Q2 2020 Paramount Group Inc Earnings Call
Thank you for standing by welcome to the Paramount Group second quarter 2020 earnings Conference call. At this time, all participants are not listen only mode. A question and answer session will follow.
The formal presentation. Please note that this conference call is being recorded today July Thirtyth 2020, I'd now like to turn the call over to Rob Simone Director of business development and Investor Relations. Thank you you may begin.
Thank you operator, and good morning by now everyone should have access to our second quarter 2020 earnings release and the supplemental information.
But can be found under the heading financial information quarterly results any investor section of the Paramount website at Www Dot Paramount heightened green 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 including without limitation.
The impact of the Krona virus Coven night team on the U.S. regional and global economy is at our tenants financial condition results of operation.
Therefore, you should exercise caution in interpreting and relying upon.
We refer you to our SEC filings for more detailed discussion of risks that could impact our future operating results in financial condition.
During the call we will discuss our non-GAAP measures, which we believe can be useful in evaluating the companies operating performance.
These measures should not be considered an isolation or as a substitute for our financial results prepared in accordance with gap.
A reconciliation of these measures to the most directly comparable GAAP measure is available on our second quarter 2020 earnings release, and our supplemental information.
Hosting the call today, we have Albert Behler, Chairman, Chief Executive Officer, and present at the company well their pace Executive Vice President Chief Financial Officer, and Treasurer, and Peter friendly Executive Vice President Lisa.
Management will provide some opening remarks and well then open the call to questions with that I'll turn the call over to Albert.
Thank you Rob and thank you everyone for joining this morning.
First and foremost I'll start by saying that all of us at Paramount Hope that do you your friends and do a family remains safe and healthy during this unprecedented global health crisis.
At Paramount, we continued to navigate this uncertain environment.
When we spoke last quarter, Oh focus, including that up our tenants what's on transferring tour remote working environment in an efficient manner.
Now that you have seen the results from this whatever whats referred to as a mandatory work from home experiment.
Let me share.
My observations.
The positive was that work got done and we did I Miss any of our deadlines or delay any of our filings.
The negatives would say I quite a few to speak off seem too far outweighed the positives.
Based on the feedback from our own employees the amount of time and effort in accomplishing that tasks was far more than it required by being in the office.
The inefficiencies, resulting from poor why fight connections the need to scheduled time for simple questions that could have been onset by simply walking over to that supervisors and various other distractions have contributed to the incremental time and effort.
And speaking to our tenants and based on our own experiences there seems to be no surrogates two in person meetings and collaborations.
The only reason this work from home experiments had some level of successful Paramount is because we are reaping the benefits of the yourself training and development and trust. If you have built with all our employees.
You cannot cultivate a positive culture, Truteam building and innovation and Furthermore, you cannot mentor the future leaders itself our country without building at <unk> poor in person in the office.
All these intangible aspects.
All right in many ways what represent hallmarks of successful companies.
That said a byproduct office is mandatory work from home experiment.
Could be that employers provide the employees more flexibility rather than requiring them to be in their offices everyday of the weak.
But in no way would that negate the need for two additional office space.
In fact space utilization discovery is currently underway and undoubtedly lead to de Densification.
The pendulum has in this cycle swung too far with the rice of co working.
And now it will swing back.
In fact, we have had tenant swift come to us and said they need more space they evaluate how best to reconfigure their offices.
Why de Densification considerations had started pre pandemic. This planning has only accelerated as companies aim to create safe and productive space for the employees.
All of which will likely require companies to add to that current real estate footprint.
As we continue to engage with Dod tenants. During this pandemic. Other then concerns surrounding the health and safety <unk> up the employees their focus is on the reintegration of their workforce.
Why do we integration will likely occur gradually over phases extending into next year.
We see our tenant starting to return, albeit slowly to their offices.
In New York the process began in late June.
In the city and that phase two off reopening and permitted tenants to begin to reoccupy office space subject to certain restrictions.
In San Francisco recent events have obviously Pos this process, but the protocols, we are adding and improvements we are making our in place across the portfolio as both the DC Reintegrate office employees over time.
Mindful of all local guidelines and working in conjunction with all of tenants. We have established protocols to ensure all individuals who arrived to our buildings feel safe and secure and a healthy environment.
Most visible we have implemented a serious off lumpy protocols and substantially augmented cleaning standards.
Less visible some of our buildings that did not have trouble if the lion air filtration devices to improve ventilation systems and sensors to measure indoor air quality have now been or in the final stages are being retrofitted.
In addition building personnel have undergone special training focused on covert 19 related issues.
We are taking these measures in an effort to ensure that we are holding ourselves at the landlord to the highest standards of workplace safety and comfort in essence being safest in class.
Turning to our financial and operating results for the quarter core FFO for the second quarter was 23 cents per share in line with the second quarter last year and consensus among our analysts.
Oh results demonstrate the strength of all assets and their resiliency during this crisis.
We continue to benefit from having a high quality portfolio of trophy assets with a roster of blue chip tenants and very limited exposure to retail.
