Acquisitions and Dispositions

6 Months Ended

Jun. 30, 2011

3. Acquisitions and Dispositions

Acquisitions

The following table provides a summary of income producing property acquisition activity (other than CapCo which is discussed below) during the six months ended June 30, 2011:


						Purchase		Mortgage
Date Purchased	Property Name	City	State	Square Feet		Price		Assumed
						(in thousands)
May 16, 2011	161 W. 16^th Street	New York	NY		56,870	$	55,000	$	—
March 16, 2011	Vons Circle Center	Long Beach	CA		148,000		37,000		11,500
March 15, 2011	Circle Center West	Long Beach	CA		64,000		20,000		—

						$	112,000	$	11,500

In conjunction with the above property acquisitions, we entered into reverse Section 1031 like-kind exchange agreements with third party intermediaries which are for a maximum of 180 days and allow us, for tax purposes, to defer gains on sale of other properties identified and sold within this period. Until the earlier of termination of the exchange agreements or 180 days after the respective acquisition dates, the third party intermediaries are the legal owner of each respective property; however, we control the activities that most significantly impact the property and retain all of the economic benefits and risks associated with the property. Therefore, we have determined we are the primary beneficiary of these VIEs and consolidated the properties and their operations as of each respective acquisition date noted above.

During the three and six months ended June 30, 2011, we expensed approximately $2.5 million and $2.6 million, respectively, of acquisition-related costs in connection with these property acquisitions which are included in general and administrative expenses in the condensed consolidated statements of income. The purchase price related to these acquisitions was funded by the use of our line of credit, cash on hand, and assumption of a mortgage with a principal balance of approximately $11.5 million which matures on October 10, 2028 and bears interest at 5.2%.

Acquisition of a Controlling Interest in CapCo

On January 4, 2011, we acquired a controlling ownership interest in CapCo through a joint venture with LIH. CapCo, which was previously wholly-owned by LIH, owns a portfolio of 13 properties in California totaling approximately 2.6 million square feet of GLA, including Serramonte Shopping Center in Daly City, Plaza Escuela in Walnut Creek, The Willows Shopping Center in Concord, 222 Sutter Street in San Francisco, and The Marketplace Shopping Center in Davis. LIH is a subsidiary of Capital Shopping Centres Group PLC, a United Kingdom real estate investment trust. The results of CapCo’s operations have been included in our condensed consolidated financial statements from the date of acquisition. Our initial fair value purchase price allocations may be refined as additional information regarding fair values of the assets acquired and liabilities assumed is received.

At the closing of the transaction, LIH contributed all of the outstanding shares of CapCo’s common stock to the joint venture in exchange for Class A Shares in the joint venture, representing an approximate 22% interest in the joint venture and we contributed a shared appreciation promissory note to the joint venture in the amount of $600.0 million and an additional $84.3 million in exchange for an approximate 78% interest in the joint venture, which consists of approximately 70% of the Class A joint venture shares and all of the Class B joint venture shares. The initial Class B joint venture shares are entitled to a preferred return of 1.5% per quarter. The actual payment of such amounts is limited to the extent that there is available cash remaining in any given period (subsequent to the payment of dividend equivalents to the holders of the Class A joint venture shares). Any remaining available cash after the preferred return is paid in a given period may be distributed, in an elective distribution, among the Class A and Class B joint venture shares, with 83.333% attributable to the Class B joint venture shares and 16.667% to the Class A joint venture shares on a pro-rata basis among the holders of such joint venture shares. Based on the respective ownership percentages held by Equity One and LIH, this allocation provides for, to the extent distributions in excess of available cash are distributed to the joint venture partners in the attribution of approximately 95% of such residual amounts to Equity One and the remaining 5% to LIH.

In addition, at the closing, LIH transferred and assigned to us an outstanding promissory note of CapCo in the amount of $67.0 million in exchange for 4.1 million shares of our common stock and one share of our newly-established Class A common stock, that (i) is convertible into 10,000 shares of our common stock in certain circumstances and (ii) subject to certain limitations, entitles LIH to voting rights with respect to a number of shares of our common stock determined with reference to the number of joint venture shares held by LIH from time to time. Effective June 29, 2011, the one share of Class A common stock was converted in accordance with its terms into 10,000 shares of our common stock.

