Q4 2020 Paramount Group Inc Earnings Call
Good day, ladies and gentlemen, thank you for standing by welcome to the Paramount Group fourth quarter 2020 earnings Conference call.
At this time all participants are in a listen only mode.
And the answer session will follow the formal presentation.
Please note that this conference call is being recorded today February 11th 'twenty 'twenty one.
I will now turn the call over to Rob Simone director of business development and Investor Relations.
Thank you operator, and good morning by now everyone should have access to our fourth quarter 2020 earnings release on the supplemental information.
Both can be found under the heading financial information quarterly results in the investors section of the Paramount website at Www Dot Paramount Hyphen group Dotcom.
So some of our comments will be forward looking statements within the meaning of the federal Securities laws forward looking statements, which are usually defined by the use of words, such as will 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 negative impact of the coronavirus COVID-19 on the U S regional and global economies, and our tenants' financial condition and results of operation.
Therefore, you should exercise caution in interpreting and relying on them. We refer you to our SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition.
During the call we will discuss our non-GAAP measures, which we believe can be useful in evaluating the company's operating performance.
These measures should not be considered in isolation or.
Or as a substitute for our financial results prepared in accordance with GAAP.
A reconciliation of these measures to the most directly comparable GAAP measure is available on our fourth quarter 2020 earnings release, and our supplemental information.
Hosting the call today, we have Albert Behler, Chairman, Chief Executive Officer, and President of the company will overpay as Chief operating Officer, Chief Financial Officer, and Treasurer, and Peter Brindley Executive Vice President head of real estate.
Management will provide some opening remarks, and we will 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.
We hope that everyone is staying safe and healthy.
I am very proud of how the Paramount of team has performed during these unprecedented times.
Yesterday, we reported core F. The old for the fourth quarter of 24 cents per share.
The resulting in core F F O of 96 cents per share for the full year.
These results reflect the strength of our assets and tenant base.
Today, we are initiating 2021 core <unk> per share guidance between 82 cents to 88 cents per share.
Whoever the review our financial results and all of 2021 guidance in greater detail.
Looking back at 2020 as a whole no one could have predicted the crisis that quickly unfolded and shocked the global economy.
The world seemed to collectively hit the pause button.
The U S office market, both public and private was no different.
The robust leasing environment of the previous year effectively froze as company's weighted to see what would happen before making any major decisions.
Paramount like most of our fellow office landlords took a defensive stance focusing on preserving liquidity and monitoring our tenants for risks to the portfolio.
I am proud to say, we fared better than most thanks to the hard work of everyone. Here has done over the years to secure our roster of blue chip tenants that were carefully evaluated for the ability to withstand market downturns.
We entered 2020 and the very strong position to endure a global market crisis.
We benefited from years of strong leasing execution without compromising on all of a stance of always leasing for the long term.
This has been evidenced by our strong rent collections, which were $96 seven per cent for the entire portfolio during the fourth quarter, demonstrating our disciplined underwriting and the overall resiliency of our portfolio.
While all of buildings have remained open throughout the pandemic most of all the tenants have and continue to work remotely.
We remain in regular contact with all the tenants ensuring that those who have returned and joy of safe and healthy working environment.
While we look forward to welcoming all of our tenants back to the office, we do not anticipate a major shift in tenants returning to the workplace until the second half of 2020 of them.
Most business leaders want the employees back of the office, but that is unlikely to happen until the majority of the population is vaccinated and the rate of infection drops.
The good news is that the government has an aggressive mandate to ensure the population is vaccinated and the two vaccines that have been approved by the F. D. A.
High efficacy rates and the third vaccine is nearing approval.
All of this bodes well for a return to normalcy as businesses reopen and travel resumes, which will undoubtedly result in a period of strong economic recovery on.
On the leasing front, we remained laser focused on all of availabilities, namely the 500 thousands of square foot Barclays block at 13 of one six Avenue at the hundreds of 30000 square foot block at 31, the best 52nd Street.
Peter will provide additional details on what we are seeing in the market.
Notwithstanding a difficult leasing environment, we managed to lease almost 700000 square feet of space with an average cash mark to market of 18.5 per cent.
As I mentioned on our last call one of the most important leases. We signed this year was a 16 year lease with iconic luxury jewelry.
Harry Winston.
This was a highly unique transaction that was executed by us internally, resulting in the lease up of 23 per cent of the available, but the retail space at 712 fifth Avenue for essentially over 80% of the previous fully escalated rent of the prior tenant.
The deal represents a powerful example of the attractiveness of the asset and its location as well as our approach towards long term value creation, even in a recessionary environment.
Turning to the transaction market.
While there was an uptick in activity in the fourth quarter overall transaction volume remains low.
Core assets that are well leased with the blue chip tenant roster and longer weighted average lease terms are commanding superior pricing and.
An example of this was a 10% sale of 16 33 Broadway the largest asset in our portfolio both in terms of size and from a valuation perspective.
