PGRE - NYSE

Good day, ladies and gentlemen. Thank you for joining us on Paramount Group's Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this conference call is being recorded today, July 31, 2025. I will now turn the call over to Tom Hennessy, the Vice President of Business Development and Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Before we begin, I would like to point everyone to our second quarter 2025 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 conditions. 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 2025 earnings release and our supplemental information. Before we begin our prepared remarks, I want to briefly address an initiative we announced shortly after our last call. In May, our Board of Directors initiated a review of strategic alternatives to maximize shareholder value. That review remains active, and we will provide updates when appropriate. However, given the ongoing nature of the review, we will not be commenting further or taking questions on the matter today. We appreciate your understanding and respect for the confidentiality and integrity of the review. With those ground rules in place, let's turn attention back to the main agenda and introduce today's speakers. Hosting the call today, we have Mr. Albert Behler, Chairman, Chief Executive Officer and President of the company; Peter Brindley, Executive Vice President, Head of Real Estate; and Linda Berberi, Executive Vice President, Chief Financial Officer and Treasurer. 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. Good morning, everyone. We delivered a strong second quarter with core FFO of $0.17 per share exceeding consensus by $0.03. The results were driven by robust leasing activity, continued operational discipline and a focused approach to capital allocation. Our performance reflects the strength of our Class A portfolio, the resilience of our markets and the depth and execution excellence of our team. The key driver of that momentum is leasing. We executed over 400,000 square feet of leases in the quarter, our highest quarterly total since 2019. This brings our year-to-date total to approximately 690,000 square feet. Notably, leasing this quarter was well balanced across our 2 markets with 52% in New York and 48% in San Francisco. That's a meaningful shift from recent quarters, where activity was more concentrated in New York. This balanced performance highlights the continued strength in New York and the growing traction we are seeing in San Francisco and the broad-based appeal of our portfolio. It also speaks to the tireless efforts of our leasing team, enduring quality of our assets and the sustained demand for high-quality space in premier submarkets. Our pipeline remains in good shape, and we are well positioned to carry this strength through the second half of the year. As a result of our strong first half performance and the momentum we are seeing across the business, we are raising full year guidance across all key metrics, including core FFO, leasing volume, cash NOI and year-end leased occupancy. Let me now turn to our markets, starting with New York. The city continues to demonstrate remarkable strength and depth, while headlines often focus on challenges in the broader office sector, what we are seeing on the ground tells a different story, a clear and sustained flight to quality. Tenants are prioritizing well-located, highly amenitized buildings that support their in-office strategies and reinforce their brand and culture. This dynamic plays directly to our strengths and continues to drive leasing velocity across our portfolio. Our performance this quarter reflects that alignment. Our New York portfolio is now 88.1% leased, the highest level since early 2022. Leasing was broad-based with strong activity across several of our flagship assets, where we continue to secure long-term commitments from high credit tenants. At 1301 Sixth Avenue, we welcomed a nationally recognized legal tenant to the tower floors and subsequent to quarter and we welcome the leading financial services company to the base. This brings leased occupancy to over 97% at the building. At 900 Third Avenue, we saw an expansion from another tenant, a global law firm that increased that buildings leased occupancy to 94%. These transactions underscore the continued demand for our high-quality space and highlight the strategic value of our portfolio to high-quality tenants. The key differentiator in the success continues to be the Paramount Club. This amenity has proven transformative, not only in attracting new tenants but in fostering a vibrant workplace community that enhances tenant satisfaction and retention. It exemplifies our commitment to delivering our hospitality caliber experience in a commercial setting, and it's a major reason why our buildings remain top of mind for tenants seeking best-in-class space. We continue to have a very robust leasing pipeline in New York, which Peter will cover in more detail shortly. I'm incredibly proud of how our team continues to execute in this environment, which is why we remain confident that we are exceptionally well positioned to continue capitalizing on the trends in the market. Shifting to San Francisco, the market remains in a period of recalibration. While overall leasing volumes are still below long-term averages, we are beginning to see encouraging signs of stabilization. Sublease space is being absorbed, and we are seeing renewed interest from tenants in sectors like AI, legal and professional services particularly for high-quality space in prime locations. That demand is translating into real activity. This quarter, we executed over 190,000 square feet of leasing in San Francisco, an acceleration that reflects both the quality of our assets and the improving sentiment in the market. Our buildings in the financial district, particularly One Market Plaza, 300 Mission Street and One Front Street remain highly competitive with tenants drawn to the location, infrastructure and flexibility. In this environment, our portfolio continues to outperform. While the recovery in San Francisco is gradual we believe it is steady and the long-term fundamentals remain intact. The city continues to attract world-class talent and innovation, and we are confident that demand for best-in-class office space will continue to follow. Our team on the ground has done an exceptional job navigating this environment and we remain focused on capturing our share of demand. As we look across the portfolio, our capital allocation strategy remains grounded in discipline, flexibility and long-term value creation. We continue to evaluate opportunities to unlock value through selective dispositions, joint ventures and reinvestment into our highest conviction assets. Our recent transactions at 900 Third Avenue and One Front Street are strong examples of this approach, allowing us to crystallize value while maintaining operational control and upside participation. At the same time, we remain focused on preserving balance sheet strength. We ended the quarter with over $534 million of cash. This liquidity gives us the flexibility to be opportunistic while also positioning us to navigate an evolving macro environment with confidence. With debt markets functioning again, especially here in New York, we are actively pursuing the refinancing of 1301 Sixth Avenue. Given the asset profile and the leasing success we have had there. We expect a smooth process, and we look to share the results with you all on our next call. More broadly, we continue to take the long view. We own and operate some of the most iconic office assets in 2 of the most dynamic cities in the world. We believe deeply in the enduring value of these markets, and we are committed to managing this portfolio with the same discipline, creativity and conviction that has defined Paramount for decades. With that, I'll hand over to Peter.

