Acadia Realty Trust

NYSE:AKR

Earnings Call Transcript 2019-Q2

[Operator]

Good day, ladies and gentlemen, and welcome to the Q2 2019 Acadia Realty Trust Earnings Conference Call [Operator Instruction]. As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Ms. Destiny Nelson. Ma'am, you may begin.

[Destiny Nelson, Finance Intern]

Good afternoon. And thank you for joining us for the second quarter 2019 Acadia Realty Trust Earnings Conference Call. My name is Destiny Nelson, and I'm an intern in our finance department.

Before we begin, please be aware that statements made during the call are not historical are 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 speak only as of the date of this call, July 23, 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.

[Ken Bernstein, President and Chief Executive Officer]

Thanks, Destiny. Great job. Good afternoon, everybody. I'd like to start with an overview of some of our longer term goals and the drivers of growth for our business, as well as then touch on how our solid second quarter results reflect on that progress in advancing those goals. Then John will discuss our quarterly results in more detail, as well as our forecast and our balance sheet metrics. Then, finally, Amy will discuss our Fund Platform and our progress on that front.

As we discussed on past calls, there are few key drivers of growth for Acadia. First comes from our Core Portfolio, where there are two broad drivers of long-term net asset value growth and earnings growth. Most importantly, it comes from the internal embedded growth in our Core Portfolio, driven by lease-up of some key vacancies, contractual growth, and then a few redevelopments. And these should combine to enable us to deliver 3% to 4% annual NOI growth from our existing Core Portfolio for the foreseeable future.

As John will discuss, our second quarter results are consistent with this thesis with same-store NOI growth coming in at the high-end of our internal goals and we're also making continued progress with our key redevelopments, most notably the City Center in San Francisco, where we're working through the municipal approvals for adding Whole Foods to the property, and then the leasing of our shop space is also meeting our internal estimates.

Then complementing our core internal growth is the ability to periodically add properties to our Core Portfolio when the stars align. The requirements and our goals here are pretty straightforward, the acquisitions have to be accretive to net asset value as well as to our long-term earnings growth and then 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 3% to 4% growth embedded in our existing portfolio.

Now these acquisitions are not ignoring the fact that the retail real estate market is still facing significant challenges. The highly disruptive separation of the haves and have-nots among retailers, it's still playing out. But on a selective basis, we're beginning to see a rebound. Whether retailers are emerging or reemerging, they are recognizing and appreciating the benefits of a physical location for reduction in customer acquisition cost, reinforcement of their brand and then most importantly, more profitable omni-channel execution.

And what our retailers are telling us is that they are most focused and most-passionate about their key locations in the critical cities and the critical markets that continue to disproportionately attract the young, well-educated, well-employed customer. Thus, we're beginning to see, in select markets and with careful analysis, what we have described as a Bumpy Bottom. Bumpy, because we can't ignore the challenges that our retailers face about the vacancies on many great streets. Bumpy because we recognize that we are likely at the late stages of the economic cycle, while still in the early stages of the future retail recovery.

But Bottom, because in many of the key corridors where we're active, we're now seeing tenants showing up and showing up with more enthusiasm and clarity today than one or two years ago. But Bottoms are only obvious in hindsight, and we won't create shareholder value by waiting for the Wall Street Journal to say that it's safe to go back in the water.

Thankfully, we're seeing this rebound even in markets where there is still significant vacancy, such as our retail adjacent to The Carlyle Hotel on Madison Avenue here in New York. After a quiet 2017 and 2018, we signed an important lease with Gabriela Hearst, then earlier this year with Monica Vinader, and then over the last week we finished our final lease with Orlebar Brown, a subsidiary of Chanel for our final vacancy at that property in each instance with improving economics.

Now some of this bounce on Madison Avenue might be due to the meaningful decline in rents over the past few years, but this positive trend, it's also playing out in other markets where rents have not been as followed. As we have discussed on past calls, on Armitage Avenue in Chicago, where our acquisition team has been able to acquire a nice concentration of buildings and our leasing team has been able to attract new emerging brands, while rents are growing in excess of our goals. The street is now dominated by digitally native retailers that started with Warby Parker and Bonobos, and then more recently we added Allbirds and Outdoor Voices. And, last month, we've leased our final vacancy there to a new exciting retailer, Lively.

And this activity, over the past two years, has driven compounded annual growth of market rents by about 20%. Then when we think about the retailers likely to populate our prospective acquisitions, they'll continue to be similar to the key tenants in our Core Portfolio today, a blend of necessity and value-based retailers, such as Target or TJ Maxx, but then also new emerging brands.

