Q1 2022 Paramount Group Inc Earnings Call
In New York.
While our portfolio same store cash NOI was up three 9% New York was up a remarkable six 6%.
And.
While portfolio leased occupancy was down 10 basis points, New York was up 40 basis points.
One theme. However, there is consistency in both our markets is a notable shift towards a flight to quality.
Brand new buildings and buildings that have been invested in are performing considerably better than class B products.
This bodes extremely well for landlords, such as Paramount, who own and manage class a and trophy assets.
We expect to continue to benefit from this phenomenon as tenants in the market are seeking well operated well located well <unk> and environmentally conscious buildings for their employees turning to the transaction market.
We are beginning to see an uptick in activity in New York.
The first quarter, so roughly $5 billion of transaction volume in New York.
Although it was driven by a few large assets in the market pricing for class a and trophy assets continues to be strong highlighting the importance of high quality class a office assets in desirable CBD markets.
The rising appetite of investors to pull the trigger on office expeditions is a strong indicator that sentiment on the future of office real estate is returning to historical norms.
For our part we have always maintained a disciplined approach with our capital and continue to monitor the markets carefully.
We have always been opportunistic and we continued with that approach during the quarter as we completed the previously announced acquisition of 1600 Broadway at 26000 square foot retail condominium in the heart of times square.
The property is 100% leased tomorrow as the flagship location for <unk> and most recently extended for 15 years, including a significant commitment by March to improve this space.
We see this commitment by March is a testament to the long term value of this iconic times square attraction and.
And resilience of the New York market in general.
The purchase price was 191.
$5 million and the joint venture closed on a $98 million mortgage loans simultaneously with the acquisition.
John venture partner here, who is an existing partner and another San Francisco asset with 191% of the asset and we will own the remaining 9% and serve as the miniature.
During the quarter, we also advanced our sustainability initiatives.
Our sustainability initiatives are embedded into our business plan and are critical to our leasing program.
Especially in the current environment as tenants are increasingly looking to partner with owners that share their values.
As you will recall, we have achieved 2021 energy star labeled across our entire office portfolio signifying that our assets perform within the top 25% in terms of energy efficiency nationwide as certified by the EPA.
We now have a portfolio that is 100% LEED platinum or gold with energy labels and <unk> certifications.
Our commitment to sustainability is undeniable and we continued to push to improve.
In April we announced that 111 Sutter Street.
LEED Gold certified building earned LEED platinum status.
And was recognized as San Francisco is highest scoring lead project in 2021, a proud achievement.
As has been the case since the pandemic began we continue to maintain sufficient liquidity, which amounts to about $1 3 billion at the end of the quarter.
With our portfolio of stable trophy assets, and our proven ability to allocate capital we remain well positioned for the long term.
Let me wrap up by saying our operating goals continue to be clear.
Our primary focus is on the lease up of our available space at the reintegration of our tenants in a safe and healthy manner.
With that I'll return the call to Peter.
Thanks, Albert and good morning.
During the first quarter, we leased approximately 203000 square feet for a weighted average lease term of seven eight years or.
Our first quarter leasing activity was highlighted by the 175000 square feet of leases, we signed in New York.
Two most significant transactions during the quarter for the previously mentioned new lease with <unk> at $16 33, Broadway and a long term renewal with the Hilton on two large floors at the base of $13 25 Avenue of the Americas.
The Hilton utilizes these floors for event space reinforcing the long term expectation of a return to large scale events.
At quarter end, our portfolio wide leased occupancy rate at share was 96% down 10 basis points quarter over quarter as.
As we look ahead, our remaining lease explorations are manageable with approximately seven 2% at share expiring per annum through 2020 for a direct result of our ongoing strategy to pre lease space and derisk future lease roll.
Turning to our margins Midtown first quarter leasing activity of approximately $3 4 million square feet. Excluding renewals was the third consecutive quarter of leasing activity in excess of 3 million square feet, an indication of the recovery that is underway.
A significant portion of this quarter's leasing occurred during the month of March as more and more companies are returning to the office, resulting in Midtown second highest quarterly leasing activity total since Q1 2020.
Renewal activity reached a modest 500000 square feet during the quarter, 55% below the five year quarterly average as 10.
Tenant interest continues to shift from short term renewals to new long term commitments.
Financial services industry continues to drive the Midtown market contributing 39% of leasing activity during the first quarter.
Despite midtown is elevated availability rate tenant touring activity for high quality direct space and the market continues to accelerate particularly in well located class a buildings.
