Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Paramount Groups Second Quarter 2019 Earnings Conference Call. [Operator Instructions] Please note that this conference call is been recorded today, August 1, 2019. I will now turn the call over to Rob Simone, Director of Business Development and Investor Relations..

Thank you, operator and good morning. By now, everyone should have access to our second quarter 2019 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 risk that could impact our future operating results and financial condition. During the call, we will discuss our non-GAAP measures, which we believe can be useful in evaluating the company’s operating performance.

These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measure is available in our second quarter 2019 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 will turn the call over to Albert..

Thank you, Rob and good morning everyone. We were able to build on our momentum from the first quarter and kept the first half of 2019 with a terrific quarter, setting new records for us as a public company all around.

Our second quarter was highlighted by our highest quarterly leasing activity on record, our highest leased occupancy on record and our de-risking the 2020 lease expirations by over 50%.

We leased a record of almost 700,000 square feet this quarter, bringing our first half leasing activity to about 1,050,000 square feet, which exceeded the midpoint of our original leasing guidance by 40%, truly extraordinary Our portfolio is now 96.7% leased. The highest leased occupancy percentage we have ever achieved as a public company.

And that is after factoring the 72% leased 712 Fifth Avenue and the 70% leased newly acquired 111 Sutter Street. Our same-store portfolio is 97.1% leased. We once again posted strong operating results with same-store cash NOI growth of 8.3% and core FFO of $0.23 per share.

And we once again raised our guidance for the full year with leasing now projected to be between 1.3 million and 1.4 million square feet and core FFO now projected to be between $0.93 and $0.97 per share. Wilbur will cover our financial and operating results and guidance, changes in greater detail.

Let me spend a minute on our extraordinary quarterly leasing results before I let Peter cover the details for the quarter. We leased 142,000 square feet in New York, and our New York portfolio continues to be virtually full at 96.6% leased. We are laser focused on the Barclays block at 1301 Sixth Avenue, which comes back to us in 17 months.

Let me take this opportunity to remind you that this is not the first time we have dealt with large block availabilities or vacancies in our New York portfolio. Not too long ago, we had to deal with large block vacancies at 1325 Sixth Avenue, 31 West 52nd and 1633 Broadway, all of which totaled almost 700,000 square feet.

And that’s two at a time, when sentiment on Midtown as a submarket was at all – was at an all-time low. We stayed on course, remained focused and executed. Today, 1325 and 31 West are 97.5% leased and 1633 is 98.4% leased. Leasing fundamentals and Midtown today are a lot better than they were at the time we dealt with those vacancies.

Availability continues to go down, asking rents have increased and tenant demand is strong, especially in the Sixth Avenue corridor, and 1301 is at the heart of it. We are confident we will be successful here as well. The leasing activity in the second quarter was led by our San Francisco portfolio, where we leased over 550,000 square feet.

The leasing was driven primarily by 4 leases in 2 buildings. The 265,000 square foot lease was First Republic and One Front Street and the 262,000 square foot of leases signed with Glassdoor, Autodesk and Maplebear at our newly re-branded 300 Mission Street. One front is now 100% leased and 300 Mission is 99.7% leased.

These two assets are prime examples of our prudent capital allocation strategy and our proactive management approach. To remind you, we acquired One Front Street in December 2016, a little over 2.5 years ago through a 1031 exchange by selling Waterview and recycling capital from Rosslyn, Virginia into San Francisco CBD.

We sold Waterview at the highest price per square foot for an asset sold in Virginia, saved about $400 million in taxes and purchased one front for under $800 per square foot. One Front was then 99% leased, with in-place cash NOI of about $22.5 million and 80% of the building said to roll in the next 5 years.

Today, it is 100% leased, pro forma cash NOI is over $35 million and the remaining weighted average lease term is 8-plus years, a tremendous value-creating endeavor by any measure. Then about 2 years ago, in July 2017, we had the opportunity to increase our ownership in 50 Beale Street, now re-branded as 300 Mission Street.

