Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Paramount Group Fourth Quarter 2018 Earnings Conference Call. [Operator Instructions] Please note that this conference call is being recorded today, February 14, 2019. I will now turn the call over to Jacques Cornet, with ICR..

Thank you, operator, and good morning. By now, everyone should have access to our fourth quarter 2018 earnings release and the supplemental information. Both can be found under the heading Financial Information Quarterly Results in the Investors section of the Paramount website at www.paramount-group.com.

Some of our comments today 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 fourth quarter and 2018 earnings release and our supplemental information.

Hosting the call today, we have Albert Behler, Chairman, Chief Executive Officer and President of the Company; Wilbur Paes, Executive Vice President, Chief Financial Officer and Treasurer; and Peter Brindley, Executive Vice President, Leasing. Management will provide some opening remarks and we will then open the call to questions.

With that, I'll turn the call over to Albert..

Thank you, Jack, and good morning, everyone. We closed out 2018 a very strong year by all measures with another excellent quarter of financial and operating performance. We posted our second consecutive year with double-digit same-store cash NOI growth.

Same-store cash NOI growth was up 13.4% in the fourth quarter compared to the same period last year and up 10.3% for the full year. Core FFO for the fourth quarter was $0.25 per share, bringing our full year 2018 core FFO to $0.96 per share. Wilbur will review our financial performance in greater detail.

In addition to the strong financial performance, we made significant progress in executing our business plan during 2018. Here are some of the highlights. We leased over 1 million square feet of space well ahead of our original guidance at positive cash mark to markets of over 13%.

All this leasing enabled us to increase our same-store leased occupancy by 310 basis points to 96.4%, driven by a 360 basis point increase in our New York portfolio, which is now 96% leased. We sold two fully stabilized buildings in Washington, DC; 2099 Pennsylvania Avenue and 425 Eye Street at full pricing for a combined $377 million.

We took $105 million of those proceeds and redeployed that into our share buyback program, opportunistically buying back around 7.6 million shares at a weighted average price of $13.95 per share, significantly below our NAV.

We completed an initial closing of Fund X, our new debt fund with $167 million of capital commitments, including $10 million from us. And just last week, we closed on the previously announced acquisition of 111 Sutter Street in San Francisco where we brought in a new joint venture partner for 51% of the equity.

111 Sutter will be managed and leased by us. Let me spend a minute on 111 Sutter, and our thought process surrounding this acquisition. We found an opportunity to once again recycle a portion of the capital received from selling stabilized assets in Washington and redeploy them into San Francisco CBD at a very attractive basis.

The under-rented Class A asset is currently 70% leased, and was acquired at a basis of $775 per square foot. But this is not for the first time we have done this. Recall, a few years back, we sold Waterview and Rosslyn, Virginia at record pricing and acquired One Front Street for $800 per square foot.

18 month ago, we increased our ownership in 50 Beale at $780 per square foot. Both One Front and 50 Beale were under-rented. In addition, One Front had significant near-term roll and 50 Beale was only 78% leased. We have outperformed with both these acquisitions, and once again, look to do the same with 11 Sutter.

When others are paying well over $1,000 per square foot for stabilized product with no prospect for value creation, we feel good about acquiring these assets at an attractive basis where we can bring to bear our strength to add value.

That being said, we are mindful of our cost of capital and chose to bring in a joint venture partner for this asset, thereby limiting our equity check and boosting returns to our shareholders by the fees we generate through managing and leasing the asset.

As we have said in the past, we will deploy capital prudently whether it is for acquisitions or opportunistically buying back our stock. Our approach has and will remain consistent. We discuss capital allocation decisions extensively, and we do not view acquisitions and share buybacks as mutually exclusive.

Going forward, investors should expect our capital allocation decisions to be based on long-term views and an appropriate balance between returning capital to shareholders, while prudently investing for future growth. While Peter will provide details on each of our markets, let me give you my perspective.

