Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Paramount Group Third Quarter 2019 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, November 7, 2019.

I will now turn the conference over to Robert Simone, Director of Business Development and Investor Relations. Please go ahead, sir..

Thank you, operator, and good morning. By now, everyone should have access to our third 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 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. Reconciliation of these measures to the most directly comparable GAAP measure is available in our third 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'll turn the call over to Albert..

Thank you, Rob, and good morning, everyone. Our team delivered another terrific quarter as we continue to advance our strategic growth initiatives. The highlights are as follows. We are in the midst of a record leasing year at Paramount and are again raising our leasing guidance to be roughly 1.5 million square feet.

At this level, the activity for the year will be almost twice the original leasing goal we set at the beginning of the year. This would be the highest leasing year on record for us in our five-year history as a public company.

Our prudent and strategic capital recycling program over the past few years has translated into steady growth in operating results. For the third quarter, same-store cash NOI grew 4.2% and core FFO for the quarter was $0.25 per share, up 5.3% year-over-year.

As we head into the last quarter of the year, we are again increasing the midpoint of our earnings guidance, and Wilbur will provide the specifics. We remain opportunistic and disciplined managing the portfolio and our capital.

We have been consistent and transparent in harvesting value in fully stabilized assets and recycling that capital into share buybacks and opportunities, where we can leverage our strengths to grow NOI and create value. Let me recap our capital recycling program. In late 2018, we sold two stabilized D.C.

assets at full pricing and retained net proceeds of approximately $350 million. We earmarked $200 million for share buybacks and $150 million for higher growth acquisition opportunities in San Francisco, where market fundamentals continue to be healthy.

We utilized $150 million to fund our share of the equity interest in 111 Sutter and 55 Second Street. We completed these acquisitions through joint venture structures that will further enhance returns to our shareholders as we manage and lease these assets.

We completed our $200 million share buyback program in early October and opportunistically repurchased 14.7 million shares at a weighted average price of $13.59 per share, a tremendous discount to NAV. In late September, we closed on the sale of Liberty Place in Washington, D.C., for $154.5 million or $900 per square foot.

And we entered into an agreement to acquire Market Center, a two-building complex in San Francisco South Financial District. Just like our previous two acquisitions in San Francisco, we intend to bring a joint venture partner at this asset and intend to use the proceeds from the sale of Liberty Place to fund our share of the acquisition.

Those were the highlights. Now we – let me offer some further perspective on the quarter, our markets and what we are doing going forward. As I mentioned in my opening remarks, we are on track to have a record year of leasing. Through the nine months, we have leased over 1.25 million square feet at starting rents of over $90 per square foot.

That activity has been well balanced across our New York and San Francisco portfolios. And all this leasing has not only increased same-store leased occupancy by 30 basis points year-to-date, but has also reduced 60% of our 2020 role in New York and San Francisco, thereby derisking our expiration schedule for the upcoming years.

Year-to-date in New York, we have leased 417,000 square feet. And our New York portfolio continues to be practically full at 96.1% leased, with very manageable expirations in the – on the horizon.

As you know, our principal focus in New York has been and continues to be the Barclays block at 1301 Sixth Avenue, which comes back to us at the end of 2020. As we have said before, our goal while lofty is to lease at least half of the space before expiration. The leasing environment in New York for well-maintained Class A trophy space remains robust.

The city's tenant base is more diverse than ever, and it continues to expand. The so-called FAANG companies are in the market looking for very large blocks of space. As we understand it, these companies are looking for anywhere between three million and four million square feet. All this represents growth space.

And if that comes to fruition, that would drive absorption. We remain very confident that we will be successful with 1301 just as we have been many times before with similar blocks of space in recent years. Turning to San Francisco, the market continues to be supply constrained and the demand is robust.

It remains difficult for high-quality tenants to find trophy-quality Class A space, and this positions us well to execute our strategy. During the quarter, we leased another 90,000 square feet at nine-plus year weighted average terms with average starting rents over $102 per square foot at positive cash mark-to-markets of 30%.

Year-to-date, we have leased about 825,000 square feet at nine-plus year weighted average terms and with average starting rents of over $95 per square foot at positive cash mark-to-markets of 29%. That math just goes to show you that current quarter activity is actually ahead of the remarkable first half we had in San Francisco.

As we touched on last quarter, our leasing during the first half of the year completed our efforts to address role at both One Front and 300 Mission. This quarter, we pivoted our focus to the recently acquired 111 Sutter Street.

And as telegraphed on our last call, we executed a lease that increased occupancy in the building by over 14% from 70.3% in June to 84.6% currently. And that lease was executed at a starting rent of over $86 per square foot, about 10% ahead of our internal underwriting at the time of acquisition.

During the third quarter, we closed the previously announced acquisition of 55 Second Street in a joint venture structure, where we ended up retaining 44.1% of the asset. And as I highlighted in my opening remarks, both 55 Second and 111 Sutter were acquired using proceeds from our capital recycling program by selling 2099 Penn and 425 Eye Street.

