Q3 2019 Earnings Call
Good day, ladies and gentlemen, thank you for standing by.
Welcome to the part among group third quarter 29, <unk> earnings Conference call.
At this time all participants on the only spend only mode.
A question answer session will follow the formal presentation.
Please note that this conference call is being recorded today November 7th 2019.
I will now turn the conference over to Rob Simone Director of business development and Investor Relations. Please go ahead Sir.
Thank you operator, and good morning by now everyone should have access to our third quarter 2019 earnings release and the supplemental information.
Both can be found under the headings financial information quarterly results in the Investor section of the Paramount website at Www Dot Paramount Hisun Gert Dot com.
Some of our comments today will be forward looking statements within the meaning of the federal Securities laws.
Forward looking statements, which are usually identified by the use of words, such as well expect should or other similar phrases are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect therefore, you should exercise caution in interpreting and relying on it.
We refer you to our FCC filings for more detailed discussion of the risks that could impact our future operating results and financial condition.
During the call, we'll discuss our non-GAAP measures, which we believe can be useful in evaluating the companies or operating performance.
These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with gas.
A reconciliation of these measures to the most directly comparable GAAP measure is available in our third quarter 2019 earnings release, and our supplemental information.
Hosting the call today, we have Albert Behler, Chairman, Chief Executive Officer, and President of the company well that pays executive Vice President and Chief Financial Officer, and Treasurer, and Peter friendly Executive Vice President leasing.
Management will provide some opening remarks, and we'll then open the call to questions with that I'll turn the call over to Albert.
Thank you, Rob and good morning, everyone.
Our team delivered another terrific quarter as we continue to advance our strategic growth initiatives.
The highlights are as follows.
We are in the midst of a record leasing year at Paramount and our again, raising our leasing guidance to be roughly 1.5 million square feet.
At this level the activity for the year well the almost twice the original leasing goal, we set at the beginning of the year.
This would be the highest leasing year on record for US you know five year history as a public company.
Our prudent and strategic capital recycling program over the past few years has translated into steady growth in operating results.
Well the third quarter same store cash I know I grew 4.2% and core F. all for the quarter was 25 cents per share up 5.3% year over year.
As we head into the last quarter off the year, we are again, increasing the midpoint of our earnings guidance and build were they provide the specifics.
We remain opportunistic and disciplined managing the portfolio and our capital we have been consistent and transparent and harvesting value and fully stabilized assets and recycling that capital into share buybacks and opportunities, where we can leverage strengths to grow and NOI and.
Create value.
Let me recap a capital recycling program.
In late 2018, we sold to stabilize D.C. assets at four pricing and retain to net proceeds of approximately $350 million.
Yeah, Mark 200 million for share buybacks, and 150 million for higher growth expedition opportunities in San Francisco, where market fundamentals continue to be healthy.
We utilize said 150 million to fund our shelf the equity interest in 111, Sutter and 55 second Street.
We completed these acquisitions through joint venture structures that will further enhance returns to our shareholders as we manage and lease these assets.
We completed our 200 million share buyback program in early October and Opportunistically repurchased 14.7 million shares at a weighted average price of 13.59, a share a tremendous discount to a navy.
In late September we closed on the sale of Liberty place in Washington, D.C. for 154.5 million or $900 per square foot.
And we entered into an agreement to acquire markets and the two building complex in San Francisco solid financial District.
Just like all previous two acquisitions in San Francisco, we intend to bring a joint venture partner at this asset and intend to use of proceeds from the sale of Liberty place to fund our share of the acquisition.
Those were the highlights now let me offer some further perspective on the quarter all markets and what we're doing going forward.
As I mentioned in my opening remarks, we are on track to have a record to yell fleecing.
Through the nine months, we have leased over 1.25 million square feet at starting rents up over $90 per square foot.
That activity has been well balanced across our New York at San Francisco portfolios and all this leasing has not only increased same store leased occupancy by 30 basis points year to date, but has also reduced 60% <unk> 2020 role in New York and San Francisco.
By de risking our exploration schedule for the upcoming years.
Yesterday to New York, we at least 417000 square feet and our New York portfolio continues to be practically for at 96.1% leased but it's very manageable expirations in the on the horizon.
