PGRE - NYSE

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Paramount Group Second Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded today, July 27, 2022. I'll now turn the call over to Tom Hennessy, Vice President of Business Development and Investor Relations. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone. Before we begin, I would like to point everyone to our second quarter 2022 earnings release and supplemental information, which were released yesterday. 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 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 second 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 Paes, 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 afternoon. We reported core FFO for the second quarter of $0.24 per share with same-store cash NOI growing 5.6% year-over-year. As a result of our strong results, we are raising our full year 2022 core FFO guidance by $0.02 at the midpoint. Wilbur will review our financial results and guidance in greater detail. During the quarter, we leased approximately 250,000 square feet, which was about 50,000 square feet more than our first quarter leasing and slightly above our second quarter 2021 leasing results, a very positive outcome in the current climate. Of the 250,000 square feet, 153,000 square feet was leased in our New York portfolio, which led the way accounting for over 60% of this quarter's leasing at a solid weighted average lease term of 9.3 years. Our New York leasing was highlighted by the expansion of SVB Securities at 1301 Avenue of the Americas where they leased the entire fifth floor, comprising over 68,000 square feet. The building is now 88.1% leased, up 380 basis points compared to March 31. We are now left with 3 desirable and contiguous space floors totaling about 200,000 square feet. The New York portfolio, approximately 70% of our overall business, continues to perform well. Not only did it account for over 60% of this quarter's leasing velocity, but it accounted for over 72% of our year-to-date leasing velocity. Job growth continues to be strong, particularly in New York, which is almost fully recovered to pre-COVID level results. Tourism is improving daily. That bodes well for all retail businesses and the city in general. The San Francisco portfolio, as expected, has lagged, but there is one trend in both markets that remains consistent, the flight to quality, and that benefits our portfolio in particular. At One Market Plaza, arguably one of the best buildings in San Francisco, we continue to execute deals with triple-digit starting rents. Of the 97,000 square feet leased in San Francisco this quarter, about 59,000 square feet or over 60% was leased at One Market Plaza at starting rents in excess of $118 per square foot. One Market Plaza continues to raise the bar in San Francisco. Notwithstanding the success we are seeing at One Market Plaza, the market in general remains challenged as tech tenants grapple with their return to office plans, keeping office utilization rates well below pre-pandemic levels and causing leasing activity to remain tepid. We believe our own leasing results demonstrate the prevalence of the flight to quality for office space in our markets as more tenants are returning to work or are planning to do so after the summer. We expect to continue to benefit from this phenomenon as tenants are seeking well-operated, well located, well amenitized and environmentally conscious buildings for their employees. Our assets deliver on every one of those fronts. On the ESG front, we are proud to note that Paramount achieved the 2022 Energy Star Partner of the Year Award from the U.S. Environmental Protection Agency, EPA; and the U.S. Department of Energy. Our assets were recognized as being in the 26% among thousands of Energy Star buildings nationwide and recognized for demonstrating superior leadership, innovation and commitment to sustainability. As we look to advance our mission to reduce the portfolio's environmental footprint, sustainability is an integral part of our business. And we capitalize on every opportunity to further embed responsible practices into our daily operations. Turning to the transaction market. Activity was muted during the quarter. The second quarter saw roughly $1.3 billion of transaction volume in New York. Pricing for Class A and trophy assets continues to be strong and higher than the public markets imply. For our part, we have always maintained a disciplined approach with our capital and continue to monitor the markets carefully. To that end, we opportunistically repurchased 268,231 shares at a weighted average price of $6.96 per share or $1.9 million in the aggregate. As has been the case since the pandemic began, we continue to maintain sufficient liquidity, which amounts to about $1.3 billion at the end of the quarter. We have maintained a defensive posture since the onset of the pandemic with our portfolio of stable trophy assets and our proven ability to allocate capital, we remain well positioned for the long term. Let me wrap up by saying our operating goals continue to be clear. Our primary focus is on the lease-up of our available space and the reintegration of our tenants in a safe and healthy manner, while we are also always looking for opportunities. With that, I will turn the call to Peter.

