Q4 2022 Paramount Group Inc Earnings Call
Good day, ladies and gentlemen, thank you for standing by.
Welcome to the Paramount group fourth quarter 2022 earnings conference call.
At this time participants are in a listen only mode.
A question and answer session will follow the formal presentation.
Please note. This conference call is being recorded today February 16 2023.
I will now turn the call over to Tom Hennessy, Vice President of business development and Investor Relations.
Thank you operator, and good morning, everyone before we begin I would like to point, everyone to our fourth quarter 2022 earnings release, and supplemental information, which we released yesterday both can be found under the heading financial results in the investors section of the Paramount Group website at Www Dot T. 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 the words such as will.
<unk> 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 measures, which we believe can be useful in evaluating the company's operating performance. 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 2022 earnings release, and our supplemental information.
Hosting the call today, we have Mr. Albert Behler, Chairman, Chief Executive Officer, and President of the company.
Wilbur pays 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 Tom and thank you everyone for joining us this morning.
As we close out another year, we continued to execute on our strategic.
<unk> initiatives of leasing up available space and maintaining a disciplined focus on generating long term value for our shareholders.
Yesterday, we reported core <unk> for the fourth quarter of 25 cents per share, bringing our total for the year to 98 cents per share the high end of our most recent guidance range.
In the fourth quarter, we leased over 205000 square feet, bringing our total for the year to over 947000 square feet.
Above the midpoint of our most recent guidance range.
We also reported positive year over year same store growth of 4% on a GAAP basis, and one 7% on a cash basis.
Today, we are initiating 2023 core <unk> per share guidance with a range between 88 cents and 94 cents per share and then expected leasing volume of between 600 and 900000 square feet.
What about the review our financial results and guidance in greater detail.
Looking back at our performance in 2022, we executed on a number of key initiatives.
We signed leases covering over 300000 square feet.
So it's you know one sixth Avenue, which are key focus.
The majority of this leasing about 259000 square feet.
Two key tenants O'melveny <unk> Myers M. S V B securities.
These leases sheriff to do both backfill existing vacancy and pre lease over 50% of the 305000 square feet of space vacated by credit a great call earlier this month.
We signed a 15 year lease with Michelin Star restaurants Din Tai Fung at our headquarters at 16 33 Broadway.
Under the iconic glass Cube Plaza.
Which is slated to open in late 2023.
This transaction, which is among the top 10 largest retail leases signed during the year further exemplifies our focus on partnering with world class retail tenants and providing a spectacular amenity for our tenants and to enable it.
The acquired through a joint venture at 26000 square foot retail condominium at $60 on a broad base, which serves as a flagship or <unk> world in the heart of times square.
I am an EMS World has long served as an icon for global tourism and its recent 15 year renewal and significant commitment to improve the space is a testament to the long term value of this asset.
While we met or exceeded most of our goals established at the beginning of the year.
Admittedly, we also did fall slightly shy of some of the lofty goals we set.
All in all I'm quite proud of our accomplishments in 2020, do especially considering the slowdown in the USA economy spurred by the first significant interest rate hikes aimed at curbing inflation.
But first standing a challenging economic environment.
2022 reports Scott was very good and is a direct reflection of the quality and desirability of our class a assets a strong tenant base and a dedicated workforce that is physically in the office.
In addition to our own employees being in the office.
We are thrilled to see our tenants coming back to the office.
After a series of false starts and stops it seems not surprisingly it's your office is here to stay.
With several big names announcing mandatory or hybrid back to the office plans.
Office occupancy rates have continued to climb steadily post labor day.
These are positive signs that we believe will continue as more people begin Boeing in permanent and.
And employers recognize see unbeatable productive value of having the workforce together in the office, our New York portfolio, which represents over 70% of our business continues to perform well and accounted for close to 80% of our 2022 leasing velocity.
In fact, the occupancy of our New York portfolio, which now sits at 92.1% has grown by an impressive 560 basis points since the trough in second quarter 2021.
The availability rate was up 50 basis points during the same period.
While our leasing volumes remain in line with historical norms deals continued to take longer to execute an observation. We had in the second half of 2022 and one that we continue to have so far in 2023.
San Francisco continues to lack New York.
New York also.
So benefits from the flight to quality trend in the market.
Well the depth of demand remains Paris.
Pricing and quality assets remains strong.
This strength is demonstrated by the results in our own portfolio, where we leased over 213000 square feet at triple digit starting rents of about $103 per square foot.
