Paramount Group, Inc. (PGRE) Q4 2022 Earnings Call Transcript

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Paramount Group, Inc. (NYSE:PGRE) Q4 2022 Earnings Conference Call February 16, 2023 10:00 AM ET

Company Participants

Tom Hennessy - Vice President of Business Development and Investor Relations

Albert Behler - Chairman, Chief Executive Officer, and President

Wilbur Paes - Chief Operating Officer, Chief Financial Officer, and Treasure

Peter Brindley - Executive Vice President, Head of Real Estate

Conference Call Participants

Steve Sakwa - Evercore

Blaine Heck - Wells Fargo

Vikram Malhotra - Mizuho

Derek Johnston - Deutsche Bank

Dylan Bazinsky - Green Street


Good day, ladies and gentlemen. Thank you for opinionated by. Welcome to nan Paramount Group Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note, this convention telephone is being recorded today, February 16, 2023.

I will now move nan telephone complete to Tom Hennessy, Vice President of Business Development and Investor Relations.

Tom Hennessy

Thank you, operator, and bully morning, everyone. Before we begin, I would for illustration to constituent everyone to our 4th fourth 2022 net merchandise and supplemental information, which were released yesterday. Both tin beryllium recovered nether nan heading Financial Results successful nan Investors conception of nan Paramount Group website astatine

Some of our comments will beryllium forward-looking statements wrong nan meaning of nan national securities laws. Forward-looking statements, which are usually identified by nan usage of nan words specified arsenic will, expect, should aliases different akin phrases are taxable to galore risks and uncertainties that would origin existent results to disagree materially from what we expect. Therefore, you should workout be aware successful interpreting and relying connected them. We mention you to our SEC filings for a much elaborate chat of nan risks that could effect our early operating results and nan financial condition.

During nan call, we will talk our non-GAAP measures, which we judge tin beryllium useful successful evaluating nan company's operating performance. These measures should not beryllium considered successful isolation aliases arsenic a substitute for our financial results prepared successful accordance pinch GAAP. A reconciliation of these measures to nan astir straight comparable GAAP measurement is disposable successful our 4th fourth 2022 net merchandise and our supplemental information.

Hosting nan telephone today, we person Mr. Albert Behler, Chairman, Chief Executive Officer and President of nan company; Wilbur Paes, Chief Operating Officer, Chief Financial Officer and Treasurer; and Peter Brindley, Executive Vice President, Head of Real Estate. Management will supply immoderate opening remarks, and we will past unfastened nan telephone to questions.

With that, I will move nan telephone complete to Albert.

Albert Behler

Thank you, Tom, and convey you, everyone, for joining america this morning. As we adjacent retired different year, we proceed to execute connected our strategical initiatives of leasing up our disposable abstraction and maintaining our disciplined attraction connected generating semipermanent worth for our shareholders.

Yesterday, we reported halfway FFO for nan 4th fourth of $0.25 per share, bringing our full for nan twelvemonth to $0.98 per share, nan precocious extremity of our astir caller guidance range. In nan 4th quarter, we leased complete 205,000 quadrate feet, bringing our full for nan twelvemonth to complete 947,000 quadrate feet, supra nan midpoint of our astir caller guidance range.

We besides reported affirmative year-over-year same-store maturation of 4% connected a GAAP ground and 1.7% connected a rate basis. Today, we are initiating 2023 halfway FFO per stock guidance pinch a scope betwixt $0.88 and $0.94 per stock and an expected leasing measurement of betwixt 600,000 and 900,000 quadrate feet. Wilbur will reappraisal our financial results and guidance successful greater detail.

Looking backmost astatine our capacity successful 2022, we executed connected a number of cardinal initiatives. We signed leases covering complete 300,000 quadrate feet astatine 1301 Sixth Avenue, which are our cardinal focus. The mostly of this leasing, astir 259,000 quadrate feet was pinch 2 cardinal tenants O'Melveny & Myers and SVB Securities. These leases service to do both, backfill existing vacancy and pre-lease complete 50% of nan 305,000 quadrate feet of abstraction vacated by Credit Agricole earlier this month.

We signed a 15-year lease pinch Michelin Star edifice successful Tai Fung astatine our office astatine 1633 Broadway nether nan iconic solid [indiscernible] Plaza, which is slated to unfastened successful precocious 2023. This transaction, which is among nan apical 10 largest unit leases signed during nan twelvemonth further exemplifies our attraction connected partnering pinch world-class unit tenants and providing a spectacular amenity for our tenants and nan neighborhood.

We acquired done a associated venture, a 26,000 quadrate ft unit condominium astatine 1600 Broadway, which serves arsenic a flagship for M&M's world successful nan bosom of Times Square. M&M's world has agelong served arsenic an icon for world tourism and its caller 15-year renewal and important committedness to amended nan abstraction is simply a testament to nan semipermanent worth of this asset.

While we met aliases exceeded astir of our goals established astatine nan opening of nan year, admittedly, we besides did autumn somewhat awkward of immoderate of nan lofty goals we set. All successful all, I'm rather proud of our accomplishments successful 2022, particularly considering nan slowdown successful nan U.S. system spurred by nan fed important liking complaint hikes aimed astatine curbing inflation.

Notwithstanding a challenging economical environment, our 2022 study paper was very bully and is simply a nonstop reflection of nan value and desirability of our Class A assets, our beardown tenant guidelines and a dedicated workforce that is physically successful nan office.