Underlying fundamentals in New York remain very strong, and that momentum has carried into 2019. 2018 represented the strongest year for leasing velocity in Midtown. As a result, availability is now at its lowest level since 2008, as positive net absorption has increased for the second consecutive year, at a rate in excess of 1 million square feet.

We have gotten more than our fair share of this leasing. In 2018, we leased over 576,000 square feet in New York, driving leased occupancy by 360 basis points since year-end 2017. Leasing activity in New York was concentrated in two buildings; 1325 Sixth Avenue and 31 West 52nd Street.

Last year, 1325 Sixth Avenue was 80.9% leased and 31 West 52nd Street was only 78% leased. Today, these buildings are leased at 96.7% and 97.5%, respectively. Our leasing momentum in New York continued into 2019 as we just announced that we have signed New Mountain Capital to 108,000 square feet on the top two floors at 1633 Broadway.

The office space in this multi-tenanted enormous 2.5 million square foot asset is now 100% leased, an astounding accomplishment. Leasing velocity in New York has continued to be robust now for a couple of years, yet we have not witnessed real rent growth.

Supply headwinds, increasing concessions, and limited activity by financial services tenants have kept a lid on it. However, we are seeing some very positive signs in the market.

Leasing velocity is robust, absorption is positive, concessions have stabilized and, last year, financial services, which now represent only 32% of the Midtown market, accounted for 41% of the activity, the highest since 2006. Unemployment is at record lows and the forecast for continued office using job growth is promising.

All this will undoubtedly put upward pressure on rents. Furthermore, top tech firms continue to increase their presence in this great city, making it more dynamic and solidifying New York as a tech hub of the East. We are constructive on New York, and remain well-positioned to take advantage of those trends.

The tremendous success we have had in leasing our New York portfolio is a direct testament to our product, location, and management. Our Class A properties, all of which are LEED Gold, continue to remain in high demand as evident in our attracting New York's most discerning tenants. In San Francisco, the market continues to fire on all cylinders.

The market remains supply constrained and we are excited about the opportunities here with roughly 3.2 million square feet in the CBD, including our recent acquisition of 111 Sutte. In 2018, we leased about 412,000 square feet at positive mark-to-markets of 29% on a cash basis.

Our San Francisco portfolio is now over 98% leased, up 160 basis points from year-end. Over the past couple of years, we have opportunistically recycled capital to increase our scale in the CBD and today we are one of the city's largest office landlords.

With an availability rate of 6.6% at year-end, we still see upward pressure on rents, which were up 12% from the prior year for Class A product in the CBD. That is why we like the additions of 50 Beale and 111 Sutter. We have leasing opportunities at both properties, both in terms of roll and rate.

Our portfolio here is well positioned to generate growth over the next few years. In Washington, DC, we remain in a very strong position. Given the quality of our portfolio, our leasing success and limited lease roll over the next three years.

We just do not have much available space, but what we do have continues to lease, and we think the portfolio will continue to outperform the market. In closing, I'd like to reflect on our report card over the past few years. We have now been public for a little over four calendar years.

Over that time, we have leased over 4.4 million square feet or over 1.1 million square feet annually. We have backfilled all of our large block vacancies. We have delivered average same-store cash NOI growth of 4.1%, including two consecutive years of double-digit growth, grown our core FFO earnings by 5.8% compounded annually.

We have sold 840 million of stabilized assets, excluding fund investments and have recycled those proceeds into higher yielding investments. We have refinanced $5.5 billion of debt, staggering our maturities.

In the process, fixing and significantly reducing our borrowing costs and we have opportunistically bought back $100 million of our stock significantly below NAV. Notwithstanding these achievements, the public markets have yet to reward us or for that matter our other CBD office peers, each of whom can tout their own accomplishments.

That said, we will continue to stay focused and run our business for long-term shareholder value creation.

As we look forward to 2019, our core FFO earnings will be impacted by the earnings dilution from asset sales, some changes in accounting rules, and the recently terminated Henri Bendel's lease, which presents us with a tremendous opportunity for value creation. Wilbur will cover our earnings guidance in greater detail.