Our focus in San Francisco, but undoubtedly be on leasing the 235000 square foot block of space at 555 market that will be vacated by Uber in July two 2023.
Turning to the transaction market.
Activity continues to remain muted.
The macroeconomic economic backdrop, and rising interest rates keep bias at bay and sell us evaluating when conditions will improve.
They have not been many quality assets that have come to the market.
And for those that have the bid ask spread remains wide.
That said, there's a wall of debt maturities on the horizon, which was certainly presented us with some opportunities.
We will be strategic and disciplined in allocating capital as we always have been.
Last but certainly not least come off our proudest achievement. This year are the great strides we've made in our sustainability initiatives.
As always our commitment to sustainability.
ESG as a whole remains it remains one of our core operating tenets.
We pride ourselves on our leadership in this area and understand.
It has not only helped us manage operating costs at <unk>.
And retaining premium tenants and ultimately enhance portfolio value, but also reduce the environmental impact we leave on the world around us.
To that end, we are proud to be named a 2022 and energy star partner of the year. As we also achieved LNG style labels across 100% of our portfolio.
Most recently, we also achieved a five star rating in the 2020 to grasp the real estate assessment for the fourth consecutive year.
The dip here.
This distinguishes our amas ESG performance is the top 20% among the 1820 entities that responded globally.
Notably we were able to maintain our market leading performance.
And 16 points above average.
The 20% growth in participation as a company rose to the top within both the management and performance scoring categories.
We look to add to these significant achievements in 2023.
<unk> continued to be integrated through all our business and remains at the forefront of how we operate.
Businesses.
To summarize it.
As we begin 2023.
Alrighty, so remain clear.
We are focused on leasing up available space and Belle coming our tenants back to the office.
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 fourth quarter, we leased approximately 205500 square feet.
Our fourth quarter leasing activity was weighted toward New York with 151700 square feet leased or approximately 74% of this quarters leasing total.
Notably O'melveny <unk> Myers expanded their lease by approximately 18500 square feet at 13 O. One Avenue of the Americas during the fourth quarter.
Within the last two quarters, we have pre leased more than 50% of the space being vacated by credit Agricole Derisking, our largest 2023 lease exploration.
For the full year, we leased approximately 947000 square feet for a weighted average lease term of eight eight years.
In the face of challenging market conditions, our portfolio continues to attract more than our fair share of demand a testament paramount's track record of providing exceptional services in the highest quality buildings in our markets and our teams ability to execute on our operating plan.
At quarter end, our same store portfolio wide leased occupancy rates at share was 91, 3% down 10 basis points from last quarter and up 70 basis points year over year.
As we look ahead, our remaining lease explorations are manageable with four 8% at share expiring by year end.
Turning to our markets Midtown fourth quarter leasing activity of approximately $2 6 million square feet, excluding renewals was down 44% quarter over quarter and down 30% below the five year quarterly average.
Despite a lackluster quarter Midtown finished the year posting a 15, 2% improvement in leasing activity as compared to 2021.
More importantly, the composition of tenant demand continues to highlight the ongoing bifurcation occurring in New York, where.
We're the market for Midtown highest quality real estate in the most well located submarkets remains active for.
For example, the sixth Avenue Submarket at 12, 3% availability continues to outperform the broader Midtown market at 18, 3% availability.
We have seen evidence of this focus on quality and location and the marketing of our availabilities along sixth Avenue at both one Avenue of the Americas and 31 West 50, <unk> Street, where we are encouraged by the interest we experienced in the second half of 2022 and into the first quarter of 2023.
Our New York portfolio is currently 92, 1% leased on a same store basis at share unchanged quarter over quarter, and up 180 basis points year over year, demonstrating the resilience of our portfolio during a challenging year for Midtown for.
For the full year, we leased approximately 734000 square feet 28, 6% above our annual New York leasing total over the last five years.
Our overall lease exploration profile in New York is manageable with three 1% that's share expiring by year end.
Turning now to San Francisco leasing activity remains muted as the market generally has taken a measured approach to returning to the office.
Many companies however.
Have recently started to reestablish workplace policy acknowledging the importance of the office with greater conviction and increasing the number of days their employees are required to be in the office.
As a result.
Physical occupancy is steadily increasing which will serve as a key driver in San Francisco's path towards recovery.
And while tech layoffs or hitting the headlines the reality is for the most part.
Total head count remains higher than it was in early 2020.