The transaction, which we announced and completed during the second quarter raised over 110 million of net proceeds and values the property at $2.4 billion on $960 per square foot.
This deal of demonstrated the underlying long term value of our real estate and the markets where the operate.
Currently there are very limited distressed opportunities in the market due to lower interest rates and ample liquidity.
We do anticipate however that these opportunities will increase over the next 12 to 18 months and we will be ready to take advantage of these opportunities through our joint venture relationships.
During the quarter. We also completed the sale of 18 99, Pennsylvania Avenue for $103 million. This completes our strategic exit from the Washington D. C market. We believe the discount at close was reasonable given current market conditions and the up please.
The that the transaction closed on time during the quarter.
As we look back to the year that was <unk>.
And look forward to the year that will be the.
We remain optimistic and focused.
Optimistic that the pandemic the soon be behind us.
Optimistic that people are tired of being isolated and look forward to returning to the normal lives.
Optimistic that this economy, the roar back to life as restaurants and movie theaters reopen and travel resumes.
And we remain focused.
Focus on the health and wellbeing of our tenants and the employees.
Focused on leasing our available space and focused on creating value for our shareholders.
With that I'll, the turn the call to Peter.
Thanks, Albert and good morning, everyone.
During the fourth quarter, we leased more than 87000 square feet at a weighted average starting rent of $90 81 per square foot.
The majority of our fourth quarter leasing activity was once again renewal based and serve to further reduce lease roll in 2021 and beyond.
At quarter end, we were 95, 2% leased.
Down 40 basis points quarter over quarter, and 70 basis points year over year.
Adjusting for the January 1st exploration of the bark of Barclays. The 13 O. One Avenue of the Americas the portfolio stands at 89, 7% leased.
We remain laser focused on the lease up of both Barclays block of 13 O. One Avenue of the Americas and the TD Bank space at 31, West 50, <unk> Street, which together comprise of approximately 629000 square feet or approximately 7% of our portfolio at share.
Our overall lease expiration profile is manageable with approximately 8% expiring per annum on of square footage basis between 2021 and 2023. The direct result of our strategy to pre lease space and Derisk future lease roll.
While these two blocks of space remain among our top priorities in the near term. It has become increasingly apparent that manageable lease roll and a portfolio comprised of best in class credit tenants will serve us well as we work through these difficult times.
Turning to our markets.
In Midtown fourth quarter leasing activity of 1.4 million square feet, excluding renewals was 64% below the five year quarterly average and down 78% year over year. According to CBRE.
Renewals of approximately 1.2 million square feet were executed during the quarter accounting for a disproportionately high percentage of total leasing velocity consistent with our overall portfolio the.
The leasing mix typically shifts toward renewals during any downturn and as expected tenants continue to take a wait and see approach toward relocating expanding or making significant investments in new and longer term space commitments.
Additionally, sublease availability in the Midtown increased year over year, and now comprises 24% of all availability slightly above mid towns five year average of 20%, but well below levels realized during previous recessions.
Despite these current headwinds we are encouraged by the uptick in tours and expect that the number of new space enquiries and in person tours will increase as the vaccine is rolled out more broadly.
Our team's ongoing objective is to ensure that we are in front of every requirement capturing more than our fair share of the activity.
Not surprisingly we are engaged with tenants representing a variety of industries that have chosen to capitalize on the current market environment and upgrade the quality of their offices.
We expect to benefit from the ongoing diversification of Midtown the tenant base and the flight to quality trend as tenants pursue the most well located and highest quality assets and managers.
Our New York portfolio was 95, 1% leased on a same store basis unchanged quarter over quarter.
During the fourth quarter, we leased approximately 70000 square feet with initial rents averaging just under $90 per square foot.
As we have stated previously 13 O. One Avenue of the Americas remains our primary focus as we market the former Barclays block of space.
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 an enormous branding opportunity on the corner of 52nd Street and six Avenue, but also a way for a large tenant to control of both access and the overall experience.
For their employees and guests.
As you might expect the recent interest 13 of one has garnered has come primarily from financial service companies and also the technology sector, which continues to increase its share of occupancy in Midtown.
Additionally, we are marketing the TD bank space of 31, West 50, <unk> Street, a trophy property that appeals to the most discerning of tenants. We believe we are getting more than our fair share of activity in the market as evidenced by the number of tours, we have had and subsequent exchange of proposals and look forward to updating you on our progress.
Yes in future quarters.
Turning now to San Francisco.
San Francisco realized limited leasing activity during the fourth quarter contributing to a 300 basis point quarter over quarter increase in total vacancy as per J L. L. Non.
Non essential officers have been shut down by the city for more days during the pandemic than any other city in the in the United States.
This has resulted in very little new leasing activity in.
Instead, it disproportionately high percentage of the transactions have been renewables generally shorter term in length as tenants of taking a wait and see approach toward relocations expansions and longer term space commitments the.
