximately 2.8 million square feet.
On January 4, 2011, we closed on the acquisition of C&C (US) No. 1, Inc., which we refer to as CapCo, through a joint venture with Liberty International Holdings Limited, or LIH. At the time of acquisition, CapCo owned a portfolio of 13 properties in California totaling approximately 2.6 million square feet of GLA. A more complete description of this acquisition is provided below in the section entitled “Business Combination” and in Note 5 to the consolidated financial statements included in this annual report.
Since 2008, the economic downturn has affected our business, especially as it relates to leasing space to smaller shop tenants. While most of our shopping centers are anchored by supermarkets, drug stores or other necessity-oriented retailers, which are less susceptible to economic cycles, other tenants in our shopping centers, particularly smaller shop tenants, have been especially vulnerable as they have faced both declining sales and reduced access to capital. As of December 31, 2011, 60.4% 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.
In 2011, we improved the quality of our portfolio through the disposition of non-retail assets and assets located in secondary markets and the acquisition of assets in target suburban and urban markets with favorable demographics which are more resistant to economic downturns. In addition to the purchase of the CapCo portfolio, we purchased four centers in California, two in Connecticut, two in New York and one in South Florida. We continue to seek opportunities to invest in our primary target markets of South Florida, the northeast and California. We also look for opportunities to develop or redevelop centers in urban markets with high barriers to entry.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, which we refer to as GAAP, requires management to make estimates and assumptions that in certain circumstances affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and revenues and expenses. These estimates are prepared using our best judgment, after considering past and current events and economic conditions. In addition, certain information relied upon by us in preparing such estimates includes internally generated financial and operating information, external market information, when available, and when necessary, information obtained from consultations with third party experts. Actual results could differ from these estimates. A discussion of possible risks which may affect these estimates is included in “Item 1A. Risk Factors” in this annual report. We consider an accounting estimate to be critical if changes in the estimate or accrual results could have a material impact on our consolidated results of operations or financial condition.
Our significant accounting policies are more fully described in Note 2 to the consolidated financial statements; however, the most significant accounting policies, which involve the use of estimates and assumptions as to future uncertainties and, therefore, may result in actual amounts that differ from estimates, are as follows:
Revenue Recognition and Accounts Receivable. Leases with tenants are classified as operating leases. Revenue includes minimum rents, expense recoveries, percentage rental payments and management and leasing services. Generally, our leases contain fixed escalations which occur at specified times during the term of the lease. Lease revenue recognition commences when the lessee is given possession of the leased space, when the asset is substantially complete in the case of leasehold improvements, and there are no contingencies offsetting the lessee’s obligation to pay rent. Minimum rents are recognized on an accrual basis over the terms of the related leases on a straight-line basis. As part of the leasing process, we may provide the lessee with an allowance for the construction of leasehold improvements. Leasehold improvements are capitalized and recorded as tenant improvements and depreciated over the shorter of the useful life of the improvements or the lease term. If the allowance represents a payment for a purpose other than funding leasehold improvements, or in the event we are not considered the owner of the improvements, the allowance is considered a lease incentive and is recognized over the lease term as a reduction to revenue.
Many of our lease agreements contain provisions that require the payment of additional rents based on the respective tenants’ sales volumes (contingent or percentage rent) and substantially all contain provisions that require reimbursement of the tenants’ allocable real estate taxes, insurance and common area maintenance costs (“CAM”). Revenue based on a percentage of a tenant’s sales is recognized only after the tenant exceeds its sales breakpoint. Revenue from tenant reimbursements of taxes, CAM and insurance is recognized in the period that the applicable costs are incurred in accordance with the lease agreements.
We make estimates of the collectability of our accounts receivable using the specific identification method related to base rents, straight-line rents, expense reimbursements and other revenue or income taking into account our experience in the retail sector, available internal and external tenant credit information, payment history, industry trends, tenant credit-worthiness and remaining lease terms. In some cases, primarily relating to straight-line rents, the collection of these amounts extends beyond one year. The extended collection period for straight-line rents along with our evaluation of tenant credit risk may result in the deferral of a portion of straight-line rental income until the collection of such income is reasonably assured. These estimates have a direct impact on our earnings.
Recognition of Gains from the Sales of Real Estate. We account for profit recognition on sales of real estate in accordance with the Property, Plant and Equipment Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). Profits from sales of real estate will not be recognized under the full accrual method by us unless (i) a sale has been consummated; (ii) the buyer’s initial and continuing investment is adequate to demonstrate a commitment to pay for the property; (iii) we have transferred to the buyer the usual risks and rewards of ownership; and (iv) we do not have significant continuing involvement with the property. Recognition of gains from sales to co-investment partnerships is recorded on only that portion of the sales not attributable to our ownership interest.
Real Estate Acquisitions. We allocate the purchase price of acquired properties to land, building, improvements and intangible assets and liabilities in accordance with the Business Combinations Topic of the FASB ASC. We allocate the initial purchase price of assets acquired (net tangible and identifiable intangible assets) and liabilities assumed based on their relative fair values at the date of acquisition. Upon acquisition of real estate operating properties, we estimate the fair value of acquired tangible assets (consisting of land, building, building improvements and tenant improvements) and identified intangible assets and liabilities (consisting of above and below-market leases, in-place leases and tenant relationships), assumed debt and redeemable units issued at the date of acquisition, based on evaluation of information and estimates available at that date. Based on these estimates, we allocate the estimated fair value to the applicable assets and liabilities. Fair value is determined based on an exit price approach, which contemplates the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. If, up to one year from the acquisition date, information regarding fair value of the assets acquired and liabilities assumed is received and estimates are refined, appropriate adjustments are made to the purchase price allocation on a retrospective basis. There are four categories of intangible assets and liabilities to be considered: (1) in-place leases; (2) above and below-market value of in-place leases; (3) lease origination costs and (4) customer relationships. The aggregate value of other acquired intangible assets, consisting of in-place leases, is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases, including fixed rate renewal options, to market rental rates over (ii) the estimated fair value of the property as-if-vacant, determined as set forth above. The value of in-place leases exclusive of the value of above-market and below-market in-place leases is amortized to depreciation expense over the estimated remaining term of the respective leases. The value of above-market and below-market in-place leases is amortized to rental revenue over the estimated remaining term of the leases. If a lease terminates prior to its stated expiration, all unamortized amounts relating to that lease are written off.
