Douglas Emmett - Q3 2023
November 1, 2023
Transcript
Operator (participant)
Ladies and gentlemen, thank you for standing by, and welcome to Douglas Emmett's Quarterly Earnings Call. Today's call is being recorded. At this time, all participants are in a listen-only mode. After management's prepared remarks, you will receive instructions for participating in the question-and-answer session. I will now turn the conference over to Stuart McElhinney, Vice President of Investor Relations for Douglas Emmett.
Stuart McElhinney (VP of Investor Relations)
Thank you. Joining us today on the call are Jordan Kaplan, our President and CEO, Kevin Crummy, our CIO, and Peter Seymour, our CFO. This call is being webcast live from our website and will be available for replay during the next 90 days. You can also find our earnings package at the investor relations section of our website. You can find reconciliations of non-GAAP financial measures discussed during today's call in the earnings package. During the course of this call, we will make forward-looking statements. These forward-looking statements are based on the beliefs of, assumptions made by, and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties, and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance, and some will prove to be incorrect.
Therefore, our actual future results can be expected to differ from our expectations, and those differences may be material. For a more detailed description of some potential risks, please refer to our SEC filings, which can be found in the investor relations section of our website. When we reach the question-and-answer portion, in consideration of others, please limit yourself to one question and one follow-up. I will now turn the call over to Jordan.
Jordan Kaplan (President and CEO)
Good morning, and thank you for joining us. Our office leasing activity during the Q3 continued at a strong pace. We executed 225 office leases covering close to 1,000,000 sq ft. Q3 activity had a much higher percentage of new leases as compared to Q2. It also included quite a few new tenants over 10,000 sq ft. All very good news. As we indicated last quarter, one large tenant in Woodland Hills renewed but downsized, which was the primary cause of our negative absorption. Nationally, office faces three challenges. Many commentators have simply focused on the narrative that work from home has permanently weakened office demand. That is wholly inconsistent with our experience and long-term expectations. Once vaccinations became ubiquitous and offices reopened, we saw meaningful jumps in leasing volume, absorption, and building utilization.
It was not until the Fed raised rates to control inflation that we saw the slowdown in large tenant leasing that impacted our absorption. Even with that slowdown, our office utilization has returned to very high levels, which was likely aided by our market's short average commute times and low reliance on public transportation. We feel that the remaining two challenges have had a more meaningful national impact. One of those challenges is that many gateway markets are suffering from new construction overhang as a result of recent overbuilding. Fortunately, that has not been a problem in our markets, where strong supply constraints have limited new construction. In fact, over the past 15 years, our markets have only added 3% to total office inventory. The third challenge, which has been most impactful for us, is that tenants, in particular large tenants, have become cautious about new investment.
This is understandable and likely an intended reaction to the Fed raising the cost of capital to slow the economy. Our results in recent quarters have been significantly impacted by this last factor, though the Fed's intervention is clearly cyclical. This is our fourth experience managing Douglas Emmett through a recession, which typically comes with a mix of pain and opportunity. We feel well prepared for both and are confident in the long-term health and resilience of our markets. With that, I will turn the call over to Kevin.
Kevin Crummy (CIO)
Thanks, Jordan, and good morning, everyone. Our two recent multifamily development projects continue to progress nicely. Our 376-unit Landmark L.A. property in Brentwood is now almost 90% leased. At our office-to-residential conversion in Honolulu, we have completed 424 of the 493 units and are on track to convert another floor into 22 apartments before year-end. We've been leasing these units as fast as we can convert them. As the remaining few office tenants move out, we will convert the last two floors. This quarter, we closed the new $350 million loan that was mentioned in our last call. The loan is secured by the two development properties, which were built using our free cash flow. The new loan bears interest at SOFR + 137 and matures in August 2033.
At Barrington Plaza, our 712-unit apartment complex in Brentwood, a significant majority of the tenants have already vacated in preparation for the installation of upgraded fire life safety systems. Tenants occupying 170 units have the right to remain until next May, and we expect them to move out at an uneven pace in the intervening period. The transaction market has remained slow, but as acquisition opportunities come to market, we are ready with ample liquidity. With that, I will turn the call over to Stuart.
Stuart McElhinney (VP of Investor Relations)
Thanks, Kevin. Good morning, everyone. During the Q3, we signed 225 office leases covering 934,000 sq ft, consisting of 267,000 sq ft of new leases and 667,000 sq ft of renewal leases. As Jordan noted, we are pleased to see more demand from new tenants over 10,000 sq ft. Reflecting the fixed annual rent growth built into our office leases, average rent on our in-place office leases continues to rise, reaching a record high in the Q3. However, as leases expire, these higher ending rents put pressure on cash leasing spreads. Still, the overall value of our new leases increased by 3.6%, even though cash spreads were down 9.7%.