This rebalancing of the employer employee relationship growing returned to office mandates and the ongoing infusion of venture capital funding into new and innovative companies in San Francisco will drive demand going forward.
San Francisco is availability rate remains elevated however, the market for San Francisco's Premier assets remains tight and economics, particularly for view space in trophy assets remains solid.
In fact, like New York flight to quality is a movement that continues to gain momentum in San Francisco as employers use real estate as a lever to enhance the workplace experience.
Leasing challenges remain in the near term our company's ongoing desire to elevate the quality of our real estate in San Francisco will result in outsized market share going forward for Paramount.
At quarter end, our San Francisco portfolio was 88, 9% leased on a same store basis at share down 40 basis points quarter over quarter, and down 270 basis points year over year.
During the fourth quarter, we leased approximately 54000 square feet at a weighted average term of one seven years with initial rents of more than $95 per square foot.
Looking ahead, our San Francisco portfolio is nine 3% at share expiring by year end.
The majority of this 2023 lease role will occur at market Center Ubers lease expires in July of 2023.
We are encouraged by the activity on this desirable block of space and look forward to updating you on our progress on our next call.
With that summary, I will turn the call over to Wilbur, who will discuss the financial results.
Thank you Peter Good morning, everyone I will start my prepared remarks, my covering the details of our fourth quarter results and then get into the building blocks of our 2023 earnings guidance, yes.
Yesterday, we reported core <unk> of 25 per share, bringing full year 2022 core <unk> and <unk> 98 per share.
Waits to a six 5% growth in earnings over the prior year.
Our fourth quarter results came in <unk> <unk> ahead of consensus and <unk> <unk> head of.
The midpoint of our guidance.
Overall, our 2022 same store growth was 4% on a GAAP basis, and one 7% on a cash basis, which was in line with our expectations.
Positive same store results were driven by our New York portfolio, which reported robust year over year same store growth of eight 5% on a GAAP basis, and six 9% on a cash basis.
Our San Francisco portfolio as expected reported negative year over year same store growth of four 2% and eight 7% on a GAAP and cash basis, respectively, driven primarily by a 270 basis point decline in occupancy.
During the fourth quarter, we executed 18 leases covering 205530 square feet of space at a weighted average starting rent of $77 66.
Or a square foot.
And for a weighted average term of three eight years.
Mark to markets on a 116142 square feet of second generation space was positive two 3% on a GAAP basis.
Negative <unk>, 7% on a cash basis.
While fourth quarter leasing metrics were generally in line with what we reported during the first nine months of the year weighted average lease terms were much shorter and driven by some short term extensions in the quarter.
Our weighted average lease term for leases executed during all of 2022 was eight eight years.
We also initiated guidance yesterday for the full year of 2023.
Let me spend a few minutes discussing the assumptions used in our guidance.
We expect 2023 core <unk> to range between $88 94 per share or <unk> 91 per share at the midpoint, which is in line with consensus.
The seven <unk> per share decrease in core <unk> when compared to our 2022 results is comprised of the following.
Negative same store cash NOI growth between three and a half and five 5% or <unk> <unk> per share.
Which as a reminder results primarily from the previously reported lease explorations of credit Agricole is 305000 square foot lease at 13 O. One Avenue of the Americas in New York and Uber is 235000 square foot lease at market Center in San Francisco.
Lower termination income of <unk> <unk> per share as we typically do not budget for termination income.
And higher interest expense of <unk> <unk> per share.
These negatives aggregating <unk> 14 per share.
Actually offset by some positives aggregating seven per share and are comprised of the following.
A full cent benefit from higher straight line rent, resulting from the commencement of new and renewal leases and.
And it <unk> benefit from lower weighted average shares outstanding resulting from the share buybacks that were executed in 2022.
Operationally, we expect the lease between 600000 and 900000 square feet during 'twenty three.
And we expect to end the year with the same store leased occupancy rates between 98% and 91, 8% or 91, 3% at the midpoint, which would keep us flat relative to where we ended 2022.
Turning to our balance sheet during the fourth quarter, we utilized $43 $7 million of cash from our balance sheet to repurchase seven 1 million of outstanding shares at a weighted average price of $6 12 per share.
We ended the quarter post these share buybacks with a little over $1 2 billion in liquidity comprised of about $452 million of cash and restricted cash and the full $750 million of undrawn capacity under our revolving credit facility.
Outstanding debt at quarter end was $3 67 billion at a weighted average interest rate of 357% and a weighted average maturity of four 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 five 7%.
