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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, ladies and gentlemen. Thank you for standing by and welcome to the Third Quarter Acadia Realty Trust Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. [Operator Instructions].
I would now like to hand the conference over to the speaker today, Jarette Seligman, Leasing Representative. Please go ahead, ma’am.
Good afternoon and thank you for joining us for the third quarter 2019 Acadia Realty Trust earnings conference call. My name is Jarette Seligman and I’m a Leasing Representative in our Leasing Department.
Before we begin, please be aware that statements made during the call that are not historical may be deemed forward-looking statements within the meaning of the Securities and Exchange Act of 1934, and actual results may differ materially from those indicated by such forward-looking statements.
Due to a variety of risks and uncertainties, including those disclosed in the company's most recent Form 10-K and other periodic filings with the SEC, forward-looking statements speaks only as of the date of this call, October 24, 2019, and the company undertakes no duty to update them.
During this call, management may refer to certain non-GAAP financial measures, including funds from operations and net operating income. Please see Acadia's earnings press release posted on its website for reconciliations of these non-GAAP financial measures with the most directly comparable GAAP financial measures.
Now, it is my pleasure to turn the call over to Ken Bernstein, President and Chief Executive Officer, who will begin today's management remarks.
Thanks, Jarette. Great job. Good afternoon, everybody. We had another solid quarter and made important progress with respect to both our existing portfolio as well as new investments.
So, I would like to start with an overview of some of the current trends we're seeing, and then discuss the key drivers of growth for our business. Next, I'll turn the call over to John, who will discuss our quarterly results in more detail and our balance sheet metrics, and finally Amy will discuss our fund platform and the progress we've made on that front.
First, in terms of macroeconomic trends and their potential impact on our business. Since our last quarterly call, there has been plenty of attention and concern around trade and around the slowdown in growth both in the global as well as the U.S. economy. From our perspective, while components of the U.S. economy seem to be decelerating, the job market and the consumer, they're still on solid footing. But almost irrespective of when we might think that the next recession could occur, we do think it’s prudent to proceed under the assumption that we are late cycle. And that means, at least for retail-focused companies like ours.
First and foremost is to focus on growing cash flow rather than increasing our exposure to new development. Second, is to make sure that our leverage and our liquidity is where we want it not eventually, but today. And then, finally, it is to make sure that we have access to dry powder for new investment opportunities, whether they're arising today from the recent so-called retail Apocalypse or opportunities arising down the road. So with these factors in mind, here's how we think about the key drivers of growth for our business.
First, in terms of our core portfolio, as we've discussed in the past, there's three key drivers of internal growth. First is through the successful lease-up of some key vacancies, and second is the contractual growth that's embedded in our portfolio, and third and finally is the completion of a few key redevelopments in our portfolio. Now these three drivers of internal growth are proceeding nicely to enable us to deliver the long-term 4% NOI growth that we have forecasted. And as John will discuss in further detail, our third quarter results are consistent with this thesis.
Then complementing our core internal growth is the ability to add properties to our core portfolio when the stars align. The requirements and our goals are pretty straightforward. The acquisitions have to be accretive to our NAV as well as to our long-term earnings growth, and they need to be consistent with our focus on street and urban properties in the key must-have markets.
In other words, these acquisitions should have the ability to drive long-term rental growth that is in excess of the current 4% growth embedded in our existing portfolio. And what we said on our last call is that we are at what we describe as a bumpy bottom. Our acquisitions are not ignoring the fact that the retail real estate market is still facing challenges but that the highly disruptive separation of the haves and have-nots amongst retailers, it's still playing out, and that this has caused an increase in vacancy even in some of the best-in-class locations. And then, the corresponding drop in rents in many instances has been significant.
For some markets, where rents grew too aggressively in 2010 to 2015 period, the fall has been dramatic, and we were clear during the run-up that we saw rents were growing at an unsustainable level, and we did our best to make sure that we navigated around this volatility. Thankfully, while it has not meant that we were immune to the corrections taking place, we have still been able to drive growth even through this period. And now that we're a few years into the correction, we are seeing some compelling opportunities arise from this rollercoaster ride.
Many institutional investors are still sidelined from the whiplash of tenant occupancies, and sellers are finally beginning to transact at realistic valuations. And at the same time, in terms of leasing demand for certain street retail locations, the recovery that we saw beginning a year ago is continuing.
Every day, it is becoming clearer that our retailers whether they are emerging or re-emerging are recognizing and appreciating the necessity of certain key physical locations for reduction in customer acquisition costs, reinforcement of the brand and then most importantly, more profitable omnichannel execution.
So with tenant demand improving, with rents having on a selective basis bottomed out, with sellers beginning to be motivated to transact, these factors are combining for the first time in several years to create some exciting acquisition opportunities on the key streets that we’re focused on.