Tenants, who are more discerning than ever before are seeking high quality real estate to compel their employees to return to the office and enhance all of the benefits that can only be realized when people are working together in person.
Tenants, increasing desire to raise the bar and improve the quality of their real estate has resulted in the flight to quality trend that continues to gain momentum in New York.
We continue to attract more than our fair share of activity in the market, which is attributable not only to the quality of our assets, but also to the strength of the sixth Avenue Submarket, which is where we have our largest availability at <unk> hundred one avenue of the Americas.
Six Avenue continues to maintain the lowest availability rate of any submarket in Midtown at 12, 9% 570 basis points below the broader midtown availability rate.
Our offering at <unk> hundred 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, a 5000 square foot tenant dedicated outdoor terrace and a soon to be world class Amenity center in the building all of which.
Continued to resonate with prospective tenants we are at various stages of discussions with several tenants and look forward to updating you on our continued progress at <unk> hundred one Avenue of the Americas.
Our New York portfolio is currently 98% leased on a same store basis at share up 40 basis points quarter over quarter, and up 350 basis points year over year.
During the first quarter, we leased more than 175000 square feet at a weighted average term of eight three years much of which served to reduce lease roll in 2022 and 2023.
Our New York portfolio has two 2% or approximately 132000 square feet at share rolling in 2022.
Which includes approximately 80000 square feet at share at 60 Wall Street, which will begin its redevelopment in June of this year.
Looking further out our overall lease expiration profile in New York is manageable with seven 1% at share expiring per annum through 2024.
Turning now to San Francisco.
While San Francisco leasing activity was muted during the first quarter. There were several key developments that contributed to recent increased tenant demand.
The statewide masked mandate was lifted during the quarter and many San Francisco based companies announced their return to office plans all of which has it resulted in an increase in utilization and will drive leasing activity going forward.
In addition venture capital funding in San Francisco remains robust.
San Francisco based company has raised more than 78 billion.
<unk> capital in 2021, an all time high and continue to attract significant capital having raised $16 5 billion through the first three months of 2022.
Venture capital backed companies accounted for 14 of the 26 deals completed in 2021 in excess of 50000 square feet and will be a key demand driver going forward in 2022.
Sublease availability remains elevated but has declined for the fourth consecutive quarter down more than 15% year over year.
The market for San Francisco's Premier assets remains tight and economics, particularly for view space in trophy assets remains strong.
Similar to New York flight to quality is a trend that continues to gain momentum in San Francisco.
At quarter end, our San Francisco portfolio was 91% leased on a same store basis at share.
During the first quarter, we leased approximately 27000 square feet at a weighted average term of four six years with initial rents of approximately $100 per square foot.
Our San Francisco portfolio has three 6% or approximately 79000 square feet at share rolling in 2022.
Looking further ahead, our overall lease expiration profile in San Francisco is manageable with seven 4% at share expiring per annum through 2024.
Our San Francisco portfolio is well positioned to manage through the current environment.
With that summary, I will turn the call over to Wilbur, who will discuss our financial results.
Thank you Peter.
Yesterday, we reported core <unk> of 25 cents per share <unk>.
<unk> ahead of consensus estimates.
Our first quarter results include $1 9 million or about <unk> <unk> per share of termination income from a retail tenant.
Same store cash NOI, which excludes termination income grew by three 9%.
And the growth was driven by our New York portfolio, which grew by a strong six 6%.
During the first quarter, we executed 12 leases covering roughly 203000 square feet of space at a weighted average starting rent of $67 67 per square foot and for a weighted average term of seven eight years.
Mark to markets on 141269 square feet of second generation space were basically flat to slightly negative on a cash and GAAP basis, respectively.
The current quarter's lower weighted average starting rent and flat mark to markets were largely attributable to the 87500 square foot renewal with Hilton, which represented a majority of second generation space and as Peter mentioned this lease.
For two base floors at 13, 25 Avenue of the Americas. So it had a disproportionate impact on this quarter's numbers.
Excluding this lease weighted average starting rents would have been $78 78 per square foot and mark to markets would have been positive, 6% and positive one 7% on a GAAP and cash basis, respectively.
Let me spend a minute on guidance.
Based on our first quarter results and our outlook for the remainder of this year, we are raising our core <unk> guidance by <unk> <unk> at the midpoint.
We now expect to end 2022 with core <unk> ranging between 93 and.
<unk> <unk> 97 per share or <unk> 95 per share at the midpoint. This one set increase in core <unk> at the midpoint is comprised of the following.
<unk> from lease termination income, which we recognized in the first quarter.
