We’ll manage them successfully now. But if anything, it gives us clearer room to run for the initiatives we want to do on balance sheet in our infinite light vehicle. Because we do believe that the lower-leveraged, infinite life vehicle that is the REIT is coming into a period where it will be a strategic advantage as opposed to during the tougher time periods where leveraged. And thus, the private equity model was superior.
Operator: Our next question comes from the line of Ki Bin Kim of Truist.
Ki Bin Kim: On Rush & Walton, the lease occupancy rate declined to 59%. Just curious if that — what’s happening there.
Ken Bernstein: A.J.?
A.J. Levine: Yes. Nothing we didn’t anticipate. That’s a very tight market. Basically, no supply there. And we’re already under LOI to backfill that space profitably at a higher rent than the previous tenant was taking. And of course, the tightness of that market is why we’re seeing, again, this spillover back on to North Michigan Avenue. We mentioned it with Paul Stewart. So market side is that, it’s not always the worst thing in the world to be getting back space.
Ki Bin Kim: And West Shore Expressway was put into the redevelopment pipeline. I’m not sure if that had any kind of noticeable impact on your same-store NOI, but if you can just provide some color on what the plans are for that asset.
John Gottfried: Yes. So Ki Bin, and I probably should have mentioned the name when I responded to, I believe it was Todd’s question, but West Shore Expressway is that asset that was under contract, just to be clear. Re-development that is not — so that was the asset we were talking about.
Ki Bin Kim: And in terms of some of these assets on the street, where you’re getting the fair market value resets, at some point, the thesis for holding that asset becomes much more tied to the individual retailer that might be doing really well versus the real estate. How do you think about that, Ken? Is that something that maybe rises up to maybe a disposition candidate? Or is there more the gift that keeps on giving later on in the future that you might want to hold on to?
Ken Bernstein: Yes. So it’s a critical issue. The way we think about any given market that we own any given carter, whether it’s Armitage Avenue, Melrose Place, SoHo, supply-demand and rent-to-sales, how are the tenants performing. So if we’re in a market that the supply-demand is imbalanced and look during the so-called retail Armageddon, and we went that — through that in a lot of markets. And as A.J. has mentioned, now it’s gone the other direction, and there’s more tenants buying for space in their space. But separate of supply and demand, we have to look at how our tenants performing. And there, we will think about that specific tenant. And if retailers in general on a given corridor are doing well, but that tenant is not, then first thing A.J. is going to try to do is replace that tenant.
That’s part of the pry-loose strategy. If we see broader reasons for concern in a given corridor or we’re overexposed to a given tenant who has no interest in departing, then that could be a disposition candidate, and we have periodically done that overall. What we’ve been pleasantly surprised with so far is tenant performance, in general, especially in relation to 2019, the tenant performance has been strong. So we’ve not had many of those issues to date, but it is something we certainly would watch closely.
Operator: Our next question comes from the line of Michael Mueller of JPMorgan.
Michael Mueller: Ken, I think you mentioned early on that the $50 million disposition was going to be modestly accretive before redeploying the proceeds. Just curious how that math works. Because they typically kind of usually cuts the other way when I think of dispositions.
Ken Bernstein: Yes. The joys of an inverted yield curve, Michael, meaning our borrowing cost is going to be in the 5s and 6s, though there’s not that immediate dilution. Did I explain that right, John?
John Gottfried: Yes, plus the fees, Mike. So I think there’s an addition to the fact that we do have some pockets there, but also the fees that we’ll earn from that as well offset.
Michael Mueller: Got it. Okay. And then maybe one follow-up question on the street occupancy and the target of going from 84% to 95% by early — late 20 — I think it was late ’25 or early ’26. Can you give us a sense, like a ballpark average rent number — rent per square foot number that we should be thinking of?
