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EARNINGS CALL TRANSCRIPT
EARNINGS CALL TRANSCRIPT 2015 - Q2
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Executives

Jacques Cornet - ICR Albert Behler - Chairman, Chief Executive Officer and President Michael Walsh - Executive Vice President, Chief Financial Officer and Treasurer Ted Koltis - Executive Vice President, Leasing Vito Messina - Senior Vice President, Asset Management Wilbur Paes - Senior Vice President and Chief Accounting Officer.

Analysts

Vance Edelson - Morgan Stanley Jamie Feldman - Bank of America Merrill Lynch Jed Reagan - Green Street Advisors Brendan Maiorana - Wells Fargo Ross Nussbaum - UBS Rich Anderson - Mizuho Securities Gabriel Hilmoe - Evercore ISI.

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Paramount Group Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note that this conference call is being recorded today, August 7, 2015.

I will now turn the call over to Jacques Cornet with ICR..

Jacques Cornet

Thank you, operator and good morning. By now, everyone should have access to our second quarter 2015 earnings release and supplemental information. Both can be found on the Paramount website at www.paramount-group.com in the Investors section.

Before we begin our formal remarks, we need to remind everyone that the discussion today will include forward-looking statements. These forward-looking statements, which are usually identified by the use of the words such as will, expect, should or other similar phrases are not guarantees of future performance.

These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect and therefore you should exercise caution in interpreting and relying on them.

We refer all of you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. We encourage investors to review our regulatory filings including the Form 10-Q for the quarter ended June 30, 2015 when it is filed with the SEC.

During today’s call, we will discuss 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 earnings release and our supplemental package.

Hosting the call today, we have Albert Behler, Chairman, Chief Executive Officer and President of the company; Michael Walsh, Executive Vice President, Chief Financial Officer and Treasurer; Ted Koltis, Executive Vice President, Leasing; Vito Messina, Senior Vice President, Asset Management; and Wilbur Paes, Senior Vice President and Chief Accounting Officer.

Management will provide some opening remarks and we’ll then open the call to questions. With that, I will turn the call over to Albert Behler..

Albert Behler Chairman, Chief Executive Officer & President

Thank you, Jacques and good morning. We appreciate everyone joining us today. We are happy with how things are developing at Paramount, especially the leasing progress we made during the quarter and the momentum we carry into the second half of the year.

During the second quarter, we leased 200,000 square feet at rates that are indicative of our continuing efforts to unlock the growth and value in our portfolio as we continue to execute our strategy of delivering long-term cash NOI growth. We are taking advantage of our strong markets to increase in place below market rents as leases expire.

Our results for the first half of the year included cash mark-to-markets of 15.7%, which highlight these efforts. We are successfully leasing our available space and are happy to report that we are now over 90% leased in Washington, DC, up 970 basis points since the IPO. Additionally, we remain over 95% leased in New York and San Francisco.

To put our leasing efforts in perspective, we have leased nearly 900,000 square feet in the past nine months. Half of these leases have commenced and the rest will begin in the next six to nine months.

Over time, the rent abatements associated with these leases will burn off resulting in corresponding cash NOI and earnings growth, but we are far from done. We are currently in active negotiations with various tenants for over 600,000 square feet of space. We continue towards our goal of leasing 1 million square feet for the year.

As we have discussed before, our lease expirations are lumpy and we are mindful that we have 1 million square feet expiring in the next 12 months.

While we are aware of the near-term impact that these lease expirations will have on our earnings in the second half of 2015 and into 2016, we view this dynamic as a meaningful opportunity to capture additional growth as we mark these leases to market.

We also continue to redevelop and reposition our properties where we can further capitalize on the quality of our buildings. During the quarter, we broke round on our redevelopment project for the public plaza at 1633 Broadway.

One Market Plaza’s lobby and retail renovation continues to track on budget and on schedule for completion by the fall of 2015. We are excited about the renovation here and very proud of this asset. We encourage you to tour the property.

During the second quarter, we raised an additional $95 million for Fund VIII, our real estate debt fund, bringing total commitments to approximately $580 million, of which we have invested $51 million.

