Good morning, and Welcome to SITE Centers' 2nd quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. 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.
Thank you, operator. 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. 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.
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 Connor 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 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. 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 submarkets 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 sq ft. We also recently started construction on several multi-tenant pad buildings, whose average cost to build are just above $500 a sq ft. 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 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 two years, our tenant retention, excluding forced move-outs, is well above historical averages. 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, 1 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 of our stores will have executed leases over the next 12 months with rents commencing in years end by 2024. We already signed one of our 12 available units in the second quarter, with two 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 remains high, which translated into an acceleration in activity. In terms of total leasing, we signed over one million sq ft of leases in the second quarter, including 170,000 sq ft of new deals. Despite this uptick in volume, our lease 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 sq ft at share in current lease negotiations, including the Bed Bath & Beyond deals that I mentioned, with blended spreads ahead of our trailing twelve-month average. We expect this leasing pipeline to be completed over the next 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 wrapping 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 at 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 in 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 the high traffic intersections within wealthy suburban communities.
Average household incomes for the second quarter investments are over $125,000. 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 market 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. With that, I'll turn it over to Connor.
Thanks, David. I'll comment first on quarterly results, discuss our revised 2023 guidance, 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 twelve-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 uncollectible 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-$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 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 three national tenants in various stages of bankruptcy as of today. That includes Cineworld, Party City, and Bed Bath & Beyond. For Cineworld, the executed agreements at all three 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 far as part of the company's restructuring, 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. 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 the second quarter. As part of the third quarter rejections, we expect to recognize additional non-cash revenue related to below-market leases, that is not included in our forecast at this time, 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 expect 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. 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, GNA 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.
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 in 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 2024. This leverage profile and liquidity provides substantial capacity and optionality to fund the company's business plan.
With that, I'll turn it back to David.
Thank you, Conor. Operator, we're ready to take questions.
We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star than two. At this time, we will pause momentarily to assemble our roster. The first question comes from Dori Kesten with DiamondRock . Please go ahead.
Thanks. Good morning. as you considered your new guidance, where do you think you've built in the most conservatism at this point?
Hey, Dori, good morning. I don't think I'd call it conservatism. I think it's prudent budget, given macro uncertainty, capital markets uncertainty. As I mentioned in my script, there's three 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 is transaction activity, the third one was, you tested my memory already. The third one was related to rent commencements. I'll say, at this point in time, look, we have better clarity on rent commencements of those three, we feel really good about occupancy in our forecast for the course of the year. All three of those could impact where we fall under the range. I don't think they're conservative in nature, but those are the three biggest factors that could impact where we end up in the range.
Okay. 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?
Dori, it's David. Remember, the next few years are most impacted by the SNO pipeline. I'd say that the convenience portfolio has a same-store number that's higher on average, once it gets to stabilization. Relative to the next few years, I think the existing portfolio is gonna have a higher same-store number simply because of occupancy uplift.
Yeah, Dori, remember that we like, 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 its CapEx light. 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. I think this point has come up on a couple of our earnings calls previously. CapEx, as a % 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.
Okay, thank you.
The next question comes from Todd Thomas with KeyBanc Capital Markets. Please go ahead.
Hi, thanks. Good morning. David, you know, appreciate the detail on Bed Bath. I think you said the leases that you have executed, you know, related to backfills for space recaptured to replace 60% of pre-bankruptcy Bed Bath rent. Is that right? Can you provide an update, just around your expectations now that you're in a sort of a quarter deeper into the process around what you think the blended mark to market may look like on the Bed Bath, you know, box re-tenanting activity?
Sure. Good morning, Todd. 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. 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%-25% increase to the existing in-place Bed Bath rents.
Okay. 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 2024 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.
Yeah, sure. I mean, the reality is that the convenience subsector is generally a renewals business. Right now, you know, relative to the comments I made about new construction, I mean, in order to generate new, kind of multi-tenant shop buildings at $500 a sq ft minus land, you really need to have rents that are pushing $60 or $70 a sq ft, which we have been achieving in some markets. The flip side of that coin is that tenants that are in high-income markets, that have been, you know, in some of these properties for a long time, in order to stay, they're gonna have to pay a market rent.
