SITE Centers Corp. (NYSE:SITC) Q2 2023 Earnings Conference Call July 25, 2023 8:00 AM ET
Company Participants
Stephanie Ruys de Perez – Vice President of Capital Markets
David Lukes – Chief Executive Officer
Conor Fennerty – Chief Financial Officer
Conference Call Participants
Dori Kesten – Wells Fargo
Todd Thomas – KeyBanc Capital Markets
Craig Mailman – Citi
Ravi Vaidya – Mizuho Securities
Samir Khanal – Evercore ISI
Alexander Goldfarb – Piper Sandler
Floris Van Dijkum – Compass Point
Ki Bin Kim – Truist
Linda Tsai – Jeffries
Mike Mueller – JPMorgan
Ronald Kamdem – Morgan Stanley
Paulina Rojas Schmidt – Green Street
Operator
Good morning, and welcome to the SITE Centers’ Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Stephanie Ruys de Perez, Vice President of Capital Markets and Asset Management at SITE Centers. Please go ahead.
Stephanie Ruys de Perez
Thank you, Operator. Good morning, and welcome to SITE Centers’ second quarter 2023 earnings conference call. Joining me today are Chief Executive Officer, David Lukes; and Chief Financial Officer, Conor Fennerty. In addition to the press release distributed this morning, we have posted our quarterly financial supplement and slide presentation on our Web site at www.sitecenters.com, which are intended to support our prepared remarks during today’s call.
Please be aware that certain of our statements today may contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to risks and uncertainties, and actual results may differ materially from our forward-looking statements. Additional information may be found in our earnings press release and in our filings with the SEC, including our most recent report on Form 10-K and 10-Q.
In addition, we will be discussing non-GAAP financial measures on today’s call, including FFO, operating FFO and same-store net operating income. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in today’s quarterly financial supplement.
At this time, it is my pleasure to introduce our Chief Executive Officer, David Lukes.
David Lukes
Good morning, and thank you for joining our second quarter earnings call. We had another strong quarter with results ahead of budget, an uptick in leasing volume and demand across all unit sizes, and continued progress sourcing investments which are additive to the long-term growth profile of the company. The net result of all this activity is a significant Signed Not Opened pipeline, with commencements ramping over the next few quarters, into 2024, which provides a tailwind for the next several years, and an offset to the impact from recaptured space from bankrupt tenants.
I’ll start with some comments on leasing and tenant activity, and then move to transactions before handing it over to Conor to give more details around the quarter and 2023 guidance.
Leasing activity has remained strong over the past few quarters, and much of our conviction and continued demand has been the result of population movement to the suburbs, and the choice by most retailers to favor a combination of in-store shopping, curbside pickup, and ship-from-store. When combined with the growth in service tenants following their customers in a hybrid work environment, it’s not surprising that demand across our wealthy suburban portfolio has been elevated. And while the occupancy uplift has been nice, we are equally pleased to see rent growth move in tandem.
In fact, the growth in rents has been supported by the lack of new construction, thereby putting a pretty tight cap on competitive new supply. There are two reasons why we believe this situation will continue for some time in the sub-markets where we operate. First, it’s notoriously difficult to achieve new open-air retail zoning in high income neighborhoods, so land available for development is low. Secondly, construction costs have surged with inflation, and the rents required to justify construction are well above our in-place rents. We recently priced a ground-up junior anchor building as part of a redevelopment plan, and the cost for that box came in at almost $300 per square foot.
We also recently started construction on several multi-tenant [pad] (ph) buildings whose average cost to build are just above $500 a square foot. As both of these examples exclude land, the total cost to build a blended new shopping center containing both shops and anchors remains a challenging math exercise, and is the primary reason why we are seeing tenant retention at very high levels, as tenants with current leases are unwilling to relocate to more expense space. Over the course of the last two years, our tenant retention, excluding forced move-outs, is well above historical averages.
Of course, one form of new supply has come from bankruptcies. And our exposure today remains limited to Cineworld, Party City, Bed Bath. With Cineworld nearing its exit and no material updates on Party City, I’ll limit my comments to Bed Bath & Beyond as we don’t have real exposure to other tenants that have filed to date. As of the first quarter, we had 17 Bed Bath & Beyond locations which represented 1.8% of base rent. Of the 17 locations in the first quarter, one lease was sold as part of a JV asset sale, four leases were acquired as part of the bankruptcy auction, and four leases were rejected, leaving eight remaining locations.
As expected, the bankruptcy process has been drawn out with multiple rounds of auctions, but we are nearing clarity on timing and control, and our leasing team is well underway with replacement tenants. Consistent with our prior commentary, inbound activity over the last several months has been elevated, and we expect that the majority or our stores will have executed leases over the next 12 months, with rents commencing in year-end by 2024. We already signed one of our 12 available units in the second quarter, with to more at lease, and two with executed LOIs. These five deals represent roughly 60% of our expected pro forma backfill rent, and are all within a mixture of public, national credit tenants.
Moving to overall portfolio leasing for the quarter, as noted, the breadth and depth of tenant demand remained high, which translated into an acceleration in activity. In terms of total leasing, we signed over 1 million square feet of leases in the second quarter, including 170,000 square feet of new deals. Despite this uptick in volume, our leased rate was down 40 basis points sequentially, to 95.5%, with the decline attributable to the rejection of four of our Bed Bath & Beyond leases.
Looking forward, we have just over 250,000 squared feet of share in current lease negotiations, including the Bed Bath & Beyond deals that I mentioned, with blended spreads ahead of our trailing 12-month average. We expect this leasing pipeline to be fully completed over two quarters. That said, the absolute level of quarterly activity will remain volatile as we simply have less space to lease until we take possession of all of our remaining Bed Bath locations in the third quarter. In terms of redevelopment, we are ramping up the final phase of our West Bay project, here in Cleveland. All three of our tenants are now open at the TGIF redevelopment at Shoppers World, and Starbucks is set to open in Carolina Pavilion and Shoppers World in the next few quarters as well.
