Equity One Sharpens Focus
Board: Real Estate Inv. Trusts: REITs

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By Reitnut
February 22, 2007

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Equity One is a mid-sized neighborhood shopping center REIT, HQ'd in Miami Beach, with a $2B market cap. It has gone through an interesting history, doing some things well, and others not so well. The head guy, Chaim Katzman, decided in mid-2006 to restructure the entire management team, and brought in a whole new set of executives, led by Jeff Olson. Jeff, in turn, brought in Greg Andrews (of Green Street fame) as CFO, and Jeff Stauffer (from Pan Pacific) as COO.

After listening to EQY's conference call today, I have several overall impressions that I would like to share, which may be of interest to some of you:

1. The management change at EQY is very, very substantial. Indeed, every major executive position has changed during the past six months, and there is no question in my mind that a MUCH better set of executives is now running the show at this REIT. Given the emphasis that I place on quality management in a REIT, this is, IMO, a very significant event. I believe that this new team will make EQY a much better company for long-term REIT investors.

2. Along with the major change in management, there is a major change in business strategy. Rather than picking up assets willy-nilly, EQY will be a much more focused company. They will concentrate on Florida, which comprises 2/3 of their real estate assets, and related markets. They will de-emphasize acquisitions and focus on the redevelopment opportunities within their portfolio, and become much more of a local sharpshooter. And they will be working hard to goose internal growth through rental rate increases (their leases are presently substantially below market rents) and, to the extent possible, push occupancy gains beyond the current rate of 95%. Management will also seek to improve the quality of earnings, along with corporate governance.

3. The shake-ups and turmoil caused by the massive management change, and its related costs, are now behind the company, which can now focus on future long-term growth.

4. Earnings-centric REIT investors were unhappy with the results for Q4 and the lower-than-expected guidance for 2007; as a result, the stock was hammered today, closing down 2.2% at $27.30 (and at one point trading as low as $25.90). However, a closer look at the operating results showed no deterioration in existing or future internal growth prospects, as SS NOI rose 2.9% in Q4 (3.0% for all of 2006), and the forecast for '07 is SS NOI growth of 3-4%.

A 19 cent per-share FFO decline in '06 vs. '05 was due to a large Texas portfolio sale last year, the payment of a special dividend in '06, costs resulting from transition to new management (including severance costs reducing headcount from 239 to 150 internal employees) and write-offs of abandoned deal costs, reflecting new management's discomfort with several pending projects devised by prior management.

Another projected FFO decline in 2007, of approximately 12 cents per share, is due to asset sales in '06 and an additional $150MM in dilutive projected sales in '07 (as the company sells poorer quality assets in non-core markets and assets with very modest growth prospects), and reduced lease termination fees and land sales revenues expected this year (the latter, while recurring, isn't included in '07 guidance).

Management claims that the quality of earnings will improve in '07 and beyond, as it will be based primarily upon operating NOI and not one-off fees and non-rental revenues.

Management also believes that the company can generate FFO growth (per share) of 7-8% over the next five years (beginning in '08 or '09), based upon stronger internal growth rates and more profitable (and more selective) external growth via redevelopments and developments. Some of the higher growth will be driven by higher tenant quality in addition to higher rents (the company plans to target more regional and national retailers).

The balance sheet is healthy, with a debt/total market cap of 35% and fixed charge coverage of 2.7x. Little debt is at variable rates of interest.

Bottom Line: This is a very good new management team, as Messrs. Olson, Andrews and Stauffer are highly-regarded among REIT mavens. I know Greg Andrews well, and believe him to be extremely bright - and he knows how REITs should go about creating value. He left Green Street because of what he saw as a great opportunity, and because he has (he told me) a tremendous amount of respect for new CEO Jeff Olson.

Unlike peers Kimco, Regency, Developers and Weingarten, Equity One will be a very focused neighborhood shopping center REIT, seeking to be a local sharpshooter in its markets. Many of its S. Florida markets can be characterized as high-barrier, which bodes well for future above-average rental rate growth. EQY's smaller size should enable a few really good external growth opportunities to goose FFO growth, and EQY will, for now, not seek to enter the JV business that's essential for above-average FFO growth at its larger peers. The trading multiple on EQY's stock may continue to improve with better returns on investment, a higher quality of earnings and better credibility and corporate governance.

Nevertheless, this new management team lacks a track record, and so investors may reserve judgment for another year or so to determine whether they can walk their talk, and deliver results in line with, or exceeding, expectations. There will, no doubt, be some pot-holes still in the road. Thus it's hard to know if the stock will outperform its peers over the near term. Furthermore, given the changes taking place at the company, analysts' estimates of NAV are not yet to be trusted. Finally, on an FFO multiple basis, the stock, at 19.8x mid-point guidance FFO for '07, the stock is hardly cheap (but neither is much else).

All that said, I am a patient long-term investor, and have been buying EQY shares over the past six months; I will continue to add slowly to my position. I think that, over the next 3-5 years, the stock will deliver very acceptable total returns (including a dividend yield of 4.4%).


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