We're making sure that we're owning the kind of properties that are critical to great more established retailers, whether they'd be Whole Foods or Lululemon, but also newer retailers who recognize that physical stores are a critical driver of their growth and of their profitability. And our team is ensuring that we are getting a significant portion of these retailers' attention on those streets and those markets that matter.

What we have found is that by having the right locations in the right markets then combined with the strong tenant relationships, the market intelligence that we have and then being able to own a concentrated cluster of buildings and use our teams' capabilities to curate with the right mix of tenants, well, that creates a powerful portfolio, a portfolio where the whole is more valuable than the sum of the parts.

We've successfully built this concentration on M Street and Georgetown, on Rush and Walton, and then Lincoln Park in Chicago, and now we're in the process of connecting the dots in Soho with our recently announced acquisitions on Greene Street and Mercer Street, where the leasing team can achieve the synergies it has elsewhere. Also, stars aligning, it means we have to have a cost of capital that enables us to compete with cash buyers. And John will walk through how we have been successfully funding our acquisitions on a leverage-neutral basis.

And finally, stars aligning also require sellers to be realistic and adequately motivated. Last quarter, we continue to add to our acquisition pipeline with sellers who for a variety of reasons are ready to move on. Hopefully, this growing pipeline then translates through into closed deals. We recognized we're still early in the rebound process and we can afford to be patient. But that being said, when the stars align, we see no reason that we cannot double the size of our approximately $2 billion street and urban portfolio over the next five years.

And with some appreciation in value, we should be able to own a $5 billion portfolio of street and urban properties in our current key markets of D.C., New York, Boston, Chicago, San Francisco and then, perhaps, a few other markets. And we believe that this will enable us to continue to differentiate ourselves and drive our net asset value growth, as well as our earnings growth.

Then complementing the growth potential from our Core Portfolio, the other key driver of our growth is and further differentiator is through our Fund Platform. In the second quarter, we continue to add assets to our Fund V portfolio. These acquisitions continue to be primarily out of favor suburban shopping centers that we're adding on a very selective basis. Amy will discuss our recent transactions in further detail. But, in short, the driver of the thesis is acquiring very attractive yield, further enhanced with non-recourse secured financing, where we can leverage it on a 2:1 basis to create mid-teens yield.

Our goal here is not significant real NOI growth. We don't foresee significant net effective rent growth in this space, and we don't need it to make our investments work nor do we need significant asset value appreciation, just stability. If rental growth or capital appreciation shows up, great. But given the low interest rate environment and other macroeconomic factors, these investments feel appropriate and they feel prudent.

In conclusion, as supported by our strong performance in the second quarter, we see enough opportunities for growth that we can continue to drive solid same-store growth in our Core Portfolio and 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 their hard work and success last quarter, and I'll turn the call to John.

[John Gottfried]

Thank you, Ken, and good afternoon. As outlined in our release, we had another strong quarter. We exceeded our expectations across all areas of our key operating metrics, increased our full year earnings and same-store NOI guidance. And lastly between our Core and Fund businesses, we have nearly $400 million of transactions to-date completed or under contract.

By diving into the quarter and starting with same-store NOI. As Ken discussed, our second quarter same-store NOI once again came in strong and ahead of our expectations at 4.8%. As we have previously guided, our street and urban portfolio led the way with quarterly growth in excess of 6%, coming from a combination of contractual bumps, lease-up, and mark-to-market, along with some operating and other efficiencies. Additionally, our suburban portfolio also performed nicely and ahead of our expectations, coming in at just over 2% for the quarter.

We are continuing to experience better-than-expected credit loss and tenant recoveries. This contributed over 100 basis points during the past quarter. As outlined in our release, we have raised our full year same-store guidance to 3.5% to 4.5%. So as we think about the variables that could impact our same-store NOI results for the balance of 2019, a couple of thoughts. From a leasing perspective, we have already signed the vast majority of leases necessary to hit our 2019 expectations. So unlike prior years, achieving our goals aren't dependent upon getting leases signed or quite honestly even the timing of rent commencement dates.

Keep in mind that as we have previously discussed, our same-store NOI metrics for the second half of the year will continue to be impacted by the profitable retenanting of H&M on State Street with Uniqlo, which we expect will commence late in the fourth quarter.

