That’s a new-to-market operator that was not there before, and they’re taking a big chunk out. So we are seeing that happen. We are also seeing, again, kind of across the board, not all sublease space is the same, right? So as it moves through its own lease expirations with its initial lease, some of that is moving over to vacancy across the markets. But we do feel like, in general, it’s kind of leveling out for now.
Operator: Thank you. Our next question comes from Yang Ku of Wells Fargo. Your line is now open. Please go ahead.
Yang Ku: Brendan, I think this could be for you. It looks like your same-store guidance increased this quarter, but straight line year-end occupancy and FFO guidance didn’t change. Could you talk about the discrepancy between different items?
Brendan Maiorana: Yes. So, I mean I think that’s really probably just a toggle between NOI’s a little bit better overall and then interest expense is a little bit higher. So those two things kind of offset one another. We probably could have maybe move — tighten the straight-line outlook a little bit, but just kept that number the same. So, there might be a little bias towards that number coming in a little bit more towards the lower end of that range, but we just decided to keep the range, give ourselves a little bit of room on that particular line item.
Yang Ku: Okay. Is part of the improvement due to kind of a better-than-expected OpEx?
Brendan Maiorana: Yes, that’s certainly part of it. I think it’s probably the biggest driver, even if we go back to the beginning part of the year. So yes, that is a fair comment. I know we’ve talked about this really since the onset of the pandemic that forecasting OpEx has been challenging for us. So, we’ve done better on OpEx than what we had predicted at the beginning part of the year. So given that, yes, that’s probably the biggest driver as opposed to top line.
Yang Ku: Okay. And then just looking out into next year. I know you guys haven’t provided guidance yet, but in terms of the impact that utilization has on OpEx margin, how should we think about the magnitude?
Brendan Maiorana: Yes, it’s a good question. And you’re right. I mean, we haven’t given guidance and we’re not prepared to do that this morning. I guess what I would say is, if you look at kind of where margins have trended this year and what we’ve talked about. We’ve seen that margins are probably down. We’ll see where the fourth quarter shakes out, but let’s call it, kind of in the neighborhood of 75 to 100 basis points kind of lower 2023 versus 2022. So — and utilization, as you point out, that has increased kind of throughout ’23 compared to ’22. So that’s been a driver of it. Inflation has been a little bit higher. Now, we do recoup a lot of that through recovery, but it still does hurt the margin outlook. So as I mentioned in the prepared remarks, I think we believe that there could be some margin pressure as we migrate over the next several quarters given inflation remains relatively high and utilization has been picking up, especially when you compare it to three to four quarters ago.
So I do think that there’s some of that headwind that exists.
Yang Ku: And just one last question. I think this could be for Ted. Could you guys talk about your federal government leases and whether there are any larger ones that are expiring over the next couple of years and what kind of conversations you’ve been having with them in terms of renewing potential size of renewal?
Ted Klinck: Sure. So the biggest government lease we have expiring we’ve got — it’s really a state government. It’s the Department of Revenue. We’ve got in Atlanta at about 250,000 square feet or so that we’ve talked about, that expires the end of 2024. And that’s one we’ve talked about in terms of — they put an RFP out that to downsize, and they’re pretty confident they’re going to be leaving the building they’re in, and we’ve talked about that. And we do think we’ve got a decent shot keeping them just move to another building, but that process is still in place. So that’s our biggest exposure. We’ve got another one that’s about 85,000 square feet, that’s early 2025. That — still don’t know what’s going to happen there. We’ve just renewed a couple in Nashville that were probably 60,000 or 70,000 feet in the last couple of quarters.
So after that, it’s a bunch of smaller, smaller government tenants across really several of our markets and then just a small exploration role for the next few years other than the two big ones.
Yang Ku: And Ted, that 85,000 square feet in early ’25 is that GSA lease?
Ted Klinck: Yes.
Operator: Thank you. Our next question comes from Robert Stevenson of Janney. Robert, your line is now open. Please go ahead.
Robert Stevenson: Are there any incremental known move-outs of size from last quarter coming up?
Ted Klinck: No, I think we’ve talked about all of them.
Robert Stevenson: Okay. And then how aggressive are landlords in your core markets today in terms of TI dollars to bolster occupancy? Or are your core markets still staying relatively rational at this point?
Ted Klinck: Yes. Look, I think it varies by market, by submarket and by deal, really. It’s — obviously, there’s more competition on the big ones because there’s fewer large customers these days, but there are certainly some markets — if you go to our top markets, maybe a Brentwood in Nashville, a South Park in Charlotte, which are very tight markets. So, I think the concessions and TI packages aren’t as competitive as it is maybe in bucket. I think Buckhead, right now, the demand is lower, vacancies higher. So it’s a more competitive situation. So it very — really just varies by market, submarket and deal.
Robert Stevenson: Okay. And then you guys have talked about dispositions and thinking that you’re going to be able to close additional dispositions over the next few months. What does that market like today? I mean can you sell more than what you currently have teed up? Is the market fluid enough, deep enough. And at this point, are the proceeds just going to be used to fund the remainder on the development pipeline? Are you going to be able to reduce debt and any appetite to repurchase stock with it now under $18?
Ted Klinck: Yes. I’ll take the first part of that, maybe Brendan can jump in on use of proceeds. But look, I think you know this capital markets are incredibly challenging really for all property types, but especially for office. And I think that’s a function of, obviously, the rates — interest rates today, the constrained lending environment. I think it’s very difficult to get an office loan today. So the real estate market, as you all know, we need a fully functioning investment sales market and a healthy banking system. And right now, the lenders are wanting to reduce their exposure to office. So getting deals across the goal line sold are very hard today. We’ve sold three assets so far, $51 million. We sold one that was all cash, and two of them did find financing.
And the assets we have out in the market today, largely be levered buyers, maybe not in one or two cases, but largely levered buyers, and they’re having to — a lot of it’s high net worth capital. They have banking relationships. I think having a banking relationship is incredibly important today to get deals done. So it’s very difficult to get any assets sold. And the nice thing is there is more capital for bite-size deals and those are generally what we have out in the market today.