John Gottfried: Yes. Mike, I would love to be able to do that, to be honest. But given different markets, there’s upper floors, lower floors. It would be difficult to do. That’s why we threw in the number, right? So I think I would love to just say $92 a foot, I think it’s — the $4 million is the best way to get there given — just given the range, upper floor, lower floor and across different markets. A.J., I don’t know or, Ken, if you have a different view but…
Ken Bernstein: Yes. I’m going to give a quick ramp on — and reminder that of all of our different metrics, occupancy is the unfortunately least relevant and least correlative to our peers because of the disparity in our assets. But if we assume John is right, and I do, on the $4 million and we assume A.J.’s right in the next couple of years, we get to that number, we probably succeed that way. If one of our suburban boxes goes away, then again, it could be a $2 rent. It can have no economic impact. It could change those metrics. So please don’t rely too much on that. Rely on our economic growth. And that, I think, will be the best way to do it, and we feel very good about that economic growth. We feel pretty good about the occupancy as well because, A.J., I don’t know why you would hold back on any leasing, but it’s not going to work from a square footage basis. We’re trying. If we can come up with that economic metric, we certainly will share it.
Operator: Our next question comes from the line of Floris Van Dijkum of Compass Point.
Floris Van Dijkum: A question, maybe if you can give us a little bit more color on what is in your same-store pool and how rent spreads can be misleading. I’m particularly referring to the 5.2% average cash rent spreads, but you only did 22 leases, yet your — obviously, your same-store was significantly higher. What percentage of your leasing activity is in your same-store pool? And maybe talk about some of the non-same-store pool. What do you pull out? For example, splitting spaces or non-comparable. I would imagine City Point is probably in your non-comparable pool. Maybe if you can give us a little bit more detail on that.
Ken Bernstein: John, just to set the table, touch on the fact that not all spreads are created equal in terms of duration, touch on comparable/non-comparable.
John Gottfried: Yes. So let’s first start with the exact assets that are not in there. First, it’s our core. So it’s just our core portfolio that we print spreads for. Second, in terms of the assets that are not in there within our core, that’s — if you look at our redevelopment page in the supplemental, we list out the big ones being San Francisco, North Michigan Avenue. Those are stripped out. So I think those are the ones — the individual assets that are not within our same-store. And then in terms of comparable/not comparable, and I’m going to let A.J. talk about that piece of it in terms of how we think about carving up space and why that’s not going to go in there, which is a good portion of our street leases are not going to show up because we are accommodating the tenants where we are buying in locations where we have critical mass and we could accommodate to a tenant’s need cutting up space.
So that’s a good portion of the street that I’m going to let A.J. expand on that piece of it. But in terms of the spreads, you threw out the percentage for the quarter. Keep in mind, what’s in our signed-not-yet-open. Those were the spreads that we signed last quarter that were in the 40%, 50% range. Those are in our signed-not-yet-open that haven’t commenced yet that haven’t contributed to our same-store growth. So I think it’s when there is a timing delay between signing and occupancy but also a mix that a good portion of the leases that we’re signing are not part of that. So that’s the one. And I’m going to let A.J. hit the piece on how we think about cutting up space, but getting back to Ken’s point on not all spreads are created equal is keep in mind that on the street, we get a shot to mark-to-market at least every 10 years, if not 5 years, depending on the lease duration.
So we’re marking to market much faster. So internally, we think about the CAGR on the lease from what is the CAGR we get and the time we sign it to the time we get another crack at resetting it. And the CAGR coming from a street as compared to a suburban, even before you factor in the cost, net effectively is double as part of the growth there. So that’s one, just not all lease spaces is created equal given that a suburban lease, you might not get that back for 30 years versus we’ve gotten within the street 3% growth and the mark-to-market after 5 or 10 years. So A.J., why don’t you talk a bit about just in terms of the comparable leases that a lot of them aren’t going to be there based on what the way that we cut up and carve this space?