Thanks, Albert, and good afternoon. During the second quarter, we leased approximately 250,000 square feet for a weighted average lease term of 9 years. Our second quarter leasing activity was more heavily weighted toward New York with approximately 153,000 square feet leased or 61.1% of this quarter's total leasing. Among the most significant transactions during the quarter was the previously mentioned expansion lease with SVB Securities at 1301 Avenue of the Americas. Our pipeline remains healthy as we continue to benefit from tenants pursuit of best-in-class buildings in both New York and San Francisco. At quarter end, our same-store portfolio-wide leased occupancy rate at share was 91.4%, up 90 basis points quarter-over-quarter and up 350 basis points year-over-year. As we look ahead, our remaining lease expirations are manageable with 0.6% at share expiring by year-end and approximately 7.3% at share expiring per annum through 2024. Turning to our markets. Midtown's second quarter leasing activity of approximately 4.2 million square feet, excluding renewals, was only 4.1% below Midtown's pre-pandemic 5-year quarterly average and was the fourth consecutive quarter of leasing activity in excess of 3 million square feet. Financial services continue to drive the Midtown market, contributing 49% of leasing activity during the second quarter, well in excess of the 32% share of occupancy the sector currently accounts for in Midtown. Midtown posted yet another quarter of positive net absorption during the second quarter, marking the third time in the past 4 quarters that Midtown has realized positive quarterly net absorption. Despite Midtown's elevated availability rate, tour activity and transaction volume for high-quality direct space in the market remains solid, particularly in well-located Class A buildings. Tenants, who are more discerning than ever before, are seeking high-quality real estate to compel their employees to return to the office and enhance all the benefits that can only be realized when people are working together in person. Tenant's increasing desire to raise the bar and improve the quality of their real estate has resulted in the flight to quality trend that continues in New York. Our New York portfolio is currently 92% leased on a same-store basis at share, up 130 basis points quarter-over-quarter and up 570 basis points year-over-year. During the second quarter, we leased more than 150,000 square feet at a weighted average term of 9.3 years. Our overall lease expiration profile in New York is manageable with 0.3% at share expiring by year-end and 7.3% at share expiring per annum through 2024. Turning now to San Francisco. Leasing activity increased quarter-over-quarter, but remains below its historical quarterly average. San Francisco market continues to take a measured approach to returning to the office. However, with the relaxation of the masking rules, San Francisco-based companies have begun to more clearly define their return to office plans. This has resulted in increased utilization as compared to earlier in the year. Despite San Francisco's elevated availability rates, the market for San Francisco's premier assets remains tight. And economics, particularly for view space and trophy assets remains strong. Similar to New York, flight to quality is a movement that continues to gain momentum in San Francisco. At quarter end, our San Francisco portfolio was 89.8% leased on a same-store basis at share. During the second quarter, we leased approximately 97,000 square feet at a weighted average term of 7.9 years with initial rents of approximately $105 per square foot. But the leasing we completed in the second quarter in San Francisco was largely comprised of several renewals, expansions and the addition of 3 new tenants to our portfolio that add to the strength and prestige of our tenant roster in San Francisco. Looking ahead, our overall lease expiration profile in San Francisco is manageable with 1.5% at share expiring by year-end and 7.5% at share expiring per annum through 2024. Our San Francisco portfolio is well positioned to manage through the current environment. With that summary, I will turn the call over to Wilbur, who will discuss the financial results.

