| • FORM 10-Q • EX-12.1 • EX-31.1 • EX-31.2 • EX-32 • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT • XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q
For the quarterly period ended June 30, 2012 Commission file number 001-13499 _______________________________ EQUITY ONE, INC. ________________________________________________________________________________ (Exact name of Registrant as specified in its charter)
_______________________________ 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 ý No o Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ý Accelerated filer o Non-accelerated filer o Smaller reporting company 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 ý As of August 2, 2012, the number of outstanding shares of Common Stock, par value $0.01 per share, of the Registrant was 114,765,118.
1 PART I – FINANCIAL INFORMATION ITEM 1. Financial Statements
* The assets of these entities can only be used to settle obligations of the variable interest entities and the liabilities include third party liabilities of the variable interest entities for which the creditors or beneficial interest holders do not have recourse against us other than for customary environmental indemnifications and non-recourse carve-outs. See accompanying notes to the condensed consolidated financial statements. 2
* Note: EPS does not foot due to the rounding of the individual calculations. See accompanying notes to the condensed consolidated financial statements. 3 EQUITY ONE, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Comprehensive (Loss) Income For the three and six months ended June 30, 2012 and 2011 (Unaudited) (In thousands)
(1) This amount includes our share of an unconsolidated joint venture's unrealized gains of $120 and $214 for the three and six months ended June 30, 2012, respectively, and $13 and $94 for the three and six months ended June 30, 2011, respectively. See accompanying notes to the condensed consolidated financial statements. 4 EQUITY ONE, INC. AND SUBSIDIARIES Condensed Consolidated Statement of Equity For the six months ended June 30, 2012 (Unaudited) (In thousands)
See accompanying notes to the condensed consolidated financial statements. 5
6
7 EQUITY ONE, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 2012 (Unaudited) 1. Organization and Basis of Presentation Organization We are a real estate investment trust, or REIT, that owns, manages, acquires, develops and redevelops shopping centers located primarily in supply constrained suburban and urban communities. We were organized as a Maryland corporation in 1992, completed our initial public offering in May 1998, and have elected to be taxed as a REIT since 1995. As of June 30, 2012, our consolidated property portfolio comprised 165 properties totaling approximately 16.8 million square feet of gross leasable area, or GLA, and included 142 shopping centers, 11 development or redevelopment properties, five non-retail properties and seven land parcels. As of June 30, 2012, our core portfolio was 91.8% leased and included national, regional and local tenants. Additionally, we had joint venture interests in 17 shopping centers and two office buildings totaling approximately 2.8 million square feet of GLA. In January 2011, we closed on the acquisition of C&C (US) No. 1, Inc., which we refer to as CapCo, through a joint venture with Liberty International Holdings Limited, or LIH. At the time of acquisition, CapCo owned a portfolio of 13 properties in California totaling approximately 2.6 million square feet of GLA. The results of CapCo have been included in our financial statements as of the date of acquisition. In December 2011, we sold 36 shopping centers, comprising 3.9 million square feet of GLA, predominantly located in the Atlanta, Tampa and Orlando markets, with additional properties located in the states of North Carolina, South Carolina, Alabama, Tennessee and Maryland. The results of operations of these properties are reflected in discontinued operations for the three and six months ended June 30, 2011. Basis of Presentation The condensed consolidated financial statements include the accounts of Equity One, Inc. and its wholly-owned subsidiaries and those other entities where we have a controlling financial interest including where we have been determined to be a primary beneficiary of a variable interest entity (“VIE”) in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). Equity One, Inc. and its subsidiaries are hereinafter referred to as “the consolidated companies”, the “Company”, “we”, “our”, “us” or similar terms. All significant intercompany transactions and balances have been eliminated in consolidation. Certain prior-period data have been reclassified to conform to the current period presentation. Certain operations have been classified as discontinued and associated results of operations and financial position are separately reported for all periods presented. Information in these notes to the condensed consolidated financial statements, unless otherwise noted, does not include the accounts of discontinued operations. The condensed consolidated financial statements included in this report are unaudited. In our opinion, all adjustments considered necessary for a fair presentation have been included, and all such adjustments are of a normal recurring nature. The results of operations for the three and six month periods ended June 30, 2012 and 2011 are not necessarily indicative of the results that may be expected for a full year. Our unaudited condensed consolidated financial statements and notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions of Form 10-Q. Accordingly, these unaudited condensed consolidated financial statements do not contain certain information included in our annual financial statements and notes. The condensed consolidated balance sheet as of December 31, 2011 was derived from audited financial statements included in our 2011 Annual Report on Form 10-K, but does not include all disclosures required under GAAP. These condensed consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission (the “SEC”) on February 29, 2012. 2. Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with GAAP 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. 8 Derivative Instruments and Hedging Activities At times, we may use derivative instruments to manage exposure to variable interest rate risk. We generally enter into interest rate swaps to manage our exposure to variable interest rate risk and treasury locks to manage the risk of interest rates rising prior to the issuance of debt. We enter into derivative instruments that qualify as cash flow hedges and do not enter into derivative instruments for speculative purposes. The interest rate swaps associated with our cash flow hedges are recorded at fair value on a recurring basis. We assess effectiveness of our cash flow hedges both at inception and on an ongoing basis. The effective portion of changes in fair value of the interest rate swaps associated with our cash flow hedges is recorded in accumulated other comprehensive loss and is subsequently reclassified into interest expense as interest is incurred on the related variable rate debt. Within the next 12 months, we expect to reclassify $2.6 million as an increase to interest expense. Our cash flow hedges become ineffective if critical terms of the hedging instrument and the debt instrument do not perfectly match such as notional amounts, settlement dates, reset dates, calculation period and LIBOR rate. In addition, we evaluate the default risk of the counterparty by monitoring the credit worthiness of the counterparty. When ineffectiveness exists, the ineffective portion of changes in fair value of the interest rate swaps associated with our cash flow hedges is recognized in earnings in the period affected. Hedge ineffectiveness has not impacted earnings in 2012, and we do not anticipate it will have a significant effect in the future. Derivative instruments and hedging activities require management to make judgments on the nature of its derivatives and their effectiveness as hedges. These judgments determine if the changes in fair value of the derivative instruments are reported in the condensed consolidated statements of income as a component of net income or as a component of comprehensive income and as a component of stockholders’ equity of Equity One, Inc. on the condensed consolidated balance sheets. While management believes its judgments are reasonable, a change in a derivative’s effectiveness as a hedge could materially affect expenses, net income and equity. See Note 9 for further detail on derivative activity. Concentration of Credit Risk A concentration of credit risk arises in our business when a national or regionally based tenant occupies a substantial amount of space in multiple properties owned by us. In that event, if the tenant suffers a significant downturn in its business, it may become unable to make its contractual rent payments to us, exposing us to potential losses in rental revenue, expense recoveries, and percentage rent. Further, the impact may be magnified if the tenant is renting space in multiple locations. Generally, we do not obtain security from our nationally-based or regionally-based tenants in support of their lease obligations to us. We regularly monitor our tenant base to assess potential concentrations of credit risk. As of June 30, 2012, Publix Super Markets, located in our South and North Florida regions, is our largest tenant and accounted for approximately 1.9 million square feet, or approximately 10.3% of our gross leasable area, and approximately $14.8 million, or 6.2%, of our annual minimum rent. As of June 30, 2012, we had outstanding receivables from Publix Super Markets of approximately $235,000. No other tenant accounted for over 5% of our annual minimum rent. Recent Accounting Pronouncements In May 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-04, "Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards ("IFRSs")." The guidance under ASU 2011-04 amends certain accounting and disclosure requirements related to fair value measurements to ensure that fair value has the same meaning in U.S. GAAP and in IFRS and that their respective fair value measurement and disclosure requirements are the same. This guidance contains certain updates to the measurement guidance as well as enhanced disclosure requirements. The most significant change in disclosures is an expansion of the information required for “Level 3” measurements including enhanced disclosure for: (1) the valuation processes used by the reporting entity and (2) the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs, if any. This guidance is effective for interim and annual periods beginning on or after December 15, 2011. We have incorporated the required disclosures within this Quarterly Report on Form 10-Q where deemed applicable and the adoption and implementation of this ASU did not have a material impact on our financial position or results of operations. In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income” which revises the manner in which companies present comprehensive income. Under ASU No. 2011-05, companies may present comprehensive income, which is net income adjusted for the components of other comprehensive income, either in a single continuous statement of comprehensive income or by using two separate but consecutive statements. Regardless of the alternative chosen, companies must display adjustments for items reclassified from other comprehensive income into net income within the presentation of both net income and other comprehensive income. ASU 2011-05 is effective for interim and annual periods beginning after December 15, 2011, on a retrospective basis. In December 2011, the FASB issued ASU No. 2011-12,”Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05.” ASU 2011-12 defers the requirement that companies present reclassification adjustments for each component of accumulated other comprehensive 9 income in both net income and other comprehensive income on the face of the financial statements. Reclassifications out of accumulated other comprehensive income are to be presented either on the face of the financial