We’ve made quite a bit of progress on our tactical redevelopment pipeline in the last few quarters, and are getting closer on a few more small-scale projects to be launched within the next 12 months in New Jersey, Florida, and Virginia, which include a handful of first-to-portfolio tenants. To my previous point about construction costs limiting supply, the aforementioned projects have signed leases or executed LOIs that average $60 per square foot net, which supports our required returns for construction. It also shows that shop tenant rents are growing due to the supply-demand imbalance.
I’ll end with transactions. We acquired three convenience properties for $49 million, with two properties at our largest market of Atlanta, and one property in Houston. We are finding quite a few opportunities since our first acquisition in that market in June of last year. The assets are consistent with investments to date, centered around strong credit and low recurring CapEx, located at high traffic intersections within wealthy suburban communities. Average household incomes for the second quarter investments are over $125,000 and the lease rate of over 98% highlights our focus on acquiring properties where renewals and lease bumps drive growth without significant CapEx.
Going forward, we remain encouraged by the unique opportunities in the convenience subsector that are a direct result of local relationships we’ve formed over the past several years. Because the cash flow growth profile and risk adjusted IRRs of this property type are elevated with rents accelerating with inflation, we will continue as we have in prior years to utilize retained cash flow and proceeds from recycling fully stabilized assets into this sub asset class when the right opportunities arise.
That said, capital markets volatility and availability is having an impact across the real estate industry, and I would expect overall transaction volume to remain low for the time being. In summary, we remain pleased with our company’s position and outlook.
Our team remains focused on growing occupancy, rents and our convenience portfolio. We also want to wish our congratulations to those who retired or are retiring this year after successful careers at SITE Centers. We are extremely grateful for your dedication and your service, which contributed to all of our accomplishments over the last several years.
And with that, I’ll turn it over to Conor.
Conor Fennerty
Thanks, David. I’ll comment first on quarterly results, discuss our revised 2023 guidance, and then conclude with the balance sheet and capital plans for the year. Second quarter results were ahead of plan, as David mentioned, due to a mix of operational factors including higher than forecast rents and recoveries from higher occupancy levels along with higher percentage and overage rent. The operational upside totaled just over $0.01 per share relative to budget. Results also benefited from just under $800,000 of non-cash rent from the conversion of cash basis tenants and below market lease income from the rejection of a Bed Bath lease.
In terms of operating metrics, trailing 12 months leasing spreads were steady across new and renewal leases, with blended spreads unchanged at just under 9%. We continue to see strong leasing economics for the pipeline, though quarter-over-quarter volumes and spreads will remain volatile given our denominator. The SNO pipeline was down modestly sequentially to $18.3 million from $19 million as rent commencements accelerated from the first quarter.
Signed leases continue to represent just under 5% of annualized second quarter based rent and over 5% if you also include leases in negotiation in our pipeline providing a tailwind to cash flow over the next 18 months, we provided an updated schedule on the expected timing of the pipeline on page six of our earnings slides.
Same-store NOI grew 1.7% in the second quarter with the uncollectible revenue line item of 190 basis point headwind to year-over-year growth. The deceleration sequentially was due in part to lost revenue related to Bed Bath, along with higher uncollectible revenue partially offset by the aforementioned rent commencements.
Moving on to our outlook, we’re revising 2023 OFFO guidance up to a range $1.13 to $1.17 per share, driven primarily by first-half 2023 outperformance, including better than expected same-store NOI and a higher outlook for full-year occupancy.
Rent commencements, transaction activity and potential tenant bankruptcies remain the largest swing factors expected to impact where we end up in the full-year range. We are also raising our same-store NOI guidance to a midpoint of 1.5%. Prior period reversals of $$3.4 million in 2022 remain a roughly 100 basis point headwinds growth, and we continue to include an annual bad debt reserve along with specific bankruptcy assumptions related to tenants that have filed for bankruptcy, along with others with well publicized liquidity concerns.
Through the second quarter, uncollectible revenue and lost revenue from bankruptcies has totaled about 125 basis points. We have three national tenants in various stages of bankruptcy as of today, and that includes Cineworld, Party City, and Bed Bath & Beyond.
For Cineworld, the executed agreement at all three of our locations remains subject to completion of the company’s bankruptcy exit, which is expected in the third quarter. That said, second quarter earnings reflect the expected amended terms.
For Party City, we have not had any rejections or store closures as far as the company — as part of the company’s restructuring. And the company has paid second and third quarter rents to date. Similar to Cineworld though, the outcome and no expected closures is subject to Orange City Bankruptcy Act.
And lastly for Bed Bath, we expect all eight of the remaining locations that David outlined to be rejected this month. Revenue from leases rejected and expected to be rejected totaled $1 million in second quarter. As part of the third quarter rejections, we expect to recognize additional non-cash revenue related to below market leases, but that is not included in our forecast at this time. And we will provide additional details with third quarter results.
Moving to the third quarter of 2023, there are a few moving pieces to consider in the second quarter. First and most impactful is revenue related to Bed Bath. As I just mentioned, we recognized $1 million in revenue related to rejected leases and leases expected to be rejected in the second quarter, which we do not expect to recognize in third quarter.
Second, we recognized just under $800,000 of non-cash revenue in the second quarter, which is non-recurring in nature. And third, we expect to incur the estimated remaining charges related to our previously announced restructuring plan in the third and fourth quarter. Excluding these charges which are excluded from OFFO, G&A is expected to average approximately $12 million per quarter in the back-half of the year. A summary of these factors is on page nine of our earnings slides.