As you know a principal focus in New York has been and continues to be the Barclays block at 13.16 Avenue, which comes back to us at the end of 2020.
As we have set before go why lofty is to lease at least half of the space before exploration.
The leasing environment in New York for Bell maintained class eight trophy space remains robust the city's tenant base is more diverse than ever and it continues to expand.
The so called the thing companies are in the market looking for very large blocks of space.
As we understand it these companies are looking for anywhere between three and 4 million square feet.
All this represents growth space and if that comes to fruition that would drive absorption.
Do you remain very confident that we will be successful with 30 no. One justice we have been many times before were similar blocks of space in recent years.
Turning to San Francisco, the market continues to eat supply constraint and the demand this robust.
It remains difficult for high quality tenants to find trophy quality class a space and this positions us well to execute our strategy.
During the quarter, we leased another 90000 square feet at nine plus year weighted average terms was average starting rents over $102 per square foot at positive cash mark to markets of 30%.
Yesterday, we have leased about 825000 square feet at nine plus year weighted average jobs and with average starting rents of over $95 per square foot at positive cash mark to markets of 29%.
That math just goes to show you that current quota activity. It's actually ahead of the remarkable first half we had been San Francisco.
As we touched on last quarter, our leasing during the first half of the year to completed our efforts to address role at both one front and 300 admission.
This quarter, we pivoted to our focus to the recently acquired 111, Sutter Street and as telegraphed in our last call. We executed at least that increased occupancy in the building by over 14% from 70.3% in June 284.6% currently.
And that lease was executed at a starting rent of over $86 per square foot about 10% ahead of our internal underwriting at the time of acquisition.
During the third quarter will be close a previously announced acquisition of 55 second Street in a joint venture structure, where we ended up retaining 44.1% off the asset.
And as I highlighted in my opening remarks, both 55 second and 111 sat there were a quiet using proceeds from a capital recycling program by selling 2099, Penn and for 25 I Street.
[noise] 55 second is a modern trophy buildings that was built in 2002 is located in San Francisco is highly desirable SaaS financial district.
This is a great asset that benefits from its location efficient and nearly column free floor plates and multiple outdoor terraces.
Currently the building is 94.8% leased primarily to accounting legal and technology tenants at rental rates that approximately 15% below market.
The opportunity here is that the weighted average remaining term on the leases is only about five years with roughly 80% rolling between 2022 and 2025.
As we did was one front and 300 and mission, we will be proactive in addressing this role.
In addition, we also entered into an agreement to acquire market center or two building class eight complex also located in the highly desirable South financial district, we expect to complete the acquisition late in the fourth quarter.
Yes. It was our recent additions we anticipate bringing in a joint venture partner and use of proceeds from the recently announced sale of Liberty place to fund our share of the acquisition.
Needless to say, we're very excited about the value creation opportunities said 111 sad to 55 second and market Center.
Lastly, I want to share of use surrounding the much talked about coal working business model.
Let me first start off by saying, we do not have any exposure to we work or any sort of coal working in our portfolio.
They did not take place by accident, but was a deliberate decision on our part.
Thinking back a couple of years co working became all their age with the right. So we work.
Did what they talk off the town and most office landlords lined up to do deals with them.
We however stayed on the sidelines and that wasn't easy.
Especially considering.
We had a lot of large block availabilities at the time.
We studied we work and we're not comfortable with their business model and credit.
We choose to remain disciplined at least a space long term to credit tenants.
Whatever to all of a certain that our discipline a judgment would be proven to right. Even I must admit it occurred a lot sooner than I anticipated.
That said, we do not think co working as a concept is bad for the real estate business in fact in a properly structured real estate business model as opposed to a hyper gross tech platform co working can serve a critical function in any market.
Well I'd be choose not to transact with we work there are other co work and provide us at a much more thoughtful about their business model and we continue to engage with them.
We think there can be benefits to a co branding partnership of sorts with a partner that reflects what we are a set Brent and appears to the most discerning tenants.
We do have select buildings, where we think co working could make sense.
Of course, if you decide to do something in this area, we would be measured thoughtful and fiscally responsible in our approach.
In closing I'd like to say that I'm very happy with the way we have positioned to our portfolio.