While 50 Beale Street was acquired at a similar basis as One Front, it was 78% leased and had significant upcoming role with Blue Cross Blue Shield set to vacate about 260,000 square feet.

Today, that asset is 99% leased, it has a prestigious new address as part of our re-branding efforts and while the Blue Cross space had not yet expired and is scheduled to expire in January 2020. We have already backfilled virtually all of that space to highly dynamic tenants.

The remaining weighted average lease term at 300 Mission is now 8-plus years. These two transactions demonstrate our approach to value creation and proactive asset and property management.

Subsequent to these transactions, we continued our balance prudent and efficient capital allocation strategy by selling two more assets in DC, at full pricing and recycling that capital into our share buyback program to crystallize a significant dislocation between asset values in the public and private markets, and did so on a leverage neutral basis, and acquiring portions of assets selectively in San Francisco with joint venture partners, where we can leverage our expertise to generate outsized returns for our shareholders.

To that end, in February, we acquired a 51% interest in 111 Sutter Street, a 70% leased asset was ample opportunity from leasing vacant space as well as re-leasing pending rollover the next 3 years at much higher rates. And I am confident we will have good news on the progress on that asset on our next quarterly call.

And we also recently announced that we entered into an agreement to acquire 55 Second Street. 55 Second is a modern trophy building that was built in 2002, and is located in San Francisco’s highly desirable south financial district. The asset benefits from its location, efficient and nearly column free floor plates and multiple outdoor terraces.

Currently, the building is 87.4% leased to primarily accounting, legal and technology tenants and at rental rates well below market. In addition, the weighted average remaining term on the leases is only 5 years with roughly 80% rolling between 2022 and 2025.

We expect to bring in a joint venture partner on the transaction prior to closing, which should occur late third quarter. Needless to say, we are very excited about the value creation opportunities at 111 Sutter and 55 Second. The San Francisco market remains supply constrained. Tenants are continuing to expand, availability continues to shrink.

And as you can see in our leasing results, rental rates for Class A space in the CBD such as ours, continue to increase at healthy rates. We also continue to actively monitor the equity markets, and selectively and opportunistically buyback of our shares.

Between June and July, we repurchased just under 890,000 shares for an aggregate of $12.2 million or $13.68 per share. Today, we have repurchased about 8.5 million shares for an aggregate of $117.5 million or $13.92 per share.

We still have $82.5 million available and our $200 million authorization and we will continue to monitor the equity markets to opportunistically buyback shares and evaluate all capital allocation opportunities in the best interest of the company and its shareholders.

In closing, while we are incredibly frustrated with where our stock price is trading. We know our long-term investors are happy with the way we have been executing on our business plan. We have leased our properties at very healthy rents and they are virtually full.

We have sold low-growth assets and recycled the portion of that capital into higher-growth assets in the market with healthier fundamentals. We have opportunistically bought back shares on a leverage-neutral basis, and in turn, maintained a healthy balance sheet with modest leverage and ample liquidity.

We have grown our earnings, our cash flow, and consequently, our dividend. And we have built a portfolio that is rock solid and is long-term leased to high-quality tenants. With that, I will turn the call to Peter to give additional insights on our leasing..

Thanks, Albert and good morning. During the second quarter, we leased approximately 700,000 square feet, yielding our best quarterly leasing result as a public company. Year-to-date, we have leased in excess of 1 million square feet.

At quarter end, we were 96.7% leased and remain encouraged by the current tenant demand in the properties, where we have availabilities. Let’s review our results by market. Beginning in New York, our portfolio was 96.6% leased at quarter end, unchanged from last quarter.

During the second quarter, we leased approximately 142,000 square feet, eliminating 33% of our 2020 lease roll. Through the first half of the year, we have leased more than 300,000 square feet at a weighted average term of approximately 10 years with initial rents of $87.24 per square foot.

The New York portfolio remains very well positioned with approximately 3.4% expiring per annum through year end 2020. Midtown’s leasing fundamentals continue to strengthen in many respects. Availability in Midtown continues to decline, down 70 basis points year-over-year to 10.6%, well below the 10-year average of 11.7%.