Thank you, Albert, and good morning. During the second quarter, we leased approximately 405,000 square feet, 52% of which occurred in New York and the remainder in San Francisco. This brings our year-to-date total to approximately 690,000 square feet leased, well ahead of our original guidance and providing support for our decision to raise full year guidance to 1.3 million square feet at the midpoint. The weighted average term for leases signed during the second quarter was 12.9 years, with starting rents in both New York and San Francisco above $90 per square foot. At quarter end, our same-store portfolio-wide leased occupancy rate at share was 85.4%, down 80 basis points from last quarter, driven primarily by the scheduled lease expiration of Google at One Market Plaza in San Francisco. In New York and San Francisco, tenants continue to prioritize premier centrally located amenity-rich buildings. We remain focused on further developing our tenant relationships, delivering market-leading hospitality, securing renewals for upcoming lease expirations and filling our vacant spaces. Year-to-date, 45% of our leasing activity has occurred on vacant space, 27% on space scheduled to expire in 2025 and the balance has served to derisk lease roll in 2026 and 2027. Our pipeline remains robust with more than 275,000 square feet of leases in active negotiation or advanced stage proposals, more than half of which are for vacant space and the balance for space scheduled to expire in 2025, 2026 and 2027. Beyond that, our pipeline continues to grow. And it is notable that in San Francisco, we have seen the number of tours and tenant proposals continue to accelerate this year. In the New York market, Midtown's leasing activity, excluding renewals, during the second quarter was 3.8 million square feet, 10% ahead of the 5-year quarterly average. The second quarter marked the seventh consecutive quarter leasing activity has outpaced the 5-year quarterly average in Midtown. And when combined with the first quarter, resulted in the strongest first half of the year since 2018. Availability continues to decline, particularly in Midtown's core submarkets and net absorption remained positive for the fourth consecutive quarter. Robust leasing demand, coupled with conversions of select office buildings, limited new development and the ongoing reduction of sublease availability has resulted in a scarcity of high-quality availability in Midtown's premier buildings. We continue to gain momentum and expect the ongoing absorption of quality space in our submarkets to support improved deal economics moving forward. The second quarter in New York was largely defined by the completion of 121,000 square foot new lease with the law firm Benesch at 1301 Avenue of the Americas. In addition and subsequent to quarter end, we completed 2 significant transactions within our New York portfolio, neither of which are included in our pipeline. At 1301 Avenue of the Americas, we completed 136,000 square foot lease with Piper Sandler on 2 full base floors in the building that were previously vacant. At 31 West 52nd Second Street, we completed a 133,000 square foot lease with a professional service firm on a block of floors that were also previously vacant. We are proud to welcome both companies to Paramount portfolio. At quarter end, our New York portfolio was 88.1% leased on a same-store basis at share, up 70 basis points quarter-over-quarter. Our lease expiration profile in New York is manageable with approximately 141,500 square feet or 2.6% at share expiring by year-end. Turning to San Francisco. Market-wide leasing activity continues to steadily improve as year-to-date leasing in San Francisco puts calendar year 2025 on pace to be the highest annual leasing total since 2019. While overall market conditions remain challenging, availability has started to decline, down 110 basis points quarter-over-quarter. San Francisco-based companies across a variety of industry have become increasingly engaged in reviewing their real estate strategy as evidenced by the increasing number of tours and proposals in our portfolio. This is particularly true of AI-based companies which have accounted for more than 55 deals or 800,000 square feet of leasing year-to-date and have become an increasingly large percentage of the tenants in the market profile. These companies acknowledge the importance of the office and continue to raise significant venture capital funding. In fact, approximately 68% of the AI-based demand in San Francisco originated from companies that are new to the market further reinforcing San Francisco's growing importance as an AI hub. During the second quarter, we leased approximately 193,000 square feet to leading tech and financial service companies and law firms. We remain laser-focused on the continued backfill of the former Google space at One Market Plaza and the portion of the JPMorgan space at One Front Street that expires later this year. As previously mentioned, planning is underway to deliver exceptional amenities at both One Market Plaza and One Front Street. We intend to leverage our experience from the Paramount Club and are confident our amenity plan will resonate with existing tenants and prospective tenants alike. At quarter end, our San Francisco portfolio was 75.1% leased on a same-store basis at share, down 720 basis points quarter-over- quarter, driven primarily by the known Google move out at One Market Plaza. Our lease expiration profile in San Francisco remains elevated with approximately 255,000 square feet or 19.7% at share expiring by year-end. With that summary, I will turn the call over to Linda, who will discuss the financial results.

