Q4 2021 Paramount Group Inc Earnings Call
Good day, ladies and gentlemen, thank you for standing by welcome to the Paramount Group fourth quarter 2021 earnings conference call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Please note that this conference call is being recorded today February 23rd 2022.
I will now turn the call over to your house Jacques Cornet of ICR. Thank you you may begin.
Thank you operator, and good morning, everyone before we begin I'd like to point, everyone to our fourth quarter 2021 earnings release, and supplemental information, which were released yesterday, which can be found under the heading financial information quarterly results in the investors.
Section of the Paramount group website at Www Dot P. G R E Dot com.
Some of our comments 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 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 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 financial measures, which we believe can be useful in evaluating the company's operating performance. These.
These measures should not be considered in isolation 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 in our fourth quarter 2021 earnings release, and our supplemental information.
Hosting the call today, we have Mr. Albert Baylor Chairman, Chief Executive Officer, and President of the company Wilbur Page, 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 will turn the call over to Albert.
Thank you Jack and thank you everyone for joining us this morning.
We delivered another year of strong operating performance in 2021, and we carried that momentum into 2022, as we return to normal see nationwide.
While the emergence of the omicron, Barry and delay the return to pre pandemic life. It seems the worst is behind us and tenants are once again returning to the office full time.
Albeit with some flexibility baked into their plants.
Yesterday, we reported core F F O for the fourth quarter of <unk> 24 cents per share.
The other thing and core <unk> of 19, two cents per share for the full year.
These results reflect the quality and desirability of our a class a assets and strong tenant base.
Today, we are initiating 2022 core <unk> per share guidance with a range between 91 cents and 97 cents per share well ahead of market consensus.
Wilbur will review, our financial results and our 2022 guidance in greater detail.
Yeah.
Yesterday, we also announced the signing of Din Tai Fung for the glass Cube at 16 33 Broadway.
The lease up of this space has been several years in the making and we couldn't be happier with the outcome.
While it took longer than we hoped we remain disciplined and not leasing the space for the sake of leasing it.
But bearing in mind that this unique space sits in front of the building was $2 5 million square feet of office tenants above.
Tenants that in most instances have chosen 16 73 Broadway at the headquarter location.
Their decision is always driven in large part because of the quality of the asset the desirability of the location.
The ability of the landlord to operate the asset in a class a manner and surround it with the right type of amenities for the employees.
We welcome what were known and Michelin Star rated Din Tai Fung to the Paramount portfolio.
Their desire to select New York City as their first location on the East coast once again cement city as one of the premier destinations for retail across the globe.
Looking back at 2021, our results stand on their own.
We met or exceeded almost all of our goals.
On the leasing front, we executed on over 1 million square feet, 45% above the leasing we've reported for last year.
Our fourth quarter leasing was 137% above the fourth quarter of last year, highlighting the strength of our portfolio and the fact that the market is indeed trending back towards normal.
While we fell slightly shy of our goal to lease 50% of the Barclays vacancy we exceeded our goal at 31 west at least 62% of the TD Bank vacancy.
All said, we leased about 46% of that vacant space in 2021.
Very fine outcome.
Especially considering the environment in which we executed.
We also remain encouraged by the long term commitments on both new and renewal leases signed in 2021 as demonstrated in our strong average lease term of nine four years compared to just four years in 2020.
The trends we see in our portfolio are also reflected in the Midtown Manhattan market more broadly.
New York is recovering with goods store.
The residential market is on fire with vacancy rates at record lows. The city is easing COVID-19 restrictions and encouraging employees to bring their employees back and the labor market continues to tighten.
Leasing velocity increased across the Midtown market by over 45% year over year and average asking rents are ticking up.
We see these as positive signs for the resurgence of office space in New York City during 2022 and beyond.
In San Francisco tenants continue to take a more gradual approach towards a return to offices.
While our San Francisco leasing activity still favors renewals or new leases, we are beginning to see positive signs as leasing velocity increased by over 70% during 2021 compared to 2020.
As we have seen throughout the pandemic, while asking rents have continued to come under pressure in San Francisco lend lots with high quality assets continue to outperform and maintain rents at or above prior levels.
In other words much like what's happening in New York the flight to quality is noticeable.
Our initial rents on leases signed during 2021 grew to about $100 per square foot in San Francisco compared to 94.5 during 2019 before the start of the pandemic.
Our results continued to demonstrate the strength and resilience of our portfolio as we continued to benefit from the high quality of our assets.
As far as our leasing goals for 2020 to go we are targeting between 825001 million and 225000 square feet and we remain laser focused on our availabilities Peter will provide additional details on what we are seeing in each of our markets.