In allocating the purchase price to identified intangible assets and liabilities of an acquired property, the value of above-market and below-market leases is estimated based on the present value of the difference between the contractual amounts, including fixed rate renewal options, to be paid pursuant to the leases and management’s estimate of the market lease rates and other lease provision (i.e., expense recapture, base rental changes, etc.) measured over a period equal to the estimated remaining term of the lease. The capitalized above-market or below-market intangible is amortized to rental income over the estimated remaining term of the respective lease, which includes the expected renewal option period.
Real Estate Properties and Development Assets. The nature of our business as an owner, developer and operator of retail shopping centers means that we invest significant amounts of capital into our properties. Depreciation and maintenance costs relating to our properties constitute substantial costs for us as well as the industry as a whole. We capitalize real estate investments and depreciate them based on estimates of the assets’ physical and economic useful lives. The cost of our real estate investments is charged to depreciation expense over the estimated life of the asset using straight-line rates for financial statement purposes. We periodically review the estimated lives of our assets and implement changes, as necessary, to these estimates and, therefore, to our depreciation rates.
Properties and real estate under development are recorded at cost. We compute depreciation using the straight-line method over the estimated useful lives of up to 55 years for buildings and improvements, the minimum lease term or economic useful life for tenant improvements, and five to seven years for furniture and equipment. Expenditures for ordinary maintenance and repairs are expensed to operations as they are incurred. Significant renovations and improvements, which improve or extend the useful life of assets, are capitalized. The useful lives of amortizable intangible assets are evaluated each reporting period with any changes in estimated useful lives being accounted for over the revised remaining useful life.
Properties also include construction in progress and land held for development. These properties are carried at cost and no depreciation is recorded. Properties undergoing significant renovations and improvements are considered under development. All direct and indirect costs related to development activities, except certain demolition costs which are expensed as incurred, are capitalized into properties in construction in progress and land held for development on our consolidated balance sheet. Costs incurred include predevelopment expenditures directly related to a specific project including development and construction costs, interest, insurance and real estate taxes. Indirect development costs include employee salaries and benefits and other related costs that are directly associated with the development of the property. Our method of calculating capitalized interest is based upon applying our weighted average borrowing rate to that portion of actual costs incurred. The capitalization of such expenses ceases when the property is ready for its intended use, but no later than one year from substantial completion of major construction activity. If we determine that a project is no longer probable, all predevelopment project costs are immediately expensed. Similar costs related to properties not under development are expensed as incurred.
We capitalized external and internal costs related to development and redevelopment activities of $45.9 million and $544,000, respectively, in 2011 and $8.5 million and $487,000, respectively, in 2010. We capitalized external and internal costs related to other property improvements of $24.6 million and $173,000, respectively in 2011, and $16.9 million and $174,000, respectively, in 2010. We capitalized external and internal costs related to leasing activities of $4.0 million and $3.2 million, respectively, in 2011 and $2.7 million and $2.0 million, respectively, in 2010.
Long Lived Assets. We evaluate the carrying value of long-lived assets, including definite-lived intangible assets, when events or changes in circumstances indicate that the carrying value may not be recoverable in accordance with the Property, Plant and Equipment Topic of the FASB ASC. The carrying value of a long-lived asset is considered impaired when the total projected undiscounted cash flows from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. For long-lived assets to be held and used, the fair value of fixed (tangible) assets and definite-lived intangible assets is determined primarily using either internal projected cash flows discounted at a rate commensurate with the risk involved or an external appraisal. For long-lived assets to be disposed of by sale or other than by sale, fair value is determined in a similar manner or based on actual sales prices as determined by executed sales contracts, except that fair values are reduced for disposal costs. At December 31, 2011, we reviewed the operating properties and construction in progress for impairment on a property-by-property and project-by-project basis in accordance with the Property, Plant and Equipment Topic of the FASB ASC, as we determined the current economic conditions and the sales prices of recent operating property disposals to be general indicators of impairment.
Investments in Joint Ventures. We strategically invest in entities that own, manage, acquire, develop and redevelop operating properties. Our partners generally are financial or other strategic institutions. We analyze our joint ventures under the FASB ASC Topics of Consolidation and Real Estate-General in order to determine whether the entity should be consolidated. If it is determined that these investments do not require consolidation because the entities are not variable interest entities (“VIEs”) in accordance with the Consolidation Topic of the FASB ASC, we are not considered the primary beneficiary of the entities determined to be VIEs, we do not have voting control, and/or the limited partners (or non-managing members) have substantive participatory rights, then the selection of the accounting method used to account for our investments in unconsolidated joint ventures is generally determined by our voting interests and the degree of influence we have over the entity. Management uses its judgment when determining if we are the primary beneficiary of, or have a controlling interest in, an entity in which we have a variable interest. Factors considered in determining whether we have the power to direct the activities that most significantly impact the entity’s economic performance include risk and reward sharing, experience and financial condition of the other partners, voting rights, involvement in day-to-day capital and operating decisions and the extent of our involvement in the entity.
