Douglas Emmett Inc
NYSE:DEI
Earnings Call Analysis
Q3-2023 Analysis
Douglas Emmett Inc
Despite facing challenges such as overbuilding in gateways markets and cautious investment activity due to higher costs of capital, our office leasing activity remained robust with 225 leases executing nearly one million square feet in the third quarter. A significant increase in new leases suggests that the demand narrative remains strong in our markets where short commutes and limited reliance on public transportation have contributed to high levels of building utilization. Notably, our properties have not been heavily impacted by new construction, with markets only expanding office inventory by 3% in the last 15 years.
Our multifamily developments have been progressing smoothly. The Landmark L.A. property is almost fully leased, and our Honolulu office-to-residential conversion is fast filling up, with further conversions planned. We closed a $350 million loan, securing liquidity and underscoring our strong cash flow situation. Although the transaction market has slowed, we are well-prepared for acquisition opportunities with our financial position.
Our leasing dynamics continue to favor growth, with increases in average rent reaching record highs despite pressure on leasing spreads. We maintain low leasing costs and, with a 99% leased residential portfolio achieving healthy rent increments, our residential properties accounted for 18% of overall revenues even as we prepare for upgrades at Barrington Plaza.
We've seen a moderate revenue increase of 0.7% from last year, primarily from higher tenant recoveries and parking revenue in our office segment combined with contributions from our multifamily properties. However, higher interest expenses on floating-rate debt led to a 15% decrease in FFO per share and a 24% decline in AFFO. We've raised our occupancy expectations and same-property NOI growth in our guidance, maintaining a conservative approach amid market uncertainties.
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Ladies and gentlemen, thank you for standing by, and welcome to Douglas Emmett's quarterly earnings call. Today's call is being recorded. [Operator Instructions]. I will now turn the conference over to Stuart McElhinney, Vice President of Investor Relations for Douglas Emmett.
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. [Operator Instructions] I will now turn the call over to Jordan.
Good morning and thank you for joining us. Our office leasing activity during the third quarter continued at a strong pace. We executed 225 office leases covering close to 1 million square feet. Third quarter activity had a much higher percentage of new leases as compared to second quarter. It also included quite a few new tenants over 10,000 square feet, 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 3 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 markets short average commute times and low reliance on public transportation. We feel that the remaining 2 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.
Thanks, Jordan, and good morning, everyone. Our 2 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 2 floors.
This quarter, we closed the new $350 million loan that was mentioned in our last call. The loan is secured by the 2 development properties, which were built using our free cash flow. The new loan bears interest at SOFR plus 1.37% 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.
Thanks, Kevin. Good morning, everyone. During the third quarter, we signed 225 office leases, covering 934,000 square feet, consisting of 267,000 square feet of new leases and 667,000 square feet of renewal leases. As Jordan noted, we are pleased to see more demand from new tenants over 10,000 square feet. 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 third quarter. 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 square foot per year, our leasing costs during the third quarter remained well below the average of other office REITs in our benchmark group.
Our residential properties continue to perform well during the third quarter, 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.
Thanks, Stuart. Good morning, everyone. Reviewing our results compared to the third quarter 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. AFFO decreased 24% to $68.7 million, as we built out more square footage this quarter as a result of higher leasing volume, and 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 Instructions] And our first question will come from Michael Griffin with Citi.
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 via later in the year into 2024. And anything you could comment there would be helpful.
Yes, Michael, thanks. So happy to see the increase in -- particularly in new leasing in Q3. That was good to see. We need that ratio of new to renewal to be in that 30% range because we know on average, we're going to renew in that high 60s is kind of where our historical renewal rate is. So we do need to see that new leasing kind of in that range to see positive absorption, of course, this quarter. We warrant you do we had that large move-out in Woodland Hills, which drove most of the negative there. So -- and then looking at '24 expirations. 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 at the end of Q3.
Great. And then with the new term loan, you've got ample dry powder with cash on the balance sheet. Can you maybe talk a little bit about opportunities you're seeing out there in the market, be at office or multifamily? How or when we can see you capitalize on potential distress in the market?
Yes, I may -- I don't want to hold 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 are some really great buildings that we don't own in these markets, and we still have a real positive view of the market. 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.
And our next question will come from Alexander Goldfarb with Piper Sandler.
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 outside of your core markets, are there -- when you say you guys are working on distress, would you say or underwriting deals, is it 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 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 want to put any more money in, and therefore, it's "distressed" even though to those of us that wouldn't look like distress.
