Q3 2024 Paramount Group Inc Earnings Call
Good day ladies and gentlemen, thank you for standing by. Welcome to the Paramount Group, third quarter 2024 earnings conference call. At this time, Albert Distance or an Oistonone mood, a question and answer session will follow the formal presentation.
Speaker Change: Please note that this conference is called as being recorded today October 31, 2024. And now turn up all over to Tom Hennessy, Vice President of Business Development and Investor Relations. Thank you, you may begin.
Thank you, operator and good morning everyone. Before we begin, I would like to point everyone to our third quarter, 2024 earnings release and supplemental information, which we release yesterday.
Speaker Change: Both can be found under the heading financial results in the investors section of the Paramount Group website at www.pgre.com
Some of our comments will be forward looking statements within the meaning of the federal securities laws. Forward looking statements which are usually identified by the use of words such as will, expect, should or other similar phrases are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect.
Therefore, you should exercise caution and 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-gap 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 GAP. A reconciliation of these measures to the most directly comparable GAP measure is available in our third quarter, 2024 earnings release in our supplemental information.
hosting the call today. We have Mr. Albert Behler, Chairman, Chief Executive Officer and President of the company, Wilbur Paes, Chief Operating Officer, Chief Financial Officer and Treasurer, and Peter Brindley, Executive Vice President, head of Real Estate.
Speaker Change: Management will provide some opening remarks and we will then open the call of the questions. With that, I will turn the call over to Albert.
Good morning, everyone. Thank you for joining our call today.
Yesterday we released our third quarter results reporting call ever-ball of 19 cents per share at penny above consensus.
In the third quarter, we list 179,000 square feet, bringing our year today total to 655,000 square feet least.
We are now trending ahead of most of the goals that we had established at the beginning of the year.
in New York, released 72,000 square feet in the third quarter.
While our third quarter leading in New York was trailing that of the previous two quarters, the pipeline which Peter Wilcover in a few minutes is robust.
and most of the leasing we expect to complete in the fourth quarter will be in New York.
We are seeing good interest from a wide array of tenants, especially financial services and law firms.
This demand re-affirms our conviction of the long-term appeal of high quality, strategically located office spaces in New York's core sub-market.
The Paramel Club at 13.0167U, which we unveiled last quarter, has been receiving exceptional reviews from our tenants, prospective tenants, and brokers alike.
This bespoke amenity has quickly become a key differentiator enhancing our ability to both retain existing tenants and attract new ones.
The enthusiastic reception it has received paladates on investment in creating unique tenant-focused spaces.
I'm also happy to report on the tremendous success of Dintai Fung, the Michelin Star Dress Run that opened in July, Beniz, the iconic last cube at 1633 Broadway.
In addition to the entire farm, we also welcome the Italian bakery Rosetta and sign the lease on the last remaining retail space with La Pecora Bianca, a vibrant Italian restaurant at 1633 Broadway.
These carefully curated amenities have generated significant buzz, adding a new dimension of energy and sophistication to our headquarters.
All these unique offerings, elevating our portfolio, setting us apart in a highly competitive market.
As businesses continue to gravitate towards the highest quality of office spaces, we are confident our properties are well positioned to meet this demand, driving occupancy improvement and leasing rates across our New York assets.
shifting to San Francisco.
As you will recall from our last earnings call, we indicated that JP Morgan was unlikely to renew the majority of their space at one front street that was set to expire in 2025.
In the third quarter, JP Morgan renewed approximately 10% of their 2025 expiry.
While we are all disappointed with the outcome of the new Neaturne exploration, J.P. Morgan will continue to have a significant presence at one front with about 125,000 square feet.
Speaker Change: Posted's 2025 expiry.
One front street is a terrific asset at one of the finest locations in San Francisco CBD.
We are now in the early planning stages of repositioning the asset with a reimagined ground floor experience and various edit amenities all in an effort to return one front to being among the top 15 office buildings in San Francisco.
We look forward to sharing more details around our plans in the upcoming quarters.
Why the San Francisco Leasing Market remains challenging. We continue to make progress on our business plan.