What we're learning from underwriting when we're buying properties to dealing with the renewals, you know, once we've owned them, is that the rents are growing faster than we had anticipated. 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, you know, one thing interesting about, you know, small shop tenants in high income and high traffic corridors, is that there's a very large number of concepts that would take a 1,200-1,800 sq f t space, and so that competition drives a lot of this, a lot of this rent.
Okay. A good portion of those expirations, though, include, renewals with stated rent, or do you expect to be able to negotiate, extension options with, you know, the higher market rents that you're seeing?
Some of them have fixed rent options, but one thing nice about the 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.
Okay. Just lastly, for Connor, you know, how much in annualized G&A expense savings is the voluntary retirement program expected to yield in 2024? You mentioned the $12 million run rate in the back half of the year here in 2023. I mean, is that appropriate to assume as we think about 2024?
Hey, Todd. Good morning. We mentioned in our 8-K, the annualized savings, I think, were just over $3 million. It's not all in G&A, but that is where the vast majority of it will fall. You know, 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. You're right to assume that there should be, call it, less of an inflation upward force 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 use the back half of this year's run rate.
Okay. How much of the $3 million is expected to be in G&A?
I think it's just over-.
is the balance in operating expenses today?
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.
... Okay, thank you.
You're welcome.
The next question comes from Craig Mailman with Citi. Please go ahead.
Hey, good morning. 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. 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, I guess, where do you think the return on that capital is today versus maybe 6-12 months ago? Is it still in the same range, or are these increased costs biting into the returns, even with the higher rents?
Hey, good morning, Craig. Are you specifically thinking about the ground up shop developments that I mentioned?
I guess, more like net effective rents, right? In terms of the vacancy and re-tenanting, I guess, not renewals, but new leasing, right? New rents are moving higher, there's competition for space, but the cost to build out that space is now higher, right? 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 and 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?
Got it. If you're looking at purely on the leasing side of the equation, forgetting about ground up construction, purely on leasing economics, if you look at our SNO and you look at the trailing 12 months by quarter of net effective rents, it's staying pretty consistent. I think part of the reason for that is that rent growth is keeping up with tenant improvements pretty much across the board in the portfolio. You know, 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's a tenant for tenant backfill. The cost to backfill a tenant with a new tenant is really not that expensive.
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. I think the highest return on capital is leasing existing vacant spaces, and that's where most of the leasing CapEx has gone 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. That's why we've been pretty prudent about breaking ground on small projects. We have done so in those markets, like Boston and Virginia and Florida, where we can generate that kind of rent.
Okay, that's helpful. 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?
Yeah, I think there's, I mean, as rents get to where they are, you're talking about junior anchors that are, you know, well into the $20s, you know, shop rents that are well north of $50 or $60 in a number of spaces. There are concepts that don't generate enough four-wall EBITDA to pay that rent. The benefit right now is that there's multiple choices. 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 four-wall EBITDA to pay that type of rent, so that put a cap on the rents.
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.
Okay. 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, you know, start to give you pause that shop leasing could begin to inflect?
We have not. I mean, I think I ask that question daily. Definitely weekly and maybe daily, Craig, we have not seen anything today.
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? 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, kind of how you guys look at that number?
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. That number is closer to 200 basis points today. Of that, between Bed Bath and other tenants falling out, we've utilized about 125. 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 of the range and less at the top end of the range, we still have a decent amount of cushion in the back half.
Awesome. Thank you.
Welcome.
The next question comes from Haendel St. Juste with Mizuho. Please go ahead.
Hi, good morning. This is Ravi Vaidya on the line for Haendel St. Juste. Hope you guys are doing well. You referenced a 20% marks 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?
Rav, 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. I would say that, you know, 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%-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.