Our portfolio is effectively full and upcoming lease expirations are below average over the next couple of years.
The space. It we do have available, it's very attractive and leasing within a reasonable periods of time on favorable terms relative to the market.
We have been very consistent in our efforts to sell low growth assets and recycle that capital into higher growth assets in a market with healthy fundamentals.
We have opportunistically bought back shares on a leverage neutral basis and in turn maintained a healthy balance sheet with modest leverage and ample liquidity.
And we have built a portfolio that is rock solid.
And as long term leased two high quality tenants.
Effect that will undoubtedly get more appreciation and did not too distant future.
With that I'll turn the call to Peter to give additional insights on our leasing.
Thanks, Albert and good morning.
During the third quarter, we leased approximately 209000 square feet, bringing our year to date total to more than 1.250 million square feet leased.
[noise]. This leasing production has not only addressed immediate vacancy in the portfolio, but has also serve to further reduce our near term lease role, which is currently a manageable 6.9% expiring per annum through year end 2023.
At quarter end, we were 96.7% leased on a same store basis up 30 basis points year to date, our availability has remained very well positioned relative to current tenant demand and we expect to build on our proven track record of attracting credit tenants across a diverse range of.
Industry.
Let's review our results by market.
Beginning in New York, our same store portfolio is 96.1% leased at quarter end up 10 basis points year to date.
During the third quarter, we leased approximately 115000 square feet.
Through the first nine months of a year, we have leased approximately 417000 square feet at a weighted average term of approximately nine years with initial rents nearing $84 per square foot.
During this period, we have eliminated approximately 53% of our 2020 lease roll.
As a result, the New York portfolio is very well positioned with approximately 6.8% expiring per annum through year end 2023.
Our New York properties are ideally located and well positioned relative to current tenant demand.
We have capitalized on this competitive competitive advantage by successfully leasing to the most discerning of tenants quarter after quarter.
We remain focused on the successful lease up of our remaining availability is the largest stuff, which is the Barclays block of space at 30, No. One avenue of the Americas and perceive current market conditions to be a tailwind and our effort to lease the space.
30, no one avenue of the Americas is located in the heart of the sixth Avenue Submarket among mid Townsend strongest performing submarkets.
Year to date six Avenue has contributed more than any other submarket toward positive absorption in Midtown.
Additionally, the sixth Avenue Submarket boasts the lowest availability rate if any submarket in Midtown at 9.5% 200 basis points below the broader Midtown availability right.
We are confident that the strength of the sixth Avenue Submarket, coupled with 30, no one's central location large inefficient and floor plates building quality and the size of the block will yield an accretive result.
We are actively marketing this space and look forward to updating you on our progress.
As a reminder, Barclays lease expires on December 31, 2020, and shows up in our lease expiration table and 2021.
On the retail front, we are moving the process forward on the bendel space, but nothing yet worth discussing.
At 16, 33 Broadway we have made progress and are currently focused on one tenant for acute space.
This particular user would provide a tremendous amenity for the office portion of the building, which as you know is fully leased.
We hope to have more to share soon.
In San Francisco, our same store portfolio was 99.8% leased at quarter end up 180 basis points a year to date.
During the third quarter, we leased approximately 90000 square feet.
Through the first nine months of the year, we have leased approximately 825000 square feet at a weighted average term of approximately nine years with initial rents over $95 per square foot.
During this period, we have eliminated approximately 70% of our 2020 lease roll on a same store basis.
Looking ahead, the San Francisco portfolio is very well positioned with approximately 6.3% expiring per annum through year end 2023.
Leasing fundamentals in San Francisco continue to strengthen and we continue to capitalize by securing long term deals with best in class tenants.
Net absorption in San Francisco remains positive and the average asking rents continue to increase up 16.6% year over year for class a product in the CBD.
They can see for class a product in the CBD continues to decline down 220 basis points year over year to 5.3%.
It is our expectation that rents will increase further given robust demand and limited supply.
At one market Plaza, we completed five transactions during the quarter, bringing our occupancy to 99.6% leased up 60 basis points year to date.
One market continues to achieve among the highest rents in San Francisco.
At one front Street, we are 100% leased as a result of last quarter's long term 265000 square foot expansion with first Republic Bank.
