Q2 2023 Site Centers Corp Earnings Call
Participants
Conor M. Fennerty; Executive VP, CFO & Treasurer; SITE Centers Corp.
David R. Lukes; President, CEO & Director; SITE Centers Corp.
Stephanie Ruys de Perez; VP of Capital Markets; SITE Centers Corp.
Alexander David Goldfarb; MD & Senior Research Analyst; Piper Sandler & Co., Research Division
Craig Allen Mailman; Research Analyst; Citigroup Inc., Research Division
Dori Lynn Kesten; Senior Analyst; Wells Fargo Securities, LLC, Research Division
Floris Gerbrand Hendrik Van Dijkum; MD & Senior Research Analyst; Compass Point Research & Trading, LLC, Research Division
Ki Bin Kim; MD; Truist Securities, Inc., Research Division
Linda Tsai; Equity Analyst; Jefferies LLC, Research Division
Michael William Mueller; Senior Analyst; JPMorgan Chase & Co, Research Division
Paulina Alejandra Rojas-Schmidt; Analyst of Retail; Green Street Advisors, LLC, Research Division
Ravi Vijay Vaidya; VP; Mizuho Securities USA LLC, Research Division
Ronald Kamdem; Equity Analyst; Morgan Stanley, Research Division
Samir Upadhyay Khanal; MD & Equity Research Analyst; Evercore ISI Institutional Equities, Research Division
Todd Michael Thomas; MD & Senior Equity Research Analyst; KeyBanc Capital Markets Inc., Research Division
Presentation
Operator
Good morning, and welcome to SITE Centers Second Quarter 2023 Earnings Conference Call. (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.
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 website 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 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 R. 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 Open 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 movements to the suburbs and the choice by most retailers to favor a combination of in-store shopping, curbside pick-up and shipped from store.
When combined with the growth and 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 2 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 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 of blended new shopping center, containing both shops and anchors, remains a challenging math exercise and it's a primary reason why we are seeing tenant retention at very high levels as tenants with current leases are unwilling to relocate to more expensive space.
Over the course of the last 2 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 to-date remains limited to Cineworld, Party City and 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, 4 leases were acquired as part of the bankruptcy auction and 4 leases were rejected leaving 8 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 of our stores will have executed leases over the next 12 months with rents commencing in year's end by 2024. We already signed 1 of our 12 available units in the second quarter with 2 more at lease and 2 with executed LOIs. These 5 deals represent roughly 60% of our expected pro forma backfill rents 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 remains 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 4 of our Bed Bath & Beyond leases.
Looking forward, we have just over 250,000 square feet at share in current lease negotiations, including the Bed Bath & Beyond deals that I mentioned with blended spreads ahead of our tailing 12-month average. We expect this leasing pipeline to be completed over the next 2 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 wrapping up the final phase of our West Bay project here in Cleveland. All 3 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 of our construction costs, limiting supply, the aforementioned projects have signed leases or executed LOIs at 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 3 convenience properties for $49 million. With 2 properties at our largest market of Atlanta and 1 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 the high-traffic intersections within wealthy suburban communities. Average household incomes for the second quarter investments are over $125,000 and the leased 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 sub-sector 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 a 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 M. 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 over trend. 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 the Bed Bath lease.
In terms of operating metrics, trailing 12-month 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 base 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 6 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 unflexed revenue, partially offset by the aforementioned rent commencements.
Moving on to our outlook. We're revising 2023 OFFO guidance up to a range of $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 remained 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 headwind to 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 3 national tenants in various stages of bankruptcy as of today and that includes Cineworld, Party City and Bed Bath & Beyond. For Cineworld, the executed agreements at all 3 of our locations remain 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 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 Party City's bankruptcy exit.
And lastly, for Bed Bath, we expect all 8 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 the 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 from the second quarter. First and most impactful is revenue related to Bed Bath. As I just mentioned, we recognized $1 million of revenue related to rejected leases and leases expected to be rejected in the second quarter, which we do not expect to recognize in the third quarter. Second, we recognized just under $800,000 of non-cash revenues 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 9 of our earnings slides.