<unk> from better than expected portfolio operations, partially offset by <unk> <unk> from higher interest expense on variable rate debt.
We continue to expect same store cash NOI growth to be between one and 2% notwithstanding that our first quarter results are trending ahead of these expectations as we will be contending with tougher comps in the second half of the year on.
On the same token we expect GAAP same store NOI growth to be between two five and three 5% notwithstanding that our first quarter results are lagging these expectations as we expect to benefit from higher straight line rent commencement as the year progresses.
Turning to our balance sheet.
We ended the quarter with $1 two 5 billion in liquidity comprised of $502 million of cash and cash equivalents and $750 million of capacity under our revolving credit facility.
Outstanding debt at quarter end was $3 7 billion at a weighted average interest rate of three 3% and a weighted average maturity of four eight years.
87% of our debt is fixed and has a weighted average interest rate of three 6%. The remaining 13% is floating and has a weighted average interest rate of 374%.
We have no debt maturing in 2022, and only 5% of our share of debt maturing in 2023.
Lastly, we have updated our investor deck, and our schedule of free rent, which increased by 49% from our February investor deck, and now sits at $51 8 million.
The deck can be found on our website at www Dot <unk> dot com.
With that operator, please open the lines for questions.
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Your first question comes from Steve Sochua with Evercore.
Thanks, Good morning.
I guess first.
Albert and I don't know how much detail you can go into on the kind of the monarch did better but I'm just curious how you and the board have sort of thought about some of these strategic alternatives that have come up in <unk>.
Maybe what steps.
Things New are you doing to try and close the gap.
You sort of see out there between where you think NAV is and where the stock trades.
Okay. Thank you Steve for that question.
You would ask that kind of a question.
It's really our board takes these kind of things very seriously and so they did also on the monarch situations and we have been very straightforward.
And upfront I think with the public.
It's too early.
Early too.
Speculate or comment on what the board is really going to do in the future.
Consistently review our strategy.
In board meetings.
And we.
We had our financial advisers in this case engaged to.
To value of the company again, because we had been.
Over to you about 18 months before as you might recall.
We updated figures and had a very open and Frank discussion and we came to the conclusion unanimously that this is not.
The right time at this point in the cycle, we're doing a lot of leasing and we are doing.
The operations work that's required to increase value in this portfolio and Thats why we came to the conclusion at that time.
That's my answer on that.
Okay, Thanks, and maybe one for Peter on leasing I know you guys are still working on finalizing the back filling of Barclays but.
My understanding.
Is 24, you've got Clifford chance and I think that they've now.
<unk> signed in the new location. So I think that may be a bigger backfill for you. So I'm just curious if you can share any thoughts there and then I believe Uber is a large lease exploration and kind of the early part of 2003 and I'm. Just wondering if you could sort of talk about what youre seeing for that upcoming exploration as well.
Thanks.
Sure Steve I'll start with <unk> hundred one we feel like we're making really nice progress on that Barclays block. In fact, we are in advanced negotiations now for another full floor recall Theres 68000 square feet each and.
And we look forward to updating you.
On our progress on that floor beyond just that floor alone. We do have other activity on what will be the remaining three floor is call. It 200000 square feet.
At that point, which which obviously when we started.
With 500000 square feet, we think is significant progress.
We're seeing the types of tenants that you would expect in paramount's portfolio creditworthy dynamic tenants in many cases in the case that I'm, referring to now represents expansion. So those are the types of discussions that we're now having as it relates to 31 West 50, <unk> Street. It's a trophy building. The building itself shows beautifully has all the attributes.
That's a new construction and as good a location is there is so whatever ultimately happens with Clifford.
Already at this point, having discussions with prospective tenants that are circling if you will.
Enquiring about the opportunity and the availability in may of 2024.
At market Center, we have some nice activity on that 234000 square feet that rolls in 2023.
The Hooper space you referred to.
We have some nice activity via several proposals.
Building is extremely well located there is a number of attributes that tenants that are now in the market are attracted to.
It's too soon at this point for me to go beyond anything that I've, just now said, but suffice it to say, we feel optimistic about how that block is positioned relative to current tenant demand.
And maybe just one follow up and then I'll yield on the Barclays space.
The deal that you are sort of working plus the others. How would you compare the rents or maybe the net effective rents today versus maybe where you thought they would be at the time that you were getting the space back.
I think we're right there actually on the economics I think we all know concessions are slightly slightly elevated but we think we've done just fine rents.
We also think is.
Held firm for these floors the buildings well located there is.