Year-to-date, we have announced $180 million of core acquisitions that are closed or under contract. Last quarter, we continued to add to our acquisition pipeline with sellers who for a variety of reasons are ready to move on. In Soho, we added another building contiguous to our previously announced Greene Street assets. This property occupied by Theory is similar in economics and growth to our other Soho acquisitions, and upon closing on the balance of our Greene Street assets, we will own five contiguous buildings on Greene Street.
And in Chicago on Armitage Avenue, we added two buildings to our Armitage Avenue portfolio, one contiguous with our existing properties and one across the street. And as you may recall, we already own eight buildings with tenants ranging from Warby Parker to Alberts. In fact, the street is now dominated by exciting and unique retailers with most of the prior vacancies being successfully occupied in rents now growing significantly over the past two years.
What we found here and elsewhere, is where we can aggregate enough buildings in the right locations, where we can connect the dots in the right markets, and then use our teams' capabilities to curate these streets with the right mix of tenants. This creates a powerful portfolio. Additionally, we have found that when vacancies dry up, when scarcity and the rules of supply and demand kick-in, well, rents grow.
Along with executing this strategy in Soho in Lincoln Park, we recently agreed to acquire a portfolio of five contiguous storefronts on Melrose Place in Los Angeles. This supply constrained market not only has strong surrounding local demographics, but for many retailers on the street, Melrose Place represents their key LA presence. The unique smaller format storefronts that complement a mix of food, service, soft goods, has enabled key retailers to create a presence on a luxury, LA Retail corridor that is highly differentiated from Rodeo Drive, or even other shopping corridors.
And given the strong retailer performance, given the strong retailer demand, this supply constrained market should provide strong growth opportunities driven by contractual growth, some mark-to-market opportunities, and then longer-term value creation opportunities over time.
In terms of our fund business, complementing the growth potential of our core portfolio, the other driver of growth and a further differentiator for us is through our fund platform. In the third quarter, we continue to grow our Fund V portfolio and these acquisitions continue to be primarily out of favor but stable, Suburban Shopping Centers.
Year-to-date, we've acquired $330 million of property and Fund V is now 16% invested. Amy will discuss our recent transactions in further detail. But in short, the driver of this thesis is acquiring stable properties at an attractive yield, further enhanced with non-recourse secured financing, where we can create mid-teens levered yields on our investments.
So far a few years in, we have acquired about $650 million of shopping centers at a blended unlevered yield of 8% with approximately two-thirds leveraged at a fixed rate blending to 3.7% resulting in mid-teens plus current leverage yield.
Now we recognize that the U.S. is over retailed. And whether in primary or secondary markets, many shopping centers will not be able to hold on to their current yields. That's why we had to be selective in the assets we're choosing. That's why we've avoided portfolio acquisitions. But by carefully screening these investments for the right locations, rent to sales, rent to market, discount for replacement costs, the right co-tenancy provisions, we have created a pool of stable cash flow.
Now we appreciate why these type of assets with limited growth might not make sense in the public market portfolios, but for a private fund like ours that can use more aggressive leverage, we think these investments are quite compelling. In fact, it is rare to see the spread between borrowing costs and unlevered yield be as wide as it is now, such that we can achieve our return goals from existing cash flow without material growth or capital appreciation. Since institutional capital still seems to be hesitant to re-enter the market for most retail, we expect this contrary investment opportunity likely to continue.
On the other side of the fund investment spectrum, while we are continuing to look at value-add opportunities given that we are late cycle given that construction costs are still growing faster than rental growth, the risk adjusted returns for undertaking new developments are just not there yet.
So in conclusion, as supported by our strong performance in the third quarter, we see enough opportunities for growth that we continue to drive solid same-store growth in our core portfolio, begin to carefully and accretively add assets to our core, and then utilize our fund platform for opportunistic growth.
With that, I'd like to thank the team for another solid quarter and turn the call over to John.
Thanks, Ken and good afternoon everyone.
As outlined in our release, our third quarter results and key metrics came in strong and in line with our expectations. Before diving into the details of the quarter, I want to spend a moment to reaffirm a few key messages. Our core NOI which comprises the vast majority of our underlying NAV remains on track to grow in excess of 4% over $20 million of incremental NOI over the next several years. As we've discussed, this 4% growth consists of 3% embedded growth and other 1% from a handful of profitable redevelopments.
Secondly, in terms of the cost to fund this growth, we remain on track to spend $80 million to $100 million inclusive of the redevelopment spend, as well as recurring CapEx and tenanting costs. And as of the third quarter, we have funded over 50% of these amounts, as we are nearing substantial completion of our two key redevelopments.