The joint venture shares received by LIH are redeemable for cash or, solely at our option, our common stock on a one-for-one basis, subject to certain adjustments. LIH’s ability to participate in earnings of CapCo is limited to their right to receive distributions payable on their joint venture shares. These non-elective distributions are designed to mirror dividends paid on our common stock. As such, earnings attributable to the noncontrolling interest as reflected in our condensed consolidated statement of income will be limited to distributions made to LIH on its joint venture shares. Distributions to LIH in the three and six months ended June 30, 2011 were $2.1 million and $4.5 million, respectively, which were equivalent to the per share dividends declared on our common stock, adjusted for certain prorations as stipulated by the terms of the transaction.

In connection with the CapCo transaction, we also executed an Equityholders Agreement, among us, Capital Shopping Centers plc (“CSC”), LIH, Gazit-Globe Ltd. (“Gazit”), MGN (USA) Inc., Gazit (1995), Inc., MGN America, LLC, Silver Maple (2001), Inc. and Ficus, Inc. Pursuant to the Equityholders Agreement, we increased the size of our board of directors by one seat, effective January 4, 2011, and appointed David Fischel, a designee of CSC, to the board. Subject to its continuing to hold a minimum number of shares of our common stock (on a fully diluted basis), CSC has the right to nominate one candidate for election to our board of directors at each annual meeting of our stockholders at which directors are elected.

Also in connection with the CapCo transaction, we amended our charter to (i) reclassify and designate one authorized but unissued share of our common stock as one share of a newly-established class of our capital stock, denominated as Class A Common Stock, (ii) add foreign ownership limits and (iii) modify the existing ownership limits for individuals (as defined for purposes of certain provisions of the Internal Revenue Code of 1986, as amended, or the Code). The foreign ownership limits provide that, subject to certain exceptions, a foreign person may not acquire, beneficially or constructively, any shares of our capital stock, if immediately following the acquisition of such shares, the fair market value of the shares of our capital stock owned, directly and indirectly, by all foreign persons (other than LIH and its affiliates) would comprise 29% or more of the fair market value of the issued and outstanding shares of our capital stock.

The ownership limits for individuals in our charter were amended to provide that, subject to exceptions, no person (as such term is defined in our charter), other than an individual (who will be subject to the more restrictive limits discussed below), may own, or be deemed to own, directly and by virtue of certain constructive ownership provisions of the Code, more than 9.9% in value of the outstanding shares of our capital stock in the aggregate or more than 9.9%, in value or number of shares, whichever is more restrictive, of the outstanding shares of our common stock, and no individual may own, or be deemed to own, directly and by virtue of certain constructive ownership provisions of the Code, more than 5.0% in value of the outstanding shares of our capital stock in the aggregate or more than 5.0%, in value or number of shares, whichever is more restrictive, of the outstanding shares of our common stock.

Under our charter, the board of directors may increase the ownership limits. In addition, our board of directors, in its sole discretion, may exempt a person from the ownership limits and may establish a new limit applicable to that person if that person submits to the board of directors certain representations and undertakings, including representations that demonstrate, to the reasonable satisfaction of the board, that such ownership would not jeopardize our status as a REIT under the Code.

The fair value of the 4.1 million shares of common stock transferred of $73.7 million was based on the closing market price of our common stock on the closing date of $18.15 per share.

We expensed approximately $7.1 million of acquisition-related costs in connection with the CapCo transaction of which $35,000 and $1.8 million was recorded in general and administrative expenses in the accompanying condensed consolidated statements of income during the three and six months ended June 30, 2011, respectively, and approximately $2.4 million and $3.3 million was recorded in general and administrative expenses for the three and six months ended June 30, 2010, respectively.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date. See “Business Combinations” in Note 2 for the methods used to fair value the income producing properties and the related lease intangibles:


	Estimated Fair Value
	(In thousands)
Assets acquired:
Income producing properties	$	425,199
Properties held for sale		36,317
Construction in progress		1,530
Cash and cash equivalents		23,412
Accounts and other receivables		663
Investments in and advances to joint ventures		48,092
Above-market leases		11,153
Other assets⁽¹⁾		46,593

Total assets acquired	$	592,959


Liabilities assumed:
Mortgage notes payable	$	256,467
Unamortized premium on notes payable, net		5,346
Accrued expenses		8,957
Below-market leases		12,797
Tenant security deposits		871
Other liabilities		1,561

Total liabilities assumed	$	285,999


Estimated fair value of net assets acquired	$	306,960


⁽¹⁾		Included under the caption “Other assets” are intangible assets related to in-place leases, lease commissions and lease origination costs.