At an average of only $5.59 per sq ft per year, our leasing costs during the Q3 remained well below the average of other office REITs in our benchmark group. Our residential properties continued to perform well during the Q3, providing 18% of our overall revenues, even with increasing vacancy at Barrington Plaza, which is being emptied in preparation for a major fire life safety upgrade. Our portfolio was 99% leased at quarter end, with healthy rent roll-ups across all markets. With that, I'll turn the call over to Peter to discuss our results.
Peter Seymour (CFO)
Thanks, Stuart. Good morning, everyone. Reviewing our results compared to the Q3 of 2022, revenue increased by 0.7%, primarily due to higher tenant recoveries and parking revenue from our office portfolio, and new units delivered in our multifamily portfolio, partly offset by tenants vacating Barrington Plaza. FFO decreased by 15% to $0.45 per share, primarily as a result of higher interest expense on our floating rate debt. FFO decreased 24% to $68.7 million, as we built out more square footage this quarter as a result of higher leasing volume. Same property cash NOI increased by 0.4%, driven primarily by our higher revenues. Our G&A remains very low relative to our benchmark group at only 5% of revenue.
Turning to guidance, we increased our assumptions for occupancy and same-property NOI growth, but the positive impact from these changes was not enough to increase the FFO guidance outside of the range we gave you last quarter. For information on assumptions underlying our guidance, please refer to the schedule in the earnings package. As usual, our guidance does not assume the impact of future acquisitions, dispositions or financings. I will now turn the call over to the operator so we can take your questions.
Operator (participant)
We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. Again, in consideration of other participants, please limit yourself to one question and one follow-up on today's call. To withdraw a question from the queue, please press star then two. At this time, we will pause just momentarily to assemble our roster. Our first question will come from Michael Griffin with Citi. Please go ahead.
Michael Griffin (Senior Equity Research Analyst)
Great, thanks. Maybe just on the leasing front. I'm curious if you need to see larger tenant demand pick up more, kind of in order to see that net absorption rate turn positive, you know, be it later in the year into 2024, and then anything you can comment there would be helpful.
Kevin Crummy (CIO)
Yeah, Michael, thanks. Yeah, so happy to see the, you know, the increase in, in particularly in new leasing in Q3. That was good to see. We need that ratio of new to renewal to be, you know, in that 30% range, because we know, on average, we're going to renew, you know, in that high 60s is kind of where our historical renewal rate is. So we do, we do need to see that new leasing kind of in that range to see positive absorption. Of course, this quarter, we warned you that we had that large move out at Woodland Hills, which drove most of the negative there. So and then, you know, looking at 2024 expirations, you know, we've talked a lot about Warner Bros.
We know that's going to be a headwind for absorption next year when they move out, you know, at the end of Q3.
Michael Griffin (Senior Equity Research Analyst)
Great, thanks. And then with the new term loan, you've got ample dry powder, you know, with cash on the balance sheet. Can you maybe talk a little bit about opportunities you're seeing out there in the market, be it office or multifamily? And how or when we can see you capitalize on potential distress in the market?
Peter Seymour (CFO)
Yeah, I mean, you know, I hope-- I don't want to hope for distress for anybody, but I can't tell you we've seen anyone coming to us with significant distress, although we are working on stuff. I've said before, our preference is to try and buy some of the-- There's some really great buildings that we don't own in these markets, and we still have a real positive view of the markets. But people aren't... I don't think people's private-- It's mostly in private hands, and I don't think their internal values are anywhere around clearly where maybe some people are certainly valuing REITs or anything else similar to that.
Michael Griffin (Senior Equity Research Analyst)
Great. That's it for me. Thanks for the time.
Peter Seymour (CFO)
Thanks.
Operator (participant)
Our next question will come from Alexander Goldfarb with Piper Sandler. Please go ahead.
Alexander Goldfarb (Equity Research Analyst)
Hey, morning out there. I guess, Jordan, to that point, obviously the Blackstone Howard Hughes project has gotten a lot of interest, or sorry, made a lot of headlines, I should say, headlines that is, but clearly is, you know, outside of your core markets. Are there, when you say you guys are working on distress, would you say, or underwriting deals, is it, you know, deals like that, like private equity-type deals from the last cycle that are the ones that you guys are looking at? Or are there other deals, be it like a family that, you know, has loans coming up that they don't have the capital to put in?
Just trying to get a framework for what kind of distress, if it's like the typical sort of over-levered PE-type thing, and not to say the Blackstone deal is that way. Or is it like perhaps long-held family or partnership where the partners just don't wanna put any more money in, and therefore it's quote, unquote, "distress," even though to, to those of us, it wouldn't look like distress.