Finally, ending with a balance sheet and capital activity, at quarter end, leverage was 5.5 times, fix charges four times, and our unsecured debt yield was over 20%. The company had a $175 million outstanding on a line of credit. And our expectation is that the balance will move forward over the remaining of the year as a result of retained cash flow and net investments in capital markets activity. The net result is that we continue to expect debt-to-EBITDA to remain below six times through yearend to generate almost $50 million of retained cash flow with an AFFO payout ratio of roughly 70% and have no unsecured maturities until August of 2024. This leverage profile and liquidity provides substantial capacity and optionality to fund the company’s business plan.
And with that, I’ll turn it back to David.
David Lukes
Thank you, Conor. Operator, we are ready to take question.
Question-and-Answer Session
Operator
[Operator Instructions] The first question comes from Dori Kesten with Wells Fargo. Please go ahead.
Dori Kesten
Thanks. Good morning. As you considered your new guidance, where do you think you have built in the most conservatism at this point?
Conor Fennerty
Hey, Dori. Good morning. I don’t think I would call it conservatism, I think it’s prudent budget, given macro uncertainty, capital markets uncertainty. As I mentioned in my script, there is three factors that could impact where we fall in the range the most, and those are occupancy, which is driven by bankruptcies [as well as rent] (ph). Second one is transaction activity. And the third one was, you’re testing my memory already — the third one was related to rent commencements. And I’ll say at point of time, look, we have better clarity on rent commencement of those three, and we feel really good about our occupancy and our forecast [across] (ph) the year. But all three of those could impact where we fall under the range. So, again I don’t think they are conservative in nature, but those are three biggest factors that could impact where we end up in the range.
Dori Kesten
Okay. And then, just one more, as you push more into convenience assets, where do you think your same-store NOI growth could stabilize over the next few years?
David Lukes
Dori, this is David. I think — remember the next few years are most impacted by the SNO pipeline. So, I would say that the convenience portfolio has a same-store number that’s higher on average once it gets to stabilization. But relative to the next few years, I think the existing portfolio is going to have a higher same-store numbers simply because of occupancy uplift.
Conor Fennerty
Yes, and Dori, remember we like the — to David’s point, we like the convenience asset because it’s higher run rate on an occupancy-neutral basis. We also like the portfolio, given it’s CapEx-light. So, to David’s point, it’s dilutive in the near-term from a same-store perspective. It’s accretive on an occupancy-neutral basis, but it’s incredibly accretive to us from an AFFO perspective. And so, I think this point has come up on a couple of our earnings calls previously. CapEx as a percentage of NOI, as the convenience portfolio grows, will continue to go down, which is something we’re most encouraged by investments in that property type.
Dori Kesten
All right, thank you.
Operator
The next question comes from Todd Thomas with KeyBanc Capital Markets. Please go ahead.
Todd Thomas
Hi, thanks. Good morning. David, I appreciate the detail on Bed Bath. I think you said the leases that you have executed related to backfills for space recaptured to replace 60% of pre-bankruptcy Bed Bath rent. Is that right? And then can you provide an update just around your expectations now that you’re sort of a quarter deeper into the process around what you think the blended mark-to-market may look like on the Bed Bath box [re-tenanting] (ph) activity?
David Lukes
Sure. Good morning, Todd. I think what I meant to say was that the combination of the signed leases, the leases that are currently renegotiated, and the signed LOIs represent about 60% of the backfill number. And therefore, since we know the economics of those signed deals and the ones that are under negotiation today, I would say that we’re on target to see somewhere around a 20% to 25% increase to the existing in-place Bed Bath rents.
Todd Thomas
Okay. And then on the convenience portfolio, you highlighted the lease maturity scheduling in the earnings deck, where you have 11% of AVR expiring through the end of ’24 for that segment. Can you talk about the mark-to-market on those leases, and just discuss the environment for rent growth that you’re seeing in that product, I guess, in light of your comments around elevated retention and the lack of new construction taking place?
David Lukes
Yes, sure. I mean the realty is that the convenience subsector is generally a renewals business. And right now, relative to the comments I made about new construction, in order to generate new multi-tenant shop buildings at $500 a square foot minus land, you really need to have rents that are pushing $60 or $70 a square foot, which we have been achieving in some markets. But the flipside of that coin is that tenants that are in high income markets that have been in some of these properties for a long time, in order to stay they’re going to have to pay a market rent. And what we’re learning from underwriting when we’re buying properties, to dealing with the renewals once we’ve owned them, it is the rents are growing faster than we had anticipated.
So, we feel very happy with the renewal probability and what the upside is in a lot of the shop rents. I’ll remind you, Todd, that one thing interesting about small-shop tenants in high income and high traffic corridors is that there is a very large number of concepts that would take a 1,200 to 1,800 square-foot space. And so, that competition drives a lot of this rent.
Todd Thomas
Okay. And so, a good portion of those expirations though include renewals with stated rent or do you expect to be able to negotiate extension options with the higher market rents that you’re seeing?
David Lukes
Some of them have fixed rent options. But one thing nice about this subsector is that we do have the ability to capture upside with naked renewals, which is certainly a much higher percentage than you would find in an anchored property.
Todd Thomas
Okay. And just lastly for Conor, how much in annualized G&A expense savings is the voluntary retirement program expected to yield in ’24? And you mentioned the $12 million run rate in the back-half of the year, here in ’23, is that appropriate to assume as we think about 2024?
