By Michael Fickes

When Chaim Katzman took Equity One, Inc. (NYSE: EQY) public in 1998, he started with nothing more than a handful of grocery-anchored shopping centers. Today, Equity One owns 182 centers in the fastest growing metropolitan areas of 12 southern U.S. states. The portfolio includes 123 grocery-anchored centers, 11drug store-anchored centers and 41 centers anchored by other kinds of retailers.

In just over five years, chairman and chief executive officer Katzman has built Equity One's total assets from less than $200 million to nearly $1.5 billion. Over the past three years, the REIT's revenues have surged to $83 million from $27.2 million, while funds from operations have climbed to nearly $31 million from $13.4 million.

Recently, Katzman talked to Real Estate Portfolio about Equity One's remarkable growth as well as some of the challenges that lie ahead.

CHAIM CLOSE UP

AGE: 64 FAMILY: Married with three children (ages 16, 12 and 10) HOME: Miami EDUCATION: Law degree, Tel Aviv University EARLY CAREER: Practicing real estate attorney in Israel. Moved to Miami in 1989 after establishing business interests in the U.S. LAST VACATION: Skiing in the Swiss Alps. FAVORITE MOVIE: “Apollo 13.” “It teaches you that you can resolve the most difficult problems by staying cool,” Katzman says. “If I could, I would show it at every company management meeting.” FAVORITE BOOK: “The Clash of Civilizations and the Remaking of the World Order,” by Samuel P. Huntington. PROFESSIONAL ASSOCIATIONS: NAREIT, International Council of Shopping Centers. CIVIC ACTIVITIES: Board member of the Concert Association of Florida, Inc. and the GableStage Theatre. Honorary president of the Greater Than Life Foundation. Hobbies and Pastimes: “Music, theater, riding my bicycle and driving through shopping centers.”

Portfolio: Equity One's growth has come primarily through the acquisition of three larger retail real estate concerns: The Centerfund Realty (U.S.) Corporation (CEFUS) and United Investors Realty Trust (UIRT) in 2001 and the IRT Property Company in 2003. How did a relatively small REIT manage those acquisitions?
Katzman: Despite our plans for growth, Equity One suffered from thin liquidity in 2000. We decided to issue more stock and use stock as a currency in acquiring property. That has worked well. We took over the 28-property CEFUS portfolio in an exchange for stock valued at $120.6 million. We also assumed $157 million in debt. We bought UIRT's 85-property portfolio with $33 million cash and $33 million in stock. In this transaction we assumed $82 million in debt.

Portfolio: Your biggest acquisition to date has been IRT Property's 88 or so shopping centers, for which you paid $730 million; including $188 million in cash, about $252 million in stock, and $290 million in assumed debt.
In these three recent transactions, you have assumed just over $500 million in debt. What has this done to your debt-to-equity ratio?
Katzman: Actually, we have maintained very conservative leverage. Today our debt-to-equity ratio is below 40 percent. We have an S&P debt rating of BBB-, a $340 million unsecured line of credit with Wells Fargo, and lots of dry powder. This is a financial structure that allows us maximum flexibility. It enables us to approach major transactions with a demonstrated ability to close.

Portfolio: Your acquisitions have focused largely on grocery-anchored centers in the south, especially in Florida, Texas, and Georgia. Why?
Katzman: Population growth is what drives the retail business. You want to be in an area where the population is growing and you see more and more roofs. Florida is such a location, with population growing almost 2 percent per year—about twice the national average. Texas is growing even faster than Florida, and Georgia isn't far behind Texas.

Right now we have properties in 12 southern states. Almost 40 percent of the growth of the U.S. population is in states that we cover.

Portfolio: At the same time, other shopping center REITs are looking to the Sunbelt's population growth to expand their companies. How do you deal with the competition?
Katzman: We believe that if you want to be successful in this business, you need to lease to the first and second-ranked grocers in each market. In Florida, for example, you want to be with Publix. In Texas, you want to be with Kroger and with HEB. The dominant players in each market will survive competition.

Portfolio: A recent report from UBS Investment Research observes that Equity One shopping centers have more exposure to Wal-Mart Supercenters—the ones that also sell groceries—than other shopping center owners in your markets. How big is that threat?
Katzman: What that report does not evaluate is the strength of the grocery anchors in our centers. We believe that if you hold onto the dominant grocers in a market, you will not be hurt by Wal-Mart. To put it mildly, Wal-Mart does not offer an exceptional shopping experience. It is all about price. But the number one grocer in a market serves a clientele that looks for convenience as well as good price. Those customers will not abandon you for Wal-Mart.

Portfolio: How can you be sure?
Katzman: Wal-Mart does hurt the third and fourth-ranked grocers in a market. That's been demonstrated. But our centers, with the top grocers in the market, have not been hurt by nearby Wal-Marts. In addition, the vast majority of our properties are in dense urban areas with high barriers to entry. I believe these strategies will enable us to be successful in our efforts to combat Wal-Mart.

Portfolio: How has Equity One fared through the recession?
Katzman: Prior to the major acquisitions of the past three years, our portfolio was 95 percent leased. We bought portfolios with substantial vacancies caused by the recession. UIRT, for example, came 80 percent leased. As a result, by the middle of 2002, our properties were only 86 percent leased.
But there is something counter-intuitive about this. Keep in mind that we got those vacancies for free. And every square foot we lease now goes straight to the bottom line. I think this is a good thing.

Portfolio: As long as you can lease the vacant property.
Katzman: And we have. Our leasing rate has gone from 86 percent in the middle of 2002 to 90 percent today, a rate that compares well with other shopping center REITs.

Portfolio: How do you size up the retail market for 2004?
Katzman: We see clear signs of recovery, especially in the area of growing small business formation. In addition, our leasing pipeline was easier to fill in 2003 than it was in 2002. So we are cautiously optimistic about 2004.

Portfolio: With that optimism, are you looking at acquiring more companies?
Katzman: Our acquisition strategy is part of a decision to grow the company exponentially. The three acquisitions we have made so far have taken us toward our goal of becoming one of the dominant REITs in the shopping center business. But we are not satisfied yet.