Finally, ending with the balance sheet and capital activity. At quarter end, leverage was 5.5x, fixed charge was 4x and our unsecured debt yield was over 20%. The company had $175 million outstanding on our line of credit. And our expectation is that the balance will move lower over the remainder of the year as a result of retained cash flow and net investment and capital markets activity. The net result is that we continue to expect debt to EBITDA to remain below 6x through year-end 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 R. Lukes
Thank you, Conor. Operator, we're ready to take questions.
Question and Answer Session
Operator
(Operator Instructions) The first question comes from Dori Kesten with Wells Fargo.
Dori Lynn Kesten
As you consider your new guidance, where do you think you've built in the most conservatism at this point?
Conor M. Fennerty
I don't think I'd call it conservatism. I think it's a prudent budget given macro uncertainty, capital markets uncertainty. As I mentioned in my script, there's 3 factors that could impact where we fall in the range the most. And those are occupancy, which is driven by bankruptcies, lost rent. The second one was transaction activity. And the third one was -- your testing my memory already. The third one was related to rent commencements. And I'll say, at this point in time, we have better clarity on rent commencements of those 3 and we feel really good about our occupancy and our forecast for the course of the year. But all 3 of those could impact where we fall under the range. So again, I don't think they're conservative in nature, but those are the 3 biggest factors that could impact where we end up in the range.
Dori Lynn Kesten
Okay. And 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 R. Lukes
Dori, it's David. I think the -- remember, the next few years are most impacted by the SNO pipeline. So I'd 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 number simply because of occupancy uplift.
Conor M. 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.
Operator
The next question comes from Todd Thomas with KeyBanc Capital Markets.
Todd Michael Thomas
David, I appreciate the detail on Bed Bath. I think you said the leases that you have executed related to backfills for space recapture is replaced 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 retenanting activity?
David R. Lukes
Sure. I think what I meant to say was that the combination of the signed leases, the leases that are currently being negotiated 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 Michael Thomas
Okay. And then on the convenience portfolio, you highlighted the lease maturity schedule in the earnings deck, where you have 11% of ABR 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 R. Lukes
Yes, sure. I mean, the reality is that the convenience sub-sector is generally a renewal business. And right now, relative to the comments I made about new construction in order to generate new kind of multi-tenant shop building that's $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 flip side of that coin is that tenants that are in high-income markets that are -- 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 is that 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's 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 Michael Thomas
Okay. But -- 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 R. Lukes
Some of them have fixed rent options, but one thing nice about the sub-sector 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 Michael 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 -- I mean, is that appropriate to assume as we think about 2024?
Conor M. Fennerty
Todd, we mentioned in our 8-K 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 this run rate is closer to the right run rate. Remember, we're still just starting the process for insurance, for D&O, 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 force on G&A next year than there would be in a normal year. Again, we'll provide explicit guidance as we get closer, but you're getting pretty close if you start to use the back half of this year as a run rate.
Todd Michael Thomas
Okay. How much of the $3 million is expected to be in G&A? And is the balance in operating expenses today?
Conor M. 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 can -- we have some color on that in the slides, but we can have a more in-depth conversation offline if you like.
Operator
The next question comes from Craig Mailman with Citi.
Craig Allen Mailman
Dave, I just want to go back to the leasing commentary and maybe the construction cost increases here. I mean, you guys are getting good rent increases as is a lot of your peers. But when you factor in kind of the bump in TI costs and just overall cost of capital, I mean, from a return perspective, even with the higher rents, are you -- I guess, 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 fighting into the returns even with the higher rents?
David R. Lukes
Greg, are you specifically thinking about the ground-up shop developments that I mentioned?