With that, I will turn the call to Peter to give additional insights on our leasing..

Thanks, Albert, and good morning. We had a very productive year, exceeding our 2018 leasing goal by a wide margin. At the end of the year, our portfolio was 96.4% leased, up 310 basis points from one year ago. During the fourth quarter, we leased approximately 213,000 square feet to end the year with more than 1 million square feet leased.

This production not only address the immediate vacancy in the portfolio, but also serve to further reduce our near-term lease roll, which is currently a very manageable 5.1% expiring per annum through year-end 2020. Let's review the highlights by market.

Beginning in New York, our portfolio was 96% leased at year-end, up 360 basis points year-over-year. During the fourth quarter, we leased more than 112,000 square feet, bringing our year-to-date total to approximately 576,000 square feet leased.

The New York portfolio remains very well positioned with approximately 4.3% expiring per annum through year-end 2020. Midtown's leasing fundamentals continue to strengthen in many respects. Midtown set a new record in 2018 by recording more than 20 million square feet of new leasing activity.

The result of this historic velocity is an availability rate of 10.3%, its lowest level in a decade. In addition, this leasing activity contributed to Midtown's second consecutive year of positive absorption in excess of 1 million square feet. All of these factors reinforce the health of the Midtown market.

We have certainly captured more than our fair share of tenant demand as evidenced by our leasing results. And we expect further progress in the year ahead. In fact, and as Albert mentioned, we signed a 16.5 year 108,000 square foot lease with New Mountain Capital, subsequent to quarter-end.

New Mountain Capital has leased the top two floors at 1633 Broadway, bringing the office portion of the building to 100% leased. That is no small achievement for a building measuring more than 2.5 million square feet.

Now that we have successfully leased our large blocks of vacancy in the New York portfolio, we have turned our attention to 1301 Avenue of the Americas where Barclays lease expires on December 31, 2020, which, as a reminder, shows up in our lease expiration table in 2021.

We have been ramping up our marketing for this block of space and are confident that this opportunity will garner significant interest, particularly given the size of the block, the quality of the building, and its central location.

1301 Avenue of the Americas boasts large and efficient floor plates, which will undoubtedly resonate with prospective tenants. In San Francisco, we ended the year at 98% leased, up 160 basis points year-over-year.

During the fourth quarter, we leased approximately 101,000 square feet, bringing our 2018 total leasing activity in San Francisco to more than 411,000 square feet leased. San Francisco's office leasing fundamentals continue to strengthen on every level.

San Francisco set a record in 2018 with the signing of 21 leases in excess of 100,000 square feet, 14 of which were with tech companies. Net absorption remains positive and average asking rents continue to increase, up 12% year-over-year for Class A product in the CBD.

Vacancy for Class A product in the CBD continues to decline, down 250 basis points year-over-year to 6.6%. It is our expectation that rents will increase further given the robust demand and limited supply, especially for large blocks of space in the CBD. At One Market Plaza, we are 99% leased.

During the fourth quarter, we executed a lease with the financial services company for our last full floor vacancy. One Market remains in high demand and continues to achieve among the highest rents in San Francisco. At One Front, we are currently 96.3% leased and have significant interest from premier tenants on our remaining availability.

We look forward to continued progress at the property in the year ahead. At 50 Beale Street, we continue to make significant progress. We ended the year with leased occupancy at 99.7%, up from 82.6% a year ago.

During the fourth quarter, we renewed an existing technology tenant in the building and expanded them by approximately 22,000 square feet which effectively eliminated all 2019 lease roll at the building.

During the past year, we have - we began the process of repositioning the building by commencing our Lobby Renovation transacting with Equinox in the base of the building and securing base floors with dynamic tech tenants.

We have realized significant rent growth throughout the year and have set the stage for the marketing of the 262,000 square foot block of space we expect to get back at the beginning of 2020 when Blue Shield vacates the property.

