Q3 2022 Paramount Group Inc Earnings Call
And sellers evaluating when conditions will improve.
For our part we have always maintained a disciplined approach with our capital and continue to monitor the markets carefully.
To date, we opportunistically repurchased six 5 million shares at a weighted average price of $6 41 per share or 41 $7 million in the aggregate.
As has been the case since the pandemic again, we continue to maintain sufficient liquidity, which amounts to about $1 $3 billion.
At the end of the quarter.
We have maintained a defensive posture since the onset of the pandemic with our portfolio of stable trophy assets and our 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 third quarter, we leased approximately 288000 square feet for a weighted average lease term of 12 five years.
Our third quarter leasing activity was heavily weighted toward New York with approximately 254000 square feet leased.
Or 88% of this quarter's leasing total.
Among the most significant transactions during the quarter was the previously mentioned 142000 square foot lease with O'melveny <unk> Myers at <unk> hundred one Avenue of the Americas, which further exemplifies the appeal of the building as it continues to attract today's most discerning tenants.
Our pipeline remains healthy as we continue to benefit from tenants pursuing best in class buildings in both New York and San Francisco.
At quarter end, our same store portfolio wide leased occupancy rates at share was 91, 4% unchanged from last quarter and up 110 basis points year over year.
As we look ahead, our remaining lease explorations are manageable with 2% at share expiring by year end and approximately six 8% at share expiring per annum through 2024.
Turning to our markets Midtown third quarter leasing activity of approximately $4 6 million square feet. Excluding renewals was four 5% above Midtown pre pandemic five year quarterly average and was the second highest quarterly leasing total since Q4 of 2019.
The third quarter's leasing activity was led by large relocations.
Tenants' ongoing desire to raise the bar and improve the quality of their real estate has resulted in the flight to quality trend that continues in New York.
Financial services continue to drive the Midtown market contributing 46% of leasing activity during the third quarter.
In excess of the 32% share of occupancy this sector currently accounts for in Midtown.
And Midtown posted yet another quarter of positive net absorption during the third quarter, marking the fourth time in the past five quarters that Midtown has realized positive quarterly net absorption.
Despite midtown elevated availability rate recent tour activity, especially with small to mid sized tenants and transaction volume for high quality direct space and the market remains solid, particularly in well located class a buildings.
Our New York portfolio was currently 92, 1% leased on a same store basis at share up 10 basis points quarter over quarter, and up 220 basis points year over year.
During the third quarter, we leased more than 250000 square feet at a weighted average term of $12 nine years.
Our overall lease expiration profile in New York is manageable with 1% at share expiring by year end and six 4% at share expiring per annum through 2024.
Turning now to San Francisco leasing activity remains muted as the market continues to take a measured approach to returning to the office.
Office utilization has increased since labor day, However, and is currently the highest it has been since 2019, which is an encouraging trend disc.
Despite San Francisco's elevated availability rate 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 movement that continues to gain momentum in San Francisco as employers use real estate as a lever to compel their employees to return to the office.
At quarter end, our San Francisco portfolio was 89, 3% leased on a same store basis at share.
During the third quarter, we leased approximately 35000 square feet at a weighted average term of seven three years with initial rents of approximately $114 per square foot.
Looking ahead, our overall lease exploration profile in San Francisco is manageable with four percentage share expiring by year end and seven 8% 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 the financial results.
Thank you Peter yesterday, we reported core <unk> of 24 per share.
In line with consensus estimates and a penny higher than the prior year's third quarter same.
Same store cash NOI grew by a modest <unk>, 4%.
Much like the first and second quarters.
In the third quarter was once again, driven by our New York portfolio, which grew by a very strong six 2%, while the same store growth in our San Francisco portfolio as.
As expected decreased by 11%.
GAAP same store NOI growth was solid at six 3% portfolio wide with New York, increasing by a robust, 10% and San Francisco decreasing by <unk>, 4%.
During the third quarter, we executed 12 leases covering 288554 square feet of space at a weighted average starting rent of $82 76 per square foot.
And for a weighted average lease term of 12 and a half years.
Mark to markets on 204178 square feet of second generation space was positive four 4% on a GAAP basis and negative 10, 5% on a cash basis.
Given our in line third quarter financial results and our outlook for the remainder of the year, we are maintaining our financial guidance metrics at the midpoint.
We continue to expect core <unk> to be 97 per share at the midpoint and our expectation for same store GAAP and cash NOI growth continues to be 4% and 2% respectively at the midpoint.
Turning to our balance sheet, we ended the quarter with almost $1 3 billion in liquidity comprised of $500 million of cash and restricted cash and the full $750 million of undrawn capacity under our revolving credit facility.