Average asking rents have increased by more than 14% year-over-year as current tenant demand remains strong.

We remain heavily focused on the successful lease-up of our remaining availabilities, the largest of which is the Barclays block of space at 1301 Avenue of the Americas and perceive current market conditions to be a tailwind in our efforts to lease the space.

As an example, 1301 Avenue of the Americas is located in the heart of the Sixth Avenue submarket, where the second quarter leasing activity exceeded its own 5-year quarterly average by 32%.

In addition, the Sixth Avenue submarket realized a more positive absorption than any other submarket in Midtown in the second quarter, causing the availability rate to decline 150 basis points quarter-over-quarter to 9.3%, among the lowest of any submarket in Midtown.

We are confident that the strength of the Midtown market, and more specifically, the Sixth Avenue submarket, coupled with 1301 central location, large and efficient floor plates, building quality and the size of the block, will yield an accretive result.

As a reminder, Barclays’ lease expires on December 31, 2020, and shows up in our lease expiration table in the 2021. In San Francisco, we ended the quarter at 97.3% leased, up 290 basis points from last quarter.

During the second quarter, we leased approximately 551,000 square feet, which included 3 of the top 5 largest leases in San Francisco, bringing our year-to-date leasing to approximately 735,000 square feet. The result of our leasing production this quarter is a portfolio that has been fortified with the elimination of 67% of our 2020 lease roll.

Looking ahead, the San Francisco portfolio is very well positioned, with approximately 3.7% expiring per annum through year-end 2020. Leasing fundamentals in San Francisco continue to strengthen on every level, and we continue to capitalize by securing long-term deals with best-in-class tenants.

Net absorption in San Francisco remains positive and average asking rents continue to increase, up 8.7% year-over-year for Class A product in the CBD. Vacancy for Class A product in the CBD continues to decline, down 430 basis points to 4.2%, the lowest it has been since the early 2000s.

It is our expectation that rents will increase further given the robust demand and limited supply. At One Market Plaza, we are 99.3% leased, up 10 basis points from last quarter. At One Front Street, we ended the quarter 100% leased.

As we previously announced, during the quarter, we signed a 265,000 square foot lease expansion with First Republic bank. The expansion spans 16 floors and has stagger expirations with the weighted average lease term of approximately 10 years.

We are thrilled that First Republic now leases over 515,000 square feet or roughly 80% of this trophy office tower. At our newly re-branded 300 Mission Street, we are currently 99.7% leased.

We successfully completed the lease-up of 300 Mission with 3 deals totaling more than 262,000 square feet at a weighted average initial rent of $92.77 per square foot and a weighted average lease term of 10.5 years.

These three deals eliminate virtually all lease roll through 2020 and cap off a successful repositioning of subsequent lease-up of the building. Lastly, in San Francisco, we are excited by the opportunity we have at 111 Sutter Street, and encouraged by the current level of interest in our vacant spaces.

The building is currently 70.3% leased with approximately half of the in-place leases scheduled to roll over the next 3 years. Similar to One Front and 300 Mission, we are well positioned to take advantage of the building’s current and upcoming availabilities and create tremendous value in the process.

We look forward to updating you on our progress next quarter. In Washington, DC, we ended the quarter at 94.1% leased and remain very well positioned with approximately 6.1% expiring per annum through year-end 2020.

Despite increasing supply in the core submarkets of DC, our strategy continues to allow us to attract demand from premier tenants for our limited availabilities. Our approach in D.C. is unchanged. With that summary, I will turn the call over to Wilbur, who will discuss the financial results..

the same-store portfolio in New York is 96.6% leased, up 60 basis points from year-end; the same-store portfolio in San Francisco is 99.6% leased, up 160 basis points from year-end, driven by the First Republic lease at One Front Street; and Washington remains virtually full at 94.1%.

As highlighted by Albert and Peter earlier, we had a tremendous leasing quarter, and all that leasing was done in terrific mark-to-markets of 25% cash and 21.6% GAAP. It comes at no surprise to us that San Francisco once again led the way with mark-to-markets of 33.4% cash and 29.5% GAAP.