Oh collections have remained solid and consistent and have not materially changed from our pre cobot collections.
To quantify we have collected almost 98% of all contractual rents to office tenants and just under 60% from a retail and non office tenants, bringing total portfolio wide collections to over 96%.
Well Barber cover both financial results into all collections in greater detail, including the methodology of our reported figures as we have seen a diversity in practice in which these figures are being reported.
I'm happy to see that our efforts in building a high quality office centric portfolio with the blue chip tenant roster and where retail service and the as an amenity to office tenants, it's manifesting itself through our high collection rate.
From a leasing perspective, our leasing team at a productive quarter as we executed on more than 300000 square feet at a weighted average starting rent in excess of $93 per square foot.
As we expected and as I highlighted on our last call virtually all of the activity was renewal based and addressed expirations in 2021 and beyond.
We ended the quarter nearly 96% leased on a same store basis and for the remainder of the year have just 1% of annualized rent rolling.
Longer term, we remain well positioned.
Peter will provide more detail on our leasing activities, but I want to make a few observations about all markets.
Renewal leasing activity in Midtown post the onset of the pandemic as represented a higher than normal shelf total leasing.
This is consistent with what we're seeing in our leasing results and I just mentioned a moment ago.
Companies are taking a wait and see approach towards relocating or expanding.
As a result tenants are focusing on shorter term renewals.
Most if not all activity has been exploration driven a trend we anticipate will continue until there is better clarity with the economy and depend dynamic.
Within our New York portfolio, the Barclays space at 30, No one Avenue of the Americas remains our primary focus.
As we discussed in our last call into current environment. We continue to view the lease up of this space and the 2021 event.
Nonetheless over the long run we continued to see six Avenue as one of the most desirable submarkets in the city.
[noise] space that is centrally located and that's up market in a high quality building was large and deficient floorplates remains very attractive to prospective tenants over the long term.
In San Francisco, the sentiment is not much different.
Similar to New York tenants are focusing more on renewal transactions, many of which short term.
Tenants are taking a similar bait and see approach towards committing to new space until there is more clarity around the broader economic outlook and the reopening process.
As in New York, we are in a strong position.
Our portfolio in San Francisco is nearly 97% leased at quarter end with a very manageable exploration profile over the next four years.
During the quarter, we executed renewals on approximately 250000 square feet at rents, averaging nearly $100 per square foot.
Turning to the transaction market much like in leasing volumes have slowed to considerably.
From our perspective this drop in transaction volume is not driven by a lack of liquidity in fact, the appetite for class a product and gateway cities across the U.S. remains including interest from foreign buyers.
However, the market is on pause in a period of price discovery.
There are opportunistic buyers looking for bargains, but there are no sellers to provide those bargains, causing a considerable gap between the bid and ask between buyers and sellers.
In addition, the cost of debt capital at historically low levels and the debt markets remain very liquid which is resulting in sellers opting to refinance instead.
How this plays out and for how long is unknown and will depend on how the global economy emerges from this current crisis.
It is that price discovery process as well as the debate around workplace flexibility and de Densification that leads to the continuing this location in our stock price as well as those up our peers in New York and San Francisco focused CBD office suites.
But a frustrating for shareholders and us alike, we have to remain disciplined and focused on the long range objectives as a favorable long term fundamentals supporting all markets are unchanged.
To ensure we remain in a position of strength to execute on our long term strategy over the short term, we continued to maintain a defensive posture around liquidity and preservation of capital until there is better visibility on the economy as a whole.
During the quarter as previously reported amidst all the market volatility and severe dislocation of our stock price, we announced and closed on a 10% sale of 16, 33 Broadway raising over $110 million.
Net proceeds.
The transaction valued the property at $2.4 billion or $960 per square foot.
16, 33 is the largest asset in our portfolio both in terms of size and from a valuation perspective, and we think that transaction is indicative of the underlying long term value of our real estate compared to the level said, which our stock is currently trading.
Also as previously reported we have entered into an agreement to sell 18 99, Pennsylvania Avenue, our last remaining property in Washington DC.
We remain on track and expect that transaction to close in the fourth quarter.
Overall, we continue to manage through the current uncertainty in a strong financial position was a stable portfolio of high quality class a buildings occupied by high quality credit tenants.
Focusing on re integrating current tenants in a manner in which vary.
Single employee of every tenant fields, they are entering a safe and healthy environment.
We are focusing on extending lease expirations and continuing to engage with the markets, where we have availability.
We are focusing on ensuring we maintain sufficient liquidity, which amounted to 1.35 billion at the end of the quota and remain well capitalized and positions for the long term with that I would turn the call to Peter to provide additional insights on our leasing.
Thanks, Albert and good morning, everyone.
During the second quarter, we leased in excess of 300000 square feet at a weighted average starting rent of $93.47 per square foot.
All of this activity was renewal based and primarily addressed expirations in 2021 and beyond.
At quarter end, we were 95.6% leased on a same store basis down 20 basis points quarter over quarter.