statement in which other comprehensive income is presented or disclosed in the notes to the financial statements. Reclassification adjustments into net income need not be presented during the deferral period. This action does not affect the requirement to present items of net income, other comprehensive income and total comprehensive income in a single continuous or two consecutive statements. The effective date for the deferred portion has not yet been determined. When adopted, the deferred portion of the guidance is not expected to materially impact our consolidated financial statements. We have incorporated the required disclosures within this Quarterly Report on Form 10-Q where deemed applicable and the adoption and implementation of this ASU did not have an impact on our financial position or results of operations. In September 2011, the FASB issued ASU No. 2011-08, “Testing Goodwill for Impairment (the revised standard)”. Under ASU No. 2011-08 companies have the option to perform a qualitative assessment that may allow them to skip the annual two-step test and reduce costs. The guidance is effective for fiscal years beginning after December 15, 2011 and earlier adoption is permitted. The adoption and implementation of this ASU did not have a material impact on our results of operations or financial condition. In December 2011, the FASB issued ASU No. 2011-10, “Derecognition of in Substance Real Estate”. The amendments in ASU 2011-10 resolve the diversity in practice about whether the guidance in Subtopic 360-20 applies to the derecognition of in substance real estate when the parent ceases to have a controlling financial interest (as described in Subtopic 810-10) in a subsidiary that is in substance real estate because of a default by the subsidiary on its nonrecourse debt. The guidance emphasizes that the accounting for such transactions is based on their substance rather than their form. The amendments in the ASU should be applied on a prospective basis to deconsolidation events occurring after the effective date. Prior periods should not be adjusted even if the reporting entity has continuing involvement with previously derecognized in substance real estate entities. The guidance is effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012. We do not believe that the adoption of this ASU will have a material impact on our results of operations or financial condition. In December 2011, the FASB issued ASU No. 2011-11, “Disclosures about Offsetting Assets and Liabilities”. Under ASU 2011-11 disclosures are required to provide information to help reconcile differences in the offsetting requirements under U.S. GAAP and IFRS. The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. In addition, the ASU requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. The guidance is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. We do not believe that the adoption of this ASU will have a material impact on our results of operations or financial condition. 3. Acquisitions The following table provides a summary of income producing property acquisition activity during the six months ended June 30, 2012:
______________________________________________ (1) In acres. (2) The purchase price has been preliminarily allocated to real estate assets acquired and liabilities, as applicable, assumed in accordance with our accounting policies for business combinations. The purchase price and related accounting will be finalized after our valuation studies are complete. During the three and six months ended June 30, 2012, we did not recognize any material measurement period adjustments related to prior year or first quarter 2012 acquisitions. The purchase price and related accounting for the prior year acquisitions of Aventura Square, Culver Center, Danbury Green and Southbury Green are still within the measurement period and will be finalized after our valuation studies are complete. 10 In conjunction with the acquisition of Compo Acres, we entered into a reverse Section 1031 like-kind exchange agreement with a third party intermediary which was for a maximum of 180 days and allowed us, for tax purposes, to defer gains on the sale of other properties identified and sold within this period. Until the earlier of termination of the exchange agreement or 180 days after the acquisition date, the third party intermediary was the legal owner of the property; however, we controlled the activities that most significantly impacted the property and retained all of the economic benefits and risks associated with the property. Therefore, at the date of acquisition, we determined that we were the primary beneficiary of this VIE and consolidated the property and its operations as of the acquisition date noted above. As of June 30, 2012, legal ownership had been transferred to us by the qualified intermediary. We expensed transaction-related costs in connection with completed or pending property acquisitions of approximately $440,000 and $1.4 million during the three and six months ended June 30, 2012, respectively, and approximately $3.2 million and $5.5 million during the three and six months ended June 30, 2011, respectively, which are included in general and administrative costs in the condensed consolidated statements of income. The purchase price related to the 2012 acquisitions listed in the above table was funded by the use of our line of credit, cash on hand, proceeds from the term loan and proceeds from dispositions. 4. Dispositions The following table provides a summary of disposition activity during the six months ended June 30, 2012:
______________________________________________ (1) Includes $27.2 million of mortgage debt repaid by the buyer at closing. (2) In acres. As part of our strategy to upgrade and diversify our portfolio and recycle our existing capital, we evaluate opportunities to sell assets or otherwise contribute assets to existing or new joint ventures with third parties. If the market values of these assets are below their carrying values, it is possible that the disposition or contribution of these assets could result in impairments or other losses. Depending on the prevailing market conditions and historical carrying values, these impairments and losses could be material. Discontinued Operations We report as discontinued operations, properties held-for-sale and operating properties sold in the current period. The results of these discontinued operations are included in a separate component of income/loss on the condensed consolidated statements of income under the caption discontinued operations. This reporting has resulted in certain reclassifications of financial statement amounts. 