We have strategically increased our position in San Francisco and the results are self-evident.

Given our very strong second quarter of leasing, we are raising our leasing guidance to now be between 1.3 million and 1.4 million square feet, up 50% at the midpoint from our prior estimate and up 80% from the midpoint of our original guidance back in February.

We are also raising our core FFO guidance and that is now expected to be between $0.93 and $0.97 per share, up $0.03 per share at the midpoint from our prior estimate.

This increase was driven by $0.02 from better-than-expected portfolio operations and $0.01 from the acquisition of a joint venture interest in 55 Second Street, which we anticipate will close towards the end of the third quarter.

Turning to our balance sheet, we have over $1.1 billion of liquidity comprised of $285 million of cash and restricted cash, and $830 million of availability on our credit facility. Our outstanding debt at quarter end was $3.36 billion at a weighted average interest rate of 3.7% and a weighted average maturity of 4 years.

80% of our debt is fixed and has a weighted average interest rate of 3.6%, the remaining 20% 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.

As Albert touched upon earlier, we have continued our share buyback program, and opportunistically, we purchased our shares. To date, we have repurchased about 8.5 million shares for an aggregate of $117.5 million or $15.92 per share.

We have an additional $82.5 million of capacity under our existing authorization, and we’ll continue to monitor our stock as we repurchase additional shares opportunistically. Lastly, we have also updated our investor deck including our schedule of free rent and signed leases not yet commenced, which now sits at $55.4 million.

This information can be found on our website at www.paramount-group.com. With that, operator, please open the lines for questions..

[Operator Instructions] Our first question comes from Jason Green with Evercore..

Good morning. First question I have is on buybacks. You mentioned, you were active in Q2 ‘19, and have been active in the third quarter.

I guess, generally speaking, how you’re thinking about share backs versus other acquisitions or other investment opportunities?.

Well, this is Albert Behler. As I said in our remarks before, we’re opportunistically looking at acquisitions as well as buying back shares. So it’s not an either/or, it’s – we can do both at the same time. And we will be looking at it really opportunistically..

Okay. And I guess on the Barclays space.

I guess if you could talk about just – what activity has been like on this space from the users you’re having discussions with? And at this point, kind of, what you’re expectation is for the number of tenants that – it will required to fill that space?.

Jason, it’s Peter. We feel very good about the current level of activity. We’re in discussions with several 2 and 3-floor tenants. As a reminder, the Barclays block comprises floors 2 through 6, 8,9. So ultimately, this could be 2, maybe 3 tenants in the end, but it remains to be seen as too soon to say just yet..

Okay, thank you..

You are welcome..

Our next question comes from Vikram Malhotra with Morgan Stanley..

Thanks for taking the question. Just a follow-up on the Barclays space, I know you sort of have this informal goal of getting a certain amount done prior to them moving out. Just sort of wondering, given the activity you’re seeing, what’s the likelihood of, say, having at least NOI or some sort of activity by year-end, this year and..

Vikram, the activity as Peter was saying on the last question, activity is very strong and good for this early in the game. And I go out on a limb that we should have a letter of intent or something sign up, hopefully before the end of the year for 2 floors or so..

And the mark-to-market expectation is the same in a sense nothing has changed? You still expect sort of a roll up?.

Yes. We are expecting a high single digit mark-to-market increase for that space..

Okay.

And then any update on activity or prospects at the Bendel space?.

Well, this is still a little early. We just got it back a couple of month ago. And as I have mentioned before, it’s a great opportunity for us. We were waiting to get that space back since we acquired the property in 1998. It didn’t come back at the best time for the retail market, but we are very positive about it.

We think it’s a great upside opportunity. You remember we collected $9.6 million more or less gross on that space, and we hope we can re-lease even just the ground floor at the same rate. So too early to give you updates and detail, but we are very optimistic at the medium-term value creation opportunity for the portfolio here..

Okay. And just last one. In the last few years, you’ve sort of reshaped the portfolio. You have a nice activity and nice holding now on the West Coast and San Francisco. Just sort of wondering, going forward from a capital – from a deployment standpoint, you have Fund IX still to be deployed.