For the remainder of the year, our New York in San Francisco portfolios have lease roll equating to 1% on a square footage basis and 1% on an annualized rent basis.
Needless to say this is very manageable, particularly at a time of uncertainty and is the result of our strategy to pre lease space and de risk future role.
Moreover, through 2024 hour, New York, and San Francisco portfolios lease role is 7.7% per annum inclusive of the Barclays block expiring at the end of this year.
While in person touring and leasing activity is expectedly down in both of our markets. It has become increasingly apparent that limited lease role in the near term and the portfolio comprised of best in class credit tenants will serve us well as we work through these difficult times.
Well, let's review our results by market, starting with New York.
The Midtown Manhattan office market saw new leasing activity declined significantly during the second quarter amidst the ongoing pandemic.
However, approximately 1.2 million square feet of renewals were executed during the quarter generally in line with the five year quarterly average.
As expected renewals, which represented 48% of Midtown total leasing velocity during the quarter. We're generally shorter term in length relative to historical norms as tenants elected to buy time before reassessing their longer term real estate requirements.
It is our expectation that renewals will comprise a disproportionately high percentage of mid teens leasing velocity in the near term.
With that being said the number of new space inquiries and virtual tours has accelerated over the past several weeks.
In certain cases these virtual tours have been a precursor to in person tours, which has allowed us to remain productive during this period.
On our last call. We mentioned that we were in late stage negotiations with a 50000 square foot tenant.
And the second quarter, we signed this extension with IC BC at 16 33 Broadway for approximately five years and is starting rent of $82 per square foot, resulting in the further reduction of our 2021 lease roll.
Our New York same store portfolio is 95.3% leased at quarter end unchanged since year end.
Looking ahead, the New York portfolio is very well positioned with approximately 7.9% of currently leased space expiring per annum through year end 2024, which figure includes the lease expiration of Barclays 500000 square foot block as reflected in our.
2021 lease expiration schedule.
Excluding the Barclays space, a modest 6.6% of currently leased space in New York is set to expire per annum through year end 2024.
As we have stated previously 13, a one avenue of the Americas remains our primary focus as we market the Barclays block of space.
The sixth Avenue sub market remains among mid towns most well positioned submarkets.
Our offering is even more compelling in today's environment, given certain attributes such as walkability to major transit hubs and our ability to create a private welcome center that affords not only in a more enormous branding opportunity, but also away for a large tenant to control the experience for its employees.
And it's guests.
We have been actively presenting the building through virtual presentations to both tenants in the market and the brokerage community and remain confident that we are well positioned.
We look forward to updating you on our progress.
Turning now to San Francisco.
Two weeks ago, the city paused, it's phased reopening amidst an increase in cobot 19 cases.
The result of this will extend the slowdown of new leasing activity beyond the second quarter.
Similar to what we are experiencing in New York.
Tenants have focused on renewal transactions, particularly short term in length and have largely taken a wait and see approach toward relocations.
Expansions and longer term space commitments.
Despite this pause in the market, we remain long term believers in the resiliency of the San Francisco market.
Unlike prior cycles, the San Francisco market is anchored by mature.
George Captech financial services, and the like life Sciences firms all of which have continued to attract a disproportionately high percentage of venture capital funding through the first half of 2020.
Our same store portfolio in San Francisco is 96.9% leased at quarter end down 50 basis points quarter over quarter.
During the second quarter, we leased approximately 250000 square feet at a weighted average term of almost four years with initial rents averaging just under $99 per square foot.
The San Francisco portfolio also has limited near term role with just 7.3% of currently leased space expiring per annum through year end 2024.
At one market Plaza, we completed two significant renewal transactions during the quarter the largest of which was an approximately 150000 square foot extension with a law firm.
We previewed on our last call.
This deal was the largest transaction completed in San Francisco during the second quarter and will contribute to the further reduction of lease role in our portfolio. As this space was set to roll in 2021.
In addition, we extended another law firm in the building for approximately 85000 square feet.
The two renewals resulted in a cash mark to market of 37.2% and both deals reinforced one markets immense appeal.
Two leading tenants.
One market plazas leased occupancy remains virtually full at 98.2%.
With that summary, I will turn the call over to Wilbur.
Who will discuss the financial results.
Thanks Peter.
Let me briefly cover our financial and operating results for the quarter.
Yesterday, we reported core AFFO of 23 cents per share, which was in line with consensus and consistent with that of the prior years second quarter.
That said, our second quarter was impacted by coal that 19, which resulted in us taking some noncash write downs and reserves, which totaled four cents per share.
As such core AFFO would have been 27 cents per share how did not been for the four cents write off and reserves that we took.
Oh, the four cents three cents represented noncash write offs related to straight line rent balances and one cents represented reserves against accounts receivable.
All of the reserves that we took this quarter, whether it was against a straight line rent or against accounts receivable related to the retail tenants in our portfolio.
Which by the way accounted for only 3.5% off our annualized rents.
And that is not a modified or adjusted figure that is the pre coal that pre rent relief and pre rent deferral figure.
As expected our same store results for the second quarter, well also negatively impacted due to the pandemic and more specifically.