Thank you, Peter. Yesterday, we reported core FFO of $0.24 per share, $0.02 ahead of consensus estimates and 10.8% higher than the prior year second quarter. Same-store cash NOI grew by a strong 5.6%. Much like the first quarter, the growth in the second quarter was once again driven by our New York portfolio, which grew by a robust 9.2%, while the same-store growth in our San Francisco portfolio decreased, as expected, by 2%. GAAP same-store NOI growth was even better at 9% portfolio-wide with New York at 11.6% and San Francisco at 4.1%. During the second quarter, we executed 20 leases covering slightly over 250,000 square feet of space at weighted average starting rents of $78.28 per square foot and for a weighted average term of 9 years. Mark-to-markets on 96,052 square feet of second-generation space was negative 5.3% on a cash basis and positive 0.5% on a GAAP basis. As a reminder, mark-to-markets are calculated on space that has been vacant for less than 12 months. Therefore, by definition, the 68,000 square foot lease with SVB Securities for the former Barclays space was not included in our reported mark-to-market figures. That lease had a positive mark-to-market of 3.1% on a cash basis and was basically flat on a GAAP basis. Given our strong second quarter financial results and our outlook for the remainder of the year, we are once again raising guidance, and this time, on several fronts. We now expect core FFO to be between $0.95 and $0.99 per share or $0.97 per share at the midpoint, $0.02 higher than the midpoint of our previous guidance. The $0.02 increase in core FFO at the midpoint is comprised of the following: $0.01 from better portfolio operations; $0.01 from higher straight line rent; $0.01 from lower interest expense, partially offset by $0.01 from higher G&A expense. We are also raising our expectation for same-store cash NOI growth by 50 basis points at the midpoint, resulting in new same-store cash NOI growth range of 1.5% and 2.5%. We also expect same-store GAAP NOI growth to be higher by 100 basis points at the midpoint resulting in a new same-store GAAP NOI growth range of 3.5% and 2.5%. As I referenced in my previous remarks, during our first quarter conference call, we continue to expect our same-store cash NOI growth to decelerate for the rest of the year as we contend with tougher comps in the second half of the year. Our year-to-date portfolio-wide same-store cash NOI growth sits at 4.7%, and the midpoint of our increased range is now up to 2%, implying flattish growth in the second half of the year. Same-store GAAP NOI growth, however, is expected to accelerate in the second half of the year. Our year-to-date portfolio-wide same-store GAAP NOI growth sits at 3% and the midpoint of our increased range is now up to 4%, implying a 5% growth in the second half of the year as we expect to benefit from higher straight-line rent commencements as the year progresses. Turning to our balance sheet. We ended the quarter with almost $1.3 billion in liquidity, comprised of about $525 million of cash and restricted cash and the full $750 million of undrawn capacity under our revolving credit facility. We have been very disciplined and mindful in managing our balance sheet for moments like this where there's a scarcity of debt capital and a rising interest rate environment. We have limited maturities and limited exposure to variable rate debt. Our outstanding debt at quarter end was $3.7 billion at a weighted average interest rate of 3.41% and a weighted average maturity of 4.6 years. 87% of our debt is fixed and has a weighted average interest rate of 3.26%. The remaining 13% is floating and has a weighted average interest rate of 4.43%. We have no debt maturing in 2022, and roughly 5% of our share of debt maturing in 2023. Lastly, we have updated our investor deck, which includes our schedule of free rent and the related burn-off, which increased by 6% from our April investor deck and now sits at $55.2 million at share. Our investor deck can be found on our website at www.pgre.com. With that, operator, please open the line for questions.

[Operator Instructions] Our first question comes from the line of Brian Spahn with Evercore ISI.

Albert, you mentioned the transaction market. And we saw 1336 Ave sell this month for about $625 a foot, which is meaningful above your implied price per foot for your New York City assets. So curious your thoughts there and where you see the transaction market heading into the back half of the year? And maybe Wilbur, if you could just tie in how the debt markets are evolving as well? And how that relates to the financing of office assets?

Yes. I would say that the transaction was an aberration. The seller is a private equity firm that have their own opinion about New York properties. And I think that asset in a normal market without that special situation there would have traded at better pricing. It's an asset that we looked at from time to time, it needs TLC. It has a couple of small tenant spaces. And I don't think this is reflective of the Class A and trophy office market in New York. As I mentioned, an aberration, a special circumstance. I think there was some debt that was coming due and had to be repaid and in this market it might be a difficult task.

Sure, I can just add to that, Brian, is the debt market right now is very volatile. CMBS is down significantly. I mean, it's down 29% relative to the first quarter CMBS issuances and about 50% from the fourth quarter of 2021. So what it's done is you have the bank market that's a little bit more open to do office deals right now selectively, and that's where some of the deals are getting done. It's getting done in the bank market.

Got it. Okay. And you mentioned share buybacks as well. So can you maybe just talk us through your capital allocation plans for the back half of the year? And what is the capacity to continue buying back stock just given where the leverage is at?