Conor Fennerty
Hey, Todd, good morning. We mentioned in our 8-K in the annualized savings, I think we’re just over $3 million. It’s not all in G&A, but that is where the vast majority of it will fall. When we come to 2024, we’ll obviously provide guidance. You’re right to think about the back-half as run rate is closer to the right run rate. Remember, we’re still just starting the process for insurance for [D&O] (ph), for a whole host of other factors that drive G&A. But you’re right to assume that there should be, call it, less of inflation upward for us on G&A next year than there would be on a normal year. Again, we’ll provide explicit guidance as we get closer, but you’re getting pretty close, if you start to, the back-half of this year’s run rate.
Todd Thomas
Okay. How much of the $3 million is expected to be in G&A? And is the balance in operating expenses today?
Conor Fennerty
So, just over 80%-plus of it would be in G&A. There are some pieces that will fall into depreciation; we’ll have lower, effectively non-real estate depreciation on a go-forward basis. We have some color on that in the slides, but we can have a more in-depth conversation offline, if you’d like.
Todd Thomas
Okay, thank you.
Conor Fennerty
Welcome.
Operator
The next question comes from Craig Mailman with Citi. Please go ahead.
Craig Mailman
Hey, good morning. David, I just want to go back to the leasing commentary and maybe the construction cost increases here. You guys are getting good rent increases, as is a lot of your peers. But when you factor in the bump in TI costs, and just overall cost of capital, from a return respective, even with the higher rents, where do you think the return on that capital is today, versus maybe 6 to 12 months ago? Is it still in the same range or are these increased costs biting into the returns even with the higher rents?
David Lukes
Hey, good morning, Craig. Are you specifically thinking about the ground-up shop developments that I mentioned or –?
Craig Mailman
No, more like — I guess more like net effective rents, in terms of the vacancy and re-tenanting, I guess, not renewals but new leases. If new rents are moving higher, there’s competition for space. But the cost to build out that space is now higher, kind of like what you guys are seeing in ground-up development. Are the returns on the new leasing as good as they were 6 to 12 months ago given the fact that your cost of capital is higher, and consumption costs are higher on build-ups? Just trying to get a sense of are the market rent growth on a net effective basis keeping pace when you factor in the costs associated with getting tenants in the space?
David Lukes
Got it. Well, if you’re looking purely on the leasing side of the equation, so forgetting about ground-up construction, purely on leasing economics. If you look at our sub and you look at the trailing 12 months by quarter of net effective rents, it’s staying pretty consistent. And I think part of the reason for that is that rent growth is keeping up with tenant improvements in pretty much across the board in the portfolio. And so, I think you have to remember that as much as construction costs have gone up, when you re-tenant a box and you’re not splitting it, it’s a tenant-per-tenant backfill. The cost to backfill a tenant with a new tenant is really not that expensive. So, even if it’s gone up 20% or 30% in the last couple of years, it’s a relatively small number relative to building a brand new building. So, I think the highest return on capital is leasing existing vacant spaces, and that’s where most of the leasing CapEx has gone in the past few years.
Switching to new construction, it’s difficult to make the math work unless your shop rents are north of $60 a foot, and that’s why we’ve been pretty prudent about breaking ground on small projects. But have done so in those markets like Boston, and Virginia, and Florida, where we can generate that kind of rent.
Craig Mailman
Okay, that’s helpful. And I’m just curious, are you starting to see any segments or tenant type that is just pushing back on the rent increases at this point where they just don’t feel like the business is supportive of these new rents?
David Lukes
Yes, I think there are some — as rents get to where they are, you’re talking about junior anchors that are well into the 20s, shop rents that are well north of $50 or $60 in a number of spaces. There are concepts that don’t generate enough 4-wall EBITDA to pay that rent. The benefit right now is that there are multiple choices. And I think that’s what’s different than five or six years ago, where the choice to backfill tenants may have been a tenant that can’t generate enough same-store or 4-wall EBITDA to pay that type of rent. And so, that’s put a cap on the rent. But today, the demand for space has been so strong in these high income suburbs, that those tenants that can’t afford to pay those rents just simply lose out on the negotiations, and those that generate a lot of sales can pay it.
Craig Mailman
Okay. And then I know I asked this last quarter of you and your peers. But are you guys seeing any issues with some of your shop tenants being able to access capital through their banking relationships or any kind of change in AR balances, anything that would start to give you pause that shop leasing could begin to inflect?
Conor Fennerty
Look, we have not. I mean I think I ask that question daily — definitely weekly, and maybe daily, Craig. But we have not seen anything to date.
Craig Mailman
And then just last quick one. I think you said, Conor, you did 125 basis points of bad debt year-to-date. How does that compare to budget, and maybe can you give us an update? I think you said 225 last quarter. Can you just give us updated numbers on bad debt bankruptcy, how you guys look at that number?
Conor Fennerty
Sure, Craig, you’re right. The last quarter, when you asked the question, it was about 225 basis points. As both Dave and I said in our prepared remarks, we’re running ahead of plan on occupancy year-to-date, and for the back-half of the year our expectation. So, that number is closer to 200 basis points today. And of that, between Bed Bath and other tenants falling out, we’ve utilized about 125. So, we still have a cushion or a reserve or, call it, 75 basis points in the back-half of the year. Obviously, more at the bottom end of the range and less at the top end of the range. But we still have a decent amount of cushion in the back-half.
Craig Mailman
Awesome. Thank you.
Conor Fennerty
Welcome.
Operator
The next question comes from Haendel St. Juste with Mizuho. Please go ahead.
Ravi Vaidya
Hi, good morning. This is Ravi Vaidya on the line for Haendel St. Juste. Hope you guys are doing well. You referenced a 20% mark-to-market on leases from Bed Bath. I think last quarter you mentioned it to be a little higher, 25% to 30%, any reason for the downtick? And can you discuss any of the capital costs associated with generating that sort of spread?
