10-Q 1 form10-q.htm EQUITY ONE, INC. FORM 10-Q FOR THE PERIOD ENDED 3/31/07 Equity One, Inc. Form 10-Q for the Period Ended 3/31/07
 

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
 

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2007

Commission File No. 001-13499

 
 
EQUITY ONE, INC.
(Exact name of registrant as specified in its charter)


Maryland
  
52-1794271
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer
Identification No.)


1600 N.E. Miami Gardens Drive
N. Miami Beach, Florida
  
33179
(Address of principal executive offices)
  
(Zip Code)


(305) 947-1664
(Registrant's telephone number, including area code)


 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes x        No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  x     Accelerated filer  o     Non-accelerated filer  o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes o  No x
 
 
 
Applicable only to Corporate Issuers:
 
As of the close of business on May 2, 2007, 73,817,066 shares of the Company's common stock, par value $0.01 per share, were outstanding.
 
 

 
 
EQUITY ONE, INC. AND SUBSIDIARIES
 
QUARTERLY REPORT ON FORM 10-Q
 
QUARTER ENDED MARCH 31, 2007
 
TABLE OF CONTENTS
 
 
PART I - FINANCIAL INFORMATION
 
Item 1.
Financial Statements
Page
     
 
Condensed Consolidated Balance Sheets as of March 31, 2007 (unaudited) and December 31, 2006
1
     
 
Condensed Consolidated Statements of Operations (unaudited) three months ended March 31, 2007 and 2006
2
     
 
Condensed Consolidated Statements of Comprehensive Income (unaudited) three months ended
March 31, 2007 and 2006
3
     
 
Condensed Consolidated Statement of Stockholders' Equity (unaudited) three months ended March 31, 2007
4
     
 
Condensed Consolidated Statements of Cash Flows (unaudited) three months ended March 31, 2007 and 2006
5
     
 
Notes to the Condensed Consolidated Financial Statements
7
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
33
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
41
     
Item 4.
Controls and Procedures
43
     
     
PART II - OTHER INFORMATION
  
     
Item 1.
Legal Proceedings
44
     
Item 1A.
Risk Factors
44
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
44
     
Item 3.
Defaults Upon Senior Securities
44
     
Item 4.
Submission of Matters to a Vote of Security Holders
44
     
Item 5.
Other Information
44
     
Item 6.
Exhibits
44
     
Signatures
  
45




PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
 
EQUITY ONE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 31, 2007 and December 31, 2006
(In thousands, except per share data)
(Unaudited)
 
   
March 31,
2007
  
December 31,
2006
  
ASSETS
              
Properties:
              
Income producing
  
$
2,050,644
  
$
1 ,896,843
  
Less: accumulated depreciation
    
(151,286
)
  
(144,825
)
Income-producing property, net
    
1,899,358
    
1,752,018
  
Construction in progress and land held for development
    
78,519
    
113,340
  
Properties held for sale
    
20,280
    
20,353
  
Properties, net
    
1,998,157
    
1,885,711
  
Cash and Cash Equivalents
    
6,620
    
-
  
Cash Held in Escrow
    
1,496
    
1,547
  
Accounts and Other Receivables, net
    
17,925
    
18,967
  
Securities
    
75,495
    
75,102
  
Goodwill
    
13,092
    
13,092
  
Other Assets
    
81,153
    
75,356
  
TOTAL ASSETS
  
$
2,193,938
  
$
2,069,775
  
LIABILITIES AND STOCKHOLDERS’ EQUITY
              
Liabilities:
              
Notes Payable
              
Mortgage notes payable
  
$
416,857
  
$
391,647
  
Mortgage notes payable related to property held for sale
    
-
    
-
  
Unsecured revolving credit facilities
    
162,636
    
76,500
  
Unsecured senior notes payable
    
591,415
    
591,187
  
     
1,170,908
    
1,059,334
  
Unamortized premium/discount on notes payable
    
11,840
    
10,322
  
Total notes payable
    
1,182,748
    
1,069,656
  
Other liabilities
              
Accounts payable and accrued expenses
    
38,172
    
36,565
  
Tenant security deposits
    
9,817
    
9,622
  
Other liabilities
    
33,120
    
27,265
  
Total liabilities
    
1,263,857
    
1,143,108
  
Minority interests
    
989
    
989
  
Commitments and contingencies
              
Stockholders’ equity:
              
Preferred stock, $0.01 par value - 10,000 shares authorized but unissued unissued
    
-
    
-
  
Common stock, $0.01 par value - 100,000 shares authorized 73,070 and 72,756 shares issued and outstanding for 2007 and 2006, respectively
    
731
    
728
  
Additional paid-in capital
    
900,621
    
895,247
  
Retained earnings
    
35,084
    
37,201
  
Accumulated other comprehensive loss
    
(7,344
)
  
(7,498
)
Total stockholders’ equity
    
929,092
    
925,678
  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  
$
2,193,938
  
$
2,069,775
  
See accompanying notes to condensed consolidated financial statements.
              
 
- 1 -
 
EQUITY ONE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the three months ended March 31, 2007 and 2006
(In thousands, except per share data)
(Unaudited)
  
   
Three months ended March 31,
  
   
2007
  
2006
  
REVENUE:
              
Minimum rent
  
$
47,735
  
$
41,874
  
Expense recoveries
    
13,368
    
12,098
  
Percentage rent
    
1,260
    
1,274
  
Management and leasing services
    
837
    
155
  
Total revenue
    
63,200
    
55,401
  
               
COSTS AND EXPENSES:
              
Property operating
   
16,668
    
15,355
  
Management and leasing services
   
746
    
77
  
Rental property depreciation and amortization
    
11,309
    
9,865
  
General and administrative
    
7,765
    
4,616
  
Total costs and expenses
    
36,488
    
29,913
  
               
INCOME BEFORE OTHER INCOME AND EXPENSE, MINORITY INTEREST AND DISCONTINUED OPERATIONS
    
26,712
    
25,488
  
               
OTHER INCOME AND EXPENSE:
              
Investment income
    
6,207
    
4,652
  
Other income
    
182
    
350
  
Interest expense
    
(15,757
)
  
(13,971
)
Amortization of deferred financing fees
    
(388
)
  
(345
)
Gain on sale of real estate
    
1,067
    
314
  
Loss on extinguishment of debt
    
-
    
(292
)
INCOME BEFORE MINORITY INTEREST AND DISCONTINUED OPERATIONS
    
18,023
    
16,196
  
Minority Interest
    
(28
)
  
(28
)
INCOME FROM CONTINUING OPERATIONS
    
17,995
    
16,168
  
               
DISCONTINUED OPERATIONS:
              
Operations of income-producing properties sold or held for sale
    
292
    
5,705
  
Gain on disposal of income-producing properties
    
1,732
    
492
  
Income from discontinued operations
    
2,024
    
6,197
  
               
NET INCOME
  
$
20,019
  
$
22,365
  
               
EARNINGS PER COMMON SHARE, BASIC:
              
Continuing operations
  
$
0.24
  
$
0.22
  
Discontinued operations
    
0.03
    
0.08
  
   
$
0.27
  
$
0.30
  
Number of Shares Used in Computing Basic Earnings per Share
    
72,974
    
75,151
  
               
EARNINGS PER COMMON SHARE, DILUTED
              
Continuing operations
  
$
0.24
  
$
0.21
  
Discontinued operations
    
0.03
    
0.08
  
   
$
0.27
  
$
0.29
  
Number of Shares Used in Computing Diluted Earning per Share
    
73,990
    
75,978
  
See accompanying notes to the condensed consolidated financial statements.
              
 
- 2 -




EQUITY ONE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
For the three months ended March 31, 2007 and 2006
(In thousands, except per share data)
(Unaudited)
  
   
Three months ended
March 31,
  
   
2007
  
2006
  
           
NET INCOME
  
$
20,019
  
$
22,365
  
               
OTHER COMPREHENSIVE INCOME (LOSS):
              
Net unrealized holding (loss) gain on securities available for sale
    
554
    
(7,112
)
Changes in fair value of cash flow hedges
    
(349
)
  
-
  
Reclassification adjustment for loss on sale of securities included in net income
    
(14
)
  
(3
)
Net realized gain on settlement of interest rate contracts
    
-
    
1,543
  
Amortization of interest rate contracts
    
(37
)
  
(9
)
COMPREHENSIVE INCOME
  
$
20,173
  
$
16,784
  
               
See accompanying notes to the condensed consolidated financial statements.




- 3 -


 
EQUITY ONE, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders’ Equity
For the three months ended March 31, 2007
(In thousands, except per share data)
(Unaudited)
 
  
 
   
   
Common
Stock
  
Additional
Paid-In
Capital
  
Retained
Earnings
  
Accumulated Other Comprehen-sive Income/(Loss)
  
Total
Stockholders’
Equity
  
BALANCE, JANUARY 1, 2007
  
$
728
    $
895,247
  
$
37,201
  
$
(7,498
)
$
925,678
  
Issuance of common stock
    
3
    
2,965
    
-
    
-
    
2,968
  
Share-based compensation expense
    
-
    
2,409
    
-
    
-
    
2,409
  
Net income
    
-
    
-
    
20,019
    
-
    
20,019
  
Dividends paid
    
-
    
-
    
(22,136
)
  
-
    
(22,136
)
Other comprehensive income
    
-
    
-
    
-
    
154
    
154
  
BALANCE, MARCH 31, 2007
  
$
731
    $
900,621
  
$
35,084
  
$
(7,344
)
$
929,092
  
 



See accompanying notes to the condensed consolidated financial statements.











- 4 -


 
EQUITY ONE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the three months ended March 31, 2007 and 2006
(In thousands)
(Unaudited)
 
  
       
   
Three months ended March 31,
 
   
2007
  
2006
  
OPERATING ACTIVITIES:
              
Net income
  
$
20,019
  
$
22,365
  
Adjustments to reconcile net income to net cash provided by operating activities:
              
Straight line rent adjustment
    
(454
)
  
(621
)
Amortization of above/(below) market lease intangibles
    
(933
)
  
(523
)
Provision for losses on accounts receivable
    
301
    
(226
)
Amortization of premium on notes payable
    
(456
)
  
(2,886
)
Amortization of deferred financing fees
    
388
    
355
  
Rental property depreciation and amortization
    
11,374
    
12,039
  
Stock-based compensation
    
2,409
    
1,387
  
Amortization of derivatives
    
(37
)
  
-
  
Gain on disposal of real estate and income-producing properties
    
(2,799
)
  
(806
)
Gain on sale of securities
    
(16
)
  
(4
)
Minority interest
   
28
    
28
  
Changes in assets and liabilities:
              
Accounts and other receivables
    
(978
)
  
312
  
Other assets
    
(1,661
)
  
(3,592
)
Accounts payable and accrued expenses
    
3,177
    
108
  
Tenant security deposits
    
195
    
510
  
Other liabilities
    
1,374
    
205
  
Net cash provided by operating activities
    
31,931
    
28,651
  
               
INVESTING ACTIVITIES:
              
Additions to and purchases of rental property
    
(98,517
)
  
(83,421
)
Land held for development
    
-
    
(26,950
)
Additions to construction in progress
    
(5,441
)
  
(6,350
)
Proceeds from disposal of rental properties
    
10,562
    
2,883
  
Increase in cash held in escrow
    
51
    
-
  
Increase in deferred leasing costs
    
(1,550
)
  
(1,253
)
Additions to notes receivable
    
(14
)
  
-
  
Proceeds from repayment of notes receivable
    
13
    
1,476
  
Proceeds from sale of securities
    
246
    
57
  
Cash used to purchase securities
    
(81
)
  
(25,078
)
Net cash used in investing activities
    
(94,731
)
  
(138,636
)
(Continued)


- 5 -


EQUITY ONE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the three months ended March 31, 2007 and 2006
(In thousands)
(Unaudited)
  
           
   
Three months ended March 31,
 
   
2007
  
2006
  
FINANCING ACTIVITIES:
              
Repayments of mortgage notes payable
  
$
2,480
  
$
(13,817
)
Net borrowings under revolving credit facilities
    
86,136
    
21,835
  
Proceeds from senior debt offerings
    
-
    
123,284
  
Increase in deferred financing costs
    
-
    
(1,611
)
Proceeds from issuance of common stock
    
2,968
    
5,219
  
Stock issuance costs
    
-
    
(29
)
Cash dividends paid to stockholders
    
(22,136
)
  
(22,753
)
Distributions to minority interest
    
(28
)
  
(29
)
Net cash provided by financing activities
    
69,420
    
112,099
  
               
Net increase in cash and cash equivalents
    
6,620
    
2,114
  
Cash and cash equivalents at beginning of the period
    
-
    
102
  
Cash and cash equivalents at end of the period
  
$
6,620
  
$
2,216
  
               
Supplemental Disclosure of Cash Flow Information:
              
Cash paid for interest, net of amount capitalized
  
$
17,557
  
$
12,382
  
Supplemental Schedule of Non-Cash Investing and Financing Activities:
              
Change in unrealized holding gain (loss) on securities
  
$
540
  
$
(7,112
)
Change in fair value of hedges
  
$
(349
)
      
               
The Company acquired and assumed mortgages on some of the
rental property acquisitions:
              
Fair value of rental property
  
$
69,069
    
-
  
Assumption of mortgage notes payable
    
(27,740
)
  
-
  
Fair value adjustment of mortgage notes payable
    
(1,974
)
  
-
  
Cash paid for rental property
  
$
39,355
  
$
-
  
The Company issued senior unsecured notes:
              
Face value of notes
  
$
-
  
$
125,000
  
Underwriting Costs
    
-
    
(812
)
Discount
    
-
    
(904
)
Cash received
  
$
-
  
$
123,284
  
               
(Concluded)
               
See accompanying notes to the condensed consolidated financial statements.
              