We stay involved and look at every real estate opportunity in our markets and this business gives us additional insight in evaluating equity investments for Paramount. We continue to uphold a disciplined acquisition strategy that has guided our decisions for the past 20 plus years.

Subsequent to the second quarter, Fund VII, our real estate equity fund, ended into an agreement to purchase 670 Broadway, a 77,000 square foot creative office building located in the NoHo section of Manhattan.

The property is currently fully leased with below market leases expiring in the next 12 months, creating a unique opportunity for us to reposition and release the asset. It is important to note that this transaction was sourced off market, a testament to our deep industry relationships. With this acquisition, Fund VII will be fully invested.

Our outlook remains positive on the markets in which we operate. We have seen an uptick in activity as demand remains strong and availability for Class A space in our markets remains limited. These factors provide a favorable dynamic as our leases expire.

The Class A space that we have is among the best tower space in the market, allowing us to further capitalize on this trend. To sum it up, we are proud of the progress we have made. Along with our current momentum, the company has a strong foundation to generate same-store NOI growth for several years in the future.

With that overview, I will now turn the call over to Vito to discuss the second quarter leasing activity..

Vito Messina Senior Vice President of Asset Management

Thank you, Albert. In the second quarter, we leased 199,972 square feet at a weighted average initial rent of $71.84 per square foot at an average term of 11.1 years. Tenant improvements and leasing commissions were $7.38 per square foot per annum, or 10.3% of initial rents in line with first quarter leasing activities.

This activity, offset by lease expirations, increased our portfolio wide leased occupancy to 94.8% at June 30, 2015, up 20 basis points from the last quarter and 90 basis points from year end.

Of the 199,972 square feet leased during the quarter, a 138,232 square feet represents leases on second-generation space for which we achieved a positive mark-to-market of 15.4% on a cash basis and 19% on a GAAP basis.

The majority of our second quarter leasing activity or 137,975 square feet was in New York at a weighted average initial rental rate of $78.58 per square foot at an average term of 10.5 years. Tenant improvements and leasing commissions were $7.43 per square foot per annum, or 9.5% of initial rents.

Of the 137,975 square feet leased in New York, 126,306 square feet represent that leases on second generation space for which we achieved a positive mark-to-market of 14.4% on a cash basis and 17.3% on a GAAP basis. At 1325 Avenue of the Americas, the 15th to 16th floors became vacant effective June 30, 2015.

And we are able to sign a lease for the entire 53,000 square feet with a new tenant whose lease begins at the end of the third quarter of this year. Additionally at 1633 Broadway, we secured a lease with an existing subtenant on a direct basis on one full floor or 52,000 square feet.

Turning to Washington DC, the portfolio is 90.2% leased as of June 30, 2015, up 170 basis points from the prior quarter and 970 basis points over the last three quarters. During the second quarter, we leased 28,863 square feet in DC, all of which was first generation space at 425 Eye Street.

This activity brings that property’s leased occupancy to 96.4%, up 750 basis points from the first quarter. In San Francisco, our property was 97.8% leased as of June 30, 2015, up 110 basis points from the last quarter.

During the second quarter, we leased 33,134 square feet, of which 11,926 square feet represented our share of second generation leases for which we achieved a positive mark to market of 27.9% on a cash basis and 39.1% on a GAAP basis. We continued to see strength in leasing trends and mark to market in this building.

We expect to further benefit from these trends as over 14% of our leases roll through the end of 2016 at rental rates significantly below market. Our biggest tenant in One Market is Google, which has recently leased an additional 22,000 square feet and now leases approximately 18% of the building.

With that, I will turn the call over to Ted who will provide an update of what we are seeing in each of our markets..

Ted Koltis

Thank you, Vito. What we are seeing is a healthy pipeline in all three markets. As Albert commented earlier, we have strong momentum heading into the second half of the year with negotiations in various stages on over 600,000 square feet of available space.

In Manhattan, we remain focused on availabilities at 1633 Broadway and 1301 Avenue of the Americas. Strong market trends, notably in large block activity correspond directly with our availabilities.