And lastly, in terms of balance sheet strength. During the year, we have further strengthened our already rock solid balance sheet, raising approximately $140 million of equity to proactively fund our accretive acquisition pipeline, as well as increasing our liquidity through an additional $100 million of revolver capacity.
By diving into the quarter and starting with same-store NOI. Our third quarter same-store NOI was in line with our expectations at 3.1% with our streets and urban portfolio, continuing to drive our results, growing 4.8% for the quarter or roughly 500 basis points over our suburban portfolio. Year-to-date, our same-store portfolio grew 4.1% with street and urban contributing 6.6% which is at the upper end of our initial range of 5% to 7% and suburban coming in around 1%.
It is also worth pointing out that this growth is coming off a strong prior year comp in the mid-3s and consistent with our past practice, it excludes the incremental NOI from our two accretive redevelopment projects.
And I want to spend a moment on our occupancy. Our in-place occupancy is currently at 93.5% with street and urban at 91.7%. Both of which are fairly flat, if not slightly down from prior year comps, which demonstrates that our NOI growth is largely coming from the operations of our portfolio, which consists of contractual rental growth, positive lease spreads, and efficiently operating our business.
We view our full occupancy of 96%, so this gives us a few hundred basis points of occupancy gains, primarily within our higher value street and urban portfolio, which we expect will drive our future growth above and beyond our existing contractual rent bumps and positive lease spreads.
Now moving on to our quarterly credit loss, the bankruptcy of Forever 21 had an approximately 30 basis points impact during the quarter. As we have discussed, we have one Forever 21 in our core portfolio, consisting of approximately 16,000 square feet at a prime location in Lincoln Park, Chicago, adjacent to the recently opened experiential Lululemon concept that Amy will discuss in a moment. While we don't yet have the certainty on the recapture and the timing, we have strong and active tenant interest in the space and are also exploring various profitable redevelopment alternatives. The full-year NOI impact of Forever 21 is roughly 100 basis points when factoring in annual rent and recoveries.
And I want to spend a moment on lease activities including those new leases that we have signed, along with a handful of spaces that we expect to get back over the next few quarters. As Ken highlighted, we are continuing to see active tenant interest across all of our markets in our street and urban portfolio as well as suburban, with new deals being executed at rents at or above our expectations.
During the third quarter, we signed approximately $2.3 million and over 80,000 square feet of new leases, including conforming and non-conforming leases. This volume is up over 20% from the prior quarter. Year-to-date, we have executed approximately $8 million of new leases.
So notwithstanding the retail rollercoaster that Ken discussed, our nine-month leasing activity exceeds what we accomplished in all of 2018, which as you may recall, was a very strong year for us in terms of deal volume.
Of the $2.3 million in new leases that we signed this quarter, we are continuing to execute leases in line with our expectations throughout our street and urban markets, including the final vacancy at Madison Avenue with Orlebar Brown, AT&T at our redevelopment at City Center in San Francisco, Aurate on Spring Street and Soho, and 7 For All Mankind at Westport, Connecticut.
On terms of rent spreads, including our -- in our reported spreads is one of the very few top of the market leases we signed. The lease involved their final space at Madison Avenue. It consists of approximately 400 square feet. It was initially executed in 2016 at approximately $1,000 a foot and reset in line with our expectations about 40% lower. Excluding the impact of the single lease, the cash spread on the other conforming space was approximately 30%.
Now moving on to tenant rollover, what we don't get have a solid read on 2020 as we are in the midst of our annual budgeting process, I did want to highlight a few items. Over the next few quarters, we expect to get back a few prime street locations upon their natural lease expiration consisting of approximately 12,000 square feet at high demand locations including Soho, Walton Street in Chicago, and on Greenwich Avenue with in-place rents ranging from $150 to over $450 a foot.
We are in active discussions on each of these spaces. And while we don't get have a precise estimate of the 2020 downtime, we are optimistic that we should have the vast majority of these high quality spaces spoken for at profitable rents prior to or shortly after lease expiration.
Within our suburban portfolio, we have two grocers comprised of approximately 100,000 square feet, with leases that expire over the next few quarters. These leases reside in our Elmwood Park and Pacesetter properties with average rents in the low 20s.
We have already signed new leases on approximately 80% of this expiring space, with anticipated downtime of approximately 12 to 18 months as we turn the spaces.
So while tenant rollover inevitably creates variability in short-term metrics, particularly given the diversity of rents that exists in our portfolio ranging from $5 to over $800 a foot thankfully, our portfolio consists of high quality high demand locations and this profitable rollover is an integral part of our plan to grow our NOI at 4% over the next few years as we bring expiring rents to market.
Now moving on to our earnings, our third quarter came in strong and ahead of our expectations at $0.34 a share, driven by the strength of our core portfolio.