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 large cap Tech financial services and life Sciences firms all of which will lead the way out of the recession.
Our of San Francisco portfolio was 95, 7% leased on a same store basis down 110 basis points quarter over quarter. During the fourth quarter, we leased approximately 16000 square feet for a weighted average term of four two years with initial rents averaging almost $97 per square foot.
This brings full year leasing in San Francisco to approximately 475000 square feet.
Approximately 68% of our 2020 leasing in San Francisco serve to reduce 2021 lease role in fact, our San Francisco portfolio has five 5% or just 128000 square feet at share Rolling in 2021.
Looking ahead, our overall lease expiration profile in San Francisco is manageable with approximately eight 1% expiring per annum on the square footage basis between 2021 and 2023.
Needless to say, our San Francisco portfolio is well positioned to manage through the pandemic.
With that summary, I will turn the call over to Wilbur, who will discuss the financial results.
Thanks Peter.
Yesterday, we reported core <unk> of 24 cents per share, which was <unk> <unk> ahead of consensus bringing full year 2020 core I first of all the 96 cents per share.
The current quarter's core of <unk>. Once again included some non cash write offs of straight line rent balances aggregating three per share. Excluding this write off of core up therefore would have been 27 cents per share.
Same store cash NOI was positive two 2% in the quarter, bringing full year same store cash NOI growth to positive 0.2%.
Our portfolio wide collections continued to be strong at 96, 7% during the fourth quarter with office collections at 98% and collections from non office tenants improving to over 60%.
As a reminder, our collection figures have always been based on pre COVID-19 rental obligations. As we believe this is a better and more factual depiction of the status of our business.
During the fourth quarter, we executed 10 leases covering 87283 square feet of space at a weighted average starting rent of $90 81 per square foot, resulting in mark to markets of two 3% on a GAAP basis and negative one 3% on a cash base.
This.
Full year of leasing activity amounted to 699159 square feet at a weighted average starting rent of $89 on 85 cents per square foot, resulting in mark to markets of 19, 8% on a GAAP basis and 18.
5% on a cash basis.
Yesterday, we initiated guidance for the full year of 2021.
Let me spend a few minutes discussing the assumptions used in our guidance.
We expect 2021 core of footfall to range between 82, and 88 cents per share or <unk> 85 per share at the midpoint.
We expect same store results to be negative this year driven by the two large known move outs of Barclays and TD Bank aggregating about 629000 square feet, which accounts for a majority of our lease explorations in 2021.
Our goal is the lease between 600 900000 square feet this year, including 50% of the Barclays space and we expect to end the year with the same store leased occupancy rate between 88 and 90 per cent.
As I highlighted earlier, we provided 2021 core of our full guidance with a range of between $82 88 per share or <unk> 85 per share at the midpoint.
While the midpoint of our core <unk> guidance is ahead of consensus by <unk> <unk> per share. It is below 2020 core <unk> by <unk> 11 per share.
The decrease of <unk> 11 per share is comprised of the following.
A five cent reduction due to the sale of $8 99, Pennsylvania Avenue in December 2020, and the sale of of 10% interest in 16 to 33 Broadway in May 2020.
A 17% reduction from the loss in earnings due to the Barclays and TD Bank lease explorations.
The nine cent reduction from lower straight line rent adjustments, which is more than offset by a 16% benefit from contractual rent steps and the burn off of free rent.
<unk> <unk> benefit from lower interest expense and a <unk> <unk> benefit from lower G&A expenses.
Turning to our balance sheet, we ended the quarter with $1 46 billion of liquidity comprised of $460 million of cash and restricted cash and the full billion dollars of capacity under our revolving credit facility.
Outstanding debt at quarter end was $3 6 billion and has a weighted average interest rate of three 2% and a weighted average maturity of four nine years.
This of course includes the death of the debt at 13 O. One that is set to mature in November of this year. Excluding the 13 on one that the weighted average interest rate on the remaining debt is three 4% and the weighted average maturity of six two years.
As we have previously discussed it was on plan all along to approach. The 13 on one refinancing in early 2021. We are currently in the process of doing just that the debt markets have improved significantly from the onset of the pandemic and that bodes well for this high quality asset.
Notwithstanding the existing vacancy.
We'll provide an update on the status of this refinancing on our next call.
Lastly, we have updated our investor deck, which among other things lays out the building blocks to our 2021 guidance and free rent burn off schedule of.
This can be found on our website at www Dot Paramount Hyphen group Dot com.
With that operator, please open the lines for questions.
Thank you we will now be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad, a confirmation on totally kind of your line is there any question too.
You May press star two if he would like to remove your question from me too.
Four of participants using speaker equipment, it may be necessary to pick up your handset before pressing the star two.
Our first question comes from the line of Steve <unk> with Evercore ISI. Please proceed with your question.
Thanks, Good morning, maybe Albert of Peter could you guys just talk a little bit more about the the.