Yes. We have been historically very careful with capital allocation, and we are opportunistic in what we use the capital for our shareholders for. We have been -- when we buy back shares, it should be leverage neutral. And this was an approved assignment by the Board a while ago. And when the price was attractive, we took this opportunity. So we are very careful with our capital. And -- but we are in a special situation at Paramount in some ways because we don't have any leverage on balance sheet. Our leverage is on the assets. And the assets, as Wilbur was saying, in his remarks, our long-term finance. We have short-term financing of about approximately 15% overall, and we have cash on balance sheet that was earmarked by the Board for buyback opportunities. I can't tell you what we will do in the future here. I don't want to do that at this point. But we are opportunistic, and we -- all of our options to deploy capital and maintain, of course, appropriate liquidity. We have been through these kind of cycles before, and we want to be prudent. And I mean with our acquisition, for example, that we got criticized for -- of 1600 Broadway a couple of quarters ago, we put very little of our own equity, but it was a proven partner who wanted to buy that asset. We manage it for them. We put in 5% of the equity and get a return for 9% of the equity. That shows that we are very disciplined and stay opportunistic.

Our next question comes from the line of Vikram Malhotra with Mizuho Securities.

Maybe just Wilbur to start. Can you clarify 60 Wall, was the capitalized interest already in guide?

No. So thanks for the question, Vikram. I think you're referring probably to the component of the guidance and how we lowered interest expense in the guidance. I can tell you, it has nothing to do with the capitalization of 60 Wall interest. When we came up with our guidance at the beginning of the year, we did have a plan to only refinance opportunistically one of the debt that's maturing in 2024. And that was going to result in interest expense being higher because we have plan to potentially see if we could upsize that debt. That has been tabled because that was being done purely on an opportunistic basis, given the volatility in the markets, we table that for now. And that's where the decrease that you saw in the guidance from an interest expense perspective came from, it's not because of 60 Wall and the potential capitalization of interest there.

Got it. Okay. So it's potential -- so I mean you're not capitalizing that yet?

Yes. No, we haven't started capitalizing interest yet.

Got it. Okay. And then one of your peers just laid out sort of bigger picture risks to kind of trends and I guess their own specific NOI and headwinds to numbers for '23. I know, obviously, you're not going to give us '23 guide, but can you maybe just walk us through any big picture puts and takes we should be considering for 2023?

Well, big picture, I can say, we seem to be in a pretty good spot with regard to leasing. And you remember with the move of Barclays out of 1301, there was a reduction of leasing of the total portfolio. That is going to be picked up. We have very limited expirations. We have earmarked for what we need the capital to keep the portfolio in good shape. And the TIs and the commissions for the [indiscernible] have been done. And the situation should look reasonably positive.

Yes. I was just going to -- maybe add a couple on that. On the '23 expirations as far as moving pieces, Vikram, there's really two. One in New York; and one in San Francisco. In New York, in February '23, you have the Credit Agricole space that's expiring. That's about 300,000 square feet. And then you have in San Francisco, the Uber space expiring in July of '23. These both are known moveouts. And of course, Credit Agricole is at 1301, that is owned 100% by PGRE, so that will have a 100% impact on our numbers. Whereas Uber is at market center, and we own 67%. So that's going to have a pro rata impact on that number. But Peter will talk to you about the activity that we are seeing on both of those blocks. And -- but to answer your question, those are the big moveouts.

Yes. No, that was going to be my last question on the activity. But just to clarify, I guess what I meant more specifically was given the economic slowdown, all the announcements from tech companies, I guess what your peer was baking in was slowing -- slower leasing activity, higher interest costs, et cetera. So just those sort of factors that will influence the stabilized portfolio and then the other below-the-line puts and takes that one should think about. The expirations are definitely -- the commentary on the expirations are helpful, but just wanting some color on the other piece of the income statement.

I'll start and then maybe Peter can add on the activity. But in terms of the puts and takes, look, we've gone through COVID and our collections had been sector-leading during that period. And that's because we've been very, very prudent in making sure the tenants we transact with. So if you're asking for, hey, do we see anything as a headwind aside from the known moveout? The answer is no. That said, anything can happen vis-a-vis a bankruptcy or a tenant moving out, we do not have any reason to believe as we sit here today that any of that is happening in our portfolio.