David Lukes
Ravi, the capital costs really haven’t changed in the last 90 days. I think if you’re hearing us say the difference between 20%, and 25%, and 30%, it’s probably a management team that can’t remember 90 days ago. But I would say that if we’re talking about 60% of the leases look like the economics are baked, and we’re kind of saying on a blended, it’s somewhere to 20% to 30% increase. We won’t really know until all of the leases are signed, but that’s generally the direction of where the spreads are.
Ravi Vaidya
Got it, that’s helpful. Just one more here, moving past that Bed Bath, but can you discuss what your watch list right now, and what it is on an AVR basis across the portfolio, and what the potential mark-to-market and demand could be for that?
Conor Fennerty
Well, it’s a very specific question. We generally don’t outline what exactly is our watch list as a percentage of AVR. I will say to you as I mentioned in my prepared remarks, we had about $600,000 of non-cash rent related to taking tenants off a cash basis, which implies that we feel more comfortable about our tenant list or tenant roster today than ever before, and at least than 90 days ago. So, there are, without fail, a number of tenants we have in our top 50, and a couple others at the margin that we’re concerned about. As Craig just mentioned, we have a reserve, and we have a reserve for a reason.
But I will tell you that list continues to wind down. And I would say the opposite of that and the most encouraging thing, to David’s point, the depth and breadth of demand to back those spaces across unit sizes remains robust. So, there will be bankruptcies. We are expecting others in the course of the next six to 18 months. But I would just tell you, given the quality of our portfolio and to mark-to-market and the level of demand we have today, we feel really good about backfilling that. If you look past of last six years to this portfolio, and yes, it has changed a little bit with asset sales and acquisitions, we’ve generally been able to generate between 20% and 100% mark-to-market on bankruptcies.
The 100% is not sustainable; it’s unique to certain situations. But, without fail, we’ve generated, call that the low-20s, 30% for [Toys] (ph), for Sports Authority, for Golfsmith, and we can go on. So, it’s a very longwinded way, Ravi, of saying there will be more bankruptcies. There’s a couple we’re watching, but we feel really good about the level of demand and the economics to backfill those tenants.
Ravi Vaidya
Thank you. I appreciate the color, guys.
Operator
The next question comes from Samir Khanal with Evercore ISI. Please go ahead.
Samir Khanal
Hey, good morning, everyone. Conor, I know you mentioned there hasn’t been much change in shop space, I think to Craig’s question. When I look at occupancy, it was down a little bit in the quarter. I know you kind of had big increases sequentially over the last few quarters. So, I’m just trying to figure out, is there anything to read into that at this point?
Conor Fennerty
Hey, Samir, good morning. So, one of the challenges with our definition is it’s never — so everything below 10,000 square feet falls into the shop category. If you bifurcated that between less than 5,000 and 5,000 to 10,000, you’d see a little bit different story. The less than 5,000, there’s no change, it continues to tick higher. The 5,000 to 10,000, we had one Tuesday Morning come back to us, we had a couple other, I’ll say, four [smooth-outs] (ph), meaning we made the decision to re-tenant the space. Of the one Tuesday Morning, to give you color, we had the backfill already executed on a positive 60%-plus mark-to-market, which was done this last quarter.
So, it really is a story of getting a couple 5,000 to 10,000 square foot unit sizes, our units back. And again, we feel really good about backfilling, and it will just take a little bit time. So, again, nothing we are seeing on shop demand, but you are right to say it does not pause. And in terms of less than 10,000 per feet, the occupancy is much higher that we have seen over three or four quarters.
Samir Khanal
Got it. No, no, thank you for that. And then, I guess just my second question on the transaction market. I mean are you seeing more assets come to market in the second-half here? Whether it’s the convenience centers that you are sort of looking at or just kind of open air in general? Anything on cap rates would be helpful. Thanks.
David Lukes
Yes, Samir, I certainly would say we are not seeing more volume on the market for sure. There is still a bid-ask spread. We are seeing plenty of convenience properties to underwrite. Plenty, I mean the amount of work that we have to do to look at properties has kept the team in transactions very busy. And it’s pretty neatly fixed in the two categories. Those where the seller is still looking to last year’s prices and those where the seller is open-minded to where we think values are today. And so, we’ve been very careful and prudent on actually completely transactions. There is plenty to look at. But there has still been a pretty bid-ask spread.
Samir Khanal
Thank you.
Operator
The next question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.
Alexander Goldfarb
Hey, good morning and thank you. So, two questions; David and Conor, just big picture, you spoke about the Signed but Not Yet Commenced ramping up over the next four — Sorry, that pipeline providing positive ramp up over the next few years. And I think you said that it was either more than enough to mitigate the store closings or equally offset. But I am just trying to understand so that when we look at the company as you guys go forward, it sounds like the demand from tenants is more than enough to offset these store closings that you experience in Party City Bed Baths et cetera. But I just want to make sure that we’re not sort of getting too excited about the Signed but Not Yet Commenced relative to the immediacy of tenants stop giving back space today?
David Lukes
Hi, good morning, Alex. I think you are correctly reading through this. With 310 basis points spread, the SNO pipeline is marching along with executed leases with credit tenants. And so, the confidence there is when we layer in which spaces are coming back, and what the spreads are on those spaces, we do feel like the SNO pipeline is tilting the scale more heavily than future move outs at this point. Now, that could change. If leasing slowdowns and if bankruptcies pick up, that could change. But at this particular point, it still feels like the scale is tilted towards growth given the SNO pipeline.