Our maturities are well lathered and I exposure to variable rate debt is limited.
Outstanding debt at quarter end was $3 67 billion at a weighted average interest rate of.
For three years.
87% of our debt is fixed and has a weighted average interest rate of three 6% and.
And the remaining 13% is floating and has a weighted average interest rate of 539%.
We have no debt maturing in 2022, and roughly 5% of our share of debt maturing in 2023.
With that operator, please open the lines for questions.
Thank you.
I'll now be conducting a question and answer session.
I would like to ask a question please.
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One moment, please while we poll for questions.
Our first question comes from Bryan Hunt.
With Evercore ISI. Please go ahead.
Hey, good morning.
So Peter with concessions haven't been elevated now for quite a while I'm curious at what point do you think face rents really start to come down or what's the downside risk there just given vacancy in the market and maybe in particular, San Francisco do you think price as a lever you could use to attract more demand or are there just not enough tenants in the market today.
I don't I don't feel a lot of downward pressure on our direct rents, yes concessions are elevated to have been for some time, but our portfolio is well leased well occupied our buildings are highly improved and.
I wouldn't go so far as to say, we have tremendous pricing power, but I don't see.
Erosion on direct asking rents.
In our markets.
I would say.
Our you can see that from the average.
The rent per square foot that we see in San Francisco that because of the quality of our assets, we get our fair share and we get pretty good pricing.
In the market so.
I think they're in pretty good spot.
It's hard to say, how the market develops over the long run.
But I would say.
We are also trending to.
More longer term leases.
And then a smaller tool so have more concessions.
You have other peers of ours or other markets, where they hit.
Tending to be more short term leases and of course.
So smaller and those kind of markets.
Okay I.
I guess, Peter just fulfilling on San Francisco.
Maybe could you just talk about the demand outlook, there and maybe in particular the back selling efforts through the Uber space Thats coming back next year.
Sure I'll start with the Uber space.
Brian which is 234000 square feet coming back in July of 2023, what I would say is that we have some some real activity on that space. So I can't say much more at this point, but we do have.
Activity, there and I think fundamentally we'd like to see tech.
Companies.
Even more demonstrative in their requirement that employees return to the office, we think utilization, while it's up in San Francisco, it's not where it should be and we regard utilization is the fuel that will power our business going forward So of course.
It's all sort of developing real time. It has increased since labor day were at approximately 50%, which is up considerably relative to last year, but we do need to see more progress in terms of.
Tenants returning to the office before I think we see meaningful demand in San Francisco that being said trophy assets like one market continued to perform we added another.
Terrific tenants to the portfolio in the most recent quarter.
We continue to maintain real pricing power and that asset, but fundamentally in San Francisco, we need the technology user I would say the same about New York too to sort of embrace a return to the office in a more meaningful way.
Okay.
Got it thanks, and maybe just one last one for Wilbur.
I realize you don't have a lot of debt maturing next year at 5%, but maybe could you just talk about your plans there to refinance.
You think you could issue and then I believe you've got some swaps expiring on the debt at <unk> over the next couple of years. So could you just talk about plans and addressing that piece as well.
Hi.
As you pointed out Brian in 2023 less than 5% of our stack of debt.
<unk> in 2023.
Two of those one piece of that is on 60 wall, where we have 5% of Winona.
The net debt has an extension option, which we are going to avail ourselves of.
As you know 60 wall is going into redevelopment phase.
And then you have 111 and 300 mission.
JV assets that we own where we have debt maturing.
<unk> hundred 11 side also has an extension option that we will avail ourselves off and 300 mission.
Which.
Matures in the second half of 2023.
I'll watch and monitor the markets to see.
Where pricing is the good news for this debt thats maturing all of the debt on.
These assets are very very conservatively levered.
Leverage so we don't feels we face the risk of coming out of pocket on balance sheet to be able to pay down this debt.
As we see the markets today.
As far as the second part of your question on the swaps.
The swap you mentioned that one doesn't come due until 2024, we're going to continue to monitor the markets to see how that develops but.
Relative to.
The rest of the office Brethren in the industry I think we are sitting quiet.
At a good position with respect to our exposure to variable rate debt and I've said this in our prepared remarks.
To be specific I think all of 12, 8% of our debt is variable and the remaining is fixed so I exposure to the current interest rate environment has limited.
Let's say, we have a good mix of fixed and variable.
Thanks very much.
Sure.
Next question comes from Derek Johnston.
Yes.
That's back.
Please go ahead.
Hi, everybody. Thank you.