Okay. Great. And then, Peter, just if you could give us some color. You mentioned the submarket in Midtown well positioned. On the assets where you're looking -- that you're looking to lease up, could you just give us a little bit more flavor on the pipeline, what type of tenants or the larger one -- full couple of floor users? Are there smaller tenants? Just maybe give us more color on the pipeline.

Well, I'll start in New York. At 1301, we, of course, have the remaining 200,000 square feet in the base of the building and then we have the former Credit Agricole floors, which as Wilbur noted, is 300,000 square feet and makes up roughly 3/4 of our 2023 lease roll in New York. And what I would say as it relates to that block of space is we've got a considerable amount of activity in the pipeline on that Credit Agricole space that rolls in February of 2023. We're feel encouraged by the demand. And it's typically larger tenants. This is a larger tenant-type building. It's a magnet for -- as you can see in the tenant roster, creditworthy-type tenants. The type of activity that we're garnering is no different. And we look forward to giving you an update as we move forward with some of the interest on those floors. As it relates to the base floors, I would say that we're left with the file, if you will, of the former block Barclays space. We've got floors 2, 3 and 4. They show extremely well. Recall, they have direct connectivity to the retail space, which we've positioned as a private welcome center, which allowed for tremendous branding opportunity on 52nd and 6. And we have really very good activity on those floors, too. So I can't, Vikram, say much more just yet in that regard. But suffice it to say, 1301 is where we're spending quite a bit of time. In San Frisco, market center, of course, where we get 234,000 square feet back. in July of next year. We all know that San Francisco's leasing has been -- has lagged. However, the better product has found ways to be productive. And what I would say at this point, although it's still early, is that we have some real interest, 555 Market, where that expiration is, represents a significant portion of the role in 2023. And we're heavily focused on going to market on those floors. We have some really nice activity there, too, which I look forward to updating you on. But once again, it's too early for me to say much more than that. But suffice it to say, we feel good about our pipeline. And we continue to think that our current pipeline will put us within our range.

Our next question comes from the line of Tom Catherwood with BTIG.

Peter, you said in your prepared remarks a comment about leasing pipeline remains healthy. Can you quantify the size of the pipeline right now and maybe how that compares to your usual midyear levels?

Sure. I'll start by saying, we had a productive quarter in San Francisco. You heard me say that we brought 3 new tenants into the full -- three tenants that we're really very proud to add to the San Francisco portfolio. That said, our pipeline based on leases out will bring us into our range. I want to be clear about that. It is more heavily weighted to New York. When you think about what we've done so far this year, our year-to-date leasing has been predominantly financial services, I should say, just about 50% financial services, which is not unlike what we're seeing in the broader Midtown market. Going forward, I would say it's more diversified in terms of industries represented, our pipeline that is. We've got financial services. We have tech. We have legal. I think that's one of the elements of New York that's oftentimes overlooked. Over the past several years, the city has diversified the tenant base significantly. And so while tech has been not nearly as active as they were 2 years ago, for example, financial services has stepped up, and we'll see that ebb and flow, I think, going forward. But suffice it to say, we feel good about our pipeline. We like the fact that it has a diverse range of industry represented, and we're looking forward to a productive second half.

And following a comment on San Francisco. Just a thought on the positioning of your portfolio. I understand what you were saying as far as flight to quality. Obviously, a lot of demand for the view space, the rents you're getting at One Market obviously, eye opening there. When you think of the base of your portfolio, especially as you work away from the water, what do you think needs to change to generate some more leasing momentum in that market? Is it small tenants coming back? Is it tech coming back? Is it business services? Is there something else once we get below the view space that finally drives a pickup in your assets there?

I think the San Francisco, as we said, over the last quarter is behind New York on coming back to the office move. And I think that's affecting leasing in combination with some general market changes in San Francisco. Each building is different, as we know. And the one that is maybe the softest right now is 111 Sutter because it's designed more for incubator and small tenant space. And the activity is not that great. But as you know, it's a very small asset in our portfolio, and we have a partner. And we own a minority stake. So I think the larger assets are doing better. And I'm optimistic that once things change to the better that San Francisco will come back as well. Peter and I were there recently, and the city looks really much, much better than before. I think it's important that the city government is taking more charge of security and safety. And I think that's part of what was necessary in the city. And it's taken care of and worked with, and we work on that.