 

 
- 6 -

EQUITY ONE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2007
(Unaudited)

1. Organization and Basis of Presentation
 
Organization
 
Equity One, Inc. operates as a self-managed real estate investment trust (“REIT”) that principally acquires, renovates, develops and manages neighborhood and community shopping centers anchored by leading supermarkets, drug stores or discount retail store chains.
 
Basis of Presentation
 
The consolidated financial statements include the accounts of Equity One, Inc. and its wholly-owned subsidiaries and those partnerships where it has financial and operating control. Equity One, Inc. and its subsidiaries are hereinafter referred to as “the consolidated companies” or the “Company.”
 
Investments in joint ventures not controlled by the Company are accounted for under the equity method of accounting where the Company has concluded that the venture is not a variable interest entity or the Company is not the primary beneficiary and subject to the consolidation rules of FIN 46(R), “Consolidation of Variable Interest Entities.”
 
All significant intercompany transactions and balances have been eliminated in consolidation.
 
Certain prior-year data have been reclassified to conform to the 2007 presentation.
 
Portfolio
 
As of March 31, 2007, the Company owned or had interests in 179 properties consisting of 161 shopping centers, nine development/redevelopment properties, six non-retail properties and three parcels of land.
 
Interim Financial Presentation
 
The accompanying unaudited condensed consolidated financial statements have been prepared by the Company’s management in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (the “SEC”). Accordingly, these unaudited condensed consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The results of operations for the three month period ended March 31, 2007 are not necessarily indicative of the results that may be expected for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained elsewhere in this Form 10-Q and with Management’s Discussion and Analysis of Financial Condition and Results of Operations and audited consolidated financial statements and related footnotes, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, filed with the SEC on March 5, 2007.
 

- 7 -

EQUITY ONE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2007
(Unaudited)

 
2.
Summary of Significant Accounting Policies
 
Properties
 
Income-producing property is stated at cost and includes all costs related to acquisition, development and construction, including tenant improvements, interest incurred during development, costs of predevelopment and certain direct and indirect costs of development. 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 Company is actively pursuing acquisition opportunities and will not be successful in all cases; costs incurred related to these acquisition opportunities are expensed when it is probable that the Company will not be successful in the acquisition.
 
Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets, as follows:
 
Land improvements
40 years
Buildings
30-40 years
Building improvements
5-40 years
Tenant improvements
Over the shorter of the term of the related lease or economic useful life
Equipment
5-7 years

Business Combinations
 
The results of operations of any acquired property are included in the Company’s financial statements as of the date of its acquisition.
 
The Company allocates the purchase price of acquired companies and properties to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. Fair value is defined as the amount at which that asset could be bought or sold in a current transaction between willing parties (other than in a forced or liquidation sale). In order to allocate the purchase price of acquired companies and properties to the tangible and intangible assets acquired, the Company identifies and estimates the fair value of the land, buildings and improvements, reviews the leases to determine the existence of, and estimates the fair value of, any contractual or other legal rights and investigates the existence of, and estimates the fair value of, any other identifiable intangible assets. Such valuations require management to make significant estimates and assumptions, especially with respect to intangibles.
 
The cost approach is used as the primary method to estimate the fair value of the buildings, improvements and other assets. The cost approach is based upon the current costs to develop the particular asset in that geographic location, less an allowance for physical and functional depreciation. The assigned value for buildings and improvements is based on an as-if vacant basis. The market value approach is used as the primary method to estimate the fair value of the land. The determination of the fair value of contractual intangibles is based on the costs incurred to originate a lease, including commissions and legal costs, excluding any new leases negotiated in connection with the purchase of a property. In-place lease values are based on management’s evaluation of the specific characteristics of each lease and the Company’s overall relationship with each tenant. Among the factors considered in the allocation of these values include the nature of the existing relationship with the tenant, the tenant’s credit quality, the expectation of lease renewals, the estimated carrying costs of the property during a hypothetical expected lease-up period, current market conditions and costs to execute similar leases. Estimated carrying costs include real estate taxes, insurance, other property operating costs and estimates of lost rentals at market rates during the hypothetical expected lease-up periods, given the specific market conditions.
 

- 8 -

EQUITY ONE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2007
(Unaudited)

 
Above-market and below-market lease values are determined based on the present value (using a discount rate reflecting the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the leases negotiated and in-place at the time of acquisition and (ii) management’s estimate of fair market lease rates for the property or equivalent property, measured over a period equal to the remaining non-cancelable term of the lease. The value of above-market lease values is amortized as a reduction of rental income over the remaining terms of the respective leases. The value of below-market lease values is amortized as an increase to rental income over the remaining terms of the respective leases.
 
The Company allocates no value to customer relationship intangibles if it has pre-existing business relationships with the retailers. Other than as discussed above, the Company has determined that its real estate properties do not have any other significant identifiable intangibles.
 
Critical estimates in valuing certain of the intangibles and the assumptions of what marketplace participants would use in making estimates of fair value include, but are not limited to: future expected cash flows, estimated carrying costs, estimated origination costs, lease up periods and tenant risk attributes, as well as assumptions about the period of time the acquired lease will continue to be used in the Company’s portfolio and discount rates used in these calculations. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. Assumptions may not always reflect unanticipated events and changes in circumstances may occur. In making such estimates, management uses a number of sources, including appraisals, third party cost segregation studies or other market data, as well as, information obtained in its pre-acquisition due diligence and marketing and leasing activities.
 
In the event that a tenant terminates its lease, any unamortized portion of each related intangible is expensed.
 
Intangibles associated with property acquisitions are included in other assets and other liabilities in the accompanying consolidated balance sheets.
 
Construction in Progress and Land Held for Development
 
Land held for development is stated at cost. Costs incurred during the predevelopment stage are capitalized once management has identified a site, determined that the project is feasible and it is probable that the Company is able to proceed with the project. Properties undergoing significant renovations and improvements are considered under development. The Company estimates the cost of a property undergoing renovations as a basis for determining eligible costs. Interest, real estate taxes and other costs directly related to the properties and projects under development are capitalized until the property is ready for its intended use. Similar costs related to properties not under development are expensed as incurred. In addition, the Company writes off costs related to predevelopment projects when it determines that it will no longer pursue the project.
 
Total interest expense capitalized to construction in progress and land held for development was $1.1 million for each of the quarters ended March 31, 2007 and 2006.
 

 

 

 

 

- 9 -


 
EQUITY ONE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2007
(Unaudited)

 
Property Held for Sale
 
Under Statement of Financial Accounting Standards, or SFAS, No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the definition of a component of an entity, assuming no significant continuing involvement, requires that operating properties that are sold or classified as held for sale be accounted for as discontinued operations. Accordingly, the results of operations of operating properties disposed of or classified as held for sale for which the Company has no significant continuing involvement are reflected as discontinued operations. Given the nature of real estate sales contracts, it is not unusual for such contracts to allow potential buyers a period of time to evaluate the property prior to formal acceptance of the contract. In addition, certain other matters critical to the final sale, such as financing arrangements; often remain pending even upon contract acceptance. As a result, properties under contract may not close within the expected time period, or may not close at all. Due to these uncertainties, the Company generally does not classify a property as “discontinued operations” until it is sold, unless management has otherwise determined that the property meets the criteria of SFAS No. 144 and is likely to close within the time requirements.
 
Long-lived Assets
 
On a periodic basis, or whenever events or change in circumstances indicate, the Company assesses whether the value of its real estate properties may be impaired. A property’s value is impaired only if it is probable that management’s estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property are less than the historical net carrying value of the property. In management’s estimate of cash flows, it considers facts such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other factors. In addition, the undiscounted cash flows may consider a probability-weighted cash flow estimation approach when alternative courses of action to recover the carrying amount of a long-lived asset are under consideration or a range is estimated. The determination of undiscounted cash flows requires significant estimates by management and considers the expected course of action at the balance sheet date. Subsequent changes in estimated undiscounted cash flows arising from changes in anticipated actions could impact the determination of whether impairment exits and whether the effects could materially impact the Company’s net income. The assessments have a direct impact on the Company’s net income because recording an impairment charge results in an immediate charge to expense.
 
To the extent that impairment has occurred, the loss will be measured as the excess of the carrying amount of the property over the fair value of the property.
 
When assets are identified by the Company as held for sale, the Company estimates the sales prices, net of selling costs, of such assets. Assets that will be sold together in a single transaction are aggregated in determining if the net sales proceeds of the group are expected to be less than the net book value of the assets. If, in management’s opinion, the net sales price of the assets, which have been identified for sale, are expected to be less than the net book value of the assets, an impairment charge is recorded. For the three months ended March 31, 2006, $86,000 of impairment loss related to a property that was subsequently sold was recognized and is reflected in income from discontinued operations. There was no impairment loss for the three months ended March 31, 2007.
 
Cash and Cash Equivalents

The Company considers highly liquid investments with an initial maturity of three months or less to be cash equivalents.
 

- 10 -


EQUITY ONE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2007
(Unaudited)

 
Cash Held in Escrow
 
Cash held in escrow represents the cash proceeds of property sales that are being held by qualified intermediaries in anticipation of the acquisition of replacement properties in tax-free exchanges under Section 1031 of the Internal Revenue Code.
 
Accounts Receivable
 
Accounts receivable include amounts billed to tenants and accrued expense recoveries due from tenants. Management evaluates the collectibility of these receivables and adjusts the allowance for doubtful accounts to reflect amounts estimated to be uncollectible. The allowance for doubtful accounts was approximately $1.7 million and $1.6 million at March 31, 2007 and December 31, 2006, respectively.
 
Securities
 
Historically, the Company’s investments consist primarily of equity and debt securities. The Company’s equity investments are classified as available-for-sale and recorded at fair value based on current market prices. Changes in the fair value of the equity investments are included in accumulated other comprehensive income (loss). While the Company currently owns no debt securities, in the past they were recorded at cost and are classified as held-to-maturity, with the related discount/premium amortized over the life of the investment using the effective interest method.
 
For securities classified as held-to-maturity, the Company determines whether a decline in fair value below the amortized cost basis is other-than-temporary. If it is probable that the Company will be unable to collect all amounts due according to the contractual terms of a debt security, an other-than-temporary impairment is considered to have occurred. The determination of other-than-temporary declines in value requires significant estimates and assumptions by management and requires the consideration of expected outcomes that are out of management’s control. Subsequent changes in estimates, assumptions used or expected outcomes could impact the determination of whether a decline in value is other-than-temporary and whether the effects could materially impact the Company’s financial position or net income. If the decline in fair value is judged to be other-than-temporary, the cost basis of the individual security will be written down to fair value as a new cost basis and the amount of the write-down will be included in earnings (that is, accounted for as a realized loss).
 