This block of space, which is located on 50 Beale's uppermost floors, is the largest big block availability in San Francisco over the next 12 months.

Given 50 Beale's physical attributes, which includes virtually column-free floors and its highly desirable location in the heart of South Financial District, it is not surprising that we already have a high level of activity on the space.

We view the lease up of this space as a tremendous opportunity to create additional value as the current in-place rent is roughly $55 per square foot, well below market. Lastly, in San Francisco, we are excited by the opportunity we now have at 111 Sutter Street, the latest addition to the portfolio.

The building is currently 70% occupied, plus roughly half of the in-place leases are scheduled to roll in the next three years. Similar to One Front and 50 Beale, we are well positioned to take advantage of the availabilities as well as the roll. Turning to Washington, DC, we ended 2018 with the portfolio 98% leased.

Despite the influx of new supply in the core submarkets of DC, we continue to attract demand from premier tenants for our limited availabilities. This is a testament to not only of the location, but also the quality of our properties in DC. With that summary, I will turn the call over to Wilbur, who will discuss the financial results..

Thanks Peter. Financial and operating results for the quarter were once again very strong. Our core FFO for the quarter was $0.25 per share, up 13.6% from $0.22 per share in the prior year's fourth quarter. This increase was once again driven by sector-leading same-store NOI growth of 13.4% cash and 12.8% GAAP.

In addition, the current quarter included a $0.01 of termination income from Henri Bendel, more on that in a bit. Full-year same-store NOI growth was 10.3% cash, and 9.1% GAAP, both well ahead of our original guidance. We ended the year with the same-store leased occupancy rate of 96.4%, up 310 basis points from the prior-year.

Our New York portfolio is now 96% leased, up 360 basis points; San Francisco is 98% leased, up 160 basis points; and Washington is also 98% leased, up 50 basis points. We leased over 213,000 square feet in the quarter and mark-to-markets with 2.9% cash and 11% GAAP.

The current quarter mark-to-markets were impacted by 73,000 square foot short-term renewal at the current in-place rents, which also impacted the weighted average lease term for the quarter. For the year ended 2018, we leased over 1 million square feet and mark-to-markets with 13.3% cash and 13.2% GAAP.

On our last call, we announced that we had repurchased $50 million of our shares in October.

Well, in December, the markets were even more turbulent and we aggressively and opportunistically repurchased an additional $55 million worth of shares, bringing our total share buyback to $105 million at a weighted average price of $13.95 per share, which is not only significantly below our NAV, but below where our stock is currently trading.

Turning to our balance sheet, our outstanding debt at quarter end was $3.1 billion at a weighted average interest rate of 3.7% and weighted average maturity of just under five years. 86% of our debt is fixed and has a weighted average interest rate of 3.6%. The remaining 14% is floating and has a weighted average interest rate of 4.2%.

We have no debt maturing until the fourth quarter of 2021 and beyond that, our maturities are well laddered. Our outlook for 2019 remains solid. We expect to lease 600,000 to 900,000 square feet for the year.

We expect our share of same-store leased occupancy to be between 94% and 96%, which includes the impact of the recently terminated Henri Bendel's lease and we expect same-store cash NOI growth of 5% to 7% which once again was negatively impacted by 250 basis points due to the Henri Bendel's lease termination.

Excluding the impact of this termination, same-store cash NOI growth would have been 7.5% to 9.5%. Notwithstanding our positive outlook for 2019, we do expect core FFO earnings to be lower in 2019 when compared to 2018.

Our 2019 core FFO earnings are impacted by a number of factors, including our capital allocation decision to sell core stabilized assets at cap rates in the mid 4% and buy back our stock at nearly 6% cap rates. We will gladly trade short-term earnings dilution for long-term shareholder value creation.

Having said that, as Albert highlighted earlier, we do not view our capital allocation decisions as mutually exclusive, and we will continue to deploy capital prudently, whether it is for share buybacks or acquisition opportunities.