Got it. That's helpful. Just one more here. Moving past that Bed Bath, can you discuss the what 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?
Well, it's a very, 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 of cash-basis, which implies that we feel more comfortable about our tenant list or tenant roster today than ever before, at least than 90 days ago. 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. I will tell you, that list continues to wind down.
I would say the opposite of that, the most encouraging thing, to David's point, the depth and breadth of demand to backfill spaces across unit sizes remains robust. There will be bankruptcies. We are expecting others over the course of the next six to 18 months. 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 six years of 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 fail, 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. It's a very long-winded way, Robbie, 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.
Thank you. I appreciate the color, guys.
The next question comes from Samir Khanal with Evercore ISI. Please go ahead.
Hey, good morning, everyone. Connor, I know you mentioned there hasn't been much change in shop space, I think, to Craig's question. You know, 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?
Hey, Sameer. Good morning. One of the challenges with our definition is remember, it's everything below 10,000 sq ft falls into 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. It continues to tick higher. The five to 10, we had 1 Tuesday Morning come back to us. We had a couple other, I'll say, forced move-outs, meaning we made a decision to re-tenant the space. Of the 1 Tuesday Morning, though, 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 down this last quarter.
It really is a story of getting a couple 5,000-10,000 sq ft unit sizes or unit, units back. Again, we feel really good about backfilling them, but it'll just take a little bit of time. 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 sq ft, kind of the occupancy mark higher that you've seen over the last, call it, three or four quarters.
Got it. No, no, thank you for that. 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? You know, whether it's the convenience centers that you're sort of looking at or just kind of open air in general. Anything on cap rates would be helpful. Thanks.
Yeah, Sameer, 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. It pretty neatly fits into 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. 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.
Thank you.
The next question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.
Hey, good morning. Thank you. Two questions. David and Connor, just big picture, you spoke about, you know, the signed but not yet commenced, ramping up over the next... Or sorry, that pipeline, providing, you know, positive ramp-up over the next few years. I think you said that it was either more than enough to mitigate the store closings or equally offsets. I'm just trying to understand so that, you know, when we look at the company as you guys go forward, you know, it sounds like the demand from tenants is more than enough to offset these store closings that you're experiencing, the Party Cities, Bed Bath, et cetera.
I just wanna 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, you know, giving back space today.
Hey, good morning, Alex. I think you are correctly reading through this with a 310 basis point spread. The SNO pipeline is marching along with executed leases with credit tenants. 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. At this particular point, it still feels like the scale is tilted towards, you know, towards growth, given the SNO pipeline.
I would say, Alex, this year is a perfect example of that. I mean, we just lost our seventh-largest tenant, which is liquidated, Bed Bath & Beyond, which, as of the first quarter, represented 1.7% or 1.8% of base rent. We're expecting to do 1.5% same for this year at the midpoint. Then if you adjust for the prior period reversal headwinds, we've been doing mid-2s despite losing our seventh-largest tenant. 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 SNO pipeline is incredibly unique. It's very different than 2006, 2007, or other periods where you had, you know, bankruptcies, or 2017, we had bankruptcies.
I would just tell you, we're incredibly encouraged, and the size of the tailwind feels like it far outstrips bankruptcies or store closures to date. To David's point, that could change tomorrow, but it's a fairly large tailwind we have over the next two-plus years. The one mitigate, I would just say to the sector, and I made the comment at the last quarter, it feels like this is a tailwind that could drive above-trend growth for the entire sector for the next couple of years. The one mitigate is gonna 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.
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.
Connor, you know, 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. I just wanna make sure I understand those dynamics correctly and can sort of link where third quarter is gonna be versus second quarter. If that's the case, and assuming, again, no more credit issues, it sounds like, third quarter is gonna 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.
Is that correct, that basically revenue is gonna go down $1.8 million G&A resets, and therefore, third quarter, assuming no, you know, interest rate or additional store closings, third quarter is the new base quarter for the company?