11 The components of income and expense relating to discontinued operations for the three and six months ended June 30, 2012 and 2011 are shown below. These include the results of operations through the date of each respective sale for properties sold during 2011 and 2012 and the operations for the applicable period for those assets classified as held for sale as of June 30, 2012:
Properties held for sale are recorded at the lower of the carrying amount or the expected sales price less costs to sell. The sale or disposal of a “component of an entity” is treated as discontinued operations. The operating properties sold by us typically meet the definition of a component of an entity and as such the revenues and expenses associated with sold properties are reclassified to discontinued operations for all periods presented. During the three and six months ended June 30, 2012, we recognized impairment losses of $1.5 million and $3.4 million, respectively, related to two properties held for sale based on the expected sales prices less costs to sell. During the three and six months ended June 30, 2011, we recognized an impairment loss of $1.3 million relating to our investment in two properties that were held for sale. 12 5. Investments in and Advances to Unconsolidated Joint Ventures As of June 30, 2012, our investments in and advances to unconsolidated joint ventures in the condensed consolidated balance sheets were composed of the following:
______________________________________________ (1) With the exception of the Madison 2260 Realty LLC and Madison 1235 Realty LLC joint ventures, which are accounted for under the cost method, all unconsolidated joint ventures are accounted for under the equity method. (2) The investment balance as of June 30, 2012 and December 31, 2011 is presented net of deferred gains of $3.3 million for both periods associated with the disposition of assets by us to the joint venture. (3) Our effective interest is 48% when considering the 5% noncontrolling interest held by Vestar Development Company. (4) The investment balance as of June 30, 2012 and December 31, 2011 is presented net of a deferred gain of approximately $404,000 for both periods associated with the disposition of assets by us to the joint venture in 2011. Equity in (loss) income of unconsolidated joint ventures totaled $(152,000) and $(340,000) for the three and six months ended June 30, 2012, respectively, and totaled $(98,000) and $268,000, respectively, for the same periods in 2011. Management fees and leasing fees paid to us associated with these joint ventures, which are included in management and leasing services revenue in the accompanying condensed consolidated statements of income, totaled approximately $489,000 and $1.3 million for the three and six months ended June 30, 2012, respectively, and $603,000 and $1.0 million for the three and six months ended June 30, 2011, respectively. New York Common Retirement Fund Joint Venture In May 2011, we sold two operating properties, Country Walk Plaza in Miami, Florida and Veranda Shoppes in Plantation, Florida to Equity One JV Portfolio, LLC, a newly formed joint venture between us and the New York State Common Retirement Fund (“NYCRF”). In December 2011, the joint venture purchased an operating property located in Framingham, Massachusetts, for an aggregate purchase price of $23.2 million, which included the assumption of $10.4 million of mortgage debt. On January 26, 2012, our NYCRF joint venture made an $18.5 million mortgage loan (the “JV Loan”) secured by a newly developed shopping center. The JV Loan bears interest at 6.25%, has a maturity of nine years and is pari passu with a $71.4 million mortgage loan (the “Third Party Loan”) provided by a third party lender. In addition to the JV Loan, we provided a mezzanine loan (the “Mezzanine Loan”) indirectly secured by the shopping center in the amount of $19.3 million. The Mezzanine Loan bears interest at 10.0% and has a maturity of nine years. During certain periods prior to January 26, 2014, the joint venture has an option to purchase the shopping center and during certain different periods the borrower has a put option to sell the shopping center to the joint venture, in each case for a formula based purchase price currently projected to be approximately $143.0 million, which is comprised of a predetermined fixed amount of $128.4 million and a variable amount to be derived from the minimum rent associated with a portion of the shopping center under development. In the event it acquires the shopping center, the joint venture is required to immediately repay the Mezzanine Loan. If certain events of default occur under the Third Party Loan, the JV Loan will become 13 subordinate to such Third Party Loan. In that case, we will be obligated to purchase the JV Loan at par plus accrued interest. In addition, if the put and call options expire unexercised, the JV Loan will become subordinate to the Third Party Loan and we will be required to purchase the JV Loan at par plus accrued interest. We have determined that the entities holding direct and indirect interests in the shopping center are VIEs. However, in relation to the VIE in which we hold a variable interest, we are not the primary beneficiary as we do not have the power to direct the activities that most significantly impact the VIE’s economic performance. NYCRF holds a 70% interest in the joint venture and we own a 30% interest. We perform the day to day accounting and property management functions for the joint venture and, as such, earn a management fee for the services provided. Our ownership interest in this joint venture is accounted for under the equity method. 