As of March 31, 2007, the Company indirectly owned approximately 3.8 million ordinary shares of DIM Vastgoed N.V. (“DIM”), representing 48.1% of the total outstanding ordinary shares of DIM. In addition, the Company has committed to buy, in September 2007, certificates representing an additional 45,362 ordinary shares for total consideration of approximately $941,000. DIM is a public company organized under the laws of the Netherlands, the shares of which are listed on Euronext Amsterdam and which operates as a closed-end investment company owning and operating a portfolio of 20 shopping center properties aggregating approximately 2.5 million square feet in the southeastern United States. DIM’s capital structure includes priority shares and ordinary shares. The priority shares are 100% owned by a foundation that is controlled by its supervisory board. The ordinary shares have voting rights; however, only the priority shares have the right to nominate members to the supervisory board and to approve certain other corporate matters. As of March 31, 2007, management believes that the investment in DIM should be accounted for as an available-for-sale security because, as of that date, the Company was unable to exert significant influence over DIM’s operating or financial policies and, based on DIM’s organizational and capital structure, the Company was unable to participate in the affairs of DIM’s supervisory board.

 

- 11 -

EQUITY ONE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2007
(Unaudited)



As of March 31, 2007, the fair value of DIM’s ordinary shares is less than the carrying amount of the Company’s investment. The Company’s aggregate cost is approximately $78.0 million and, based on the closing market price on March 31, 2007, following the declaration of DIM’s annual dividend, the ordinary shares of DIM had a fair value of approximately $72.0 million. This implies an unrealized loss of $6.0 million. The Company has evaluated the severity and duration of the possible impairment, together with the near-term prospects of DIM, the thin trading market for DIM shares and the ability and the intent of the Company to hold the investment for a reasonable period of time sufficient for a forecasted recovery of the carrying cost. As a result of these factors and the Company’s own evaluation of the net asset value of the underlying properties of DIM, the Company does not consider the investment to be other-than-temporarily impaired at March 31, 2007.

As of March 31, 2007, the Company owned 124,600 shares of preferred stock of a publicly traded REIT that had a fair value of $3.3 million, a carrying amount of $3.1 million and an unrealized gain of approximately $200,000.
 
As of March 31, 2007, the Company owned 14,859 shares of common stock of Winn Dixie that had a fair value of approximately $262,300, a carrying amount of $182,200 and an unrealized gain of approximately $80,100.
 
The specific identification method is used to determine realized gain or loss on securities sold.
 
The following table reflects the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are deemed other-than-temporarily impaired:
 
   
   
 
As of March 31
 
2007
  
2006
 
 (In thousands)
Investment
  
Fair Value
  
Unrealized Loss
  
Fair Value
  
Unrealized Loss
  
Equity securities
  
$
75,494
  
$
5,809
  
$
73,417
  
$
2,636
  
Debt securities
    
-
    
-
  
$
11,918
    
-
  
                           


- 12 -


EQUITY ONE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2007
(Unaudited)
Goodwill
 
Goodwill has been recorded to reflect the excess of cost over the fair value of net assets acquired in various business acquisitions. The Company adopted SFAS No. 142 on January 1, 2002 and no longer amortizes goodwill.
 
The Company is required to perform annual, or more frequently in certain circumstances, impairment tests of its goodwill. The Company has elected to test for goodwill impairment in November of each year. The goodwill impairment test is a two-step process which requires management to make judgments in determining what assumptions to use in the calculation. The first step of the process 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 by determining an “implied fair value” of goodwill. The determination of a reporting unit’s implied fair value of goodwill requires the Company to allocate the estimated fair value of the reporting unit to the assets and liabilities of the reporting unit. Any unallocated fair value represents the implied fair value of goodwill which is compared to its corresponding carrying amount. During the periods presented, no impairment of goodwill was incurred.
 
The key assumptions management employs to determine the fair value of the Company’s reporting units (each property is considered a reporting unit) include (a) net operating income; (b) cash flows; and (c) an estimation of the fair value of each reporting unit, which was based on the Company’s experience in evaluating properties for acquisition and relevant market conditions. A variance in the net operating income or discount rate could have a significant impact on the amount of any goodwill impairment charge recorded.
 
Management cannot predict the occurrence of certain future events that might adversely affect the reported value of goodwill that totaled $13.1 million at March 31, 2007. Such events include, but are not limited to, strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on the Company’s tenant base, or a materially negative change in its relationships with significant tenants.
 
For the three months ended March 31, 2006, $29,000, of goodwill was included in the gain from the disposal of income-producing properties. No properties sold during the three months ended March 31, 2007 included goodwill.
 
Deferred Costs and Intangibles
 
Deferred costs, intangible assets included in other assets and intangible liabilities included in other liabilities consist of loan origination fees, leasing costs and the value of intangibles when a property was acquired. Loan and other fees directly related to rental property financing with third parties are amortized over the term of the loan which approximates the effective interest method. Direct salaries, third-party fees and other costs incurred by the Company to originate a lease are capitalized and are being amortized using the straight-line method over the term of the related leases. Intangible assets consist of in-place lease values, tenant origination costs and above-market rents that were acquired in connection with the acquisition of the properties. Intangible liabilities consist of below-market rents that are also acquired in connection with the acquisition of properties. Both intangible assets and liabilities are being amortized using the straight-line method over the term of the related leases.
 
Deposits
 
Deposits included in other assets are comprised of funds held by various institutions for future payments of property taxes, insurance and improvements, utility and other service deposits.
 

- 13 -

EQUITY ONE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2007
(Unaudited)

 
Minority Interest
 
On January 1, 1999, Equity One (Walden Woods) Inc., a wholly-owned subsidiary of the Company, entered into a limited partnership as a general partner. An income-producing shopping center (“Walden Woods Village”) was contributed by its owners (the “Minority Partners”), and the Company contributed 93,656 shares of the Company’s common stock (the “Walden Woods Shares”) to the limited partnership at an agreed-upon price of $10.30 per share. Based on this per share price and the net value of property contributed by the Minority Partners, the limited partners received 93,656 partnership units. The Company has entered into a Redemption Agreement with the Minority Partners whereby the Minority Partners can request that the Company purchase either their limited partnership units or any shares of common stock which they received in exchange for their partnership units at a price of $10.30 per unit or per share at any time before January 1, 2014. As a result of the Redemption Agreement, the Company has consolidated the accounts of the partnership with the Company’s financial data. In addition, under the terms of the limited partnership agreement, the Minority Partners do not have an interest in the Walden Woods Shares except to the extent of dividends. Accordingly, a preference in earnings has been allocated to the Minority Partners to the extent of the dividends declared. The Walden Woods Shares are not considered outstanding in the consolidated financial statements and are excluded from the share count in the calculation of primary earnings per share.
 
Until January 1, 2006, the Company had a controlling general partnership interest (75% interest) in Venice Plaza and recorded a minority interest for the limited partners’ share of equity. In January 2006, the Company acquired the minority partner’s interest (and eliminated the related minority interest).
 
The Company has controlling interests in two joint ventures that, together, own the Company’s Sunlake development project. The Company has funded all of the acquisition costs, is required to fund any necessary development and operating costs, receives an 8% preferred return on its advances and is entitled to 60% of the profits thereafter. The minority partners are not required to make contributions and, to date, have not contributed any capital. The joint ventures are in the process of obtaining the required approvals and permits to continue their mixed-use business plan. No minority interest has been recorded as the venture has incurred operating losses after taking into account the Company’s preferred return.
 
The Company also has a controlling, membership interest in Dolphin Village Partners, LLC, a venture that owns the Company’s Dolphin Village shopping center. The Company funded all of the acquisition costs, is required to fund any necessary development and operating costs, receives an 8% preferred return on its advances and is entitled to 50% of the profits thereafter. The minority partner is not required to make contributions and, to date, has not contributed any capital. The joint venture has obtained preliminary approval of its redevelopment plans and is evaluating the feasibility of those plans. No minority interest has been recorded as the venture has incurred operating losses after taking into account the Company’s preferred return.
 

- 14 -

EQUITY ONE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2007
(Unaudited)

 
Use of Derivative Financial Instruments
 
The Company accounts for derivative and hedging activities in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended and interpreted. These accounting standards require the Company to measure derivatives, including certain derivatives embedded in other contracts, at fair value and to recognize them in the consolidated balance sheets as assets or liabilities, depending on the Company’s rights or obligations under the applicable derivative contract. For derivatives designated as fair value hedges, the changes in the fair value of both the derivative instrument and the hedged item are recorded in earnings. For derivatives designated as cash flow hedges, the effective portions of changes in fair value of the derivative are reported in other comprehensive income and are subsequently reclassified into earnings when the hedged item affects earnings. Changes in fair value of derivative instruments not designated as hedging instruments, and ineffective portions of hedges, are recognized in earnings in the current period.
 
The Company does not enter into derivative instruments for speculative purposes. The Company requires that the hedges or derivative financial instruments be effective in managing the interest rate risk exposure that they are designated to hedge. This effectiveness is essential to qualify for hedge accounting. Hedges that meet these hedging criteria are formally designated as such at the inception of the contract. When the terms of an underlying transaction are modified, or when the underlying hedged item ceases to exist, resulting in some ineffectiveness, the change in the fair value of the derivative instrument will be included in earnings. Additionally, any derivative instrument used for risk management that becomes ineffective is marked-to-market each period.
 
The Company believes that it mitigates its credit risk by entering into these agreements with major financial institutions. Net interest differentials to be paid or received under a swap contract and/or collar agreement are included in interest expense as incurred or earned.
 
The estimated fair value of the Company’s derivative financial instruments has been determined using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions or estimation methodologies may have a material effect on the estimated fair value.
 
As of March 31, 2007, the Company had in place an aggregate notional amount of $85.0 million of 10-year Treasury rate locks, at a weighted interest rate of 5.10% per annum, which were executed to hedge the benchmark interest rate associated with a fixed-rate borrowing in April 2007 which were unwound on April 11, 2007 in connection with a $150.0 million private placement of 6.00% unsecured fixed rate notes due September 2017 (see note 11).
 
During 2004, concurrent with the issuance of the $200.0 million 3.875% senior unsecured notes, the Company entered into a $100.0 million notional principal variable rate interest swap with an estimated fair value of $3.6 million as of March 31, 2007. This swap converted fixed rate debt to variable rate based on the 6 month LIBOR in arrears plus 0.4375%, and matures April 15, 2009.

- 15 -

EQUITY ONE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2007
(Unaudited)

 
Revenue Recognition
 
Rental income comprises minimum rents, expense reimbursements, termination fees and percentage rent payments. Minimum rents are recognized over the lease term on a straight-line basis. As part of the leasing process, the Company 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 the Company is not considered the owner of the improvements, the allowance is considered to be a lease incentive and is recognized over the lease term as a reduction to revenue. Factors considered during this evaluation include, among others, the type of improvements made, who holds legal title to the improvements, and other controlling rights provided by the lease agreement. Determination of the accounting for a tenant allowance is made on a case-by-case basis, considering the facts and circumstances of the individual tenant lease. Lease revenue recognition commences when the lessee is given possession of the leased space and there are no contingencies offsetting the lessee’s obligation to pay rent.
 
Substantially all of the lease agreements contain provisions that require the payment of additional rents based on the respective tenant’s sales volume (contingent or percentage rent) and reimbursement of the tenant’s share of real estate taxes, insurance and common area maintenance (“CAM”) costs. Percentage rents are recognized when the tenant’s reported sales have achieved the specified levels as defined in their respective lease agreements. Expense recoveries of real estate taxes, insurance and CAM costs are recognized in the period that the applicable costs are incurred in accordance with the lease agreements. The Company accounts for these leases as operating leases as the Company has retained substantially all risks and benefits of property ownership.
 
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required rent payments. The computation of this allowance is based on the tenants’ payment history and current credit quality.
 
The Company has been engaged by joint ventures and other third parties to provide property management and leasing services. The fees are generally calculated as a percentage of either revenues received or reimbursement of costs and are recognized as services are provided.
 
The Company accounts for profit recognition on sales of real estate in accordance with SFAS No. 66 “Accounting for Sales of Real Estate.” In summary, profits from sales will not be recognized by the Company unless a sale has been consummated, the buyer’s initial and continuing investment is adequate to demonstrate a commitment to pay for the property, the Company has transferred to the buyer the usual risks and rewards of ownership, and the Company does not have substantial continuing involvement with the property. The sales of operating properties where the Company does not have continuing involvement are reflected in discontinued operations.
 