This quarter released approximately 107,000 square feet, bringing our year-to-date total to 287,000 square feet least.
Most of the leasing and San Francisco continues to be renewed based and for shorter terms.
but that said, the flight to quality remains prevalent.
and San Francisco's position as a hop of tech innovation and its leadership in AI-focused venture capital funding underscore its potential for recovery.
We are confident our portfolio has well suited to capitalize on these trends.
Turning to our balance sheet.
It remains robust with approximately $412 million in cash and restricted cash.
In an effort to maintain the utmost financial flexibility, our boards suspended our regular quarterly dividend.
This was a carefully considered decision, 8th at enhancing our financial resilience, retaining an access of $30 million in cash on an annualized basis.
The broader real estate transaction market while still subdued is showing signs of revival.
We are seeing an uptick in potential deals which could signal a more active market in the coming year.
Speaker Change: The persistent gap between buyer and seller expectations is beginning to narrow, potentially unlocking more opportunities.
In this evolving landscape, we remain committed to our discipline approach to capital allocation.
Our strong financial position enables us to act swiftly on attractive opportunities, particularly those involving strategic partnerships where we can leverage our market expertise.
Speaker Change: with that, I'll hand over to Peter.
Thank you, Albert. Thank you, Good morning. During the third quarter, we least approximately 179,000 square feet with approximately 72,000 square feet in New York and 107,000 square feet in San Francisco.
The weighted average term for Lisa Sinder in the third quarter was 8.1 years.
The third quarter's velocity was evenly split roughly between new leases, including expansions and renewals in both New York and San Francisco.
Looking ahead to the fourth quarter, we're encouraged by the tour activity we see across our portfolio, particularly in New York, where markedly improving market dynamics and the paramount club have been a significant tailwind.
The ever-increasing interest from prospective tenants coupled with our year-to-date leasing momentum, positions as well to finish the year strong, with accelerating leasing velocity and increased occupancy.
Speaker Change: In both New York and San Francisco, we continue to see tenants prioritizing premium, centrally located, the Minity Rich buildings operated by well-capitalized, reputable owners.
This trend plays to our strengths, allowing us to leverage our market position and grow our leasing pipeline.
Our focus remains on maintaining strong tenant relationships, securing renewals for upcoming explorations and leasing our vacant space.
Our pipeline is solid with more than 230,000 square feet of leases out, 80% of which are with new tenants, for vacant space or soon to be vacant space.
Speaker Change: At quarter end, our same store for fully-awaited least occupancy rate at share was 84.7%. Down 160 basis points quarter over quarter.
Speaker Change: This decline was primarily driven by several known moveouts, the largest of which was Leerink at 1301 Avenue of the Americas.
The remaining lease expiration for the year are manageable, with approximately 0.3% expiring ad share in the fourth quarter.
Speaker Change: Turning to our markets.
Speaker Change: Midtown's third quarter leasing activity outpaced the five-year quarterly average for the fourth consecutive quarter.
The man for high quality assets in mid-tenths course of markets continues to accelerate.
Speaker Change: Increased Veal Volume and Select Submarkets throughout Midtown has resulted in increased competition for space, creating a greater sense of urgency among tenants.
Speaker Change: The knock-on effect has been an accelerated decision-making process for tenants and improved leverage for landlords.
Speaker Change: Throughout Manhattan, Tenet's space demand has grown to more than 2018, 2019 levels, and is a driving force behind midtowns improving leasing fundamentals.
Our New York portfolio was currently 85% least on a same store basis at share, down 190 basis points quarter over quarter. Our least expiration profile in New York remains manageable with approximately 0.2% expiring at share by year end.
Schifting to San Francisco, Leasing activity in San Francisco is steadily improving up approximately 45% as compared to the first nine months of 2023.
While overall market conditions remain challenging given elevated supply, there has been a steady uptick in leasing inquiries and tour activity, which have increasingly led to proposals.
San Francisco-based companies continue to attract significant venture capital funding, especially for AI-focused companies, raising approximately 20% of the global AI venture capital funding here to date.