6. Variable Interest Entities Included within our consolidated operating properties at June 30, 2012 are two consolidated joint venture properties, Danbury Green and Southbury Green, that are held through VIEs and for which we are the primary beneficiary. These entities have been established to own and operate real estate property. Our involvement with these entities is through our majority ownership of the properties. These entities were deemed VIEs primarily because they may not have sufficient equity at risk for them to finance their activities without additional subordinated financial support from other parties. Specifically, with respect to the VIEs holding the Danbury Green and Southbury Green properties, we determined that the interests held by the other equity investors were not equity investments at risk pursuant to the Consolidation Topic of the FASB ASC and also gave consideration to the maturity of certain debt obligations of the entities. We determined that we are the primary beneficiary of these VIEs as a result of our having the power to direct the activities that most significantly impact their economic performance and the obligation to absorb losses, as well as the right to receive benefits, that could be potentially significant to the VIEs. At June 30, 2012 and December 31, 2011, the total assets of the VIE which owns Danbury Green and Southbury Green was approximately $111.5 million and $109.2 million, respectively. These assets can only be used to settle obligations of the VIE. At June 30, 2012 and December 31, 2011, the liabilities of the VIE which owns Danbury Green and Southbury Green of $63.6 million and $61.9 million, respectively, include third party liabilities for which the creditors or beneficial interest holders do not have recourse against us other than for customary environmental indemnifications and non-recourse carve-outs. The classification of these assets is primarily within real estate and the classification of liabilities is primarily within mortgages payable and redeemable and nonredeemable noncontrolling interests in the condensed consolidated balance sheets (as discussed further in Note 12). Included within our consolidated operating properties at December 31, 2011, in addition to Danbury Green and Southbury Green, was one consolidated property, 90-30 Metropolitan Avenue, which was held at the time by a qualified intermediary. As of June 30, 2012, legal ownership had been transferred to us by the qualified intermediary, and as such it is no longer considered a VIE. At June 30, 2012 and December 31, 2011, total assets of these VIEs were approximately $111.5 million and $138.2 million, respectively, and total liabilities were approximately $63.6 million and $62.4 million, respectively, including non-recourse mortgage debt of $45.7 million at both June 30, 2012 and December 31, 2011. The majority of the operations of these VIEs are funded with cash flows generated from the properties. We have not provided financial support to any of these VIEs that we were not previously contractually required to provide; our contractual commitments consist primarily of funding any capital expenditures, including tenant improvements, which are deemed necessary to continue to operate the entity and any operating cash shortfalls that the entity may experience. 7. Mezzanine Loans Receivable On July 5, 2011, we invested in a $45.0 million junior mezzanine loan indirectly secured by a portfolio of seven California shopping centers which had an aggregate appraised value of approximately $272.0 million at the time we acquired the mezzanine loan. This mezzanine loan is subordinated in right of payment to a $120.0 million mortgage loan and a $60.0 million senior mezzanine loan, matures on July 9, 2013 subject to the borrower’s ability to extend the maturity date for three additional one-year periods, and bears interest at 8.46% per annum plus one month LIBOR (subject to a 0.75% per annum LIBOR floor). At June 30, 2012, the mezzanine loan bore interest of 9.21%. We capitalized $108,000 in net fees paid relating to the acquisition of this loan and are amortizing these amounts against interest income over the initial two-year term. As of June 30, 2012, the loan was performing, and the carrying amount of the loan was $45.2 million. This carrying amount also reflects our maximum exposure to loss related to this investment. At inception, and as of June 30, 2012, we had and continue to have the ability and intention to hold this mezzanine loan to maturity. 14 On January 26, 2012, we invested in a $19.3 million mezzanine loan indirectly secured by a newly developed shopping center. This mezzanine financing bears interest at 10.0% and has a maturity of nine years (see Note 5 for further details). As of June 30, 2012, the loan was performing, and the carrying amount of the loan was $19.5 million. As discussed in Note 5 above, if certain events of default occur under the Third Party Loan, the JV Loan of $18.5 million will become subordinate to it. In that case, we will be obligated to purchase the JV Loan at par plus accrued interest. In addition, if the put and call options expire unexercised, the JV Loan will become subordinate to the Third Party Loan and we will be required to purchase the JV Loan at par plus accrued interest. As a result of these conditions, in the event of default, our maximum exposure to loss related to this investment includes the carrying amount of the $19.5 million mezzanine loan, the $18.5 million JV Loan we would be obligated to purchase, as well as our 30% share of any potential losses or liability incurred by the joint venture as a result of any default. At inception and as of June 30, 2012, we had and continue to have the ability to hold this mezzanine loan to maturity. While we do not intend to sell the mezzanine loan, the joint venture may acquire the shopping center and repay our mezzanine loan prior to maturity; however, we believe that we will recover our cost basis and as such we continue to classify this investment as held to maturity. 