I don't wanna say it's the new base for the company, Alex. There's other factors moving them, but your math is correct. We're losing $1.8 billion sequentially. The offset is, as we just discussed, is the SNO pipeline. If you look at our schedule on page six in the slides, we have about $4 million annualized coming in, so call it $1 million a quarter, coming in in the third quarter. I do think commenced occupancy, cash commenced occupancy should be flattish quarter-over-quarter. Then to your point, you have the adjustment on the non-cash piece. Then you're right, you've got a good run rate, ex Bed Bath, in the third quarter.
Okay. Just 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?
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. It was more the unitholders and the structure it was in, as opposed to the fact that they were simply OP units outstanding.
Okay, thanks.
The next question comes from Floris van Dijkum with Laderburge Thalmann Please go ahead.
Morning, guys. Thank you for taking my question. I, you know, it's very encouraging in terms of the leasing. I'm looking at, you know, shop occupancy up 300 basis points year-over-year. I mean, that should really drive your growth and I suspect does drive your growth and your confidence going forward. I just wanted to get you guys to comment on, you know, maybe a little, you know, a couple other, you know, bumps on the road, potentially. In particular, AMC and Jo-Ann, which I think together account for 2.3% of your ABR.
I know there's something came out over last weekend about AMC and its ability to, you know, to keep the lights on, if you will, or to keep funding itself. You know, how are you thinking about that? If you can give a little bit of an update on that. You know, 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's, you know, scares some people when, you know, borrowing at 9.25% for five year money. I'll stop there. I'll, you know, have you guys address those separately.
All right. Good morning, Floris. I'll opine on theaters for a second, and then turn it over to Connor, who hasn't been to a movie theater in nine years. anytime for you to bring it up. I mean, if 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 RVI, 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. To my kind of aforementioned speech about construction costs and redevelopment, a large tract of land that has a building parked at six per 1,000 means that there's a lot of density available on that property. We tried during the pandemic to get a bunch of theaters back from these tenants, and we're unable to do so. What happens going forward is anybody's guess. I don't really have an opinion as to what's gonna 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.
Yeah, Floris, the other tenant you asked about, I mean, I don't think it's appropriate for us to opine on individual tenants. I would just point to our commentary, I think, to Ravi question and a couple of others, that when we've gotten space back, we just have had a successful track record over the last six years of backfilling that space at compelling economics. There are some large format tenants that you just mentioned that have a particularly low rent per sq ft, so the marked 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.
I would just say broadly, you know, for five-year or 10-year money, depending on which tenor you wanna go with, you're talking about all-in rates between 6%-7%. 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. 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, quote-unquote, on multifamily and industrial. You couple that with the performance of open-air retail over the last five+ years, and you could paint the picture or make the case for more capital availability on the debt side for open-air shopping centers. 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. Again, I would point you closer to all-in rates are called 6%-7%, whether you're secured or unsecured.
Whether your tenors five, seven, 10 years, that could change tomorrow, but where, benchmark rates move. I don't think the transaction you're pointing to is really relevant to us or anyone else in the open-air sector.
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? Obviously, you like the land underneath them. You know, even if you get those back, you think you're gonna make money on that longer term. Maybe if we can get some more color on that'd be appreciated.
Floris, I'm happy to send you the list of locations.
Thanks, David.
The next question comes from Ki Bin Kim with Truist. Please go ahead.
Thanks. Morning. You already touched on some of this, on your comments, 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.
The short answer is no, Keven. 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 sq ft shopping center universe, right? We're 121 assets. For our properties, as of today, we're seeing really healthy demand. I don't know how if it's possible to extrapolate that to the entire sector, or the other assets or the other, excuse me, regional space.
With student loan payments mostly resuming, you know, how do you see that impacting your, you know, your customers or your tenants?
Ki Bin, if you look at our tenant roster and locations, it doesn't feel like a student, a kind of middle-income market portfolio. I would remind you that the leases are pretty long term. They tend to do with, you know, large, publicly traded companies. The rent that we get that is not fixed rent, i.e., a percentage of sales, is almost zero. 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.