And amenity center that will soon be in that building and so those are the types of things that we've done to ensure that the economics on these deals and I'm now referring to.
Or what we had expected for some time.
Great. Thanks, that's it for me.
Thanks, Steve.
Next question.
Hotshot with let's say, Ohio.
Thanks, So much for taking the question just maybe on that last question around the pipeline.
You can see last quarter and this quarter you outlined.
Pretty solid increase in the occupancy through all the leasing.
And Peter you gave a little bit more color on activity on specific buildings.
You can add to this in terms of your confidence.
On the pipeline, maybe any more attributes around the pipeline. What do you think you can close near term in terms of what is actually close to the finish line and where maybe the heavy lift is if you can just unpack it a little bit more so we just get confidence around the lease up trajectory over the next call. It six to 12 months.
Vikram, it's a very good question, but you know us now since a couple of years.
This team is always executed on leasing as <unk>.
Victor and forecast.
We did a 1 million square feet last year. The pipeline is pretty good for this year. We are forecasting another 1 million square feet for this year and what it is in the pipeline and we are talking in various stages of.
Discussion and negotiation with potential tenants is in the million square feet, you know in New York It takes sometimes.
Especially on the larger leases.
We had similar discussions a couple of years ago. It just takes long time to execute these larger leases. So it's very hard to predict quarter by quarter, but we are very confident to achieve our hour.
Guidance.
Okay, Okay fair enough.
Albert maybe just sticking with you on just the overall demand from your conversations with maybe a fun partner just other.
Private investors in the U S and Europe .
What's the relative appetite for.
Its properties in New York, San Francisco, and just given the move in.
Any thoughts on.
Any potential move in cap rates.
Well you have.
The changes in cap rates will come most probably was changing.
And the debt market.
We don't see that really at this point in time, because there is a significant amount of equity capital that is looking for a home.
At this point you would talk more.
With optimistic investors, who would like to take advantage of the current situation of the market.
And Youre looking at some core investors, who like to see cash flow.
And those are the investors who are looking at an asset that we closed on this quarter like 1600, Broadway, which was a great opportunity for us.
Something that the investors really really.
Wanted to get as a long term.
Safe cash flowing.
Income producing transactions so.
The equity capital.
As there is relative debt capital.
And it really depends on what kind of pocket there.
We're looking at and I would say New York is.
Currently a little bit more unfavorable than San Francisco, but I think thats that will that will change for the soon I am personally.
Vince at San Francisco Long term is a very very good market to be invested in.
Okay. Thanks for the color and then we'll be just last one for you.
In the guidance I see that you.
Get the fee income is the same at 29% to $30 million, but you did have higher fee income this quarter.
One was sort of straight lining it you would it be after then reduce your estimates going forward. So just two questions one what what drove that higher.
This quarter and second in the guide have you included any feeds from the recent.
Retail deal that you closed the JV.
Sure and Vikram, if I if I, if I were to unpack that question and you go back to when we initially provided guidance in the range for fees. We did highlight that fee income was going to be higher relative to last year.
Primarily because of that transaction and to your point.
All that happened is that fee income was recognized in the first quarter because that retail transaction closed. So you are right.
For the full year that would mean, if you have straight line your fee income relative to the midpoint of the guidance. We provided there was some acceleration in Q1 and there should be some deceleration in the upcoming quarters, but the overall number was baked into our guidance and hence it did not change.
Great. Thanks, so much.
Sure. Thanks Victor.
Next question Ronald Camden with Morgan Stanley .
Hey, just a couple quick ones just starting with Capex.
Put some really great disclosure sort of.
The ATM have total capex in the quarter and that about $10 million of redevelopment Capex this quarter.
Is that the right run rate that we should think about for the rest of the year is there any sort of new or a different project with <unk> coming on and off that we should think about on the Capex front.
For this year.
So all I'll tell you the capex schedule, you're referring to in the supplemental that's done on a cash basis.
And so everything from quarter to quarter, there could be fluctuations right because it's the timing of spend for <unk> and what have you. So.
It's hard for us to say that Thats, an appropriate run rate, but if you look.
Year over year, we've had a fairly consistent amount of capex.
<unk>.
In our portfolio. So I would I would tend to stay away from quarter to quarter metrics, but look at it from a year over year basis.
Got it that's helpful.
Then just want to hit on the dividend solve a sort of.
11% raise.
In the quarter, maybe just some commentary on on what the thinking was it to that and sort of marry that with how youre thinking about sort of capital allocation buyback.
Buybacks.
Which has been which you guys have done in the past how should we think about that.