We use the equity method of accounting for investments in unconsolidated joint ventures when we own 20% or more of the voting interests and have significant influence but do not have a controlling financial interest, or if we own less than 20% of the voting interests but have determined that we have significant influence. Under the equity method, we record our investments in and advances to these entities in our consolidated balance sheets and our proportionate share of earnings or losses earned by the joint venture is recognized in equity in income (loss) of unconsolidated joint ventures in our consolidated statements of income. We derive revenue through our involvement with unconsolidated joint ventures in the form of management and leasing services and interest earned on loans and advances. We account for these revenues gross of our ownership interest in each respective joint venture and record our proportionate share of related expenses in equity in income (loss) of unconsolidated joint ventures
The cost method of accounting is used for unconsolidated entities in which we do not have the ability to exercise significant influence and we have virtually no influence over partnership operating and financial policies. Under the cost method, income distributions from the partnership are recognized in investment income. Distributions that exceed our share of earnings are applied to reduce the carrying value of our investment and any capital contributions will increase the carrying value of our investment. The fair value of a cost method investment is not estimated if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment.
These joint ventures typically obtain non-recourse third-party financing on their property investments, thus contractually limiting our exposure to losses to the amount of our equity investment, and, due to the lender’s exposure to losses, a lender typically will require a minimum level of equity in order to mitigate its risk. Our exposure to losses associated with unconsolidated joint ventures is primarily limited to the carrying value of these investments.
On a periodic basis, we evaluate our investments in unconsolidated entities for impairment in accordance with the Investments-Equity Method and Joint Ventures Topic of the FASB ASC. We assess whether there are any indicators, including underlying property operating performance and general market conditions, that the value of our investments in unconsolidated joint ventures may be impaired. An investment in a joint venture is considered impaired only if we determine that its fair value is less than the net carrying value of the investment in that joint venture on an other-than-temporary basis. Cash flow projections for the investments consider property level factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other factors. We consider various qualitative factors to determine if a decrease in the value of our investment is other-than-temporary. These factors include the age of the venture, our intent and ability to retain our investment in the entity, the financial condition and long-term prospects of the entity and relationships with our partners and banks. If we believe that the decline in the fair value of the investment is temporary, no impairment charge is recorded. If our analysis indicates that there is an other-than-temporary impairment related to the investment in a particular joint venture, the carrying value of the venture will be adjusted to an amount that reflects the estimated fair value of the investment.
Goodwill. Goodwill has been recorded to reflect the excess of cost over the fair value of net identifiable assets acquired in various business acquisitions. We perform annual, or more frequently in certain circumstances, impairment tests of our goodwill. We have elected to test for goodwill impairment in November of each year. The goodwill impairment test is a two-step process that requires us to make decisions in determining appropriate assumptions to use in the calculation. The first step consists of estimating the fair value of each reporting unit and comparing those estimated fair values with the carrying values, which include the allocated goodwill. If the estimated fair value is less than the carrying value, a second step is performed to compute the amount of the impairment, if any, by determining an “implied fair value” of goodwill. The determination of each reporting unit’s (each property is considered a reporting unit) implied fair value of goodwill requires us to allocate the estimated fair value of the reporting unit to its assets and liabilities. Any unallocated fair value represents the implied fair value of goodwill which is compared to its corresponding carrying amount.
Share Based Compensation and Incentive Awards. We recognize all share-based awards to employees, including grants of stock options, in our financial statements based on fair values. Because there is no observable market for our options, management must make critical estimates in determining the fair value at the grant date. Variations in the assumptions will have a direct impact on our net income. Critical estimates in determining the fair value of options at the grant date include: expected volatility, expected dividend yield, risk-free interest rate, involuntary conversion due to change in control and expected exercise history of similar grants.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Overview
We are a real estate investment trust, or REIT, that owns, manages, acquires, develops and redevelops shopping centers 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 on a tenant-driven basis, leveraging either existing tenant relationships or geographic and demographic knowledge while seeking to minimize risks associated with land development.
As of June 30, 2012 , our consolidated property portfolio comprised 165 properties totaling approximately 16.8 million square feet of gross leasable area, or GLA, and included 142 shopping centers, 11 development or redevelopment properties, five non-retail properties and seven land parcels. As of June 30, 2012 , our core portfolio was 91.8% leased and included national, regional and local tenants. Additionally, we had joint venture interests in 17 shopping centers and two office buildings totaling approximately 2.8 million square feet of GLA.
In January 2011, we closed on the acquisition of C&C (US) No. 1, Inc., which we refer to as CapCo, through a joint venture with Liberty International Holdings Limited, or LIH. At the time of acquisition, CapCo owned a portfolio of 13 properties in California totaling approximately 2.6 million square feet of GLA. In December 2011, we sold 36 shopping centers, comprising 3.9 million square feet of GLA, predominantly located in the Atlanta, Tampa and Orlando markets, with additional properties located in the states of North Carolina, South Carolina, Alabama, Tennessee and Maryland.
The difficult economic environment continues to affect our business, especially as it relates to leasing space to smaller shop tenants. While most of our shopping centers are anchored by supermarkets, drug stores or other necessity-oriented retailers, which are less susceptible to economic cycles, other tenants in our shopping centers, particularly smaller shop tenants, have been especially vulnerable as they have faced both declining sales and reduced access to capital. As of June 30, 2012, 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 continue to seek opportunities to invest in our primary target markets of South Florida, California and the northeastern United States. We also look for 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.