But our election not to utilize the relief provisions provided by gap as it relates to lease modifications.
What I mean by that is that we elected to not record any revenue from tenants, who is rent, we deferred or abated and will only record such revenue when it is paid.
While some of that appears availed themselves of the relief provisions provided by gap in response to the pandemic. We felt our approach was the most conservative one and better represents the true cash NOI generated by the business in the current period versus the alternative of overseas.
Operating cash NOI by building up receivables that may ultimately have to be written off in the future.
This was the primary driver in our same store cash NOI growth being negative 4.1%.
As Albert highlighted earlier I collections during the second quarter continued to remain solid and office collections have only improved throughout the second quarter and into July.
During the second quarter average collections from office tenants stood at 97.8%.
A remarkable result.
Well office collections had been robust and improving.
Yes leave the same cannot be said about retail collections, which has steadily deteriorated to just under 58%.
This result is not surprising to us at all as the retail tenants in our portfolio on service oriented and serve as an amenity to office buildings and these tenants beads restaurants or Peters have been closed during the pandemic with some of them resuming operations only in a limited can.
Pasadena.
Notwithstanding the retail collections overall portfolio collections averaged 96.4% for the second quarter and this is because retail represents only a small portion of the overall pie and accounts for only 3.5% of our annualized rents.
Because not everyone May report collections on the same basis, we do I think it is important to note that these figures are based on pre coated contractual rents that do not take into account deferrals or abatements, which we believe is a more fateful representation of our business.
During the second quarter, we executed 14 leases covering over 300000 square feet at robust positive mark to markets of 24.2% on a cash basis and 19.2% on a GAAP basis.
Mark to markets in New York was 0.3% cash and 2.7% gap.
Mark to markets in San Francisco continued to be stellar at 37.4% cash and 27% gap.
Turning to our balance sheet, we ended the quarter with over 1.35 billion in liquidity comprised of over 550 million of cash unrestricted cash and 800 million of capacity under our revolving credit facility.
Cash balances increased by roughly 150 million since the last quarter driven primarily by the proceeds generated from the sale of a 10% interest in 16 33 Broadway.
Our outstanding debt at quarter end was 3.83 billion and includes 200 million that was board under our revolver.
Other than the borrowings under our revolver all of our debt is secured and non recourse.
This debt has a weighted average interest rate of 3.1% and a weighted average maturity of 5.2 years.
83% of our debt is fixed and has a weighted average interest rate of 3.4%. The remaining 17% is floating and has a weighted average interest rate of 2%.
We have no debt maturing until the fourth quarter of 2021 and beyond that our maturities are well laddered.
With that operator, please open the line for questions.
Thank you at this time will be conducting a question.
Fashion.
I'd like to ask your question. Please press star one on your telephone Keith.
Hey, confirmation telemarketing labs in the question.
You May proceed start to feel like.
From the Q.
For participants uses speaker equipment, it may be necessary to pick up your handset before a pressing the star key one moment. Please why we poll for questions.
Yeah.
My first question comes from Derrick Johnson with Deutsche Bank. Please proceed with your question.
Of these renewals deals.
Is it the tenants desire to lock in relatively favorable terms caused by the pandemic is it the expectation that they perhaps won't need additional space in the near to midterm given work from home success.
Any additional trends emerging.
Or where data that you can share on these elevated renewals.
Derek I think we missed the first part of your question could you could you say that again I think it's about the work from home.
Situation, but maybe you can can do it again I think that came through.
While Billy.
Of course, Albert and I'll paraphrase, so just looking at what's driving the pull forward.
Deals.
And you know didnt have a great sense as to whether or not it was tenants looking to lock on favorable terms caused by the and damage.
Or maybe because they don't think they're going to need additional base in the near term given work from home success any any trends that you can share. In addition to your prepared comments would be.
Thank you.
Sure Derrick.
The this is pretty normal when.
And these kind of business environments.
Similar to what happened after September 11.
Or after the great financial crisis.
Tenants don't if they have to.
Extend or make a decision their focus on rather shorter term and they.
They don't want to make additional investments major decisions.
So that's very very typical.
And.
I have to say there was no real pressure on pricing.
To the second part of your question.
I think the terms that Peter and his team.
We're able to achieve for market and.
And we're pretty much as expected.
Okay. Thanks Albert.
How do you guys think about balancing capital allocation priorities, especially given since June 33 Broadway.
How do you look at further acquisitions, perhaps him San Fran or other markets.
Potentially redevelop.
Turning that that or even possibly contemplating share repurchases at these low valuation how do you kind of back that up.
Currently and this kind of environment the priorities.
Keeping liquidity and capital preservation until you have a good visibility on the recovery and.
You see term of.
Don't catch a falling knife I think it's too early to really.
Analyzed capital markets development with regard to property values and be a clearly not an acquisition mode in general.
Its liquidity preservation and.
Do you need to find a.
A willing seller and are willing buyer and currently that has not been defined yet.
Yeah, now understood and and lastly.