Yeah.
Looking at the transaction market. There is not much that has changed since the last we spoke but we are seeing some green shoots here in New York.
The overall transaction volume during the fourth quarter was relatively muted December volume was $4 5 billion. The highest it's been since the beginning of Covid and there was another 8 billion under contract, suggesting a strong start to 2022.
Liquidity is ample and pricing remains strong for top quality assets.
Inflation and rising construction costs will increase replacement costs underscoring the inherent value of our portfolio at.
As always we remain interested yet disciplined with our capital.
Wanted to other markets carefully.
We are on the verge of completing with a joint venture partner or the acquisition of 1600 Broadway at 26000 square foot retail condominium in the heart of times square the.
The property is 100% leased to Morris as our flagship location for EM in EMS World and was recently extended for 15 years, including a 25 million dollar commitment by Morris to improve this space.
We see this committed.
Commitment by Mas is a testament to the long term value of this iconic times square attraction and resilience of the New York market in general.
The purchase price was 191 5 million and the joint venture will close on a 98 million mortgage loan simultaneously with the acquisition.
Our joint venture partner here, who is an existing partner and another San Francisco asset will own 91% of the asset and we will own the remaining 9% and serve as a miniature.
Lastly, I'd be remiss, if I didn't highlight another element of our portfolio that we take great pride in sustainability will.
We remain 100% committed to sustainability and ESG and are proud of our accomplishments and improving our portfolio all of our markets and our environment.
Our sustainability efforts have continued to put US ahead of the pack as we recently announced we achieved 2021 energy star labeled across our entire office portfolio certified by the EPA and signifying that our assets perform within the top 25%.
In terms of energy efficiency nationwide.
Additionally, Paramount achieved a five star rating in the 2021 grasp be real estate assessment for the third consecutive year and in a in public disclosure securing the number one ranking among its peer group of U S. A office properties for 2020.
One.
To conclude.
As we begin 2022 priorities are straightforward we are focused on the lease up of our available space and the reintegration of our tenants in a safe and healthy manner.
As has been the case since the pandemic began we continue to maintain sufficient liquidity, which amounts to about 1.25 billion at the end of the quarter.
With our portfolio of stable trophy assets and a proven ability to allocate capital we remain well positioned for the long term.
With that I will turn the call to Peter.
Thanks, Albert and good morning during the fourth quarter, we leased approximately 207000 square feet for a weighted average lease term of eight two years.
For the full year, our leasing velocity was approximately 1.017 million square feet in line with our five year annual average.
This is the direct result of the quality of our assets and a testament to the effort and ability of our team to execute and even the most challenging of environments.
Our fourth quarter leasing activity was highlighted by deals in San Francisco, which accounted for over 65% of the volume.
We completed a new 76000 square foot long term lease with a leading global investment bank and a new 43000 square foot long term lease with a leading private equity firm both at triple digit starting rents at one market Plaza.
These transactions serve as good examples of the flight to quality trend that continues to gain momentum in our markets and continues to inure to our benefit given the quality of our portfolio.
At quarter end, our portfolio wide leased occupancy rates at share was 97% up 40 basis points quarter over quarter.
As we look ahead, our remaining lease expirations are manageable with approximately seven 3% at share expiring per annum through.
Through 2020 for a direct result of our ongoing strategy to pre lease space and D risked future lease roll.
Turning to our markets in Midtown we have realized improvement of key demand drivers throughout the year.
<unk> fourth quarter leasing activity of $5 5 million square feet, excluding renewals was up 67% quarter over quarter and 44% above the five year quarterly average according to CBRE.
In fact leasing activity improved during each quarter throughout the year capping off the year with a return to pre pandemic levels.
In Q4.
Renewal activity reached a modest 846000 square feet during the quarter, 29% below the five year quarterly average as tenant interest continues to shift from short term renewals to new longer term commitments as evidenced by the results in our New York portfolio.
Midtown quarterly net absorption was positive for the second consecutive quarter. The direct result of leasing activity exceeding new space additions and the withdrawal of more than 1 million square feet of sublet space during the fourth quarter.
While sublease space availability currently comprises 22% of all available space in Midtown slightly above the five year average of 21% tender.
Tenant touring activity for high quality direct space in the market continues to accelerate particularly in well located class a buildings. Our New York portfolio is currently 94% leased on a same store basis at share up 50 basis points quarter over quarter.
During the fourth quarter, we leased approximately 70500 square feet at a weighted average term of five five years.
Of the 70500 square feet leased in the quarter 24000 square feet represented swing space that was leased for less than a year, which affected the weighted average lease term.