The goal of six to 900000, and maybe talk a little bit about the pipeline today and how you maybe see the leasing the unfolding I guess, Alberta as you talked about employees really aren't coming back of the office till probably the second half of the year. So just how are the discussions with companies going how's the pipeline stack up and how.
How do you sort of think the leasing volume unfolds over the course of the year.
Yeah. The steep morning, it's a very good question I think I would like to summarize it and then Peter will go into more detail.
The activity, we will be very focused on who.
Who to talk to and I think currently you see you see tenants in the market, who really need space and some of them are more long term focused and not looking at the next 12 months, we want to make sure that their business model works the long term and those of other kind of 10 of.
We are going to talk to and in communication with and the.
That that kind of communication has stopped the stronger by the end of last year.
And.
We think that.
Most probably we will have more.
The real signed Inc to leases by the second half than the first half of this year, but its a its hard to at this point too to summarize and predict because we went through so many different.
The changes of the pandemic over the low end the impact on the on the.
Coming back to work.
On the scenario that that prediction is a little little difficult, but we.
We are cautiously as you could see I think from the earnings.
Earnings call cautiously optimistic yeah, Steve.
Steve There is no question is as we have said before the getting people back into the office directly correlates to the general leasing velocity on the market, which we all recognize is in 2020 very challenge, but I will tell you that we have a lot of conviction in our offering we are having meaningful conversations with with Teck and with financial service based companies varying of.
Sizes of call. It from one floor of two two the majority of the space that we're marketing at 13 of one and also 31 west. So we are actively touring in fact, we had of 300000 foot towards us yesterday.
We are also giving virtual tours I think in every instance, we're putting our best foot forward and communicating the various attributes of this offering that we.
Have a lot of the conviction in and so we.
We continue to do all of the right things as we have in the past as we've leased up large blocks of space before.
We're communicating with tenants I think in many cases that are looking to upgrade their current office and participate in this flight to quality trend that we are now realizing and in many cases, we're talking about long term deals here, where tenants are committed to improving space and doing the long term deal with us. So look I think things are moving slower than any of us would like but we've been here every day. The team has entered.
Josh we like who were communicating with now in terms of credit and the opportunity tenants are latching on to the private entrance among other things that we're communicating as part of our offering.
And that's that's what the current state of searching on one of 31 west are at the moment.
Okay, Peter if I could just ask the follow up for the for the new tenants that you're talking to I realize it's still early and there.
And the thought process, but you know how are they sort of thinking about densities in states you should states usage and you know that's 300 thousands of what tenants.
Are they on a similar sized footprint today or they end up bigger or smaller I'm, just trying to get a sense for how tenants are really thinking about densities work from home.
And overall space needs are since we haven't seen much new leasing activity.
Yeah, I think Steve I think it's yet to be decided quite quite frankly, it's entirely fluid we're talking to tenants. We're talking of architects I don't see at this point a lot of change on the other side of this pandemic by way of configuration in terms of how tenants are improving their space I think it will be somewhat similar to what we had experienced.
Experienced pre Covid. However, I don't think it will be nearly as dense the densification trend that we've been contending with for more than a decade I think.
Will ease because that was already in motion pre COVID-19. So.
So I think what Youll see is perhaps slightly more rentable square footage attributable to each employee, but I do think companies are going to look for innovative ways to get people back in creative ways that foster collaboration because because certainly that is of critical importance of these companies remaining productive. So in speaking with architects and tenants. They are trying to figure out how they create the.
Of communal spaces.
That that encourage collaboration.
But in terms of overall configuration I think it's really hard to point to any trend that that's different from what we what we've experienced historically other than perhaps a little bit more space per employee.
Yeah.
Okay, maybe Albert just one question for you on transactions I mean, you sort of mentioned that there hasn't been a lot of distress in the marketplace, maybe for obvious reasons with the rates being as low as they are but it sounds like you know you've got some funds and you've got partners. I mean, how are you sort of thinking about transaction activity, given where your stock price sort of.
Trade the it sounds like you do most of these in joint ventures, but what are you are you looking for lease up opportunities and you're just looking for high quality deals of discounts that don't have a lot of leasing risk I mean, how are you sort of thinking about what to put it in the portfolio whether it totally under JV.
As I mentioned.
It's a it's a little early to.
To come up with Oh to find opportunities I think theres no theres no stress in the market yet because of a lot of liquidity, but the opportunities we look at and we do this.
In general also for our mezzanine business.
And we get kind of the the first indication of where the market is trending.
We we are focusing more on value add in the future.
But we think that that's too early at this point to really.
Go into specific markets, we don't see an opportunity and you know we wanna be staying very very careful with the was investing of P. J <unk> equity in those kind of and those kind of investments.
And mainly focus on joint venture opportunities wherever you can end the had solid returns on property management and other fees. So we are looking at the value creation, so opportunistic and not long term the Lee.
<unk> the opportunities that's not our kind of the business model.
Okay. Thank you that's it for me.
Sure. Thank you.
Our next question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.