As we have seen over the last year, there continues to be growing activity for the larger deals in Midtown as compared to a slowing for such deals in Midtown South and Downtown. Our assets are benefiting from this trend as well as low inventory levels along the Westside and 6th Avenue submarkets.

On the Westside, activity remains solid and we continue to see strong demand from growing TAMI tenants. At 1633 Broadway, our large floor plates can provide for efficient open layouts, which are well suited to these types of tenants. We are also seeing increased activity from financial services tenants and from the traditional tenants for our space.

On 6th Avenue, we continue to see consistent activity, especially on larger spaces. As we have mentioned before, the vacant floors at 1301 Avenue of the Americas and the space rolling next year are primarily the top of the building. These are arguably the best available large blocks currently on 6th Avenue.

Similar to 1633 Broadway, we are in active negotiations on a number of situations at 1301 A of A. The 5th Avenue submarket continues to see higher prices and less availability. Inventory is extremely limited and we don’t see this environment changing any time soon and are therefore able to continue to increase rates.

Turning to Washington DC, we like where our assets fit competitively within the CBD, and given our steady success over the last few quarters, we remain confident. There is a limited supply of trophy space and we expect our assets along Pennsylvania Avenue will benefit meaningfully from this market dynamic.

In addition, as mentioned last quarter, we saw increased activity on the peripheries of the CBD and as a result, 425 Eye Street in the NoMa District had significant lease up during the quarter and continues to have strong activity on the limited space remaining there.

Turning to San Francisco, the market remains extremely healthy with very low inventory, especially along the Mission Street and Market Street corridors, which directly benefits One Market Plaza. The redevelopment of the lobby and retail are nearing completion and will enhance our already strong competitive position.

And although we don’t have much space available until next year, we feel very good about our ability to capture higher rents when leases expire. With that, I will turn the call over to Mike, who will discuss the second quarter financial results in more detail..

Michael Walsh

Thanks Ted. Turning to our financials, our core FFO was $0.22 per share for the second quarter, including $0.02 per share of carry interest from our funds business due to changes in market value. FFO for the quarter was $0.25 per share and includes $15.8 million for our share of unrealized gains on interest rate swaps.

This was partially offset by $5.9 million of transfer taxes, $2.3 million of acquisition and transaction-related costs and $721,000 of predecessor tax true up.

Our portfolio ended the quarter at 92.9% occupied, up 1.6% from the first quarter and included $16.1 million of straight line rent and $900,000 of net above and below market lease revenues on a consolidated basis. $10 million of this quarter’s straight line rent was attributable to free rent.

Turning to our balance sheet, we ended the quarter with ample liquidity with $438 million in cash and $800 million available under our revolving credit facility. Our outstanding consolidated debt of $2.9 billion is effectively unchanged from last quarter with an average interest rate of 5.5%.

Our net upcoming maturity in December 2016 is a $926 million mortgage loan on 1633 Broadway with a weighted average interest rate of 5.39%. We are currently exploring options to refinance this debt early. Our leverage metrics remain very conservative with overall net debt to total enterprise value of 30.6% and net debt to adjusted EBITDA of 5.9 times.

In response to ongoing investor dialogue, we continue to enhance our supplemental package to include additional information that we believe will be helpful. This quarter, we provided additional disclosures for our consolidated and unconsolidated joint ventures, OP level result and our pro rata share of maturing debt.

Moving to our earnings guidance, we expect full year 2015 core FFO attributable to Paramount Group Inc. to be between $0.79 and $0.81 per share. Our pro rata share of cash NOI for the six months ended June 30, 2015 was $155.8 million.

We expect our pro rata share of cash NOI for the second half of 2015 to be $7 million to $11 million lower than the first half, primarily due to the 500,000 square feet of lease expirations in the second half of the year. This will be partially offset by the burn off of free rent from previously signed leases.

Lastly, we assume no one-time events or capital markets transaction in our guidance.

With that, operator, please open the lines for questions?.

Operator

Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Vance Edelson from Morgan Stanley..

Vance Edelson

Terrific. Good morning guys.