Excluding this space the remaining 46500 square feet was leased for a weighted average term of eight years.
For the full year, we leased approximately 779000 square feet, our highest leasing total in New York since 2015 for a weighted average term of nine seven years.
Our New York portfolio has two 9% or approximately 170000 square feet at share rolling in 2022.
Looking further out our overall lease expiration profile in New York is manageable with seven 2% at share expiring per annum through 2024.
We continue to attract more than our fair share of the activity in the market highlighting not only the quality of our assets, but the strength of the sixth Avenue Submarket, which is where we have our largest availability at 13 O. One avenue of the Americas.
While Midtown is overall availability rates that's at 17, 6%. The Avenue continues to maintain the lowest availability rate of any submarket in Midtown at 12, 6%.
Not a surprise given tenants increasing desire to be centrally located with superior access to transit.
Our offering a third general one Avenue of the Americas includes the possibility of a significant welcome center on the Avenue for a large tenant prominent branding large and efficient base floors of 5000 square foot tenant dedicated outdoor space and a soon to be world class Amenity center in the building all of which continue to resonate with prospective.
Tenants.
We look forward to updating you on our continued progress at 13 O One Avenue of the Americas.
Turning now to San Francisco office leasing slowed during the fourth quarter relative to the third quarter.
This slowdown was largely attributable to the army crop variant as companies further delayed their return to work plans.
Despite the slowdown San Francisco significantly exceeded its 2020 leasing total.
Venture capital funding remains robust as San Francisco based company has received over $78 billion and funding during 2021 and all time high.
Companies backed by these funds continue to drive demand in San Francisco accounting for 14 of the 26 leases completed in 2021 in excess of 50000 square feet.
Sublease availability remains elevated but has declined for the third consecutive quarter down one 9% quarter over quarter as per J L. L.
The market for San Francisco's Premier assets remains tight and economics, particularly for view space in trophy assets remains strong as evidenced by our fourth quarter transactions in San Francisco and our current leasing activity.
Yeah.
At quarter end, our San Francisco portfolio was 91, 6% leased on a same store basis that share up 20 basis points quarter over quarter.
During the fourth quarter, we leased more than 136000 square feet at a weighted average term of 10.9 years with initial rents averaging $110 per square foot.
This lease execution is a testament to the desirability of our assets and our ability container to the most discerning tenants of the world many of whom are seeking high quality real estate to enhance the work experience for their employees.
For the full year, we leased approximately 237007 hundred square feet at a weighted average term of eight years with initial rents averaging approximately $100 per square foot.
Our San Francisco portfolio has 5.4% or approximately 121000 square feet at share rolling in 2022.
Looking further ahead, our overall lease exploration profile in San Francisco is manageable with seven 6% at share expiring per annum through 2024.
Our San Francisco portfolio was well positioned to manage through the current environment.
With that said I will turn the call over to Wilbur, who will discuss the financial results.
Thanks, Peter Yes.
Yesterday, we reported core <unk> of 24 cents per share, bringing full year 2021 core <unk> to <unk> 92 per share ahead of consensus and at the high end of the range of our revised guidance.
Same store cash NOI grew by three 3% in the quarter, bringing full year same store cash NOI growth to two 4%.
Okay.
During the fourth quarter, we executed 12 leases covering 206952 square feet of space at a weighted average starting rent of $89.37 per square foot for a weighted average lease term of eight two years.
Mark to markets on second generation space were 18, 7% on a GAAP basis, and 10% on a cash basis.
Yesterday, we also initiated guidance for the full year of 2022.
Let me spend a few minutes discussing the assumptions used in our guidance.
We expect 2022 core <unk> to range between <unk>, 91, and 97 cents or <unk> 94 per share at the midpoint.
The mid point of our core <unk> guidance is not only ahead of consensus by <unk>, but also higher than 2021 core <unk> by <unk>.
The two cent per share increase in core <unk> is comprised of the following.
A <unk> <unk> increase in NOI, primarily due to higher straight line rents from the lease up of vacant space in 2021.
One cent increase in fee income, primarily resulting from fees expected in connection with the pending acquisition of 1600 Broadway.
Partially offset by one cent from higher interest expense, primarily due to higher rates on variable rate debt.
For 2022 same store growth is expected to be between two 5% and three 5% on a GAAP basis and between 1% and 2% on a cash basis.
We expect to lease between 825000 and $1 million 225000 square feet.
And we expect to end the year with the same store leased occupancy rate between 93, 6% and 95% or 94, 3% at the midpoint, which represents a 360 basis point increase over 2021.
Turning to our balance sheet in December we refinanced our existing revolving credit facility with a new $750 million credit facility.