Historically, we've kind of thought of how amount as a three market the company as you.
Do you see.
Looks like it's going to be San Fran in New York going forward.
It is there any appetite or potentiality, or perhaps seattle or or L.A.R. or another market you know even if it's several quarters down the line or or is your footprint. We sat thank you.
Yeah I wouldn't.
Currently do anything entrepreneurial and a new market it's.
As I said before it's way too early to do something like that I think DC, we invested at the right time, we we harvested what we what we worked on most of the properties got at least.
In a pretty solid market.
Currently.
As we pointed out we are in the process of selling all last assets, we are still asset managing and NDC. That's a market that might become attractive I don't see to become attractive for investments within the next year or so but.
We still have.
Small.
Operating management platform there for the asset said, we are managing for.
For.
Assets it outside of Paramount group.
We are not considering two going into another market like you were saying Seattle or so at this point.
Thank you guys.
Sure.
Our next question comes from Blaine Heck with Wells Fargo. Please proceed with your question.
Great. Thanks, So clearly the biggest question and focus for you guys continues to be the Barclays Backfilling 13, no one.
Can you just gave a little more color how much current activity you guys have there you know how has the market changed since even just last quarter or maybe just discuss your level of willingness to be flexible on rent or concessions in order to get a lease signed and in a tenant in there.
Hi, Brian This is Peter what I would say is that we continue to have productive conversations it has slowed a bit as tenants recalibrate their own requirements and what they require space on a go forward basis, we have put together what I would say as a very effective presentation that.
We've been sharing with both tenants in the market and the brokerage community and all of the attributes that we've talked about have been very well received.
The private welcome center of the enormous branding opportunity the outdoor space that we can create and so when we think about our offering relative to other opportunities. We do have a lot of conviction in our pricing.
At this point there is some price discovery, taking place, but generally speaking relative to other large blocks of space as well located as ours.
There are not many at our price points. So.
We think that as tenants further define their requirements will be well position to capitalize on that demand as things start to normalize.
Okay. That's helpful.
However, I wanted to go back to one of your comments during the prepared remarks he said.
You guys have been approached by tenants that are asking for more space to densify or or maybe reconfigure their office environment. The healthier and safer can you just expand on that a little bit is this something that was just a one off requests or is it more widespread throughout your portfolio and I guess how much.
In the way of additional space requirements do you think this trend could create.
I think it's still very early.
At this stage two to have these kind of discussions.
Tenants are.
Focus more on the re entry.
To get their workforce back into the office space.
And I think Thats focused for most of the tenants more like early September.
But we we had a couple of requests and especially when there's an opportunity like there's a small vacancy next to an existing.
Attendance occupancy and and they want to be early and.
On their plans and.
They have requested.
Whether they could potentially take those take that space. So we think that this will accelerate post crisis.
Those currently people are focused on the day today and.
I think that's that's one of the trends as we focused on.
Okay, that's helpful and.
And then maybe one one last Walker will occur.
We appreciate the conservative approach to same store NOI.
But given that some of the peer group that you mentioned is reporting same sort of using a calculation that does include.
Net revenue that was deferred despite the fact that they're not actually collecting that cash during the quarter.
If you were to do that for you know what the result would have been for your cash same store in Hawaii.
Yes, but I don't want to give you an exact figure, but needless to say would be higher.
But look we it's I don't want to comment about other people other people have a greater exposure to retail we are office centric.
You know with large credit quality tenants, it's for us retail as I as as Albert said and I said in our prepared remarks I'd service oriented retail. These are newsstands restaurants at the base of office buildings.
And they all feeling a lot of pain, so for us too.
Sit here and prognosticated when all its three months people will come back to the well to look for additional relief based on the reopening protocols, we thought it would be prudent and the most conservative approach to take that number out and so weekend presented to our investors the true cash and the to same store and and the two operations of the.
Business in this period.
Got it okay fair enough. Thanks.
Sure.
Our next question comes from Steve Sakwa with Evercore. Please proceed with your question.
Thanks, Good morning, I know, it's not a large number but on the lease expiration schedule. There's about a 135000 feet I guess about 91000 at your share.
That comes due basically in the back half of this year you can you kind of provide us an update on kind of the status of those and then.
So could you maybe just talk about the TD space that comes back in the second half of 2021.
Sure I, maybe I'll start and then and Peter and Albert can chime in.
Youre right, Steve basically we have 91000 square feet at share and if you look at where occupancy is 95.7% on on the recurring on a continuing portfolio that would equate to bringing occupancy level down about 1%. We are based on the.
The outlook, we have and the discussions are ongoing we think that number doesn't goal.
Well below possibly a 20 basis point or 25 basis point reduction. So we feel good about the explorations in the back half and the possibility renewing a majority of them.
Steve as it relates to the TD space, roughly 130000 square feet expiring in April of 21.
The building shows beautifully the lobby as most recently been re done it's one of the more highly regarded class eight products in Midtown we've begun marketing those floors, which are highly efficient floors and.
We.
Look forward as as tour activity and activity in general start to come back at some point hopefully in the near future. We look forward to to providing an update on on the progress we're making at 31 west 52nd.