Jordan Kaplan (President and CEO)
Okay, so the Howard Hughes project hasn't been offered for sale, just by the way, but it. But it—I know I've been reading the same articles you guys have been reading. The stuff that I'd say we're working on the hardest or the most hopeful are some—a lot of assets have been owned for a very long time by families that might, you know, have debt coming up, or the debt coming up is gonna be at a much higher rate, or do they wanna put, you know, a lot of capital in to remargin those loans at this time? It's that—it's some of it is that kind of thing, and some of it is what you were describing.
You know, you were kind of loosely having Howard Hughes represent, which is, you know, institutionally owned real estate, that the institution certainly could put the money in to remargin, but they're just not, and they're going, "We don't wanna... We're not happy with this any, you know, with, with owning this. We've gone too long." I mean, you gotta remember, a lot of these guys, we've gone through a oddly long period. I mean, we had COVID, which was its own thing, has been a lot worse than anyone might have imagined of any one of these events happening. So it's worn out some big institutional companies in terms of, you know, their ownership, and they've just said, "We're sick of screwing with this.
Alexander Goldfarb (Equity Research Analyst)
Okay. And then the second question is, on the Barrington, can you just sort of walk through, you know, what is reflected in the Q3, as far as the impact, and then the remaining 170 units, that's through I guess, you guys said May of next year. But just wanna understand, you know, is all of... You know, basically, where are we with regards to modeling and the Barrington impact? How much more should we take out for the Q4 based on the move-outs that occurred during the Q3, and then trying to get a sense of the earnings impact when the remaining 170 units vacate?
Jordan Kaplan (President and CEO)
Well, there's less than 200 tenants in there right now. So it's pretty impacted. And,
Alexander Goldfarb (Equity Research Analyst)
No, but is 3Q the full impact of all of those move-outs to date, or? That's what I'm trying to get at.
Jordan Kaplan (President and CEO)
No, no. No. I mean, there's still people moving out. People moved out last week. I've had people... Go ahead.
Peter Seymour (CFO)
Yeah, it's Peter, Alex. The people who are still in, they still pay rent. They have to pay rent in order to stay in. So you're gonna, you know... So now you know how many people have the right to stay until May, and then it's anybody's guess how fast, you know, they move out, and we've got the holidays coming up, and we've got, you know, in until May, and, you know, that trajectory ultimately gets down to zero, but we don't, you know, we don't know the pace that it's gonna move at.
Alexander Goldfarb (Equity Research Analyst)
No, I understand that, Peter, but I'm trying to get at, in the Q3, how much, how much of the impact, because presumably, the people didn't move out the first day of the Q3. So the people who-
Jordan Kaplan (President and CEO)
That's right, so-
Alexander Goldfarb (Equity Research Analyst)
How many more tenants would it be?
Jordan Kaplan (President and CEO)
I mean, I don't think we're pretty even, even if I was happy to just tell you that, I don't know the number, and I don't think anyone here knows the exact number.
Peter Seymour (CFO)
So I mean, I'll say one other thing. So there was a big day, which was the beginning of September, when a large number of people had a deadline to move out. So people were moving out in advance of that, but a lot of... There was a lot of activity in September. So I don't think you've seen the-
Jordan Kaplan (President and CEO)
Yeah, I think the Q4 will be a lot less in that building than the Q3. I'll even go more that I, I actually think there will be meaningless rounding error of people, like, as you get into Q2 of next year.
Alexander Goldfarb (Equity Research Analyst)
Okay, thank you.
Jordan Kaplan (President and CEO)
So that's the speed things are going.
Alexander Goldfarb (Equity Research Analyst)
Okay, thank you.
Operator (participant)
Our next question will come from Blaine Heck with Wells Fargo. Please go ahead.
Blaine Heck (Executive Director and Senior Equity Research Analyst)
Great, thank you. So just to clarify on guidance first, you know, clearly there were some positive revisions with respect to occupancy and same store, but can you just talk a little bit more about the decision not to boost FFO guidance, and whether there are any factors that might be kind of offsetting those improvements, or is it just kind of conservatism, given the overall environment?
Peter Seymour (CFO)
Yeah, I mean, it's Peter again. I mean, look, we did have some slight positives, you know, adjustments to our assumptions, but they weren't enough to take us outside the range. And, you know, we just talked about Barrington, which of course, we can't predict very well.
Blaine Heck (Executive Director and Senior Equity Research Analyst)
Okay, that's helpful. Probably, sticking with you, Peter, we noticed that the line of credit expired during the quarter, and it didn't look like it was renewed or recast. Can you just talk about that decision, kind of whether you have the ability to replace it, but just didn't like pricing, and you know, I guess whether the process to establish a new line in the future is any more difficult than it would've been to keep one in place this quarter?