In summation to our ain labor being successful nan office, we are thrilled to spot our tenants coming backmost to nan office. After a bid of falls, starts and stops, it seems not amazingly that nan agency is present to enactment pinch respective large names announcing mandatory aliases hybrid back-to-the-office plans, agency occupancy rates person continued to climb steadily station Labor Day. These are affirmative signs that we judge will proceed arsenic much group statesman going successful imperishable and employers admit nan unbeatable productive worth of having nan workforce together successful nan office.

Our New York portfolio, which represents complete 70% of our business continues to execute good and accounted for adjacent to 80% of our 2022 leasing velocity. In fact, nan occupancy of our New York portfolio, which now sits astatine 92.1%, has grown by an awesome 560 ground points since nan trough successful 2nd 4th 2021, while nan readiness complaint was up 50 ground points during nan aforesaid period.

While our leasing volumes stay successful statement pinch humanities norms, deals proceed to return longer to execute, an study we had successful nan 2nd half of 2022 and 1 that we proceed to person truthful acold successful 2023.

San Francisco continues to lag New York. But for illustration New York, it besides benefits from nan formation to value inclination successful nan market. While nan extent of request remains sparse, pricing and value assets remained strong. This spot is demonstrated by nan results successful our ain portfolio, wherever we leased complete 213,000 quadrate feet astatine triple-digit starting rents of astir $103 per quadrate foot. Our attraction successful San Francisco will undoubtedly beryllium connected leasing nan 235,000 quadrate ft artifact of abstraction astatine 555 marketplace that will beryllium vacated by Uber successful July 2023.

Turning to nan transaction market. Activity continues to stay muted. The macro economical backdrop and rising liking rates support buyers astatine bay and sellers evaluating erstwhile conditions will improve. There person not been galore value assets that person travel to nan market. And for those that person nan spot aspread remains wide. That said, location is simply a wall of trial maturities connected nan horizon, which will surely coming america pinch immoderate opportunities. We will beryllium strategical and disciplined successful allocating superior arsenic we ever person been.

Last but surely not least, immoderate of our proudest achievements this twelvemonth are nan awesome strides we meet successful our sustainability initiatives. As always, our committedness to sustainability and ESG arsenic a full remains 1 of our halfway operating tenets. We pridefulness ourselves connected our activity successful this area and understand that has not only helped america negociate operating costs, pull and clasp premium tenants and yet heighten portfolio value, but besides trim nan biology effect we time off connected nan world astir us.

To that end, we were proud to beryllium named 2022 Energy Star Partner of nan twelvemonth arsenic we besides achieved power labels crossed 100% of our portfolio. Most recently, we besides achieved a 5-star standing successful nan 2022 GRESB Real Estate Assessment for nan 4th consecutive year. This distinguishes Paramount's ESG capacity successful nan apical 20% among nan 1,820 entities that responded globally. Notably, we were capable to support our market-leading performance, coming successful 16 points supra mean contempt a 20% maturation successful information arsenic nan institution roseate to nan apical wrong some nan guidance and capacity scoring categories. We look to adhd to these important achievements successful 2023, ESG will proceed to beryllium integrated passim our business and remains astatine nan forefront of really we run our businesses.

To summarize, arsenic we statesman 2023, our priorities stay clear. We are focused connected leasing up our disposable abstraction and welcoming our tenants backmost to nan office. With our portfolio of unchangeable trophy assets and our proven expertise to allocate capital, we stay good positioned for nan agelong term.

With that, I will move nan telephone to Peter.

Peter Brindley

Thanks, Albert, and bully morning. During nan 4th quarter, we leased astir 205,500 quadrate feet. Our 4th fourth leasing activity was weighted toward New York pinch 151,700 quadrate feet leased aliases astir 74% of this quarter's leasing total.

Notably, O'Melveny & Myers expanded their lease by astir 18,500 quadrate feet astatine 1301 Avenue of nan Americas during nan 4th quarter. Within nan past 2 quarters, we person pre-leased much than 50% of nan abstraction being vacated by Credit Agricole, derisking our largest 2023 lease expiration.

For nan afloat year, we leased astir 947,000 quadrate feet for a weighted mean lease word of 8.8 years. In nan look of challenging marketplace conditions, our portfolio continues to pull much than our adjacent stock of demand, a testament to Paramount's way grounds of providing exceptional services successful nan highest value buildings successful our markets and our team's expertise to execute connected our operating plan.

At 4th end, our same-store portfolio-wide leased occupancy complaint astatine stock was 91.3%, down 10 ground points from past 4th and up 70 ground points year-over-year. As we look ahead, our remaining lease expirations are manageable pinch 4.8% astatine stock expiring by year-end.

Turning to our markets. Midtown's 4th fourth leasing activity of astir 2.6 cardinal quadrate feet, excluding renewals, was down 44% quarter-over-quarter and down 30% beneath nan 5-year quarterly average. Despite a deficiency luster quarter, Midtown vanished nan twelvemonth posting a 15.2% betterment successful leasing activity arsenic compared to 2021.

More importantly, nan creation of tenant request continues to item nan ongoing bifurcation occurring successful New York, wherever nan marketplace for Midtown's highest value existent property successful nan astir well-located submarkets remains active. For example, nan Sixth Avenue submarket astatine 12.3% readiness continues to outperform nan broader Midtown marketplace astatine 18.3% availability. We person seen grounds of this attraction connected value and location successful nan trading of our availabilities on Sixth Avenue astatine some 1301 Avenue of nan Americas and 31 West 52nd Street, wherever we are encouraged by nan liking we knowledgeable successful nan 2nd half of 2022 and into nan first 4th of 2023.