Reduction in sizing of the facility was commensurate with the reduction in our unencumbered asset pool as we sold unencumbered assets in Washington D. C over the past four years and recycled those proceeds into JV assets in San Francisco.
Our liquidity at quarter end amounted to over $1 $2 5 billion comprised of $508 million of cash and restricted cash and the full $750 million of availability under our new revolving credit facility.
Our outstanding debt at quarter end was $3 six 6 billion at a weighted average interest rate of three 3% and a weighted average maturity of five years.
87% of our debt is fixed and has a weighted average interest rate of $3 two 6%.
The remaining 13% is floating and has a weighted average interest rate of 357% we have no debt maturing in 2022 and beyond that our maturities are well lathered.
Lastly, we have updated our investor deck, which can be found on our website at www Dot <unk> dot com.
With that operator, please open the lines for questions.
Thank you at this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue.
You May press star two if you'd like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Okay.
Our first question comes from Steve Sochua with Evercore. Please proceed with your question.
Yes, thanks, good morning.
Wilbur I was or Peter I was wondering if you could just maybe talk a little bit more about the leasing activity as part of 2022 guidance I know that that's a kind of a gross number and not an AD share number and I realize there's a pretty big difference between your gross explorations and youre at share explorations, and I guess, where I'm trying to really get at is you know.
How much of your existing portfolio do you expect to renew this year how much of this new leasing activity is you know for some of the JV assets versus the wholly owned and where do you think occupancy.
A b at the end of the year.
Sure maybe I'll start and then ask Peter can certainly chime in.
A lot a lot of things to unpack in that question, Steve So first.
In terms of the lease volume that we projected in guidance.
I'll call it a million 25 square feet at the mid point is right in line with our historical average in clearing what we delivered in 2021.
When you look at the square footage expiring in 2022.
You have a gross number of 2 million square feet at share that number is about 290000 square feet.
This particular year of 2022 that is a wide gap between the gross square footage that is expiring versus the at share and that's primarily because of 60 wall. That's a 1.6 plus million square foot asset that is going to be taken out of service for redevelopment in June .
All in.
In our a million square feet of leasing our $1 25 square feet of leasing we do not factor any leasing from 60 wall. So.
You do have other JV assets that we projected leasing on.
It does not include 60 wall, so by and large that biggest delta is excluded from that number. If we are successful in pre leasing some stuff at 60 wall that will certainly help us in getting towards the high end of that guidance, which is the 1 million to 25.
Off the 290000 square feet that is that share that's expiring.
Because 60 wall is in that number 5% of the million 660 wall is about 80000 square feet. So the true exploration in the portfolio at share is about 210000 square feet exclude.
Excluding 60 wall.
And.
I think the only large block space in that number is at 300 mission we have bechtel.
Which is like a 90000 square foot lease and we own 31%. So that's yeah. That's about under 30000 square feet for us Thats in that number other than that there is no known move out and it's a small space that we typically are going to endeavor to try to do our best to renew.
Yeah.
Okay and do you have a sense for I I appreciate the you know the.
Lease percentage at the end of the year how would this do you think translate into occupancy at year end realizing that.
You know some of the leasing that you're doing is for maybe larger chunks of space may not actually take physical occupancy this year, but what do you think occupancy range is by year end.
So we don't put out.
I think what you're talking about is the actual occupancy of the GAAP occupancy if you will for a year and we've always guided as a at least occupancy which is as you know Steve is a leading indicator and then it's a matter of.
Time, before the tenant takes possession, and and and and and and that reflect that is reflected in GAAP occupancy.
I mean, we set very very robust goals. This year as we do every year.
Yeah, we saw a lot of the notes and some thinking into this very ambitious goal, but that's what we do.
360 basis point increase in leased occupancy that is an app share number that's not at 100% ports.
Portfolio, so that the share numbers so in order to achieve that when you deduct leases expiring in the year, we need to do occupancy increasing leasing.
In excess of half a million square feet at share to be able to achieve that so that's a very.
Rigorous goal that we set for ourselves.
We feel good about meeting that goal.
Great. Thanks for that color and just one other question maybe for Albert I'm I didn't see any mention about share buybacks in the quarter I know you're doing this small J D. A transaction, where Europe , you know, 9% owner, but you know where does share buyback sort of fit in given the stock continues to trade.
You know at a large discount to your own internal NAV estimate.
Steve It's a fair question as we discussed at the end of <unk>.
The buybacks.
<unk> have to be leverage neutral and.
So we remain very disciplined on that basis.
And the investment.
There's always gets discussed with the board on the quarter.
Quarterly basis.