While we have experienced and expect to see continued gradual improvement in economic conditions during the remainder of 2012, we expect continuing challenges in leasing space to small shop tenants. We believe the continued diversification of our portfolio during 2011, including the reinvestment of proceeds from dispositions into higher quality assets, has made us less susceptible to economic downturns. In that light, we anticipate that our "core" portfolio occupancy (which excludes non-retail properties, properties held in unconsolidated joint ventures and development properties) and same-property net operating income (as defined below) for the remainder of 2012 will continue to experience a modest increase as compared to 2011.
Results of Operations
We derive substantially all of our revenues from rents received from tenants under existing leases on each of our properties. These revenues include 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’ revenues, 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 and six months ended June 30, 2012 , we moved one property totaling approximately 92,000 square feet and two properties totaling 201,000 square feet, respectively, out of the same-property pools.
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 amortization of deferred financing fees, rental property depreciation and amortization, interest expense, impairment losses, general and administrative expense, and to exclude revenues earned from management and leasing services, straight line rent adjustments, accretion of below market lease intangibles (net), gain on sale of real estate, equity in income (loss) of unconsolidated joint ventures, gain on bargain purchase and acquisition of controlling interest in subsidiary, gain (loss) on extinguishment of debt, investment income, 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 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, recent changes in segment structure, and the geographic diversification of our portfolio of properties, and for a reconciliation of NOI to income from continuing operations before tax and before discontinued operations for the three and six months ended June 30, 2012 and 2011 .
Same Property NOI and Occupancy Information
Same-property NOI increased by $278,000 and $2.2 million , or 0.7% and 2.7% , respectively, for the three and six months ended June 30, 2012 driven primarily by a net increase in minimum rent due to rent commencements and contractual rent increases and lower bad debt expense; partially offset by a decrease in expense recovery income.
Comparison of the three months ended June 30, 2012 to 2011 - Segments
South Florida: Revenues increased by 4.3% or $923,000 to $22.6 million for 2012 from $21.7 million for 2011 . NOI for South Florida increased by 6.7% or $939,000 to $15.0 million for 2012 from $14.1 million for 2011 . Revenues increased due to our acquisition of Aventura Square in 2011 and increased occupancy and higher rent from contractual rent increases and new rent commencements at our same site properties. These increases in revenue were partially offset by a decrease in revenue due to the sale of two properties to our NYCRF joint venture during 2011 and a decrease in expense recovery income resulting from lower recoverable expenses and a decline in our expense recovery ratios at our same site properties. The increase in NOI was primarily a result of the increase in revenues.
North Florida: Revenues decreased by 6.1% or $738,000 to $11.4 million for 2012 from $12.1 million for 2011 . NOI decreased by 5.7% or $475,000 to $7.9 million for 2012 from $8.4 million for 2011 . Revenues decreased due to lower percentage rent income and a decrease in expense recovery income resulting from lower recoverable expenses and a decline in our expense recovery ratio at our same site properties. The decrease in NOI was a result of the decrease in revenues partially offset by a decrease in real estate tax expense.
Southeast: Revenues increased by 2.9% or $401,000 to $14.1 million for 2012 from $13.7 million for 2011 . NOI increased by 3.5% or $332,000 to $9.9 million for 2012 from $9.5 million for 2011 . The increase in revenues was primarily a result of higher minimum rent due to new rent commencements and contractual rent increases and higher expense recovery income due to an increase in recoverable expenses. The increase in NOI was a result of the increased revenues partially offset by the increase in recoverable expenses.
Northeast: Revenues increased by 43.4% or $3.5 million to $11.7 million for 2012 from $8.2 million for 2011 . NOI increased by 42.0% or $2.5 million to $8.5 million for 2012 from $6.0 million for 2011 . The increase in both revenues and NOI was a result of our acquisition of Compo Acres, Danbury Green, Southbury Green, and Post Road Plaza located in Connecticut and 90-30 Metropolitan and 161 W. 16 th Street located in New York City.
West Coast: Revenues increased by 33.8% or $4.3 million to $17.1 million for 2012 from $12.8 million for 2011 . NOI increased by 31.3% or $2.7 million to $11.2 million for 2012 from $8.5 million for 2011 . The increase in revenues was a result of our acquisition of Culver Center, Potrero, and Ralph's Circle Center located in California, partially offset by lower expense recovery income at our same site properties. The increase in NOI was primarily a result of our acquisitions, partially offset by the decline in expense recovery income at our same site properties.
Non-retail: Revenues decreased by 11.0% or $77,000 to $621,000 for 2012 from $698,000 for 2011 . NOI increased by 16.5% or $47,000 to $332,000 for 2012 from $285,000 for 2011 . The decrease in revenues was due to an increase in rent abatements. The increase in NOI was due to a decrease in operating expenses partially offset by the increase in rent abatements.
Comparison of the Six Months Ended June 30, 2012 to 2011 - Segments
South Florida: Revenues increased by 4.0% or $1.8 million to $46.0 million for 2012 from $44.2 million for 2011 . NOI for South Florida increased by 7.7% or $2.2 million to $30.9 million for 2012 from $28.7 million for 2011 . Revenues increased due to our acquisition of Aventura Square and increased occupancy and higher rent from contractual rent increases and new rent commencements at our same site properties, as well as an increase in percentage rent primarily from anchor tenants. These increases in revenue were partially offset by decreases in revenue due to the sale of two properties to our NYCRF joint venture during 2011 and lower lease termination fees received in 2012. The increase in NOI was a result of our acquisition of Aventura Square and a decrease in real estate tax expense at our same site properties partially offset by the sale of two properties to our NYCRF joint venture.