Our next question comes from the line of Derek Johnston with Deutsche Bank.

So look, I've asked this question a couple of times. But I don't really know if I've gotten the answer. So I was hoping, Albert, it seems like a lot of companies are talking about expanded JV partnerships. And really, I'm just wondering, how deep is the investor pool right now, right? If it's sovereigns, if it's pensions? And maybe now versus previous cycles, and that -- especially for New York and potentially San Fran assets?

Yes. Very good question. We have a long history, even before we went public, long history of working with joint venture partners together. And the reason is that the assets we are focused on are mostly larger in size and dollar amounts. And we like to work with partners. It derisks for Paramount the equity exposure. And we really have diversified our group of potential joint venture partners over the last decade, so we could see -- we have had this last acquisition with 1600 Broadway a new developed partnership. And those relationships have proven very reliable and stable source of capital over the last 20 years. And we -- right now, I think people are all a little more conservative right now. When I say right now, means over the last couple of months, they want to see how the capital markets develop, how interest rates develop. But the general fundamental movement is still positive for the United States. If you look to other parts of the world, it's not as safe. I mean, the United States is still a safe haven and a stable economy. If you look at the currencies, the dollar is -- and that's currently maybe a little bit of a handicap that the dollar is so strong. So investors also like to have a little bargain on the exchange rate, even so they hedge mostly, in most cases, their investments. But we are very optimistic about working with partners in the future. And it's not like a group that runs in and out of mortgage. We have many of them, they've invested in multiple, multiple assets.

That's very helpful, actually. And then since we're on partnerships, and I know it's only 5%, but 60 Wall Street redevelopment, this has been taken out of service. Any possible time line, thoughts, conversions? There's certainly a nice fee stream to tap into here. So any updates on that somewhat under pressure submarket --

Well, we have looked at that, Derek, a while ago about converting the asset into other uses. And it's not feasible. The layout of the floors, it doesn't make sense. Actually, we looked at it a long, long time ago and coming up with different scenarios for our joint venture partners because internally, we wanted to discuss what would be the best capital investment for the renovation. And currently, we are envisioning to do a major renovation, as you know, and it will be a fantastic, nearly new kind of building. And we are sticking to keeping it as an office.

[Operator Instructions] Our next question comes from the line of Ronald Kamdem with Morgan Stanley.

Great. Just a couple of quick ones. Just first is just on the transaction activity, and I appreciate the comments about staying opportunistic, but is it fair to say if there's sort of an opportunity out there, would it have to be sort of with the JV partner? Maybe can you comment on just how much debt you're willing to take on to get something done. How are you thinking about that?

We look every time on an asset-by-asset basis and opportunity-to-opportunity basis, it depends on the underwriting and on whether it's a value add, whether it's a core. Normally, we wouldn't buy a core building. I say that, but we just bought the M&M building, which was as core as it can get. But that was an opportunity, a special opportunity for us where we could proactively buy something semi-off market and with the right partner and the right capital allocation for Paramount. We wouldn't have spent a lot of equity off of Paramount's precious equity on that asset. So -- but in general, I can tell you, we will, for the time being, not allocate a lot of Paramount equity. We will definitely do it in cooperation with a joint venture or joint venture partners, as we have done previously, and we would be looking more for real value-add opportunities.

Great. That's helpful. And then on the fee income guidance of $30 million at the midpoint, just thinking about sort of 2023 sort of to the question earlier, was there anything -- maybe can you remind us what -- if there's anything one-time or is that all recurring?

So Ron, as you may recall: one, let me just start by saying, obviously, we're not guiding to 2023 yet. That said, to answer your question, as it relates to '22, last quarter, there was a onetime rate. If you look at the results, last quarter, core FFO was $0.25 per share. There was $0.02 of one-timer in the first quarter of 2022 related to fee income. And so that should not be expected to recur. But that will get partially offset by development fees we'll start to receive 60 Wall as well. So no, but there was $0.02 of one timer and that's about $5 million in 2022 related to fee income.