The problem on stock is doing.
On a relative basis pretty well so we had this opportunistic investment opportunity at <unk>.
Eminem, but theyre very small equity investment.
That that we thought made made a hell of a lot of sense for our shareholders.
An asset that we had a preemptive opportunity too.
Ooh underwrite and the Investor.
Wanted to put money out in the market and we.
We are making a very nice return for our shareholders as being a part owner and manager and being compensated well for that.
Steve I just wanted to add I mean look as Albert said, we spend a lot of time discussing this with the board in terms of capital allocation. This particular investment is a very insignificant amount of capital from <unk> balance sheet and as Albert said, Yes. This is more of a strategic investment.
For us and our partner, which suddenly and newest to the benefit of shareholders that said when you look at the share buyback and the reason we didn't do a whole lot in 2021 and 2021 is because if you recall, we also cut our dividend.
In the middle of Covid, we reduced the dividend.
And we had the impending vacancy of Barclays and TD Bank, there was going to take out $40 million of cash from the system.
Yes, we deliberated this with the board at Great length, and it didn't seem prudent at that time. If you are cutting your dividend to then use that capital to go buy back stock. So.
Now we have better visibility 2021 is behind us as we look in 2022, we're going to continue to take every capital allocation decision.
Very deliberately with the board and try to see where things shape up.
Okay. I guess last question for me just on the transaction side al but I know you've looked to sell some small stakes in buildings and there's a lot of tax issues. Do you currently have any assets on the market are you currently exploring additional asset sales either in whole or in part.
Well, we are looking at this opportunistically as I've said in the past.
If.
And the market has been the <unk>.
Actions as I mentioned in my in my earnings.
Script.
The market has been relatively slow on the transaction side. So we want to get good value for our shareholders.
I can tell you that we are in the market to sell an asset currently.
But.
It's clearly one of the considerations, we have if you know the private market and the public market.
A big difference currently and we are watching it very carefully and we're seeing that.
Foreign investors much more actively.
Looking at the United States again, and so we have a hand on the pulse so to speak.
We want to be.
Careful about getting the best return for our shareholders.
Yeah.
Great. That's it for me thank you.
Thank you.
Our next question is from Jamie Feldman with Bank of America. Please proceed with your question.
Thank you and good morning, I guess, just sticking with the.
Sent lease guidance at least occupancy guidance can you give a little bit more color as to which assets do you think youll make the most traction.
You've got obviously, a good amount of space at 13 O one.
903rd just curious kind of where you think you can see.
712 fifth I'm, just curious where you think you'll you'll make the most traction next year.
Or maybe just any color on how it feels today.
Sure, maybe I'll start a little bit Jimmy and then Peter might chime in.
Again, if you go back to what I said.
In order to achieve that leased occupancy guidance, you'll need to lease in excess of half a million square feet at share and that has to be existing vacant space right, because otherwise youre not moving the needle a renewal is not helping that figure.
So when you look at the existing vacant space in the portfolio.
Youre going to have to make a significant dent in 13 O. One as you point out.
The Barclays block of the remaining space, we have there.
So that's factored in the guidance as well as.
Vacancy at 712, as you point out there's vacancy across the portfolio, but you'd have to make a significant dent in the $13, one and 31 west space to be able to achieve that.
So can you talk about what your leasing goal is at 13 O. One.
I mean I I'll go always is to make sure all the spaces leased.
Last year Alberts set a 50% goal and I think he addressed that in his prepared remarks that we did that was an ambitious goal and we came within striking distance we fell shy at 13 O. One slightly and then we exceeded 31, west which was not factored in that goal given the timing of when that space.
This came back.
So you know again.
The goal always is and Peter knows.
Yeah he's smiling.
Noel and Stewart to lease all of this space Jamie our goal is to lease all 272000 square feet of floors. Two through five I will tell you our offering has evolved during this period of time and right now what's truly resonating as not only the welcome center, which allows for tremendous branding on 56, but we've also identified a way to activate what equates to about five.
<unk> thousand square feet of outdoor space and that coupled with the amenity center.
Really I think at this point has resonated and we we are projecting that we will lease that space, we do have activity.
And.
That's a big part of why we are where we are with our with our projections.
Thank you Peter can you talk more about the activity.
Maybe how has it changed in the last couple of months.
I would say we've seen professional service companies consulting firms, but largely financial service companies. We have had conversations with tech, but I would say that the most sort of advanced discussions are are with financial service companies, which is not surprising because throughout 2021, we saw financial services leading.
The way in terms of a recovery in Midtown contributing 36% towards total leasing velocity in Midtown so that that sort of jives with what we're seeing specifically at the asset at 13 O. One.