At 300 Mission Street, we are 99.7% leased.
As reported last quarter, we successfully completed the lease up of 300 mission with three deals totaling more than 262000 square feet at a weighted average initial rent of $92.70 per square foot at a weighted average lease term of 10 and a half years.
We have now turned our attention to 111 Sutter Street, which we acquired in February of 2019.
The building is architecturally significant and appeals to creative tenants and traditional tenants alike.
During the quarter, we signed new lease with Tomorrow, and exciting Tech company and pioneer in the car sharing space.
Tour at least three floors totaling approximately 40000 square fees.
With this lease we have increased our leased occupancy percentage at 111, Sutter to 84.6% up from 70.3% in June and we look forward to continued progress as we execute on our business plan for 111 Sutter.
Lastly in San Francisco, we are excited by the opportunity we Havent 55 seconds trades at building that is currently 94.8% leased.
Within place leases well below market.
The building boasts an award winning design.
Efficient floor plates desirable amenities and they central location.
All of which will support our team's effort to take advantage of the current and upcoming availabilities and create tremendous value in the process much like what we have done in the recent past with our portfolio in San Francisco.
In Washington, DC with 18, 99, Pennsylvania Avenue, we are currently 90.4% leased with a diminimus amount of lease roll over the next two years.
Despite increasing supply in the course submarkets of DC, our strategy continues to allow us to attract demand from premier tenants for our limited availability.
With that summary, I will turn the call over to Wilbur, who will discuss the financial results.
Thanks Peter.
We had another strong quarter, a financial and operating performance.
Our core assets all for the quarter was 25 cents per share, bringing our year to date results to 72 cents per share.
Core operations for the quarter were in line and the outperformance was largely driven by fee income in connection with our acquisition of 55 second Street.
Based on the outlook for the fourth quarter. We are once again, increasing core AFFO guidance to be between 95 97 cents per share.
Up a pending at the midpoint from our prior guidance.
If you take a deeper dive. However, the increase is really two cents per share since our prior guidance did not include the sale of Liberty place as a result, we no longer expects to receive a penny of earnings that would otherwise have contributed to the fourth quarter.
Our same store cash NOI grew by a healthy 4.2%.
But as expected decelerated this quarter relative to the first two quarters, if the or given higher comps from the prior year.
Yes. The date same store cash NOI grew by a robust 7.8%.
We now expect to end the year with same store cash NOI growth of 7%, which is 100 basis points lower than the midpoint from our previous guidance.
This decrease was driven by tenant electing to convert that tenant improvement allowance into free rent, thereby reducing the cash rents we were expecting to receive in 2019.
Looking at same store leased occupancy we ended the quarter at 96.7%.
By any measure and up 30 basis points from year end.
As we had been Telegraphing all year long lease expirations in 2019, we're back ended and we have 95000 square feet expiring in the fourth quarter, including 73000 square foot known move out at 903rd.
That equates to a 110 basis point decline in occupancy from quarter end.
Notwithstanding this decline we expect to end the year with same store leased occupancy rate between 96 and 96.4%.
50 basis points at the midpoint from quarter end.
That's highlighted earlier, we continued our leasing momentum this quarter and despite limited availability, we have been executing leases for significant space in both New York and San Francisco.
During the quarter, we executed 14 leases covering 209000 square feet at positive mark to markets of 11.1% cash and 13.8% Yep.
San Francisco once again outperformed with mark to markets of 29.9%, Josh and 47.7% Yep.
Two markets in Europe , we're roughly in line with the market in the low single digit range as cash Mark to markets were up 2.5% and yet mark to markets were down 2.8%.
Turning to on balance sheet, we ended the quarter with over 1.3 billion of liquidity comprised of 323 million of cash unrestricted cash and $1 billion availability on our credit facility.
Outstanding debt at quarter end was 3.3 billion at a weighted average interest rate of 3.7% and a weighted average maturity in four years.
85% of our debt is fixed and has a weighted average interest rate of 3.6%.
The remaining 15% is floating and has a weighted average interest rate of 4%.
We have no debt maturing until the fourth quarter of 2021 and beyond that our maturities are well laddered.