Conor Fennerty
Yes. And I would say, Alex, this year is a perfect example of that. I mean we just lost our seventh largest tenant which has liquidated, Bed Bath & Beyond, which as of the first quarter represented 1.7% or 1.8% of base rent. And we’re expecting to do 1.5% same-store this year at the mid point. And then, if you adjusted prior period reversal, we were doing mid 2s despite losing our seventh largest tenant. And so, I think that’s a great example of the kind of growth we are seeing in industry where this headwind — or excuse me, this tailwind when we have no pipeline is incredibly unique. It’s very different than ’06, ’07 or other period where you had bankruptcies, or ’17 we had bankruptcies. So, I would just tell you, we’re incredibly encouraged. And the size of tailwind feels like it far outstrips bankruptcies or store closures today.
Now, as David’s point, that could change tomorrow, but it’s a fairly large tailwind we have over the next two-plus years. So, it’s the one mid again, and so, I would say for the sector when I made the comment the last quarter, it feels like this a tailwind that could drive above trend growth in the entire sector over the couple of years. But one mid again is going to be interest expense. It’s not a SITE Center’s unique issue; it’s an industry issue. That is the one headwind that we will be dealing with. But the other headwinds that we dealt, i.e., fees going away et cetera, G&A, we are largely through those as a company. So, it really is just a function of NOI growth offset or partially offset by some interesting facts.
Alexander Goldfarb
Okay. And then, Conor, as we go from second quarter to third quarter, you mentioned that there was $1 million of rent — of cash rent that’s going away. There is also $800,000 of straight-line rent that’s going away. So, I just want to make sure I understand those dynamics correctly and can sort of link where third quarter is going to be versus second quarter. And if that’s the case and assuming again no more credit issues, it sounds like third quarter is going to be a new run rate for the company because it’ll have your reset G&A. It’ll have no more Bed Bath in it. So, is that correct that basically revenue is going to go down $1.8 million, G&A resets and therefore third quarter, assuming no interest rate or additional store closings, third quarter is the new base quarter for the company?
David Lukes
I don’t want to say it’s the new base for the company, Alex. There’s other factors moving it, but your math is correct. We’re losing $1.8 million sequentially. Now, the offset is, as we just discussed is the SNO pipeline. If you look at our schedule on Page 6 in the slides, we have about $4 million annualized coming in, so called a million a quarter coming in, in the third quarter. So, I do think commenced occupancy cash commenced occupancy should be flattish quarter-over-quarter. And then, to your point, you have the adjustment on the non-cash piece. And then, you’re right, you’ve got a good run rate ex-Bed Bath in the third quarter.
Alexander Goldfarb
Okay. And then, if you’ll humor me, just one quickie. The OP units that you bought back, the press release said that it saves you some tax and accounting expense. Is that minimal expense, or is that sort of meaningful dollars that buying back these OPs saves you guys?
David Lukes
It’s fairly minimal. It was a significant use of time for our tax and legal department. The OP units, I think, dated back to the 90s, so it was more the unitholders and the structure it was in, as opposed to the fact that they were simply OP units outstanding.
Alexander Goldfarb
Okay, thanks.
Operator
The next question comes from Floris Van Dijkum with Compass Point. Please go ahead.
Floris Van Dijkum
Good morning, guys. Thank you for taking my question. So, it’s very encouraging in terms of the leasing, I’m looking at shop occupancy up 300 basis points year-over-year. I mean that should really drive your growth, I suspect does drive your growth and your confidence going forward. I just wanted to get you guys to comments on maybe a couple of other bumps on the road, potentially, and in particular AMC and Jo-Ann, which I think together account for 2.3% of your AVR. I know there’s something came out over last weekend about AMC and its ability to keep the lights on, if you will, or to keep funding itself. How are you thinking about that? And if you can give a little bit of an update on that and then a follow on, I’d love to, Connor, get your insight on the debt capital markets, particularly regarding the latest refinancing by Piedmont. I know it’s a different sector, but I think it scares some people borrowing at 9.25% for five year money. I’ll stop there. Have you guys addressed those separately?
David Lukes
Hi, good morning, Floris. I’ll opine on theaters for a second and then turn it over to Connor, who hasn’t been to movie theater in nine years. And it’s a funny time for you to bring it up. I mean, you think about the whipsaw in sentiment on theaters in the last three years, culminating in this past weekend, it’s very difficult for us to have a long-term view. As real estate investors, I would say our long-term view. Remember when we spun off RBI, we were very careful to spin off the assets that had underperforming theaters, and the only theaters we kept were ones that had strong sales pre-pandemic.
The other feature of the assets we kept with theaters was that most of the rent we’re getting from AMC in particular, comes from individual buildings on large tracts of land. And to my kind of aforementioned speech about construction costs and redevelopment, a large track of land that has a building parked at six per thousand means that there’s a lot of density available on that property. So, we tried during the pandemic to get a bunch of theaters back from these tenants, and we’re unable to do so. So, what happens going forward is anybody’s guess, I don’t really have an opinion as to what’s going to happen with the theater business over time. I will say that the land we own underneath these freestanding buildings is worth a lot, and I do think that there’s a higher and better use in the future in those locations.
Conor Fennerty
Floris, the other tenant you asked about, I mean, I don’t think it’s appropriate for us to find on individual tenants. I would just point to our commentary, I think to Robbie’s question a couple others, that when we’ve got space back, we just have had a successful track record of the last six years of back-link that space at compelling economics. There are some large format tenants that you just mentioned that have a particularly low rent per square foot, so the mark-to-market market could be even larger on some of those boxes. To your point on the debt capital markets, I don’t think the transaction that you reference is relevant to us or anyone else in the open air sector for a handful of reasons.