<unk>.
But we do expect Tac to two to become more active in the year ahead, we have had conversations obviously theres a large floors. The outdoor spaces appealing it is a central as it gets in Midtown. So we think we appeal to a wide.
Universe of prospective tenants, but for the time being to answer your question specifically, it's financial services that that seemed to be latching on I would say most in the most in the most meaningful way.
And you asked about 712 fifth Avenue.
That's a building as you know that's catering more towards smaller tenants because of lower size is about 10000 square feet. So there's pretty good activity and we are optimistic about 712.
For the rest of the year the smaller tenants are more decisive in this market.
The larger tenants seem to.
A little bit more and it's totally understandable.
They they have to make sure they have consensus on where they want to go.
With their space needs.
Thank you.
And then I guess.
The tenant sizes 13 O. One I mean, how would you characterize the average tenant size.
I mean, it's.
From a 60000 square foot tenant, which is one floor 68000 to be precise.
Two a multi floor activity so we have everything.
We are trying not to break up a floor for two tenants.
And we're also focusing on some of the tariff loss it might come back in Tucson.
That will come back from from credit Agricole later in.
In the decade so.
Yeah.
Cable to offer a pretty wide range between 30060 8000 square feet.
Okay. Thank you.
And Paramount published an 8-K yesterday changing the bylaws for the board for board seats talking about.
Stricter requirements to get on the board can you talk more about that decision.
Maybe can you explain the change and then talk more about that decision.
Yeah, it's it's.
It's a fair question, but it's something that's very shareholder friendly we have discussed it soon.
Since we went public.
And.
The board decided to amend the bylaws we have had.
Plenty of discussions with our large shareholders and.
We'll see.
There was a request to be more open and flexible and we wanted to make sure that Oh.
Our shareholders got hurt and that's why we are we are.
Pursuing this.
Yes, and Jamie maybe just to add to your question about about the background I mean, if you look at last year's shareholder voting results.
Our chair of the NCG Committee received less than a majority support.
And the board test management to conduct a shareholder outreach because of that he had according to our current governance. He had offered to tender his resignation, which the board rejected and then test management and we have filed an 8-K last year highlighting that.
That the board task management with reaching out to all your large shareholders. After conducting outreach to figure out the reasons for for that less than majority support and we did that as Albert said and we heard and this was one of the things that came up and you'll see.
Other shareholder friendly corporate governance changes that come up as a result of that outreach, which will be more fully articulated and described in our proxy statement.
The reason for the 8-K filing with respect to proxy access is a technical matter.
Because we were filing our 10-K and technically if you did not file this 8-K, what it could.
Render it could render your 10-K.
Invalid and you would have to file a 10-K amendment.
Three days later and so we tried to get it all done simultaneously avoiding that 10-K, if you will.
Thank you so just to be clear can you just explain what the changes.
So currently Paramount bylaws do not permit shareholders to nominate.
I'll.
Our slate to.
Existing.
And you cannot use our materials to do it you can certainly do that you'd have to run your things separately, but proxy access does is allows you to.
Do that through our materials and and it's designed for shareholders that are.
In in the stock for some period of time.
To benefit those shareholders.
The construct that we adopted is no different than the construct that's prevailing in the market.
And amongst all our peers.
Okay and then the construct is you have to have a 3% stake for three years.
To nominate two direct is that correct.
And you're saying before.
Shareholder couldn't even nominated director.
They caught you suddenly could nominated director you cannot use our proxy materials to do that now you can.
I see.
Okay, and this was purely driven by.
The the week voting.
Last year, there was nothing else going on in the market or any other reason you guys would do this.
No there's no other reason.
Okay.
Alright, Thank you for the clarification and then finally for me.
Can you just talk about the economics of that didn't typhon least congratulations on getting that done by the way how should we think about the earnings impact.
Yes.
Yeah look the.
As Albert touched upon this deal one just got done I don't think it's appropriate for us to talk about the economics.
On the call, but I will tell you. This is less about this.
This moving the needle on a building that generates in excess of $100 million of NOI. This is more about us curating the right amenity for the two and a half million square feet that is above that space and so you know we are very focused on making sure.
We have the right amenities in our building.
This is something that is very important to our tenants.
And and there's going to be more to come Peter highlighted in Alberta. We're working also on an amenity center at 13 O. One we have.
6 million square feet that surround this paramount portfolio, all within walking distance and the idea here is to make sure that all of our assets have appropriate amenities for the tenants that we do business with.
I mean over the years Jamie.
Jamie you might recall, we had other opportunities to rent it didn't Tai fung spaces I might call. It now.