We have under $200 million of debt at share maturing in 2023 and $478 million at Shea maturing in 2024 and beyond that.
Charities are well lathered.
With that operator, please open the line for questions.
Thank you.
We'll now be conducting a question and answer session.
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One moment, please while we poll for questions.
We have a first question from the line of Steve Sokolov with Evercore. Please go ahead.
Yes. Thanks, Good morning, Peter I was just wondering if you could elaborate a little bit on the leasing environment and in particular, how the demand that you're seeing for the upcoming vacancy in San Francisco and Uber. The types of tenants that may be looking and then also just maybe comment on a little bit the weighted average.
Lease term I know wilbert touched on it but that was obviously quite short and I'm, just curious kind of the mindset of tenants today.
Steve.
I think we all know in San Francisco, There is less overall demand in the market today due to corporate earnings pressure and other macro headwinds I will say we have a.
A really very I think compelling offering at market Center.
We do know that similar to New York and San Francisco tenants are highly discerning and they are when active looking at.
Real estate, that's well located that has something to offer and at this point of course, we're heavily focused on this 235000 square foot block that as you know comes back in the second quarter and I'm happy to say that we've got good activity and I would say, it's predominantly from tech users who have been pulling back as we know, but not all of them and those that are active we have been talking to.
And as I said in my remarks, we look forward to updating you on our next call and we hope to share with you. Some some some good progress similar to what we've done on the with the credit Agricole block. Our intention is to de risk. This block of space in advance of the exploration later this year.
And is there as it relates to average term I think.
I don't I wouldn't look at the fourth quarter is indicative of what we expect going forward I know that the term in the fourth quarter was shorter if you look at the full year. It was it was considerably longer I wouldn't chalk the fourth quarter up to any sort of trend that we're seeing in the market. We're having constructive conversations now with perspective tenants all of.
Whom are willing to invest capital to improve the space beyond what we would contribute by way of Ti and we're talking about longer terms with these tenants, particularly at.
Our trophy assets.
And Steve I mean, if you look at the first three quarters of the year. The weighted average term on leases. We executed was 10 years, it's only the fourth quarter that was three eight that blended to the eight eight that I alluded to in my remarks.
Okay, maybe and then well, but one other question just as you look through the debt I know, it's not very heavy but you do have you know a couple of a.
Mortgages coming due this year or next year I'm, just curious kind of your thoughts on the mortgage market today, and you know sort of the refinance ability of of the assets and you know just to what extent you need to put any capital in or just how are you sort of thinking about the upcoming maturities.
Sure so.
As you pointed out we have three loans maturing in 'twenty three I'd say all of these three loans are joint venture loans.
The mortgage market is very very tight right now I mean, it's tough <unk> is basically nonexistent.
And there's a lot of pressure.
Given where values are and given a declining.
As some of these leases roll so.
It's going to be challenging.
With respect to being able to refinance.
Some of these assets in our portfolio I would tell you. We obviously are talking about 60 wall we have.
5% interest in that asset that has a one year extension, which we've already availed ourselves for.
We're going to maintain discussions with the lender and our joint venture partners on that asset.
Next loan we have maturing is in March of 'twenty three that is at 111 Sutter.
And.
Not one currently.
Why is not sufficient to cover the debt service you saw we took an impairment on that on that asset.
Negotiation, we're in active discussions.
Our joint venture partner with the lender so more to come on that and.
And the last maturity. We have is in October of 'twenty, three which is <unk>.
300 mission, that's a fairly low levered loan.
I don't envision it has got great coverage its a great asset that's 84% leased in San Francisco, It's got a super nice tenant roster, we don't envision any issue with refinancing that.
That asset that said that current rate is 365 that will undoubtedly be higher.
Great. Thanks, that's it for me.
Thank you.
Thank you we take next question from the line of Tomcat.
B T I G. Please go ahead.
Excellent. Thank you and good morning, everyone just tack on 111 Sutter.
Wilbur you mentioned, obviously you'd have more to tell us next quarter, but as far as the impairment goes is there a shift in strategy on the asset is that just because of the refinancing or is that because of the change in hold period or is there. Some other driver there.
So that's a great question Tom.
There is.
One you should know refinancing and debt maturities have nothing to do with the impairment of an asset that's a.
GAAP requirement that has to do with the recoverability of the asset base.
Based on the cash flows on the estimated home period.