Simultaneous with the closing of the transaction, we contributed an additional $84.3 million to the joint venture in exchange for additional Class B joint venture shares, which amount was used to repay the remaining principal amount due on the mortgage loan secured by the Serramonte Shopping Center. Although the mortgage loan was paid off at closing, the liability is reflected in the fair value of net assets acquired above since the obligation became ours upon closing.

The fair values of the acquired intangible assets and liabilities, all of which have definite lives and are amortized, were assigned as follows:


			Remaining Weighted-
	Fair Value		Average Useful Life
	(in thousands)		(in years)
In-place leases	$	38,222		6.2
Above-market leases		11,153		7.2
Lease commissions		4,583		7.8
Lease origination costs		992		6.0
Below-market leases		12,797		6.8

As of the acquisition date, we classified three properties with fair values totaling approximately $36.3 million as held for sale. We report the operating results of properties classified as held for sale as discontinued operations. Results of these held for sale properties are included in a separate component of income on the condensed consolidated statement of income under the caption “operations of income producing properties sold or held for sale.”

The fair values of the mortgage notes payable were determined by use of present value techniques and appropriate market interest rates on a loan by loan basis. In valuing the mortgage notes at each property, we considered the loan-to-value (“LTV”) ratio, maturity date and other pertinent factors related to the loan as well as occupancy level, market location, physical property condition, asset class, cash flow and other factors related to collateral. At the time of valuation, the range of possible borrowings varied by property from 5% to 7%.

The fair value of the noncontrolling interest in CapCo was estimated by reference to the amount that LIH would be entitled to receive upon a redemption of its Class A joint venture shares, which is equal to the value of the same number of shares of Equity One common stock plus any accrued but unpaid quarterly distributions with respect to the Class A joint venture shares. As a result, the approximately 11.4 million joint venture shares were valued based on the closing price of Equity One common stock on January 4, 2011. We engaged a third party valuation firm to independently value the joint venture shares considering the economic risks and rewards that are unique to a holder of such joint venture shares. In this case, consideration was given to the restriction on transferability and the probability that such joint venture shares would not be redeemed for shares of our stock for at least five years due to the tax obligations that LIH would incur upon their conversion. A 12.8% discount to the January 4, 2011 stock price was used to value these joint venture shares using the Finnerty Model, a prominent valuation model used by valuation experts to approximate the value of non-marketable investments. The fair value of the joint venture shares held by LIH was estimated at $15.83 per share, or $179.8 million in aggregate.

The fair value of the identifiable assets acquired and liabilities assumed exceeded the sum of the fair value of the consideration transferred and the fair value of the noncontrolling interest. The fair value of the assets acquired significantly increased from the date the original purchase terms were agreed upon until the closing of the transaction on January 4, 2011. In addition, as discussed above, the fair value of the consideration paid reflected a 12.8% discount applicable to the noncontrolling interest. As a result, we recognized a gain of approximately $53.5 million which is included in the line item entitled “gain on bargain purchase” in the condensed consolidated statement of income for the six months ended June 30, 2011. The following table provides a reconciliation of the gain on bargain purchase:


	(In thousands)
Fair value of net assets acquired	$	306,960
Fair value of consideration transferred		(73,698	)
Fair value of noncontrolling interest		(179,795	)

Gain on bargain purchase	$	53,467

The amounts of revenues and earnings of CapCo included in our condensed consolidated statements of income from the acquisition date are as follows:


	Three Months ended			Six Months ended
	June 30, 2011			June 30, 2011
	(In thousands)
Revenues	$	15,145		$	27,439
Net loss attributable to Equity One, Inc.	$	(756	)	$	(2,284	)