Based on the above factors and our outlook for 2019, we expect 2019 core FFO to be between $0.88 and $0.92 per share or $0.90 per share at the midpoint. This represents a $0.06 per share decrease or 6.3% lower from 2018.

This decrease is due to the following items, some of which were highlighted on our prior earnings call, an incremental $0.08 per share from higher same-store cash NOI growth of 5% to 7%; an increase in NOI of $0.01 per share from the acquisition of a 49% interest in 111 Sutter Street in February 2019; a $0.02 per share benefit in earnings resulting from a lower share count due to the share repurchases in 2018.

These positive items, aggregating $0.11 per share, are more than offset by the following; a $0.06 per share decrease in straight-line rent and FAS 141 income, primarily due to the burn off of free rent; $0.05 per share of lower earnings resulting from the sale of the two Washington DC assets; $0.03 per share of higher interest and debt expense, including $0.01 from debt in connection with the acquisition of a JV interest in 111 Sutter Street; $0.02 per share of higher G&A costs, solely due to a change in accounting rules for capitalizing internal leasing costs; and $0.01 per share of lower termination income, which is something we typically do not budget for.

We have laid out the building blocks for our 2019 guidance in more detail in our investor deck and supplemental package, both of which can be found on our website at www.paramount-group.com. Furthermore, we have updated our schedule of free rent and signed leases not yet commenced, which now sits at $51.8 million.

With that, Operator, please open the lines for questions..

[Operator Instructions] Our first question is coming from the line of Jason Green with Evercore. Please proceed with your question..

Can we infer by the ramping up of marketing at the Barclays space, that it's clear at this point that Barclays will be leaving the space?.

Well, it's - this is Albert Behler. It's not 100% clear that Barclays is leaving the space.

As we know from other experiences in the past, even for the investors who know us from when we went public, some of these financial services tenants make their decisions in the last moment because they really don't know exactly how their business model works ahead of time.

So there is still an option that Barclays will stay in this space, but as a proactive landlord we, of course, have started marketing efforts and Peter can tell you a little bit more in detail..

Yes, Jason, we've already engaged with third-party prospective tenants for this block of space. We feel like our offering here is compelling. It's extremely well located. It has very large floor plates, which is what tenants are seeking in many instances when they are looking for large amounts of space.

And so we think that the attributes of this block of space will be very well received as we, as we said, ramp up the marketing of this block of space..

And then just a question on the buyback. You've done $105 million on the $200 million so far, the first $50 million was done at around $14.50 which isn't too far off from where pricing is today.

Can we infer that you're still a buyer of shares with that remaining $95 million where pricing is today?.

Well, the remaining $95 million is approved by the Board. We are very - we want to stay consistent and balanced in our approach. We were very aggressive, as you can see from our figures here in the fourth quarter, where the opportunity arose, and I think that was successful. It was a successful outcome.

So I don't want to commit to anything at this point in time. We are watching the markets and we will be staying balanced and consistent and opportunistically buying back stock or investing in future growth..

The next question comes from the line of Vikram Malhotra with Morgan Stanley. Please proceed with your questions..

Just want to clarify on that Barclays space. How does the renewal option work? Is there a specific time they have to notify you? Just anymore color would be helpful..

Vikram, it's Peter. That period of time has elapsed. We all know that these deals oftentimes don't get exercised pursuant to an option. And as Albert has said, Morgan - the tenant that we had been discussing a deal with 1633 took place toward the end of their lease.

So we don't have total clarity from Barclays just yet in terms of what their intentions are beyond 2020. We are in discussions with them, but as we've now said, we're certainly not waiting around. We feel very good about the marketability of this block of space.

And as we have now also said, we have engaged with third-party prospective tenants who are interested in this block..

And just on that space.

So are there - is it possible to sign someone in advance or do you need to like have them leave and then you'd have to - similar to the other large space that you'd have to like completely do - white-box it et cetera and then lease it?.