Can you clarify why <unk> your leased occupancy is not matching the level of leasing velocity that was printed in the quarter.
No.
Was hoping you can provide some type of color on that divergence.
Sure Derrick I'll start.
Me.
And then maybe maybe I'll go first and then Mike Albert.
Albert.
As you recall, we always are trying to do.
Forward looking leasing so we take these opportunities where they come in some of the leasing that has been happening is the <unk>.
Happening in years to come so not for the current year. So they are less.
Occupancy increasing debt, but they are definitely derisking.
The future years.
Leasing management is encouraged to lease whatever is available and if a tenant and we have these discussions going on sometimes quite early.
Because.
<unk>.
Having offices larger office.
Tenants in space and they normally plan a couple of years in advance.
It's quite normal that you have these things happening.
It is difficult to plan.
But that maybe gives you a little bit more color.
Okay.
Okay, I don't know if we'll ever wanted to jump in there as well because.
Yeah.
Add something to that.
We had if you go back to our prepared remarks last quarter, we had sort of cautioned that.
The goal was a tall order it was ambitious to get to but we did not reduce the occupancy range because it wasn't activity in the pipeline that we still felt could get done.
But it was not sufficient visibility. So we said we're going to we're going to wait for another quarter before we start to fine tune those metrics if you will.
On point with respect to your question why leasing velocity is not down necessarily the same as the leased occupancy is.
Albert tried to allude to was.
Getting pre lease a statin. So essentially we did 142000 square foot lease with o'melveny, if that lease had gotten done on the existing vacant floors of Barclays. Former space you would have not seen that.
Pulled back in lease occupancy if you will but it got done on the credit Agricole space, which doesn't come due until February of 2023. So we when we sit around and look we're happy that it got done whether it's the Barclays block of the credit Agricole bought because thats near term vacancy, but what you're not seeing is that in.
<unk> impact on occupancy you will see that now in our lease expiration profile because as you will have noticed we reduced the lease explorations in 2023 by 142000 square feet on that space, because we derisk that so we're just as happy taking that on the credit Agricole.
Mark versus the Barclays block.
Unfortunately as far as the metrics goes that's the way it falls out.
Okay. Thank you actually that's pretty helpful. I appreciate it.
One last one.
More bigger picture I guess, so look you guys have done a fair amount of leasing so far in 2022 on the new space are you seeing any interesting trends regarding the build out or anything that could be attributable to a post COVID-19 or perhaps a hybrid work environment.
The densification that youre seeing and requirements.
Any more space, perhaps dedicated to entertaining or anything notable that you could share with us. Thank you.
I think it's fluid in terms of how tenants are improving their space I don't think theres, a one size fits all approach I do think what's driving this flight to quality trend as tenants desire to deliver an elevated experience to their employees or do you think he densification has been in play for some time and that will carry <unk>.
Forward.
Tenants that have been active in this market care a lot about delivering an elevated experience like I said.
In terms of what that means I think a lot of tenants are seeking flexibility. Some of these bigger deals have flexibility built in because I don't think most tenants have calibrated fully in terms of what exactly they are going to deliver to their tenants I do know they are all seeking ways to either create outdoor space create more communal opportunities that allow for this.
Critically important interaction that's needed in person, but in terms of there being sort of a one size fits all this is what and how tenants will improve space going forward.
It's changing in real time, and every tenant has has a different idea of what that looks like for their firm.
But the idea of delivering a better experience.
Reflect who they are as a brand.
As in play and you would almost go so far as to say, there's a renewed interest in real estate as a result of all of it and so far this year specifically in New York This market's been.
And by large tenants relocating in order to execute on what I am now describing going forward I do think we will see a lot of small to mid sized tenants.
Start to follow suit.
And Thats exactly what were seeing real time in a lot of our buildings. That's not to say, we don't have large tenants looking at the pace of 13, one because we do.
But but but we're starting to see the small and mid sized tenants start to contribute to total leasing activity specifically here in New York.
I think what's helpful for us.
Is it all.
Julio is pretty well in <unk> and <unk>.
The beauty of our months portfolio in New York as well as in San Francisco that we can offer all kinds of different sizes some spaces that guide.
For each asset each property is.
Is this all character and so on.
Specifics and Peter and his team play this very very nicely.
Even if a tenant wants to grow.
One asset might be fully leased like a 6% share.
And we have other options to offer.
And.
I think that.
In the future it will be more important that.
The net.
Offering security offering services.
And being much more service oriented than in the past, especially in New York, but also in San Francisco.
Thank you guys.
Okay.
Thank you.
Next question comes from Vikram Malhotra with Mizuho. Please go ahead.