Jordan Kaplan (President and CEO)
Number two, we didn't like the pricing. So when you look at the cost. So first of all, it's expensive to borrow for office right now. I don't think there's any secret about that. And then when you, when we're a company that is typically, we also have cash, and we don't tend to be huge users of our credit line. I think they want to charge even more and, and now, and really gigantic on use fees. And when you look at it, you kind of end up feeling like, wow, I mean, I'd rather just do a loan and get the interest in the bank than pay this colossal fees to get into it, and then colossal on use fees of not even having the money. So it was just priced outside of what we thought was reasonable.
Now, we still like, it was secured by six buildings, and now those buildings are completely no debt on them. And by the way, there's still, you know, there's 30+ buildings that are that way. So, we have a ton of buildings that we could use to secure a credit line, but the, it's very poor economics right now.
Blaine Heck (Executive Director and Senior Equity Research Analyst)
Great. Thank you guys.
Jordan Kaplan (President and CEO)
Thanks.
Operator (participant)
Our next question will come from John Kim with BMO. Please go ahead.
John Kim (Managing Director and Equity Research Analyst)
Thank you. Can you just talk about the uplift in your occupancy guidance for the year? It looks like there's still a lot of leasing you need to do, and leasing activity was up quite a bit this quarter. But just wanted some additional color on the change in guidance.
Kevin Crummy (CIO)
Yeah, I think that, you know, I think we did a little bit better on leasing than we expected, so that was reflected in the range. But, you're right, we still got a lot of leasing to do in Q4, and that's certainly what we're focused on. That's been the focus around here, as we've been saying for, you know, a lot of quarters here now, is office leasing, and getting back to positive absorption is our number one focus. So that remains true.
Jordan Kaplan (President and CEO)
You know, I in my opening remarks, I said, you know, this quarter, I was glad to see we did a little better on new, and we did a little better on larger new. And like both of those are really kind of, that's the issue, because we're doing a good amount of renewal, we're doing a good amount of small tenants. So, that's what. There's one quarter doesn't create a pattern for sure, and it might've just been a good quarter. But that's kind of what you want to keep an eye out for, because that's where we, that's what we mostly see driving our negative absorption.
John Kim (Managing Director and Equity Research Analyst)
And Jordan, those new leases, are those tenants that are downsizing from other spaces, or are they businesses that have been built up or emerged and now leasing, looking to lease office space?
Kevin Crummy (CIO)
I think we see a mixed bag of everything. I mean, we've got guys growing, we've got new business formation, we've got guys moving from other buildings. So, you know, we did 225 deals, so you get a lot of variety of kind of story behind those deals. That's, that's always true and kind of typical for what we're used to seeing.
John Kim (Managing Director and Equity Research Analyst)
Okay. Thank you.
Operator (participant)
Our next question will come from Jay Poskitt with Evercore. Please go ahead.
Jay Poskitt (Equity Research Associate)
Hey, thanks for taking my question. I was wondering if you could just provide a breakdown, just the leasing pipeline, between new and renewal tenants and just some of the main industries that are looking for space now.
Kevin Crummy (CIO)
Yeah, Jay, we don't, we don't provide pipeline, you know, new renewal like that. We've. That's not something we've ever focused on. We, you know, we're kind of a flow business with all these small tenants and, and so many transactions happening. So. And it's, it's a relatively short pipeline. As you know, we're not negotiating leases, excuse me, for, you know, for the end of 2024. We're, we're still working on, you know, 2023 leasing and Q1 2024 leasing in the pipeline that we've got. So, no real color to provide there. As far as the industries, it's, you know, you can look at the pie chart in our supplemental and assume that it's gonna look pretty much just like that. We haven't seen any real major changes in, in trends among the industry.
So still very diverse, still pretty typical for what we've historically seen.
Jay Poskitt (Equity Research Associate)
Yeah.
Jordan Kaplan (President and CEO)
I think that pie chart barely moves. I mean,
Go back-
... If you look at it, yeah, you can go back, way back, and you'll go, "Wow, they've had the same mix of industries and tenants for a very long time." And, similarly, we have another chart in there that represents the size of our tenants that has been very consistent for a very long time.
Jay Poskitt (Equity Research Associate)
That's helpful. Thank you. And then just a quick question on the renewal percentage in the quarter. I know you had that one larger tenant that renewed but downsized. I was just wondering if there's anything else that helped drive that higher retention in the quarter?