Just wondering how you’re thinking about incremental investments New York versus San Francisco from year-on, and just in terms of portfolio mix?.

Yes. We will be opportunistic there as well. We’re very focused on not to buy – not a replacement cost. We have been having a lastingly of buying and selling assets at the right timing and we remain opportunistic. We look at value creation only, we will not buy a core asset.

We have been showing nothing in San Francisco that our team can opportunistically create value is one front, and 300 Mission was what’s before. We have the process of doing – staying with 111 Sutter. But we also look at opportunities in New York, but we will be very, very cautious about additional investment.

The market in general seems to be fully priced, but there are opportunities, and we are focusing on these opportunities as well..

Okay, great. Thank you..

You are welcome..

Our next question comes from Jamie Feldman with Bank of America Merrill Lynch..

Congratulation on all the leasing. So I guess I want to focus on the guidance pickup. It looks like you kept all of your kind of core same-store NOI assumptions and occupancy assumptions for the same-store. So I assume a lot of this is coming from better-than-expected operations in San Francisco and some of the acquisitions you’ve done.

Can you just talk about how those buildings are coming in versus your underwriting?.

I mean the building’s coming in general more positive than the underwrote. We are very cautious when we underwrite an asset. We want to create value, as I mentioned a minute ago, and I think that’s reflected in our ability to raise our guidance. And I’m sure Wilbur will add to this..

Right. And just to clarify on Albert’s point. When we underwrote One Front Street, we were expecting mark-to-markets 20% plus. The execution in that building has been north of 30% plus. So gives you a sense of how much ahead of underwriting that asset was.

When you look at the guidance, and I think your question is, okay, the earnings were up, and we didn’t change the same-store NOI metric. And if you recall, Jamie, at the beginning of the year, our original guidance fall for same-store GAAP NOI to be flat to slightly positive.

And we raised that in the first quarter in our May conference call to 3% to 5%. That raise at the time also contemplated the fact that the leases at First Republic were done. So we were a little bit ahead in raising that GAAP metric.

And the leasing that’s done this quarter encapsulates the First Republic deal and the leasing that got done with respect to 50 Beale is a pre-leasing opportunity. So really it has no impact on ‘19 because that tenant is in place through year-end ‘19. So hopefully that answers your question..

So I guess it’s two sense that you guys talking about the bump.

Like what exactly is that from?.

One is already the beat from this quarter, okay? That’s factored into the number. And then one is what we expect for the back half of this year..

Okay. And then I assume we’ll see more [indiscernible] buying from you guys, it seems to be going pretty well.

I mean how do you think about valuations in that market in kind of justifying cap rates and yields and IRRs?.

Well, we have been pretty conservative there too. We have been buying assets substantially below replacement cost, and some of the newer assets that have been trading, we did not participate in those. That have been trading for $1,400, $1,500 a square foot, because there was no value to be created.

If you look at Park Tower, that wasn’t an asset that we would have – I mean it’s a pretty building but it’s not something that we can do anything on a value creation basis.

And as I said before, it doesn’t mean we are shifting towards San Francisco necessarily, we will be opportunistic if something comes up in New York that we feel good about and we can create value, we will be definitely looking at that as well.

So we are not thinking about increasing as a certain percentage of our portfolio in San Francisco necessarily, we are opportunistic, we have boots on the ground in both markets as well as in Washington, D.C., that’s one of our operating principles. And that’s why we, as you can see, create the value.

We don’t farm out operations to a third party, because you want be hands-on and proactive on things that we have to do to others..

Okay. And then I guess just finally, thinking about the Barclays space, do you think you’ll end – I know you had the option to take back some of their space early.

Do you think some of – if you look at the discussions you’re having today, do you think that would require you to do that or you think it all expires at the end of next year?.

Well, we would be – we have a lot of flexibility since the leasing team has made their arrangement with Barclays to take back some space early. That gives us flexibility, it gives Barclays flexibility. But I think Peter and his team are looking at potentially taking some space back earlier, that I mentioned before. And Peter said so too.