Craig Allen Mailman
No, more like -- I guess, more like net effective rents in terms of the vacancy and retenanting, I guess, not renewals, but new leasing. 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. I mean, 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, construction costs are higher on build-ups. I'm 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 R. 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 improvement 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 retenant a box and you're not splitting it, it's a tenant for tenant backfill. But 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 we have done so in those markets like Boston and Virginia and Florida where we can generate that kind of rent.
Craig Allen Mailman
Okay. That's helpful. And I'm just kind of 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 R. Lukes
Yes. I think there's -- I mean, 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's multiple choices. And I think that's what's different than 5 or 6 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 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 pass.
Craig Allen Mailman
Okay. And then I know I asked this last quarter of I think 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 M. Fennerty
We have not. I mean, I think I ask that question daily -- definitely, weekly and maybe daily, Craig, but we have not seen anything strange.
Craig Allen 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 million last quarter. Can you just give us updated numbers on bad debt bankruptcy kind of how you guys look at that number?
Conor M. Fennerty
Sure, Craig. You're right. 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 the occupancy year-to-date and for the back half of the year, our expectations. 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 of, 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.
Operator
The next question comes from Haendel St. Juste with Mizuho.
Ravi Vijay Vaidya
This is Ravi Vaidya on the line for Haendel St. Juste. I 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 at kind of 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 R. 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% is probably a management team that can't remember 90 days ago. But I would say that we're talking about 60% of the leases look like the economics are baked and we're kind of staying 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 kind of generally the direction of where the spreads are.
Ravi Vijay Vaidya
Got it. That's helpful. Just one more here. Can you -- moving past that Bed Bath, can you discuss what's your watchlist right now and what it is on an ABR basis across the portfolio? And what the potential mark-to-market and demand could be for that?
Conor M. Fennerty
Well, it's a very specific question. We generally don't outline what exactly is our watchlist as a percentage of ABR. 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, at least 90 days ago. So there are, without fail, a number of tenants we have in our top 50 and there are couple of 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 offset of that and the most encouraging thing, to David's point, the depth and breadth of demand to backfill spaces across unit sizes remains robust. So there will be bankruptcies. We are expecting others over the course of the next 6 to 18 months. But I would just tell you given the quality of our portfolio and the mark-to-market and the level of demand we have today, we feel really good about backfilling that.
If you look past over the last 6 years for this portfolio, and yes, it's 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 sale, we've generated to call that the kind of low-20s, 30% for Toys, for Sports Authority, for Golfsmith and we can kind of go on. So it's a very long-winded 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.
Operator
The next question comes from Samir Khanal with Evercore ISI.
Samir Upadhyay Khanal
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 kind of read into that at this point?
Conor M. Fennerty
So one of the challenges with our definition is, remember, everything below 10,000 square feet falls in the shop category. If you bifurcated that between less than 5 and 5 to 10, you'd see a little bit different story. The less than 5 there's no change and it continues to tick higher. The 5 to 10, we had one Tuesday Morning come back to us. We had a couple of other, I'll say, forced move-outs, meaning we made the decision to retenant the space. Of the one Tuesday Morning, to give you kind of color, we had a backfill -- we had the backfill, excuse me, already executed at a positive 60% plus mark-to-market, which is done this last quarter. So it really is a story of getting a couple of 5,000 to 10,000 square foot unit sizes or units back. And again, we feel really good about backfilling them, it will just take a little bit of time. So again, nothing we're seeing on shop demand, but you're right to say, there's been a pause in terms of less than 10,000 square feet kind of the occupancy much higher than you've seen over the last, call it, 3 or 4 quarters.
Samir Upadhyay Khanal
Got it. And then I guess just my second question on the transaction market. I mean, are you seeing more assets coming to market in the second half here, whether it's the convenience centers that you're sort of looking at or just kind of open here in general? Anything on cap rates would be helpful.
David R. Lukes
Yes, Samir, I certainly would say we're not seeing more volume on the market for sure. There's still a bid-ask spread. We're 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 and transactions very busy. And it pretty neatly fits into 2 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 completing transactions. There's plenty to look at, but there's still been a pretty wide bid-ask spread.