At 2099 Pennsylvania Ave the lease percentage has plateaued some despite the shortage of trophy space in the neighborhood, so how do you feel about the prospects for finding additional tenants there before year end?.

Albert Behler Chairman, Chief Executive Officer & President

Vance, we feel positive about finding the prospects there. I mean the trophy market in DC is very tight. Along Pennsylvania Avenue, there really isn’t any direct availability. So we are seeing significant activity from tenants on that space. And we feel pretty good about where we stand..

Vance Edelson

Okay, great to hear.

And then it looks like the first quarter 2016 expiration figure came down some, does that suggest there was an early renewal, if you can just fill us on that?.

Vito Messina Senior Vice President of Asset Management

Hey, Vance this is Vito. No, there was not an early renewal. It was expiring on the last day and it moves to the first day of the second quarter. And I think we have tried to footnote that in the supplemental as well..

Vance Edelson

Okay, got it. And then from Mike, you mentioned exploring options to refinance early the $926 million of debt coming due next year.

Can you give us some feel for what the interest rate savings might be and what the timing might be? Are we talking about the next quarter or two or might this drag into next year?.

Michael Walsh

We are actively working on it. I mean, the current rate is 5.39% and it depends on what tenure we go to for this particular refinancing. And we are evaluating that currently..

Vance Edelson

Okay, great. I will get back in the queue. Thanks..

Operator

Our next question is from Jamie Feldman, Bank of America Merrill Lynch..

Jamie Feldman

Thank you and good morning..

Albert Behler Chairman, Chief Executive Officer & President

Good morning, Jamie..

Jamie Feldman

So, I guess, Mike, in terms of the guidance, you had mentioned $7 million to $11 million less.

Can you just talk us through what you are thinking on some of the larger leases? I know Morgan Stanley, maybe just talk through the big lease expirations and what’s in the guidance?.

Michael Walsh

Well, we gave the guidance of where we think our share of cash NOI will be based on the lease expirations that we have. I think talking about the individual leases themselves it’s more for Ted and Vito to handle..

Ted Koltis

Sure. Well, as we said in the past, we have expirations beginning 7/1 at 1633 two floors in the base of the building that expired on 7/1/2015.

And then as we have talked about again in the past, you have BofA on 150,000 square feet that expires 9/1/15, Morgan Stanley, October 31, 2015 and then Kasowitz Benson for two floors there on November 30, 2015..

Albert Behler Chairman, Chief Executive Officer & President

And so, I mean just to add to that, as you heard, we renewed one of the existing subtenants on the BofA floors. We continue to market the rest of the floors were in various stages of negotiations with several prospects on those floors.

I will say that we are just continuing to talk to existing tenants such as Morgan Stanley about staying in the space and remaining in the space. And we feel very good about where we stand in negotiations on several of those spaces..

Jamie Feldman

Okay. But I guess other than the subtenant lease in terms of the large leases you have expiring between now and the end of the year. Since last quarter, it sounds like nothing has really changed. I am sure you are having lot of conversations, but....

Albert Behler Chairman, Chief Executive Officer & President

Yes, we are having lot of conversations. I mean, we are not sitting still. Things are moving forward. We just don’t have anything definitive to report yet..

Michael Walsh

Okay, alright. But it’s more than – Jamie, it’s more than conversations. I mean, we are in various proposal stages with – as I mentioned in my remarks or about 600,000 square feet and the majority of those are on 1633 and 1301..

Jamie Feldman

Okay.

And then I guess back to the guidance again that unrealized gains, how did you model that for the rest of the year and also the volatility to that number?.

Michael Walsh

Yes, Jamie, it’s nearly impossible to come up with what we think the changing market value is going to be for our share of fund to business. So, in the guidance, we have not assumed that there is anything in the way of increases or decreases in the fair value of our fund business.

So, the only thing that we have is if you look at, I think, it’s Page 14, you will see our share if you would have backed that out and used that run-rate. That’s probably a good starting point..

Jamie Feldman

So, you are saying the second quarter run-rate or just that is flat, is zero for the rest of the year?.