Okay. So -- the Howard Hughes project hasn't been offered for sale, just by the way, but 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 -- a lot of assets have been owned for a very long time by families that might have debt coming up or the debt coming up is going to be at a much higher rate, or do they want to put a lot of capital into remargin those loans at this time. It's that -- some of it is that kind of thing. And some of it is what you described -- you were kind of loosely having Howard Hughes represented, which is institutionally owned real estate that the institution certainly could put the money into remargin, but they're just not and they're going -- we don't want we're not happy with this and with donning this, we've gone too long.
I mean you got to remember, a lot of these guys, we've gone through an oddly long period. I mean, we had COVID, which was its own thing, and now we're in what I would call like probably what would be a typical recession or a recession over the last couple of years. But adding the 2 together has been a lot worse than anyone might have imagined of any 1 of these events happening. So it's worn out some big institutional companies in terms of their ownership, and they're just stick a [ screw ] with this.
Okay. And then the second question is on the Barrington, can you just sort of walk through what is reflected in third quarter as far as the impact and then the remaining 170 units that's through, I guess, you guys said May of next year. But I just want to understand, is all -- basically, where are we with regards to modeling and the Barrington impact? How much more should we take out for the fourth quarter based on the move-outs that occurred during the third quarter and then trying to get a sense of the earnings impact on the remaining 170 units vacate.
Well, there's less than 200 tenants in there right now. So it's pretty impacted.
Is 3Q the full impact of all of those move-outs to date? Or that's what I'm trying to get at?
No. No. I mean, there are still people moving out. People moved out last week. People -- go ahead.
Yes. Hi, 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 going to -- so now you know how many people have the right to stay until May and then it's anybody's guess how fast they move out and they got the holidays coming up, and we've got in until May. And that trajectory ultimately gets down to 0, but we don't know the pace that it's going to move at.
No, I understand that, Peter, but I'm trying to get at, in the third quarter, how much of the impact because presumably the people didn't move out the first day of the third quarter. So the people -- so how many [ rents they'll pay ].
I mean I don't think we 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.
I'll say one other thing. So there was a big day which was 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 this.
Yes, I think the fourth quarter will be a lot less in that building than the third quarter. And I'll even go more that I actually think there will be meaningless rounding error of people like as you get into second quarter of next year.
And our next question will come from Blaine Heck with Wells Fargo.
So just to clarify on guidance first, clearly, there were some positive revisions with respect to occupancy in 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?
Yes. I mean -- it's Peter again. I mean, like we did have some slight positive adjustments to our assumptions, but they weren't enough to take us outside the range. And we just talked about Barrington, which, of course, we can't predict very well.
Okay. That's helpful. And 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 be [Indiscernible]. Can you just talk about that decision kind of whether you have the ability to replace it, but just didn't like pricing? And I guess whether the process to establish a new line in the future is any more difficult than it would have been to keep one in place this quarter?
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 -- we're a company that [ prickly ], 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 now and really gigantic unused 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, then pay this colossal fees to get into it, and then colossus 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 6 buildings. And now those buildings are completely no debt on them. And by the way, there's still -- there's 30-plus buildings that are that way. So -- we have a ton of buildings that we could use to secure a credit line, but it's very poor economics right now.
And our next question will come from John Kim with BMO.
Can you just talk about the uplift in your occupancy guidance for the year? 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.
Yes. 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 a lot of quarters here now is office leasing and getting back to positive absorption is our #1 focus. So that remains true.
In my opening remarks, I said 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 have just been a good quarter. But that's kind of what you want to keep an eye out for because that's what we mostly see driving our negative absorption.
And Jordon, those new leases, are those tenants that are downsizing from other spaces? Or are they businesses that have been built up or emerge and now looking to lease office space?
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 we did 225 deals, so you get a lot of variety of kind of story behind those deals. And that's always true and kind of typical for what we're used to seeing.
Our next question will come from Jay [indiscernible] with Evercore.
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 safe now?
Jay, we don't provide pipeline, new renewal like that. That's not something we've ever focused on. We're kind of a flow business with all these small tenants and so many transactions happening. So -- and it's a relatively short pipeline. As you know, we're not negotiating leases for the end of 2024. We're still working on 2023 leasing and Q1 '24 leasing in the pipeline that we've got. So -- no real color to provide there. As far as the industries, it's -- you can look at the pie chart in our supplemental and assume that it's going to look pretty much just like that. We haven't seen any real major changes in trends among the industry. So still very diverse, still pretty typical for what we've historically seen.