A.J. Levine: Yes. Look, at the end of the day, it’s all about maximizing value and accommodating what your tenants are looking for. Sometimes that means combining spaces, sometimes that means demising spaces. I think we’re fortunate just because of the scale that we have in these markets that we can accommodate what these tenants are looking for. I mean you think about Saint Laurent on the Gold Coast, for instance, that was 2 spaces that we combined, right, because Saint Laurent had the need to expand, right? They were looking for a larger space. So not necessarily a conforming lease, but certainly an important and an impactful lease nonetheless. The number you should be focusing on this total leasing volume, right, and not necessarily the number of conforming leases that we have.
And I think it’s also good to point — it’s also important to point out, and the folks at Green Street were kind enough to remind us that when we are carving up space or combining space, the money that we’re spending to do that is much smaller as a percentage of ABR than when we’re doing it in our suffers. So really, again, it comes down to maximizing value, and it comes down to accommodating what the tenant is looking for, and sometimes it doesn’t fit into the existing space.
Floris Van Dijkum: Great. It’s helpful. And I think that it can be misleading sometimes to — for people to focus too much on the spreads. It’s — ultimately, it’s about the NOI growth. Maybe if you could — if I could get your comments, Ken, maybe if you had money that you wanted to deploy today, where — which street markets — street retail markets you find right now are the most compelling? Is it New York? Is it D.C.? Is it Chicago? Where do you see the biggest opportunities? I know you have to be somewhat cagey here because you’re presumably looking at all of them. But is there much of a difference between — in the returns available as you look at those markets?
Ken Bernstein: The way to think about it, and I am going to be cagey, Floris, so I’m not going to mention specific markets. There’s 1 or 2 markets: Chicago, for instance, where we see a nice rebound, but we have plenty of exposure there. So I’d be reluctant to see us add there, but that’s really specific to Acadia that to where we see necessarily the opportunities. Otherwise, we think about markets in a few different categories. One is kind of early-stage pathway of growth. Henderson Avenue in Dallas is an example of that, where we haven’t yet added value, we haven’t yet brought the retailers. A.J. mentioned the ones that we have on Armitage Avenue or the ones that you’d see on Green Street in SoHo. So early pathway to growth, and there are a variety of markets as long as they are ripe for the kind of retailers we do business with.
Then there’s those that present opportunity for significant mark-to-market but are well established. And M Street in Georgetown is a prime example. It went through a retailer cleansing process, if you will, during COVID. And we’re seeing significant rental growth in established market but probably less mature. And then the final are the more mature ones. Greenwich Avenue in Connecticut got a COVID lift. We’re enjoying strong tenant demand, but probably doesn’t seem to have that kind of growth. And then your pricing should adjust for all of these different factors: established market, generally gets lower cap rates, but if it has lower growth, then we might tap the brakes a bit more on that. And then overall, what we’re trying to provide is a nice blend for our shareholders, some early stage, some moderate, some more mature, so that we can have a stable pipeline of growth.
Final point around that is where luxury shows up right now. There’s a lot of room to draft. And so we’re certainly keeping in close contact with our retailers to understand where the luxury retailers may want to show up.
Operator: Our next question comes from the line of Paulina Rojas-Schmidt of Green Street.
Paulina Rojas-Schmidt: Can you please add more color around the in-place occupancy, which was north of 500 basis points in street retail and suburban assets?
John Gottfried: Paula, was your question on is the movement in occupancy sequentially from Q4 to Q1? Is that the question?
Paulina Rojas-Schmidt: Yes. Based on what I’m seeing, it wasn’t just one category but a few and a little more than I was expecting due to seasonality.
John Gottfried: Yes. So it was — and we tried to articulate it in our release, but the biggest driver of that was the 70 basis points from a — we identified it was actually a liquor store at one of our suburban assets that moved out. That was 70 basis points. Another 15 basis points was the space that we got back on Rush & Walton in Chicago. And beyond that, nothing of significance. And again, going back to Ken’s remarks and really following up on my remarks is that notwithstanding this occupancy, I’ll call it a dip. If you look at the NOI growth, we actually increased because we’re placing that — we’re putting in higher dollar rents, which doesn’t show up those percentages. So I think — I know it’s a metric we need to think about and focus on. But for us, it’s really the rent behind those occupancies that’s much more impactful than that $10 liquor store that moved out that I believe A.J. has already back all that.