As Albert mentioned, we remain opportunistic in taking advantage of dislocations in our share price. During 2019, we repurchased 7.2 million shares at a weighted average price of $13.22 per share or an aggregate of 94.6 million.
Thereby completing our 200 million dollar share buyback program.
All in all between the 105.4 million, we repurchased in 2018, and the 94.6 million we repurchased in 2019, we have bought back 14.7 million shares or over 6% of outstanding flowed at a weighted average price of 13.
As in 59 cents per share.
Furthermore, this buyback will save as $5.9 million annually in dividends and distributions.
The board continues to share our belief that strategically buying back shares in a leverage neutral manner can be an effective component to our efforts to create long term shareholder value.
And have authorized us to put in place in order to 200 million dollar share repurchase program.
Lastly, we've also updated our investor deck, including our schedule the free rent and signed leases Lucky commenced which now sits at 41.3 million. This information can be found on our website at www Dot Paramount Tyson group Dot com.
With that operator, please open the lines for questions.
Thank you we will now begin the question and answer session.
He joined the question Q You Me Press Star then one on your telephone keypad.
You will hear that tone and knowledge in your request.
If you're using his speakerphone, please pick up your handset before pricing any keys.
So with that on your question. Please press Star then too.
We will pause for a moment, let's call it is trying to Q.
Our first question is from Vikram Malhotra with Morgan Stanley . Please go ahead.
Thanks for taking the questions I'm.
Just first maybe where the burden on the guidance suggests spend <unk> I believe it had to do with a B C. D is being converted to free rent can you give us more color walk us through exactly what happened and then going forward is there any follow on impact into 2020.
Sure.
Basically this was a deal that we had signed early in the year.
That gave us the tenant and election to convert it's free rent.
I gave you an election, the convergence tenant improvement allowance into free rent at the time, we signed a deal the anticipation was that the tenant would use it as a tenant improvement allowance and the options that attendant to convert this went into 2020 and are you know unexpectedly they notified us that they would like.
To avail themselves of that option in the current year and so that was a onetime effects that kind of effect in 2009 teams numbers. So had we known that sooner we would have adjusted the guidance prior quarter, but that happened now and we thought it's the right thing to do an adjusted guidance Accordingly, So that's what happened.
We don't expect this to having any impact into 2020.
But there's no like net cash because in fact right because you're just there's no denying economic.
In fact, Vikram as you pointed out is neutral because if you're looking at this from an F.C.D. perspective, you would have either had a higher cash rent and a higher capex or a lot of cash rent and lower capex. So yes that is very is neutral.
Okay great.
Then just on the the box office space I I know you know that do you mentioned you guys are you you're confident in leasing that up can you give us just any more color what you're seeing more recently in the types of tenants are you still comfortable with kind of the lose school, you've put out of getting 50% done before they expire.
Yeah Big problems is our we.
We haven't changed all approach there we see a good.
Array of different tenants are financed and service as well as.
Legal and Tammy.
This space will not go in one lot that would be very very unusual, but it's a size wise interesting because it's in an area.
All 300000 square feet, plus where there is only limited space available. So we have very solid showings and we have the availability as we said on the last call that we could take back on the floor by floor basis that space early and I think that advance us too.
Lease it up swiftly and that's why we are confident to it.
To have our goal achieved two lease more than 50% or 50% before expiration.
Okay, great and added but just if I can sneak one more and they've been reports out. That's a you know potentially you might be exploring the sale of foot off a couple of buildings in particular 16 33.
And I'm, just wondering with distinct acts sort of expiring now in the shares to trading at big discount.
Due to a two consensus and Navy can you sort of walk us through how you're thinking about you know potentially attacking that gap over the next call. It three to six months.
Well I I don't think do you expect me to go into too much detail become here and that's a.
Still speculative fun and too early to go into any detail I think what's out in the reports is that we are looking at potentially selling half or up to half percent up of 16. So this week and not the entire building.
And and potentially nine under third and that's I think hardly a reported but not reported by the company and it's too early to really go into details on that but we have said in the past if you have created value.
Then acid and be could.
Use those proceeds to to use them for other.
Other needs a potentially buying back shares or investing in high growth assets, we would we would consider those options.
And we will act in the best interest to have to shareholders at the time.
Okay, great Congrats on a strong quota.