Our New York portfolio is presently 92.1% leased connected a same-store ground astatine share, unchanged quarter-over-quarter and up 180 ground points year-over-year, demonstrating nan resilience of our portfolio during a challenging twelvemonth for Midtown.

For nan afloat year, we leased astir 734,000 quadrate feet, 28.6% supra our yearly New York leasing full complete nan past 5 years. Our wide lease expiration floor plan successful New York is manageable pinch 3.1% nett stock expiring by year-end.

Turning now to San Francisco. Leasing activity remains muted arsenic nan marketplace mostly has taken a measured attack to returning to nan office. Many companies, however, person precocious started to reestablish workplace policy, acknowledging nan value of nan agency pinch greater condemnation and expanding nan number of days their labor are required to beryllium successful nan office.

As a result, beingness occupancy is steadily increasing, which will service arsenic a cardinal driver successful San Francisco's way toward recovery. And while tech layoffs are hitting nan headlines, nan reality is, for nan astir part, that full caput count remains higher than it was successful early 2020. This rebalancing of nan employer-employee relationship, increasing return to agency mandates and nan ongoing infusion of task superior backing into caller and innovative companies successful San Francisco will thrust request going forward.

San Francisco's readiness complaint remained elevated. However, nan marketplace for San Francisco's premier assets remains tight and economics, peculiarly for position abstraction and trophy assets remains solid. In fact, for illustration New York, formation to value of nan activity that continues to summation momentum successful San Francisco arsenic employers usage existent property arsenic a lever to heighten nan workplace experience.

Leasing challenges stay successful nan adjacent term. The company's ongoing desire to elevate nan value of their existent property successful San Francisco will consequence successful outsized marketplace stock going guardant for Paramount. At 4th end, our San Francisco portfolio was 88.9% leased connected a same-store ground astatine share, down 40 ground points quarter-over-quarter and down 270 ground points year-over-year.

During nan 4th quarter, we leased astir 54,000 quadrate feet astatine a weighted mean word of 1.7 years pinch first rents of much than $95 per quadrate foot. Looking ahead, our San Francisco portfolio has 9.3% astatine stock expiring by year-end. The mostly of this 2023 lease rotation will hap astatine Market Center aliases Uber's lease expires successful July of 2023. We are encouraged by nan activity connected this desirable artifact of abstraction and look guardant to updating you connected our advancement connected our adjacent call.

With that summary, I will move nan telephone complete to Wilbur, who will talk nan financial results.

Wilbur Paes

Thank you, Peter. Good morning, everyone. I will commencement my prepared remarks by covering nan specifications of our 4th fourth results and past get into nan building blocks of our 2023 net guidance. Yesterday, we reported halfway FFO of $0.25 per share, bringing afloat twelvemonth 2022 halfway FFO to $0.98 per share, which equates to a 6.5% maturation successful net complete nan anterior year.

Our 4th fourth results came successful $0.01 up of statement and $0.01 up of nan midpoint of our guidance. Overall, our 2022 same-store maturation was 4% connected a GAAP ground and 1.7% connected a rate basis, which was successful statement pinch our expectations. The affirmative same-store results were driven by our New York portfolio, which reported robust year-over-year same-store maturation of 8.5% connected a GAAP ground and 6.9% connected a rate basis.

Our San Francisco portfolio, arsenic expected, reported antagonistic year-over-year same-store maturation of 4.2% and 8.7% connected a GAAP and rate basis, respectively, driven chiefly by a 270 ground constituent diminution successful occupancy.

During nan 4th quarter, we executed 18 leases covering 205,530 quadrate feet of abstraction astatine a weighted mean starting rent of $77.66 per quadrate ft and for a weighted mean word of 3.8 years. Mark-to-markets connected 16,142 quadrate feet of second-generation abstraction was affirmative 2.3% connected a GAAP ground and antagonistic 0.7% connected a rate basis.

While 4th fourth leasing metrics were mostly successful statement pinch what we reported during nan first 9 months of nan year, weighted mean lease position were overmuch shorter and driven by immoderate short-term extensions successful nan quarter. Our weighted mean lease word for leases executed during each of 2022 was 8.8 years.

We besides initiated guidance yesterday for nan afloat twelvemonth of 2023. Let maine walk a fewer minutes discussing nan assumptions utilized successful our guidance. We expect 2020 halfway FFO to scope betwixt $0.88 and $0.94 per stock aliases $0.91 per stock astatine nan midpoint, which is successful statement pinch consensus. The $0.07 per stock alteration successful halfway FFO erstwhile compared to our 2022 results is comprised of nan following, antagonistic same-store rate NOI maturation betwixt 3.5% and 5.5% aliases $0.08 per share, which, arsenic a reminder, results chiefly from nan antecedently reported lease expirations of Credit Agricole's 305,000 quadrate ft lease astatine 1301 Avenue of nan Americas successful New York and Uber's 235,000 quadrate ft lease astatine Market Center successful San Francisco.

Lower termination income of $0.01 per stock arsenic we typically do not fund for termination income and higher liking disbursal of $0.05 per share. These negatives aggregating $0.14 per stock are partially offset by immoderate positives aggregating $0.07 per stock and are comprised of nan following, a $0.04 use from higher straight-line rent resulting from nan commencement of caller and renewal leases and a $0.03 use from little weighted mean shares outstanding resulting from nan stock buybacks that were executed successful 2022.

Operationally, we expect to lease betwixt 600,000 and 900,000 quadrate feet during '23, and we expect to extremity nan twelvemonth pinch a same-store leased occupancy complaint betwixt 90.8% and 91.8% aliases 91.3% astatine nan midpoint, which would support america level comparative to wherever we ended 2022.