Thanks, so much for taking the question. So maybe just to start with you Theres a lot of.
I guess variability as you mentioned amongst your peers the variable rate debt exposure.
Exploration et cetera can you I know you gave us guidance a quarter from now but can you just help us with some of the maybe the bigger blocks that we should be thinking about as we focus on 23.
Including maybe.
Interest expense trajectory.
Sure and without getting ahead of skis and as you point out we're not we're not giving.
Guidance currently.
And what I would say is we are.
We're going through that process right now.
I think the good news on some of the variable rate debt that we have which as I said before is less than 13% of our total debt stack is protected through interest rate cap.
When it gaps LIBOR at 2% and as we all know we've eclipsed that mark so.
We are we are benefiting from that LIBOR cap that cap expires in August of 2023.
$360 million of variable rate debt, which is down one and it's the largest part of our debt stack that's variable so.
At some level, obviously you have the protection through August 2023, and we will look.
We now and then to continue to extend by a new cap on that loan. So if youre looking at interest expense trajectory.
We'd not again, giving 2023 guidance, yet I don't think youre going to see.
Deterioration in interest deterioration in earnings rather as a result of interest beyond five.
<unk> call it four to five.
For Paramount.
And then just the other building blocks just remind us obviously, we know of the move outs, but.
And anything else, we should be aware of.
So if you looked at our investor deck Vikram, we did put out.
On our investor deck really the large blocks what.
What the status is of the large blocks how much it's leased and what the upcoming role is and as you know the large block vacancy. We have is some of the remaining barclays' space, you've got credit Agricole, which Peter and his team have already derisked, 47% of <unk>.
That expires in February 2003, and then you have Uber, which 234150 7000 square feet at share for Paramount.
<unk>.
Rolls in.
In July of 2023, so when you look at 2023 I want to say, we have under 600000 square feet rolling and about 65% of that role is in those two large blocks between credit Agricole and Uber.
Okay.
Well I guess just Albert.
Yeah.
Everyone's trying to get a better sense of where cap rates are across New York San Francisco just other markets.
I'm just curious if you have a view given sort of.
You also have a fund business and other partner in.
In Europe I'm, just wanted to get a better sense of where do you think values are settling out between sort of the having to have not buildings.
Yes, I mean across the board.
You can say that not only for the United States, but also in Europe , but can you talk about the U S. Today.
Because of the interest rate environment.
The debt funding environment, the more tightness in the markets and with recession fears and talk in front of us.
Cap rates have increased.
And.
It's at least 50 basis points that I would say.
Across the board, but it's very hard to say.
Because building by building.
They are different.
Where in the past you would.
<unk>.
Having more interest and value add and opportunistic.
The ones, who still want to buy.
<unk>.
More equity than in the past because of the of the debt.
The difficulties and the situation there.
Rates are very hard to.
And debt financing is not so easy to cover so.
Those people are more interested in core investments.
If it comes to who is interested definitely the euro investors attracting back because of the strong dollar.
They come they can make sense of.
Investing.
Currently.
20% more equity capital today, only because the dollar has strengthened so much so.
If you have interest it's more coming from.
From Canadian from the Canadian side.
From the Middle East.
But.
Like in 2009.
And the great financial crisis, the great financial crisis as many call it.
There was a big discrepancy between.
Cement ask.
The bias expected to get.
To seal and the sellers didn't want to.
It's really and I think this will go on for a while.
Once who are well capitalized.
They can they can really.
Wait and the ones who get.
Refinancing pressure high.
Hi, mezzanine debt on their balance sheet and these are more of the b class kind of assets or owners.
Those those market participants will get.
Under more pressure and we would like to.
Take advantage of that.
We are not in a hurry at all.
And it would be.
In the last calls.
Our own <unk> equity, but more or less.
Fund, our joint venture partners equity and it would be very opportunistic.
And not focused on core assets.
So just maybe last clarification, you referenced <unk> equity you bought back shares.
Okay.
And I guess, we're trying to get a better sense of like the bid ask where does the underlying an EV of this company.
In the past the company has received.
A bit from several investors.
Over the past two years, obviously valuing the company at a much higher level and so.
Can you sort of just remind us.
When youre, saying waiting for the right time to for Clermont to invest versus where the equity price is today.
Bought from buying shares what else.
Are you sort of thinking envisioning.
For people to realize value and if that value is not realized.
The next steps.
Okay.
I think in like.
I've said before not that much has changed.
I think buying back our shares in a very controlled manner.
That will be discussed with the board on a quarterly basis.
And we always have said, we want to do it on a leverage neutral basis.
And.
I think that it makes sense.