Thank you, Peter, and good morning, everyone. Yesterday afternoon, we reported core FFO of $0.17 per share for the second quarter, exceeding Wall Street consensus estimates by $0.03. In the second quarter, we executed 14 leases totaling approximately 405,000 square feet with weighted average starting rents of $92 per square foot and an average lease term of 12.9 years. Mark-to-market on the 205,000 square feet of second-generation space was down 5.4% on a cash basis and up 2.6% on a GAAP basis. At quarter end, the lease occupancy rate of our same-store portfolio at share was 85.4%, down 80 basis points from the first quarter. By market, New York increased 70 basis points to 88.1%, while San Francisco was down 720 basis points primarily due to the previously discussed scheduled lease expiration of Google at One Market Plaza. Given our strong year-to-date performance and the momentum we expect to maintain through the remainder of the year, we are raising guidance across several key metrics. First, we are increasing and narrowing our full year core FFO guidance to a range of $0.55 per share and $0.59 per share with a midpoint of $0.57 per share. This represents a $0.03 per share increase from prior guidance at the midpoint. Second, we are raising our full year leasing guidance to a range of 1.2 million to 1.4 million square feet or 1.3 million square feet at the midpoint. This represents an increase of 300,000 square feet or 30% from our previous midpoint. Lastly, we are increasing our same-store lease occupancy guidance to a range of 86.9% and 88.9% with the midpoint of 87.9%. This represents a 250 basis point increase from our previous guidance and reflects the continued strength of our New York portfolio, where we are seeing sustained leasing velocity and the manageable lease exploration profile. As we noted on prior calls, occupancy in New York has stabilized and is now in an upward trajectory. In contrast, we expect to see near-term softness in San Francisco driven by volume of upcoming lease expirations. That said, we remain confident in the long-term recovery of that market supported by improving tenant sentiment and early signs of stabilization. Turning to the balance sheet. We ended the quarter with approximately $534 million in cash and restricted cash improved in part by the partial equity sales completed earlier in the year. This strong liquidity position provides us with meaningful flexibility as we move forward. Our total debt, excluding our noncore assets stands at $3.2 billion with a weighted average interest rate of 4.3% and a weighted average maturity of 2.4 years. Importantly, 73% of this debt is fixed at a weighted average rate of 3.5%, and our floating rate exposure is largely hedged, reducing our effective floating rate debt to less than 1% of the total. We have no core debt maturities until 2026 and our largest upcoming maturity, the $860 million loan on 1301 at the Americas is backed by high performing over 97% leased assets on a pro forma basis in a liquid and well-functioning debt market. We are on track to refinance the asset and look forward to sharing more on our next call. As part of our ongoing capital strategy, we also completed the sale of a 25% equity interest in One Front Street during the quarter at a gross asset value of $255 million. The transaction included a $40.5 million in seller financing and generated $11.5 million in net proceeds. The transaction allowed us to bring in a partner to help reposition the asset and unlock long-term value. Finally, with respect to Market Center, 1 of our 2 noncore assets in San Francisco. We designated the property as noncore in early 2024 and have since worked closely with the lender to facilitate a resolution. That process is now complete. The property has been formally disposed of and both asset and its associated debt have been removed from our portfolio statistics. This outcome is fully aligned with our strategy to preserve balance sheet strength focusing on core assets and maintaining flexibility to pursue value-accretive opportunities. We remain disciplined in our capital allocation strategy with a clear focus on preserving liquidity, derisking the balance sheet and investing selectively within our portfolio. This includes targeted leasing capital, strategic redevelopment and high-impact enhancements also the potential addition of a Paramount Club in San Francisco, all aimed at driving long-term value. With strong liquidity, prudent asset level leverage and a high-quality portfolio, we are well positioned to execute on our priorities and remain agile as market conditions evolve. With that, operator, please open the line for questions.