Thank you. Thank you.
Our next question is from Jason Green with Evercore. Please go ahead.
Good morning, looking at the Investor deck from around perspective, you're now you call it 22% San Francisco in 76%, New York City, all else equal what's the angle for allocation from a geographic perspective.
There's really no angle or Jason a we are looking at it very opportunistically and we have been a buying as a is very clear and to San Francisco This year quite successfully and.
Have a recycle assets from Washington, D.C. into this markets because of the higher gross that comes with the.
With the assets in San Francisco that doesn't mean that we would not be able.
To address that program, we are not really aggressively doing this we are looking for for opportunities and we look at it opportunistically and.
We are looking at on a case by case basis, but we'll be very decisive if you see an opportunity into these markets and Jason I will just add that a you know your commentary about the 22% that is obviously as US Threeq you 19, and does not reflect the market Center acquisition, So that pie chart effectively will.
Organically grow when we close that transaction.
Got it and then on the share buyback soon and authorizing the additional 200 million dollar program I guess, how do you think about the program given on the one and you are buying assets at a very attractive cap rate, but on the other hand, the buybacks you've done to date haven't done all that much for the stock.
So I mean, you know you can look at it from that way, but that's clearly not the right measure to look at it I think we understand the value inherent in the in the stock we understand where the market is trading.
Assets apps at an implied.
Price for flood pick a number 700 and the low and we have been consistently selling assets well north of that number the theory on the buyback is not to move the stock price, but it's a capital allocation view on long term value creation, so why not troubled by the fact that.
The buyback has not impacted the stock price significantly in fact, we're probably one of the few companies that can say that the buyback has been executed at a price below where our stock is currently trading and there's not a lot of people can say that so we've been very very selective very opportunistic Albert had highlighted from the very beginning that.
It would be a dual approach and all capital allocation decisions are considered very carefully by the board in how we want to take advantage. So there's no real change and not thinking.
Okay.
Got it thank you very much.
Thank you [laughter]. Our next question is from Jamie Feldman with Bank of America Merrill Lynch. Please go ahead.
Great. Thank you.
So I guess I mean going back to 16, 33 am I understanding as you probably need to refinance some data or do some sort of recapitalization, there or whether you decide to sell 50% or refinancing what's kind of that timing and kinda deadline, where you have to make a decision either way and if you wanted to do the 50% sale can you just talk through.
You know tax protection, you know whether that could be special dividend or just how you would have to handle the proceeds.
Well at two different things going on here, Jamie we up.
Actually looking to take advantage of the low interest rate environment to refinance the debt off the asset.
That's one thing we.
Currently looking at and that would be accretive and be a parallel looking at a potentially doing something else.
I wouldn't like to go into a too much too much detail here I mean, the cost of debt remains very attractive and so we're looking at that option and we could always.
Do it 10 31 exchange as we have done in the past with war W and through the predecessor, we have done it successfully a couple of times so be Toby.
Very well.
Very cautious and smart about how we do this.
Yeah I can just that you said you need to do there is no need the debt on 16 33 today matures at the end of 2022 and it is on 3.55% weighted average interest rate, we just see tremendous liquidity in the market. The asset is 100% leased on the.
Office side weighted average term on existing leases over 10 years. So we as as a good capital allocators and stewards of capital will continue to explore the possibility of reducing the interest rate that on a very significant asset in this portfolio. So that's a separate approach and as Albert said.
Opportunistically as we felt we've created value we'll explore the opportunities from that tax protection point of view you know the staying tax and Winkler Masters instinct acts on any of these assets as Burns off come November 20 thoughts. So this is not a state tax issue unnecessarily it is going to be a taxable gain issue.
Which would then require special dividend or the assets in the New York portfolio have a significant tax gain and and hence you know if we were ever to transact on anything like that we would have to evaluate all the tax consequences, whether its special dividend, whether it's 10 31, and we'll do that in due course.
As a when when the time permits and if the opportunity arises.
Okay.
Thank you do have excess capital to put to work I mean, clearly you've sent the message you like San Francisco a lot.
So I guess two questions. One is how do you feel about the supply pipeline coming in San Francisco and kind of a long term.
Aspects in that market as you do you start to see south central Soma projects coming on line.