Our current model has us coming in between 3% to 4% for the next six months. So the real remaining variable as to where we fall within the range involves our credit loss. We have included a reserve of roughly 75 basis points of credit loss for the balance of the year. While this is lower than we had initially projected, it's consistent with what we have been experiencing over the past several quarters. And based upon what we are seeing throughout our portfolio, we feel that we are in pretty good shape as we look forward over the near-term and even better over the long-term.

I would like to spend a moment to discuss how we think more broadly about tenant credit and the impact it could have in our portfolio. Without a doubt, disruption of Ascena Group, Pier 1, or Bed, Bath & Beyond will impact our short-term metrics. However, it's important to keep in mind a few things. In terms of ABR, over 60% of the rents we collect are located in high-density street and urban locations, including the South, the Market District in San Francisco and North Michigan Avenue in Chicago. These extremely dense urban locations have population and median household incomes well above national averages, which are the most important demographics that drive retailer demand.

Additionally, while we are always cautious to disclose our current view of market rents on a given space, on average, the vintage of these leases are in excess of 12 years old. So while tenant disruption will have short-term quarterly implications, we are confident that not only will strong retailer demand exist, but more importantly a recapture of these spaces would be a profitable experience.

So in addition to the strong same-store growth we have seen for the first half of the year, along with an optimistic outlook for the balance of 2019, we reaffirm our projection of maintaining 3% to 4% NOI growth, inclusive of redevelopment over the course of the next several years. Additionally, and as I will discuss in a few moments, our most recent acquisitions are further accretive to this growth as we anticipate a 5% CAGR over the next several years.

Now moving on to rent spreads. As outlined in our release, we've reported nominal conforming new leases, consisting of a single insignificant suburban lease. Given the strength that we are seeing in our results and as we look forward, this doesn't provide the full picture of our leasing efforts. The vast majority of our second quarter leasing activity involved non-conforming leases as we profitably split and reconfigured space. I want to provide some color on these leases. They represented approximately 50,000 square feet or 100 basis points of occupancy, generating approximately $1.9 million at annual base rents at an estimated cost under $30 a foot with a weighted average lease term of approximately 10 years.

A majority of these non-conforming leases came from our street and urban portfolio, and included Monica Vinader on Madison Avenue, Lively on Armitage, and Reformation on Walton Street. These three leases alone will contribute roughly $1 million of annual NOI. And, as Ken highlighted, not only did these leases bring us the full occupancy on these key streets, we captured double-digit rental growth during the lease-up.

Now moving on to earnings. Our second quarter came in strong and ahead of our expectations at $0.36 a share. Included in the second quarter is approximately a $0.01 of transactional income for the monetization of a Fund III investment. So notwithstanding the temporary dilution from the pre-funding of our acquisition pipeline, the strength of our internal and external growth enabled us to raise our 2019 FFO guidance.

And we are seeing strength across all areas of our business. Our projected Core NOI is anticipated to come in at the high-end of our initial range, driven both by profitable leasing and credit experience along with the accretion from external investments. And, as Amy will discuss, profitably deploying fund dollars enabling us to earn incremental FFO from both the NOI and the related fees from owning and overseeing these investments.

As outlined in our release, we broke our FFO guidance into two buckets; FFO before and after transactional activities. FFO before transactional activities is our recurring earnings stream, which, as I just discussed, is coming in above the high-end of our initial range. The transactional component of our FFO typically represents 5% to 10% in any given year. In our updated guidance, we are projecting $0.10 to $0.12 of transactional items, of which roughly $0.08 has already been recognized. Some of the transactional items that we had initially contemplated could move into 2020.

I now want to spend a moment on our recent Core acquisitions. Based upon the pricing we are seeing and our current funding cost, we are anticipating approximately $0.01 of FFO accretion for every $100 million of Core investments that we put to work.

As Ken discussed, we are now under contract to acquire seven properties in Soho at an aggregate cost of just over $120 million. Of this seven Soho properties, three have closed at a cost of approximately $50 million with the balance expected to close in phases over the next several quarters. These assets are projected to generate a 5% CAGR over the next several years through a combination of contractual growth along with some mark-to-market opportunities. The Soho portfolio has an average remaining lease term of approximately six years.

In terms of funding, we have effectively funded on a leverage-neutral basis for the purchases to-date, along with the remaining assets under contract through the $75 million that we raised under our ATM at an average gross issuance price in excess of $28.50 per share.

Now moving on to our balance sheet. It continues to remain exactly where we want it, specifically our leverage profile, borrowing cost and our maturities. We have no maturities for the next several years, and, furthermore, given the low rate environment and flatness of the yield curve we continue to lock our interest rates through the swap markets whenever we have an opportunity to hedge our exposure.