Great. Thanks. Good morning, just following up on Steve's earlier question and probably for Peter can you just talk about what you've been seeing on the concession side of things in New York and and what you think it's kind of going to take on both of the Ti per square foot and free rent per year of term to get these deals done at Barclays space in TD space.
And do you think theres going to be any major differences in the concession packages between the two spaces.
Hi, Blaine I think.
I think concessions are slightly elevated relative to where they were pre COVID-19 I think on of free rent basis, if you're if you're negotiating with the credit tenant youre going to be slightly.
The more slightly more than a month per year of term call. It and I think T eyes have elevated.
Weighted slightly I think you're generally on a on a long term deal and the 100 Thirtyish neighborhood.
And generally I think.
The direct rents of generally held up I think I think net effective rents have been impacted largely as a result of of the slight increase in concessions that that owners are having to give in order to transact right now during this during this window of time.
That makes sense and any difference in the concessions between the two spaces or do you think it'll be pretty.
Pretty similar.
I think you can assume that there'll be similar.
Okay helpful. And then maybe a couple of for for either Wilberger Albert I'm.
Just wondering what your appetite is for share buybacks and in 'twenty. One would you need to sell an asset to resume buybacks or do you think of you guys have the capacity for more of a while staying within your kind of the targeted leverage range without additional capital.
We've always done buybacks and we've said that we've done it on a leverage neutral basis. If you look at what we did in 2020.
Yes, we did that by transacting at 16, 33 and use that capital to buyback so.
Right now, we're being very very mindful and focused on on the balance sheet on the liquidity on balance sheet. If you saw the shares we bought back in the fourth quarter was around $11 $5 million.
Which was very opportunistic at a price of $66 66, So I don't think we have.
We're going full on.
Buyback of using existing cash on balance sheet, we're going to be losing.
40, $45 million or so on cash flow in 2021, given the Barclays vacancy given the TD bank of vacancy and these are non move outs. So I think we're going to be very very thoughtful.
We feel there is opportunity of the market to buy back stock because of such a continued depressed values.
We will look to be opportunistic as yet.
Got it that makes sense of last one for me sticking with the U Wilbur again, we appreciate your conservative approach to the cash same store NOI and excluding the non cash revenue from deferred rent as you've been granting it to certain tenants, but with respect to cash same store NOI guidance similar to the way that those the.
The roles hit hurt your cash same store in 2020 is there a positive tailwind from the repayment of those deferred rents being factored into that flat to negative 2% guidance.
Yes, that's the last of one point Blaine. There is there is some element of that payback of that is factored in because otherwise if you were to run that.
You could not come to the range. We provided if you had not factored some of that tailwind.
Got 40 plus million as I said coming out in cash and that would otherwise lead you to be significantly negative on a same store basis in 2021 and and <unk>.
Between negative two and flat. So there is some element of that tailwind that you've talked about there's obviously the burn off of free rent that's factored into that number largely.
The deals that were last year, not being that that come from.
Blue chip tenant roster that we feel very good about and collecting that rent in 2021. So there's an element of that and there's an element of organic bumps.
On existing leases from the Blue chip tenant roster that I just talked about.
Alright, great. Thanks, guys.
Thank you.
Yeah.
Our next question comes from the line of Rick Skidmore with Goldman Sachs. Please proceed with your question.
Good morning. Thank you Albert just to follow up on the acquisition transaction market as you look at your portfolio going forward.
How do you think the mix changes over time now that you're out of D. C. You get larger in San Francisco or is it too early to tell.
The very good question, we get it quite often.
Rick So we.
We have been quite active over the last couple of years in San Francisco.
And the and I think that was the that was a good we found the good opportunities because we have the platform that they have of leasing platform, which was which was very helpful in creating value.
But the long history has said we are open.
Opportunistic so we look at both markets for the time being the same for the time being we are not considering the third or fourth market.
We are looking at both markets and the.
We'll we'll opportunistically approach potential investment, we like New York, and we like San Francisco of both of them.
And then maybe a question for Peter Thank you Albert a question for Peter just in terms of the difference between tenants viewpoints on long term space needs between New York and San Francisco It seems like each week, we we see something in the in the press around a large.
Tech tenant deciding to work from home more in San Francisco or what are you hearing on the ground.
From your tenants or perspective tenants and.
In terms of their long term space needs is there a difference between the two cities on or anything that's the strikes you between in those conversations that youre having.
Sure well look in San Francisco, we're seeing a lot of San Francisco based companies higher we're seeing a lot of venture capital money.
More than 2020 of than in 2019 are.
Invested in San Francisco based companies. So so we generally feel like when some of the restrictions and shelter in place ordinances are lifted in San Francisco, we will be having more productive conversations than leasing will pick back up that's our fundamental belief because we believe that these companies are well capitalized and will lead the way out of the recession I think the fact that non Sn.
<unk> has been essentially shut down.