Well, you could potentially sign a lease in advance. The most probable outcome is that this entire space will be broken up in various different leases. And I would assume, at this point, that we would have some leasing early on because of the activity for this space.

It's unique space, big floor plates, and in Midtown, as I had outlined in my remarks, the market is getting tighter, and this place is really catering to users, not only financial services, but also TAMI users. And as we have been quite successful here at 1633, where we are 100% leased with big floors, that's a unique opportunity here as well..

And then just last question, if I may. Just on Henri Bendel space, given sort of the - maybe I shouldn't call it competing space, but other availabilities around 5th Avenue and just the news we've heard at the - since the start of the year.

Can you give us an update, sort of what are the prospects, timing, how much capital would you have to spend to offer that space et cetera?.

It's a little early to - I mean, Henri Bendel just closed their doors. And I think we gave the news even earlier in the last quarter what the outcome would be with regard to Bendel. It's too early to predict the outcome at this point, but we are very excited about getting this space back.

You might recall that when we went public, we even had mentioned as one of the opportunities to create value and we think it's a tremendous opportunity to bring in a tenant because of the income being so substantially below the current market rate.

Even in a depressed market - retail market, I think, that's where you're referring to, I think this will be an opportunity for the public company to generate growth..

And just on that, when you say depressed rate, I mean, we know this was like well, well below, I think $70 or $80 on average a foot.

If you were to venture even just a wide range at grade where do you think this sort of space, given the location, what would you be able to garner at grade on a per foot?.

Yes, it's a good question, Vikram. We can make it very simple.

The gross rent for the entire space currently was at $9.5 million and if you would lease just the ground floor, which is about 9,000 square feet, you would - we would - even in today's market environment, we would expect the rent to double and keep in mind, only 50% would be accounted for the public company, because we have a joint venture partner..

The next question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your questions..

Thanks. Good morning. Albert, your share price is up a little this year but it still trades at almost a 40% discount to consensus NAV. With what - it looks like pretty solid internal growth even despite the Henri Bendel move out.

How are you guys thinking about investments during this year? Is there really any real estate investment that you guys see out there that can match that profile of repurchasing shares at this point? And how do you think about maybe the desire to grow the Company versus using that available capital for what looks like a solid investment in repurchasing shares?.

Yes, as I had mentioned earlier and also in my remarks before, we will be looking out for investing for future growth and as well as opportunistically looking at buying back stock when it's appropriate time. As you could see from the results, we were very aggressively buying when the opportunity was there in the fourth quarter.

I think one of the few of the public companies who took advantage of the buyback programs and it might not look like much because it's only $55 million, but you have to also keep in mind that during the holidays and you have limits of what you can buy on a daily basis. But - so we are watching it very, very carefully.

We are at the same time looking at market opportunities that increase the value of the Company of PGRE, and if you look at 111 Sutter, that's one of those opportunities where we have a chance to buy an asset well below replacement cost, and where we can create value through managing and leasing the asset and doing limited refurbishments and finding partners in doing so, so we can limit our own equity investment and use our relationships with - that we have built over the last 20 years..

Blaine, I just want to add one question, I mean you started the questioning with - that we're trading at a 40% discount to consensus. I mean, that's not accurate. That would imply that consensus has our NAV at $24, $25 a share..

Maybe I have the wrong number. But either way - so moving on, I guess, to 111 Sutter, you mentioned - just to follow-up on that. You talked about the value creation prospects there.

Can you just get into - maybe for Peter - get into any of the detail as far as lease up prospects, upcoming rent roll and what you think the mark-to-market on the in-place rents is?.

Yes, let me start first, Blaine.

This is a typical asset that we - and it might look - if you look at the photo, it's maybe not a Paramount kind of aged asset, but I would like to remind everyone that we have been, as an asset managing in our portfolio, unfortunately, the public company only has 1%, 745 Fifth Avenue, which is at a fantastic ground zero kind of location next to Central Park and that building, we bought in - the previous bought in the mid of 2002 and we generated a 10 time multiple on equity over the holding period.