In summary, the strength we saw earlier in the year has continued and our outlook remains strong. Our business is well-positioned for continued growth with a strong and growing Core Portfolio, along with an increasing number of accretive investment opportunities.

With that, I will turn the call over to Amy to discuss our Fund business.

[Amy Racanello]

Thanks, John. Today, I'll review the steady and important progress that we continue to make on our Fund Platforms, buy-fix-sell mandate. Beginning with acquisitions, we are pleased with our current transaction momentum. During the first half of 2019, we completed approximately $190 million of acquisitions, of which approximately $140 million were completed during the second quarter. This compares to approximately $150 million of volume for all of 2018.

Since the beginning of this year, Fund V has invested approximately $175 million in four properties. All four are open-air shopping centers in non-prime markets in Utah, Florida, Rhode Island and Connecticut. We have, therefore, our high-yielding, that is entry cap rates of 8% plus. In general, we've been able to buy these higher yielding properties at a significant discount to replacement cost.

Since cash flow stability is key to our strategy, we are extremely focused on co-tenancy provisions and metrics, such as rent to sales and rent to market. With leverage, these investments should deliver an attractive current return enabling the Fund to get most of its total return from cash flow. In fact, we are currently clipping an approximate mid-teens leverage return on our existing Fund V investments. And when it's time to sell, our view is that the yield starved capital markets will return to these stable assets and create an attractive exit opportunity for our finite-life Fund.

In addition to these higher yielding suburban shopping centers, during the second quarter, Fund V also made a value-add investment which was derisked by some pre-leasing activity. Overall, Fund V has made fewer value-add investments than originally anticipated. Make no mistake, we have and will continue to carefully underwrite potential value-add opportunities. But while some value-add opportunities are starting to pencil, headwinds remain most significantly construction costs and full scale development remains unattractive on a risk-adjusted basis.

Looking ahead, our Fund V acquisition pipeline exceeds $100 million of high yielding shopping centers. Our frustration here has been the high volume of deals that fail our screening process. Regardless, we remain selective. And to-date, we've allocated about half of Fund V capital commitment and have two years left in the Fund's investment period.

Turning now to dispositions. In June, Fund IV was fully repaid on the preferred equity investment that it made in Chicago's West Loop in February 2016, earning a 16% internal rate of return and a 1.7 equity multiple. This $15 million structured equity investment enabled Fund IV to participate in an interesting retail redevelopment and a next generation street retail corridor, while providing downside protection from construction cost overruns and fluctuations in market rents and is still experimental retail corridor.

Turning to our existing investments. In July, our new Lululemon opened to much fanfare at 938 West North Avenue in Lincoln Park, Chicago. This is a super-sized store that includes new elements beyond shopping, such as a restaurant, workout studios, and meditation space. And at City Point in Downtown, Brooklyn, since the beginning of the year, we've executed leases for 38,000 square feet of space, of which 32,000 square feet were executed during the second quarter.

On the upper levels, we signed an 18,000 square feet office lease with NYU Dental School and on Prince Street in the concourse level, we signed a total of three leases aggregating 20,000 square feet. This includes leases with [Casper], as well as McNally Jackson, an independent event-driven bookstore that is operated on Prince Street in Soho for the past 15 years. This will be their third location. These stores are anticipated to open between Labor Day and year-end. Regarding our lease-up strategy for the balance of City Point's street level availabilities, we remain focused on continuing to cultivate an eclectic and experiential merchandise mix to complement our food, entertainment, and value-oriented anchors.

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 embedded profits, and create value within our existing Fund Portfolio. Now, we are happy to answer your questions.

[Operator]

[Operator Instructions] Our first question comes from Craig Schmidt with Bank of America. Your line is now open.

[Craig Schmidt, Bank of America]

I wonder if you could spend a little time on other potential opportunities where you could pursue the clustering strategy?

[Ken Bernstein, President and Chief Executive Officer]

Sure. So simply clustering assets, Craig, on the wrong card or with the wrong tenants, I'm not sure would accomplish a lot. But there are handful of markets that we're currently active in and then there are several others that we've certainly been observing over the years. So when we think about our activity in New York, it will be where we see tenant's gravitating to. First and foremost would be Soho.

There are some markets in Brooklyn that are interesting and a couple of others in New York City. But I'd say, first and foremost would be Soho. In Chicago, we like the Gold Coast, where we're active on Rush and Walton; Oak Street could also present an opportunity. And then in San Francisco, there are also two or three other markets that we're spending some time on.