So because you could have an impairment on an asset even if an asset is unencumbered. So just to clarify that 0.1st.
The impairment model from an accounting standpoint, you have to look at indicators and those indicators at some of those indicators. It is a drop in occupancy of the assets is a drop in NOI and if you look at 111, sorry, theres been a significant drop in occupancy relative to last year. So everybody is.
Focused on asset values every quarter, we run through these analysis determined the whole period.
And based on that.
Determined the recoverability of the assets. So that's what caused the impairment now this is a joint venture impairment. So you really got the three steps.
After you figure out on a non discounted basis that the cash flows is not sufficient to recover your basis. Then you got to look at it at a discounted basis to determine the amount of impairment and the last step when you have investments accounted for under the equity method you have to decide whether your investment.
Other than temporarily impaired and you got it then justify why you believe it's either not other than temporarily impaired.
It's longer than that and so.
We did that analysis, and that's where we shook out with the impairment.
Got it got it appreciate that Wilbur and they kind of at least a bit of a broader question and its a little vague and I apologize, but you know when I think back to conversations we've had in the past about how you constructed your portfolio, it's always been intentional where youre attempting to capture a wide.
From a tenant demand for class a space you have New York for example, you're hypertrophy space 50, onewest since you're stuck in or or or sorry, 31, why should he said I can't.
Or you know 13 O One Avenue the Americas, and then you've got great space, but more of a relative value play 903rd 13 25 Avenue the Americas.
Everything that you're saying, especially in San Francisco It sounds like it's trophy demand as trophy demand do you think you would change your portfolio construction strategy going forward is there something where even that relative value space is kind of a lesson demand or is the expectation does that eventually comes.
Back.
So this is Albert on the strategy of Paramount I think it's.
Currently.
Coming out that the strategy was a good one the portfolio is pretty stable in <unk>.
Both markets.
Look at 111, Sutter is clearly a different kind of.
Clearly, it's clearly a different kind of assets, we you might recall only two and a half years ago.
People were very interested especially in San Francisco.
Moving to brick and timber condo buildings, yes, it seemed attractive at the time.
And it fit a campus of.
The office property, you said, we had acquired in San Francisco.
Unfortunately in this case, we were under heavy renovation of an asset that was.
Of older age and it's really.
<unk> focused on venture and small tech companies and those have been hit the hardest in this recession.
And the demand for this.
Relatively low many of those folks can work from home and still.
<unk> believes that that is.
It's the best for their business model or the loss of that business model, but across the board our portfolio is still 91, 3% leased.
We are with our guidance focusing this year.
On increasing that.
Over 100 basis points.
We have long term leases as credit tenants, which are really helpful.
In recessionary environments.
We have been focused on that.
And we.
We have growth in our San Francisco portfolio nearly all of the leases we have despite the fact, where the market is we have rental increases of 3% per year.
And to.
Two the financing part we have been focusing also.
Mainly on long term fixed loan financings, we only had 15% and now less than 15%.
Floating rate debt, because we wanted to match.
Both.
Size of the of the balance sheet, So I think conceptually.
Our portfolio is well prepared.
For a downturn and that's what we were focusing on in the past and the quality of the assets is catering to 10 tenants are looking for class a and trophy.
And that's what we are offering and that's why.
Peter and his team have done that.
Tremendously.
Good job last year, and bringing up the the occupancy its $13 30.
One sixth Avenue, and a difficult leasing environment.
And I think we will stick to this.
So this concept and we are I mean, we have 712 fifth avenue that caters to smaller assets to smaller tenants.
And that fits in our New York campus as well, it's a it's a different kind of tenant in 111 Sutter malls.
Also our high end.
<unk>.
That is in the long run this will do very well.
Really really helpful. Thank you for that Albert than kind of one last cleanup one if I can maybe for Wilbur.
Our Capex and then maybe leasing cost expectations for the year, you did the big leases with Melburnian Myers and FCB and.
In 2002, I expect I would assume that some of that spend rolls in in 'twenty three.
What are you kind of expecting or baking in as far as that Capex expense this year.
So Tom as you know, we don't give a necessarily specific capex guidance because it inherently is tough based on when tenants.
Submit invoices for Ti.
And so.
My guess is Youre question is headed towards the Fad.
Ratio on the dividend coverage and look we I think you saw where our ratios where this quarter was elevated because we got one of these lumpy requests for <unk>, but then if you look at the full year.
We had we had nice coverage on the on the Fad ratio I don't think we expect something too dissimilar.