I think that pie chart barely moves. I mean if you look at it, yes, you can go back way back, and you'll go, wow, they've had the same mix of industries and tenants for very long time. And similarly, we have another chart in there that represent the size of our tenants that has been very consistent for a very long time.
That's helpful. 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 attention in the quarter?
Yes. 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 630 that we had left to do. And you're right that we did renew a slightly higher percentage. It's actually a meaningfully higher percentage with a quarter to go than we had typically over the prior year. But I think that was just timing of a couple of guys waiting 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.
And our next question will come from Upal Rana with KeyBanc.
I just want to circle back to Barrington Plaza just quickly. 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'm just trying to look for a sense of timeline here for the -- going forward.
Yes. I expect the tenants to be out. And its a -- it's years to do all the fire life safety work and all the modifications that I mean, obviously have 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 years in years 3, 4 -- it's a while.
Okay. Great. That's helpful. And then in regards to the space that Warner Bros has given back next year, how confident are you in potentially leasing that up maybe before they exit the space?
I would not say we're confident that we're leasing it up before they exited the space. I would say that -- I'll give you -- I can tell you this, that market historically in L.A., my 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 there. I mean they're studios all right there. It's called the media is for the right reason. And so like, for instance, the building that we own this being vacated has never had 1 foot vacant for 30 years. So a fantastic market. Now what's happening right now, large tenants are pulling back.
There's a lot of consternation in the entertainment industry. So this has to be coming maybe reasonably because it's a studio of the 10 there, not a great time to have vacancy there. If the long-term prospects of the building are outstanding because it's a fantastic market. But right now, I am seeing where like a lot of a large set of deals happening. So this is a fantastic building. It's extremely well located. I can tell you a lot of great stuff about the building, but -- it's also going to be a big job to lease it up.
And our next question will come from Dylan Burzinski with Green Street.
I guess just any update on some of the zoning changes that were made at the state level for multifamily zoning that you guys have?
Well, the state has been our friend in this. And so there was AB 2011, which L.A. just gave guidance on. This is in July. And it allows us to do a zone change without a public hearing process. And at [ Wave Sequel ], there's an affordable component. And so those -- 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...
That one was real helpful.
That one was super help.
Yes. That one was like telling kids they no longer have to take the SATS to go to college, that's a big one. Does that change sort of any immediate impact on projects outside of Barrington, or is this still a longer-term process?
It's shorter than it was before that, much shorter. And it probably -- 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 -- I mean, you guys won't see it because we still have to go through the city's process to get entitlements, and we have to want to build the buildings, and I think it's the right time and right construction costs and everything. But I mean, it's completely different conversation and much more able to realize in a timeline that's like where you're making a decision in that same time period. It's really big.
And our next question will come from Rich Anderson with Wedbush.
First question, your thought of as an office REIT, but we talked more and more about multifamily lately for all the different things that you're doing. And we have a fair amount of your REIT peers that look at L.A. in Southern California in general and say, I want to get out of here, given all the regulatory political risks of owning multifamily real estate in this area of the country. Do you have any -- do you have any interest, or have you hadn't seen any of that come to market and market rate type multifamily product from peer REITs that might become interesting to you? Is that a part of your pipeline?
We're seeing multifamily more than we're seeing the quality office that we want. And some of it's new. Some of it's coming off of a construction loan. Yes. I mean, Kevin, you can talk about it.
Yes. It's -- it's definitely -- it's 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 we're 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 keep in mind, those politics that make it difficult to build also make it great to own.
Yes. I think Kevin said it [ I agree with him ]. If you want to generate profit or money or capital, you can still sell apartments in these markets at very low cap rates. And those trades are happening. 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.
And then second question for 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 a different environment. And you said you're not seeing stress, but you're kind of 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.
We're -- I would love to get a lot like 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 '80s about the 10 habits of successful companies when they go stick to your knitting. That's what we're doing. I think our markets are fantastic. I tried to -- I don't -- we haven't gotten any questions about like the 3 things I laid out 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 can't find a better mix of drivers, supply constraints, environmental quality of life, I mean the whole deal, then the markets that we're focused on here.
And when we go to another market, [ it goes ], yes, 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 a super good short commute here and the housing nearby and 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 are there. And I think their prices have gone way down, probably have gone too low at this point, but I would still say our capital to do stuff here.
Our next question will come from Camille Bonnel with Bank of America.
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, there 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?
Yes, Camille, No, we're not seeing vacancy concentrated in any particular assets. I mean if you look at the submarket stats we give you, unfortunately, we've seen declines kind of across markets as we face the challenges of COVID and now facing 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. And 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 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're still facing some downsizing from large tenants that we mentioned. And so far, the trend has still been slightly negative. So we just need to see that turnaround. We need to see the confidence change in the small guys and the larger guys feel more comfortable about growing again.