So it's really a matter of listening carefully to our retailers, understanding where the new emerging retailers want to show up ideally with a combination of also strong existing retailers, being able to acquire enough density of buildings, preferably contiguous, which is what we'll be doing in Soho, but at least close to each other, which was the case, at least when we started out on Armitage Avenue in Chicago. So that the retailers, the shoppers, can all work together and enjoy a vibrant shopping experience. And what we're seeing more so today, I think, than ever is that that confluence really assist so wide variety of the retailers and we want to make sure we own enough up in any given street that we're benefiting from that.

[Craig Schmidt, Bank of America]

And it's my sense that the digitally native names want to be clustered, they actually want to be near the other names that are emerging?

[Ken Bernstein, President and Chief Executive Officer]

Yes, and that's not a new concept. Retailers wanting to be around other successful retailers has been around longer than Acadia has. What is new this time is these digitally native retailers, for example, and it's not just the digitally native, but in those instances when the shopper is going to Armitage Avenue and has a choice between Allbirds and Outdoor Voices and Bonobos and UNTUCKit, and a variety of others, the sales that are generated from that street are not simply four-wall EBITDA, it's also attracting and familiarizing the customer with those brands.

And then the customer can choose when and how they want to shop, when they want to accept delivery, and a variety of other instances. And that type of retailers also then attracting food, attracting fitness, and you're seeing that clustering benefit a wide variety of users and then our goal is to capture as much of that as we can. Amy discussed the new concept that Lululemon is executing on North Avenue in Chicago, where we put them in. And that's a prime example of the shoppers are there and we need to make sure that they are getting as well-rounded experience as they can.

[Craig Schmidt, Bank of America]

And then just a quick question on capex. It looks like it may be trending slightly less than the year ago, is this consistent with your expectation given the second half?

[John Gottfried]

So I would say that in terms of a trend, we did a bulk of the leasing, we talked about last year we had $8 million worth of leasing to accomplish, which we accomplished last year, which created a heightened CapEx burden. And, currently, as we're releasing a lot of it is -- as we highlighted in our release, street and urban, which isn't a lot of square feet. And from a cost perspective, and I laid out the cost in my remarks, was coming in around $30 a foot. So here we are seeing those costs becoming particularly with the spaces we have to lease in a much more -- a much lower level.

[Operator]

Thank you. And our next question comes from Christy McElroy, Citi. Your line is now open.

[Christy McElroy, Citi]

Ken, I appreciate all the comments that you made in the opening remarks regarding uptick in leasing you've seen in your assets. Just wanted -- hoping you can address, you've not seen a great trend in overall sentiment around street and flagship space, generally you've had Topshop filing, you've had concerns around Forever 21, and Barneys, Abercrombie closing some larger stores and others talking about occupancy costs in the larger flagships just being too high. How do you reconcile that sentiment and the negativity that's out there with regard to larger space on Fifth Avenue and other tougher locations with your portfolio and what you own and how you're buying?

[Ken Bernstein, President and Chief Executive Officer]

So I think there are few distinctions that are worth watching. One is, there is no doubt that for larger format users, it's a more challenging time. Now whether that's due to the increase in omni-channel where retailers can do more with less, and thus there are fewer takers of large format space or other reasons, I think it will take a while to understand, but that's why we were very excited, for instance, when we announced adding Uniqlo in replacement of H&M on State Street, because it's large format and those are the ones that do concern me more.

So in the instances of large format users, I think you will see continued challenges. Long-term, you have seen, in many instances, large format users retreat from some of these great corridors and alternative users show up even more profitably. So if I had predicted 10 years ago that Lord & Taylor's flagship would end up being an office use and it would have been a profitable trade, people would have thought I was crazy and now it's factual. So do keep in mind that some of this will lend to profitable alternative use. But thankfully for our portfolio, we have minimal large format and we're talking about smaller format locations.

In those instances, we are seeing a net increase in demand, notwithstanding, some of the retailers you just mentioned and there the way I would divide it is, if you have a retailer who is struggling to drive their top line sales throughout the country, throughout the world. Well, there is no way to make the math work in more expensive flagship locations. If your sales are declining, it's going to be painful and you can imagine the decision-making that's going on in the boardrooms or the bankruptcy courts, etc. And in those instances, the sooner they can get out the better for them and frankly the better for the streets.