In terms of annual guidance, we have maintained the mid-point but tightened our range to $1.40 to $1.42 as we are not guiding towards any additional transactional income for the balance of the year. As highlighted in our release, we have raised approximately $140 million of equity during the year to pre-fund our investment pipeline.
Based upon expected closing dates, we anticipate a penny or so of short-term dilution in 2019. As Amy will discuss in addition to the strength of our core portfolio, we are also seeing strength in our fund business. During 2019, we have closed on over $300 million of investments in Fund V which are generating a 15% levered AFFO yield. While the vast majority of our FFO and even higher percentage of our NAV comes from our real estate operating business, approximately 10% of our FFO routinely shows up for profitable transactional income, whether it be from leasing, construction and development fees promotes within our fund business, or other value creating transactions across our dual platform.
During 2019, we expect to earn approximately $0.10 from transactional income. Again while too early to provide 2020 expectations, given our shift towards stabilized high yield assets with less leasing turnover, along with expected dispositions of Fund IV assets, I would anticipate a few cent decline on fund transactional and asset management fees in 2020, keeping in mind and as evident in our Q3 results, these fees are being supplemented by high quality recurring NOI stream from the Fund V investments.
Before moving on to our recent acquisitions, I also want to highlight a decline in the quarter of about a penny related to non-cash, straight line rent and below market lease adjustments. As we look forward, I would expect on a pro rata basis that these quarterly non-cash adjustments to be in the $1.5 million to $2 million range beginning in the fourth quarter and continuing throughout 2020.
Now, in terms of core investments, Ken, hit the key points in his remarks, but as we’ve discussed last quarter, we are anticipating a penny of FFO accretion for every $100 million of core acquisitions that we do. Further, the assets that we acquired, as well as those that are under contract are expected to be accretive to our existing in-place NOI growth of 4%.
And lastly, as a segway into our balance sheet, we have pre-funded our investment pipeline raising approximately $140 million of equity at an issuance price in excess of $28.60 a share. While our balance sheet has always been best-in-class over the past few months, we have made further strides price to strengthen it with core debt to EBITDA under 5%, no maturities for the next several years, and expanding our revolver capacity by another $100 million.
Our balance sheet along with a significant dry powder remaining in our fund business is poised to aggressively capitalize on the opportunities that we have and we will continue to pursue in the marketplace.
So as we finish another strong quarter and start looking into 2020 and beyond, our outlook, both in terms of internal and external growth remain strong.
And with that, I will turn the call over to Amy to discuss our fund business.
Thanks, John.
Today I'll review the steady and important progress that we continue to make on our funds platforms, buy-fix-sell mandate. Beginning with acquisitions, through the third quarter of 2019, we completed approximately $320 million of acquisitions. This compares to approximately $150 million of Fund acquisition volume for all of 2018.
During the third quarter, Fund V acquired a total of three properties for $142 million, of which $55 million was acquired in partnership with DLC. We considered two of the three properties to be the, quote “best game in town”. That is, we view these properties as top among a handful of competitive properties in their respective markets due to their strong positioning and tenant line-up.
To that point, tenants at these properties include Ross Dress for Less, Best Buy, Dollar Tree, and Ulta. The third property is a well located Kmart anchored shopping center. Here the 95,000 square foot Kmart pays rent of less than $3 per square foot, which we've identified as an accretive value-add opportunity over the next few years. In the interim at our acquisition cap rate, the property continues to generate a strong leverage yield.
As Ken mentioned, over the past few years, we have successfully aggregated an approximately $650 million 14 property portfolio on behalf of Fund V and we've done so at an unleveraged yield of approximately 8%.
With leverage, we are currently clipping a high-teens yield on our invested equity. From a downside perspective, at this rate, we can have a zero cost basis in only six years. But more realistically, we are thinking about how much more quickly we can achieve our equity multiple goals, equity multiple goals, as the approximately 150 basis points of cap rate expansion that we've seen over the past few years for these types of non-supermarket anchored centers begins to reverse.
In general, with 100 basis points of exit cap compression, we can achieve roughly the same equity multiple in three years instead of five and the positive impact on that IRR given the compressed cold period is generally north of 500 basis points.
As previously discussed, cash flow stability is key to our strategy. To that point, we are pleased to report that these carefully selected assets continue to perform consistent with our underwritten expectations. And in the few instances where we have unexpectedly lost a tenant, for example, at Babies “R” Us in Hickory, North Carolina, we've been able to backfill the box in that instance with Home Goods on a generally yield neutral basis.
Turning now to dispositions. In September, Fund IV sold 930 West North Avenue in Lincoln Park, Chicago. We acquired this property in November 2013. As previously discussed, during our hold period, we re-tenanted this building with a supersized Lululemon, their new flagship includes new elements beyond shopping such as the restaurant, workout studios and meditation space.