Speaker Change: This significant inflow of capital has begun to translate into increased demand for office space.
of the more than 60 AI leases completed year-to-date.
approximately 70% of these leases are new to market.
This developing AI demand coupled with active requirements from more traditional tenants in San Francisco has buoyed San Francisco's tenant to the market pipeline to levels approaching pre-pandemic levels.
Speaker Change: Our high quality portfolio in San Francisco was well positioned as the market recovery progresses.
Speaker Change: As mentioned, we remain focused on derisking future lease roll and leasing vacant and soon to be vacant space. Most notably the backfill of Google space at one market plaza and the portion of JP Morgan space at one front street that expires in 2025.
At a quarter-end, our San Francisco portfolio was 83.6% least on the same store basis at share. Down 60 basis points, quarter-over quarter.
Speaker Change: Overall, were encouraged by our progress this quarter and look forward to building on this momentum in the months ahead.
Speaker Change: With that summary, I will turn the call over to Wilbur, who will discuss the financial results.
Thank you Peter and good morning everyone. Yesterday we reported core FFO of 19 cents per share, which was a penny higher than Wall Street consensus.
Wilbur: St. St. Grote in the quarter, while down 2.9% on a cash basis, an up 1.8% on a gap basis, came in better than expected due to a true up and expense billings in our San Francisco portfolio.
Speaker Change: During the third quarter, we executed 12 leases totaling 179,403 square feet at a weighted average starting rent of 84,55 cents per square foot and for a weighted average lease term of 8.1 years.
Mark II markets on 96,320 square feet of second generation space were negative 10.4% on a cash basis and negative 4.2% on a gap basis.
Speaker Change: Based on our year-to-date results, as well as our outlook for the remainder of the year, we have updated our guidance.
Speaker Change: and improved our same stroke cash and gap N.O.I. Group outlook by 100 basis points and 50 basis points respectively.
As such, we are raising our core effortful guidance by one cent at the midpoint to a new range of 78-80 cents per share.
From an operational standpoint, we have increased our leasing guidance to a new range of 825,000 square feet to 925,000 square feet. And I've reduced our same still leased occupancy range by 50 basis points at the midpoint.
Speaker Change: Please refer to paid six of our supplemental package for additional information regarding the changes in assumptions underlying our guidance.
Turning to our balance sheet, our liquidity position remains strong at over 1.1 billion.
We ended the quarter with over 412 million of cash and restricted cash and share and the full 750 million of undrawn capacity under our revolver.
In August, the 500 million interest rates swapped and the 360 million interest rate cap on 130.16 Avenue expired.
Upon exploration of the swap and cap, we entered into a new agreement for the entire 860 million to cap so far at 3.5% through August 2025.
Speaker Change: Our standing debt at 4-end was 3.61 billion at a weighted average interest rate of 4.53% and a weighted average maturity of 2.9 years.
This, of course, includes the debt on the two non-coracits in San Francisco, excluding the debt on the non-coracits. We have 3.25 billion of debt at a weighted average interest rate of 4.26 percent and a weighted average maturity of 3.1 years.
73% of this debt is fixed at a weighted average interest rate of 3.5% and the remaining 27% is floating at a weighted average interest rate of 6.29%.
Including the debt on non-corassets, we have no debt maturedies until 2026.
Please refer to page 40 in our supplemental package for the impact of the non-code debt on our capital structure.
With that operator, please open the lines for questions.
Speaker Change: Great, thank you. At this time we will be conducting a question and answer session.
Speaker Change: If you'd like to ask a question, please press star 1 under telephone keypad. A confirmation call will indicate your line is in the question queue. You may press star 2 through move yourself in the queue.
Speaker Change: for resistance using speaker equipment and maybe necessary to take up your handset before pressing the star key.
Speaker Change: One moment please avoid pull for questions.
Our first question is from Boyn HECK from Wells Fargo, please go ahead.
Great thanks, good morning. So first I was hoping to give some color on Market Center. I was reported that the debt is being marketed for sale. Can you just talk about the reception from the market thus far and your thoughts on timing and potential pricing of the sale?