55 Second is a modern trophy building that was built in 2002, is located in San Francisco's highly desirable South Financial district. This is a great asset that benefits from its location, efficient and nearly column-free floor plates and multiple outdoor terraces.

Currently, the building is 94.8% leased, primarily to accounting, legal and technology tenants at rental rates that are approximately 15% below market. The opportunity here is that the weighted average remaining term on the leases is only about five years with roughly 80% rolling between 2022 and 2025.

As we did with One Front and 300 Mission, we will be proactive in addressing this role. In addition, we also entered into an agreement to acquire Market Center, a two-building Class A complex, also located in the highly desirable South Financial District. We expect to complete the acquisition late in the fourth quarter.

As with our recent additions, we anticipate bringing in a joint venture partner and use the proceeds from the recently announced sale of Liberty Place to fund our share of the acquisition. Needless to say, we are very excited about the value creation opportunities at 111 Sutter, 55 Second and Market Center.

Lastly, I want to share our views surrounding the much talked about co-working business model. Let me first start off by saying, we do not have any exposure to WeWork or any sort of co-working in our portfolio. They did not take place by accident, but was a deliberate decision on our part.

Thinking back a couple of years, co-working became all the rage with the rise of WeWork. It was the talk of the town and most office landlords lined up to do deals with them. We, however, stayed on the sidelines, and that wasn't easy, especially considering we had a lot of large block availabilities at the time.

We studied WeWork, and we're not comfortable with their business model and credit. We choose to remain disciplined, and leased our space long-term to credit tenants. While I was always certain that our discipline and judgment would be proven right, even I must admit it occurred a lot sooner than I anticipated.

That said, we do not think co-working as a concept is bad for the real estate business. In fact, in a properly structured real estate business model as opposed to a hyper-growth tech platform, co-working can serve a critical function in any market.

While we choose not to transact with WeWork, there are other co-working providers that are much more thoughtful about their business model, and we continue to engage with them. We think there can be benefits to a co-branding partnership of sorts with a partner that reflects who we are as a brand and appears to the most discerning tenants.

We do have select buildings where we think co-working could make sense. Of course, if you decide to do something in this area, we would be measured, thoughtful and fiscally responsible in our approach. In closing, I'd like to say that I'm very happy with the way we have positioned our portfolio.

Our portfolio is effectively full, and upcoming lease expirations are below average over the next couple of years. The space that we do have available is very attractive and leasing within reasonable periods of time on favorable terms relative to the market.

We have been very consistent in our efforts to sell low growth assets and recycle 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.

And we have built a portfolio that is rock solid and is long-term leased to high quality tenants, a fact that will undoubtedly get more appreciation in the not-too-distant future. With that, I will turn the call to Peter to give additional insights on our leasing..

Thanks, Albert, and good morning. During the third quarter, we leased approximately 209,000 square feet, bringing our year-to-date total to more than 1,250,000 square feet leased.

This leasing production has not only addressed immediate vacancy in the portfolio, but has also served to further reduce our near-term lease roll, which is currently a manageable 6.9% expiring per annum through year-end 2023. At quarter end, we were 96.7% leased on a same-store basis, up 30 basis points year-to-date.

Our availability has remained very well positioned relative to current tenant demand, and we expect to build on our proven track record of attracting credit tenants across a diverse range of industry. Let's review our results by market. Beginning in New York, our same-store portfolio is 96.1% leased at quarter end, up 10 basis points year-to-date.

During the third quarter, we leased approximately 115,000 square feet. Through the first nine months of the year, we have leased approximately 417,000 square feet at a weighted average term of approximately nine years with initial rents nearing $84 per square foot. During this period, we have eliminated approximately 53% of our 2020 lease roll.

As a result, the New York portfolio is very well positioned with approximately 6.8% expiring per annum through year-end 2023. Our New York properties are ideally located and well positioned relative to current tenant demand.

We have capitalized on this competitive advantage by successfully leasing to the most discerning of tenants quarter after quarter. We remain 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 effort to lease the space. 1301 Avenue of the Americas is located in the heart of the Sixth Avenue submarket, among Midtown's strongest performing submarkets. Year-to-date, Sixth Avenue has contributed more than any other submarket toward positive absorption in Midtown.

Additionally, the Sixth Avenue submarket boasts the lowest availability rates of any submarket in Midtown at 9.5%, 200 basis points below the broader Midtown availability rate.

We are confident that the strength of the Sixth Avenue submarket coupled with 1301's central location, large and efficient floor plates, building quality and the size of the block will yield an accretive result. We are actively marketing space and look forward to updating you on our progress.

As a reminder, Barclays lease expires on December 31, 2020, and shows up in our lease expiration table in 2021. On the retail front, we are moving the process forward on the Bendel space, but nothing yet worth discussing. At 1633 Broadway, we have made progress and are currently focused on one tenant for the cube space.