<unk>.
We are still looking at opportunities to potentially.
Take in joint venture partners and assets that we have ourselves.
Our valued properly and as I mentioned these could be more core kind of assets.
But but we would also do this very controlled.
And I don't think its a good idea.
And to think about.
Doing any kind of clarity.
Strategic thing at this point.
We had two attempts like you mentioned in the past.
They're both very optimistic.
And.
I think we were very transparent immediately with the market.
We looked at each opportunity because we want to do the best for our shareholders.
And we went to our financial advisers to the board.
And we came to the conclusion that it didn't make sense for us at that point in time, So we look at each opportunity at each.
At each.
Opportunity to generate more shareholder value, but it has to make makes sense for the shareholders long term.
It takes it takes a long time to build.
To buy assets and develop them to the point that we have to develop them and that gets underappreciated by some of the long the short term.
Investors.
<unk>.
You could buy a certain assets like the southern bias here and Thats not the case.
And it takes long term.
Pruning pruning a good greenlaw.
Fair enough. Thanks, so much.
Okay.
You are welcome.
Again, if you would like to ask a question. Please press star one on your telephone keypad.
Next question comes from Ronald Camden with Morgan Stanley . Please go ahead.
Hey, Thanks for having me on just a couple quick ones for me.
Just starting on the first one on the lease rate cut.
Scott on the guidance, maybe can you provide any color in terms of just is this more in Europe has been more San Francisco and just sort of maybe those tenants that you thought maybe you could get done this year.
Like any industry any sort of trying to refinance all of the attack.
Just sort of any color on that would be helpful.
Yeah.
So maybe I'll.
Maybe I'll start and then Peter again.
In.
As far as the tenant mix is going.
I don't know if you heard I did address a portion of that question.
In the beginning of the call in the lease rate was cut again because of some of the activity in the big deal that we got done with.
Happened to Derisk, the future role, which was the credit agricole blocked that comes due in February 2023 versus the existing vacant block of Barclays and so had that deal got done on the Lincoln Block you would not have seen necessarily that part.
A significant part in the in the leased occupancy percentage and that was basically what drove that and part of it is obviously as Albert alluded to in his prepared remarks, there is activating the pipeline, but as we sit here two months before year end and the degree at which that activity.
<unk> is moving forward.
We didn't feel comfortable enough to say that may get done by year end it could but it may not and so we tried to do what we believe was the more conservative thing to say, let's push this out because it doesn't seem we don't have more likelihood that not that activity get signed before year end.
I would just say that the makeup Ron of the tenants sticking with <unk> hundred one between credit Agricole.
Well on the vacant space is predominantly services.
And professional service type.
One of the things I think that's underappreciated about New York, specifically is just how diverse the city's tenant basis. So while technology led the way in 2019 across.
Manhattan, contributing 25% toward leasing activity.
Fairly inactive year to date, but financial services have been very active contributing just shy of 50% of total leasing activity. So so we are seeing demand from financial service type tenants law firms as evidenced by the deal that we just completed on the on the credit Agricole block.
But.
The Wolverine point, they just haven't moved as quickly as we would like and so we're working through that of course, but we think we sit in a good position and we're doing all of the blocking and tackling that we've always done in order to have success on those two blocks of space.
Great and then Mike back and wanted to just just digging in a little bit on your opening comments. You also just mentioned as well just maybe it's taking a little bit longer.
On closing on some of these leases any color on what are the tenants, saying or is that a recession is that work from home is unclear plan like what is there sort of any thematic.
That you can point to.
Yeah.
Yes.
I would tell you in.
Obviously.
These can chime in but it's less on the work from home. Obviously there is some element of that is people, but we've not seen a direct correlation between the work from home and a reduction in space needs of demand. So we've not seen that and thats starting to shift where more companies are becoming more demonstrated with.
To getting employees back into the office I think a lot of it is driven by the macroeconomic headwinds.
Persistent inflation.
A fact that as hell bent on trying to carve that through a rising interest rate environment. So I think a lot of that is and the fears of recession is holding people back.
Back in terms of making the decisions I think Albert alluded to that also earlier in his remarks.
Great. Thanks, so much.
Thank you.
There are no further questions at this time.
Like to turn the call over to Albert <unk>, Chairman and Chief Executive Officer, and President for closing remarks.
Thank you very much for joining us today.
I look forward to give you further updates on perm.
In the next earnings call Goodbye.
This concludes today's teleconference. You may disconnect your lines at this time.
Thank you for your participation have a good day.
Yeah.
[music].
Yes.
Yes.
Okay.
I'll be back.
Yes, I can hear you.
Okay.