So those tenants will retreat, they should and what you're seeing now are whether they're digitally native or emerging retailers who used to count on other channels to drive their sales, but now recognize they need stores. The retailers we're adding, for instance, on Madison Avenue, adjacent to The Carlyle Hotel, they're not digitally native, but they are recognizing the importance of the stores. And the same is true for the digitally native, who while they're able to achieve some level of growth online-only, when they start looking at their CPA, their cost per acquisition of customer when they look at brand loyalty, when they look at brand identity, they're seeing that having the right locations in these key market is essential to their long-term growth, to their pathway to profitability, and they're beginning to show up.

It's why I described it as a Bumpy Bottom, it's why the narrative will continue to be negative, because on its face some of those age old brand that we all grew up with, they are going away and people are going to have to get used to it. There is still a lot of vacancy, but what we're seeing and it's purely anecdotal and it's purely attributable to our portfolio, but I do think it's playing out, is what we're seeing as these new brands showing up, some other existing brands were ready to go back on offense recognizing the importance of these stores. And so over the next 12 to 24 months, expect to see this shift for the smaller format stores where retailers can open powerful locations in the right markets profitably. And then we'll be talking about that in a year or two. But in the meantime, those retailers that are filing bankruptcy will go away.

[Christy McElroy, Citi]

And John just wanted to follow up on your comment regarding Bed, Bath and Pier 1 and Ascena, and recognizing the nature of your portfolio and opportunity to raise rents on recapture. If you look at that watchlist exposure, how much of that ABR is sitting in that 60% urban street versus the suburban portfolio. And Bed, Bath and Pier 1 specifically are two retailers that are actively trying to renegotiate rents lower. Are you working with either on restructuring anything and what kind of risk is coming down the price in terms of expirations for those guys?

[John Gottfried]

Yes. So Christy, in terms of the 60% when -- I said that number out in my remarks, that was 60% of the rents from those names are in street and urban. So if you look at -- specifically, that's -- a good chunk of that is sitting in San Francisco and that is not a space that they are looking for rent relief on and same with Ascena on North Michigan Avenue, which is 80% of our -- Ascena exposure also has not -- have not come to us requesting rent relief.

[Christy McElroy, Citi]

So nothing happening on any of those spaces. And with regard to explorations, is there any risk in the next year or two, losing stores?

[John Gottfried]

Of those locations, no I don't think so. And given that they haven't come to us on the others, don't anticipate a follow-up from that the next few years. And there is a decent amount of term on all those leases.

[Operator]

Thank you. And our next question comes from Todd Thomas with KeyBanc Capital Markets. Your line is now open.

[Todd Thomas, KeyBanc Capital Markets]

Ken, in terms of the investment opportunities that you're seeing in some of your existing street and urban markets like Soho and some of the other markets you mentioned that you're observing, are you seeing any larger portfolios or chunkier assets come to market? And would you contemplate a larger scale transaction, maybe a partnership or some consolidated joint venture in the Core Portfolio?

[Ken Bernstein, President and Chief Executive Officer]

So, first of all, we have not seen any large portfolios that are attractively priced to our expectations yet. I say that with the following caveat is, there have been some very large transactions on Fifth Avenue that folks are probably pretty aware of on private, on public, and that's certainly where multi-billion dollar transactions in, combined. Could there come a point in time where we team up with sovereign wealth capital or otherwise to fund something like that? Very possibly. Right now, though, our main focus is doing more of what we're doing in Soho where we are clustering a bunch of the assets. So I don't want to rule that out, but that is not currently on our radar screen.

In terms of other large portfolios, I think we're in the early stages, but we are finding that sellers are being much more realistic 2019 than they were at 2018. We are seeing just enough new data points as to where market rents are today. So if you have a seller, who is willing to be realistic about cap rates, realistic about where rents are today, then we get pretty excited because what our retailers are telling us is, at today's rents, for the right locations, for the right format size, at today's rents, they can get constructive.

And the thought that we're somehow limited to 1% or 2% or even 3% market rent growth when these stars align, what we have seen on Armitage Avenue, what we're seeing elsewhere is a pretty decent bounce back. So, hopefully, there will be enough realistic sellers, hopefully the stars, as I described before, will align, because then for these right corridors we would like to buy more rather than less, but what I outlined, Todd, of doubling the size of that portfolio over the next five years, I think, would be the realistic expectation not over the next five months.