North Florida: Revenues decreased by 4.1% or $988,000 to $22.9 million for 2012 from $23.9 million for 2011 . NOI decreased by 1.3% or $210,000 to $16.1 million for 2012 from $16.3 million for 2011 . Revenues decreased due to lower percentage rent, an increase in rent concessions and abatements, and a decrease in expense recovery income resulting from lower recoverable expenses at our same site properties. The decrease in NOI was a result of the decrease in revenues; partially offset by decreases in recoverable operating expenses, bad debt expense and real estate tax expense.
Southeast: Revenues increased by 1.7% or $456,000 to $28.1 million for 2012 from $27.6 million for 2011 . NOI increased by 2.3% or $453,000 to $19.8 million for 2012 from $19.4 million for 2011 . The increase in revenues was primarily a result of higher minimum rent due to new rent commencements and contractual rent increases and higher expense recovery income due to an increase in recoverable expenses. The increase in NOI was a result of the increased revenues.
Northeast: Revenues increased by 38.4% or $6.4 million to $23.1 million for 2012 from $16.7 million for 2011 . NOI increased by 35.3% or $4.1 million to $15.9 million for 2012 from $11.7 million for 2011 . The increase in both revenues and NOI was primarily a result of our 2011 and 2012 acquisitions noted above. The increase in NOI from acquisitions was partially offset by an increase in non-recoverable property operating expenses due primarily to the settlement of a tenant dispute during 2012 which resulted in a $525,000 expense in the first quarter of 2012.
West Coast: Revenues increased by 40.4% or $9.5 million to $32.8 million for 2012 from $23.4 million for 2011 . NOI increased by 39.0% or $6.1 million to $21.7 million for 2012 from $15.6 million for 2011 . The increase in revenues was primarily attributable to our acquisitions and, to a lesser extent, new rent commencements and an increase in percentage rent due to higher reported tenant sales. The increase in NOI was primarily attributable to our acquisitions and, to a lesser extent, an increase in NOI from our same site properties due to the increase in revenues and a decrease in bad debt expense, partially offset by higher real estate tax expense.
Non-retail: Revenues decreased by 12.6% or $184,000 to $1.3 million for 2012 from $1.5 million for 2011 . NOI decreased by 1.6% or $11,000 to $667,000 for 2012 from $678,000 for 2011 . The decrease in revenues was due to an increase in rent abatements. The decrease in NOI was due to the increase in rent abatements partially offset by a decrease in operating expenses.
Funds From Operations
We believe Funds from Operations (“FFO”) (when combined with the primary GAAP presentations) is a useful supplemental measure of our operating performance that is a recognized metric used extensively by the real estate industry and, in particular, REITs. The National Association of Real Estate Investment Trusts (“NAREIT”) stated in its April 2002 White Paper on Funds
from Operations, “Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminish predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry investors have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves”.
FFO, as defined by NAREIT, is “net income (computed in accordance with GAAP), excluding gains (or losses) from sales of, or impairment charges related to, depreciable operating properties, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.” NAREIT states further that “adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis.” We believe that financial analysts, investors and stockholders are better served by the presentation of comparable period operating results generated from our FFO measure. Our method of calculating FFO may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs. In October 2011, NAREIT clarified that FFO should exclude the impact of impairment losses on depreciable operating properties, either wholly-owned or in joint ventures. We calculated FFO for all periods presented in accordance with this clarification.
FFO is presented to assist investors in analyzing our operating performance. FFO (i) does not represent cash flow from operations as defined by GAAP, (ii) is not indicative of cash available to fund all cash flow needs, including the ability to make distributions, (iii) is not an alternative to cash flow as a measure of liquidity, and (iv) should not be considered as an alternative to net income (which is determined in accordance with GAAP) for purposes of evaluating our operating performance.
CONF CALL
Michelle Villano - Investor Relations
With me on today's call are Jeffery S. Olson, Chief Executive Officer, Tom Caputo our President, Mark Langer, Chief Financial Officer, and Arthur Gallagher, General Counsel.
Before we get started I'd like to remind everyone that some of our statements today may be forward-looking in nature. Although we believe that such statements are based upon reasonable assumptions, you should assume that those statements are subject to risk and uncertainties and actual results may differ materially from the forward-looking statements. Additional information about such factors and uncertainties that could actual results to differ may be found in our earnings release and in our filings with the Securities and Exchange Commission.
Finally, please note that on today's we will be discussing non-GAAP financial measures, including FFO. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can also be found in the earnings release. Both the earnings release and our quarterly financial supplement are available on our website at www.equityone.net.
At this time I'd like to turn the call over to our CEO, Jeff Olson.
Jeffery S. Olson - Chief Executive Officer
Thank you for joining us for our Third Quarter 2009 Earnings Call. We're very pleased with how we performed this quarter and we're excited about the opportunities that lie ahead. Our third quarter results were consistent with our expectations and we are seeing signs of a healthier leasing market. The financing market has dramatically improved and we have plenty of access to capital. We are excited about our new investment in Long Island and we are looking at a number of ways to create value at this site. We will tell you more about this investment later in our call.
I will address three topics this morning, operations, external growth, and financing. On operations our same property NOI and occupancy declines were in line with our internal expectations. As Tom will discuss in more detail, we have seen resilience in our anchor tenants as demonstrated by our 95% occupancy rate for our anchor spaces. This rate is the same level we experienced in 2007 when the market was at its peak.
While the downward pressure in occupancy since 2007 has primarily come from our shops, we are starting to see some signs of stabilization. For example, during the quarter we signed nearly 200,000 square feet in new leases versus 123,000 square feet in the second quarter and a 101,000 square feet in the first quarter. The bulk of our increases came from small stores.