Concentration of Credit Risk
 
A concentration of credit risk arises in the Company’s business when a national or regionally based tenant occupies a substantial amount of space in multiple properties owned by the Company. In that event, if the tenant suffers a significant downturn in its business, it may become unable to make its contractual rent payments to the Company, exposing the Company to a potential loss in rental revenue, expense recoveries, and percentage rent that is magnified as a result of the tenant renting space in multiple locations. Generally, the Company does not obtain security from its national or regionally based tenants in support of their lease obligations to the Company. The Company regularly monitors its tenant base to assess potential concentrations of credit risk. Publix Super Markets accounts for over 10% of the Company’s annualized minimum rent, or approximately $19.2 million of annualized minimum rent. No other tenant accounts for over 5% of the Company’s annualized minimum rent.
 

- 16 -

 
EQUITY ONE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2007
(Unaudited)

 
Earnings Per Share
 
Basic earnings per share (“EPS”) are computed by dividing net income by the weighted average number of shares of the Company’s common stock outstanding during the period. Diluted EPS reflects the potential dilution that could occur from shares issuable under stock-based compensation plans, which would include the exercise of stock options, and the conversion of the operating partnership units held by minority limited partners.
 
Income Taxes
 
The Company elected to be taxed as a REIT under the Internal Revenue Code (“Code”), commencing with its taxable year ended December 31, 1995.  To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its REIT taxable income to its stockholders.  Also, at least 95% of the Company’s gross income in any year must be derived from qualifying sources. 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. It is management’s intention to adhere to these requirements and maintain the Company’s REIT status. As a REIT, the Company generally will not be subject to corporate level federal income tax on taxable income it distributes currently to its stockholders.  If the Company fails to qualify as a REIT in any taxable year, it 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 the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property, and to federal income and excise taxes on its undistributed taxable income.  Accordingly, the only provision for federal income taxes in the accompanying consolidated financial statements relates to the Company’s consolidated taxable REIT subsidiaries (“TRSs”). The Company’s TRSs did not have significant tax provisions or deferred income tax items during the periods reported hereunder.
 
Stock-Based Compensation
 
Cumulative Effect of Change in Accounting Principle
 
Prior to January 1, 2006, the Company accounted for stock-based compensation under the recognition and measurement provisions of Accounting Principle Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, as permitted by SFAS No. 123, “Accounting for Stock-Based Compensation.” Under APB No. 25, no stock-based compensation costs were recognized in the Statement of Operations for stock options as our options granted had an exercise price equal to the market value of our common shares on the date of grant. Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), “Share-Based Payment”, using the modified-prospective-transition method. Under this transition method, compensation cost recognized beginning January 1, 2006, includes: (a) compensation costs for all share-based payments granted prior to, but not vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). The Company has always used the binomial model to value stock options and intends to continue to use this model in the future.
 
On January 1, 2006, the Company recorded the cumulative effect of adopting SFAS No. 123(R). This cumulative effect resulted in decreasing accrued liabilities by $4.5 million and increasing shareholder equity by $4.5 million. These balance sheet changes related to deferred compensation on unvested shares. There was no effect on the consolidated statement of operations or cash flows. Under SFAS No. 123(R), deferred compensation is no longer recorded at the time unvested shares are issued. Share-based compensation is now recorded over the requisite service period with an offsetting credit to equity (generally additional paid-in capital).
 

- 17 -

 
EQUITY ONE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2007
(Unaudited)

Share-Based Compensation Subsequent to the Adoption of SFAS 123(R)
 
Share-based compensation expense charged against earnings for the three months ended March 31, 2007 and 2006, was $2.4 million and $1.3 million, respectively, of which $594,000 and $73,000, respectively, related to stock options, $3,000 and $0, respectively, related to Employee Stock Purchase Plan from the adoption of SFAS No. 123(R), and $1.8 million and $1.3 million, respectively, related to restricted stock grants, including amounts for which vesting was accelerated under severance agreements. Share-based compensation capitalized as part of properties and related assets for the three months ended March 31, 2007 and 2006 was $52,000 and $53,000, respectively.
 
Segment Information
 
The Company’s properties are community and neighborhood shopping centers located predominantly in high-growth and high-barrier markets in the southern and northeastern United States. Each of the Company’s centers is a separate operating segment which has been aggregated and reported as one reportable segment because they have characteristics so similar that they are expected to have essentially the same future prospects. The economic characteristics include similar returns, occupancy and tenants. In addition, each center is located near a metropolitan area with similar economic demographics and site characteristics. No individual property constitutes more than 10% of the Company’s combined revenue, net income or assets, and thus the individual properties have been aggregated into one reportable segment based upon their similarities with regard to both the nature and economics of the centers, tenants and operational processes, as well as long-term average financial performance. In addition, no shopping center is located outside the United States.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Recent Accounting Pronouncements
 
In June 2006, the EITF reached a consensus on EITF Issue No. 06-02, “Accounting for Sabbatical Leave and Other Similar Benefits (“EITF 06-02”).” EITF 06-02 provides that an employee’s right to a compensated absence under a sabbatical leave or similar benefit arrangement in which the employee is not required to perform any duties during the absence is an accumulating benefit. Therefore, such arrangements should be accounted for as a liability with the cost recognized over the service period during which the employee earns the benefit. Effective January 1, 2007, the provisions of EITF 06-02 was adopted and did not impact the accounting for certain of the Company’s employment arrangements.
 
In June 2006, the FASB issued SFAS Interpretation No. 48 - “Accounting for Uncertainty in Income Taxes (“FIN 48”).” In summary, FIN 48 requires that all tax positions subject to SFAS No. 109 - “Accounting for Income Taxes,” to be analyzed using a two-step approach. The first step requires an entity to determine if a tax position is more likely than not be sustained upon examination. In the second step, the tax benefit is measured as the largest amount of benefit, determined on a cumulative probability basis that is more likely than not to be realized upon ultimate settlement. FIN 48 was effective for fiscal years beginning after December 15, 2006, with any adjustment in a company’s tax provision being accounted for as a cumulative effect of accounting change in beginning equity. The adoption of the standard did not have a material impact on the Company’s consolidated financial statements.
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS”) No. 157, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The adoption of this standard is not expected to materially impact how the Company measures fair value.
 

 
- 18 -

 
EQUITY ONE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2007
(Unaudited)
 

 
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of SFAS Statements No. 87, 88, 106 and 132(R), (“SFAS”) No. 158.” SFAS No. 158 requires recognition of the over funded or under funded status of a benefit postretirement plan in the statement of financial position, as well as recognition of changes in that funded status through comprehensive income in the year in which they occur. SFAS No. 158 also requires a change in the measurement of a plan’s assets and benefit obligations as of the end date of the employer’s fiscal year. SFAS No. 158 was effective for fiscal years ending after December 15, 2006, except for the measurement date provision, which is effective for fiscal years ending after December 15, 2008. The adoption of the effective provisions of the standard did not have a material impact on the Company’s consolidated financial statements and the measurement provisions are not expected to have a material impact on the company’s consolidated financial statements.
 
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements (“SAB 108”),” which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The adoption of the standard did not materially impact the Company’s financial statements.
 
In February 2007, the FASB issued No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS”) No. 159 which allows entities to voluntarily choose, at specified election dates, to measure many financial assets and financial liabilities at fair value. The election is made on an instrument-by-instrument basis and is irrevocable. Subsequent to the adoption of SFAS No. 159, changes in fair value for the particular instruments shall be reported in earnings. Upon initial adoption, SFAS No. 159 provides entities with a one-time chance to elect the fair value option for existing eligible items. The effect of the first measurement to fair value should be reported as a cumulative-effect adjustment to the opening balance of retained earnings in the year the Statement is adopted. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the effects of this standard to its consolidated financial statements.
 

- 19 -

EQUITY ONE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2007
(Unaudited)
 
3.
Acquisitions 
 
The following table provide a summary of properties acquired during the three months ended March 31, 2007:  
 
                 
Date
  
 
Property
  
City, State
  
Gross Leasable Area
  
Purchase Price
           
(In square feet)
  
(In thousands)
01/09/07
  
Concord Shopping Plaza
  
Miami, FL
  
298,986
  
$                 48,433
02/07/07
  
Shelby Plaza Land
  
Shelby, NC
  
N/A
  
505
02/15/07
  
Alafaya Commons Outparcel
  
Orlando, FL
  
N/A
  
2,146
03/09/07
  
Buckhead Station
  
Atlanta, GA
  
233,930
  
68,000
 
$               119,084
   

No equity interests were issued or issuable in connection with the above purchase and no contingent payments, options or commitments are provided for in the agreements. No goodwill was recorded in conjunction with any of the individual property acquisitions.
 
4.
Property Held for Sale and Dispositions
 
The following table provides a summary of property disposition activity for the three months ended March 31, 2007:
 
                     
Date
 
Property
  
City, State
  
 
Gross Leasable Area
  
Sales Price
  
Gain
Income-producing properties
      
(In square feet)
  
(In thousands)
01/11/07
  
Pinhook Plaza Office Building
  
Lafayette, LA
  
4,406
  
$               350
  
$               266
03/14/07
  
Eustis Square Shopping Center
  
Eustis, FL
  
126,791
  
7,100
  
1,466
   
Total
          
$            7,450
  
$            1,732
                     
Sale of real estate
                
03/22/07
  
Venice Plaza Outparcel
  
Venice, FL
  
N/A
  
1,500
  
1,067
   
Total
          
$            8,950
  
$            2,799
                     
 
As of March 31, 2007, one shopping center in Huntsville, Alabama and one parcel of land in Tampa, Florida, were held for sale. The two properties have a net book value of $20.1 million comprised of 77,844 square feet of gross leasable area for the shopping center and approximately 62.6 acres for the land parcel.
 

- 20 -

EQUITY ONE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2007
(Unaudited)
 

 
 
The summary selected operating results for income-producing properties disposed of or designated as held for sale, with no significant continuing involvement, are as follows for the three months ended March 31, 2007 and 2006:
 
           
   
 
2007
  
2006
  
   
 (In thousands)
  
Rental Revenue
  
$
333
  
$
12
  
Expenses
              
Property operating expenses
    
23
    
(3
)
Rental property depreciation and amortization
    
(64
)
  
(2
)
Interest expense
    
-
    
-
  
Other
    
-
    
(1
)
Operations of income producing properties sold or held for sale
  
$
292
  
$
6
  
               
 
In April 2006, the Company disposed of 29 of its properties located in Texas (“the Texas Properties”) to EQYInvest Texas, LLC, a Delaware limited liability company (the “JV”). In December, 2006, the Company disposed of its 20% interest in the JV and simultaneously entered into a management agreement pursuant to which the Company managed and leased the properties on behalf of the JV. Effective April 1, 2007, the management agreement was terminated, and other than limited accounting support, all services provided under that agreement ceased.
 
The Company has guaranteed the joint venture an operating return based on certain predetermined targets for the first twelve months following the sale, which will require the Company to pay to the joint venture an amount of up to $2.0 million in the event that the joint venture does not achieve its targeted operating returns. The Company has also agreed to fund remaining construction costs to complete various projects in an amount up to $1.6 million. These obligations are reflected in other liabilities in the accompanying condensed consolidated balance sheets.
 
5.
Investments in Joint Ventures
 
As of March 31, 2007 and December 31, 2006, the Company did not have investments in unconsolidated joint ventures.
 
6.
Borrowings
 
The following table is a summary of the Company’s mortgage notes payable balances for periods ended March 31, 2007 and December 31, 2006:
 
           
Mortgage Notes Payable
  
  
March 31,
2007
  
 
 December 31, 2006
  
   
 (In thousands)
  
Fixed rate mortgage loans
  
$
 416,857
  
$
 391,647
  
    Unamortized net premium on mortgage notes payable
    
 12,012
    
 10,463
  
 
   $   428,869   
$
 402,110
  
 
          
 
  
 
The weighted average interest rate of the mortgage notes payable at March 31, 2007 and December 31, 2006 was 7.23% and 7.26% respectively, excluding the effects of the net premium adjustment.
 

 
- 21 -

 
EQUITY ONE, INC. AND SUBSIDIARIES
 
Notes to Condensed Consolidated Financial Statements
March 31, 2007
(Unaudited)
 
 
Each of the existing mortgage loans is secured by a mortgage on one or more of the Company’s properties. Certain of the mortgage loans involving an aggregate principal balance of approximately $76.0 million contain prohibitions on transfers of ownership which may have been violated by the Company’s previous issuances of common stock or in connection with past acquisitions and may be violated by transactions involving the Company’s capital stock in the future. If a violation were established, it could serve as a basis for a lender to accelerate amounts due under the affected mortgage. To date, no lender has notified the Company that it intends to accelerate its mortgage. In the event that the mortgage holders declare defaults under the mortgage documents, the Company will, if required, repay the remaining mortgage from existing resources, refinancing of such mortgages, borrowings under its revolving lines of credit or other sources of financing. Based on discussions with various lenders, current credit market conditions and other factors, the Company believes that the mortgages will not be accelerated. Accordingly, the Company believes that the violations of these prohibitions will not have a material adverse impact on the Company’s results of operations or financial condition.
 