[Todd Thomas, KeyBanc Capital Markets]

Okay. That's helpful. And then in terms of Soho, specifically, previously you've said that you're underweight Soho and it does represent less than 10% of the Core Portfolio in terms of NOI. You seem emboldened by the activity you're seeing there. How should we think about that? Can you help us size up the potential longer term opportunity in that submarket, in that context of doubling the size of the street and urban retail portfolio over the next five years? I mean, where do you think Soho should be from in terms of its waiting within the portfolio longer term?

[Ken Bernstein, President and Chief Executive Officer]

So, I'll partially answer that question, Todd, because I don't want to put out a definitive number for one specific submarket. In the past, when I said we were underweight New York and Soho, it was because the pricing just didn't make sense. Pricing defined as what, our billing and yield was, what the perceived growth was, and what our retailers were telling us was the growth potential in terms of their rents.

So we were under way, because we couldn't find good entry points. If we can find good entry points, there is no reason that New York and probably Soho wouldn't be a larger piece of our ownership than D.C. or San Francisco or Chicago. So there is fair amount of room to run within this five-year plan without getting specific as to Soho. But let me take a moment to explain the process how we think about our acquisitions. Has to be on a match-funded leverage-neutral basis, we have multiple different ways we can access capital.

But I would say the most important thing is listening carefully to what our retailers are telling us. Are these stores important to them? Are they profitable? Do they have room to grow in those markets? And where do they want to show up? So we spent a fair amount of time, our leasing team but all of us, listening carefully to, where do we think our retailers want to show up. And it changes over time as we've talked even earlier on this call about some retailers who used to be hot, now they're not and they're leaving. So we're trying to listen carefully to where might the future be.

So far what we're hearing is the kind of locations that we are owning that are attracting that right blend of retailers both emerging and reemerging, whether it's M Street, Georgetown, Lincoln Park, Chicago and now Soho, which is more expensive, so retailers have to get their act together before they show up, but we are bullish on Soho for that reason.

But I don't want to make it sound as though we should own everything in Soho at the expense of some of these other good markets, we will have to see where the sellers are most realistic, where the tenants are most enthusiastic, and the capital markets have to make sense. And then, thus, stay tuned over the next year or two to see how the percentage has changed.

[Todd Thomas, KeyBanc Capital Markets]

And just one last one. John, you run through some details around the non-conforming lease to sign in the quarter and also spoke about the timing of the Uniqlo commencement at State in Washington in the fourth quarter. Can you help us bring some of the leasing activity back to that $8 million NOI bucket, which you've said is now closer to $9 million plus. In terms of how much of that's signed now and how much NOI on an annualized basis from that opportunity did you realize in the quarter?

[John Gottfried]

Sure, Todd. So I think just as a reminder, we had, in 2018, put out a goal of getting $8 million worth of annual NOI leased. And as we announced a few quarters ago, we accomplished that goal in 2018. So sticking with the $8 million; $3 million of that $8 million was reflected in our 2018 results and the incremental $5 million is showing up in 2018 or 2019, Todd. So to answer your question, all of the $8 million is currently commencing. So that gives us an incremental $5 million over where we said if we look at that pool of leases compared to the prior year.

Then when we think about the $9 million, so we -- as we started start leasing and our expectations of where we thought would be and where rents have grown to, we had saw the $8 million growing to $9 million and then with some of the leases that both Ken and I mentioned on the call, those are well along our way to getting into the $9 million and which start to see those showing up potentially toward the end of the third quarter, but certainly by the end of the fourth quarter we'll see those in our results.

The other thing I'd point out, Todd, as well, maybe the last point on this is that, if you look at where our occupancy currently is, with -- in addition to the nine that we've signed, we're at just under a physical occupancy of 94%. So we have some incremental room to grow. So it's not as if we're done is that we still have some NOI -- some occupancy that we could capture and some good spaces remaining in that, that it's not -- there is still some growth in front of us just on the occupancy level.

[Todd Thomas, KeyBanc Capital Markets]

But the $5 million that you were expecting to show up in ' 19, how much of that is in the run rate, I guess, as of the second quarter here?

[John Gottfried]

All of it. So, yes, all of the $8 million is up and running. So they have the full $8 million in '19; $3 million of the $8 million was in -- I'm sorry, the full $8 million is in '19; $3 million of the $8 million was in '18.

[Todd Thomas, KeyBanc Capital Markets]

Okay, full amount, so an incremental $5 million before -- for the prior year.

[Operator]

Thank you. [Operator Instructions] Our next question comes from Vince Tibone with Green Street Advisors. Your line is now open.