And I would just say broadly, for five year or 10 year money, depending on which tenant you want to go with, you’re talking about all-in rates between 6% and 7%. And it’s a function of a couple of things. One, if you just look at the leverage profile of our company versus others, particularly the one you mentioned, the second piece is about the NOI growth of our company and the sector versus the one that you mentioned. And the third piece is you could make the argument that even though there is less capital available for real estate today, you could argue that there’s actually more capital available for open air retail today. And it’s a function of a couple of things. One, there’s less capital going to office today. That’s not a surprise probably to you or anyone else on this call. The other piece is generally quite a few lenders are full “Multifamily and industrial.”
And so, you couple that with the performance of open air retail over the last five plus years and you could paint the picture or make the case for more capital availability on the debt side for open air shopping centers. Now, it doesn’t mean the rates are attractive versus where they were three or four years ago, but it does mean that if you have a high quality shopping center or a high quality portfolio of shopping centers, there are definitely no shortage of bidders who are looking at that. And the capital available is definitely there today. So, again, I would point you closer to all-in rates of call it 6% to 7%, whether you’re secured or unsecured, and again, whether your tenant is five, seven, 10 years. That could change tomorrow where benchmark rates move. But again, I don’t think the transaction you’re pointing to is really relevant to us or anyone else in the open air sector.
Floris Van Dijkum
Thanks, Connor. I appreciate that. I sort of figured I’d get a response, something similar maybe just following up on the AMC and five locations. Could you give us a little bit more insight into where those locations are? And obviously, you like the land underneath them. Even if you get those back, you think you’re going to make money on that longer-term. Maybe if we can get some more color on that, that’ll be appreciated.
David Lukes
Floris, I’m happy to send you the list of locations.
Floris Van Dijkum
Thanks, David.
Operator
The next question comes from Ki Bin Kim with Truist. Please go ahead.
Ki Bin Kim
Thanks. Good morning. You already touched on some of this on your comments, but I was curious if there’s been any type of incremental change that you’ve noticed from your attendance and overall top of the funnel demand?
David Lukes
The short answer is no. Ki Bin, I think to our comments, we’re continually surprised by the depth and breadth of demand. Remember, also we own this pretty small portfolio relative to the broader 30,000 square foot shopping center universe, right. We’re 121 assets. So, four of our properties, as of today, we’re seeing really healthy demand. I don’t know how if it’s possible to extrapolate that the entire sector or the other assets or the other excuse me, regional space.
Ki Bin Kim
And with student loan payments mostly resuming, how do you see that impacting your customers or your tenants?
David Lukes
Ki Bin, if you look at our tenant roster and locations, it doesn’t feel like a student kind of middle income market portfolio. I would remind you that leases are pretty long-term. They tend to be with large, publicly traded companies. And the rent that we get that is not fixed rent i.e. a percentage of sales is almost zero. So, I think that as much as we’re respectful and thoughtful as to how that might impact overall sales, consumer sales, I don’t really see it having an impact on our rental stream.
Ki Bin Kim
Yes, that makes sense. I wouldn’t make an immediate impact to your rental stream. I’ve just meant overall to the environment and how retailers might be leaning in or leaning away from certain decisions.
David Lukes
It is a good question. At this point, the demand is so fierce, even if it took a little bit of steam off a bit, there’s still quite a bit of demand and there’s just not enough space left.
Ki Bin Kim
Got it. Thank you.
Operator
The next question comes from Linda Tsai with Jefferies. Please go ahead.
Linda Tsai
Hi, good morning. In recent filings in a news article, it seems like Party City’s restructuring is going worse than expected. They’re missing internal sales estimates, and they might emerge more levered than previously expected. So, how are you thinking about their health post restructuring? And are you reserving for what you thought post bankruptcy rents might look like?
Conor Fennerty
Hey, Linda. Good morning, it’s Connor. I think to kind of point to prior answers, I think it’s appropriate to opine on specific tenants. I would just tell you we know what you know, Party City’s on cash basis, they’re in bankruptcy. We’ve not had any store closures to date. Until they come out of bankruptcy, it’s a risk. And so, we’ve got a reserve for a reason of the back-half the year. If you recall, when they initially filed, we did not expect a material impact on our rents or revenue stream from them for a couple of reasons. One, we had quite a bit of demand, so we effectively said accept or reject the vast majority of those leases.
And so, if that turns out to be the case and we get a couple of those back or all of them back, then I would just tell you, for those locations, which I think we have 15 or 16 as of today, we feel really good about the depth of demand from a whole host of tenants in that unit size. Samir asked a similar question about that unit size, and again, we’re just seeing good demand. So, again, we’ll see how it plays out. They’re on cash basis, so there really shouldn’t be an impact other than if they had store closures and we’ll see how the bank process plays out.
Linda Tsai
And then where do you expect occupancy to be year end? I know you said you’re going to get the remainder of the Bed Bath boxes back in 3Q?
Conor Fennerty
Yes, so to Alex’s point, I point you kind of to cash occupancy, which is a little different than GLA weighted occupancy, which is obviously what we report. I would just say in general, I would expect occupancy to be flattish from the second to the third quarter, meaning we lose the revenue related to Bed Bath, and it’s offset by commencements from the SNO pipeline. And in the fourth quarter, depending on how the credit markets or bankruptcy situation plays out, we should have an uptick from the third to the fourth quarter as more leases commence, that could be offset or partially mitigated by future bankruptcies like Party City to your point. But at this time, assuming no material bankruptcies, we would have an uptick from the third to the fourth quarter.
Linda Tsai
Thanks.
Conor Fennerty
You’re welcome, Linda.
Operator
The next question comes from Mike Mueller with JPMorgan. Please go ahead.
Mike Mueller
Yes, hi. I was just wondering, can you give a little color on some of the redevelopments that you cited in the prepared comments that may be starting in the next year or so?
