Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Paramount Group Inc (PGRE, Financial) reported core FFO of $0.20 per share for the second quarter, in line with consensus.
- The company executed leases of approximately 198,500 square feet in Q2, bringing the year-to-date leasing volume to about 475,000 square feet.
- Strong leasing activity in New York, with approximately 178,000 square feet leased during the quarter.
- The opening of Paramount Club at 1301 Avenue of the Americas has been well received and is attracting new tenants.
- The grand opening of the Michelin star-rated Taipan restaurant at 1633 Broadway has generated significant buzz and excitement.
Negative Points
- Same-store portfolio-wide leased occupancy rate at share, excluding noncore assets, was 86.3%, down 280 basis points from last quarter and down 440 basis points year-over-year.
- San Francisco market remains tough with leasing velocity below long-term averages and a record high availability of 37.1%.
- Outstanding debt at quarter end was $3.6 billion with a weighted average interest rate of 3.92% and a weighted average maturity of 3.1 years.
- The company has no debt maturities until 2026, but 13% of its debt is floating with a weighted average interest rate of 8.01%.
- Known move-out of Clifford Chance at 31 West 52nd Street has impacted occupancy rates.
Q & A Highlights
Q: Can you remind us of the large known vacates between now and the end of 2025? Also, what are some potential vacates over the next 18 months?
A: Google and JPMorgan make up 4% of our 2025 lease expirations. Google will vacate roughly 340,000 square feet, and we are in discussions with JPMorgan about their 241,000 square feet at One Front Street. We expect to keep a portion of JPMorgan's space. We are also having constructive conversations with other tenants with 2025 lease expirations.
Q: How do you plan to fund potential acquisitions given your current capital structure and stock price?
A: We are looking at Class A and Trophy assets carefully. We will not use much of our current liquidity but will invest asset-light, leveraging outside venture capital. We have developed relationships with private investors, especially foreign and private ones, who are interested in the market.
Q: Any updates on the retail block on Fifth Avenue and Showtime's space at 1633 Broadway?
A: We have more activity on the retail space at 712 Fifth Avenue than ever before, with productive deals on Upper Fifth. We are seeing interest from luxury segment tenants. Regarding Showtime, we are monitoring their plans, but the lease does not come up for a while.
Q: Can you provide more details on how much San Francisco leasing was factored into your guidance?
A: We have leased 475,000 square feet year-to-date, ahead of the linear target. We feel good about reaching our leasing targets based on the current pipeline and activity.
Q: What assumptions are factored into your interest expense guidance following the increase this quarter?
A: Our interest expense guidance was initially based on expectations of rate cuts that did not materialize. We have adjusted our assumptions based on current Fed expectations. The rate cap and swap at 1301 Avenue of the Americas expiring in August were also factored in.
Q: Can you talk about balancing the risk of high concentration in buildings and large tenants versus the benefits of diversification?
A: Our portfolio is quite diversified across different tenant types and building characteristics. New York's tenant mix has become more diversified over the years, including tech and entertainment sectors, which helps mitigate risks.
Q: What are the drivers of the increase in same-store NOI expectations?
A: The increase is driven by reduced operating expenses in the second half of the year and strong performance in the second quarter. However, we expect NOI to be negative in the second half due to the Clifford Chance move-out and the impending lease expiration of Leerink at 1301 Avenue of the Americas.
Q: Can you provide more color on the demand for co-investing in office investments?
A: Institutional capital is not the front runner; private capital, including family offices and ultra-high net worth individuals, is more interested. They see the current pricing advantage and are becoming more active as office attendance improves.
Q: What are your expectations for net effective rents over the next 12-24 months?
A: We believe we are close to the bottom in New York, with some improvement already seen, especially for Class A and Trophy assets. San Francisco might take a bit longer, but we are also close to the bottom for Class A assets there.
Q: What is the status of the noncore assets at 111 Sutter Street and Market Center?
A: We are still in negotiations. The loan at 111 Sutter Street has been extended to December 2025. The process for Market Center is ongoing and can take a while due to multiple banks being involved.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