Michael Walsh

The carry interest components we are assuming is zero for the rest of the year..

Albert Behler Chairman, Chief Executive Officer & President

And we are not projecting any future increases or decreases in the market value. So, you would not in our guidance have any unrealized gain projections whatever is in the number is two to six months..

Jamie Feldman

Got it. Okay.

And then any just latest thoughts on capital markets, I know you had the one acquisition through the fund, but are you seeing any change in underwriting or demand for assets or maybe increasing demand for assets as we are heading closer to rate hikes?.

Michael Walsh

Well, Jamie, with regard to acquisitions, there is really nothing definite that we can report at this point. As we mentioned on earlier calls, we are constantly seeing deals and analyzing them for the company as well as for Fund VIII, Fund VII as we have mentioned is now fully invested.

And we want to remain selective and disciplined in our approach and we are comparing external to internal, including joint venture interest..

Jamie Feldman

Okay.

And then just a final question for me, can you remind us when the redevelopment at the base of 1633 will be done?.

Michael Walsh

Yes. We broke ground as we have mentioned on the last call in May and we expect completion of that space in the fourth quarter of 2016..

Jamie Feldman

Okay.

And then, any update on conversations for that space?.

Michael Walsh

Well, we have a lot of conversations, but we want to be very selective on the retail tenancy and as our headquarter building was a tremendous exposure to upscale office tenants and we want to keep it in first class shape. And so we are very selective. We have lot of interest for the space.

The good news is that in the meantime, retail rents are still climbing up..

Jamie Feldman

Okay. Alright, thank you..

Michael Walsh

Thank you, Jamie..

Operator

Our next question is from Jed Reagan, Green Street Advisors..

Jed Reagan

Good morning, guys..

Michael Walsh

Good morning, Jed..

Albert Behler Chairman, Chief Executive Officer & President

Good morning, Jed..

Jed Reagan

Hi. You talked about the 600,000 square feet of leasing in the pipeline.

I am just curious how that compares to maybe this time last quarter? And then also you I think kind of touched on pickup in financial services activity, I wonder if you could just give a little bit more color on that? And if that includes the big banks and where are you seeing that?.

Albert Behler Chairman, Chief Executive Officer & President

Sure. I will say that. And I think the 600,000 is probably a little bit stronger this quarter than it was in the last quarter in terms of where we are with proposal stage and the depth of our conversations.

And specifically to with regard to financial services tenants, we are seeing more towards and more proposals from financial services tenants on both properties, specifically, really 1301 has seen an uptick in that activity..

Jed Reagan

Is that more sort of smaller boutique kind of asset management type firms or is that include the big banks?.

Albert Behler Chairman, Chief Executive Officer & President

It includes – it definitely includes the big banks. And it’s probably the mid-tier type financial services as well just due to the size of the floor plates in the blocks..

Jed Reagan

Okay, that’s helpful.

And then the 670 Broadway deal, I realized that’s pretty small into the fund, but just wonder if you can talk a little bit more about the economics behind that deal, maybe a cap rate and then some of the attributes that made that deal attractive to you guys? And then also just how you determined to acquire that building through the fund and not kind of fully on balance sheet for Paramount?.

Albert Behler Chairman, Chief Executive Officer & President

Yes. Well, let me first answer the question why not for Paramount. It really was a relatively small sized asset. And the whole building quality would not have fit really the Paramount portfolio, but the Fund VII has a different goal.

It’s more opportunistic focused and we see substantial upside as we had reported the majority of the tendency is moving out of that building. We will upgrade and renovate it. And we have a lot of interest for retail as well as office tenants for the property.

It’s in a unique location and we are quite proud that we could buy it on an off-market situation..

Jed Reagan

Can you quantify the mark-to-market potential on in-place rents?.

Albert Behler Chairman, Chief Executive Officer & President

It’s substantial. Let’s leave it at that. These partly were long, old leases that – and especially on the retail and of the property that market, the NoHo market has really changed drastically over the last couple of years. And so you will see a substantial increase in the rents in that property..

Jed Reagan

Okay, that’s helpful.