Yeah, I mean, that makes sense. That wouldn't make an immediate impact to your rental stream. I just meant overall to the environment and how retailers might be leaning in or leaning away from certain decisions.
Yeah. It's a good question. I mean, at this point, the demand is so fierce. You know, even if it took a little bit of steam off of it, there's still quite a bit of demand, and there's just not enough space left.
Got it. Thank you.
The next question comes from Linda Tsai with Jefferies. Please go ahead.
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. You know, how are you thinking about their health post-restructuring, and are you reserving for what you thought post-bankruptcy rents might look like?
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 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. 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 said, accept or reject, the vast majority of those leases.
If that turns out to be the case and we get a couple of those back or all of them back, 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. You know, Samir asked a similar question about that unit size, again, we're just seeing good demand. again, we'll see how it plays out. They're on a cash basis, there really shouldn't be an impact, other than if they have store closures, we'll see how the bankruptcy process plays out.
Where do you expect occupancy to be year-end? I know you said you're gonna get the remainder of the Bed Bath boxes back in 3Q.
I mean, I'd 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. 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. At this time, assuming no material bankruptcies, we would have an uptick from the third to the fourth quarter.
Thanks.
You're welcome, Linda.
The next question comes from Michael Mueller with JP Morgan. Please go ahead.
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?
Sure, Mike. 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. You know, you fast forward a year and a half later, we've been pre-leasing, going through the city municipalities to get entitlements, and Joe Cher and his team have been, you know, kind of preparing these projects for launch. 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.
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, that's why we're able to achieve rents that are kind of in the $60 net range.
Mike, I think the projects that are added to the pipeline are gonna 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. It's really just a continuation of what we've been building, just at different sites, to Dave's point.
Got it. It sounds like mostly outparcels. Is that right?
Yeah, it's generally multi-tenant pad outparcels and then a few single-tenant drive-through outparcels.
Got it. Okay, that was it. Thank you.
Thanks, Mike.
The next question comes from Ronald Kamdem with Morgan Stanley. Please go ahead.
Hey, just 2 quick ones for me. I think the bad debt comment of 125 basis points, how much of that was Bed Bath, number one?
Hey, Ron, it's Connor. Good morning. It's about 100 basis points of the 125, and that 100 basis points is the impact for the full year.
Helpful. And just one more on internal, then another one on acquisitions. As we're thinking about rolling the calendar to 2024, I think you know, you talked about the SNO pipeline being a tailwind, which is great. You obviously have rent bumps, releasing spreads. Is the biggest delta, when we're thinking about the same-store NOI growth function, really going to be the bad debt assumptions based on some of these bankruptcies in the news? Are there other things we should be mindful of in the portfolio?
Yeah, 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 in my response to Alex. Those three pieces, you hit the nail on the head, are gonna drive 2024 in our respective growth.
Got it. 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? 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?
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.
Great. Cap rates and IRRs?
The cap rates is an interesting question because, you know, what we've seen from sellers is a pretty wide range of expectations on going-in cap rate. 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. 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. 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.
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 renewals business. It takes low CapEx, and it has everything to do with your belief and understanding of market rents. 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. 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.
Helpful. Thank you.
The last question comes from Paulina Rojas Schmidt with Green Street. Please go ahead.
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, the bidder did not show up, the variety of the bids, dollar amount paid, et cetera?
Good morning, Paulina. I don't think we were surprised. You know, it was an auction that was so well anticipated. It's one of the few in the last, you know, couple of years that are of that size, there was a tremendous amount of conversation about it. I think, you know, when we met with you in, you know, in the months prior to that, I think what we had said was that the amount of duration left on a chain leases, you know, for a junior anchor, really were not enough, I think, to generate large portfolio transactions of those leases.
You know, 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. 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, you know, a couple of regional tenants came in and bought a few leases. 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.
Okay. Thank you.