Okay and I know this is a very difficult question that sort of try in.
Triangulate or come up with but do you have a sense.
Kind of where you think the whole portfolio stands on a mark to market basis, I realize there's a lot of questions about what market rents have done or have not done and.
Discussions maybe about T.I.s.
But could you just maybe give us where you think the mark to market is today and then maybe Peter just talked about concessions in the marketplace.
You think they may change going forward.
Steve like is that it's very difficult question, then I think it's too early to answer that.
It's and it really depends also.
On property by property.
And is different from San Francisco, and two New York I would I would rather answer that on the next earnings call.
But when the market has.
He has played out a little better yeah on concession, Steve I think CBR requests.
Hi around 107, and free rent around 14 months for deals.
10 years or more in length I think the reality is in terms of new activity. There havent been a lot of data points over the last quarter I do know in a few instances on a few select deals that were executed there was another month or two given.
To finalize the deal during this turbulent period of time, but but generally it's really I think too hard to say.
What what ultimately happens by way of economics on on deals going forward.
Okay and then just last question I guess Albert on on the debt book, and just kind of meds physicians and kind of what you guys you're seeing in the marketplace any activity or anything that we should be thinking about as it relates to your funds and.
Any kind of future investments or anything that you see on the distressed side.
Well, we Oh fund eight is fully invested as you know and.
Our acquisition team is analyzing opportunities actually quite caught Libya.
Seeing opportunities getting better.
Over the next 12 to 24 month.
Because I think liquidity is still.
Pretty pretty.
Pretty strong currently and the bid ask spread.
Well, we're narrow over time. So we are analyzing a lot of it. We are also as you know raising a special situations fund.
Opportunities that come up this is something that we had already in the pipeline before the pandemic hit not that we know anything more than anybody else, but we had a special situations fund.
In the great financial crisis at the end.
Which was quite successful and we see opportunities. There. This is a fund that can invested activities as well as.
That positions and.
I think thats, an area where we.
First of all of you have a lot of investor interest and where we see opportunities over the next 12 to 24 month.
Great. Thank you that's it for me.
Sure you're welcome.
Our next question comes from Jamie Feldman with Bank of America. Please proceed.
Thank you.
I want to talk about sublease space, increasing in both New York in San Francisco I'm, just curious where your view as of.
How much higher you think it could go and what the impact is on the leasing market and potentially economics.
Sure Jamie in New York in Midtown, specifically sublease space is 21% total availability is about 6.3 million square feet, which is very much in line with the five year quarterly average. So it is not elevated there are rumors about some tenants potentially putting space on the market.
We haven't seen it yet.
More normal levels like I just described so so.
We're paying close attention to that because obviously sublease space oftentimes puts downward pressure on.
Direct average asking rent in San Francisco Sublease space is elevated in excess of 4 million square feet. If you look in the CBD, specifically, where we're looking at of course, it's roughly 2.6 million square feet, which is.
Less than 5% of total inventory so it is elevated sublease space.
Can be potentially difficult to deal with you'd like to see some of that absorbed in the near term of course with all the obvious reasons.
But but it is slightly elevated in San Francisco, we are paying close attention to it as it as a factor.
Are you starting to see that space.
Come up as competitive in your at least discussions.
And we Havent.
Now we have not.
All right and you had talked about at the outset, it's called some of the retrofits you've done in terms of upgrading filters and I think you said sensors can you talk about anything else you've done.
As a result, this covidien just what the costs have been.
Well the cost is.
Jamie a factor that is really pretty much de minimis and.
We we have talked to our tenants and the tenants no that this will be most probably.
The operating expense full and they they.
They see that this is a requirement and they can deal with it I think.
The main focus of the tenants is to to be in a safe environment to make sure that the employees come to an office building that's run in a first class.
Fashion, and it's really not something that will.
The significant to the bottom line.
Okay, you think that's doing it because you can pass it through or just not significant overall.
Significant overall and it becomes even more insignificant when you can pass it through.
And of the any other any other projects, you're contemplating that might be larger.
No.
Not not very glad.
Okay.
And as you think about potential distressed opportunities.
You know given.
More of a focus on wellness standards going forward are there certain.
Qualifications of buildings that you would only look at me is there anything that maybe you would have looked at pre covidien now you're not willing to based on either a major.
Our quality or any of the other kind of new things people are thinking about.
That's a good question, Jamie we have because we really believe in quality assets.
We have been.
Pounding that.
And.
For a for quite some time because the quality of assets is important.
To to create a strong portfolio.
With with long term leases and credit tenants and I think I'll focus will be even more focused on these kind of assets that have some other issues more on the financial side.
Well well sell on needs needs help on the is a difficult situation on the financing side, where we could basically a bridge the gap, but from an asset quality point of view I think we're looking more for.
Clos a now than ever.
Okay.
And your capital partners.
You guys are focused in San Francisco in New York, but is there any interest in for them and.
Maybe pursuing markets they haven't in the past given maybe population trends or just any other things that they're thinking about that they didn't in the past.