Turning to our equilibrium sheet. During nan 4th quarter, we utilized $43.7 cardinal of rate from our equilibrium expanse to repurchase $7.1 cardinal of our outstanding shares astatine a weighted mean value of $6.12 per share. We ended nan 4th station these stock buybacks pinch a small complete $1.2 cardinal successful liquidity, comprised of astir $452 cardinal of rate and restricted rate and nan afloat $750 cardinal of undrawn capacity nether our revolving in installments facility.

Our outstanding indebtedness astatine 4th extremity was $3.67 cardinal astatine a weighted mean liking complaint of 3.57% and a weighted mean maturity of 4 years. 87% of our indebtedness is fixed and has a weighted mean liking complaint of 3.6% and nan remaining 13% is floating and has a weighted mean liking complaint of 5.7%. We person nether $200 cardinal of indebtedness astatine stock maturing successful 2023 and $478 cardinal astatine stock maturing successful 2024. And beyond that, our maturities are good laddered.

With that, operator, please unfastened nan statement for questions.

Question-and-Answer Session


Thank you. [Operator Instructions] We person a first mobility from nan statement of Steve Sakwa pinch Evercore. Please spell ahead.

Steve Sakwa

Yeah. Thanks, bully morning. Peter, I was conscionable wondering if you could elaborate a small spot connected nan leasing environment. And successful particular, nan request that you're seeing for nan upcoming vacancy successful San Francisco and Uber and nan types of tenants that whitethorn beryllium looking?

And past besides conscionable possibly remark connected a small spot nan weighted mean lease term. I cognize Wilbur touched connected it, but that was evidently rather short. And I'm conscionable funny benignant of nan mindset of tenants today?

Peter Brindley

Steve, I deliberation we each cognize successful San Francisco, location is little wide request successful nan marketplace coming owed to firm net unit and different macro headwinds. I will opportunity we person a really very, I think, compelling offering astatine Market Center. We do cognize that akin to New York and San Francisco, tenants are highly discerning and they are erstwhile progressive looking astatine existent property that's good located that has thing to offer.

And astatine this point, of course, we're heavy focused connected this 235,000 quadrate ft artifact that, arsenic you know, comes backmost successful nan 2nd quarter. And I'm happy to opportunity that we've sewage bully activity. And I would opportunity it's predominantly from tech users who person been pulling backmost arsenic we know, but not each of them. And those that are active, we've been talking to. And arsenic I said successful my remarks, we look guardant to updating you connected our adjacent call, and we dream to stock pinch you immoderate bully progress. Similar to what we've done connected nan - pinch nan Credit Agricole block, our volition is to derisk this artifact of abstraction successful beforehand of nan expiration later this year.

And arsenic it relates to mean term, I deliberation I don't - I wouldn't look astatine nan 4th fourth arsenic suggestive of what we expect going forward. I cognize that nan word successful nan 4th fourth was shorter. If you look astatine nan afloat year, it was considerably longer.

I wouldn't chalk nan 4th fourth up to immoderate benignant of inclination that we're seeing successful nan market. We're having constructive conversations now pinch prospective tenants, each of whom are consenting to put superior to amended nan abstraction beyond what we would lend by measurement of TI [ph] And we're talking astir longer position pinch these tenants, peculiarly astatine our trophy assets.

Wilbur Paes

And Steve, I mean, if you look astatine nan first 3 quarters of nan year, nan weighted mean word connected leases we executed was 10 years. It's only nan 4th quarter, that was 3.8%, that blended to nan 8.8% that I alluded to successful my remarks.

Steve Sakwa

Okay. Maybe - and then, Wilbur, 1 different question. Just arsenic you look done nan debt, I cognize it's not very heavy, but you do person a mates of mortgages coming owed this twelvemonth aliases adjacent year. I'm conscionable funny benignant of your thoughts connected nan owe marketplace coming and benignant of nan re-financeability of nan assets and conscionable to grade you request to put immoderate superior successful aliases conscionable really are you benignant of reasoning astir nan upcoming maturities?

Wilbur Paes

Sure. So arsenic you constituent out, we had 3 loans maturing successful '23. I'd opportunity each of these 3 loans are associated task loans, nan owe marketplace is very, very tight correct now. I mean it's reliable - CMBS is fundamentally nonexistent. And there's a batch of unit fixed wherever values are fixed a declining NOI arsenic immoderate of these leases roll.

So it's going to beryllium challenging pinch respect to being capable to refinance immoderate of these assets. In our portfolio, I will show you, we evidently are talking astir 60 wells [ph] We person a 5% liking successful that asset. That has a 1-year extension, which we've already availed ourselves for. And we're going to support discussions pinch nan lender and our associated task partners connected that asset.

The adjacent indebtedness we person maturing is successful March of '23, that is astatine 111 Sutter and that one, currently, nan NOI is not capable to screen nan indebtedness service. You saw we took an impairment connected that asset. When speech went progressive discussions, america and our associated task partner pinch nan lender. So much to travel connected that.

And nan past maturity we person is successful October of '23, which is 300 Mission. That's a reasonably debased levered loan. I don't envision it's sewage awesome coverage. It's a awesome asset. It's 84% leased successful San Francisco. It's sewage a ace bully tenant roster. We don't envision immoderate rumor pinch refinancing that asset. That said, that existent complaint is 3.65 that will undoubtedly beryllium higher.

Steve Sakwa

Great. Thanks. That's it for me.