Two other tenants and we have seen they.
They have mostly failed in the market and I think our judgment was right not too too.
To put them in front of our headquarter building there was always a big concern at this.
You should be an asset an amenity to our to the tenant base and we are very convinced that.
This with a terrific design.
Spearheaded by by David Rockwell Group.
B will be a tremendous amenity to the to the office tenants.
Okay. So it sounds like from an earnings perspective, we probably shouldn't model much that the right way to think about it.
Yeah.
I would I would say this is this is not gonna isn't going to be less than a penny of earnings.
Yeah.
Okay.
And sorry, just to go back to my last question because I got a couple of people E Mail me and the response, so if you're making a comment that this is more shareholder friendly now to have the restrictions in place.
But before I don't think well restrictions I guess I just wanted to make sure I understand your point.
Before there was no ability for a shareholder to use our proxy material.
At all period and now they could use it but they have.
To have 3%.
The 3% share interest for a longer period of time.
This is only to use our our proxy of knock them run their own thing and we've talked about this a great land. This is not the right forum to talk about this Jamie I mean, youre looking for an education on proxy access we should take that separately offline.
Yes.
Okay. No I was just getting clarification, because I think a couple of people were confused but that's fine. Thank.
Thank you I appreciate your thoughts.
Youre welcome.
Our next question comes from Vikram Malhotra with Mizuho Group. Please proceed with your question.
Thanks for taking the question. So I just I am sure. We can take the the 8-K language offline, but I just wanted to clarify the specific requirements.
The 3% three years is that pretty common across your peer set.
Yes, it's pretty common.
Okay, that's the standard market standard background.
Okay.
I guess, just you know you talked a little bit about are you using funds and acquisition potential acquisitions, maybe even dispositions I'm just wondering specifically on the fund business. Some of your peers have talked about.
Being maybe more asset light going forward.
And I'm wondering kind of the the diluted at times square, which I know is not in the fund business, but you have a smaller stake just how are you envisioning use of the funds or the fund business going forward.
Well I think the.
<unk> business is more of an asset light if you want to say that.
Model and.
I think we have said it for years, especially under the under the current.
Market environment. This is great for our shareholders that we have access to third party investors.
And and increase.
The assets under management in the fee income for our shareholders.
So I think that's a direction that we had.
Communicated before that we were that we will use in the future also in the office segment I mean, we have done this with <unk>.
60 wall.
And with other assets as well.
Okay. That's that's helpful and then just.
You know as we sort of see a pickup in activity more returned to work can you just update us on your thoughts as you're leasing up the space, what's the appetite to offer sort of a co working like service internally or maybe even leverage.
A third party co working companies as you as you lease up.
Well, if we take this on a on an asset by asset or building by building.
Decision. So each building has a different character and as we mentioned that are certainly no one.
Planning on a larger amenity center that.
It will be.
It will be catering to.
Entire midtown portfolio so.
You could see that a combination of that could be a co working.
But we take it on a case by case, we are not making a business out of it.
Okay, and then just last one maybe Wilbur you you mentioned about the dividend adjustment during COVID-19 .
With the leasing progress you have done last year and now this year as you anticipated.
Is it reasonable to think that.
The dividend will only be revisited post the lease up.
Well I think look the dividend is discussed with the board quarterly.
And it's re visited.
And again like I said quarterly as the progress is made I mean, we have made.
A bit of progress relative to the lease explorations that took place in 2020, and we will once again discuss that in the board, but the dividend was was right sized.
To a point right to reflect the taxable income and and the cash flow that was being generated.
And I think as this leasing progress continues to move forward.
One should envision that that would translate in increased taxable income, which would then translate into an increased dividend. So I'm not forecasting anything but it just seems logical that that would be the case and thats as I said, a board decision and we visit that with the board periodically.
Great. Thank you.
Thank you.
Our next question is from Ronald Camden with Morgan Stanley . Please proceed with your question.
Hey, just two quick ones one on just on the same store NOI guidance for the cash numbers, maybe can you talk about sort of the components.
The one 5% at the midpoint.
Hottest free rents factor into that rent escalators, and so forth just a little bit more color on the components.
Sure.
I think you saw a couple of notes I think some people thought that that number on the Cas side was a little bit lower than what they would have forecasted but on the flip side 2021 was a lot higher than people forecasted when you look at that number part of that reason is because of the pre leasing success that we've had in too.
And in 'twenty one so.
What I mean by that is obviously, if you're renewing leases there is a free rent component.
When youre doing the early renewal of leases that would not have otherwise expired in 2022.
That free rent has effected some of that cash rent that you would otherwise have received in 2022 and that's why that number is lower than then what.