As it has been for the majority of this year has led to fewer conversations in that regard, but the anticipation is that those will pick back up as we as we move forward New York is a little bit further along because of course non essential has been allowed back in the office for a longer period of time.
New York has become more interesting than ever before it's become more diverse than ever before in fact tech led leasing activity in Midtown in other words, they contributed more toward leasing activity during the year with 27% of the demand. So I think the resiliency of New York and the diversification of the city's tenant base is oftentimes under.
Appreciate it I think we're having.
I think more constructive conversations with prospective tenants in New York on our availabilities, but I think that that's a good thing right because we have considerably more role in 2021 in New York than we do San Francisco with only 128000 square feet expiring at share in San Francisco a lot of the leasing we did this year derisked the <unk>.
<unk>, our 2021 of 2022 role in San Francisco. So we look forward to San Francisco being opened up we feel the same about New York, but at this point, we are having more constructive conversations with prospective tenants in New York across a variety of industry.
And that's how I would address your question Rick.
Okay. Thanks, Peter I appreciate it.
Yeah.
Our next question comes from the line of Tom Catherwood with BTG. Please proceed with your question.
Thank you and good morning, everyone.
Morning, Jonathan.
Quick question just on the the New York City market in General I guess, it's probably applies the San Francisco as well.
We hear about office landlords trying to create a quote unquote ecosystem and they're building. These days you know the layering in both big block space with our Prebuilt program, maybe some self managed co working space, but the idea of being that they can approach multiple tiers of the leasing market.
As of the city of starts to reopen.
From what I'm hearing from you guys you know the focus in your available space still seems to be larger or full floor or bigger tenants.
What's your thought about kind of layering in different types of office offerings within your assets or is the physical nature of your buildings not necessitate that.
You know Tom all of a portfolio is very diversified from the get go. So we have we have properties that have 10000 square feet per floor of like 712 fifth Avenue and we have been doing pre built 10 years ago. So this is not new for us. So we are working on multiple disciplines.
In our leasing approach since years and we do this also in San Francisco, where for example in market Center you have.
A smaller floor plates and one of the buildings and the and the other one the larger floor plate. So so we mix it up in the create.
Create the best opportunity for us long term.
And.
So we do with the with the amenity packages I mean, we started very early on when people didn't even the use of word of many.
We started at one market plaza to totally renovate the retail.
Section of it it looked before very stale and not inviting and we have redone the entire the the entire retail space and then filled it up nicely to really help the.
The.
The the office space and it has worked it has improved.
On the rental rates and the.
It's something that we we have I think an hour you know of.
Culture to really approach leasing on an asset by asset basis, and other general broad brush kind of approach to the entire portfolio.
Yeah, I would I would only add to that Tom by saying, we do have a very nice product mix in terms of our availability on as a result, we do see.
Broad range of perspective tenants ranging from call of 3000 square feet to 600000 square feet. So I think our portfolio lends itself to the product mix that we're able to offer the other thing around amenities. We are contemplating some conferencing space at 13 of one it's something that the tenants that were speaking with now as I referred to previous.
Have asked about as an as an amenity that would move the needle on their estimation and that's something I think that we can do and have a real advantage given our scale in and around the building. If you think about where our properties are located so we can offer it as of as an exclusive type of <unk>.
<unk>, if you will to Paramount tenants, which which as you can imagine is very well received so we're always thinking about that in terms of of our offering I mean amenities also go so far as to include a private welcome center as we referred to in my remarks that allow for branding and so forth and so on not to mention exclusivity. So.
So the the our offerings are diverse in nature and I think it's largely a function of not only how we think about our real estate, but the buildings that comprise our portfolio.
Appreciate that thank you both.
Peter maybe sticking on the on the leasing you had this comment about New York being more diverse, especially when it came to tenants and tenants in Midtown.
When youre doing your showings has the geographic footprint or the net that these tenants are casting has that expanded or did the saying another way are you being comped not just against you know other trophy Midtown buildings on the West side are you not being comped against lower Manhattan Brooks.
Glen kind of other other Midtown south of other Submarkets in Manhattan or has the search area of tightened up.
I think I think it used to be that you could anticipate with some level of confidence of what other buildings were being contemplated I do think tenants are willing to consider other submarkets, but I do think it's actually tightening up a bit I have to say most recently I do think the pendulum has swung.
From a new product new product new product to location location location in many respects and I think we went the two very nicely I think thats part of the reason we've had the level of interest we have a third channel one in 31 west.
As I said in my remarks, I do think walkability of something that matters I think the idea that you come into your central.
Grand Central let's use an example on then you've got to get on another train for example to get to your your building in Midtown for example is less desirable than having the ability to walk there. So I think there's a renewed focused on on on location and when you study of our portfolio you see that we have continually reinvested in our product and we think that the atrophy.
Use of our products are entirely cutting edge.
<unk>.
That's how I would address the question, but the only thing I'd say just to clarify when Peter referred to some markets. He was not talking about the Brooklyn right.