The Company’s outstanding unsecured senior notes debt at March 31, 2007 and December 31, 2006 consists of the following:
 
           
Unsecured Senior Notes Payable
  
 
March 31,
2007
  
December 31, 2006
  
   
(In thousands)
  
3.875% Senior Notes, due 4/15/09
  
$
200,000
  
$
200,000
  
Fair value of interest rate swap
    
(3,585
)
  
(3,813
)
7.84% Senior Notes, due 1/23/12
    
25,000
    
25,000
  
5.375% Senior Notes, due 10/15/15
    
120,000
    
120,000
  
6.0% Senior Notes, due 9/15/16
    
125,000
    
125,000
  
6.25% Senior Notes, due 1/15/17
    
125,000
    
125,000
  
Unamortized net premium/(discount) on unsecured senior notes payable
    
(172
)
  
(141
)
   
$
591,243
  
$
591,046
  
               
 
The weighted average interest rate of the unsecured senior notes at March 31, 2007 and December 31, 2006 was 5.68% and 5.67% respectively, excluding the effects of the interest rate swap and net premium adjustment.
 
The indentures under which the Company’s unsecured senior notes were issued have several covenants which limit the ability to incur debt, require the Company to maintain an unencumbered assets ratio above a specified level and limit the ability to consolidate, sell, lease, or convey substantially all of the assets to, or merge with any other entity. These notes have also been guaranteed by most of the Company’s subsidiaries.
 
The Company swapped $100.0 million notional principal of the $200.0 million, 3.875% senior notes to a floating interest rate based on the 6-month LIBOR in arrears plus 0.4375%.
 
 
- 22 -

EQUITY ONE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2007
(Unaudited)
 
 
The following table provides a summary of the Company’s unsecured revolving lines of credit balances at March 31, 2007 and December 31, 2006:
 
           
Unsecured Revolving Credit Facilities
  
 
March 31,
2007
  
December 31, 2006
  
   
(In thousands)
  
Wells Fargo
  
$
162,636
  
$
76,500
  
City National Bank
    
-
    
-
  
   
$
162,636
  
$
76,500
  
               
 

 
In January 2006, the Company entered into an amended and restated unsecured revolving credit facility, with a syndicate of banks for which Wells Fargo Bank, National Association is the sole lead arranger and administrative agent. This facility has a maximum principal amount of $275.0 million and bears interest at the Company’s option at (i) LIBOR plus 0.45% to 1.15%, depending on the credit ratings of the Company’s senior unsecured notes or (ii) Federal Funds Rate plus 0.5%. The facility is guaranteed by most of the Company’s subsidiaries. Based on the Company’s current rating, the LIBOR spread is 0.80%. The facility also includes a competitive bid option which allows the Company to conduct auctions among the participating banks for borrowings in an amount not to exceed $137.5 million, a $35.0 million swing line facility for short term borrowings, and a $20.0 million letter of credit commitment. The facility may, at the request of the Company, be increased up to a total commitment of $400.0 million. The facility expires January 17, 2009 with a one-year extension option. In addition, the facility contains customary covenants, including financial covenants regarding debt levels, total liabilities, interest coverage, EBITDA coverage ratios, unencumbered properties and permitted investments which may limit the amount available under the facility. If a default under the facility exists, the Company’s ability to pay dividends would be limited to the amount necessary to maintain the Company’s status as a REIT unless the default is a payment default or bankruptcy event in which case the Company would be prohibited from paying any dividends. The weighted average interest rate at March 31, 2007 and December 31, 2006, was 5.69% and 5.63%, respectively. The facility also provides collateral for $3.6 million in outstanding letters of credit.
 
The Company has a $5.0 million unsecured credit facility with City National Bank of Florida, of which there was no outstanding balance at March 31, 2007 and December 31, 2006. This facility also provides collateral for $1.5 million in outstanding letters of credit.
 
The Company also has an additional $1.1 million outstanding letter of credit with PNC Bank.
 
As of March 31, 2007, the availability under the various credit facilities was approximately $112.0 million net of outstanding balances and letters of credit.
 
- 23 -

EQUITY ONE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2007
(Unaudited)
 
7.
Stockholders’ Equity and Earnings Per Share
 
The following table depicts common stock activity during the three month period ended March 31, 2007:
 

   
   
 
Common Stock (1)
 
  
Options Exercised
  
 
Total
  
   
(In thousands)
  
Board of Directors
    
15
    
16
    
31
  
Officers (2)
    
40
    
226
    
266
  
Employees and other
    
13
    
4
    
17
  
     
68
    
246
    
314
  
                     
 
(1)    Effective January 1, 2006, the Company changed the method of accounting for restricted stock to comply with the provisions of SFAS Statement No. 123(R). During the first quarter of 2007, the Company granted 371,100 shares of restricted stock which are subject to forfeiture and vest over periods from two to five years. Under SFAS Statement No. 123(R), restricted stock with a requisite service period is not deemed to be issued until the shares vest and, accordingly, the above schedule includes 111,983 shares that vested during the current period.
 
(2)   Net of shares surrendered on the exercise of options.
 
 
The following summarizes the calculation of basic and diluted shares for the three months ended March 31, 2007 and 2006:
 
       
Denominator
  
 
2007
  
2006
  
   
 (In thousands)
  
Basic earnings per share - weighted average shares
   
72,974
    
75,151
  
 
Walden Woods Village, Ltd
    
94
    
94
  
Unvested restricted stock
    
645
    
447
  
Stock options (using treasury method)
    
277
    
286
  
Subtotal
    
1,016
    
827
  
 
Diluted earnings per share - weighted average shares
    
73,990
    
75,978
  
               
 
 

- 24 -

EQUITY ONE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2007
(Unaudited)
 
8.
Share-Based Compensation Plans
 
As of March 31, 2007, we have grants outstanding under four share-based compensations plans, including two plans that we assumed in connection with our merger with IRT Property Company. While awards are outstanding under these plans, the Equity One 2000 Executive Incentive Compensation Plan is the primary plan under which current awards are granted. The 2000 plan was adopted by our stockholders in June 2000 and amended in May 2002 and July 2004. The number of shares reserved for issuance under the plan is currently 5.5 million, of which approximately 850,000 remain available for delivery.
 
The term of each award is determined by the Compensation Committee of the Company’s Board of Directors (the “Committee”), but in no event can be longer than ten years from the date of the grant. The vesting of the awards is determined by the Committee, in its sole and absolute discretion, at the date of grant of the award. Dividends are paid on unvested shares. Certain options and share awards provide for accelerated vesting if there is a change in control.

The fair value of each option award is estimated on the date of grant using binomial option-pricing model. Expected volatilities, option life (years), dividend yields, employee exercises and employee terminations are primarily based on historical data. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The Company measures compensation costs for restricted stock awards based on the fair value of the Company’s common stock at the date of the grant and charges to expense such amounts to earnings ratably over the vesting period.

The following table reports stock option activity during the three month period ended March 31, 2007:

   
   
Shares Under Option
  
Weighted-Average Exercise Price
  
Weighted Average Remaining Contractual Term
  
Aggregate Intrinsic Value
  
     
(In thousands)
          
(In years)
    
(In thousands)
  
Outstanding at December 31, 2006
    
2,437
  
$
22.82
              
Granted
    
30
    
26.66
              
Exercised
    
(246
)
  
16.78
              
Forfeited or expired
    
-
    
-
              
Outstanding at March 31, 2007
    
2,221
  
$
23.54
    
8.8
  
$
6,579
  
Exercisable at March 31, 2007
    
364
  
$
18.20
    
3.0
  
$
3,016
  
                           
 
There were 30,000 options granted during the three months ended March 31, 2007. At March 31, 2007, these options held no intrinsic value. The total intrinsic value of options exercised during the three months ended March 31, 2007, was $1.5 million. The total cash received from option exercised was $2.9 million.

 
- 25 -

EQUITY ONE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2007
(Unaudited)


The following table presents information regarding unvested restricted stock activity during the period ended March 31, 2007:

   
   
Unvested Shares
 
 
Weighted-Average
Price
  
   
(In thousands)
      
Unvested at December 31, 2006
    
381
  
$
23.58
  
Granted
    
371
  
$
26.58
  
Vested
    
(112
)
$
22.04
  
Forfeited
    
(18
)
$
23.79
  
Unvested at March 31, 2007
    
622
  
$
25.64
  
               


The total vesting-date value of the shares that vested during the three months ended March 31, 2007, was $3.0 million.

As of March 31, 2007, there was $16.1 million of total unrecognized compensation expense related to unvested share-based compensation arrangements (options and unvested restricted shares) granted under our plans. This cost is expected to be recognized over the next 4.0 years.

- 26 -
 

EQUITY ONE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2007
(Unaudited)
 
9.
Condensed Consolidating Financial Information
 
Most of the Company’s subsidiaries, have guaranteed the Company’s indebtedness under the unsecured senior notes and the revolving credit facility. The guarantees are joint and several and full and unconditional.
 
   
Condensed Balance Sheet
As of March 31, 2007
  
Equity One, Inc.
  
Combined
Guarantor
Subsidiaries
  
Non-Guarantor
Subsidiaries
  
Eliminating Entries
  
Consolidated
  
ASSETS
  
(In thousands )
  
Properties, net
  
$
355,467
  
$
1,118,464
  
$
524,226
  
$
-
  
$
1,998,157
  
Investment in affiliates
    
628,309
    
-
    
-
    
(628,309
)
  
-
  
Other assets
    
46,475
    
45,948
    
103,358
    
-
    
195,781
  
Total Assets
  
$
1,030,251
  
$
1,164,412
  
$
627,584
  
$
(628,309
)
$
2,193,938
  
LIABILITIES
                                
Mortgage notes payable
  
$
46,688
  
$
126,655
  
$
243,514
  
$
-
  
$
416,857
  
Unsecured revolving credit facilities
    
162,636
    
-
    
-
    
-
    
162,636
  
Unsecured senior notes payable
    
591,415
    
-
    
-
    
-
    
591,415
  
Unamortized premium on notes payable
    
(33
)
  
4,181
    
7,692
    
-
    
11,840
  
Other liabilities
    
27,158
    
34,928
    
19,023
    
-
    
81,109
  
Total Liabilities
    
827,864
    
165,764
    
270,229
    
-
    
1,263,857
  
MINORITY INTEREST
    
-
    
-
    
-
    
989
    
989
  
STOCKHOLDERS’ EQUITY
    
202,387
    
998,648
    
357,355
    
(629,298
)
  
929,092
  
Total Liabilities and
Stockholders’ Equity
  
$
1,030,251
  
$
1,164,412
  
$
627,584
  
$
(628,309
)
$
2,193,938
  
 

 
   
Condensed Balance Sheet
As of March 31, 2006
  
Equity One, Inc.
  
Combined
Guarantor
Subsidiaries
  
Non-Guarantor
Subsidiaries
  
Eliminating Entries
  
Consolidated
  
ASSETS
  
(In thousands)
  
Properties, net
  
$
355,817
  
$
1,003,181
  
$
526,713
  
$
-
  
$
1,885,711
  
Investment in affiliates
    
700,622
    
140,134
    
(201,618
)
  
(639,138
)
  
-
  
Other assets
    
48,917
    
38,575
    
96,572
    
-
    
184, 064
  
Total Assets
  
$
1,105,356
  
$
1,181,890
  
$
421,667
  
$
( 639,138
)
$
2,069,775
  
LIABILITIES
                                
Mortgage notes payable
  
$
47,113
  
$
99,867
  
$
244,667
  
$
-
  
$
391,647
  
Unsecured revolving credit facilities
    
76,500
    
-
    
-
    
-
    
76,500
  
Unsecured senior notes
    
591,187
    
-
    
-
    
-
    
591,187
  
Unamortized premium on notes payable
    
11
    
2,346
    
7,965
    
-
    
10,322
  
Other liabilities
    
26,217
    
28,623
    
18,612
    
-
    
73,452
  
Total Liabilities
    
741,028
    
130,836
    
271,244
    
-
    
1,143,108
  
MINORITY INTEREST
    
-
    
-
    
-
    
989
    
989
  
STOCKHOLDERS’ EQUITY
    
364,328
    
1,051,054
    
150,423
    
(640,127
)
  
925,678
  
Total Liabilities and
Stockholders’ Equity
  
$
1,105,356
  
$
1,181,890
  
$
421,667
  
$
(639,138
)
$
2,069,775
  
       

 
- 27 -

EQUITY ONE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2007
(Unaudited)


   
Condensed Statement of Operations
For the three months ended
March 31, 2007
  
Equity One, Inc.
  