Kevin Crummy (CIO)
Yeah, I don't know that it was. I know you, in your note, focused on kind of the remaining expirations that we showed you at 63, that we had left to do. You're right, that we did renew a slightly higher percentage. Actually, a meaningfully higher percentage, with a quarter to go than we had typically over the prior year. But you know, I think that was just timing of a couple of guys waiting, you know, a little longer to make their renewal decision, so that it fell into Q3 rather than in the quarter before that, which might be more typical.
Jay Poskitt (Equity Research Associate)
That's great. Thanks.
Operator (participant)
Our next question will come from Upal Rana with KeyBanc. Please go ahead.
Upal Rana (Senior Equity Research Analyst)
Hey, thanks for taking my question. I just want to circle back to Barrington Plaza just quickly. You know, do you fully intend to expect all the tenants to be out by May of 2024? And when do you expect the sprinkler installations to be complete? So I just, I'm just trying to look for a sense of timeline here for the going forward.
Jordan Kaplan (President and CEO)
Yeah, I expect the tenants to be out, and it's years to do all the fire life safety work and all the modifications that, I mean, you know, obviously, it had to be years because we had to vacate all the buildings, and to do all the work that the city required is an immense project. I mean, years, you know, three, four, a while.
Upal Rana (Senior Equity Research Analyst)
Okay, great. Thank you. That was helpful. And then in regards to the space that Warner Bros. is giving back next year, you know, how confident are you in potentially leasing that up, maybe before they exit the space?
Jordan Kaplan (President and CEO)
I would not say we're confident that we're leasing it up before they exit the space. I would say that—I'll give you... I can tell you this, that market, historically in L.A., like, 30-year run, has been one of the best markets in L.A. Now, with that said, there's a lot of turmoil, and it's driven by the fact that the studios actually have their studios there. I mean, so it's not just like, they might have office space there. I mean, there's studios all right there. It's called the Media District for the right reason. And so, like, for instance, the building that we own that's being vacated, has never had one foot vacant for 30 years. So a fantastic market. Now, what's happening right now? Right now, large tenants are pulling back. There's a lot of consternation in the entertainment industry.
So, you know, this happens to be coming, maybe reasonably, because it's a studio that's in there, at not a great time to have vacancy there. It's the long-term prospects for the building are outstanding because it's a fantastic market. But right now, I haven't seen where, like, a lot of the large tenant deals happening. So, you know, this is a fantastic building. It's extremely well located. I mean, I could tell you a lot of great stuff about the building, but it's also gonna be a big job to lease it up.
Upal Rana (Senior Equity Research Analyst)
Great. That was, that was helpful. Thank you.
Operator (participant)
Our next question will come from Dylan Brzezinski with Green Street. Please go ahead.
Dylan Burzinski (Senior Research Analyst)
Hi, guys. Thanks for taking the question. I guess, just any update on some of the zoning changes that were made at the state level for multi-family zoning that you guys have?
Jordan Kaplan (President and CEO)
Well, the state has been our friend in this. And so there was AB-2011, which LA just gave guidance on. This is in July, and it allows us to do a zone change without a public hearing process, and it waives CEQA if there's an affordable component. And so, you know, that's great for getting more housing done and getting around the NIMBY squad in L.A. And so the state has been throwing things out. Some are helpful, some aren't, but you know-
Kevin Crummy (CIO)
That one was real helpful.
Jordan Kaplan (President and CEO)
That one was super helpful.
Kevin Crummy (CIO)
Yeah, that one was like telling kids they no longer have to take the SATs to go to college. I mean, that's a big one.
Dylan Burzinski (Senior Research Analyst)
Does that change sort of any immediate impact on projects outside of Barrington, or is this still a longer-term process?
Jordan Kaplan (President and CEO)
Shorter than it was before that, much shorter. It's the value we've been talking about, and it's a very concrete realization of the impact of sites that we own. That change happened. That's a really big change. I mean, you guys won't see it because we still have to go through, you know, the city's process to get entitlements, and we have to want to build the buildings and think it's the right time and right construction costs and everything. But, I mean, it's a completely different conversation and much more able to realize in a timeline that's con- you know, like, where you're making a decision in that same time period. It's really big.
Dylan Burzinski (Senior Research Analyst)
Great. That's all I had. Thank you.
Operator (participant)
Our next question will come from Rich Anderson with Wedbush. Please go ahead.
Rich Anderson (Managing Director and Senior Equity Research Analyst)
Hey, good morning out there. First question, you know, you're thought of as an office REIT, but we talk more and more about multifamily lately for all the different things that you're doing. You know, we have a fair amount of your REIT peers that look at L.A. and Southern California in general and say, you know, want to get out of here, given all the regulatory political risks of owning multifamily real estate in this area of the country. Have you had any interest, or have you seen any of that come to market and market-rate type multifamily product from pure REITs that might become interesting to you? Is that a part of your pipeline?