And just as a follow-up to that, now that you have fully deployed Fund VII, are you thinking about rebooting another equity fund at this point?.

Michael Walsh

We are not planning on doing any other new funds at this point. As we have mentioned Fund VIII, which is a mezzanine debt fund, we raised additional equity – additional funds for this. We are now at $580 million, the goal might be up to $700 million, but that’s a mezzanine debt fund and we want to focus on that.

Besides the focus, the main focus of course is on Paramount growing our asset base and finding the right asset, which is not easy in this relatively expensive market..

Jed Reagan

Should we think of fund date as sort of the last of the fund business or might you still at some point in the future consider additional funds?.

Michael Walsh

I wouldn’t totally say that there would be no funds in the future. And we always have made that same statement. But for the time being, it will take a while to deploy that fire power and we will focus on the PGRE investments in the meantime..

Jed Reagan

Okay, great. Thanks very much..

Operator

Our next question is from Brendan Maiorana from Wells Fargo..

Brendan Maiorana

Thanks..

Albert Behler Chairman, Chief Executive Officer & President

Hi, Brendan..

Brendan Maiorana

Hi, guys..

Michael Walsh

Good morning..

Brendan Maiorana

Good morning. So Albert, you mentioned you felt pretty confident in the 1 million square foot leasing goal for the year.

I think you guys have done 355, year-to-date, and then you guys have talked about kind of the 600 of prospects, it sounds like it’s pretty far along, is it fair to think that there is some leasing that’s going to happen that’s not in that prospect pool that will get you to the 1 million square foot?.

Albert Behler Chairman, Chief Executive Officer & President

Well, we have – as we had mentioned, I think it was the first earnings call, it’s very common that especially for larger leases that they are executed in the fourth quarter of the year. So we are very confident that we achieve the 1 million square feet as planned.

And as Ted had mentioned before, there is a lot of activity, especially for building 1633 Broadway and 1301. And we are very confident that this can be achieved, may be overachieved..

Brendan Maiorana

Okay, great.

And are there – I think you guys detailed a couple of the big tenants that are expirations that are expected or potential move outs, are there – is there some renewal activity in the balance of that 500,000 square feet that expires this year that’s maybe not part of that 600, but is likely to renew?.

Albert Behler Chairman, Chief Executive Officer & President

Well, we – at this point, we don’t want to really go into specifics, because we are in various negotiation stages and I hope you appreciate that. There is confidentiality agreed upon – between parties. And there is a potential that some of the tenants that you might be considering to move out, will stay ultimately..

Brendan Maiorana

Yes. No, I didn’t want to sort of get into tenant specifics. I was just wondering if there is probably 600,000 square feet that you guys talked about that’s the pipeline, those are probably large tenants.

Are there – is there some renewal activity just in maybe some of your bread and butter smaller tenants that’s likely to happen, and maybe that’s not part of that larger pool of 600 that could happen, I am not sure whether or not that’s the case?.

Albert Behler Chairman, Chief Executive Officer & President

Yes. Well, there is clearly a pool of also smaller tenants who would renew in our portfolio..

Brendan Maiorana

Okay, great. And then this one might be for Mike. So you mentioned $10 million of free rent, I think it’s up a little bit from where it was last quarter, which is good. So that’s $20 million sort of annualized for the back half of the year.

How should we think about – how much of that is likely to come online in the remaining six months compared to the overall NOI decline that you have highlighted of the I think 7 to 9 – or $7 million to $11 million for the back half of the year?.

Michael Walsh

The $10 million is probably a good run rate for the rest of the year. And it will burn off in ‘15, but more will burn off in 2016. I would expect that as we sign leases that we are talking about that, that will get replaced as well, but it will turn itself into cash in the next 6 months to 12 months..

Brendan Maiorana

Okay. But it sounds like you don’t expect a lot of that to turn into cash in the back half of the year. So the downdraft in NOI is it really being offset much by leases commencing on a cash basis..