Albert Behler

Thank you.


We return adjacent mobility from nan statement of Tom Kate [ph] pinch BTIG. Please spell ahead.

– Unidentified Analyst

Excellent. Thank you and bully morning, everyone. Just backmost connected 111 Sutter. Wilbur, you mentioned, obviously, you'd person much to show america adjacent quarter. But arsenic acold arsenic nan impairment goes, is location a displacement successful strategy connected nan asset? Is that conscionable because of nan refinancing? Or is that because of a alteration successful clasp period? Or is location immoderate different driver there?

Wilbur Paes

So that's a awesome question, Tom. There is - one, you should know, refinancing and indebtedness maturities person thing to do pinch nan impairment of an asset. That's a GAAP request that has to do pinch nan recoverability of nan plus based connected nan rate flows and nan estimated clasp period. So because you could person an impairment connected an plus moreover if an plus is unencumbered. So conscionable to explain that constituent first.

The impairment exemplary from an accounting standpoint, you person to look astatine indicators. And those indicators -- immoderate of those indicators if there's a driblet successful occupancy of nan assets has a driblet successful NOI. And if you look astatine 111 Sutter, there's been a important driblet successful occupancy comparative to past year. So everybody is focused connected plus values. Every quarter, we tally done these study find nan full period. And based connected that, you find nan recoverability of nan assets. So that's what caused nan impairment.

Now this is simply a associated task impairment. So you really spell to 3 steps. After you fig retired connected an undiscounted ground that nan rate flows is not capable to retrieve your basis, past you sewage to look astatine it astatine a discounted ground to find nan magnitude of impairment.

And nan past measurement erstwhile you person investments accounted for nether nan equity method, you person to determine whether your finance is different than temporarily impaired. And you sewage to past warrant why you judge it's either not different than deportely [ph] impaired aliases it's longer than that. And truthful we did that analysis, and that's wherever we shook retired pinch nan impairment.

– Unidentified Analyst

Got it. I admit that, Wilbur. And nan benignant of - it leads to a spot of a broader question, and it's a small vague, and I apologize. But erstwhile I deliberation backmost to conversations we've had successful nan past astir really you've constructed your portfolio, it's ever been intentional wherever you're attempting to seizure a wide spectrum of tenant request for people A space. You person -- successful New York, for example, you person your trophy abstraction astatine 51 West 50 2nd aliases sorry, 31 West aliases nan 2nd aliases 1301 Avenue of nan Americas and past you've sewage awesome space, but much of a comparative worth play, not 3, 1325 Avenue successful nan Americas.

Everything that you're seeing, particularly successful San Francisco, sounds for illustration it's trophy demand, it's trophy demand. Do you deliberation you would alteration your portfolio building strategy going forward? Is location thing wherever moreover that comparative worth abstraction is benignant of little successful demand? Or is nan anticipation that, that yet comes back?

Albert Behler

This is Albert. On nan strategy of Paramount, I deliberation it's presently coming retired that nan strategy was a bully one. The portfolio is beautiful unchangeable successful some markets. If you look astatine 111 Sutter, it's intelligibly a different benignant of intelligibly a different benignant of assets. We - you mightiness recall, only 2.5 years ago, group were very interested, particularly successful San Francisco, moving to ceramic and timber benignant of buildings.

The assets seemed charismatic astatine nan time, and it fresh our field of agency properties that we had acquired successful San Francisco. Unfortunately, successful this case, we were nether dense renewal of an plus that was of older property and is really focused connected task and mini tech companies. And those person been deed nan hardest successful this recession and nan request for this is comparatively low. Many of those folks tin activity from location and still judge that location is nan champion for their business exemplary aliases they mislaid their business model.

But crossed nan board, our portfolio is still 91.3% leased. We are -- pinch our guidance focusing this twelvemonth connected expanding that by complete 100 ground points. We person semipermanent leases pinch in installments tenants which are really adjuvant successful recessionary environments. We person been focused connected that. And we person maturation successful our San Francisco portfolio, astir successful each of nan leases we have, contempt nan truth wherever nan marketplace is. We person rental increases of 3% per year. And to nan financing part, we person been focusing besides chiefly connected semipermanent fixed indebtedness financings.

We only had 15% and now little than 15% floating complaint indebtedness because we wanted to lucifer some sides of nan equilibrium sheet. So I deliberation conceptually, our portfolio is good prepared for a downturn, and that's what we were focusing connected successful nan past. And nan value of nan assets is catering to tenants are looking for Class A and trophy and that's what we are offering.

And that's why Peter and his squad person done a tremendously bully occupation past twelvemonth successful bringing up nan occupancy astatine 13016 Avenue successful a difficult leasing situation -- and I deliberation we will instrumentality to this concept. And we person -- I mean, we person 12 Fifth Avenue that caters to smaller assets to smaller tenants. And that fits successful our New York field arsenic well. It's a different benignant of tenant than 111 Sutter much of nan ultra-high end. And that is, successful nan agelong run, this will do very well.

– Unidentified Analyst

Really, really helpful. Thank you, Albert And past benignant of 1 past cleanup one, if I can, possibly for Wilbur. CapEx and possibly leasing costs expectations for nan year. You did nan large leases pinch nan O'Melveny & Myers and SEB successful '22, I expect - I would presume that immoderate of that walk rolls in, successful '23. What are you benignant of expecting aliases baking successful arsenic acold arsenic that CapEx disbursal this year?

Wilbur Paes

So Tom, arsenic you know, we don't springiness needfully circumstantial CapEx guidance because it inherently is reliable based connected erstwhile tenants taxable nan invoices for TIs. And truthful my conjecture is your mobility is headed towards nan fab ratio and nan dividend coverage.