It was developed about the - it's about the same vintage as 111 Sutter, and we had to apply the same improvements over time.

It's just, if an asset is liked by tenants, when it gets PLC and management expertise, all hands on deck, then you can create tremendous value over a holding period and Peter and the team in San Francisco are already working on with the tenants as well as getting the property ready to get upgraded.

Peter?.

Yes, I would add that we are very excited about this property. It will certainly appeal to your creative user. There is opportunity not only in the immediate vacancy, but we've got roughly half the building rolling over the next three years. And so we have experience with this vintage property. We have a very clear plan on how to have success here.

We think we may even appeal. Our first proposal came from a very, very well established Fortune 500 firm. So everybody is looking for a bit of creative in addition to what you might think of as your typical sort of creative type user. So we think we appeal to a very broad universe of prospective tenants here.

We love the attributes of the real estate itself. We have a very clear plan and we're up and running..

The next question comes from the line of Derek Johnston with Deutsche Bank. Please proceed with your questions..

This is actually Tom Hennessy for Derek Johnston. As you mentioned the trends with the New York CBD, I mean it's shown significant progress, stabilized concessions, really strong leasing velocity, nothing negative to point to really, but there has been a lag to achieving the higher mark-to-markets.

Could you explain possibly what is driving that and where you think that will be achieved?.

Yes, I think I pointed it out in my remarks that I think there seems to be very strong momentum in play and we have a very robust velocity. We had the best leasing year, absent Midtown New York and it's positive absorption and I have seen many of these cycles. It takes a while.

We have a lot of very positive momentum with office job growth and low unemployment.

And I think that will result if it - unless we have a black swan event, will result in an upward pressure on rents and I think that gives us a great opportunity for the upcoming expirations on our assets in Midtown and especially, I'm looking at 1301, 6th Avenue as well as 712 Fifth Avenue and 900 Third..

Tom, I just want to add to your question about the mark-to-markets. If you're referring to the mark-to-markets that we have reported and our statistics for 2018, you should know that the full year mark-to-market that we reported was 13.3%. So we don't characterize that as being a weak mark-to-market.

If you're referring to the quarter at 2.9%, we highlighted the fact that it included a 73,000 square foot lease on a 108,000 square foot of activity in New York that was just extended short term, so that - at the current in-place rent, so that impacted the mark-to-market.

So if you were to exclude that, on a very little activity in New York, our mark-to-markets were well into double-digits..

And one of the other things that we are noticing is, generally in the fourth quarters, the rent spreads seem to be a little lower than in the first three quarters.

Is there anything that drives that seasonality?.

No, there is normally - we had historically more of leases done by the end of the year, especially in New York when we had these large spaces being executed and you see with the New Mountain lease, it got done basically negotiated in the fourth quarter, and then we could announce it in early in 2019.

That is very typical here in New York, but otherwise, I wouldn't say there's nothing - there is no seasonality in these reports over the quarter..

[Operator Instructions] The next question is from the line of James Feldman with Bank of America. Please proceed with your questions..

I guess on the Bendel lease, can you just talk more about the depth of demand for that space? It sounds like you would get a fantastic mark-to-market, but just what - how many retailers are out there that would be interested?.

Jamie, it's a good question, but it's very hard to answer. As you can expect, it's a great location, most probably one of the best location in the world I would venture to say. We had, in a stronger market, lots of demands from other tenants who wanted to get in that location.

I'm not giving names on this call, but we have - we are very confident that we find a very good use for that location..

And I assume there's nothing in your 2019 guidance for it being back-filled?.

Correct..

Okay. And then....

Because even if you were to lease it, Jamie, even if you were to lease it, the point is, by the time you lease up the space and tender possession to the tenant and then the space gets build out for its intended use, you're not recognizing any benefit in GAAP earnings in 2019..

And then, for the Barclays space, I mean, what do you think the asking rents will be for that space, assuming it does come back? And what kind of mark-to-market is that versus where you are today?.