Active tenants include Panera Bread, TD Bank, Anytime Fitness, Edible Arrangements, Dunkin Donuts, Subway, along with many local restaurants, nail salons, and medical services providers. The summer is typically the toughest season for our Florida retailers as tourism is low. Now that we are headed back into high season, we expect most of those retailers that made it through the summer to stay.
Turning to our external growth, our plan will continue to be focused on acquiring high quality centers containing below market rent that have some opportunity for value creation. While there are a limited number of centers that have these characteristics and are available for purchase, we are starting to identify and probably more importantly create some unique opportunities.
One such opportunity was Westbury Plaza located in the heart of Nassau County, Long Island. We put Westbury under letter of intent in early August when the financial markets were tight for many. We closed on it last week. We are very excited about this property. There is enormous demand for retail in this region as the demographics are strong and barriers to entry are high. It is one of the most productive retail corridors in the entire country, and our center is the dominant center in this market.
Our tenants generate sales of nearly $500 million per year. We paid an eight cap on this property. And while we are still evaluating our financing options, should we decide to place a long-term mortgage on it, our initial cash-on-cash returns would be in excess of 10.5% based on the most recent quotes we have received from potential lenders.
During our due diligence period, we also tied up a large development parcel in close proximity to Westbury Plaza. And this site may allow us to expand some of our undersized retailers and recapture some of our below market leases. It is a bit early to get into much detail, but we look forward to discussing this opportunity in the coming weeks.
The Westbury investment leads to my third topic, financing. It's amazing how much has changed in just a short period of time. It was only six months ago when we were repurchasing our public bonds for $0.60 to $0.70 on the dollar, implying yields to maturity of 13% to 15%. Now we are receiving daily loan quotes from the banks on issuing ten-year bonds in the unsecured market in the mid 7% rate range, and we have also received ten-year mortgage quotes on Westbury in the low 6% rate range.
In addition, we have received expressions of interest on Westbury from several potential joint venture partners. Our ultimate financing decision on Westbury will be made in conjunction with our redevelopment plans and our desire to provide our shareholders with any benefits from the value that is created.
As tough as it is to find A quality assets, we continue to diligently look to source and create opportunities within our targeted markets. We are confident that we will find more acquisitions as billions of dollars of debt maturities are on the horizon and many landlords do not have the capital to invest in leasing or redeveloping their shopping centers.
Value-added acquisitions will require capital and this led to our decision to decrease our dividend. We want to find more transactions like Westbury. The new payout ratio is more appropriate for our industry specter and our capital structure. It better aligns capital allocation with our growth objectives while still maintaining an attractive dividend yield.
With that, I'd like to turn the call over to Tom who will review our operations and investment activity.
Thomas A. Caputo - President
This morning I will discuss our third quarter operational highlights with regards to leasing and property management, and I will add some color to our recent Westbury acquisition. Our tenant relation's team continues to actively meet with national and regional retailers to assess opportunities and strengthen our relationships with new and existing tenants.
We have conducted over 70 portfolio reviews year-to-date and we scheduled approximately 15 additional meetings prior to the end of the year. These reviews enable us to better understand retailer performance at EQY centers and explore possibilities for expansion at other EQY sites. Needless to say, we schedule multiple portfolio reviews with our largest tenants during the course of each year.
Leasing continues to be our highest corporate priority. Our leasing team remains very focused on leasing existing vacancies and retaining tenants in our portfolio. We're in good shape with our anchor occupancy, which ended the quarter at 95.4%. Our small star occupancy has been more of a challenge during the economic downturn with over 1.1 million square feet of shop space vacant at the end of the quarter.
Our leasing agents continue to spend two or three days a week canvassing competing centers for new tenants. During the quarter we added two new junior agents who have one responsibility, canvas competing centers for our senior leasing agents. At the end of the day, the key to leasing local shop space is basic blocking and tackling until the job is done.
Our same side occupancy declined 60 basis points from 90.7% to 90.1%. The decline in occupancy included the loss of a 32,000 square foot Ingles at Wesley Chapel and a 32,000 square foot Ingles at Corp Commerce Crossing. Both stores have been dark in paying for several years.
We had a very productive third quarter on the leasing front with 131 lease transactions totaling 564,000 square feet. We executed 43 new leases totaling 198,700 square feet at an average rental rate of $13.18 per foot, 36 of the 43 new leases were with a combination of national, regional and local shop tenants occupying less than 5,000 square feet. The new tenants include nine restaurants, several mobile phone stores, a variety of service uses and most interestingly given the economy, two real estate offices.
As Jeff mentioned, we leased almost twice as much space in the third quarter as we did in each of the first two quarters of the year. We also renewed 81 leases totaling 224,300 square feet at an average rental rate of $12.82 a foot, and seven other tenants exercised contractual renewal options for leases totaling 141,100 feet at an average rental rate of $4.75 a foot.
Our leasing team completed a number of significant leases in the quarter. We executed a lease with LA Fitness for 50,795 square feet currently occupied by Publix at our pavilion center in Naples. Publix will be relocating next door in 2010 to a larger store formerly occupied by Albertsons. We are disappointed to lose Publix, but delighted we've been able to backfill their box a year before the supermarket vacates.
We also executed a lease with Little Giant supermarket for the 32,000 square feet at Wesley Chapel formerly leased to Ingles, which had been dark in paying for over four years. You may recall last quarter we mentioned the addition of a 50,000 square foot vocational college at Wesley Chapel. The addition of the Everest Institute has significantly increased traffic with approximately 800 to 1,000 students visiting the school each day. The combination of the school and the new supermarket has generated significant tenant interest in the property.