You may recall that this property is down the block from another Acadia redevelopment known as Lincoln Park Center. Formerly Border's Books, that property is now anchored by design within reach. After completing that re-anchoring we sold Lincoln Park Center in January 2015, achieving nearly 60% IRR and 2.7 multiple on invested equity. In comparison, the realized returns for our neighboring Lululemon reflects the reality post retail Armageddon that assets are taking longer to lease up and when that happens, there is downward pressure on returns.
That said; keep in mind that both Funds III and IV has benefited from very profitable investments on Lincoln Road in Miami Beach. And with respect to Fund III, which is further along in its monetization period, on a growth basis, we've already achieved a 21% IRR and north of a 2X on invested equity on our sold investments through last quarter.
Looking ahead, we're focused on stabilizing that Funds Final IV investments, most notably a new shop right directly across the street from Cortland Town Center in Westchester County, New York. Although it's still too early to predict the exact timing of lease sales, we look forward to the successful winding down of Fund III over the next couple of years, especially since our prior sales have put us in a profitable position.
Finally, a brief update on City Point, our urban retail property in Downtown, Brooklyn. We were pleased to welcome Kasper to Prince Street at the end of the summer. Store openings for Camp and McNally Jackson will follow on Prince Street in short order. And on the fourth floor, we are also in the process of expanding Alamo Drafthouse, our incredibly successful movie theaters.
City Point benefits from its strong location at the epicenter of growth in Downtown Brooklyn and it's critical mass of compelling food, entertainment, and soft good uses, which continues to drive strong food traffic and anchor sales.
Looking ahead, we believe that rents of this property have a lot of runway, especially once the construction on Gold Street is completed as a new park at Willoughby Square opens.
In conclusion, we had another productive quarter in our Fund platform. We continue to execute on our opportunistic and value-add investment strategy, monetize our stabilized properties, and create value within our existing fund portfolio.
Now, we are happy to answer your questions.
Thank you. [Operator Instructions].
Our first question comes from Christy McElroy of Citi. Your line is now open.
Hey, good afternoon, everyone. John, I just wanted to reconcile some of the items that you discussed around expectations for same-store NOI growth. You talked about the occupancy runway and getting ultimately to 96%. You have the Uniqlo lease commencing and other leases executed, but you also talked about these high value street space recaptures next year. How should we be thinking about all of those moving parts in the context of same-store NOI growth, is the 3.5% to 4.5% that you've seen this year sustainable into 2020 or should we expect something closer to that 3% kind of longer term, embedded growth rate that you also talked about?
Yes, Christy, and I think you sort of highlighted that there are a lot of moving pieces. And I think we will, as we always do, give more definitive guidance in February, but I think we reaffirm that the 4%, which is 3% same-store through the next several years is intact, but until we have some certainty around the moving pieces, I guess it's a little bit too early at this point to give anything firm.
Okay. Just on the Uniqlo lease, can you talk about the P&L impact there in the context of sort of the timing around when they took the space, and when the rent commences and how that impacted -- how that’s impacted straight line rent versus the timing of when that starts to get booked as cash rent. So, when they sort of took over the space versus when they actually start paying rent?
Yes. So, I think for GAAP purposes, we, when we turn over a second-generation space, where we're not doing significant work, we will start straight lining as of the turnover day, which began this quarter. So, there's a few hundred thousand dollars of straight-line adjustments related to Uniqlo, but given that their rent doesn’t commence until they open, that’s going to be in late Q4 that it will start showing and be reflected in our same-store results.
Thank you. And our next question comes from Craig Schmidt of Bank of America. Your line is now open.
Thank you. I was wondering if you could give me the total square foot of the five contiguous storefronts on Melrose Place.
As soon as we close, Craig, we will give more detail, and we're pretty close to getting this closed and we have a firm contract. But there's a lot we want to talk about there as soon as that happens.
Okay. And then maybe this might limit this as well. But, I was wondering if maybe you could contrast the street and urban market in LA versus let's say on New York or San Francisco, and how you want to take advantage of that?
Sure. And each market is different. But all of the markets, the first stop is conversations with our retailers. Where do you want to be, what’s working, what’s affordable, what’s profitable, how do you think about your businesses? And so, while it's certainly different on Armitage Avenue than on Greene Street, and certainly different in Union Square, San Francisco versus in LA and on Melrose Place, here's what our retailers have been telling us, you have a three block stretch that's really quite unique for them where combination of Social Media and Instagrammable moments ,but also for these retailers to drive their omnichannel sales, it is at the epicenter of it.
So, whether it's Glossier or The Row, they're looking at these streets as being powerful above and beyond the fact that they are profitable on a rent to sales basis, which they are. They are affordable relative to other alternatives, which they are. But because they are unique, because especially in LA, where the shopping experiences are very different, let's say than strolling in Soho, this is providing what our retailers telling us is a unique opportunity for them to really get their brand out there in a positive way where they can drive both four wall EBITDA, but then as importantly omnichannel.