We think that the asking rent will be somewhere in the mid to high $70, and that should be about 8% more than where we - I mean, the final rate should be around 8% higher than where we are today, the taking rent..

And what kind of CapEx do you think you need?.

Well, it's the regular CapEx that we - about $90 for a 10-year lease. Most of these leases we have experienced for these large spaces, it tend to be a little longer than 10 years, very often 15 to 20 as of late. So one should expect a little lesser TI on the second extension. So anything that goes beyond 10 years gets lesser TI.

So in average you might for a 15-year lease think about $100 to $110 in TIs..

And if you look, Jamie, out of the statistics we reported in the year, I mean, TIs and leasing commissions that we include as a percentage of initial rent have basically trended consistent quarter-over-quarter in the 11% to 12% on average because we look at it as a percentage of initial rent..

Are there any tenants in the building looking to expand?.

Yes. But again, we are not giving names. I mean that's normal in a - and I had mentioned it earlier in the quarters.

Once you have a building that's 100% leased or close to 100%, remember, 1301 is in the high 90% - 98% leased, you - normally in a good market momentum, you get the opportunity to take - to lease more to tenants that you already have an occupancy.

We see that momentum here at 1633 where we are 100% leased that tenants are giving Peter a call and looking for more space, so that's good news for the landlord..

And can you remind us what floors you're talking - that space is on?.

Jamie, it's floors two through six, eight and nine, and then there are some below grade….

All right. And then, you - sorry..

The good news there is, we have the ability to tie the lowest floors like the second floor into ground floor space with access from the street level. That's something that seems to be getting in higher demand.

We see that in San Francisco, and also, again, New York the tenants, the larger tenants would like to have their own branding, as well as their own access to their space. So that's a unique opportunity that we have with this location. So branding and access straight from the street to that space, I think, could be making a big difference here..

And then, is there any kind of conversion opportunity like to more retail or anything like that, or, no, it's pretty much starting in the second floor, it's all office?.

Well, that's another reason why we left one of the tenants, we extended it only short-term. So we have an opportunity to do something on the retail and with ground floor access as well as potentially on the second floor..

And then you did a great job explaining how you've redeployed capital into value-add investments in San Francisco. Our understanding is, you're going to see more assets come on the market in New York.

I mean, what's the likelihood that we see you actually buying in some of your other markets outside of San Francisco?.

Well, we will be very cautious. As I mentioned before, we think the values are pretty full. And if you would buy something in another market, I would only think about New York at this point and New York, again, it has to be attractive value and we would be very cautious at this point..

What's your thought on valuations and cap rates in New York and the trend?.

I think it's very stable because there is a tremendous amount of liquidity in the markets. We lost a couple of equity buyers because of the Europeans have a difficult time with hedging issues to the dollar. It cost them about 300 to 350 basis points per annum.

So that takes a lot of the competition out of the equation, but you still have good strength in the market. I think the cap rates because of interest rates not going up substantially and the mezzanine financing actually getting more aggressive because more liquidity being available in the market will be pretty stable..

Are you finding - last question for me.

Are you finding from your fund partners or your investors, are they just more interested in West Coast right now, or they're actually pretty interested across all your markets?.

I would say they are interested in across all markets but for different reasons. And not all of the investors are interested in the same markets.

San Francisco is still - for many foreigners, it's a little bit more exotic and further away, and then there are other investors closer to and more comfortable with San Francisco, they are very hot and heavy on San Francisco. New York, I think it's a good value proposition with certain assets.

And so - and Washington DC are smaller assets that can be bought by many, many investors because the equity check is relatively small. So the values that you get for us that's in Washington, DC is quite tremendous compared to other markets..

Thank you. We've reached the end of the question-and-answer session. I'll now turn the call over to Albert Behler for closing remarks..

Thank you all for joining us today. We look forward to providing an update on our continued progress when we report our first quarter results in the spring. Goodbye..

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