Our leasing team is in serious discussions with several national tenants who are now interested in a total of approximately 35,000 square feet of space in the center. At Skylake, we are under contract to purchase an adjacent parcel currently occupied by a gas station. We executed a lease during the quarter with TD Bank to replace the current fuel station operator.
Cash leasing spreads for new leases in the second quarter were positive 24.4%. Excluding the lease with LA Fitness, cash leasing spreads were slightly negative at 2.41%. Cash leasing spreads for our negotiated renewals were negative 3.2%. It is important to note that the negative spreads are highly concentrated in 24 leases, which were renewed for two years or less.
These leases, which will rollover over the next two years, have a negative rent spread of 17% as compared to the remaining 57 leases, which were renewed for more than two years and have a positive rent spread of 2.1%. We are making a concentrated effort to limit the duration of leases with lower rents. Rent spreads for contractual renewal options increased 2.2%.
Tenant improvements for new leases during the quarter were $32 per foot. Excluding the new lease with LA Fitness which includes a very expensive renovation of an old supermarket, same store TI's for new leases were slightly less than $12 a foot.
Overall, our leasing pipeline is healthy. We have executed leases with tenants under construction, which will generate in excess of $3 million in annual rent when the tenants open for business. Approximately two-thirds of this rent will commence in the first half of 2010. In addition, we have new leases currently under negotiation for approximately 100,000 square feet at slightly positive rent spreads and renewals currently under negotiation for approximately 100,000 feet at slightly negative rent spreads.
Occupancy in the DIM Vastgoed portfolio declined 80 basis points from 91.9% on June 30 to 91.1% at the end of the third quarter. EQY assumed the leasing responsibilities for the DIM portfolio on June 1 and we expect to assume responsibility for renewals within the next few weeks. We should have full control of the leasing, property management and accounting for DIM by March 31.
The DIM portfolio includes 21 shopping centers, 16 of which are anchored by supermarkets. This portfolio fits very nicely into the Equity One footprint with ten properties located in Georgia, five properties located in Florida, and three in North Carolina.
Our property management team is focused on collections and property expense controls. We anticipated bad debt would be a challenge and we incorporated a higher reserve into our 2009 budget. We have increased resources in our accounting group to maximize the recovery of our accounts receivable. We now have a dedicated team focused on national and regional tenants and we have increased our oversight of monthly collection results for small shop tenants.
Our goal on the property expense controls front is to reduce costs while at the same time enhancing the quality of the services we deliver to the tenants. We continue to explore opportunities to bundle services in every category and are constantly talking to multi-regional and national service providers. The reductions in the cost of third-party services will help reduce occupancy costs for our tenants, and a portion of the savings will drop to our bottom line.
During the quarter, we launched what we anticipate will be a profitable solar program. We installed solar panels on the roof of the Shaw supermarket at Webster Square in Massachusetts. Shaw's will purchase 100% of the entity generated by the solar panels. Our initial investment will be reduced by substantial rebates from the federal and state governments and EQY will earn an attractive return on our net investment. We intend to expand this roof top solar program throughout our Massachusetts portfolio and then explore options in the balance of our portfolio.
EQY entered into another revenue enhancing venture this quarter with Capital Telecom. We executed a master agreement with Capital Telecom to develop cell towers throughout the EQY portfolio. Capital Telecom will provide the equipment and construct the cell towers on EQY properties identified by multiple mobile carriers. EQY and Capital Telecom will split the revenues from this program.
The acquisition of Westbury Plaza clearly was a very important event for Equity One. We are delighted we had the opportunity to purchase such a high quality asset as we entered the New York market. The property is extremely well located and arguably one of the best retail markets in the Northeast.
The productivity of the tenants at Westbury Plaza is higher than any center I have seen in over 25 years in the acquisitions business. We are confident there will be ways to add value to Westbury Plaza as we work through plans for the nearby development site, which we will purchase within the next few weeks.
Unsolicited retailer demand for this location has been incredibly strong and we have not even begun to market the site. We believe the acquisition of Westbury Plaza and the development site will lead to the opportunities for EQY to expand our presents in the Northeast with other high quality assets in supply constrain markets.
Now I'd like to turn the call over to our CFO. Mark Langer, for his comments about our financial results.
Mark Langer - Chief Financial Officer
We're pleased to be here today to provide a detailed look at our third quarter earnings, which I note include minimal non-recurring items. In fact, our goal is to provide both simplicity and transparency around our reported results. We believe that as a natural consequence of our straight forward capital structure, the ownership structure of our assets, and the limited nature of our development pipeline.
Prior to discussing our results, I thought I would reflect on a few themes that came to mind as we were preparing for our recent board meetings. In the last several weeks at big portion of my time has been spent evaluating our long-term financing strategy especially as we gain clarity on our acquisition activity.
Our financing goals moving forward are designed to meet the following five objectives. One, maintain overall leverage ratios in the low to mid 40% range. Two, reduce the percentage of encumbered NOI in our portfolio relative to unencumbered NOI. Three, maintain a well laddered debt maturity schedule. Four, use longer term financing and maintain an average term to maturity of at least six years. And five, we want to maintain credit facilities and sufficient amounts that provide adequate liquidity both for acquisition opportunities and for unexpected shocks in the market when traditional financing options may be less attractive.
In terms of recent financing activity, we used our line to fund $52 million of mortgage debt which matured in October on the loan for Carolina Pavilion. We also used our line for the $104 million purchase of Westbury. We are currently in discussions to term this out during the quarter in an effort to keep our line balanced at lower levels.
We are currently evaluating all of our alternatives in this regard, including the unsecured bond market, longer term mortgage financing and joint venture financing. We are encouraged by the quotes we are receiving for mortgage debt on Westbury, which are in the low 6% range, as well as the favorable move in unsecured bond pricing and which our costs on ten-year notes may be in the mid 7% range.