Not seeing somebody looking at our buildings on looking in Brooklyn.
That's different Submarkets obviously.
Patton.
[laughter] very very fair. Thank you. Thank you both and then just one more quick one for me Wilbur lapping against Brooklyn.
[laughter].
One of <unk>.
We're looking at the leasing guidance and then earnings guidance as well on squaring the up given.
Given that leases, obviously take a long time to come to fruition, even though the interest seems to be picking up is there a certain amount of leasing that you have to hit to reach the midpoint of your guidance or does guidance pretty much assume none of the leasing that happens in 2021 ends up flowing into earnings.
Well I think we said in my remarks, So I said in my remarks at the we're expecting that the lease around the 50% of the Barclays space.
By the end of 2021.
And and that is a that's a goal that the we will achieve.
And the and that's part of it.
If I can dimension that a little bit.
Two parts to that question in terms of one on the leasing side on one on the earnings side.
On the leasing side of the fed as Albert said, we have the goal of 600 of 900000 square feet.
While at $7 50 at the midpoint, if you want to do the math.
If you look at a weighted.
We ended the year of Tom we ended the year with the leased occupancy rate of 95, 2%, we have roughly of 1 million square feet expiring, assuming all of those leases expire and not a single square footage at least that would have a 10, 4% impact to occupancy so that would bring you down to $84.
Eight in on.
Wanted to get to the midpoint of our same store occupancy guidance, which is 89% that would imply 375000 square feet of new leasing of occupancy increasing leasing and so that's about 50% of the total leasing goal.
At the midpoint of our leasing that we've provided and so the question was asked early on in terms of renewal and in lease and new leasing. That's the answer really it's off of the 750, you have baked in 375000 square feet of occupancy, increasing leasing which will to what al.
<unk> set includes 50% of our.
The estimation of the Barclays block to get leased up in the year and the remaining 50% of that leasing goal is renewal based and we will venture to say.
Most of the renewal stuff will get done in the first half of the year and the occupancy increasing leasing towards the second half of the year. So that's the the discussion on the leasing items on the earnings guidance. If you follow that along.
We have not factored any benefit from the potential lease up of the Barclays space.
In 2021 earnings so that should help and said the risk part of that question. Tom is is if we anticipate that lease gets executed in the second half of the year. There is going to be time before the tenant takes possession and builds up the of space before we commence GAAP revenue recognition and.
We have not factored any of that benefit in 2021.
Got it that's really helpful. Thanks, everyone.
Sure you're welcome.
Our next question comes from the line of Matteo Okusanya with Mizuho. Please proceed with your question.
Hi, good morning.
Thanks for the time I also along the line of guidance could you talk a little bit about our.
Expectations for non office income Oh, non office revenues in 'twenty, 'twenty, one, including any potential for additional lease up of the of the then of the format of Bendel space.
Sure I'll talk about the first of all of them on a lot on.
On Albert will touch upon the Bendel space.
If you saw the collections.
Tyler on the on the non office side, the increased over 10% 10 percentage points relative to last quarter. So last quarter. The non office component, which as a reminder of that entire group only accounts for three 5% of annualized revenue.
That was at 50% we saw a nice uptick in that which went from 50 to 60 plus percent I think of the exact number was $60 three if I'm not mistaken.
And we are anticipating that that will continue to trend in the right direction.
We have.
Obviously moved a lot of that sector.
Cash basis, so theres no real.
Right off of future straight lining of receivables that we anticipate in 2021 relative to that and we think that that quarter over quarter that number should continue to increase.
So as we got through the second half of your question Tayo we.
We leased.
The significant but relatively small space, but income wise of very significant piece of the Henri Bendel space already up the last year.
That provides us with about 85 per cent of the income that would be achieved of the entire space.
For the last couple of years from Henri Bendel.
And the market and this will be the tenant most probably will be in the same.
In the same segment, which will be most of all the luxury goods.
Is relatively slow for the time being so we haven't planned for 2021 to get the space occupied we also of Wanna be selective.
And that's why we are.
A little bit.
The capsule and.
And cautious to find the right use for that space. It should be should be fitting the entire corn, the which is one of the best retail caught us in the world.
Very helpful. Thank you guys.
Youre welcome.
As a reminder, it is star one to ask a question. Our next question comes from the line of the Grandma hold true with Morgan Stanley. Please proceed with your question.
Thanks for taking the question and part of it if you've touched on this before but just.
I wanted to check on thoughts on the dividend.
The obviously reduced the dividend given sort of your conservative approach.
Given you sort of leave the Barclays <unk> growth. This year I'm just thinking of just one piece of news the latest thoughts on how you think about the dividend going into next year.
Beyond.
Sure Vikram, we were very very thoughtful here.
Going through our dividend policy with the board. We felt it was the right thing to do in terms of right sizing the dividend relative to where we are on the pandemic and also bearing in mind that we were going to lose.
40, plus million dollars of cash flow.