And you're going to see that continue because it is such a unique stretch. And then from our perspective, and we've been pretty clear about this, we want to own clusters where we can connect the dots where we can control enough different spaces because already in conversations with retailers, some want to expand, others want to consider other alternatives. In Armitage, we're going through this right now in a positive way. So, where we can move tenants around, where we own enough continuous or near spaces, that has been a proven success for us.
And so we think about the different markets in the United States when we sit down with retailers and ask them, where are they excited? And that's what leads us there first and foremost.
And then secondly, because -- just because retailers want to be there, and just because we like the location, we need realistic sellers. If we don't see realistic sellers, there's nothing we can do. So, we have a situation here where we think there's long-term value-add opportunities. We have a seller that we have enjoyed doing business with. So, we're looking forward to it.
Thank you. And our next question comes from Todd Thomas of KeyBanc Capital Markets. Your line is now open.
Hi, thanks. Just first question, in terms of operations here. So John, the Forever21 that you discussed, you said there was a 30-basis-point impact in the quarter and the annual impact is expected to be roughly 100 basis points, but you haven't recaptured that space yet. So what was the 30 basis points attributable to specifically in the quarter and is the rent and NOI run rate already accounting for downtime or the recapture of that space?
Yes, so Todd the prepetition bankruptcy rents or would have been September's rent wasn't paid. So that is why we put a full reserve on the one month, so rent recoveries and the open receivables, so that's one month of the third quarter.
Okay, got it. And -- and then, so a couple of questions on investments here. So first, we've seen the pace of investments pick up some particularly in the core. And I'm just wondering if we should expect to see investment activity accelerate further as we think about 2020 just based on what's in the pipeline and then curious whether you're seeing some larger portfolios come to market as seller expectations seem to have reset some -- maybe something a little more sizable than what you've seen this year so far in Soho and in LA now, or should we still be mostly thinking about smaller one-offs and some small portfolios or collections of assets like this.
So, it's a great question Todd. And the short answer is, I don't know. And so people ought not read too much into what I'm about to say, because the last time I talked about a pathway to growth that was both aspirational and I would argue observational meaning when I look around now and I see who is active and who is not, who sidelines in terms of specially of high quality street and urban assets. We feel really good about our position both in terms of what we understand our dialogue with the retailers, where we can pick locations that seem to over the next one, three, five, 10 plus years work. There is not a lot of bidding competition and there are more and more larger portfolios coming to market.
And to your point, sellers I think are, not all of them, but sellers are beginning to become more realistic. So, there is nothing that would cause me to think that we couldn't see more investment activity in it ramp up, but the reality is we don't have to do any deals in order to drive strong internal growth, in order to drive strong core growth.
So, if sellers change their minds, if there are shifts in the economy that caused us to pause shifts in the stock market that caused us to pause, we'll pause. But right now, I like what we're seeing and we're still in the early stages of the shakeout of the haves and have-nots, so . So as more and more clarity comes in, as retailers become more adamant that they're rethinking their business models, and you're seeing this not just from digitally natives but from iconic brands saying, you know what, we're going to reduce the amount we're selling through the wholesale channel. We'll try to grow DTC, but while we do grow direct to consumer, we need to acknowledge that stores are an important piece of the way we do business.
Well, when we hear retailers talking like that, when we say, where do you want to be? And to the extent we can get our foot in the door on those type of acquisitions, especially where we can own multiple buildings, that makes sense for us. You've seen on the small side, we can have one or two buildings on any given street that we're already active in and we're a small enough, nimble enough company we can do that well. As we think about larger portfolio transactions, there needs to be concentration and they need to make sense or we won't do them. But as I started this conversation, one, I don't know, two, but when I look around, I like how we're positioned in terms of the lack of competition. There is still plenty of competition out there, but it's much different than it used to be and that makes us pretty excited.
Okay, that's helpful. And what about in Fund V with the high yielding investment strategy there so you noted the spread between unlevered returns and borrowing costs being extremely attractive. Are you starting to see cap rates compress a little bit on that product. As it sounds like you might be underwriting or anticipating based on your comments, and is the competition changing at all for those assets given the decline in borrowing costs.
Yes. So I keep waiting for that and there is a somewhat schizophrenia world we live in, where we're waiting. Could cap rates go up when you talk to some people, could they go down when you talk to others? So to be clear, and so everyone understands this spread is primarily in non-supermarket anchored shopping centers. There still a lot of muscle memory around supermarket anchored shopping centers. It's not that we don't like them, but even John hinted at this earlier in his prepared remarks, there’s a lot of disruption in the supermarket space, that may or may not be priced into the amount of redevelopment that has to occur. But for non-supermarket anchored centers so far, we are seeing decent deal flow.