Combined
Guarantor
Subsidiaries
  
Non-Guarantor
Subsidiaries
  
 
Eliminating
Entries
  
Consolidated
  
   
(In thousands)
  
REVENUE:
                      
Minimum rents
  
$
9,133
  
$
25,775
  
$
12,827
  
$
-
  
$
47,735
  
Expense recoveries
    
2,647
    
7,197
    
3,524
    
-
    
13,368
  
Percentage rent
    
105
    
614
    
541
    
-
    
1,260
  
Management and leasing services
    
837
    
-
    
-
    
-
    
837
  
Total rental revenue
    
12,722
    
33,586
    
16,892
    
-
    
63,200
  
EQUITY IN SUBSIDIARIES’
EARNINGS:
    
28,770
    
-
    
-
    
(28,770
)
  
-
  
COSTS AND EXPENSES:
                                
Property operating
   
2,893
    
9,979
    
3,796
    
-
    
16,668
  
Management and leasing services
    
-
    
746
    
-
    
-
    
746
  
Rental property depreciation and amortization
    
1,889
    
6,167
    
3,253
    
-
    
11,309
  
General and administrative
   
7,766
    
(5
)
  
4
    
-
    
7,765
  
Total costs and expenses
    
12,548
    
16,887
    
7,053
    
-
    
36,488
  
INCOME BEFORE OTHER INCOME AND EXPENSES, MINORITY INTEREST AND DISCONTINUED OPERATIONS
    
28,944
    
16,699
    
9,839
    
(28,770
)
  
26,712
  
OTHER INCOME AND EXPENSES:
                                
Investment income
    
252
    
1
    
5,954
    
-
    
6,207
  
Other income
    
182
    
-
    
-
    
-
    
182
  
Interest expense
    
(10,091
)
  
(1,617
)
  
(4,049
)
  
-
    
(15,757
)
Amortization of deferred financing fees
    
(335
)
  
(21
)
  
(32
)
  
-
    
(388
)
Gain on sale of real estate
    
1,067
    
-
    
-
    
-
    
1,067
  
INCOME BEFORE MINORITY INTEREST AND DISCONTINUED OPERATIONS
   
20,019
    
15,062
    
11,712
    
(28,770
)
  
18,023
  
Minority Interest
    
-
    
(28
)
  
-
    
-
    
(28
)
INCOME FROM CONTINUING OPERATIONS
    
20,019
    
15,034
    
11,712
    
(28,770
)
  
17,995
  
DISCONTINUED OPERATIONS:
                                
Operations of income producing properties sold or held for sale
    
-
    
292
    
-
    
-
    
292
  
Gain on disposal of income- producing properties
    
-
    
1,732
    
-
    
-
    
1,732
  
Income from discontinued operations
    
-
    
2,024
    
-
    
-
    
2,024
  
NET INCOME
  
$
20,019
  
$
17,058
  
$
11,712
    
(28,770
)
$
20,019
  
     


- 28 -

EQUITY ONE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2007
(Unaudited)



   
Condensed Statement of Operations
For the three months ended
March 31, 2006
  
Equity One, Inc.
  
Combined
Guarantor
Subsidiaries
  
Non-Guarantor
Subsidiaries
  
 
Eliminating
Entries
  
Consolidated
  
   
(In thousands)
  
REVENUE:
                      
Minimum rents
  
$
9,046
  
$
21,781
  
$
11,047
  
$
-
  
$
41,874
  
Expense recoveries
    
2,581
    
6,242
    
3,275
    
-
    
12,098
  
Percentage rent
    
111
    
755
    
408
    
-
    
1,274
  
Management and leasing services
    
-
    
155
    
-
    
-
    
155
  
Total rental revenue
    
11,738
    
28,933
    
14,730
    
-
    
55,401
  
EQUITY IN SUBSIDIARIES’
EARNINGS:
    
27,175
    
-
    
-
    
(27,175
)
  
-
  
COSTS AND EXPENSES:
                                
Property operating
   
3,062
    
8,838
    
3,455
    
-
    
15,355
  
Management and leasing services
    
-
    
77
    
-
    
-
    
77
  
Rental property depreciation and amortization
    
1,831
    
4,995
    
3,039
    
-
    
9,865
  
General and administrative
   
4,298
    
313
    
5
    
-
    
4,616
  
Total costs and expenses
    
9,191
    
14,223
    
6,499
    
-
    
29,913
  
INCOME BEFORE OTHER INCOME AND EXPENSES, MINORITY INTEREST AND DISCONTINUED OPERATIONS
    
29,722
    
14,710
    
8,231
    
(27,175
)
  
25,488
  
OTHER INCOME AND EXPENSES:
                                
Investment income
    
297
    
60
    
4,295
    
-
    
4,652
  
Other income
    
350
    
-
    
-
    
-
    
350
  
Interest expense
    
(8,192
)
  
(1,723
)
  
(4,056
)
  
-
    
(13,971
)
Amortization of deferred financing fees
    
(292
)
  
(20
)
  
(33
)
  
-
    
(345
)
Gain on sale of real estate
    
-
    
314
    
-
    
-
    
314
  
Loss on extinguishment of debt
    
-
    
-
    
(292
)
        
(292
)
INCOME BEFORE MINORITY INTEREST AND DISCONTINUED OPERATIONS
   
21,885
    
13,341
    
8,145
    
(27,175
)
  
16,196
  
Minority Interest
    
-
    
(28
)
  
-
    
-
    
(28
)
INCOME FROM CONTINUING OPERATIONS
    
21,885
    
13,313
    
8,145
    
(27,175
)
  
16,168
  
DISCONTINUED OPERATIONS:
                                
Operations of income producing properties sold or held for sale
    
(12
)
  
5,188
    
529
    
-
    
5,705
  
Gain on disposal of income- producing properties
    
492
    
-
    
-
    
-
    
492
  
Income from discontinued operations
    
480
    
5,188
    
529
    
-
    
6,197
  
NET INCOME
  
$
22,365
  
$
18,501
  
$
8,674
  
$
(27,175
)
$
22,365
  
     



- 29 -


EQUITY ONE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2007
(Unaudited)


   
Condensed Statement of Cash Flows
For the three months ended
March 31, 2007
  
Equity One, Inc.
  
Combined
Guarantor
Subsidiaries
  
Non-Guarantor
Subsidiaries
  
Consolidated
  
   
(In thousands)
  
Net cash provided by operating activities
  
$
(2,488
)
$
16,996
  
$
17,423
  
$
31,931
  
INVESTING ACTIVITIES:
                          
Additions to and purchase of properties
    
(2,169
)
  
(96,348
)
  
-
    
(98,517
)
Additions to construction in progress
    
(65
)
  
(4,923
)
  
(453
)
  
(5,441
)
Proceeds from disposal of rental properties
    
1,461
    
8,439
    
662
    
10,562
  
Increase in cash held in escrow
    
51
    
-
    
-
    
51
  
Increase in deferred leasing costs
    
(197
)
  
(1,111
)
  
(242
)
  
(1,550
)
Additions to notes receivable
    
-
    
(14
)
  
-
    
(14
)
Proceeds from repayment of notes receivable
    
-
    
10
    
3
    
13
  
Proceeds from sale of securities
    
246
    
-
    
-
    
246
  
Cash used to purchase securities
    
(81
)
  
-
    
-
    
(81
)
Advances from (to) affiliates
    
(57,414
)
  
75,954
    
(18,540
)
  
-
  
Net cash (used in) provided by investing activities
    
(58,168
)
  
(17,993
)
  
(18,570
)
  
(94,731
)
FINANCING ACTIVITIES:
                          
Repayment of mortgage notes payable
    
336
    
997
    
1,147
    
2,480
  
Net borrowings under revolving credit facilities
    
86,136
    
-
    
-
    
86,136
  
Proceeds from issuance of common stock
    
2,968
    
-
    
-
    
2,968
  
Cash dividends paid to stockholders
    
(22,136
)
  
-
    
-
    
(22,136
)
Distributions to minority interest
    
(28
)
  
-
    
-
    
(28
)
Net cash provided by (used in) financing activities
    
67,276
    
997
    
1,147
    
69,420
  
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
6,620
    
-
    
-
    
6,620
  
CASH AND CASH EQUIVALENTS,
BEGINNING OF THE PERIOD
    
-
    
-
    
-
    
-
  
CASH AND CASH EQUIVALENTS,
END OF THE PERIOD
  
$
6,620
    
-
    
-
  
$
6,620
  
       


- 30 -


EQUITY ONE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2007
(Unaudited)


   
Condensed Statement of Cash Flows
For the three months ended
March 31, 2006
  
Equity One, Inc.
  
Combined
Guarantor
Subsidiaries
  
Non-Guarantor
Subsidiaries
  
Consolidated
  
   
(In thousands)
  
Net cash provided by operating activities
  
$
469
  
$
17,365
  
$
10,817
  
$
28,651
  
INVESTING ACTIVITIES:
                          
Additions to and purchase of properties
    
(1,937
)
  
(953
)
  
(80,531
)
  
(83,421
)
Purchases of land held for development
    
-
    
(1,906
)
  
(25,044
)
  
(26,950
)
Additions to construction in progress
    
(313
)
  
(5,606
)
  
(431
)
  
(6,350
)
Proceeds from disposal of properties
    
2,569
    
314
    
-
    
2,883
  
Proceeds from sale of securities
    
57
    
-
    
-
    
57
  
Cash used to purchase securities
    
(434
)
  
-
    
(24,644
)
  
(25,078
)
Proceeds from repayment of notes receivable
    
1,477
    
(2
)
  
1
    
1,476
  
Increase in deferred leasing costs
    
(253
)
  
(814
)
  
(186
)
  
(1,253
)
Advances from (to) affiliates
    
(125,041
)
  
(7,344
)
  
132,385
    
-
  
Net cash (used in) provided by investing activities
    
(123,875
)
  
(16,311
)
  
1,550
    
(138,636
)
FINANCING ACTIVITIES:
                          
Repayment of mortgage notes payable
    
(396
)
  
(1,054
)
  
(12,367
)
  
(13,817
)
Net borrowings under revolving credit facilities
    
21,835
    
-
    
-
    
21,835
  
Proceeds from senior debt offering
    
123,284
    
-
    
-
    
123,284
  
Increase in deferred financing costs
    
(1,611
)
  
-
    
-
    
(1,611
)
Proceeds from issuance of common stock
    
5,219
    
-
    
-
    
5,219
  
Stock issuance costs
    
(29
)
  
-
    
-
    
(29
)
Cash dividends paid to stockholders
    
(22,753
)
  
-
    
-
    
(22,753
)
Distributions to minority interest
    
(29
)
  
-
    
-
    
(29
)
Net cash provided by (used in) financing activities
    
125,520
    
(1,054
)
  
(12,367
)
  
112,099
  
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
2,114
    
-
    
-
    
2,114
  
CASH AND CASH EQUIVALENTS,
BEGINNING OF THE PERIOD
    
102
    
-
    
-
    
102
  
CASH AND CASH EQUIVALENTS,
END OF THE PERIOD
  
$
2,216
  
$
-
  
$
-
  
$
2,216
  
 




- 31 -

EQUITY ONE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2007
(Unaudited)

 
10.
Commitments and Contingencies
 
As of March 31, 2007, the Company has pledged letters of credit totaling $6.2 million as additional security for certain financings and other activities.
 
The Company has committed to fund approximately $8.5 million, based on current plans and estimates, in order to complete pending development and redevelopment projects. These obligations, comprised principally of construction contracts, are generally due as the work is performed and are expected to be financed by the funds available under our credit facilities.
 
Certain of the Company’s properties are subject to a ground lease, which are accounted for as operating leases and have annual obligations of approximately $100,000.
 