[Vince Tibone, Green Street Advisors]

Could you provide some additional color on the new development on Wisconsin Avenue? And then also help me understand why that property was included on the acquisitions page? It's all the footnote, but just any more clarity would be helpful.

[Ken Bernstein, President and Chief Executive Officer]

Sure. It was a small ground lease addition to our partnership, so not a meaningful amount of capital being deployed. It is a good addition to that overall portfolio on M Street. We own couple dozen buildings there and this was one that was available, we want to see that the right retailer comes in.

[John Gottfried]

And, Vince, what I'd highlight in terms of on the capital outlay was well under $1 million that we actually outlaid as part of that. So not a big dollar amount and several years in front of us.

[Vince Tibone, Green Street Advisors]

And then on the -- just I saw there was -- somewhere on the Wisconsin Avenue development page, is there any more color for the $30 million in spend what you guys are going to be doing there?

[Ken Bernstein, President and Chief Executive Officer]

And it's still in the early stages, so that's -- so not at this point.

[Vince Tibone, Green Street Advisors]

My next one is probably for Amy. I mean how much of all-in borrowing rates change for non-recourse mortgage debt now that treasury rates were much lower than they were late last year, like have the spreads widen back out now the treasuries are lower?

[John Gottfried]

So I think certainly -- and guess I'll take that. So I think on terms of all-in borrowing rates that -- I think, we're still seeing -- just given the drop in rates still meeting where we expect it to in terms of financing, so we're doing the high-yield. We are capturing that on the bottom line. But I would say that, I'm not sure the spreads have changed all that much, albeit the underlying index has. So I'm not seeing a big change in spreads.

[Ken Bernstein, President and Chief Executive Officer]

No bulge in spreads, Vince, and then to the extent that we can reach out into the three- to seven-year range, it's a meaningful cost savings.

[Vince Tibone, Green Street Advisors]

Do you think that's had a change in buyer appetite or just demand -- investor demand for the higher yielding assets?

[Ken Bernstein, President and Chief Executive Officer]

Given that our volume is in fact ticking up, we have not seen a change in cap rates, meaning we've not seen cap rates move in. We have seen competition over the last few years. I don't think there is a significant increase, everyone still spooked about retail. And as long as we can be disciplined and careful about how we're underwriting through and what Amy discussed about co-tenancies and rent to sales and the other metrics, we think we can find low growth, perhaps no growth, but stable yields in the 7.5 to 8.5 range, sometimes higher if there's more risk, but not really lower and we're not seeing that compress, we're just seeing an increased volume on our side.

[Operator]

Thank you. And our next question comes from Michael Mueller with JP Morgan. Your line is now open.

[Michael Mueller, JP Morgan]

In terms of doubling the $2 billion urban infill portfolio. Can you talk a little bit about high-level funding components between cash flow, how you think about dispositions, equity and just how we should be thinking about that over the next several years?

[Ken Bernstein, President and Chief Executive Officer]

Sure. As we have for the past 15 of our 20 years, we've been very disciplined to make sure that we are realistically match funding and that means probably two-thirds equity, one-third debt, but recognizing that we have other avenues for capital. We touched on a little bit earlier, Michael, the potential to utilize joint venture capital, that's always a possibility, but there is enough complexity within Acadia as we all know, today that I'm not jumping up and down to add another layer of complexity.

Secondly, if the public markets are not there for prudent match funding, then we do need to keep in mind that our capital recycling component of our business, primarily through our funds affords us a fair amount of capital that comes back, partially it's the equity that's return from our pro rata share in a given fund investment, but also since these fund investments are two-thirds levered, our net debt effectively has reduced as well disproportionately from any sales. So that's also a portion. But I don't want to understate the importance of one form or another of equity. I do not envision this growth being driven by us leveraging up.

Historically, we have found a certain percentage of sellers are interested in OP units in the 2012 to 2014, 2015 period when we were growing street assets, about 20% of the transactions had OP units involved. So that's also a possibility, but this is a five-year goal where I simply wanted to lay out we could double the size. We could have meaningful earnings accretion, NAV accretion provided the stars align and we'll check in every year or so to see how we're doing relative to it.

[Operator]

Thank you. And I'm not showing any further questions, at this time. I would now like to turn the call back over to Ken Bernstein for any further remarks.

[Ken Bernstein, President and Chief Executive Officer]

Thank you all for joining us today and enjoy the rest of your summer. And we look forward to speaking with you again in the fall.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. This conclude today's program and you may all disconnect. Everyone, have a wonderful day.