There is good activity and I would expect that some of the floors will come back early and be released before they leave this space entirely..

Okay. Would those – would they be rent paying by the end of ‘20? I mean just thinking about someone else’s perspective..

I can’t give you the detail on a monthly basis at this point, Jamie. So these things are in flux. It would be too early to say that at this point..

Okay. And then do you have an update on the 1633 retail? I think you guys are thinking that [indiscernible]..

Yes. Well, first of all 1633, a 2.5 million plus square foot is 100% leased as an office. So we have not a single square foot vacant.

And I think the very – can be very proud of that this is very unusual, it’s not a single-tenant building, it’s a multi-tenant building with a lot of activity, a lot of new, modern TAMI tenants that it call it their home over the last couple of years. So actually there is more demand for meeting space and amenities.

So we expect the retail space to be used as amenity space and we have been very focused, as you might recall, over the last period, to find the right tenant for this space. We could have leased it a couple of times to tenants that would not be an amenity and would not be helpful to support the headquarter character of this asset.

And we are confident that over the next 6 to 9 month there will be a tenant that we can be proud of..

Okay great. Thank you..

Sure. You are welcome..

Our next question comes from Derek Johnston from Deutsche Bank. Please go ahead..

Good morning, everyone. How you are doing? Albert in your opening remarks, you did mention a disconnect between the sentiment in the New York midtown office market and fundamentals, right? So, I’m wondering if you still think that, that sentiment is off base given the current leasing velocity and fundamentals that you see today.

And how has leasing trends change versus just a couple of quarters ago? Please thank you..

Yes. We think the demand is quite diverse. In New York, you have seen that there is a lot of technology interest in the market as well. I think New York is in the process of establishing itself as the second technology market in the United States by far. We have the experience from San Francisco.

And I think these big technology companies, they figured out that they have to be in New York as well. Some of the big players want to be in New York City. The others have to be there.

It’s a competition for talent, and the competition for talent demands that if Google is in one market and Facebook is one market and Salesforce, the others have to come in there too.

And I think that over time, and we are at the reflection points, I feel, that over time, the demand will pick up in New York, of course by then, and we already feel it that asking rents are getting higher and the concessions are on the way to moderate. So that’s why we are generally optimistic about this market..

Okay, great. And then just lastly on Barclays, I know we are spending a lot of time on this and probably too much time.

But I was wondering, within that building, if you were able to attract a large single tenant, do you have the capability of creating a private entrance to the space for a large single tenant? Because I know that’s something that those tenants tend to enjoy..

Derek, it’s Peter. Thanks for the question. We are having conversations with tenants that have asked about it because we do have a piece of retail on the south side of the building that would provide connectivity directly up to one of the Barclays’ floor, this is the second floor, to be specific.

And that is, I think, a hugely compelling component of our offering. That separates us in the market. So, no, part of our discussion with a few of these tenants is, how we can create that branding and that connectivity up to the office premises? And that’s a very real discussion that we are now having..

In addition to that, we did so strategically. It’s a space that is currently occupied by Big & Tall. And they are on a month-to-month extension. So, Peter and his team created that opportunity strategically. And I think that’s a great opportunity for especially, the lower floors of these buildings.

And there is signage opportunity, access opportunity, which I think gives that space a tremendous advantage over the competition..

That’s very helpful. And then just lastly, so the press has reported that WeWork is contemplating in IPO capital raise.

How would you view of them as a tenant or partner change if they were successful at shoring up the balance sheet?.

I would say no comment at this point. I mean they’re in the process of doing their IPO. I think it’s pretty well known in the market what I think about WeWork. So, I don’t want to go into further details. We had opportunities, I’ve said, before. We could have leased all of our vacant space to co-working companies.

We have chosen a different route because we like long-term credit tenants in our space with the growing rents. We want to establish the most stable portfolio and I think the leasing team has done a great job there. The property the properties are long-term leased, we don’t have much of expirations for the next couple of years.