No not at this point I don't think that.
Our investment partners.
That fickle.
That they believe that this is a long term trend.
They're very much belief in.
Our strategy.
Of CBD markets and.
Believed that this is something that will be overcome within the next 12 to 24 month. So they see the opportunities say there.
Rather than running with everybody else with the heard the.
Doing what we do and tried to be counter cyclical.
Okay.
And then.
I know you took some impairments or.
Right got that credit tenant.
Jimmy review the debt book as well you take any charges there how do you think about the risk of that going forward.
So that book that you're referring to obviously it fits in our fund business, which is we represent a very small portion of it and so we on not our our requirement to take any reserves on that it would be obviously the owner of that asset who would have to look at that.
That said, we Havent had.
Real distressed signals in that book yet.
But we are well we're doing our best to monitor all the the mess positions we have recently the fun.
Okay, you're seeing none of those positions have been impaired.
Into the fund.
Now so again I don't want to comment on what.
People are doing with respect to the assets I think the positions. We have there. There is one investment that's been broadly talked about in the market, where we had a position.
But other than that we are looking pretty good on that book.
And again, Jamie being the.
Public company investment in those funds is de Minimis.
We we have a 10 million investment and 800 million dollar fund just too.
Remind everyone.
Okay all right. Thank you.
Sure you're welcome.
Our next question concern Vikram Malhotra with Morgan Stanley. Please proceed with your question.
Hi, Thanks.
So I I recognize it's probably early heard this question are there may not be an update but any any incremental talks on timing or strategy around leasing up the Henri bendel space.
Become you.
I mean, you know well how the retail market works. So it's really too early to tell.
Tell you anything.
About that situation you can imagine.
Up and down on fifth Avenue with.
In addition to the pandemic, having the demonstrations over the last couple of weeks it hasn't improved.
The.
The showings, so I really can't give you an update on that.
Interested parties.
I believe it or not.
But it's too early to to say anything.
More than that.
Okay fair enough.
Just the known move outs are you talking little bit about DD can you just clarify over the next call. It 12 to 18 months or there are there any other known kind of move outs call. It over 50000 feet.
Well I think you know Barclays you know TD and.
I don't think Theres anything anything else, that's in rig or am I mean.
The question earlier, when you look at what's happening in the second half of this year, which is about 90000 square feet look at what's happening in 2021, it's about 960000 square feet and when you aggregate all that million plus square feet together.
As Albert said Barclays is 500, that's a known move out NTD.
Pre pandemic was a intending to move out so those are the two only spaces that are in a in the range coverage that you articulated that I've known move outs.
Okay Fair enough and then Wilbur just I wanted to clarify the.
Vision due to kind of straight line write offs related to you know the retail tenants.
Then what you what you wrote off and preserve our reserve for that is the the total amount right. There's no like you assess that certain amount and said this is what may not get paid in the future and this is could be you just took or you just wrote down the entire a chunk of it and notch the.
Fixed what you talk may or may not occur in the future.
That is correct I mean, we did not sit here and try to assess.
You know it should we take a reserve against 20%, 30%. We we thought the most prudent conservative approach would be that's reserve the entire amount, we obviously going to retain our rights and not a no way gives the tenant any relief from a legal perspective, but from keeping our books and records clean.
As of the 100% of those tenants balances and we've effectively moved to a cash basis of accounting because as I said before you don't want to be in a situation where the initial deferral was for two months in three months in the Lockdown continues and then you have to.
Yes, I'll do this again next quarter for another three months and then reassess how much of that you should reserve against if they pay US we will record that income when and when and if they pair and that's the approach. We took so that should not occur next quarter absent a not the pool or another way.
Well, if any any of the discussions but everything we did was based on the discussions and amendments and executions, we conducted in the quarter.
And just lastly, there is there a part or discussion you had with any of these tenants that are now cash being that you may decide to have some sort of percentage rent in there.
Well, that's the that's potentially.
With with retail tenants.
That is if you want to throw them a lifeline that that is.
It is helpful because.
As we said before some of these tenants are really an amenity to the office buildings.
We like to worked with them.
Because you don't want to have a.
An unused space.
And for the next 24 to 36 months, while the market recovers I think it's an amenity that.
Provides the office tenants was services.
And so we're working with tenants there and percentage rent is one of the features that you might use I think I'm just to add to what Alberta and further clarify that was discussions on on the persona is not in and then not with the intent that youre going to take a a lease.
The agreement and moved from a fixed base rent concept to a percentage room concept for the remainder term. It's mainly you used as a bridge a such that those tenants Ken can get back on their feet and then.
Payback.
Over the over the remaining lease terms I want I was just make sure that's clear.
Great. Thanks, so much.
You're welcome.
Our next question comes from Tayo Okusanya with Mizuho. Please proceed with your question.
Hi, Jeff Good morning.
In regards to your buildings and kind of retrofitting the building to get a client a tenant is much more comfortable.
With there with the with the health requirement.