Jordan Kaplan (President and CEO)
We're seeing multifamily. We are more than we're seeing, quality office that we want. Some of it's new, some of it's coming off a construction loan. I mean, Kevin, you can talk about it, kind of, I don't know.
Kevin Crummy (CIO)
Yeah, it's definitely a combination of some institutional owners that are looking to get out, and multifamily in L.A. is still attractive relative to other markets. And then we also have seen some people who bought with floating rate debt and were planning on doing a repositioning that are getting squeezed right now. And so-
... But I wouldn't say that there's a wholesale abandonment of L.A. due to the politics. It's the politics have moved a little bit left, and we're all working on moving that back to the center. But, you know, keep in mind, those politics that make it difficult to build also make it great to own.
Jordan Kaplan (President and CEO)
Yeah, I think, to say, I think Kevin said it real accurate, which is, if you wanna generate profit or money or capital, you can still sell apartments in these markets at pre- very low cap rates.
Kevin Crummy (CIO)
Yeah.
Jordan Kaplan (President and CEO)
Those trades are happening. They, I mean, it's why I keep saying to you guys, we can build way cheaper in terms of cap rate than what people are selling apartments for right now.
Rich Anderson (Managing Director and Senior Equity Research Analyst)
Okay. Good enough. Okay, and then second question from me is, and you probably get a derivative of this question every other quarter about expanding your geographical horizons, but this is a different world and different environment, and you said you're not seeing stress, but you're waiting and looking. What would you say about nearby markets to the extent that you have some intel there, like Orange County or San Diego? I mean, does that ring a bell to you at all in terms of having a look at, or are you sticking to your knitting where you are now?
Jordan Kaplan (President and CEO)
I would love to give you, like, a long talk about the market and give you a long and real great-sounding answer, but the short answer is what you said. Coming from the book from the 80's, about the 10 habits of successful companies when they go stick to your knitting, and that's what we're doing.
Rich Anderson (Managing Director and Senior Equity Research Analyst)
Okay. That's good enough for me. Thank you.
Jordan Kaplan (President and CEO)
I mean, I think, I think our markets are fantastic. I try to—I know we haven't gotten any questions about, like, the three things I laid out in, in the, in the prepared remarks. But I really tried to say in those prepared remarks, like, here's what's impacting office, and this is why I'm so optimistic about our buildings and our markets and our tenant demand. And I just, I just can't find a better mix of drivers, supply constraints, environmental and quality of life, I mean, the whole deal, than the markets that we're focused on here. And when we go to another market, everybody goes, "Yeah, but you can build a ton," or whatever the case may be. And I mentioned the overbuilding is one of the issues.
And then, of course, we also have the super good short commutes here and, the housing nearby and, you know, the supply constraints. So I just... It's very hard to find a mix that's that good in the other markets. Although, I think it's now more people are realizing, I mean, obviously, San Francisco has a very powerful drivers in the universities they have there, and I think their prices have gone way down, probably have gone too low at this point, but I would still save our capital to do stuff here.
Rich Anderson (Managing Director and Senior Equity Research Analyst)
Well, fair enough. Thanks very much.
Operator (participant)
Our next question will come from Camille Bonnel with Bank of America. Please go ahead.
Camille Bonnel (Director of Equity Research)
Hello. So bigger picture, think your leasing teams deserve credit for the activity to date, just given this challenging market. However, if we look at the portfolio's occupancy trends, it really hasn't been enough to offset the declines in since 2019. So are you seeing this vacancy being concentrated in one or a few of your assets? And can you talk to the sort of downtime you're seeing in some of this vacancy?
Kevin Crummy (CIO)
Yeah, Camille. No, we're not seeing vacancy concentrated in any particular assets. I mean, if you look at the sub-market stats we give you, you know, unfortunately, we've seen declines kind of across markets as we've faced the challenges of COVID and now facing the, you know, the challenges, the more recent challenges that Jordan spoke about in his prepared remarks. So, it's not a specific asset issue, it's really a demand issue based on the kind of uncertainty in the market. We have primarily small tenants, and when they're feeling good about their business and they're in growth mode, then we see incredible pickup, and we know that that we can turn things around quickly here and get good positive absorption in growth cycles. But we haven't seen that yet.
I mean, we've—we're still facing some downsizing from large tenants that we mentioned, and, and so far, the, you know, the trend has, has still been slightly negative. So we just need to see that turn around. We just need to see the confidence change in, in those, in those small guys, and then the larger guys feel more comfortable about growing again.