As a result of these two large non move out so what that has enabled us to do is is right size of the dividend in 2021.
Offset that dimunition of <unk> cash flow call it to the tune of $30 million in savings from that new dividend policy. So it preserves liquidity in the company and it provides a path for significant dividend growth going forward because as you lease up of the Barclays space as the lease up.
The TD Bank space, you will see a really nice uptick in our cash flow and in taxable income, which will translate into increased dividends.
Okay. That's that's helpful and then just going back.
A couple of comments Peter made on just the San Francisco and New York.
Wanted to get your thoughts on two aspects just kind of weird sub lease rates are today.
In boots in both markets.
And what Youre hearing kind of from.
On the brokerage community or tenants on.
On kind of where sublease could go and ultimately.
To get it.
Transaction activity sort of back to pre Covid levels is sort of your current view on where you think sort of effective rent da Vinci central the down given kind of where some of these rates starts of how much of a decline in market rents do you think will eventually see.
Sure Vikram so in New York in my remarks, I pointed out that sublease availability in Midtown is 24% of total availability, which which you know looking back in time, which is important to do during the dotcom bust. It did reach 45% of total availability and then again in the great financial crisis.
And Midtown specifically it was 33%. So so sublease availability is of course lower relative to those two periods of time, there's no question that sublease space.
It does serve as a headwind, but I wanted to make sure. The that you understand something which I think is very interesting.
Book, where the tenant who's trying who's listed a considerable amount of space in Midtown recently in the commentary was if we leased one or two floors. We will withdraw our space, we're sort of testing the water, we're going to drop the rent we don't want to deploy much capital in order to secure a subtenant and I think that sentiment is.
The somewhat widespread in fact, we're competing for a space right now on one of our buildings offer of deal rather.
Because of the deal that they had on for a sublease space at another property fell apart when the when the tenant decided they didn't in fact, one of the sublet their space and CBRE has put out of really very nice statistic that I think tells what are sort of further reinforces what I'm now describing and that isn't in Manhattan from 2008.
Eight to 2009, there was 24 million square feet of sublease space added to the market and from 2009 to 2010 and $13 6 million square feet was withdrawn from the market. So I think the truth of the matter is that as people come back to work and utilization discovery takes place as it is now I think of lot of the.
Tenants will realize that.
They don't in fact want to sublease, the space and I think that will likely to remove some of the inventory that we're having to compete with in the near term. So so I think it's important to be aware of that phenomenon thankfully in Midtown specifically the figures arent.
Arent.
Two elevated.
But it's something that we're keeping a close eye on because it certainly serves as a headwind in the near term and San Francisco I think much of what I've. Just described will apply a sublease availability in the CBD is elevated in San Francisco and.
The the general sentiment is that when more people come back much of that space will be withdrawn as well, but there is no question that in the near term sublease space does serve as a headwind as it relates to net effective rents. The second part of your question I think it's very very difficult given how few data points there have been.
My instinct at this point is that net effective rents largely as a result of elevated concessions probably down in the neighborhood of of 10% I would say during this period of time.
But it's really hard to say with a lot of conviction.
Exactly how that will settle given the lack of transactions.
Okay fair enough. Thanks, so much.
Thank you Vikram.
Our next question comes from the line of Daniel Ismail with Green Street. Please proceed with your question.
Great. Thank you.
Just a question on the the leasing targets for 'twenty and 'twenty one.
That lease terms of will continue to be a fairly shorts or do you think will revert to a more normalized level was kind of get back of the office.
What I would say Dan is our product is what we're now marketing as tip is larger blocks of space. We're generally dealing with larger companies that have greater visibility perhaps into what the future holds and so as a result.
We're dealing with tenants that are contemplating long term deals generally 10 15 years in some cases, even more where the intention is to invest in the space and be there for a long period of time. So the conversations that we're having yes. We've had some we've transacted. Most recently on some short term deals and there will be some some short term transaction because <unk>.
Tenants at this point of our more comfortable doing short term transactions of maintaining that flexibility, but I think largely a function of our product has resulted in us having conversations that typically.
As it relates to 13 on one of 31 west have been more longer term in nature.
And then.
Sticking with leasing you mentioned the of 300 thousands of corporate toward the other day I'm just curious on the in the leasing pipeline is that mostly relocations or are there any of that expansion on that group.
Yeah.
Well when I look at the composition of demand it primarily of relocations in one case the tenants taking more space in the other case theyre, taking roughly the same amount of space I think it varies every situation is different.
Spent some time on each one of these situations that we were to sit down but I think suffice. It to say these are primarily relocations and each tenant to sort of viewing of differently. One of them requires more space right now that work that we're competing for considerably.
Considerably more space.
Great. Thanks, David.
There are no further questions I, Thank you and I'd like to hand, the call back to Mr. Behler for closing remarks.
Well. Thank you all for joining US today, we look forward to providing an update on our continued progress when we report the first quarter results in may of Goodbye.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.