But what you said about the leasing group is something we've said in good markets. Which we've spent a ton of money building a very, very sophisticated leasing platform in order to 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 an incredible amount of leasing. We've had now 2 quarters that were close to 1 million fee, that's a lot of leasing. I mean, I look at our peers that are 3x our size, 4x our size for doing more leasing than they're doing. So we're -- there's a ton of activity, and we have a platform that's designed properly to really capture our fair share and more than our fair share of that activity.
And as Peter alluded to, and as I said, I really do believe this is a function of the 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 going to be a lot of pain. We want to cut -- we want to 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 going to do this whatever this new movie or whatever it is, are all in the mode of -- 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?
I like the mechanical typewriters. It's good feedback. I guess the point is from a liquidity standpoint and -- 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.
Well, we've been balancing it for the last 3 or 4 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.
And our next question will be a follow-up from John Kim with BMO.
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 can imagine some of these tenants being kicked out, maybe bad actors?
Yes. 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 we're seeing good payment good collection trends on the multifamily side. And I don't think there's a meaningful impact from Barrington.
Would you say bad debt has come down in the second quarter?
Well, we never.
As a percent of our collections in the quarter.
We've handled that much bad debt on the multifamily side to begin with that. Yes.
Very far to come. There nothing to come down. I mean pretty much everyone pays.
Okay. And looking at your top tenant list, I'm just curious, the tenant that you mentioned that downside during the quarter, was it among your top 5 tenants. There were a couple of very small movements this quarter. And then secondly, this is going back a couple of quarters. What happened in Macerich [ saw off the top list ]?
Yes. 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.
To understand it. That list is a tenant that could have like 20 locations.
Yes. So we gave you the ones -- the tenants that are over 1% of our rent, which is kind of how we sign that list. And Macerich fell off that, would they downsized a little bit, I think, last year and fell out of that. And then -- but the other tenant I mentioned was not on that list to begin with.
Our next question will come from Bill Crow with Raymond James.
Jordan, a 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 now to start to think about downsizing your Honolulu exposure?
Would be more attempting if we weren't making so much money in I mean that's a really successful market now for us. So you're right to say that. It has to be structured correctly or smart to remember that. That had more to do is 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 a big one on our list right now to start. We have some new construction, we can start up. We have units we can build out that right now, but we don't like the -- now we don't like the combination of construction costs against where 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 a joint venture with us to do that. And we actually have people who want to do that. So we're the ones that are like kind of putting -- put that on hold for a little while.
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.
You're just talking about the increase in parking and other income and in...
Yes, I'm curious whether you get more activity levels or -- I'm sorry.
No, it's been a steady -- it's Peter speaking. It's been a relatively steady increase as utilization just continues to -- it was relatively high last year, but it's higher now.
Well, I hope it's both. I hope it's -- we're getting a little more for the spaces, and I suspect I mean it has a lot more to do with just more people.
Our next question will come from Steve Sakwa with Evercore.
Jordan. I just wondered if you've made any progress with the insurance companies, broadly speaking, on the payments for the Barrington redevelopment.
Is there progress to know that we're in heated disagreements because we've definitely gotten that far. We're in extreme disagreement with those guys. And we have a lot of wood to chop there. We're obviously not letting it go as they wanted to do. So this is going to take years probably to work out. It -- but it is what it is.
Okay. And then maybe just circling back on some of the questions around development. I mean it sounds like you're maybe tapping the breaks are not aggressive about moving forward. I guess what would it take? You got some entitlements on some other Honolulu assets. I think you own a bunch of other redevelopment sites for multifamily in L.A. What -- I guess, what would the 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?
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 L.A. I mean, not -- why we have a lot of buy-right, but some of these sites in L.A. are like Virgin on buy right now with these changes, which is incredible. I mean, incredible. And I'm talking about by right, like a major amount of units on sites we own. But then, of course, still, and I will also say to argue for it, is that there -- I mean even today, at today's numbers, much higher cap rates than what anything is 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 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 going to be there, like it's not an opportunity that goes away is building these apartments. So that was an easy one to put on hold and go, well, we're going to save capital for some of these other things, 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 a hold because it's not something that's going to go away.
And this concludes our question-and-answer session. I would like to turn the conference back over to Jordan Kaplan for any closing remarks.
Well, thank you all for joining us, and we look forward to speaking with you again next quarter. Goodbye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.