There’s competition, but not nearly as much as there used to be because institutional investors are still, for the most part on the sidelines. What I do expect to change is the type of seller primarily over the last couple of years it has been public companies selling assets and I think appropriately so deleverage them. It seems to me based on a bunch of recent data plus how stocks have trade and that many of them are saying mission accomplished on their side and great.
What we are now seeing is other institutions saying it is time given the life of those funds or is there in core funds for them to try to monetize? And I'm not seeing enough new institutional private capital jumping into sync that those spreads compress. But do keep in mind, I think we're in a win-win position. So if interest rates stay low and cap rates compress a little bit, we can still achieve our returns because we didn't underwrite 3.7% blended interest rate. We underwrote higher. If cap rates compress a lot, I think, Amy, hinted at, we have no problem in our buy-fix-sell model monetizing. So we just have to be nimble enough that if the markets continue, we'll continue to add. That is my guess is my base case for the next year or two. But if we see a shift, if we see a return in terms of institutional capital coming back into this stable low growth, but stable retail environment, great. We know how to monetize and how to create shareholder value around that.
Thank you. And the next question comes from Vince Tibone of Green Street Advisors. Your line is now open.
Hey, good morning. So Los Angeles is a new market for Acadia. I'm just curious, if you're actively looking to gain further scale there and if so, would it be likely concentrated in the Melrose area or are there other streets or submarkets in LA that you find interesting?
So Vince, we don't add new markets casually and we'd spent months, it’s not years, watching the different markets to see where can we get the right combination of scale, adequate barriers to entry, strong retailer demand, and LA is a disperse to call it one market to even pretend that it's anything like San Francisco or New York in terms of that level of dispersion, it's very different. So we would welcome the opportunities if we see them. You could run through your list right now of where are the key streets that we want to be active in. And then the question is do we have enough realistic sellers where we can aggregate enough of a portfolio on a given promenade to say we can make a difference. And if the answer is no and it's just too disperse and it's still going through too much headwind, we'll probably hold off on that location until we see it turning the corner.
And there may other be other areas that are great to go out to dinner that are really hip. But again, we don't think we can add enough building there or we may wait until we see a larger opportunity. But there are probably three to five different markets in LA, each of them separate that excite different retailers’ different way. If we can see the right entry point, I see no reason for us to not add, but we are patient and discipline. So for now, I would expect to see us stay focused on Melrose Place. Let's prove that out and then we'll see what shows up next.
I mean that makes sense. So kind of on that point, it seems like other new markets seem pretty unlikely in the near-term then, I mean, is it fair to say that growth will be – no, external growth will probably be concentrated more in your core markets and now possibly Los Angeles.
We on a ratio of 10 to 1, our acquisition investment and leasing team spends time on those markets that we're currently active in. So we do not feel like we need to go add a new market a quarter, a month, or even a year. We have great concentration down in DC. We're beginning finally to build concentration in New York City. Boston, Chicago, San Francisco, now LA. We could debate online or offline where the next place should be. But I would expect our team to be spending 90% of their time and effort on the existing market because that's what we're going to know best. And frankly, other than maybe one or two other markets where retailers are saying those are must-have locations. The ones we've are in are the key gateway must-have locations for retailers looking to express their brand to the consumer in a unique way that compliments their omnichannel channel strategies.
Thank you. And our next question comes from Floris van Dijkum from Compass Point. Your line is now open.
Great. Thanks guys. Quick question on the return expectations, you’ve talked about for your funds needing 8%, unlevered returns, presumably for the core it's the same level or if not a little bit higher. And the composition of returns obviously is both income and growth. As you think about your acquisition on Melrose Place, how does the composition between income and growth compare to your New York assets and your overall portfolio?
Sure. So let me talk Floris about our $180 million of core acquisitions here to-date and be a little more vague about building-by-building or even Melrose versus Soho, et cetera. And you are absolutely right. And that the way we think about the world is there is assets you can buy and an unlevered eight and then there's assets that you buy at a lower yield well and the unlevered eight having what we anticipate to be very limited yield growth. Meaning there may be rent growth as tenants turn, but you have to spend money. So you started at an eight and it grows to an eight and our goal is making sure we don't buy eights that grow to fours.
And then on the longer-dated core assets, we've been pretty clear what we're looking for is plus or minus 4% compounded annual growth through a combination of contractual leases. These leases contractually tend to be about 3%. Sometimes they're too, sometimes they're higher, but 3% is probably a pretty good number. And then we are looking for certain upticks along the way. Although we are very sober about the realities of the marketplace right now. So we do not believe trees are going to grow to the sky there but if you use 4%.