And then secondly, how did the tone on New York City has changed.
So much I think you had mentioned 4 million square feet of potential tech demand.
Well when do we start seeing you money into value add assets in New York and kind of keeping money here locally.
On the first half of the question in San Francisco.
We are we see the market still being extremely robust.
In our area tenants I interested to to take space space, where had to have a 2020 into 2021.
So that market as we haven't seen can change, but currently we are not seeing any change change here and when it comes to the New York.
We we will be opportunistic as we had said before we.
There is not much of attractive assets in New York City currently in the market because there's a lot of liquidity on the debt side and as we've talked about it before.
Many many market participants preferred to recapitalize.
Was first mortgage debt, that's very attractive and mezzanine debt instead of selling an asset.
We know that these assets I extremely valuable and the cost of transacting, including Texas are pretty high in New York City. So market, but this is it a potential sellers will think about it twice before they're put acid into the market.
But if there is an opportunity we look at it opportunistically and we have a sufficient capital through joint venture.
Abilities, that's looking for home for their.
Equity capital, we know in Europe in other parts of the World. This negative negative interest rate momentum, a we actually see the hedging costs coming down between the dollar into euro. So there is increased activity in interest in putting capital to.
A work in the United States.
Okay, and then last from me as they can you guys. Just in case I may have missed it but did you talk about what you think your mark to market is on your 2020 exploration.
I mean, it's it's too it's too soon to towels I think by and large should we think again it is going to be a high single digit low double digit mark to market consistent with where we are today or this quarter I should say year to date, we are trying to win.
Really high double digits.
Close to 20%, but I think 2020 will be.
Closer to the high single digit low double digit.
Okay all right. Thank you.
You're welcome.
Once again, if you have a question. Please press Star then one on your telephone.
Our next question is from Derrick Johnson with Deutsche Bank. Please go ahead.
Hey, good morning, everyone. Thank you.
You know just sticking with San Fran for a second here I think year to date, you said that around 825000 square feet.
You know that that was signed.
What are you getting from these acquisitions, so market center and 55 second screen as far as expirations are concerned are they coming up here and the current lease expiration schedule.
Because obviously, there's there's a possibility of large block space about Belo in San Fran and just wondering if there's any near term optionality that.
And boasts assets I mean 55, a second suite as as we had mentioned before.
Then the building is currently a pretty much pretty much released its nice to close to 95% leased.
Over the next five years, we have about 80% rolling and this is a significant mark to market potential upside potential. The a rental rates are currently about 15% below market and so there's upside that's an upside opportunity in that and that acquisition when it becomes.
The market Center.
There will be opportunities that we don't want to go into into much detail at this point, we're expecting to close on the asset.
Before year end and we are expecting to do that together with a with a joint venture partners. We have outlined before at 111 softer we have a substantial upside here.
We have a 50% off below market leases rolling in the next three years.
And so there's upside to have in that market for sure.
Okay. Thank you that's helpful and and then Okay look when we look at fundamentals. The fundamentals, we don't have been better than expectations at office you know both for PG Ari as as really as well as your peers. However, you know the NAV discount and the negative investors' sentiment.
Really continues to persist so I guess the question as you know water investors and pundits getting wrong in office fleets right now.
Well, that's a very good questions and we ask that question ourselves from time.
So.
It's a via producing a great results, we have I would say.
One of the best assets in the markets. We are well established a they have a great team I think its momentum. That's currently not in favor of office in general and a as as we all know that can change so.
We are at a five years being a public company and we hope that this momentum will change currently investors are much more focused on growth and technology and we have been.
Putting a lot of work into establishing a a fortress like.
Long term lease two and two investment credit credit tenants.
Portfolio was long leases and growth potential in San Francisco for example in nearly all of our leases we get a increases of 3% per year. So there's growth embedded in this portfolio and it's it's a very long duration leases and that's what.
What we're looking forward because we know that the things can change in the in the economy and then I think the investors will hopefully appreciate us a little bit more.
Understood and just one quick one lastly, now what's the plan had 712 fifth Avenue with occupancy at around 71% is.
The 200 million additional share repurchase more valuable than may be repurposed positioning that asset going forward and thank you.
