Question-and-Answer Session
Operator
(Operator instructions) And our first question comes from the line of Christine McElroy with Banc of America. Please proceed.
Christine McElroy – Banc of America
Hey, good afternoon, guys. Ken, just following up on one of our last comments, if you look for opportunities to put additional Fund III capital to work, how is your underwriting and targeted IRRs changed in this environment? So what do you consider to be appropriate risk adjusted returns today?
Kenneth Bernstein
Well, for the equity, we have always targeted mid teens to low 20s returns, and as you've seen from a host of our results, primarily in Fund I but also on the RCP side we've been able to meet those and exceed it. I'm not sure that those returns need to change. What needs to change is the underlying assumptions that go into it, and we certainly are going to assume that debt, which is roughly two-thirds of those investments, debt's going to be more expensive by several hundred basis points. My guess is depending on the profile of the investment between 6% and 8% cost of debt. And that your residual returns are also going to be higher.
Now, there is a debate going on, if you compare stock prices and implied cap rates from that, with respect to transactional activity, that's very limited, there's a debate as to where residual values are, so we need to be very careful about how we view those residual values, and probably we're going to lean pretty darn hard on what will our leveraged return, our AFFO yield, if you will, after a few years out on an investment, and if that isn't close to our targeted IRRs? There's probably a disconnect. In other words, we're – we've got to get to low teens to high teens, leveraged cash flow yields on investments so that we don't have to sit and expect significant residual profit from the sale.
Christine McElroy – Banc of America
So what – in your opinion, what happens to cap rates today to get you to, assuming those different assumptions, to get you to those returns?
Kenneth Bernstein
Keep in mind, while we are thrilled to buy existing cap rate assets and we've done so periodically, the majority of what we have done over the past ten years has been either more value add, where it's going in cap rate is irrelevant and you're looking to develop between an 8% and 11% on leveraged yield and now we would probably head to the higher end of that. Okay? And then on the opportunistic side, we didn't invest in Mervyn's for a cap rate going in. And even in Bloomington, Delaware where we were able to acquire a relatively stable portfolio, there was also a significant lease up of about 30% of that, that provided a lot of yield.
- To read the full transcript on Seeking Alpha, click here »