And look, we - I deliberation you saw wherever our ratios were this 4th was elevated because we sewage 1 of these lumpy petition for TIs. But past if you look astatine nan afloat year, it was - we had bully sum connected nan FAD ratio. I don't deliberation we expect thing excessively dissimilar from that successful nan adjacent year.

– Unidentified Analyst

Understood. That’s it from me. Thanks, everyone.

Albert Behler

Thank you.


Thank you. We return adjacent mobility from nan statement of Blaine Heck pinch Wells Fargo. Please spell ahead.

Blaine Heck

Great. Thanks. Good morning. I was hoping to get a small spot much item connected what you guys are seeing successful position of tenant guidelines usage aliases your estimate of utilization and days successful nan agency per week and really really those statistic person trended frankincense acold successful 2023.

Albert Behler

Blaine, this is Albert. We -- it's a very bully question. We are really rather happy pinch really nan occupancy has fared, particularly aft Labor Day, it has accrued a batch successful New York, but besides importantly successful San Francisco, particularly successful nan mediate of nan week days. We are present successful New York astatine nan 70% level of occupancy. And successful San Francisco, we are astir 56%, 557. That's importantly much than only 4 weeks ago.

And I think, arsenic I had said previously, nan recessionary situation and nan attraction of guidance connected -- backmost to nan agency by having their folks astir and nurturing a civilization is playing out. And I deliberation group recognize that activity from location is not nan eventual extremity for each jobs. So I deliberation nan tide is shifting, particularly for our benignant of assets, wherever we connection Class A abstraction and for our benignant of tenants who judge successful having their teams astir them.

Blaine Heck

Okay. That's really helpful. And conscionable to beryllium clear, nan 70% and 56% utilization figures you're quoting, are those comparative to nan highest utilization that you saw successful 2019 aliases immoderate different benignant of guidelines 100% number?

Albert Behler

Basically of -- because you usually -- we ne'er looked astatine this earlier nan pandemic, arsenic you mightiness imagine. So we person made studies and not only america wrong our adjacent group wrong nan manufacture wherever you fundamentally recovered retired that nan afloat occupancy of agency abstraction is astir 70% to 80% because nan remainder of nan folks are walking connected vacation, their individual guidelines and different -- truthful it's ne'er 100%, you ne'er get to 100% of physically imaginable occupancy. So this is based connected a afloat occupancy considered 80% to beryllium afloat occupancy.

Blaine Heck

Okay. That's really helpful. For my 2nd question, location seems to beryllium a patient statement that's emerged astir plus values and headdress rates successful this expanding liking complaint environment. And since location aren't galore transactions that constituent to Albert, I wanted to get your return connected really overmuch you deliberation plus values and headdress complaint whitethorn person moved complete nan past year, fixed that summation successful nan costs of indebtedness and very debased readiness of debt?

Albert Behler

Yes. Also different bully question, but I don't want to springiness you a clear fig of clear number because it's -- I springiness you a comparison to 2009, 2010. People were hoping including ourselves, that this would beryllium a awesome opportunity to spell backmost successful nan marketplace and get assets. But nan bid and inquire was truthful immense because nan markets were fundamentally nan sellers were expecting that nan properties were measurement much worthy than they really were, and location were nary transactions, very akin to today. On apical of that, this time, nan indebtedness markets are not really charismatic to financing caller acquisitions.

So that, I think, slows down successful summation to conscionable a spot arsenic spread. So there's importantly -- there's a important summation of headdress rates -- and I don't want to put it successful figures because it really depends connected plus by plus and depends connected what nan purchaser is willing in. I mean we bought an plus past year, 160 Broadway astatine a very charismatic headdress rate, and it was an investor. The mostly was a ample organization investor. We conscionable had a very mini portion and we negociate nan plus for them. But they were focused connected rate flow, and that was charismatic for them. It's still an charismatic plus and nan rate travel is growing. So that's -- everyone has a different thought of what they want to beryllium investing in.

Blaine Heck

Okay. Great. And related to that, and Albert, I'll instrumentality pinch you for my past question. You mentioned nan wall of indebtedness maturities that's approaching and could spur opportunities for investments, would you opportunity you're much apt to put pinch partners successful a JV? Or do you deliberation you besides look astatine benignant of on-balance expanse acquisitions?

Albert Behler

Well, arsenic we had said, I deliberation I've said consistently complete nan past quarters, we will not put a batch of our ain capital. But location is simply a precocious request by investors that don't person boots connected nan crushed to find a partner for illustration ours who has acquisition successful these analyzable markets for illustration New York and San Francisco. And they would not require america to put successful a batch of equity, and that's still nan aforesaid goal.

Blaine Heck

Very helpful. Thank you.

Albert Behler

Thank you, Blaine.


[Operator Instructions] nan adjacent mobility from nan statement of Vikram Malhotra from Mizuho. Please spell ahead.

Vikram Malhotra

Thanks for taking nan question. Maybe, Peter, if you tin springiness america immoderate much colour connected immoderate of nan lease-up trajectory astatine nan prospects of nan cardinal vacancies. You talked a small spot astir nan Uber abstraction and tech request from smaller tenants. But possibly conscionable springiness america benignant of nan latest connected what you're seeing successful nan pipeline. And I cognize it's taking longer to lease up this unit connected rents. But if you could conscionable spell done nan cardinal vacancies and nan pipeline would beryllium helpful.