So you know that we reduced our dividend.
Dividend.
The pandemic and this was.
Tremendous precaution at the time.
We are managing.
Our capital carefully and.
You know that we have.
Close to $500 million in balance sheet cash and we have an unused credit line.
We see that.
We managed.
The leasing as well as the capital.
And also the cash flow from existing tenants.
At a very high level and I have to give kudos to my team.
I think.
We performed.
The payments under the contracts that we have.
The top end of our peer group.
The board feels comfortable to increase the dividend and the.
We are on a quarterly basis, reviewing whether we do buyback.
What we do with dividends, that's something that the board decides.
At that level on a quarterly basis.
Yes.
Ron I would only say when you looked at two hours.
Our dividend was reduced it wasn't the midst of the pandemic and it wasn't the heels off.
Largest tenant exploration and Barclays were $30 million on a building that we own 100% was coming out of the system and then you had.
A sizable exploration also from the TD bank floors. So as Albert said that was done out of an abundance of caution and as we've started to execute on our business plan and look at that.
The run rate and taxable income as well as the growth in cash flow. That's what gave the board ample comfort to <unk>.
Kris the dividend this past quarter.
Yes.
Great and just my last one.
Just thinking about sort of the legal services tenants in the portfolio, maybe can you comment on.
How are they sort of trending relative to some of the other industry types in terms of office utilization.
And so forth.
Ron its Peter I would say it varies from firm to firm at this point in terms of utilization.
So it's hard to say I will say there is a renewed interest it seems from a number of law firms in terms of seeking quality real estate in order to to recruit and retain a common theme that we've seen throughout other industry as well, but as it relates to utilization from law firm to law firm, it's really I think firm specific.
And as an additional comment.
We've talked to a lot about tenants.
Law firm tenants and Theyre, all realizing especially the successful one that the long term model is a model that you have to be in the office and you have to work out of the office at least most of the time.
Some of the associates can can get a lot of the things done.
And alternative waste, but they know that long term the growth for that business is coming from being there and being together working together and being collaborative.
Great that's it for me thanks.
Thank you.
Our next question Blaine Heck with Wells Fargo.
Great. Thanks, Good morning, Wilbur you referred to this in your remarks, but there was a pretty significant jump in the incremental NOI you guys have yet to see from signed leases not commenced during the quarter now stands at $39 million from $23 million last quarter can you just walk us through kind of the biggest drivers of that $16 million increase is it just the.
Hilton and 16, 33 cube leases or was there anything else that changed in those debts.
Sure.
It's really driven by.
Our San Francisco portfolio, if you saw the occupancy in San Francisco.
The difference between leased and occupied there is a sizable gap now at one front Street family and Thats because there was a deal that was pre leased in San Francisco.
We're an expiring tenant moved out and somebody.
I guess the largest add on their first Republic has taken that space and they have some free rent that starts to kick in and that's what's driving that number.
Okay. That's helpful.
Second question just may.
For Albert can you just talk a little bit more about the decision to purchase the retail property at 1600 Broadway I know within your JV, but maybe just your thoughts around street retail in the city going forward that'd be helpful.
In general.
Very capital was street retail and New York.
Very limited exposure ourselves.
And.
This was.
Unusual opportunity.
<unk>.
We had a relationship with the seller since many many years and so we could be very proactive in underwriting and we had an investor who.
Was was really very interested in this long term very stable and growing cash flow from from the lease income as well as the signage income.
And it was a great opportunity for us to develop that relationship.
<unk>.
We have.
Also in the past trended towards more asset light that means focusing on what we know and the.
And being in the operations of these kind of assets.
It was very attractive for our shareholders.
On the income side and very limited.
Cash and investments our equity investments.
And the returns will be will be.
We are quite excited about that relationship so.
Normally we would not have looked at it.
Retail investment standing on its own.
And this kind of.
Format, but this was very unusual.
Street retail will come back you can see it in certain certain parts of the of the New York market already.
If you walk around in downtown as well as Midtown.
Tourism.
Tourism business is back if you walk around.
The streets, you hear a lot of foreign languages, especially lately, so I think.
Speed retailers for sure not not not that in depth.
Definitely come back.
And.
I think the future it might not be.
The Sky high rents at some of the assets commanded over the last couple of years, but.
<unk> Street retailers not the debt business.
Got it thanks guys.
Thank you.
I will now turn the call over to Albert Behler for closing remarks.
Thank you all for joining us today.
We really do look forward to providing an update on our continued progress when we report our second quarter results Goodbye.
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.