Perhaps you guys might have had in your models.
Got it.
That's sort of helpful and the second question was just when.
When you think about the office utilization today and as that starts to recover.
Is there any sort of variable expenses that that we should be thinking about and the other side of that is is there a sort of whats the upside left from potential variable income variable revenues, just as that as that utilization recovers.
So you know.
Right.
96, 5% of our business is office centric and you have seen also the pandemic we have been collecting.
90, 690, 790, 899% of our ads and so on the variable side of the business I don't think Theres a whole lot that's yet to come operating expenses will trend up as office utilization increases, but that will be.
More than offset by or at least significantly offset by recoveries.
Our recoveries from tenants through through the pass up of those operating expense increases.
In terms of the various business I think the.
The three 5% is really the theater space and some of the retail space, which you know as.
As we lease that space up that will come back.
And the theaters have already started.
Operating in full swing in fact.
Both our theaters in the fourth quarter.
Had robust.
Tenants and so that is factored in our 2022 projections.
Great. Thanks, so much.
Thank you.
Our next question is from Tom Catherwood with <unk>. Please proceed with your quick.
Thank you and good morning, everybody.
For the fourth quarter leasing costs interesting to see that the cost per square foot per year in New York and San Francisco were roughly in line.
Fight the kind of material difference in starting rent Howard leasing costs trending at different rent price points or is that not the right way to think about it is it less correlated to rent and more tied to other factors, which Peter you seem to allude to in your prepared remarks.
Tom.
The market is a little bit in a difficult spot.
I encourage the team to get the space leased and occupied.
And.
We are.
I don't think that that's a trend.
We think that 2022 will get better.
Especially in New York.
And this the fourth quarter might be a little bit of an aberration.
Yeah.
Yeah that a fourth quarter number Tom that Youre looking at the 17% I think in New York, which is what you might be referring to is being elevated that did include.
A turnkey lease as well as Alberta, I mean, and so that is factored in the number which is why it's elevated and then obviously as you pointed out it is a function of you're starting rent as well.
And yeah.
So totally fair I'm, sorry, I should've been more clear on the question I was more looking at the dollar value less the percent of starting rent and when we look at the dollar value they're right on top of each other which it's interesting to see kind of implies that maybe the cost of.
Improving the space for a tenant is relatively consistent across class a and maybe the starting rent doesn't matter as much as a factor of what that tenant improvement cost it's going to be just wanted to see if theres any correlation there maybe it was tied to something else.
No I wouldn't I wouldn't take that as kind of our recipe. So I think that might be an aberration.
Totally fair and so follow up on that maybe for Wilbur you mentioned more than 500000 square feet of vacancy leasing this year, which is it's going to require a material investment in those tenant improvements what are you expecting as far as Ti spend this year compared to 21 and as vacancy leasing going to impact this year or was that.
Likely 2023 spend.
So that is more likely 2023 spend tom to be quite.
Candid because as you leased through the year.
You might get some of it at.
At the tail end of 2022, because remember it's the tenants that are spending your dollars for us than sending us proof of that spend and then as reimbursing them right. So.
It's going to be a function of how quickly you lease that space during the year when that space gets handed over to tenants when the tenants start their build out.
And when do they requisition.
For the for the reimbursement so we.
We do anticipate some of that hitting in 2022.
And then.
That carrying forward in 2023, while we also anticipate paying out the dollars that we successfully leased in 'twenty one in 'twenty two so.
Talking purely about about about capital spend I think capital spend in 2022.
It will be.
At least twice as much of that as what you did in 'twenty, one because 21 a lot of the capital spend was for leases that got executed in 2020 was a light leasing year for <unk> and the rest of the market.
Got it.
Is it for me thanks, everyone.
Thanks, Tom.
Our next question is from Daniel Ismail with Green Street Advisors. Please proceed with your question.
Great. Thank you.
Just following back up to the corporate governance changes and I believe you mentioned Albert potential shareholder friendly governance changes.
I'm a proxy season I'm just curious if you can elaborate on that and if that would include that.
And the opposite.
Well.
As Ed said this isn't something it's more technical thing that we had to do.
This this filing and we don't want to go into more detail. If you will get the proxy and there will be more as well.
I think phrased it positive state.
Statements in there so I would like to leave it at that.
Okay fair enough. Thanks, a lot.
Thank you.
This concludes our question and answer session at this time I'd like to turn the call back over to Albert Behler for closing comments.
We look forward to providing an update on this continued progress and.
We report our first quarter results. Thank you.
Yeah.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.
Conference call has ended please disconnect your lines at this time thank you.