Operator
The next question comes from Alexander Goldfarb with Piper Sandler.
Alexander David Goldfarb
So 2 questions, David and Conor, just big picture. You spoke about the signed but not yet commenced ramping up over the next -- or 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'm 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're experiencing, the Party City, Bed Bath, et cetera. But I just want to make sure that we're not sort of getting too excited about the sign, but not yet commenced relative to the immediacy of tenants stop giving back space today?
David R. Lukes
Alex, I think you are correctly reading through that with a 310 basis point 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 slows down 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 M. Fennerty
Yes. And I'd say, Alex, this year is a perfect example of that. I mean, we just lost our 7th largest tenant, which is 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 midpoint. And then if you adjust for the prior period reversal headwinds, we were doing mid-2s despite losing our 7th largest tenant. And so I think that's a great example of the kind of growth we're seeing in the industry where this headwind -- or excuse me, this tailwind we have in the SNO pipeline is incredibly unique. It's very different than '06, '07 or other periods where you had bankruptcies or '17, we have bankruptcies. So I would just tell you, we're incredibly encouraged in the size of the tailwind. Feels like it far outstrips bankruptcies or store closures today.
Now to David's point, that could change tomorrow, but it's a fairly large tailwind we have over the next 2-plus of years. So it's the one mitigant. And so I have to just say, for the sector, I made the comment at the last quarter, it feels like this is a tailwind that could drive above trend growth in the entire sector for the next couple of years. The one mitigant is going to be interest expense. It's not a SITE Centers' unique issue, it's an industry issue. That is the one headwind that we'll be dealing with. But the other headwinds that we've dealt with, i.e. fees going away, et cetera, G&A, we're largely through those as a company. So it really is just a function of NOI growth offset or partially offset by some interest expense.
Alexander David Goldfarb
Okay. And then Conor, so 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's 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 will have your reset G&A, it will 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?
Conor M. Fennerty
I don't want to say it's the new base for the company, Alex. There's other factors moving up. 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 on the slides, we have about $4 million annualized coming in, so call it, $1 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 adjusted 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 David Goldfarb
Okay. And then just if you 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?
Conor M. Fennerty
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 of the unitholders and the structure that was in as opposed to the stock that they were simply OP units outstanding.
Operator
The next question comes from Floris Van Dijkum with Compass Point.
Floris Gerbrand Hendrik Van Dijkum
So what -- 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 comment on maybe a little -- a couple of other bumps on the road potentially. And in particular, AMC and Jo-Ann, which I think together accounts for 2.3% of your ABR. 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. What -- 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, Conor, get your insight on the debt capital markets, particularly regarding the latest refinancing by Piedmont. I know it's a different sector, but it's -- I think it's scared some people borrowing at 9.25% for 5-year money. I'll stop there and have you guys address those separately.
David R. Lukes
Floris, I'll opine on theaters for a second and then turn it over to Conor who hasn't been to movie theater in 9 years. And it's a funny time for you to bring it up. I mean, if you think about the [Whipsaw] and sentiment on theaters in the last 3 years, culminating in the 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 tracks of land. And to my kind of aforementioned speech about construction costs and redevelopment, a large track of land that has a building park that's 6 per 1,000 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 that 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 M. Fennerty
Yes. And for the other that 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 Ravi's question and a couple of others that when we got space back, we just have had a successful track record over the last 6 years to backfill that space at compelling economics. There are some large format tenants that you just mentioned to have a particularly low reference square foot, the mark-to-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 referenced is relevant to us or anyone else in the open-air sector for a handful of reasons. And I would just say broadly, for 5-year or 10-year money, depending on which tenor 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 ones 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 can 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, which is a function of a couple of things. One, there's less capital going to office today. It's not a surprise to you or anyone else on this call. The other piece is, generally quite a few lenders are full on multifamily and industrial. And so you couple that with the performance of open-air retail over the last 5-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 3 or 4 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 you're tenor is 5, 7, 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 Gerbrand Hendrik Van Dijkum
Conor, I appreciate that. I sort of figured I'd get a response something similar. Maybe just following up on the AMC and 5 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 would be appreciated.