Peter Brindley

Sure. I'll commencement astatine Market Center. I commented earlier. I deliberation I whitethorn person said Q2 expiration, it's really July of '23. Nevertheless, it's approaching. We're focused connected it. And we have, arsenic I said earlier, bully activity, and I dream to springiness an update connected our adjacent telephone indicating that we've made immoderate progress. And I would opportunity it's chiefly tech companies that person been inquiring astir Market Center 555 marketplace specifically. Turning to New York. As you know, and arsenic we said successful our remarks, we did derisk 1301 significantly, nan Credit Agricole abstraction that they're presently vacating. We've derisked it by much than 50%. I would opportunity that nan request for nan equilibrium is predominantly rule firms, which rule firms person not been nan superior driver of leasing activity successful Midtown. That has really been financial services pinch an outsized practice successful position of its -- their request arsenic a portion of leasing activity. But we've seen rather a spot of request from rule firms.

Those floors laic retired very good for rule firms. They're highly efficient. Multiple architects person acknowledged arsenic much. So we person immoderate bully liking connected those floors. And past nan gait of nan building we have, arsenic you know, 200,000 quadrate feet. We've kept that crushed level vacant. We do person immoderate tenants willing successful perchance creating immoderate branding connected nan crushed level and creating connectivity up to those guidelines floors. The request is predominantly financial services, arsenic it has mostly been now for immoderate time, those floors lend themselves to a usage much accordant pinch really a financial services would deliberation astir their existent estate. So we're making immoderate advancement there. It's taken a small spot longer than we would like, but we person immoderate bully in installments tenants astatine this point, expressing immoderate liking -- and past really beyond that, nan only abstraction that I deliberation you're asking astir would beryllium 31 West 52nd Street, nan abstraction that we get backmost successful 2024. We besides person liking successful that space, too. 31 West is simply a trophy asset. We did nan lobby a mates of years ago. It shows beautifully. We person immoderate liking from some financial work firms and rule firms erstwhile again. So still excessively early to opportunity overmuch much than that.

But I deliberation nan constituent is while request is little than possibly what we had knowledgeable successful nan earlier portion of 2022, our mentation and what we're experiencing successful existent clip is that our portfolio continues to get looks from each prospective tenants, each tenants successful nan market, and it's a usability of nan measurement successful which we've invested successful nan buildings and what we person to offer. Certainly, a somewhat value and ours to our benefit. And that's nary different connected nan various blocks of abstraction that I've conscionable now outlined. We person request connected nan space, of course. We're moving very difficult to person that request into signed leases. But fixed each that we're experiencing successful nan world, I deliberation we consciousness mostly beautiful bully astir our ain pipeline.

Vikram Malhotra

And that's helpful. Maybe Albert, you referenced benignant of emerging distressed opportunities and you benignant of talked astir really you've been diligent pinch capital. But I'm conscionable wondering from your vantage constituent and possibly moreover conversations pinch possibly immoderate of your European partners aliases stakeholders. How should we commencement reasoning astir nan bid-ask aliases wherever New York agency values could beryllium shaking out? And I opportunity values, but possibly you tin talk successful position of headdress rates. It's astir apt a spot us. But immoderate sense, immoderate early denotation of halfway versus value-add benignant of wherever that dispersed is coming aliases wherever headdress rates are?

Albert Behler

Yes. Vikram, Blaine asked that mobility a mates of minutes ago, and I answered it. It's very difficult to springiness you an nonstop fig present because it's changing benignant of from plus to asset, and it really depends. It's a small spot for illustration 2009, 2010, wherever we thought that location were a batch of opportunities coming up, and they didn't travel up because location -- nan halfway truthful they had measurement excessively overmuch invested successful nan superior successful an asset. They didn't want to fto it go, and they sewage it refinanced aliases conscionable hung successful location because it turns comparatively quickly. And I deliberation we're successful a akin business correct now. This time, I deliberation nan indebtedness work mightiness compression a small spot more.

And I deliberation immoderate of nan expiring mortgages will unit immoderate of nan marketplace participants to do something, and it will beryllium really depending upon whether there's further equity that nan sponsor wants to put aliases whether they propulsion successful nan towel and springiness up nan asset. So it's very difficult to springiness you a headdress rate. But I tin show you that nan quality betwixt past twelvemonth and this twelvemonth is for judge 100 ground points.

Vikram Malhotra

Okay, that's helpful. And past Wilbur, conscionable past one. I cognize you person room connected nan dividend. You adjusted that during COVID -- but arsenic we look guardant benignant of connected taxable income pinch nan ins and outs of nan portfolio and planned lease up, is location a script wherever you whitethorn -- wherever you deliberation there's -- it's possibly prudent to create moreover much room? Or is location a script wherever nan dividend could beryllium nether unit arsenic you look retired complete nan adjacent 3 aliases 2 connected your taxable income projection.

Wilbur Paes

So Vik, first, I would opportunity nan dividend, obviously, is simply a committee policy, and that's thing we revisit pinch nan Board each quarter. It's thing that we are going to watch closely. If you look astatine nan commercialized existent property market, surely successful nan office, we are successful a recession, moreover though if nan wide system mightiness not be. At this point, location was nary determination to reside nan dividend. We person a business plan. We deliberation we tin proceed to execute connected that. The dividend is good covered. But I cannot estimate nor what we want to estimate connected what we whitethorn aliases whitethorn not do. That's thing that we will measure quarterly pinch nan board.


We return adjacent mobility from nan statement of Derek Johnston pinch Deutsche Bank. Please spell ahead.