One of the building have you had any challenges at this point in regards to retrofitting anything simply because of just the age of the building. The when he was built or or do you kind of feel that some of your older buildings can be effective new retrofitted.
So that all those issues or or concerns our deviated.
Our buildings our class a they are state of VR, we've maintained and we've kept up with latest technology by way of infrastructure, we did make some tweaks.
Replace some filters in order to improve air filtration, we think we've been highly effective in and rolling that out across the portfolio. We do perceive physical occupancy to be very important toward igniting new activity once again and so it's in our interest to get tenants back and we think obviously a big part of that is making them feel safe we've been highly communicative.
With our tenants about what it is that we're doing operationally and otherwise and we think not only do the tenants appreciate it but we think our buildings in our portfolio are extremely well positioned to accept.
Every occupancy of our tenants and that's a function of not only the infrastructure, but the protocols we put in place.
And let me add the this Albert Bourla, Let me, let me add that the age of the building is not necessary, saying anything about.
The quality of the.
Of the office space.
We have assets.
In our portfolio that.
That are a little old as long as you have the floor to ceiling heights.
To build out the space properly.
You and a good position and we are as Peter was saying we are maintaining our.
Properties in a first class fashion since.
Before we went public that's part of the culture of the company.
And and so.
So we didnt have any any issues with the.
Getting them.
Through preparing for the re entry now.
Great. That's helpful. And then just a me I've missed this earlier on but any additional insights and we got you up prop 13 mine, California at this point as we get closer to the election.
No I mean, it is our view that doesn't pass.
I'm not based on I'm curious what that is based on.
Hi, just based on talking to people in the market then and.
And that said, we don't have any other.
Greater inside than that.
Okay, but.
Thank you.
You're welcome.
Our next question is from Daniel Ismail with Green Street Advisors. Please proceed with your question.
Great. Thank you good morning.
Hey, that's on your plans and timing to start over debt maturity at 13.1, particularly in light of the Barclays exploration.
HM it's.
It's still relatively early we're talking about October next year and it's.
Something that we would consider of course.
Early in 2021, if we have some activity.
It is better to get the better terms. If you have some leasing activity on the backlist space it be have documentation on and that's a that's how we consider it its debt that should not be problematic to refinance.
Our team has been in the market.
For a couple of assets that we are managing and asset management pool. So we are well aware how the market works.
And we don't see any liquidity issues whatsoever.
So.
Is your sense that underwriters haven't really changed how they viewed office properties.
With near term Waller and gateway locations or anything like that those coding.
That's that's correct and actually the liquidity.
Is in certain areas better than before.
This low interest environment.
You have various different sources outside of the United States.
Who who want to put their money to work and as you know we have all connected in these pause.
Yeah, I would say that the one thing that underwriters are probably focused on.
A little bit more then then in the past because it was a given its run collections and if you can see from our portfolio, where those I guess, Dan. So that's a question we do get too just.
As we are going to this understanding the tenant the credit as a tenant whether they're paying rent currently whether we've engaged into any deferrals and.
Based on based on our results we've had no issues.
And.
Maybe following up on that given where debt costs and hedging costs have trended.
Could we see cap rates for stabilize class, a CBD office properties and while we're whites transactions and price discovery reasons.
Yes that that's actually happening in other markets of the world.
Were you that markets that have managed to pandemic a little better.
Then the United States at this point.
You see that.
The cap rates are holding up or even improving because of.
The low interest rate environment and the expectation.
And in many countries you have negative interest rates as you better now than I do and there's a tremendous demand for hard assets and to invest in those.
Great. Thanks, everyone.
You're welcome.
Our next question is from Tom Catherwood with BTG. Please proceed with your question.
Excellent. Thank you just a quick one for me guys.
Peter You had mentioned obviously thought at the low lease roll over the next few years, but one thing you guys had been successful doing in the past is moving tenants around creating contiguous blocks of space and kind of maximize the you know the needs of growing tenants with those that want to shrink with.
In your portfolio.
Do you view that as an opportunity given the dislocation in the market and kind of what are you seeing from your tenants that you thinking about people take advantage of in the near term.
Well you know, we have really very close relationships with our tenants and when we nurture those I will tell you that some of the activity that I've referenced historically as it relates to 31, our with with tenants that have said, we may need some additional space.
So some of that composition, if you will have perspective tenants.
Comes from existing tenants, but we're always thinking about ways as a read that weekend structure deals that are accretive and you know the reality is we do have very strong tenants in our in our portfolio and and we do expect that as they they reconfigured our space and bring their employees back to the office that those are the.
Types of conversations that we will have perhaps even more so than we have in the past and so.
Those those are relationships that.
We manage and take very seriously and nurture as I said.
Got it thanks guys.
Thank you.
Ladies and gentlemen, we reached the end of the question and answer session. At this time I'd like to turn the call back over to Albert Behler for closing comments.
Thank you all for joining US today, we look forward to giving you an update on a continuous progress when we report our third quarter results during the fourth stay safe.
Goodbye.
This concludes todays conference you may disconnect your lines at this time and we thank you for your participate.
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