From that.
In the next year.
Understood. That's it for me thanks, everyone.
Thank you.
Thank you we'll take next question from the line of Blaine Heck with Wells Fargo. Please go ahead.
Great. Thanks, Good morning, I was hoping to get a little bit more detail on what you guys are seeing in terms of tenant space usage or your estimate of utilization and days in the office per week and really how those how those statistics have trended thus far in 2023.
Blaine this is Albert.
We.
It's a very good question, we are actually quite happy with how the occupancy has fared, especially after labor day. It has increased a lot in New York, but also significantly in San Francisco.
Especially the middle of the week days.
We are here in New York at the 70% level of occupancy and in San Francisco, We are around 56% 50, 657, that's significantly more than only four weeks ago, and I think as I had said.
Previously.
Recessionary environment and the focus of.
Management on back to the office.
By having their folks around and nurturing a culture.
Is playing out and I think.
People realize that work from home there is not.
The.
The ultimate the ultimate goal for all of the apps So I think.
The tide is shifting.
Firstly for our kind of assets.
Where where we where we offer class a.
Space and for all kinds of tenants, who believe in having.
That team surround them.
Okay, that's really helpful and just to be clear here, the 70% and 56% utilization figures you are quoting are those relative to the peak utilization.
So in 2019 or some other kind of base, 100% number.
Basically off because you normally we'd be never looked at this before before the pandemic as you as you might might imagine.
So we have made studies are not only us.
Within our peer group within the industry.
Were you basically found out that the.
Occupancy office space is about 70% to 80% because the rest of it.
The folks traveling on vacation, they're personal basin.
So it's never 100%, you'll never get to 100% of physically possible occupancy.
So this is based on a on a.
Full occupancy consider that 80% to be full occupancy.
Okay, that's really helpful.
For my second question.
There seems to be a healthy debate, that's emerged around asset values and cap rates and the increasing interest rate environment and since there arent many transactions at the point to Albert I wanted to get your take on how much you think asset values and cap rates may have moved over the past year, given that increase in the cost of debt and very low.
The ability of that.
Yeah.
So another good question, but I don't want to give you a clear figure a clear number because it's I give you a comparison to 2009 2010 people.
People go hoping including ourselves.
This would be a great opportunity to go back in the market and acquire assets, but the bid and ask was so huge because the markets where basically the sellers were expecting that the property is worth way more work than they really were and there were no transactions very similar to today.
On top of that this time the debt markets are.
Not really.
Attractive to two financing new acquisitions, so that I think slows down in addition to two just a bid ask spread so theres six significantly.
This is a significant increase of cap rates.
And I.
I don't want to put it in figures because it really depends on asset by asset and depends on what.
The buyer is interested in I mean, we bought an asset last year 16, another Broadway at a very attractive cap rate.
And it was worse and invest the majority was a large institutional investor. We just had a very small piece and we manage the asset.
All of them, but they were focused on cash flow.
That was attractive for them, it's still an attractive asset and the cash flow is growing.
So so that everyone has a different.
Of what they want to be investing in.
Okay, great and related to that and Alberto I'll stick with you for my last question you mentioned the wall of debt maturities, that's approaching and could spur opportunities for investment.
Did you say you are more likely to invest with partners in a JV or do you think you can also look at kind of on balance sheet acquisitions.
Well as we had said I think I've said.
Uncertainty over the last quarter, we will not invest a lot of our own capital, but there is a high demand.
By investors don't have boots on the ground to find a partner like ours, who has experience in these.
Plex markets like New York and San Francisco.
And it would not require us to put in a lot of equity.
And that's still the same goal.
Very helpful. Thank you.
Thank you Blayne.
I'll read across participants to Kip.
To one question and one follow up.
Your next question from the lineup Vikram Malhotra from Mizuho. Please go ahead.
Thanks for taking the question maybe.
If you can give us some more color on you know.
Some of the lease up trajectory at the prospects of the key vacancies you talked little bit about Uber space in tech demand from smaller tenants, but maybe just give us kind of the latest on what you're seeing in the in the pipeline and.
I know, it's taking longer to lease up this pressure on rents, but if you could just go through the key vacancy then and pipelines would be helpful.
Sure I'll start at market Center I commented earlier I think I may have said Q2 exploration, it's actually July of 'twenty. Three Nevertheless, it's approaching we're focused on it.
And we have as I said earlier nice activity and I hope to give an update.