Then what I would tell you is, and again we have a few moving pieces on $180 million of acquisitions this year before we even get them closed. But with a few moving pieces, John said on the last call and it still remains the case, we expect to be pretty darn close to a 5% yield going in. And then we expect that 3% to 4% growth can't tell you which quarter 3% becomes 4%, but we feel pretty good after we have seen rents in some markets decline and some cases precipitously, we feel pretty good that there will be a rebound. Now, whether the rebound is a rent increasing periodically at 10%, which will be great, or an unhealthy 20% or 30% which was what was occurring in the 2010 to 2015 period, which we are not wishing for.
But if there's some form of rebound, we think there will be asymmetrical upside such that the returns we get in the core reward us for not getting current yield at eight day one reward us for a, I think more interesting, more robust long-term ownership as retailers continue to shrink their footprint, do more with less. But it's also a longer-dated investment where we're not sitting there levering it two to one. We're not worried about what the exit cap might be in two years. So hopefully that, I guess that's a long way of saying eight plus zero or five plus three or four get you to similar returns.
Fair enough. And so -- we should think about it. So, maybe five-ish initial return and then growing over time is that the right way to think about it?
With the following huge caveat there's a bunch of assets that trade well below that going in, and we have to recognize that and that given how low global interest rates are for these markets, don't be surprised when you see very low cap rate trades elsewhere. We acknowledge that. We don't chase it, but we acknowledge it. But where we can find the right portfolios, the right assets that meet those needs, the answer is, yes.
Fair enough. If so the - let me just, so if we see those lower yields, so presumably we have to assume that the growth will be higher to get to your 8% plus return that means that potentially you're looking at, 4.5% return over time.
Well let me be clear in case I wasn’t. When you see those transactions with very low yields printed, the first thing you should assume is we're not the acquirer. But there's been a few transactions on Fifth Avenue, I think that have just been incredible in terms of how low the mark-to-market effective yield is.
We're not the acquirers of this. And sellers like to point to them and say, well, why can't you compete with that sovereign wealth fund and buy at a 3.5. We can't, we won't. In the core, our focus is not chasing liquid markets. It's great to know that there's liquidity there as a backstop in terms of the capital markets. Our focus is to chase where retailers want to be and where we stand a fighting chance of seeing exceptional rental growth.
And because we're going to own them in the long run, if we can acquire at the yields, I just discussed. If it's lower, yes, you're right, if going in yield is lower than that you should expect us to be able to realize upon higher rental growth than I just discussed, but I was referring in lower yields primarily to some transactions that have made the papers at cap rates that we can't compete with.
Fair enough. One follow-up question on City Points and the expected stabilization, are you getting closer to having that asset be stabilized and have all of the ground floor retail be leased or when do you expect that to happen?
So the short answer is yes, we're getting closer and but we're nowhere near as close as I would like to do be. The great news is historically the challenge in urban mixed use retail has always been what do you do with the upper levels? And what do you do with your basement? And in that case, we are fully stabilized and frankly the retailers are crushing it between Alamo Drafthouse, Target, DeKalb Market, Trader Joe's, so we solved the hard part, what we haven't not been able to solve for is the realities that we're still in a construction zone. That's the part that's going to be incredible across the street, but is beyond our control is still at least a year away. That the tallest tower today in Downtown Brooklyn is adjacent to us and they're topped off, but they still have some more work to do. So it still feels more construction like and then the street it will down the road. That -- once that tower is complete, there's another tower block away that will then be the tallest tower in Brooklyn probably for a long time. So I don't want to predict when all of this gets done.
But what is becoming clearer to us as we look around is that we are at the epicenter of a pretty exciting area in terms of mass transit, in terms of sales that Alamos doing, Trader Joe's doing et cetera and then we just need to as aggressively as we can, but we need to be sober about how long it's going to take. We need to get this ground floor leased up. Our focus here would be, I don't want to leave money on the table. We work too long too hard for this. So predicting or telling you that next year all these rents will be at full market, I think is unlikely. I think it's a multi-year task, but we're up to it.
Thank you. And our next question comes from Hong Zhang of JPMorgan. Your line is now open.
Yes, hi guys. Just last quarter, you talked about how you're benefiting from a lower than expected current loss reserve. Is that still the case? I guess it sounds like next year the credit loss will be higher, is that fair to state?
Hi Hong. So yes, I would say in terms of where we were for the quarter, I'd say we were with the exception of the Forever 21 we were a little higher by the 30 basis points that that we took this quarter. In terms of next year, I think it’s a bit early, but I think we always start the year somewhere between thinking about to 100, 150 basis points. So I'll definitely have a better view on that as we get up to our next call.
Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Ken Bernstein for any closing remarks.
Thanks, everyone. I look forward to speaking to you next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.