Our next question comes from the line of Daniel Ismail with Green Street Advisors.

Great. Maybe just to start off, can you discuss the expansion of the Board and maybe what prompted that decision at the Board level?

Well, we had it changed in the last quarter, and this was something we -- the Board is constantly looking at refreshing and improving the diversity. And that's something that we promised our shareholders when we reached out to them. And we found the right person. We take this very seriously. And this was the right time, and this lady brings diversity to the Board. And we think that's great for shareholder value.

Got it. And then maybe just 2 quick questions on leasing for Peter. Maybe can you remind us where in-place rents sit relative to markets?

In-place rents relative to market. For a particular space, Danny?

No, just overall, where portfolio level rent these days would shake out relative to market rents.

Danny, that's a very hard question to answer. Obviously, you're dealing with product that is coming online, and that mark-to-market what you're trying to derive is a function of product mix that's available in the current environment. So I mean, I don't know if we're sitting here and marking to market the entire portfolio to tell you where the portfolio is relative to market. I can tell you that, obviously, rents are under pressure in this environment. I think we reported negative mark-to-market this quarter. Unfortunately, the place we did have the positive mark-to-market definitionally did not make it into our statistics. We have some -- so the Barclays block of space that we continue to lease will be at positive mark-to-market. But because it's been vacant for more than 12 months, it's not showing up in the statistics. And so not offsetting, if you will, the negative mark that we are reporting. And we saw a couple of reports where people highlighted that saying it was probably higher than what they thought. And that's why we added the color providing investors and analysts alike that there was a positive mark-to-market on a large piece of space that was done in the quarter that did not make it into our reported figures.

Got it. And I appreciate the complexity of trying to answer that question, so I appreciate the color. Maybe just last one for Peter on just concessions. You mentioned a few times, the stabilization of concessions over the last few quarters. I'm curious, though, with the announcement from some tenants, do you think that there's any slowing growth? Do you expect any potential upside in concessions from here? Or do you think we're at a level where concessions could be as high as they can get given where rental rates are?

I think it's hard to say. I do think they've stabilized, albeit at historically high levels. I think we'll have to see what happens in the economy going forward and in our market specifically. But I would say, for the time being, we have seen a leveling off, I would say, over the last year or so of concessions. In general, we have not, I don't think, felt compelled to give more than we would otherwise had to have give -- given a year ago, give or take, in order to transact. So I think to answer your question, for the time being though, we feel as though that they've held firm. If things would -- when things start to improve and velocity increases, when we will ultimately be able to sort of pull these in a little bit in remains to be seen. But for the time being, I think they have stabilized albeit at higher levels than certainly we've ever seen before.

Our next question comes from the line of Blaine Heck with Wells Fargo.

Just one for me, and I apologize if you guys addressed this. But looking at guidance, Wilbur, it looks like leasing and the lease rate guidance is unchanged. But same-store NOI is higher. So can you just help me reconcile what's driving that increase? Is it rents that are higher than original expectations? OpEx is lower or maybe something else altogether?

So it's coming, Blaine, from a variety of sources. Obviously, operating expenses is helping it. And then we had some early renewals that is helping the NOI beat on the guidance and the increase in the projection. As far as the leasing guidance, we left that unchanged. As Peter touched upon, when you look at year-to-date, we've done, call it, 450,000 square feet of activity. And the pipeline that Peter has is quite robust that gives us enough comfort that we fall within the range of the guidance that we laid out. Now it's going to be a tall order. It's a very tough market. We're sitting here in the summer months right now, but we have enough confidence based on the pipeline of activity and the leases at the signature that we can get to within the range of the guidance. But it was too soon for us to start to tweak that one way or another because of the lack of visibility we have probably into the fourth quarter. And we thought it makes sense for us given the visibility we have, given that we fall within the range to keep things as they are now and tweak it when we meet and talk next time. So we feel comfortable with the activity falling within the range. And whether that falls in the low end of the range or the target, that stuff will get tweaked when we meet next time.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Behler for any final comments.

Thank you all for joining us today. We look forward to providing an update on our continued progress when we report our third quarter earnings. Goodbye.