On our next call.
Indicating that we've made some progress and I would say, it's primarily tech companies.
That has been inquirer.
Enquiring about.
<unk> centre five five market, specifically turning to New York as you know and as we said in our remarks, we did derisked one significantly credit agricole space that Theyre currently vacating, we've derisked it by more than 50%.
I would say that the demand for the balance is predominantly law firms, which law firms have not been the primary driver of leasing activity in Midtown that has really been financial services.
With an outsized representation in terms of.
Demand their demand as part of leasing activity, but we've seen quite a bit of demand from law firms those floors lay out very well for law firms are highly efficient multiple architects have.
Acknowledged as much. So we have we have some nice interest on those floors and in the base of the building. We have as you know 200000 square feet. We've kept that at ground floor vacant we do have some tenants interested in potentially creating some branding on the ground floor and creating connectivity up to those base floors.
The demand is predominantly financial services as it has generally been now for some time those floors lend themselves to two or use more consistent with how our financial services would think about.
The real estate. So so we're making some progress there it's taken a little bit longer than we would like but we have some some good credit tenants at this point expressing some interest and then really beyond that the only the only space that I think you were asking about would be 31, West 50 <unk> Street.
The space that we get back in 2024, we also have interest on that space to 31 West is a trophy asset we did the lobby of couple of years ago. It shows beautifully.
Some interest from both financial service firms and law firms once again.
So it's still too early to say much more than that.
But I think the point as well while demand is less than perhaps what we had experienced in the earlier part of 2022.
Our theory and what we're experiencing in real time is that our portfolio continues to get looks from all perspective tenants all tenants in the market and it's a function of the way in which we've invested in the buildings.
What we have to offer.
Certainly a flight to quality in order to our benefit.
And that's no different on the various blocks of space that I've just outlined we have demand on the space of course, we're working very hard to convert that demand into signed leases.
Given all of that we're experiencing in the world I think we feel generally pretty good about our own pipeline.
That's helpful maybe Albert.
You referenced sort of emerging distressed opportunities and you kind of talked about how you've been patient with capital, but I'm just wondering from your vantage point and maybe even conversations with with maybe some of your European partners.
For all stakeholders.
How should we start thinking about the bid ask or where new York office values could be shaking out and I say value, but but maybe you can talk in terms of cap rates is probably a bid ask but any sense of any early indication now.
Core versus value add kind of where that spread is today or where cap rates are thank you.
Yeah.
Yeah.
Blaine asked that question a couple of minutes ago, I said that it's very hard to give you an exact figure here.
Because it's changing kind of from asset to asset and.
It really depends a little bit like 2009, 2010, where where we thought that.
There were a lot of opportunities coming up and it didn't come up because.
They are.
The seller thought they had they had.
Way too much invested in a capital and an asset they didn't want to let it go and they got.
They got it refinanced.
Just.
Hung in there because it turns relatively quickly and I think we are in a similar situation right now.
At this time I think that that is.
Service might squeeze a little bit more and I think some of the expiring mortgages will force some of the market participants to do something and it will be really depending upon whether this additional equity that the sponsor wants to invest or whether they throw in the towel and give up.
The asset so.
It's very hard to give you a cap rate, but I can tell you that.
The difference between last year and this is for sure a 100 basis points.
Okay. That's helpful and then Wilbur just last one.
I know you have you have room on the dividend you adjusted that during Covid.
But as we look forward sort of on taxable income with the ins and outs of the portfolio and planned lease up is there a scenario where you may where you think there is there is it.
May be prudent to create even more room or is there a scenario where the dividend could be under pressure as you look out.
Over the next year or two on your taxable income projection.
So first I would say that.
Dividend, obviously is a board policy and Thats, something we revisit with the board.
Every quarter.
It's something that we're going to watch closely.
If you look at the commercial real estate market certainly in the office. We are we on a recession, even though if the broad economy might not be.
At this point.
There was no decision to address the dividend.
Have a business plan, we think we can continue to execute on that the dividend is well covered but I cannot I cannot speculate nor would we want to speculate on what we may or may not do that's something that we will evaluate quarterly with the board.
Thank you.
Sure. Thanks Bye.
Thank you we take next question from the line up Derek Johnston with Deutsche Bank. Please go ahead.
Good morning.
But just on a lot's been covered but on capital allocation priorities.
So you repurchased some shares in <unk>. Please remind us what authorization has left and you know your thoughts on further buybacks versus opportunistic J b's or any other uses youre considering.