Sure, Blin, as you point out, the debt is in the market to be sold the lenders are out there to sell the asset.
We think, obviously, given that it's in the market right now, we think that some type of resolution will occur in the not-to-distant future. We are not the ones running the process, so we cannot.
Comment on the reception in the market. We are watching it just like you guys are and you know when when it gets resolved we will have a more to report but clearly the fact that it's in the market you know you'd expect resolution to happen soon and later
Okay, great, thanks Wilbur. And then can you just talk about what's driving the decrease, at least rate guidance at the end of the year, given that the leasing volume guidance increased?
Sure, when you look at it, we increase the leasing volume guidance because effectively there were some leases that were pulled back.
We read some of the analysts notes whether it was driven by some unexpected moveout that was not the case
Essentially, we sat together as a team looked at the deals in the pipeline that Peter mentioned and then thought about the probability of those deals getting executed within the next two months.
Speaker Change: and the probability of some of them getting pushed over into early 2025. And so, you know, we just typed in that and that's what caused the reduction.
I think the important thing to look here is we ended the same store at least occupancy at 84 7 to get to the revised midpoint that implies 190 basis points of absorption in the fourth quarter.
So when you look at the pipeline that Peter dimension and said, you know, we have 230,000 square feet of leases out.
Speaker Change: Most of which is on vacant space, that's what gives us the comfort to say, you know, we think we're going to have a really good fourth quarter And to get to the volume, you need 220,000 square feet to get to the midpoint
Speaker Change: So, off the 220,000 square feet, most of that is on vacant space and that's what's driving 190 basis point uptake in occupancy as we close out the year.
Great, that's really helpful. And then, you know, I think we've gone through the upcoming exploration a lot on this call in past quarters, but I wanted to take a step back and ask, you know, when you think you might see a trough and occupancy just based on the headwinds that you have.
kind of knowing any of the progress you might have made on working with the tenants to renew or backfill some of these spaces. I guess there are any level of occupancy or time frame that you'd be comfortable talking about now as a potential floor that we can kind of look forward to.
Speaker Change: Well, it's a good question, Blaine, and I think you have to look at both markets a little differently. I think New York is much more vibrant.
and you will see that our assets in New York will increase occupancy. You will hopefully see some of that.
very soon. Wilbur talked about it a little bit San Francisco, the occupancy might go lower for the portfolio because the market is just...
Significant Libain, I would say here, as we said in past earnings calls.
but we are optimistic in general because there is a lot of momentum that people are coming back to the office.
You know, even the world's regional came up with an article that was positive about the office yesterday So we see here in New York and San Francisco will follow
Speaker Change: Great, thanks, Albert.
You're welcome.
Speaker Change: Our next question is from C. Sackla from Evercore ISI, Please Go ahead.
C. Sackla: Yes, great. Good morning. Albert, I just wanted to touch on your comment about, you know, transaction market, you know, the company sort of looking for deals. I mean, how are you sort of thinking about your own current valuation?
and the ability to deploy capital. I guess what kind of returns would it take for you to kind of pull the trigger I know in the past. You've looked at Cherbaibax as an option to deploy capital. So, how do you sort of think about new acquisitions?
Higher leverage bybacks and has anything changed in your calculus as you look forward.
Speaker Change: Yeah, with Bye Backspeed we always said we want to do it
and a leverage neutral and that is still the policy.
Speaker Change: which we got to the other question. We will, and our position hasn't changed. If we do an acquisition and we have, as I mentioned, over other calls in previous calls.
We have relationships that want to invest, believe it or not.
Speaker Change: and they are cautiously looking at the opposite investment.
PGIE Equity Commitment would be very, very limited. And you would have to look at a combination of the fee income and the returns on our equity. And as we had, I think...
shown you in the past.
Speaker Change: It should be a very good double digit return for Paramount. We have a terrific team, a terrific platform and that's...
Speaker Change: What's appreciated by some of the investors and but I can tell you that there will not be a lot of P. Jerry equity capital invested.