Michael Walsh

It’s more driven by the expirations that we have in the second half of the year. As you look at the schedule and the items that Vito talked about, with a lot of those spaces, there will either be a free rent period or there will be down time and that’s what we have taken into consideration in our numbers..

Brendan Maiorana

Okay, very helpful. Alright, thanks guys..

Albert Behler Chairman, Chief Executive Officer & President

Thank you..

Operator

Our next question is from the Nick [indiscernible] from UBS..

Unidentified Analyst

Thanks.

If I look at 1633 Broadway, 1301 Avenue, Americas and 3025 Avenue Americas, I mean altogether you have about 1 million square feet expiring I will call in the next year, what are you thinking about as far as the rent mark to market on that space at this point in those different buildings, where it’s a markup or flat?.

Michael Walsh

I think, what we have achieved for the first two quarters is very, very healthy. And we are hoping that we are going to continue to achieve those types of numbers..

Albert Behler Chairman, Chief Executive Officer & President

Yes. I mean overall, it should be a positive, I would say, but it’s tough to pin what that number would be, what that percentage would be..

Unidentified Analyst

Okay.

I guess maybe building specific like 1301 Avenue Americas, you guys having expirations next year of rents around $70 range, I mean where you have sort of rents pegged in that building today for that type…?.

Albert Behler Chairman, Chief Executive Officer & President

Well, I can tell you that the asking rents on the spaces that we have available will start with 8 to 9, so..

Unidentified Analyst

Okay.

And then at 1633 Broadway, I mean that space I mean like the [indiscernible] space, they are paying $75 - $76, what are your thoughts on that?.

Albert Behler Chairman, Chief Executive Officer & President

Yes, we expect to be better..

Unidentified Analyst

Okay, alright. Thanks, that’s helpful. And then I think Ross had a follow-up question..

Ross Nussbaum

Yes. Hi guys good morning.

I had two questions on your FFO to Core FFO reconciliation, the $2.3 million of acquisition and transaction-related costs, what exactly did that relate to if Paramount didn’t actually acquire anything on its own this quarter?.

Michael Walsh

So the majority of it had to do with some costs associated with raising the $95 million for Fund VIII. And there were some transaction related costs associated with looking at several deals that we viewed..

Ross Nussbaum

And you guys thought there was an appropriate add back to get to core, even though raising funds is sort of part of the business?.

Michael Walsh

It’s one time in nature, Ross. So we decided that it was appropriate to break it out there..

Ross Nussbaum

And then maybe same question on those transfer taxes, can you discuss what that $5.9 million was, the sale of shares by former partner?.

Albert Behler Chairman, Chief Executive Officer & President

Yes. This was an IPO-related situation. A partner of ours had the option to sell shares, and PGRE agreed to cover a portion of the taxes. It’s a one-time item, it’s unique. And there is no additional liability for taxes for the future..

Ross Nussbaum

So there is nothing else like that left from any other former partners, IPO related this is all we are going to see again?.

Albert Behler Chairman, Chief Executive Officer & President

Yes. That’s correct..

Ross Nussbaum

Okay. Thank you..

Albert Behler Chairman, Chief Executive Officer & President

You are welcome..

Operator

[Operator Instructions] Our next question is from Rich Anderson from Mizuho Securities..

Richard Anderson

Thanks. Good morning.

So on the Fund VII sort of closeout deal I recall that there was $57 million remaining there to invest, can you just kind of – how did you – how are you able to kind of waver that up to $112 million or maybe I am just missing something?.

Albert Behler Chairman, Chief Executive Officer & President

Well, we are partly financing the acquisition of this debt and that fund has normally having leverage of up to 60%, 65%. So that’s in our forecast..

Richard Anderson

Fair enough, okay.

On the leasing activity, and specifically the $15.4 million – I am sorry 15.4% cash re-leasing spread, 11-year term, how does that compare to your going in expectations, were you kind of in line with that or do you think you did better than you thought you would going into those deals?.

Albert Behler Chairman, Chief Executive Officer & President

No. I think it was in line with our expectations..

Richard Anderson

Okay.

Second – third question on DC, I mean what will be the word or words you would use to describe that market, I mean is it recovering, bottoming, accelerating, what’s the word for DC right now?.