[Operator Instructions] We have a first question from [ Manas Abic ] with Evercore ISI.

Can we maybe talk a little bit about 1633 Broadway. I saw obviously, you had very great leasing in the quarter. I was just wondering what the tenant demand is for this specific building, how far you are along with covering maybe the Showtime Networks move out early next year. And what maybe the asking rents are that you asked for that specific building? Any color would be great.

1633, we have active showings and the building, as you know, has been solidly leased for the last over 10 years. And the retail is performing well. We are having in the retail segment, the last store that getting built out for a nice Italian restaurant. And then it's fully leased. Din Tai Fung in the retail is doing fantastically. It's apparently the highest grossing Din Tai Fung as we can hear in the group. And with regard to office, Peter is actively showing and he will give you more details.

Yes, [ Manas ], thanks for the question. So we are heavily focused on 1633 Broadway, slightly more than half of our lease roll in New York occurs at 1633 in 2025. Same applies to 2026 lease expiration. So we are contending with a little bit of lease roll. But as Albert mentioned, I think we did really very well procuring the retail mix that's now in place at the building. The building shows really very well. Asking rents range from, call it, $70 to $90 per square foot and activity at the moment feels very good. We're trading paper on that Showtime block of floors specifically. And we recognize that it's one of a very few block -- one of very few spaces in New York of that size, of that quality, and that's part of the reason we have the type of demand that we have currently. So more to come from us with regard to 1633, but we generally feel very good about our prospects. .

Okay. Great. And we started, obviously, the concessions came in at around, I think, $200 a square foot for the average leasing activity that you did in the quarter. We were just wondering if this is kind of like where you think going forward, that's kind of like where the price is currently for deals to be made or if that was maybe like artificially high in the quarter, just kind of like a trajectory here on like the kind of like going forward second-gen capital spending would be interesting to hear.

Are you referring to San Francisco, Manas?

I mean kind of broad across, but you can also divvy up to San Francisco, New York.

Yes. So in New York, we've said this now several -- for several quarters, concessions have certainly stabilized we expect net effective rent in New York to increase going forward, starting with the rental rate appreciation and then followed by, we think concessions starting to come in a little bit as the market continues to tighten. San Francisco TIs are varied. But if you look at our portfolio, TI as a percentage of initial rent went down in the second quarter as compared to the previous 2 quarters. And that was partly a function of New York coming down a little bit. But I think what you're probably referring to is San Francisco being elevated to some extent. And what we would say about that is that activity in San Francisco is revving up. The market continues to define itself. We did complete several long-term deals with terrific companies and law firms in the second quarter. We gave a little bit more in TI to secure those long-term transactions to secure occupancy in 2 buildings that we have 2 known move-outs in the current year and also to stoke momentum. And we think we've achieved that. We have a number of proposals at both One Front Street and One Market. When we look at our pipeline, it's becoming increasingly balanced between activity in both New York and San Francisco. And so that was some commentary around what I think you're asking about.

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

So I appreciate your commentary and transparency on the '25 and '26 large move outs, especially in the presentation, very helpful. You talked about Showtime, but I was hoping you could provide some commentary on any incoming interest on the other specific spaces you laid out, also including whether you'll be implementing any large-scale renovations on these spaces? And any color on the potential time line for those being ready to take on new leasing?

Yes. So Blaine, this is Peter. Thanks for the question. Big move-outs. So in 2025, the largest known move-out is Charter at 1633 Broadway and then you referenced Showtime, which is also at 1633 Broadway in 2026. We are making some improvements to improve the ground floor experience at 1633 Broadway that we think has certainly resonated with prospective tenants. But as I mentioned, when [ Manas ] asked the question, the lion's share or at least more than 50% in 2025 and again in 2026 of our lease expirations in New York will occur at 1633 Broadway. And so we do have opportunities. We are active with a number of prospects. I think you've seen the way in which we've executed elsewhere in the New York portfolio. More broadly, the demand in Midtown just continues to accelerate. It feels really very strong, and we think 1633 will be the beneficiary of that before too long.