A.J. Levine: Yes, we’ve signed the lease for that space, right.
Paulina Rojas-Schmidt: Okay. And we have talked about acquisitions. I’m curious what is the IRR hurdle that you have for acquisitions?
Ken Bernstein: So the IRRs, and I won’t get into that specific deal, once they close the next quarter, we’ll talk about. But in general, the IRRs on a — will vary depending on the risk and the cash flows from, call it, core plus, which would be on a levered basis, low teens through to high teens for heavier lift either redevelopments or more opportunistic and things like that. Keeping in mind that right now, unlevered returns might be the better metric, investors still talk about it on a levered basis. And who knows where cap rate compression would be. So the pricing I’m thinking about is assuming limited or no cap rate compression.
Paulina Rojas-Schmidt: Okay. But what about street retail? And I’m looking at more from the perspective of what is the minimum return that you expect more so than the actual pricing that you’re getting.
Ken Bernstein: So it’s still — and that’s a very legitimate question. And I’m, again, going to be a little bit cagey because it depends on a variety of factors. But the way to think about it is that it seems as though the lowest cap rates are for high-quality supermarket anchor. That high-quality supermarket anchor is going to, in general, throw off about 2% growth. And seems to be trading in, I’m hearing some below 6 going-in yield, some above but in that range. And that seems to be the lowest cap rate trades that we’re seeing. Street retail, as we’ve been talking about, should be, seems to be throwing off at least twice that level of growth. So if it was 200 basis points for that supermarket-anchored, it could be 400 basis points on a stabilized basis for the street retail.
So we’re getting similar going-in yield on a stabilized asset, similar going-in yields with twice the growth for street retail. That feels pretty compelling to us. Now add to it that we’re talking about value-add, recapitalizations, a variety of other transactions that may or may not conform to simple going-in yield-plus growth, but that twice the growth for the same price feels pretty darn compelling, should produce higher IRRs. Whether they are low teens or high teens, the devils in the details, and I won’t get into that yet today. As we start getting deals done, we’ll give you much better visibility around that.
Paulina Rojas-Schmidt: Okay. And then if I can — I’m guessing I’m the last one. What’s your opinion about digitally native retailers? This was a growing category a few years ago, and now some of them are showing weakness. We have the likes of Bonobos, Outdoor Voices. And so what do you think?
Ken Bernstein: Yes. So — and let’s make a distinction between — and yes, you are the last call, so I’m going to explain this. If people want to hang up, feel free to do that, but make a distinction between DTC, direct-to-consumer, and digitally native because for a while, we were blending those 2 terms. DTC is alive and well. Direct-to-consumer is what luxury retailers are doing. It’s what athleisure retailers are doing is they want to control their space and have a direct connection in an omni-channel world, whether it is online or through the stores, whether it is using social media or their flagship locations to drive that relationship. DTC is alive and well. Digitally native was a transition that a bunch of retailers during the retail Armageddon started online and wanted to transition to stores because they needed the store.
It was the only pathway to profitability. Some have made it to the other side successfully and will continue to thrive in an omni-channel world and then others you’ve mentioned may not. And that’s fine because some of them have been very exciting. They’re great for streets and they’ll do just fine. Others, as A.J. has mentioned, are part of our pry-loose strategy. We have 2 Bonobos or maybe 3, and all of them are well below market. So if they don’t make it, we’ll make money. But the final point is, when I talk to my private equity and venture friends, if they’re considering backing a digitally native, the only way they’re going to do it is if they have a real estate strategy because that is the pathway to profitability. So there’ll be shakeout.
It will not have a material impact to our earnings other than if we can pry-loose. And it is the natural evolution of retailing.
Operator: I would now like to turn the conference back to Ken Gottfried [sic] [Ken Bernstein] for closing remarks. Sir?
Ken Bernstein: The perfect combination of John and Ken. Thank you all for taking the time. We look forward to speaking to you soon.
Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.