David Lukes
Sure. Mike. Good morning. The redevelopments that we’ve begun to launch recently are a direct result of negotiations with anchor tenants during COVID where they asked for a deferral of rent, and in return, we got removal of restrictions on our land in order to add density. And so, you fast forward a year and a half later, we’ve been pre-leasing going through the city municipalities to get entitlements, and Joe Chura and his team have been kind of preparing these projects for launch.
So, if it weren’t for the COVID negotiations, we wouldn’t have the landlord control of these out parcels. But because of those COVID agreements with some of the anchors, we were able to get control back. And in some of these properties, which are quite large Southern New Jersey, Boston, Miami, Atlanta there’s such a lack of shop space in these large anchored properties that the demand for shops has been pretty strong. And that’s why we’re able to achieve rents that are kind of in the $60 net range.
Conor Fennerty
Mike, I think the projects that are added to the pipeline are going to look eerily similar to the ones on the pipeline today. It’s a lot of drive-throughs, a lot of Starbucks, a lot of banks and service users, quick service restaurants. So, it’s really just a continuation of what we’ve been building just at different sites to David’s point.
Mike Mueller
Got it. So, it sounds like mostly out parcels, is that right?
Conor Fennerty
Yes, it’s generally multitenant pad out parcels and then a few single tenant drive through out parcels.
Mike Mueller
Got it. Okay, that was it. Thank you.
Operator
The next question comes from Ronald Kamdem with Morgan Stanley. Please go ahead.
Ronald Kamdem
Hey, just two quick ones for me. So, I think the bad debt comment of 125 basis points, how much of that was Bed Bath number one?
Conor Fennerty
Hey, Ron, it’s Conor, good morning. It’s about 100 basis points of the 125 and that 100 basis points is the impact for the full-year.
Ronald Kamdem
Helpful. As we’re sort of just one more on internal of an another one on acquisitions, but as we’re sort of thinking about rolling the calendar to 2024, I think you talked about sort of the SNO pipeline being a tailwind, which is great. You obviously have rent bumps, releasing spreads. So, it’s the biggest delta, we’re thinking about the same-store NOI growth function really going to be sort of the bad debt assumptions based on some of these bankruptcies in the news or are there other sort of things we should be mindful of in the portfolio?
Conor Fennerty
Yes, I think this is a continuation of Alex’s question, Ron. It’s a function of Bed Bath, which will get a clean number in the third quarter. It’s G&A, which Todd outlined or discussed, and then it’s interest expense, which I brought up my response to Alex. So, those three pieces you hit the nail on the head are going to drive 2024 in our respective growth.
Ronald Kamdem
Got it. So, lastly, on acquisitions, one, can you sort of provide the cap rates for the deals in the quarter and sort of any targeted IRR, any metrics that you sort of use? And two, just a broader question on the convenience centers pipeline, which I think you said was sort of quite active and so forth, who’s the biggest competition in that market when you’re bidding for deals?
Conor Fennerty
The biggest competition continues to be local real estate investors. They just have a desire to buy that local property that is without question the largest competitor in the space.
Ronald Kamdem
Great. And then, cap rates and IRRs?
Conor Fennerty
The cap rates is an interesting question because what we’ve seen from sellers is a pretty wide range of expectations ongoing in cap rates. And to tell you the truth, it feels like a less relevant metric because once we get into the underwriting, we tend to find that the rents are really either below market or they tend to be at or slightly above market, depending on their vintage.
So, I would say that the unlevered IRR is a more important metric. And what we have been searching for is properties that have very low CapEx burn and a high degree of renewal probability. So, I’ll point you to the property we just bought in Houston, where the average tenure of the tenants in that property has been 25 years. So, when you’ve got a rent role that basically is without options remaining on the tenant roster, and those businesses have been operating on average for 25 years as an investor, that’s a renewals business.
It takes low CapEx, and it has everything to do with your belief and understanding of market rents. So, for us, as we’re buying convenience properties, we’re targeting high single-digit unlevered IRRs, but the risks to generate that high single-digit IRR do not take any occupancy uplift, or they don’t take a lot of CapEx. And that’s why we’re comfortable with that return profile, given the lack of risk. And if we end up in an environment where inflation is a little bit higher for longer, this sub asset class definitely benefits from those ingredients.
Ronald Kamdem
Helpful. Thank you.
Operator
And the last question comes from Paulina Rojas Schmidt with Green Street. Please go ahead.
Paulina Rojas Schmidt
Hello. Good morning. I’m curious, what are your takeaways from the results of the auction process of Bed Bath? For example, were you in any way surprised by the players that did or did not show up, the variety of the bids, dollar amount paid, et cetera?
Conor Fennerty
Good morning, Paulina. I don’t think we were surprised; it was an auction that was so well anticipated. It’s one of the few in the last couple of years that are of that size. And so, there was a lot of interest. It happened to overlap with ICSE Vegas, so there was a tremendous amount of conversation about it. But I think when we met with you in the months prior to that, I think what we had said was that the amount of duration left on chain leases for a junior anchor really were not enough, I think to generate large portfolio transactions of those leases.
If you’ve got 10 or 11 years left on a lease, it’s very difficult for another tenant to buy that without enough term left. So, our anticipation was that we would not be having a lot of purchased leases at auction. We ended up with a couple more than we would have expected. And we were also surprised at the last hour that a couple of regional tenants came in and bought a few leases. So, I would say that we were marginally surprised to the upside that we got one or two more bought than we expected, but generally, it was in line with what we had expected.
Paulina Rojas Schmidt
Okay, thank you.
Conor Fennerty
Thanks, Paulina.
Operator
This concludes our question-and-answer session. At this time, I would like to turn the conference back over to David Lukes for any closing remarks.
David Lukes
Thank you all for joining us, and we’ll speak to you next quarter.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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