Yeah.
Yeah, we have another $15 million authorization left in.
For buybacks and.
They have been more active in the <unk>.
In the last quarter, because there are more opportunity.
<unk>.
The price per shares made a lot of sense for us so.
That's might be focused on that but we.
In general we are.
We wanted to take a balanced approach.
We always.
Take it.
Look at all of our opportunities on a balanced on a balanced way.
So.
We want to stay nimble and be able to adjusted on a quarterly basis.
Dependent upon market information, we adjust that program as well.
Alright.
Add to Alberta.
Stock is obviously you can we look at it and it's it's ridiculous.
Leslie cheap at some level I would submit to you of the following okay, where.
We're sitting with $452 million of cash on balance sheet that equates to roughly $2 a share.
You have an unencumbered asset pool generating north of $60 million of NOI.
GAAP rate shakes out whatever you want to use six only because thats, our covenant calculation, but he wouldn't be able to use that.
A asset value that equates to another 425.
Per share value.
Some of that too is is north of $6 25, and that's giving zero credit to be encumbered asset pool, which is implying that every asset in the portfolio is under water.
And clearly.
That's stupid from my perspective.
Well, thank you for that.
And I guess my last one is you know.
What do you believe and what do you think is causing this tougher leasing environment that we're seeing today.
Is it more of the secular question of hybrid and work from home.
D be felt that exiting the pandemic well located class a assets of your caliber would be best positioned so is it the secular question or or a combination because we feel it could be more recessionary right and this is basically a normal cyclical backdrop that too.
Our previous cycles, we've seen so just interested in your take you know what what is the hybrid work from home.
If any and what is more cyclical and recessionary in nature.
Well you know we have we have leases portfolio.
Pretty well even during the pandemic.
During the work from home I think the work from home is.
Is.
Not coming to a total end, but it's changing I think.
Management is demanding.
Morris more time in the office.
Because it's important for the culture.
<unk> culture of the company.
I think very clearly this is a cyclical recessionary thing and.
Companies.
Anticipate.
The times get get worse before they get better and we're not and it's very typical we have seen this many many times.
I think more about if they really have.
Demand of extending a lease or moving they will extend at least short term.
The same what we saw in 2009 2010, if the lease was expiring there twice to extend it for one or two years.
They didn't have to make a space.
Decision because you have to remember I mean, we have to pay a lot of ti's and we lay out a lot of capital as landlords, but the tenant.
Himself is also spending a lot of capital and a lot of money.
When they make a move and.
That is currently I think a little bit more on all that it was <unk>.
Six months ago.
Excellent. Thanks, that's it for me guys.
Thank you.
Thank you we take the next question from the lineup Dylan Burzynski with Green Street. Please go ahead.
Hi, guys. Thanks for taking the question just curious from a geographic perspective today I think you guys are call it 75% New York, 25%, San Francisco, and you mentioned, possibly putting capital to work should opportunities present themselves, but I guess, just as you think about putting the incremental capital to work when you're thinking more on New York Morris.
And Francisco.
I'm curious to hear your thoughts on sort of the geographic perspective in terms of potential acquisition.
That's a good question.
We look at these things and we.
We got the questions all the time in the past.
Look at it Opportunistically.
San Francisco is having a tougher time currently.
But we are long term investors.
<unk>.
I think San Francisco will come around so we look at it on an asset by asset basis and market by market basis.
Okay. That's helpful. And then I guess, just a follow up because I know it's been asked several times on the call about where you guys think cap rates are but I guess, maybe another way of asking that is just for some of your higher quality assets.
Where do you think market debt all in that range Comstock or like something like a 16 30, they brought away or.
Some of your higher quality assets out in San Francisco.
Yes, I don't think I want to give you a really.
A cap rate at this point this is kind of a distressed market situation I mentioned.
Two I mentioned before on this call to couple of other.
Folks.
This is like 2009 2010.
And there weren't many transactions happening because bid ask is way too.
A way to widen the spread is way too wide.
And Thats, where we are today so.
I think it's very hard to give it give you a clear figure there.
Alright, I appreciate the thoughts thank you guys.
Thank you bye bye.
Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session and I'd like to turn the floor back over to Albert Behler for closing comments over to you Sir.
Thank you everyone for joining us today.
We really look forward to give you an update on the continued progress when we report our first quarter 2023 results.
Goodbye.
Thank you ladies and gentlemen. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you.
You for your participation.
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