Derek Johnston

So conscionable connected past been covered, but connected superior allocation priorities, you repurchased immoderate shares successful 4Q. Please punctual america what authorization is left. And your thoughts connected further buybacks versus opportunistic JVs aliases immoderate different uses you're considering?

Albert Behler

Yes. We person different EUR 15 cardinal authorization near successful -- for buybacks. And they person been much progressive successful nan past 4th because location were much opportunity. And -- nan value per stock has made a batch of consciousness for us. So that's -- mightiness beryllium focused connected that. But we -- successful general, we are -- we want to return a balanced approach. We ever return -- look astatine each of our opportunities connected a balanced way. So we want to enactment nimble and we will set it connected a quarterly ground and depending connected marketplace information, we set that programme arsenic well.

Wilbur Paes

Just to adhd to Albert, I mean, nan banal is evidently -- you tin -- we look astatine it and it's ridiculously cheap. At immoderate level, I'll taxable to you nan following, okay? We're sitting pinch $452 cardinal of rate connected equilibrium sheet. That equates to astir $2 a share. You person an unencumbered plus excavation generating northbound of $60 cardinal of NOI, return headdress rate, 6, 6 aliases immoderate you want to usage 6 only because that's a covenant calculation. But moreover if you were to usage that, it's $1 cardinal of plus value, that equates to different $425 cardinal of per stock value. So nan sum of that, too, is northbound of $6.25 and that's giving 0 in installments to nan encumbered plus pool, which is implying that each plus successful nan portfolio is underwater. And clearly, that's stupid from our perspective.

Derek Johnston

Wilbur, and I conjecture my past 1 is what do you believe? And what do you deliberation is causing this tougher leasing situation that we're seeing today? Is it much of nan secular mobility of hybrid and activity from home? Because DB felt that exiting nan pandemic, well-located Class A assets of your caliber would beryllium champion positioned. So is it nan secular mobility aliases a operation because we consciousness it could beryllium much recessionary, right? And this is fundamentally a normal cyclical backdrop that done erstwhile cycles we've seen. So conscionable willing connected your return what is nan hybrid activity from home, if any? And what is much cyclical and recessionary successful nature?

Wilbur Paes

Well, we person leased this portfolio beautiful good moreover successful -- during nan pandemic and during nan activity from home. I deliberation nan activity from location is not coming to a full end, but it's changing. I deliberation guidance is demanding much clip successful nan agency because it's important for nan culture, processing a civilization of a company. So I deliberation very clearly, this is simply a cyclical recessionary thing. And companies expect that times get worse earlier they get better, and they will not -- and it's very typical. We person seen this many, galore times. They deliberation much astir if they really person request of extending a lease aliases moving. They will widen nan lease short term, and it's nan aforesaid what we saw successful 2009, 2010. If nan lease was expiring, they effort to widen it for 1 aliases 2 years. So they didn't person to make a abstraction decision. Because you person to remember, I mean, we person to salary a batch of TIs and we laic retired a batch of superior arsenic landlords. But nan tenant himself is besides spending a batch of superior and a batch of money erstwhile they make a move. And that is currently, I think, a small spot much connected clasp than it was 6 months ago.

Derek Johnston

Excellent. Thanks. That's it for me, guys.


We return nan adjacent mobility from nan statement of Dylan Bazinsky pinch Green Street. Please spell ahead.

Dylan Bazinsky

Just curious, from a geographic perspective, today, I deliberation you guys are, telephone it, 75% New York, 25% successful San Francisco. And you mentioned perchance putting superior to activity should opportunities coming themselves. But I conjecture conscionable arsenic you deliberation astir putting that incremental superior to work, do you deliberation successful much successful New York, much San Francisco. I'm conscionable funny to perceive your thoughts connected benignant of nan geographic position successful position of imaginable acquisitions.

Albert Behler

That's a bully question. We look astatine these things and we get nan questions each nan clip successful nan past. We look astatine it opportunistically. San Francisco is having a tougher clip currently, but we are semipermanent investors. And I deliberation San Francisco will travel around. So we look astatine it connected an asset-by-asset ground and market-by-market basis.

Dylan Bazinsky

Okay. That's helpful. And past I conjecture conscionable a follow-up because I cognize it's been asked respective times successful nan telephone astir wherever you guys deliberation headdress rates are. But I conjecture possibly different measurement of asking that is conscionable for immoderate of your higher value assets, I conjecture wherever do you deliberation marketplace debt, all-in indebtedness complaint costs are for for illustration thing for illustration a 153roadway aliases immoderate of your higher value assets retired successful San Francisco?

Albert Behler

Yes, I don't deliberation I want to springiness you a really headdress complaint astatine this point. This is benignant of a distressed marketplace situation. I mentioned -- I mentioned earlier connected this telephone to a mates of different folks -- this is for illustration 2009, 2010, and location weren't galore transactions happening because bid inquire is measurement excessively wide. The dispersed is measurement excessively wide. And that's wherever we are today. So I deliberation it's very difficult to springiness you a clear fig there. Thank you. Bye-bye.


Thank you. Ladies and gentlemen, we person reached nan extremity of nan question-and-answer session. And I'd for illustration to move nan level backmost complete to Albert Behler for closing comments. Over to you, sir.

Albert Behler

Thank you, everyone, for joining america today. We really look guardant to springiness you an update connected nan continued advancement erstwhile we study our first 4th 2023 results. Goodbye.


Thank you. Ladies and gentlemen, this concludes today's teleconference. You whitethorn disconnect your lines astatine this time. Thank you for your participation.+

Editor: Naga

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