The Company is subject to litigation in the normal course of business. However, none of the litigation outstanding as of March 31, 2007, in the opinion of management, will have a material adverse effect on the financial condition or results of operations of the Company.
 
 
11.
Subsequent Events
 
On April 11, 2007, the Company issued $150.0 million of unsecured fixed rate notes in a private placement and unwound $85.0 million in 10-year Treasury rate lock at a cost of nearly $2.5 million. The notes carry an interest rate of 6.00% and are due September 2017. Interest on the notes is payable semi-annually on March 15 and September 15, with the first payment becoming due and payable on September 15, 2007. The notes are guaranteed by certain of the Company’s subsidiaries. In connection with the private placement, the Company and the guarantors have agreed to use their reasonable best efforts to consummate an exchange offer for registered securities no later than 270 days after the closing of the offering or to file a shelf registration for the resale of the securities if they cannot effect an exchange offer within that time period. If this requirement is not met, then the annual interest on the notes will increase by .25 percentage point for the first 90 days following the end of such 270 day period and .25 percentage point for each subsequent 90 day period, up to a maximum of 1.0 percentage point until the exchange offer is complete or until the shelf registration statement is declared effective. Net proceeds after issuance discounts and underwriting fees were $148.9 million, of which $148.0 million was used to repay outstanding indebtedness under the Company’s unsecured revolving credit facility, leaving a balance of $18.3 million of bank borrowings outstanding at April 30, 2007.
 

- 32 -

 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion should be read in conjunction with the consolidated interim financial statements and notes thereto appearing in Item 1 of this report and the more detailed information contained in our Annual Report on Form 10-K for the year ended December 31, 2006 filed with the Securities and Exchange Commission on March 5, 2007.
 
Unless the context otherwise requires, all references to “we”, “our”, “us”, “Equity One”, and the “Company” in this report refer collectively to Equity One, Inc. and its subsidiaries, including joint ventures.
 
Executive Overview
 
We are a real estate investment trust (“REIT”) that principally owns, manages, acquires, develops and redevelops neighborhood and community shopping centers. As of March 31, 2007, our property portfolio was comprised of 179 properties, including 161 shopping centers consisting of approximately 17.9 million square feet of gross leasable area (“GLA”), nine development/redevelopment properties, six non-retail properties and three parcels of land. As of March 31, 2007, the portfolio was 94.1% leased and included national, regional and local tenants.
 
The Company’s primary objectives are to maximize long-term stockholder value by generating sustainable cash flow growth and increasing long-term value of our real estate assets. To achieve its objectives, the Company seeks to operate its properties for long-term earnings per share growth. The Company also acquires neighborhood or community shopping centers that either have dominant anchor tenants or contain a mix of tenants which reflects the shopping needs of the communities they serve. The Company also develops and redevelops shopping centers on a tenant-driven basis, leveraging either existing tenant relationships or geographic and demographic knowledge while seeking to minimize exposure to risk associated with long-term land development.
 
The Company’s financial strategy is to execute its operating and growth strategies by utilizing a blend of internally generated funds, proceeds from divestitures, institutional borrowings and issuances of corporate equity or debt, as appropriate.
 
The execution of our business strategy during the three months ended March 31, 2007 resulted in:
 
 
·
the acquisition of two retail shopping centers for a total consideration of $116.4 million;
 
 
·
the sale of two income producing properties for an aggregate sales price of $7.5 million resulting in $1.7 million realized gains;
 
 
·
the sale of one outparcel for a sales price of $1.5 million resulting in $1.1 million of realized gain; and
 
 
·
an increase in our core portfolio occupancy rate of 10 basis points to 94.1% from 94.0% at December 31, 2006.

 
Critical Accounting Policies
 
Our 2006 Annual Report on Form 10-K contains a description of our critical accounting policies, including revenue recognition, cost capitalization, impairment of real estate assets, purchase accounting treatment for acquisitions, accounting for securities, impairment testing of goodwill, and joint venture accounting. For the three month period ended March 31, 2007, there were no material changes to these policies.
 
 

 
 

 

- 33 -

 
Results of Operations
 
Our consolidated results of operations are not necessarily comparable from period to period due to the impact of property acquisitions, dispositions, developments and redevelopments and security investments. A large portion of the change in our statement of operations line items is related to these changes in our portfolio.
 
The following summarizes line items from our unaudited consolidated statements of operations which we think are important in understanding our operations and/or those items which have significantly changed in the three months ended March 31, 2007 as compared to the same period in 2006:
 
 
       
   
 
Three Months Ended
March 31,
  
   
  (In thousands)
      
   
2007
  
2006
  
% Change
  
Total rental revenue
  
$
63,200
  
$
55,401
    
14.1
%
Property operating expenses
  
$
16,668
  
$
15,355
    
8.6
%
Management and leasing services
  
$
746
  
$
77
    
868.8
%
Rental property depreciation and amortization
  
$
11,309
  
$
9,865
    
14.6
%
General and administrative expenses
  
$
7,765
  
$
4,616
    
68.2
%
Investment income
  
$
6,207
  
$
4,652
    
33.4
%
Interest expense
  
$
15,757
  
$
13,971
    
12.8
%
Gain on sale of real estate
  
$
1,067
  
$
314
    
239.8
%
Income from discontinued operations
  
$
2,024
  
$
6,197
    
(67.3
%)
Net Income
  
$
20,019
  
$
22,365
    
(10.4
%)
 
 
 
Comparison of the three months ended March 31, 2007 to 2006
 
Total rental revenue increased by $7.8 million, or 14.1%, to $63.2 million in 2007. The increase is primarily attributable to the following:
 
 
·
an increase of $6.1 million associated with properties acquired in 2007 and 2006;
 
 
·
an increase of $1.1 million in same-property revenue due primarily to higher rental rates and tenant expense recovery income; and
 
 
·
an increase of approximately $600,000 primarily related to property management and leasing services for a portfolio of Texas properties that we sold to a third party in 2006.
 
Property operating expenses increased by $1.3 million, or 8.6%, to $16.7 million in 2007. The increase is mostly comprised of the following:
 
 
·
an increase of $1.5 million related to properties acquired in 2007 and 2006; and
 
 
·
a decrease of $156,000 in same-property operating and maintenance costs partly due to lower common area maintenance expenses.
 
Management and leasing services increased by $669,000 as a result of providing property management and leasing services for the Texas properties.
 

- 34 -



Rental property depreciation and amortization increased by $1.4 million, or 14.6%, to $11.3 million for 2007 from $9.9 million in 2006. The increase in 2007 is due primarily to the operations of properties acquired in 2007 and 2006 as well as an increase in same-property tenant improvements and leasing commissions.
 
General and administrative expenses increased by $3.1 million, or 68.2%, to $7.7 million for 2007 compared to $4.6 million in 2006. The increase is principally attributable to $1.5 million of severance-related expenses related to former employees and $1.5 million of abandoned pre-development capitalized costs related to non-viable projects.
 
Investment income increased by $1.6 million in 2007, primarily due to $5.9 million of dividend income related to the $1.57 dividend per ordinary share declared by DIM Vastgoed N.V., a Dutch company in which we own 3.8 million ordinary shares as of March 2007, which was $1.6 million higher than the dividend in 2006.
 
Interest expense increased by $1.8 million, or 12.8%, to $15.8 million for 2007 as compared to $14.0 million for 2006. The increase is primarily attributable to $1.0 million of interest incurred related to higher total unsecured senior debt outstanding associated with increased acquisition activity and a reduction of $800,000 in the amortization of fair value debt premium related to two unsecured senior notes that were paid off in March and August 2006.
 
Gain on sale of real estate in 2007 includes the sale of one outparcel for proceeds of $1.5 million, generating $1.1 million in realized gains, compared to gains in the same period of 2006 of approximately $300,000.
 
In the first quarter of 2007, we sold two income producing properties and recognized gains aggregating to $1.7 million. During the quarter, discontinued operations generated $292,000 in net operating income. In first quarter 2006, we sold one income producing property resulting in a net realized gain of $492,000. In that same quarter, we had 29 Texas properties held for sale with net operating income of $5.7 million.
 
As a result of the foregoing, net income decreased by $2.3 million, or 10.5% from $22.4 million in 2006 to $20.0 million in 2007.
 
Funds From Operations
 
We believe Funds from Operations (“FFO”) (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 depreciable real property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures”. It 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 clearer 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.
 
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. We believe net income is the most directly comparable GAAP measure to FFO.
 

- 35 -


 
The following table illustrates the calculation of FFO for the three months periods ended March 31, 2007 and 2006:
 

       
   
 
Three Months Ended
March 31,
  
   
 (In thousands)
  
   
2007
  
2006
  
Net income
 
$
 
20,019
  
$
22,365
  
Adjustments:
              
 
Rental property depreciation and amortization, including discontinued operations
    
11,373
    
12,039
  
 
Gain on disposal of depreciable real estate
    
(1,732
)
  
(492
)
 
Minority interest
    
28
    
28
  
 
Funds from operations
  
 
$
29,688
  
 
$
33,940
  
               
 
 
The following table reflects the reconciliation of FFO per diluted share to earnings per diluted share, the most directly comparable GAAP measure, for the periods presented:
 
       
   
 
Three Months Ended
March 31,
  
   
2007
  
2006
  
Earnings per diluted share (1)
  
$
 
0.27
  
$
0.29
  
Adjustments:
              
Rental property depreciation and amortization, including discontinued operations
    
0.15
    
0.16
  
Gain on disposal of depreciable real estate
    
(0.02
)
  
-
  
Funds from operations per diluted share
  
$
0.40
  
$
0.45
  
               
               
 
(1) Earnings per diluted share reflect the add-back of the minority interest(s) which are convertible to shares of our common stock.
 

- 36 -

 

 
 
Liquidity and Capital Resources
 
As of March 31, 2007, we had approximately $6.6 million of available cash and cash equivalents and $1.5 million of cash held in escrow. As a REIT, we are required to distribute at least 90% of our taxable income to our stockholders on an annual basis. Therefore, as a general matter, it is unlikely that we will have any substantial cash balances that could be used to meet any immediate liquidity needs. We also have approximately $112.0 million available that can be drawn under our unsecured revolving credit facilities.
 
The following summary discussion of our cash flows is based on the consolidated statements of cash flows and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below:
 
       
   
 
Three Months Ended
March 31,
 
  
   
 (In thousands)
  
   
2007
  
2006
  
Increase (Decrease)
  
Net cash provided by operating activities
  
$
31,931
  
$
28,651
  
$
3,280
  
Net cash used in investing activities
    
($ 94,731
)
  
($ 138,636
)
$
43,905
  
Net cash provided by financing activities
  
$
69,420
  
$
112,099
    
($ 42,679
)
                     

Our principal source of operating cash flow is cash generated from our rental properties. Our properties provide a relatively consistent stream of cash flow that provides us with resources to fund operating expenses, debt service and quarterly dividends. For the three months ended March 31, 2007, cash flow from operating activities was $31.9 million.
 
Cash used in investing activities of $94.7 million reflects primarily the acquisition and development of properties, net of dispositions. For the three months ended March 31, 2007, the acquisition of two income producing shopping centers required the use of $86.5 million in cash. In addition, we invested $17.3 million in development projects and renovations of existing centers. The Company received proceeds from the disposition of two properties of $10.6 million.
 
For the three months ended March 31, 2007, cash provided by financing activities of $69.4 million was primarily derived from net draws under our revolving line of credit of $86.1 million which was used to fund our acquisitions. During the first quarter 2007, the Company declared and paid a quarterly dividend amounting to $22.1 million.
 

- 37 -


 
The following table sets forth certain information regarding future contractual obligations, excluding interest, as of March 31, 2007:
 
     
   
 
Payments due by period
Contractual Obligations
  
Total
  
Less than
1 year (2)
  
1-3 years
  
3-5 years
  
More than
5 years
   
(In thousands)
Mortgage notes payable:
                              
Scheduled amortization
  
$
106,746
  
$
8,059
  
$
22,014
  
$
18,962
  
$
57,711
Balloon payments
    
310,111
    
2,864
    
46,400
    
168,827
    
92,020
Total mortgage obligations
    
416,857
    
10,923
    
68,414
    
187,789
    
149,731
Unsecured revolving credit facilities
    
162,636
    
-
    
162,636
    
-
    
-
Unsecured senior notes(1)
    
595,000
    
-
    
200,000
    
25,000
    
370,000
Capital leases
    
-
    
-
    
-
    
-
    
-
Operating leases
    
590
    
305
    
173
    
30
    
82
Construction Commitments
    
8,544
    
6,841
    
1,703
    
-
    
-
Total contractual obligations
  
$
1,183,627
  
$
18,069
  
$
432,926
  
$
212,819
  
$
519,813
                               
 
 
(1)
$100 million of the outstanding balance has been swapped to a floating interest rate based on the 6 month LIBOR in arrears, plus 0.4375%. The contractual obligations for the unsecured senior notes do not reflect this interest rate swap.
 