Jordan Kaplan (President and CEO)
But what you said about the leasing group is something we've said in good markets, which we've said we've spent a ton of money building a very, very sophisticated leasing platform in order to, you know, obviously, make the highs higher and make the lows less low. And I mean, we're doing. If you look at just the amount of leasing we're doing, we're doing an incredible amount of leasing. I mean, we've had now two quarters that were close to 1 million feet. That's a lot of leasing. I mean, I look at our peers that are 3 times our size, 4 times our size, we're doing more leasing than they're doing. So we're, there's a ton of activity, and we have the platform that's designed properly to really capture our fair share and more than our fair share of that activity.
As Peter alluded to, and as I said, I really do believe this is a function of the, you know, larger tenants doing exactly what the Fed has asked them to do, which is shrink back. I mean, they're making capital more expensive. They're trying to shrink the economy. They said, "We know there's gonna be a lot of pain. We wanna cut, we wanna address inflation." And people running large companies that would normally be saying, I'm opening this new division, I'm doing this new thing, I'm gonna do this, whatever, this new movie or whatever it is, are all in the mode of, I'm cutting—here's how I'm cutting expenses. And when I read, outside of our industry, I'm constantly reading about people's plan for cutting expenses.
So of course, it's impacting these guys, but that is—that's the cyclical effect of a recession. That's the point I was trying to make in my prepared remarks. Wow, are you using, like, a 1970s typewriter?
Camille Bonnel (Director of Equity Research)
I like the mechanical typewriters there. It's good feedback. I guess the point is, you know, from a liquidity standpoint, and granted, yes, you're doing a lot of leasing activity, but there's still occupancy pressures going forward just based on your lease expiration schedule. So how do you balance that liquidity and the flexibility you have on the balance sheet with the declining or risk of declining income versus opportunistic investments in this type of market?
Jordan Kaplan (President and CEO)
Well, we've been balancing it for the last three or four years, same way we've been doing it. We have plenty of cash flow to do our leasing, so that's not really an issue. Even in excess of the dividend and everything else. I mean, and even after we finished all our leasing and paid all our TIs, we still have plenty of cash flow.
Camille Bonnel (Director of Equity Research)
Okay, thank you.
Operator (participant)
Our next question will be a follow-up from John Kim with BMO. Please go ahead.
John Kim (Managing Director and Equity Research Analyst)
Thank you. I wanted to get an update on the bad debt that you had during the quarter. A lot of your multifamily peers talked about this quite extensively this quarter, and also if Barrington has had an impact on bad debt, I could imagine some of these tenants being kicked out, maybe bad actors.
Peter Seymour (CFO)
Yeah, it's Peter. I mean, we're really not seeing anything out of the ordinary in terms of bad debt on the multifamily side. So I'm not sure exactly what you're referring to with the other companies, but you know, we're seeing good payment, good collection trends on the multifamily side. And you know, I don't think there's a meaningful impact from Barrington.
John Kim (Managing Director and Equity Research Analyst)
Would you say bad debt has come down since the Q2?
Peter Seymour (CFO)
Well, we never-
Jordan Kaplan (President and CEO)
As a percentage, as a percentage of our collections in the quarter?
Peter Seymour (CFO)
We never had all that much bad debt on the multifamily side to, you know, to begin with.
Jordan Kaplan (President and CEO)
Yeah, they're not very far to come. There's nothing to come down. I mean, pretty much everyone pays.
John Kim (Managing Director and Equity Research Analyst)
Okay. And looking at your top tenants list, I'm just curious, the tenant that you mentioned that downsized during the quarter, was it among your top five tenants? There were a couple of very small movements this quarter. And then secondly-
Peter Seymour (CFO)
No.
John Kim (Managing Director and Equity Research Analyst)
This is going back a couple of quarters. What happened to Macerich? They fell off your top 10 list.
Peter Seymour (CFO)
Yeah. So John, no, the tenant that I mentioned that downsized in Q3 was not on that top list. That list, I think we cut off at 1% of our rents.
Jordan Kaplan (President and CEO)
You gotta understand, that list is a tenant that could have, like, 20 locations.
Peter Seymour (CFO)
Yeah. So we give you the, we give you the ones, the tenants that are over 1% of our rent, which is kind of how we assign that list. And, and Macerich fell off that when they downsized a little bit, I think last year, and fell out of that. And then, but the, but the other tenant I mentioned was not on that list to begin with.
John Kim (Managing Director and Equity Research Analyst)
Okay, thank you.
Operator (participant)
And again, if you have a question, you may press star then one to join the queue. Our next question will come from Bill Crow with Raymond James. Please go ahead.
