REIT's Fast Growth
Attracts Investors

NEW YORK -- Equity One Inc., a shopping-center real-estate investment trust, has grown 10-fold since going public in 1998, and its growth spurt isn't over yet.

Its total shareholder returns, for the most part, have reflected its accelerated growth pace as annual returns between 1999 and 2002 have averaged more than 20%. But investors are now wondering if its stock is becoming pricey.

Equity One, based in North Miami Beach, Fla., has been on a tear, snapping up individual properties and making several large company acquisitions, including one that doubled its portfolio size this past February. Since going public in May 1998, the company has increase its portfolio from 20 properties in two states to 180 shopping centers in 12 states.

"A few years ago, it was just a speck," said U.S. Bancorp Piper Jaffray analyst Andrew Rosivach. It's now transformed into one of the fastest growing REITs, he said.

Growth By Acquisitions

Much of Equity One's expansion has come in the past 18 months.

In 2001, the company acquired two major portfolios -- Centrefund Realty Corp. and United Investors Realty Trust. The transactions more than doubled Equity One's size to 83 properties from 32.

In 2002, the company purchased 11 more properties worth $69 million, and in February, it completed the acquisition of IRT Property Co., which more than doubled its size again to 180 properties and expanded its geographical reach into 12 states from four.

So far in 2003, Equity One has sold $14 million in properties.

Investors, analysts and ratings agencies gave the company's growth story the thumbs up.

Following the IRT merger, Equity One received an investment grade credit rating from Moody's and the S&P. Its equity float tripled to 26 million from 8.6 million shares, which effectively opened the door for larger institutional investors.

"They've been very acquisitive and have done a good job at it," said Raymond James & Associates Inc. analyst Paul Puryear, who rates the company at outperform.

As Equity One expanded, its stock price rose. The company posted total returns of 27.7% in 1999, 5.7% in 2000, 52.3% in 2001, and 5.03% in 2002, according to the National Association of Real Estate Investment Trusts.

So far in 2003, it has delivered returns of 32%, outpacing shopping-center REITs in general, which are up 24%, the S&P 500, which is up 13.3%, Nasdaq, which is up 29.9%, and the Russell 2000, which is up 23.7%.

Valuation Concerns

Many analysts now believe Equity One's stock is trading close to its net asset value, which many estimate at between $17 and $18 a share. And some wonder how much higher it can go. U.S. Bancorp's Mr. Rosivach downgraded Equity One in April to market perform from outperform based on valuation.

The company currently offers a 6.25% dividend yield, which is slightly higher than the 5.8% average in the shopping center REIT sector.

Acquisitions have fueled Equity One's growth, and Chief Financial Officer Howard Sipzner said the acquisition spree isn't over yet. Although the company is still integrating IRT's properties, it's on the lookout for new acquisition opportunities, he said. Mr. Sipzner expects Equity One to acquire $130 million in properties this year. Ultimately, he'd like the company to expand into California, the Mid-Atlantic and the Northeast.

Mr. Sipzner said Equity One is on track to achieve Thomson First Call's consensus earnings estimate for the second quarter of 36 cents a share, up from 33 cents a year ago. And he remains "comfortable" with Wall Street's funds from operations projections of $1.47 a share in 2003 and "in the range" of $1.57 in 2004. The company's FFO was $1.38 a share in 2002.

Risks Include Wal-Mart

Despite Equity One's stable earnings and strong track record for portfolio growth, the company isn't without risk.

First, it relies primarily on acquisitions to drive earnings. Its internal growth has been positive -- but more sedate. In the second quarter, net operating income rose only 2%, and its occupancy ticked up only slightly to 88% from 87.6% a year ago.

Some market experts speculate that as the economy rebounds, investors may rotate out of retail REIT stocks and into stocks with higher earnings growth. If there is a sell-off, this could affect Equity One's stock price and its ability access capital to make acquisitions.

Second, there's the threat from Wal-Mart Stores Inc. About 121 of Equity One's 180 shopping centers are anchored by grocery stores. And many grocery stores, such as Winn-Dixie, have been feeling squeezed by Wal-Mart's push into the grocery business, said Mr. Puryear.

Mr. Sipzner dismisses concerns about his company's ability to continue buying properties or companies. He noted that his company has been selling non-core and underperforming properties to raise cash. The proceeds can be reinvested into new properties. So far in 2003, it has sold about $50 million in properties, and another $90 million are being marketed. That's up from about $32 million in 2002. The company currently has about $900 million in dry powder for acquisitions, according to Mr. Sipzner.

Big Israeli Investor

Also, a big chunk -- 40% -- of Equity One's shareholder base is an Israel investment holding company, Gazit Globe, which trades on the Tel Aviv stock exchange. And this investor has provided funding for many of the company's acquisitions.

Equity One's chairman and chief executive, Chaim Katzman, is also chairman of Gazit-Globe.

Some analysts have expressed concerns that Gazit-Globe holds such a large piece of the company. However, Sipzner noted that Gazit-Globe's stake has fallen to 40% from 70% at the time of the company's IPO.

On the Wal-Mart issue, Mr. Sipzner said grocery stores in densely populated urban markets have not been affected the way suburban markets have because Wal-Mart has not been able to find the land needed to build supercenters close by. As a result, he doesn't anticipate it significantly affecting his company's shopping centers.

A looming potential threat, however, could be Wal-Mart's "neighborhood markets," which are smaller grocery stores that have opened in a few select locations. If Wal-Mart's neighborhood markets are rolled out nationwide, grocery stores in urban markets could be threatened, analysts said.

McDonald Investments Inc. analyst Richard Moore, who rates the company at buy, said Equity One has a strong track record for buying and integrating properties and companies, and delivering attractive returns on these transactions. He doesn't rule out the company snapping up other public companies in the future.

Companies bandied about as possible takeover targets have been Malan Realty Investors Inc., Kramont Realty Trust and Agree Realty Corp.

Even if investors flee to high-growth stocks, Mr. Moore believes many will still want to keep some stable companies in their portfolios. The technology blowup taught investors that "if they put all their eggs in one basket, they can get killed," he said.

Mr. Moore does not hold shares in Equity One. However his firm has had an investment banking relationship with the company. Messrs. Rosivach and Puryear don't hold shares in the company nor have their firms had an investment banking relationship with it.

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