Okay, thanks for that color. It may be one for Peter, just trying to think through all of the AI demand that has surfaced in San Francisco
I just, how are you thinking about that activity and I guess more importantly like what are the tenants looking for either what part of the city, what type of building, what type of space, you know, does the Paramount portfolio.
in any way shape or form play or roll and what they're looking for or is it, you know, they want to be in different parts of the city and different types of buildings that don't necessarily mash up with the types of assets you want today.
Yes, that's a really good question and something that we're assessing real time. I do think AI demand continues to develop and will contribute north of millions of score feet towards leasing velocity in 2024 and interestingly in terms of number of leases, 70% of those AI leases are new to market.
So yes, they are the recipient of huge venture capital funding, they acknowledge the importance of the office and they're starting to transact.
What we've seen a lot from these AI companies is that in many cases, if pursuing some of these smaller sublet opportunities, that's why we've seen sublice availability stabilize and San Francisco, which we think is a good start.
And more generally speaking, we believe that the North and South financial district is reflected in the figures.
will be the first submarkets to return San Francisco San Francisco to healthier leasing fundamental. So we are in conversations with AI-based companies. I don't know that you can say that there has been a trend that's...
heavily pronounced in terms of what their preferences are entirely, but we're in front of all of them. Many of them are names that are new to us.
and we do think that some of our product mix and our buildings will appeal to these AI-based companies that in many cases are looking for built space and are looking to move quickly.
So it's a very positive development for San Francisco. We continue to be heavily focused on it. As these requirements come about very quickly and we're expecting north of a million square feet of velocity attributable to AI-based companies in this calendar year.
Great, that's it for me, thanks.
Speaker Change: Thank you Steve.
As a reminder, if you would like to ask a question, it is Star 1.
We're next question here, from Dylan Brindley from Green Street. Please go ahead.
Hey guys, I guess just continuing on the AI theme, I guess as you guys are looking at sort of the credit of these AI tenants, I mean, how are you guys doing about that? I know obviously there's still a lot of...
Uncertainly over whether or not this AI environment is sort of a bubble and which companies are going to survive on a long-term basis. So just sort of curious that you guys are sort of looking at these companies. A lot of them mean new to you as you had you in a little bit of two Peter. I just sort of tell you guys a view from a credit perspective.
I would start by saying that the current review process that we undertake with respect to any tenant is something that we take very seriously. So it's not limited to just AI, but yes, there is...
Speaker Change: More risk with some of these newer companies and the way we evaluate that is by certainly limiting to the extent we can, a capital outlay and then securing it with a letter of credit. That is how we do it in every instance, irrespective of industry.
Speaker Change: that's helpful and then...
I think you guys mentioned, you know, appetite amongst your JV partners to look to the best capital in office today. Obviously, still taking a more cautious approach than other property types, probably. And I think on the Q1 call, you guys kind of alluded to your JV partners looking to achieve a...
Speaker Change: you know, called a seven to ten percent on my word IRR. I guess have those on my word IRR expectations change and you sort of seen an IRR premium required to you know for those looking to put capital work in San Francisco versus in the York.
I think both markets are very different from the investor point of view. In San Francisco, there's...
but we got to institutional assets.
What has been bought is normally under percent cash. It's very difficult to get debt financing for those kind of acquisitions. They haven't been traits of any significance.
So the return requirement there is more in the double digits for...
Speaker Change: San Francisco and New York, I would say it has also increased a little bit.
Speaker Change: but it really depends on the asset, it depends on...
whether it's core or opportunistic, whether you have to really do take take leasing and market risk. We look at each asset totally different. And it depends on the appetite of the investor.
Speaker Change: We see core investors, but more investors that are interested in opportunistic.
Speaker Change: Great, thanks for your time.
Thank you.
This includes the question in our conversation, Albert.
I'm sorry I had to be thankful that the Applepeller Franny Co. is in God's name.
Thank you all for joining us today. We look forward to giving you an update on our continued progress when we report the fourth quarter of a judge of 2024.
Speaker Change: Goodbye.
Speaker Change: This concludes today's teleconference. You may disconnect your lines of this time. Thank you again for your participation.