Peter and his team are already leasing at this point 2020 and 2021 expirations. We want to really create a rock solid portfolio and I think it will show if you see a downtime..

Thank you very much guys..

Thank you..

[Operator Instructions] Our next question comes from Blaine Heck with Wells Fargo. Please go ahead..

Thanks, good morning. So, Albert or Peter, just one more on the Barclays space, just thinking about the type of tenant, I know you guys originally had been looking at financial tenants, and the space kind of lends itself to that use. But it sounds like there is some big requirements from tech companies out there.

Do you think this space could show well to some of those tenants? Are you still kind of focused on financials?.

Yes. We have different floor plates, there are large floor plates, which are currently very attractive in the market for both kind of tenants. And it would be too early to say they are shown to tech tenants as well as financial service. And we are pursuing both opportunities here..

Alright. That’s helpful. And then it seems that maybe there is a little less interest in having Fifth Avenue flagship than there has been in the past.

So, I guess is there any kind of push to get that Henri Bendel space leased and put the bed in the near term? Or are you guys pretty comfortable with the interest you’re seeing there?.

Well, we’re really looking for long-term opportunity here. And as I mentioned on this call before, we were looking to get this opportunity, Henri Bendel has a flat lease. So, they leased the space in 1988 at a flat rent of $9.5 million or $9.6 million. That rent would have stayed at that same level until 2030.

So, by getting this space back, we have a tremendous opportunity to create value. And we are looking for a tenant that fits the profile of the premier location as well as the Class A trophy office building. And I said before, this might take 12 to 16, 18 months before we find the right tenant here..

Okay. That’s helpful lastly. Lastly, will there it looks like you guys were operating at a little over 8x net debt-to-EBITDA this quarter, that moves up into the mid-to high 8s with the acquisition of 55 Second depending on whether you get a JV or not. And it sounds like you’ve been buying back more shares.

You’ve also got some incremental NOI from leases coming in.

But I guess how do you think about leverage at this point? And whether you need additional funds from dispositions? Or if there are any other sources?.

Sure. One, let me just first clarify on your net debt remark, Blaine, you’re correct, if you were to look at the numbers as reported, it would be 8.1x net debt-to-EBITDA.

However, if you look at the balance sheet in greater detail, that was $170 million of borrowing under the revolving credit facility, which is offset to buy an equal amount of a loan receivable from an affiliate, which was very short term. The only thing it did is, it eclipsed the quarter.

So, when you’re looking at that leverage, you’re adding the $170 million and you’re not adding earnings that would be contributed to that because there is none. So, if you were to adjust it for that, the true metric for the quarter is 7.7x net debt-to-EBITDA. When we think about it, obviously, we’re trading in 4 to 5 caps of its assets.

From a leverage standpoint, net debt-to-EBITDA, we’re comfortable in the 7.5 to 8.5x, and even the addition of 55 Second will not take us north of that. Any future opportunities that could be done either through share buybacks or through acquisition would have to be through recycling capital or else it will increase leverage..

Okay.

And just thinking about those future opportunities, do you think you guys are more likely to continue to acquire new assets in [indiscernible] of the portfolio or is there any opportunity to purchase an additional interest and from your partners and either a San Francisco asset or a New York City asset?.

As I said before, Blaine, we will be opportunistic and we are also we will be pursuing on the other side. As Wilbur said, we’re thinking about recycling potentially capital, and we will opportunistic between New York and San Francisco.

I think at this point, it’s a little early to buying out shares of partners because normally that happens in a joint venture opportunity after 2 or 3 years, when a partner decides that they made a good return and they want to move on and do something else.

So, for us it’s important that we buy an asset at the right cost bases that we can create value. There is no urgency, there’s obviously urgency at Paramount to operate, but there is no urgency to invest. So, we will be very prudent about where we invest and what we invest into..

Alright. Thanks, guys..

Sure, you welcome..

Thank you. I would now like to turn the floor over to Albert for closing remarks..

Well, thank you, everyone for joining us today here. We are looking forward to give you an update on our progress when we report our third quarter results in November. Goodbye..

This concludes today’s call. Thank you for your participation..