Yeah that that asset or will it be have reposition if you have time, we would love to show you. The new lobby that just opened up and got finished I would say that.
The most beautiful redevelopment in New York or one off the most the and you get some very very positive.
Positive comments on it and we Oh, we are having lots of activity on the office side and you will see that hopefully over the next quarter.
And with regard to the.
To the retail space, it's available since Henri Bendel moved out early in the year that we actually were waiting for.
Because the lease was substantially below below market.
Rent and the I mentioned early on that this will take a while my take up to two years or the market in general the retail market in a on fifth Avenue and Madison Avenue is not in the best shape. Currently so the timing for getting the space back is not ideal, but Uh huh.
We have interest in this space and we're looking for the best the best option that would fit into this.
Significant and fantastic acid.
Thanks again, everyone.
You're welcome.
Our next question is from Taiyo Okusanya with Mizuho. Please go ahead.
Hi, Good morning, I just wanted to follow up on your comments about the defendant space and fifth Avenue I'm, just talking to them about are going to your interaction with retailers what exactly were interested in the space exactly what.
A you know they are willing to kind of take the space for the dam in are you trying to low ball or you know who have very aggressive lease term simply because of all the vacancy that's on fifth or are you had been more constructive conversations with people who are looking at it long term.
Well, we we are having discussions was with a interested parties. They are more in the upper end of retail.
More than the luxury retail group and the you keep in mind that the rent for that space was a nine point sixmillion.
Only and.
If you would just lisi the ground floor at that market rent and not the entire space, which is only like 10000 square feet of close to 85000 square feet. You would get you would get the same return a it's what you got from from Henri Bendel. So we would.
Stake, but people want to make sure that they get the right to use for the well this space.
Thank you.
You're welcome.
Our next question is from Daniel is Mayo with Green Street Advisors. Please go ahead.
Great. Thank you good morning.
Just a a maybe a question on a new sub markets. If you guys are evaluating potential new acquisition opportunities are you taking a look any additional new sub markets outside of your current foot fronts.
Are you talking about new sub markets outside of New York, D.C., and ER and San Francisco or Submarkets of these these three cities or the ladder.
Okay. We are constantly evaluating the markets that are outside of the three cities I would say in DC.
We are most concerned about going into certain markets outside of the CBD.
In New York.
We have never bought anything on the equity side outside of the Manhattan Island, and we are observing what's happening for sure and we have been involved in mezzanine investments outside of the Manhattan Island.
We're observing but we haven't been active so far.
Happen itself is a it's a large enough market, where we have opportunities between downtown Midtown and Midtown south potentially it's the largest market in the United States, That's where our expertise is and I think that's a that has been the disciplined enough. This company that we are focusing on on the markets. If we know.
Well and this enough.
Space for us to invest in and operate and.
When it comes to San Francisco.
As you as you could see over the last 12 months, we have been successful and buying value add opportunities in the CBD market. We're of course observing the other markets too, but we haven't done anything actively there.
In the within your current footprint it seems like the D. The push for carbon emissions and other green new deals whatever you want to call. It seems to be picking up steam has that impacted your underwriting at all.
Well we are.
Looking at the each acquisition, what what they impact with regard to carbon footprint is across the portfolio.
You might recall that we have been a very active early on.
All of our properties are LEED certified and E., the gold or platinum.
And I think we are the only office suite in that segment or that can say that so we are yeah for sure looking at each acquisition, what impact or a that half.
Okay, and then just last one for me with respect to the buyback program.
And potential.
Sam potential sales down the road I can we see you guys deploying that capital into into paying down debt I mean in future.
We we want to we want to use that could be could be one of the uses of the oh the cash but you know currently that is very attractive.
And we clearly always set and B I can reiterate.
We would not increase that for using the buyback.
Option that we have a we said we we use the sales of off assets to potentially acquire shares and the company and we want to be opportunistic and Oh, we want to do it leverage for sure leverage neutral.
Okay.
Okay. Thanks, guys.
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This concludes the question and answer session.
I would like to turn the conference back over to Albert Taylor for any closing remarks.
Thanks, everyone for joining us today, we look forward to providing an update on the continued progress when we report our fourth quarter results in February .
But.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and had a pleasant day.
HM.
Oh.
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