David R. Lukes
Floris, I'm happy to send you the list of locations.
Operator
The next question comes from Ki Bin Kim with Truist.
Ki Bin Kim
You already touched on some of this in your comments, but I was curious if there's been any type of incremental change that you've noticed from your tenants and overall top of the funnel demand?
Conor M. Fennerty
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, I mean, we own this pretty small portfolio relative to the broader 30,000 square foot shopping center universe, right? We're 121 assets. So for 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 extremely (inaudible) REITs in the space.
Ki Bin Kim
And with student loan payments mostly resuming, how do you see that impacting your customers or your tenants?
David R. 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 the 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 0. 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, I mean that makes sense. I wouldn't make an immediate impact to your rental stream. I just meant overall to an environment and how retailers might be leaning in or leaning away from certain decisions.
David R. Lukes
Yes, it's a good question. See, I mean at this point, the demand is so fierce even if it took a little bit of steam off of it, there's still quite a bit of demand, but there's just not enough space left.
Operator
The next question comes from Linda Tsai with Jefferies.
Linda Tsai
In recent filings in the 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 M. Fennerty
Linda, it's Conor. I think to kind of point to prior answer, I think it's appropriate to opine on specific tenants. I would just tell you, we know what you know. Party City is on a 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 over the back half of 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 set accept or rejection of that [compared to 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 out there 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 have store closures, and we'll see how the bankruptcy 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 M. Fennerty
Yes. So to Alex's point, I mean, I'd point you kind of to cash occupancy. It's a little different than GLA-weighted occupancy, which is obviously what we reported. I would just say, in general, I would expect occupancy to be flattish for the second and 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 and 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 and fourth quarter.
Operator
The next question comes from Mike Mueller with JPMorgan.
Michael William Mueller
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 R. Lukes
Sure, Mike. 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 1.5 years 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 outparcels. 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 M. Fennerty
Mike, I think the projects that are added to the pipeline are going to look really 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 Dave's point.
Michael William Mueller
Got it. So it sounds like mostly outparcels. Is that right?
David R. Lukes
It's generally multi-tenant pad out parcels and then a few single tenant drive-through out-parcels.
Operator
The next question comes from Ronald Kamdem with Morgan Stanley.
Ronald Kamdem
Just 2 quick ones for me. So I think the bad debt comment of 125 basis points, how much of that was Bed Bath? #1.
Conor M. Fennerty
Ron, it's Conor. 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 and then 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 re-leasing spreads. So is the biggest delta when 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 have been used or are there other sort of things we should be mindful in the portfolio?
Conor M. 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 in my response too to Alex. So those 3 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 or 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 are the -- who's the biggest competition in that market when you're bidding for deals?
David R. Lukes
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?
David R. Lukes
The cap rates is an interesting question because what we've seen from sellers is a pretty wide range of expectations on going 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 a very low CapEx burn and a high degree of renewal probability.
So I'll point you to the properties we just bought in Houston where the average tenure of the tenant in that property has been 25 years. So when you've got a rent roll 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 renewal business. It takes low CapEx and it has everything to do with your belief in understanding of market rents.
So for us, as we're buying convenience properties, we're targeting high-single-digit unlevered IRRs. But the risk 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.
Operator
And the last question comes from Paulina Rojas-Schmidt with Green Street.
Paulina Alejandra Rojas-Schmidt
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, the bidder did not show up, the variety of the bids and dollar amount paid, et cetera?
David R. Lukes
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 that happened to overlap with ICSC 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.
And 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 1 or 2 more bought than we expected. But generally, it was in line with what we had expected.
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 R. 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.