We are also in discussion with institutional investors who are very interested in forming joint ventures, particularly on high quality assets. We are considering each of these options in light of the broader objectives I just outlined.
I highlighted debt laddering being a key objective and it is one area where we feel we have shown real differentiation among many of our peers. To add more color on this, it is helpful to know that in 2010 we have approximately $72 million of maturing mortgage debt with a weighted average interest rate of approximately 8.2%. In 2011 we have approximately $69 million of maturing mortgage debt with an average rate of approximately 7.3%.
The overall LTVs on this debt are estimated to be 45% to 50%, providing good indication as to our ability to refinance at attractive pricing. Our in place interest rate of 7% to 8% are also closer to or slightly higher than current market rates, which will help avoid an unfavorable trend and interest expense moving forward.
You heard Tom talk about our main focus, which is on leasing and operations. We also continue to search for ways to take costs out of our platform and to identify new ancillary income to help enhance property level NOI. The new solar power purchase agreement with Shaw's that Tom described is one example. A real focus on property level quality, costs, and revenue generation will always be at the heart of our ultimate strategy as we believe it will provide us with a competitive advantage.
I will now walk you through our third quarter results focusing on three areas. One, changes in our balance sheet versus the second quarter. Two, the key drivers of our third quarter earnings. And three, our expectations for the balance of the year.
Starting with the balance sheet. As compared to June 30 the significant changes of note include the following. Our marketable securities declined $47.4 million, which stems from the expected sales and maturities of our investment and debt securities, which accounted for $29.5 million of the decline and the sale of our Invesco and Ramco stock, which account for the remaining $17.9 million.
Our investment and debt securities is now fully liquidated and we do not expect any similar investment for the foreseeable future. In terms of the Ramco stock sale, we recognized the gain of approximately $6.3 million during the third quarter, which represents a 68% total return on our investment net of the legal and professional fees incurred.
Our accounts receivable increased approximately $950,000 or about 10% and we continue to feel the effects of small shop tenant hardships. Our bad debt expense in the quarter was approximately $1.3 million, which is comparable to the amount recorded in Q2 but our ratio of the expense to rental and recovery income increased from 1.8% to 2%.
The bad debt expense recognized in the third quarter was in line with our expectations as outlined in our last call. On prior calls I have mentioned that our reserve is applied on a tenant-by-tenant analyses of risk and it is not set based on broad estimated percentages. Having said that, it is interesting to note that the actual level of the reserve at September 30 fully accounts for all receivables greater than 60 days past due and covers a small portion of receivable balance that is 30 to 60 days old.
We expect our reserve levels will moderate somewhat in the next two quarters as our Florida tenants generally have the most trouble in summer months and their cash flow improves as they benefit from seasonality. Our total liabilities declined by approximately $24.6 million. Primarily attributable to the $20.7 million reduction in our line of credit balance and the $3.8 million decline in our mortgage debt.
The line reduction was made possible through the maturities and sales of our investment securities that I previously mentioned. Our capital structure in increased and diluted shares outstanding reflects the full weighting of our April issuance of common stock, in which we generated approximately $126 million of proceeds from the sale of $9.1 million shares of stock.
Now turning to our incomes statement. Our FFO for the quarter was $0.36 per share. The key items impacting this result were as follows. One, the $6.3 million gain on the sale of the Ramco investment I just mentioned. Two, a gain of $2.3 million from our sale of two out parcels. Three, our same property NOI decline of 4.5%.
In addition to occupancy related factors, the variance was impacted by the year-over-year increase in bad debt expense, which was about $677,000, the impact from rent relief]and abatements, which amounted to approximately $350,000, and the year-over-year implications of real estate tax accruals, which amounted to approximately $340,000.
G&A expenses in the quarter included direct G&A costs incurred by DIM, which were approximately $180,000 greater than expected as a result of legal, management and professional fees primarily attributable to our negotiations to take over additional operating functions.
We are pleased to be making progress to take responsibility for the additional leasing and property management functions that Tom described. The integration of all accounting functions is still on tract to occur during the first quarter of 2010.
I'll now turn to our FFO guidance for the year, which we are revising to $1.65 to $1.70, up from previous estimates of $1.55 to $1.63. This new guidance incorporates the gains recognized to date on our out-parcels, our RAMCO stock sale and the impact of the Westbury acquisition. Note that we still have some uncertainty regarding our final financing plan for Westbury and the pending purchase accounting adjustments, which may move the needle slightly within the guidance range.
This new guidance also includes additional gains from the sales of out-parcels in the fourth quarter of $0.02 a share. This guidance does not assume any additional investment activity beyond what we have described today. With this guidance we are also reaffirming our full-year same-property NOI forecast, which is minus 3% to minus 4% based on our updated leasing assumptions and our projected property level expenses. My focus for the remainder of the year will be centered on three main areas.
One, executing a financing strategy that provides additional liquidity to address the acquisition activity we announced today while giving us added flexibility for the future, two, finalizing our 2010 budget and implementing added discipline to our ongoing monitoring and management of property level NOI and three, building a team of employees who are focused and excited to build value for our shareholders and our tenants.
I continue to be impressed by the dedication our employees show while they address the many challenges our tenants are facing. Watching the team of people go the extra mile to finalize leases, implement new systems and solve problems in creative ways is invigorating. Our senior executive team has recently spent a lot of time developing a strategic plan that can help us take advantage of our liquidity and balance sheet in ways that will provide future growth. I am excited to have a roadmap that will allow us to work collectively toward that goal.
I would now like to turn the call over to the operator for questions.
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Fund Letters