8. Other Assets The following is a summary of the composition of the other assets in the condensed consolidated balance sheets:
9. Borrowings Mortgage Notes Payable During the three and six months ended June 30, 2012, we prepaid $36.7 million and $37.7 million, respectively, in mortgage loans with a weighted-average interest rate of 6.80%. At June 30, 2012, the weighted-average interest rate of our fixed rate mortgage notes payable was 6.13%. Unsecured Senior Notes On January 23, 2012, we repaid the $10.0 million principal amount of 7.84% unsecured senior notes. At June 30, 2012, the weighted-average interest rate of our unsecured senior notes was 6.03%. Unsecured Revolving Credit Facilities Our primary credit facility is with a syndicate of banks and provides $575.0 million of unsecured revolving credit. As of June 30, 2012, we had drawn approximately $101.0 million against the facility, which bore interest at 1.80% per annum. As of December 31, 2011, we had drawn approximately $138.0 million against the facility, which bore interest at 1.85% per annum. The facility also includes a facility fee applicable to the lending commitments thereunder, which fee was 0.3% per annum as of June 30, 2012. The facility expires on September 30, 2015, with a one year extension at our option. We also have a $15.0 million unsecured credit facility with City National Bank of Florida, for which there was no outstanding balance as of June 30, 2012 and December 31, 2011. The facility bears interest at LIBOR plus 1.40% and expires on August 8, 2012. 15 As of June 30, 2012 the maximum availability under these credit facilities was approximately $398.7 million, net of outstanding letters of credit and subject to the covenants in the loan agreements. Term Loan and Interest Rate Swaps On February 13, 2012, we entered into an unsecured term loan in the principal amount of $200.0 million with a maturity date of February 13, 2019. On July 12, 2012, we increased the principal amount of the term loan to $250.0 million through the exercise of an accordion feature. Borrowings under the term loan bear interest, at our option, at the base rate or one month, two month, three month or six month LIBOR, in each case plus a margin of 1.500% to 2.350% depending on the credit ratings of our senior unsecured long term debt, which margin is 1.900% at June 30, 2012. The loan agreement also calls for other customary fees and charges. The loan agreement contains customary restrictions on our business, financial and affirmative covenants, events of default and remedies which are generally the same as those provided in our $575.0 million unsecured revolving credit facility. We entered into interest rate swaps to convert the LIBOR rate applicable to the term loan to a fixed interest rate, providing an effective fixed interest rate under the loan agreement of 3.46% per annum for the initial $200.0 million draw and 3.00% for the $50.0 million draw, in each case, based on the current credit ratings of our senior unsecured notes. The swaps are designated and qualified as cash flow hedges and have been recorded at fair value. The swap agreements mature on February 13, 2019. The fair value of our interest rate swaps at June 30, 2012 was a liability of $5.1 million and is included in accounts payable and accrued expenses on our condensed consolidated balance sheet at such date. 10. Other Liabilities The following is a summary of the composition of other liabilities in the condensed consolidated balance sheets:
11. Income Taxes We elected to be taxed as a REIT under the Internal Revenue Code (the "Code"), commencing with our taxable year ended December 31, 1995. It is our intention to adhere to the organizational and operational requirements to maintain our REIT status. As a REIT, we generally will not be subject to corporate level federal income tax, provided that distributions to our stockholders equal at least the amount of our REIT taxable income as defined under the Code. We are required to pay U.S. federal and state income taxes on our net taxable income, if any, from the activities conducted by our taxable REIT subsidiaries (“TRSs”). Accordingly, the only provision for federal income taxes in our condensed consolidated financial statements relates to our consolidated TRSs. We recorded an income tax benefit from continuing operations during the three months ended June 30, 2012 and 2011 of approximately $15,000 and $174,000, respectively, and for the six months ended June 30, 2012 and 2011 of approximately $61,000 and $307,000, respectively. These benefits are primarily attributable to the net operating losses generated by DIM Vastgoed, N.V. (“DIM”), a Dutch company in which we acquired a controlling interest in the first quarter of 2009, partially offset by taxable income generated by IRT Capital Corporation II (“IRT”). We recorded an income tax benefit from discontinued operations of approximately $379,000 and $811,000 during the three and six months ended June 30, 2011. There was no income tax benefit from discontinued operations recorded during the three and six months ended June 30, 2012. The tax benefits recorded related to discontinued operations for the three and six months ended June 30, 2011 was primarily attributable to the reversal of a deferred tax liability associated with properties held for sale by DIM and IRT and, to a lesser extent, by net operating losses. Although DIM is organized under the laws of the Netherlands, it pays U.S. corporate income tax based on its operations in the United States. Pursuant to the tax treaty between the U.S. and the Netherlands, DIM is entitled to the avoidance of double taxation on its U.S. income. Thus, it pays virtually no taxes in the Netherlands. As of June 30, 2012, DIM had federal and state net operating loss carry forwards of approximately $6.6 million and $9.9 million, respectively. These carry forwards begin to expire in 2027. Further, we believe that we have appropriate support for the tax positions taken on our tax returns and that our accruals for the tax liabilities are adequate for all years still subject to tax audit after 2007. 16 12. Noncontrolling Interests Noncontrolling interest represents the portion of equity that we do not own in those entities that we consolidate. We account for and report our noncontrolling interest in accordance with the provisions under the Consolidation Topic of the FASB ASC. The following is a summary of the noncontrolling interests of our consolidated entities in the condensed consolidated balance sheets:
______________________________________________ (1) This entity owns the Danbury Green Shopping Center. (2) This entity owns the Southbury Green Shopping Center. (3) This entity owns the Canyon Trails Shopping Center. (4) We have entered into a redemption agreement whereby our joint venture partner can request that we purchase their interest at any time before January 1, 2014. (5) Holds our interest in Talega Village Center JV, LLC. (6) Holds our interest in Vernola Marketplace JV, LLC. In October 2011, we acquired a 60% controlling interest in two VIEs, Danbury 6 Associates LLC and Southbury 84 Associates LLC. We determined that we are the primary beneficiary of these entities and, accordingly, we consolidated their results as of the acquisition date. Upon consolidation, we recorded $19.0 million of noncontrolling interest which represented the estimated fair value of the preferred equity interests which are entitled to a cumulative 5% annual preferred return, held by the noncontrolling interest holders. The operating agreements contain certain provisions that may require us to redeem the noncontrolling interest at the balance of their contributed capital as adjusted for unpaid preferred returns due to them pursuant to the operating agreements. The provisions are exercisable at the earlier of the partner’s death or at any time after the fifth anniversary of the acquisition closing until the tenth anniversary of the acquisition closing. Due to the redemption feature, we have recorded the $19.0 million of noncontrolling interest associated with this venture in the mezzanine section of our condensed consolidated balance sheets at June 30, 2012 and December 31, 2011, which approximates redemption value. Together with our valuation advisors, we are still in the process of determining the fair market value of the redeemable noncontrolling interests as of the acquisition date, and thus, the accounting for these business combinations has not yet been finalized. The carrying amount of the redeemable noncontrolling interest is increased by periodic accretions of a preferred return of 5%, and will be decreased by payments made to the noncontrolling partner which shall be recognized as income attributable to the noncontrolling interest holders for the period, such that the carrying amount of the noncontrolling interest will equal the mandatory redemption amount. Both the income attributable to the noncontrolling interest holders and amounts paid to them during the three and six months ended June 30, 2012 were $236,000 and $472,000, respectively. 13. Stockholders’ Equity and Earnings Per Share In connection with the CapCo acquisition on January 4, 2011, LIH transferred and assigned to us an outstanding promissory note of CapCo in the amount of $67.0 million in exchange for approximately 4.1 million shares of our common stock and one share of a newly-established class of our capital stock, Class A common stock, that (i) was convertible into 10,000 shares of our common stock in certain circumstances, and (ii) subject to certain limitations, entitled LIH to voting rights with respect to a number of shares of our common stock determined with reference to the number of joint venture shares held by LIH from time to time. Effective June 29, 2011, the one share of Class A common stock was converted in accordance with its terms into 10,000 shares of 17 our common stock. Also in connection with the closing of the CapCo transaction in 2011, we executed a Registration and Liquidity Rights Agreement between us and LIH pursuant to which we agreed to register the approximately 4.1 million shares of our common stock received by LIH in the transaction and the approximately 11.4 million shares of our common stock issuable if we exercise our right to pay for the redemption of LIH’s joint venture units with shares of our common stock. On March 9, 2012, LIH sold the approximately 4.1 million shares of our common stock issued in exchange for the CapCo note and upon conversion of the Class A common stock pursuant to a registered public offering. Pursuant to the Registration and Liquidity Rights Agreement, we paid all of the expenses of the offering other than underwriting discounts and legal expenses of counsel to LIH, which amounted to $169,000 for the six months ended June 30, 2012, and are included in general and administrative expenses in the accompanying condensed consolidated statement of income. Earnings per Share The following summarizes the calculation of basic EPS and provides a reconciliation of the amounts of net income available to common stockholders and shares of common stock used in calculating basic EPS:
* Note: EPS does not foot due to the rounding of the individual calculations. 18 The following summarizes the calculation of diluted EPS and provides a reconciliation of the amounts of net income available to common stockholders and shares of common stock used in calculating diluted EPS:
* Note: EPS does not foot due to the rounding of the individual calculations. The computation of diluted EPS for the three and six months ended June 30, 2012 did not include 1.9 million shares of common stock, issuable upon the exercises of outstanding options, at prices ranging from $21.64 to $26.66 and $19.84 to $26.66, respectively, because the option prices were greater than the average market prices of our common shares during these respective periods. The computation of diluted EPS for both the three and six months ended June 30, 2011 did not include 1.9 million shares of common stock, issuable upon the exercises of outstanding options, at prices ranging from $19.84 to $26.66 and $18.88 to $26.66, respectively, because the option prices were greater than the average market prices of our common shares during these respective periods. The computation of diluted EPS for both the three and six months ended June 30, 2012 did not include the 11.4 million units held by LIH which are convertible into our common stock. The LIH shares are redeemable for cash or, solely at our option, our common stock on a one-for-one basis, subject to certain adjustments. These convertible units are not included in the diluted weighted average share count because their inclusion is anti-dilutive. 19 14. Share-Based Payment Plans The following table presents stock option activity during the six months ended June 30, 2012:
The following table presents information regarding restricted stock activity during the six months ended June 30, 2012:
______________________________________________ * Does not include 800,000 shares of restricted stock awarded to certain executives which are subject to performance vesting conditions and are not entitled to vote or receive dividends during the performance period. During the six months ended June 30, 2012, we granted 67,134 shares of restricted stock that are subject to forfeiture and vest over periods from 0 to 3 years. The total vesting-date value of the 98,089 shares of restricted stock that vested during the six months ended June 30, 2012 was $1.8 million. Share-based compensation expense charged against earnings is summarized as follows:
As of June 30, 2012, we had $14.2 million of total unrecognized compensation expense related to unvested and restricted share-based payment arrangements (unvested options and restricted shares) granted under our Amended and Restated Equity One 2000 Executive Incentive Compensation Plan (the "2000 Plan"). This expense is expected to be recognized over a weighted-average period of 2.4 years. 20 15. Segment Reporting We review operating and financial data for each property on an individual basis; therefore each of our individual properties is a separate operating segment. We have aggregated our operating segments in six reportable segments based primarily upon our method of internal reporting which classifies our operations by geographical area. Our reportable segments by geographical area are as follows: (1) South Florida – including Miami-Dade, Broward and Palm Beach Counties; (2) North Florida – including all of Florida north of Palm Beach County; (3) Southeast - including Georgia, Louisiana, Alabama, Mississippi, North Carolina, South Carolina and Tennessee; (4) Northeast – including Connecticut, Maryland, Massachusetts, New York and Virginia; (5) West Coast – including California and Arizona; and (6) Other/Non-retail – which is comprised of our non-retail assets. Our segments as reported in this Quarterly Report on Form 10-Q for the period ended June 30, 2012 are not consistent with our segments as reported in our Annual Report on Form 10-K for the year ended December 31, 2011. We have divided our previously combined North Florida and Southeast region into two separate regions in this Quarterly Report on Form 10-Q for the period ended June 30, 2012, as a result of a change in management responsibilities for the North Florida region during the period and corresponding changes in our internal reporting. These changes have been reflected in our segment disclosures for all periods presented herein. We assess a segment’s performance based on net operating income (“NOI”). NOI excludes interest and other income, acquisition costs, general and administrative expenses, interest expense, depreciation and amortization expense, gains (losses) from extinguishments of debt, income (loss) of unconsolidated joint ventures, gains on sales of real estate, impairments, and noncontrolling interests. NOI is a non-GAAP financial measure. The most directly comparable GAAP financial measure is income from continuing operations before tax and discontinued operations, which, to calculate NOI, is adjusted to add back amortization of deferred financing fees, rental property depreciation and amortization, interest expense, impairment losses, general and administrative expense, and to exclude revenues earned from management and leasing services, straight line rent adjustments, accretion of below market lease intangibles (net), gain on sale of real estate, equity in income (loss) of unconsolidated joint ventures, gain on bargain purchase and acquisition of controlling interest in subsidiary, gain (loss) on extinguishment of debt, investment income, and other income. NOI includes management fee expense recorded at each operating segment based on a percentage of revenue which is eliminated in consolidation. We use NOI internally as a performance measure and believe NOI provides useful information to investors regarding our financial condition and results of operations because it reflects only those income and expense items that are incurred at the property level. Therefore, we believe NOI is a useful measure for evaluating the operating performance of our real estate assets. NOI presented by us may not be comparable to NOI reported by other REITs that define NOI differently. We believe that in order to facilitate a clear understanding of our operating results, NOI should be examined in conjunction with income from continuing operations before tax and discontinued operations as presented in our condensed consolidated financial statements. NOI should not be considered as an alternative to net income attributable to Equity One, Inc. as an indication of our performance or to cash flows as a measure of liquidity or our ability to make distributions. We consider NOI to be an appropriate supplemental measure to net income because it helps both investors and management to understand the core operations of our properties. The following table sets forth the financial information relating to our continuing operations presented by segments and includes a reconciliation of NOI to income from continuing operations before tax and discontinued operations, the most directly comparable GAAP financial measure: 21
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