 
(2)
Amount represents balance of obligation for the remainder of the 2007 year.
 
 
Our debt level could subject us to various risks, including the risk that our cash flow will be insufficient to meet required payments of principal and interest, and the risk that the resulting reduction in financial flexibility could inhibit our ability to develop or improve our rental properties, withstand downturns in our rental income, or take advantage of business opportunities. In addition, because we currently anticipate that only a small portion of the principal of our indebtedness will be repaid prior to maturity, it is expected that it will be necessary to refinance the majority of our debt. Accordingly, there is a risk that such indebtedness will not be able to be refinanced or that the terms of any refinancing will not be as favorable as the terms of our current indebtedness.
 
 
Off-Balance Sheet Arrangements
 
Letters of Credit: As of March 31, 2007, we have pledged letters of credit for $6.2 million as additional security for certain property matters. The letters of credit are secured by our revolving credit facilities.
 
Construction Commitments: As of March 31, 2007, we have entered into construction commitments and have outstanding as of March 31, 2007 to fund $8.5 million, based on current plans and estimates, in order to complete current development and redevelopment projects. These obligations, comprised principally of construction contracts, are generally due as the work is performed and are expected to be financed by funds available under our credit facilities.
 
Operating Lease Obligations: Certain of our properties are subject to ground leases, which are accounted for as operating leases and have annual obligations of approximately $100,000.
 
Non-Recourse Debt Guarantees: Under the terms of certain non-recourse mortgage loans, we could, under specific circumstances, be responsible for portions of the mortgage indebtedness in connection with certain customary non-recourse carve-out provisions, such as environmental conditions, misuse of funds, and material misrepresentations. In management’s judgment, it would be extremely unlikely for us to incur any material liability under these guarantees that will have a material adverse effect on the financial condition, results of operations, or cash flow of the Company.
 
 
Equity
 
On March 1, 2007, our Board of Directors approved a quarterly dividend of approximately $22.1 million, or $0.30 per share, which was paid on March 30, 2007 to stockholders of record on March 16, 2007.
 

 
- 38 -
 
Future Capital Requirements
 
We believe, based on currently proposed plans and assumptions relating to our operations, that our existing financial arrangements, together with cash generated from our operations, will be sufficient to satisfy our cash requirements for a period of at least twelve months. In the event that our plans change, our assumptions change or prove to be inaccurate or cash flows from operations or amounts available under existing financing arrangements prove to be insufficient to fund our expansion and development efforts or to the extent we discover suitable acquisition targets the purchase price of which exceeds our existing liquidity, we would be required to seek additional sources of financing. Additional financing may not be available on acceptable terms or at all, and any future equity financing could be dilutive to existing stockholders. If adequate funds are not available, our business operations could be materially adversely affected.
 
 
Distributions
 
We believe that we qualify and intend to qualify as a REIT under the Internal Revenue Code. As a REIT, we are allowed to reduce taxable income by all or a portion of our distributions to stockholders. As distributions have exceeded taxable income, no provision for federal income taxes has been made. While we intend to continue to pay dividends to our stockholders, we also will reserve such amounts of cash flow as we consider necessary for the proper maintenance and improvement of our real estate and other corporate purposes, while still maintaining our qualification as a REIT.
 
Inflation
 
Many of our leases contain provisions designed to partially mitigate the adverse impact of inflation. Such provisions include clauses enabling us to receive percentage rents based on tenant gross sales above predetermined levels, which rents generally increase as prices rise, or escalation clauses which are typically related to increases in the Consumer Price Index or similar inflation indices. Most of our leases require the tenant to pay its share of operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing our exposure to increases in costs and operating expenses resulting from inflation.

Our financial results are affected by general economic conditions in the markets in which our properties are located. An economic recession or other adverse changes in general or local economic conditions could result in the inability of some existing tenants to meet their lease obligations and could otherwise adversely affect our ability to attract or retain tenants. The properties are typically anchored by supermarkets, drug stores and other consumer necessity and service retailers which typically offer day-to-day necessities rather than luxury items. These types of tenants, in our experience, generally maintain consistent sales performance during periods of adverse economic conditions.

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Cautionary Statement Relating to Forward Looking Statements
 
Certain matters discussed in this Quarterly Report on Form 10-Q contain “forward-looking statements” for purposes of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on current expectations and are not guarantees of future performance.
 
All statements other than statements of historical facts are forward-looking statements, and can be identified by the use of forward-looking terminology such as “may,” “will,” “might,” “would,” “expect,” “anticipate,” “estimate,” “would,” “could,” “should,” “believe,” “intend,” “project,” “forecast,” “target,” “plan,” or “continue” or the negative of these words or other variations or comparable terminology, are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected. Because these statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. We caution you not to place undue reliance on those statements, which speak only as of the date of this report.
 
Among the factors that could cause actual results to differ materially are:
 
·  
general economic conditions, competition and the supply of and demand for shopping center properties in our markets;
 
·  
management’s ability to successfully combine and integrate the properties and operations of separate companies that we have acquired in the past or may acquire in the future;
 
·  
interest rate levels and the availability of financing;
 
·  
potential environmental liability and other risks associated with the ownership, development and acquisition of shopping center properties;
 
·  
risks that tenants will not take or remain in occupancy or pay rent;
 
·  
greater than anticipated construction or operating costs;
 
·  
inflationary and other general economic trends;
 
·  
the effects of hurricanes and other natural disasters; and
 
·  
other risks detailed from time to time in the reports filed by us with the Securities and Exchange Commission.
 
Except for ongoing obligations to disclose material information as required by the federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
 
Interest Rate Risk
 
The primary market risk to which we have exposure is interest rate risk. Changes in interest rates can affect our net income and cash flows. As changes in market conditions occur and interest rates increase or decrease, interest expense on the variable component of our debt will move in the same direction. We intend to utilize variable rate indebtedness available under our unsecured revolving credit facilities in order to initially fund future acquisitions, development costs and for other operating needs. With respect to our fixed rate mortgage notes and fixed rate senior unsecured notes, changes in interest rates generally do not affect our interest expense as these notes are predominantly at fixed-rates for extended terms. Because we had the intent to hold our existing fixed rate notes either to maturity or until the sale of the associated property, these fixed-rate notes do not pose an interest rate risk to our results of operations or our working capital position, only upon the refinancing of that mortgage. Our possible risk is from increases in long-term interest rates that may occur over a period of several years, as this may decrease the overall value of our real estate.
 
 
As of March 31, 2007, we had approximately $262.6 million of outstanding floating rate debt, including $100.0 million of fixed rate borrowings that we have converted to floating rate borrowings through the use of hedging agreements. We do not believe that the interest rate risk represented by our floating rate debt is material as of March 31, 2007, in relation to our $1.2 billion of outstanding debt, $2.2 billion of total assets and $1.9 billion total equity market capitalization as of that date.
 
 
If interest rates on our variable rate debt increase by 1%, the increase in annual interest expense on our variable rate debt would decrease future earnings and cash flows by approximately $2.6 million. If interest rates on our variable rate debt decrease by 1%, the decrease in interest expense on our variable rate debt would increase future earnings and cash flows by approximately $2.6 million. This assumes that the amount outstanding under our variable rate debt remains at approximately $262.6 million (including the $100 million of fixed rate debt converted to floating rate debt through the use of hedging agreements), the balance as of March 31, 2007.
 
 
The fair value of our fixed rate debt is $917.4 million, which includes the mortgage notes and fixed rate portion of the senior unsecured notes payable (excluding the unamortized premium). If interest rates increase by 1%, the fair value of our total fixed rate debt would decrease by approximately $51.2 million. If interest rates decrease by 1%, the fair value of our total outstanding debt would increase by approximately $45.3 million. This assumes that our total outstanding fixed rate debt remains at $262.6 million, the balance as of March 31, 2007.
 
 
Hedging Activities
 
To manage, or hedge, the exposure to interest rate risk, we follow established risk management policies and procedures, including the use of a variety of derivative financial instruments. We do not enter into derivative instruments for speculative purposes. We require that the hedges or derivative financial instruments be effective in managing the interest rate risk exposure that they are designated to hedge. This effectiveness is essential to qualify for hedge accounting. Hedges that meet these hedging criteria are formally designated as such at the inception of the contract. When the terms of an underlying transaction are modified, or when the underlying hedged item ceases to exist, resulting in some ineffectiveness, the change in the fair value of the derivative instrument will be included in earnings. Additionally, any derivative instrument used for risk management that becomes ineffective is marked-to-market each period and would be charged to operations.
 
We are exposed to credit risk, in the event of non-performance by the counter-parties to the hedge agreements. We believe that we mitigate our credit risk by entering into these agreements with major financial institutions. Net interest differentials to be paid or received under a swap contract and/or collar agreement are included in interest expense as incurred or earned.
 
During 2004, we entered into a $100.0 million notional principal variable rate interest swap with an estimated fair value of $5.9 million as of March 31, 2006. This swap converted fixed rate debt to variable rate based on the 6 month LIBOR in arrears plus 0.4375%, and matures April 15, 2009.
 
As of March 31, 2007, the Company had in place an aggregate notional amount of $85.0 million of 10-year Treasury rate locks, at a weighted interest rate of 5.10% per annum, which were executed to hedge the benchmark interest rate associated with a fixed-rate borrowing in April 2007 which were unwound on April 11, 2007 in connection with a $150.0 million private placement of 6.00% unsecured fixed rate notes due September 2017 (see note 11).
 
 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
 
 
The estimated fair value of our derivative financial instruments has been determined using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize in a current market exchange. The use of different market assumptions or estimation methodologies may have a material effect on the estimated fair value.
 
 
Other Market Risks
 
 
As of March 31, 2007, we had no material exposure to any other market risks (including foreign currency exchange risk, commodity price risk or equity price risk).
 

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ITEM 4. CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Also, we have investments in certain unconsolidated entities. As we do not control or manage these entities, our disclosure controls and procedures with respect to such entities are necessarily substantially more limited than those we maintain with respect to our consolidated subsidiaries.
 
As required by Rule 13a-15(b) under the Securities and Exchange Act of 1934, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
 
 
Changes in Internal Control over Financial Reporting
 
There have been no changes in our internal controls over financial reporting during the quarter ended March 31, 2007, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
 

 

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PART II - OTHER INFORMATION
 
 
ITEM 1. LEGAL PROCEEDINGS
 
Neither we nor our properties are subject to any material litigation. We and our properties may be subject to routine litigation and administrative proceedings arising in the ordinary course of business which collectively is not expected to have a material adverse affect on the business, financial condition, and results of operations or our cash flows.
 
 
ITEM 1A. RISK FACTORS
 
Our Annual Report on Form 10-K for the year ended December 31, 2006, Part I -Item 1A, Risk Factors, describes important risk factors that could cause our actual operating results to differ materially from those indicated or suggested by forward-looking statements made in this Form 10-Q or presented elsewhere by management from time to time.
 
There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2006.
 
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
 
None.
 
ITEM 3.   DEFAULTS UPON SENIOR SECURITIES
 
 
None.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 
None.
 
 
ITEM 5.  OTHER INFORMATION
 
We intend to hold our Annual Meeting of Shareholders on June 4, 2007.
 
 
ITEM 6.  EXHIBITS
 
 
(a) Exhibits:
 
31.1           Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended and Section 302 of the Sarbanes-Oxley Act of 2002.
 
31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended and Section 302 of the Sarbanes-Oxley Act of 2002.
 
32       Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended and 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.
 

 

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SIGNATURES
 

 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 

Date: May 4, 2007              
                            EQUITY ONE, INC.
 
/s/ Gregory R. Andrews
    
Gregory R. Andrews
Executive Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
 

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INDEX TO EXHIBITS
 

 
Exhibits Description
 
31.1  Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended and Section 302 of the Sarbanes-Oxley Act of 2002.
 
31.2  Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended and Section 302 of the Sarbanes-Oxley Act of 2002.
 
32            Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended and 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.