Okay. That's helpful, Peter. Albert, I was hoping you could comment on the political situation in New York. There was a pretty clear negative initial reaction to the Democratic primary results, but it seems as though the leasing commentary on this call has remained generally positive. So wanted to get your thoughts on any potential headwinds that could come from the results of the mayoral race and whether you've seen any signs of hesitation from prospective tenants to sign significant leases driven specifically by concern around those potential changes at city hub?

Blaine, we have been through -- Paramount is in existence since over 40 years, and we have worked with all the administrations that New York had and there is a lot of discussion about it always before the mayoral race, and we are willing to work with whatever comes at us. And we haven't realized any kind of hesitation with regard to making long-term leases or staying in the city.

Okay. Great. That's helpful. And sticking with you, Albert, I understand you're hesitant to provide commentary on the progress made on the strategic review before it's kind of finalized and likely also the investigation into internal controls. But I was hoping you might be able to comment on whether the SEC investigation has any impact on the strategic review from a timing perspective or otherwise?

Blaine, the facts with regard to the SEC inquiry is all laid out in the 10-Q. It's reviewing certain historical disclosures I don't expect that this has any significant impact at all to the strategic review. .

The next question comes from Tom Catherwood with BTIG. .

Maybe starting with Albert or Peter, some of your peers have noted that San Francisco office leasing outside of AI tenants has been primarily exploration-driven as tenants look for refreshed space. Has that been your experience? And if so, how are you adjusting your leasing strategy to capture this demand?

Thanks for the question, Tom. San Francisco, in general, I would say, has really picked up across the board. It's very refreshing to see how the new city administration is securing -- I mean, building up security, cleaning up the city and working with commerce and being really positive towards business. And I think that has created the tremendous increase in demand and viewings and lease transactions. And our portfolio will be the beneficiary of it. We are in prime locations as you know, in San Francisco and Peter will give some more details on it with regard to tenancy. But we see activity across the board, not just AI, we see activity in legal and finance. And it's really refreshing and positive to see that after the last couple of years, especially since the pandemic, I think San Francisco was very hard hit and you know the vacancy and -- but the city has the ability -- first of all, it's relatively square footage-wise, a smaller market than New York significantly smaller, maybe 20% of it. And it turns around very quickly. And so I'm optimistic about San Francisco.

Yes, Tom, we are seeing quite a bit of relocation opportunities, which is really very encouraging. And to Albert's point, it's not just AI, while that's a really encouraging component of this market. We, in the most recent quarter, transacted with tech, law firms, 2 law firms, financial services. So we're seeing a real nice diverse range of industry activating in this market out looking for space, considering their real estate moving forward. And so we think that's really very encouraging, not to mention these tenants are willing to enter into long-term deals as reflected in our own metrics. So we think it's really very encouraging. I can say in the last 4 to 6 weeks, the number of tours and proposals has increased significantly. And as we look at our pipeline beyond what we have defined as sort of leases out or advanced stage, it's becoming increasingly balanced between New York and San Francisco in terms of proposals that we're aiming to advance and so forth and so on. So San Francisco is beginning to heal. Availability was down 110 basis points quarter-over-quarter. There are certain data points that suggest things are really starting to percolate. But just as it relates to the experience we're having in the field, we are very active and things seem to be turning, which is encouraging.

Got it. Appreciate those thoughts. And then, Peter, looking back to New York, given that leased occupancy and a few of your Midtown assets is now well into the 90s. Where are you pushing rent? And are there buildings where you've started to test lower concession offerings? Or is that part still a ways off?

Yes. So it's interesting. Of the 38 million, 39 million square feet of availability in Midtown, 80% of it is concentrated on floors 24 and below. And so I think it's a byproduct of the flight-to-quality phenomenon that we've experienced. In other words, there's just a real scarcity of high-quality upper floor type product. And we are exercising pricing power in every instance, just about in our Midtown portfolio and starting to push rents. That will be the first, I think, component that drives net effective rents upward. In terms of concessions, they have remained fairly flat. Our expectation is that maybe free rent comes in a little bit followed by TI. But whatever the case, they have remained fairly flat, but we certainly are identifying in buildings that are now well leased when and where we have an opportunity to start to sort of leverage our high occupancy to improve the overall economics of these deals. But suffice it to say, when and where we have availability on upper floors, we are really starting to push in all of our Midtown properties.

Ladies and gentlemen, as there are no further questions, I would now like to hand the conference over to Albert Behler, Chairman, Chief Executive Officer and President for the closing comments.

Thank you all for joining us today. We'll be speaking again when we report third quarter results. Goodbye. .