Bill Crow (Managing Director)
Hey, good morning, I guess, out there. Jordan, question for you. Years ago, we talked about the potential of reducing your equity investment in Hawaii, and I don't think that market has gotten much discussion in the last few quarters. Is it more tempting, given that you're seeing some acquisition opportunities in L.A., to start to think about downsizing your Honolulu exposure?
Jordan Kaplan (President and CEO)
It would be more tempting if we weren't making so much money in Hawaii. I mean, that's a really successful market now for us. But so you're right to say that. It has to be structured correctly. You're smart to remember that. That had more to do with... We have a lot of construction opportunity there for units, and it presents a great opportunity to bring in a partner for capital to do that with what we already own there. But I don't right now, it hasn't gotten much discussion because it's not, you know, a big one on our list right now to start. We have some new construction we can start out.
We have units we can build out there right now, but we don't like the combination of construction costs against which the rents are good, but construction costs are a little out of control. So we're watching it more for a while, but it is a really good market to bring capital into, to joint venture with us to do that. And we actually have people that want to do that. So we're the ones that are, like, kind of putting that on hold for a little while.
Bill Crow (Managing Director)
... Okay. Follow-up question, different subject, but the step-up in the parking revenues, curious whether that's a volume issue or whether that's a rate issue?
Jordan Kaplan (President and CEO)
Uh.
Peter Seymour (CFO)
You're just talking about the increase in parking and other income.
Bill Crow (Managing Director)
Yeah, I'm curious whether you're getting more activity levels or... I'm sorry?
Peter Seymour (CFO)
No, it's been a steady. It's Peter speaking. It's been a relatively steady increase as utilization, you know, just continues to... It was relatively high last year, but it's higher now.
Jordan Kaplan (President and CEO)
Well, I hope it's both. I hope it, it's we're getting a little more for the spaces, and I suspect it has more, I mean, it has a lot more to do with just more people coming in.
Bill Crow (Managing Director)
Yeah. Well, that's what I'm trying to get at,
Jordan Kaplan (President and CEO)
Yeah.
Yeah. Okay. All right, thanks for the time, guys.
Thank you.
Operator (participant)
Our next question will come from Steve Sakwa with Evercore. Please go ahead.
Steve Sakwa (Senior Managing Director)
Yeah, thanks. Good morning, Jordan. I just wondered if you've made any progress with the insurance companies, broadly speaking, on the payments for the Barrington redevelopment?
Jordan Kaplan (President and CEO)
Well, is it progress to know that we're in heated disagreements? Because we've definitely gotten that far. We're in, you know, extreme disagreement with those guys, and we have a lot of wood to chop there. We're obviously not letting it go as they want us to do, so this is gonna take years, probably, to work out. It's gonna... But, you know, it is what it is.
Steve Sakwa (Senior Managing Director)
Okay, and then maybe just circling back on some of the questions around development. I mean, it sounds like, you know, you're maybe tapping the brakes or not aggressive about moving forward. I guess, what would it take? You know, you got some entitlements on some other Honolulu assets. You know, I think you own a bunch of other redevelopment sites for multifamily in L.A. You know, I guess, what would yields need to be on your capital, or how much have you raised them, and I guess, where are you relative to those new hurdles to potentially start a project?
Jordan Kaplan (President and CEO)
Well, that's a good question. So I think a lot of that, why we're not. Because it's funny, I mean, even now, what Kevin said, some of these sites are in LA. In LA, I mean, not in Hawaii. In Hawaii, we have a lot of by-right. But some of these sites in LA are, like, verging on by-right now with these changes, which is incredible. I mean, incredible. And I'm talking about by-right, like, a major amount of units and on sites we own. But then, of course, still, and I will also say, to argue for it, is that there. That, I mean, even today, at today's numbers, much higher cap rates than what anything's trading for. So the last thing you get to is, well, how do we want to use our capital?
So do we want to use our capital to just start building apartment buildings in places where now we can do it? Do we want to use our capital to buy buildings, which probably wouldn't be apartment, probably be office? I mean, you know, we obviously want to use some to guard our building. I mean, we have a whole list of uses, and an easy one that you don't have to do now because it's still gonna be there, like, it's building these apartments. So that was an easy one to put on hold and go, "Well, we're gonna save capital for some of these other things," and if nothing materializes, then probably we will use it to do that or bring some partners in to do that or do...
But right now, it's an easy one to put on hold because it's not something that's gonna go away.
Steve Sakwa (Senior Managing Director)
Great, thanks. That's it for me.
Operator (participant)
This concludes our question and answer session. I would like to turn the conference back over to Jordan Kaplan for any closing remarks.
Jordan Kaplan (President and CEO)
Well, thank you all for joining us, and we look forward to speaking with you again next quarter. Goodbye.
Operator (participant)
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.