The accompanying unaudited pro forma information for the three and six months ended June 30, 2011 and 2010 is presented as if the acquisition of CapCo on January 4, 2011 had occurred on January 1, 2010. This pro forma information is based upon the historical financial statements and should be read in conjunction with the condensed consolidated financial statements and notes thereto. This unaudited pro forma information does not purport to represent what the actual results of our operations would have been had the above occurred, nor do they purport to predict the results of operations of future periods. The unaudited pro forma information for the three and six months ended June 30, 2011 was adjusted to exclude $0 and $53.5 million of gain on bargain purchase, $35,000 and $1.8 million of acquisition related costs, and $318,000 and $868,000 of reorganization costs related to the acquisition, respectively. The unaudited pro forma information for the three and six months ended June 30, 2010 was adjusted to include $0 and $53.5 million of gain on bargain purchase and adjusted to exclude $2.4 million and $3.3 million of acquisition related costs, respectively.


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2011		2010		2011		2010
	(in thousands)
Revenues	$	88,251	$	85,156	$	173,935	$	168,268
Net income (loss) attributable to Equity One, Inc.	$	7,787	$	6,318	$	15,141	$	64,950

Property Dispositions

In June 2011, we sold one outparcel for gross proceeds of approximately $1.3 million and recognized a gain of approximately $59,000, which is included in gain on sale of real estate in the accompanying condensed consolidated statements of income for the three and six months ended June 30, 2011. We also sold an operating property for gross proceeds of approximately $1.3 million and recognized a loss of $13,000, which is included in loss on disposal of income producing properties in the accompanying condensed consolidated statements of income for the three and six months ended June 30, 2011.

In June 2011, we recognized a gain on the sale of an outparcel to our GRI-EQY I, LLC joint venture as the contingencies related to the original sale in April 2008 were met. The gain of $3.6 million, net of a deferred amount of approximately $400,000 due to our continuing involvement, is included in gain on sale of real estate in the accompanying condensed consolidated statements of income for the three and six months ended June 30, 2011.

In May 2011, we sold two operating properties to a newly formed joint venture between us and New York State Common Retirement Fund (“CRF”) for gross proceeds of approximately $39.2 million. We recognized a gain of approximately $943,000, net of the deferred amount of approximately $404,000 due to our continuing involvement in the joint venture, which is included in gain on sale of real estate in the accompanying condensed consolidated statements of income for the three and six months ended June 30, 2011. See Note 4 below for a description of the CRF joint venture.

As part of our strategy to upgrade and diversify our portfolio and recycle our existing capital, we evaluate opportunities to sell assets or otherwise contribute assets to existing or new joint ventures with third parties. If the market values of these assets are below their carrying values, it is possible that the disposition or contribution of these assets could result in impairments or other losses. Depending on the prevailing market conditions and historical carrying values, these impairments and losses could be material.

Discontinued Operations

We report as discontinued operations, properties held-for-sale and operating properties sold in the current period. The results of these discontinued operations are included in a separate component of income on the condensed consolidated statements of income under the caption discontinued operations. This reporting has resulted in certain reclassifications of financial statement amounts.

In June 2011, we recognized an impairment loss of $1.3 million relating to our investment in two properties that are held for sale.

The components of income and expense relating to discontinued operations for the three and six months ended June 30, 2011 and 2010 are shown below. These include the results of operations through the date of each respective sale for properties sold during 2011 and 2010 and the operations for the applicable period for those assets classified as held for sale as of June 30, 2011:


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2011			2010		2011			2010
	(In thousands)					(In thousands)
Rental revenue	$	1,135		$	132	$	2,211		$	316
Expenses:
Property operating expenses		409			65		768			113
Rental property depreciation and amortization		37			43		77			88
General and administrative expenses		19			—		35			—

Operations of income producing property		670			24		1,331			115
Interest expense		(280	)		—		(559	)		—
(Loss) gain on disposal of income producing properties		(13	)		1,458		(13	)		1,458
Impairment loss on income producing properties held for sale		(1,277	)		—		(1,277	)		—
Other income		—			—		2			—

(Loss) income from discontinued operations	$	(900	)	$	1,482	$	(516	)	$	1,573