Albert Behler Chairman, Chief Executive Officer & President

I think there is a cautious recovery going on in DC right now..

Michael Walsh

The DC market is not the DC market. Our properties are in the best locations in the CBD of Washington, right around Pennsylvania Avenue. We have no expirations coming up in the course of the year. And we see some increased activity for the properties that still have availabilities. So we are quite optimistic.

But this part of the Paramount strategy, we are focusing on CBDs. We have never over the last 20 years bought a suburban property, because of the high volatility and it’s not part of our long-term strategy..

Richard Anderson

Okay, great. And then the last question, it sounds like your guidance just doesn’t really assume much in the way of doing anything with the bulky expirations that are coming in the second half of the year.

But even if you are having – have some success there with the various expirations on the docket, should I assume then that there is not really any upside to guidance anyway, because of just the time lag between signing a deal and getting stuff done or do you feel like maybe you are being a little conservative about the outlook and maybe there could be some upside if you actually are able to make good on some of the activity that’s going on?.

Michael Walsh

So, for the bulk of the activity that Vito and Albert and Ted have described, there would be some downtime between leases. And these leases are expiring in the second half of the year.

So, to be able to deliver the space to the tenant and commence revenue recognition is somewhat difficult and it would either be later in the year or in the first, second quarter of 2016.

So, to have meaningful upside in that, I think would be hard where you would get it if you were to get it would be from any type of lease renewal in the mark-to-markets that we have talked about accelerating in the straight line..

Richard Anderson

Perfect. Thanks very much..

Albert Behler Chairman, Chief Executive Officer & President

You are welcome..

Operator

Our next question is from Gabriel Hilmoe from Evercore ISI..

Gabriel Hilmoe

Thanks. Good morning..

Albert Behler Chairman, Chief Executive Officer & President

Good morning, Gabe..

Gabriel Hilmoe

I guess, Albert, I think you had mentioned you have done around 900,000 square feet of leasing and with about half of that commenced in the last nine months, but maybe this is a question for Vito as well, but can you give us a sense of how that other half commences into the portfolio just in terms of timing?.

Albert Behler Chairman, Chief Executive Officer & President

Yes, it’s going to be into the second half of ‘15 and early ‘16..

Gabriel Hilmoe

Can you maybe breakout just the magnitude of kind of what’s hitting in the back half and then kind of what’s coming in first half of ‘16?.

Michael Walsh

It’s Mike. I think what you are seeing and you saw some of it this quarter, which is we provide two pieces of occupancy numbers. We provide leased and occupied. And you saw an improvement in our occupied number. And then as we talked about, we have 500,000 square feet in the second half that is set to expire.

And unless there are renewals as I just talked about that there will be some downtime in between. So, that occupied number you would expect would go down in the second half of 2015. And as these leases become revenue bruising tick back up in 2016..

Gabriel Hilmoe

Okay, that’s helpful.

And maybe just thinking about that, Mike, the NOI guidance for the back half is helpful, but can you just give us maybe a sense of where – what kind of occupancy rate is kind of baked in maybe for year end just given the FFO range that you put out?.

Michael Walsh

Well, as I just said, I think, I mean, looking at that 500,000 square feet, that’s 5% of our portfolio that is a portion of that will most likely be down from an occupied percentage as we get towards the end of the year. With some of it, we are working on some renewals as well. So, it will be a blend of that.

And then also the 900,000 square feet that you just mentioned, some of that will actually will deliver the space to tenants can come online. So, we are not providing the exact number, but that’s the range of where you would expect things to come out..

Gabriel Hilmoe

Okay, appreciate it. Thank you..

Michael Walsh

You’re welcome..

Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I will now turn the floor back to Albert Behler for closing remarks..

Albert Behler Chairman, Chief Executive Officer & President

Well, thank you all very much for joining us today this morning. We look forward to updating everyone on our progress when we report our third quarter results in early November. I wish everyone a good end of this summer..

Operator

Thank you. This concludes today’s conference. Thank you for your participation. You may disconnect your lines at this time..

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