This particular user would provide a tremendous amenity for the office portion of the building, which, as you know, is fully leased. We hope to have more to share soon. In San Francisco, our same-store portfolio was 99.8% leased at quarter end, up 180 basis points year-to-date. During the third quarter, we leased approximately 90,000 square feet.

Through the first nine months of the year, we have leased approximately 825,000 square feet at a weighted average term of approximately nine years with initial rents over $95 per square foot. During this period, we have eliminated approximately 70% of our 2020 lease roll on a same-store basis.

Looking ahead, the San Francisco portfolio is very well positioned with approximately 6.3% expiring per annum through year-end 2023. Leasing fundamentals in San Francisco continue to strengthen, 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 16.6% year-over-year for Class A product in the CBD. Vacancy for Class A product in the CBD continues to decline, down 220 basis points year-over-year to 5.3%. It is our expectation that rents will increase further given robust demand and limited supply.

At One Market Plaza, we completed five transactions during the quarter, bringing our occupancy to 99.6% leased, up 60 basis points year-to-date. One Market continues to achieve among the highest rents in San Francisco.

At One Front Street, we are 100% leased as a result of last quarter's long-term 265,000 square foot expansion with First Republic Bank. At 300 Mission Street, we are 99.7% leased.

As reported last quarter, we successfully completed the lease-up of 300 Mission with three deals totaling more than 262,000 square feet at a weighted average initial rent of $92.70 per square foot and a weighted average lease term of 10.5 years. We have now turned our attention to 111 Sutter Street, which we acquired in February of 2019.

The building is architecturally significant and appeals to creative tenants and traditional tenants alike. During the quarter, we signed a new lease with Turo, an exciting tech company and pioneer in the car sharing space. Turo leased three floors totaling approximately 40,000 square feet.

With this lease, we have increased our leased occupancy percentage at 111 Sutter to 84.6%, up from 70.3% in June, and we look forward to continued progress as we execute on our business plan for 111 Sutter.

Lastly, in San Francisco, we are excited by the opportunity we have at 55 Second Street, a building that is currently 94.8% leased with in-place leases well below market.

The building boasts an award-winning design, efficient floor plates, desirable amenities and a central location, all of which will support our team's effort to take advantage of the current and upcoming availabilities and create tremendous value in the process, much like what we have done in the recent past with our portfolio in San Francisco.

In Washington, D.C., with 1899 Pennsylvania Avenue, we are currently 90.4% leased with a de minimis amount of lease roll over the next two years. Despite increasing supply in the core submarkets of D.C., our strategy continues to allow us to attract demand from premier tenants for our limited availability.

With that summary, I will turn the call over to Wilbur, who will discuss the financial results..

Thanks Peter. We had another strong quarter of financial and operating performance. Our core FFO for the quarter was $0.25 per share, bringing our year-to-date results to $0.72 per share. Core operations for the quarter were in line, and the out-performance was largely driven by fee income in connection with our acquisition of 55 Second Street.

Based on our outlook for the fourth quarter, we are once again increasing core FFO guidance to be between $0.95 and $0.97 per share, up $0.01 at the midpoint from our prior guidance. If you take a deeper dive, however, the increase is really $0.02 per share since our prior guidance did not include the sale of Liberty Place.

As a result, we no longer expect to receive a penny of earnings that would otherwise have contributed to the fourth quarter. Our same-store cash NOI grew by a healthy 4.2%, but as expected, decelerated this quarter relative to the first two quarters of the year given higher comps from the prior year.

Year-to-date, same-store cash NOI grew by a robust 7.8%. We now expect to end the year with same-store cash NOI growth of 7%, which is 100 basis points lower than the midpoint from our previous guidance.

This decrease was driven by a tenant electing to convert their tenant improvement allowance into free rent, thereby reducing the cash rents we were expecting to receive in 2019. Looking at same-store leased occupancy, we ended the quarter at 96.7%, full by any measure and up 30 basis points from year-end.

As we have been telegraphing all year long, our lease expirations in 2019 were back-ended, and we have 95,000 square feet expiring in the fourth quarter, including a 73,000 square foot known move-out at 900 Third. That equates to a 110 basis point decline in occupancy from quarter end.

Notwithstanding this decline, we expect to end the year with same-store leased occupancy rate between 96% and 96.4%, down 50 basis points at the midpoint from quarter end. As highlighted earlier, we continued our leasing momentum this quarter.

And despite limited availability, we have been executing leases for significant space in both New York and San Francisco. During the quarter, we executed 14 leases covering 209,000 square feet at positive mark-to-markets of 11.1% cash and 13.8% GAAP. San Francisco, once again, outperformed with mark-to-markets of 29.9% cash and 47.7% GAAP.

Mark-to-markets in New York were roughly in line with the market in the low single-digit range as cash mark-to-markets were up 2.5% and GAAP mark-to-markets were down 2.8%. Turning to our balance sheet.

We ended the quarter with over $1.3 billion of liquidity, comprised of $323 million of cash and restricted cash and $1 billion of availability on our credit facility. Our outstanding debt at quarter end was $3.3 billion at a weighted average interest rate of 3.7% and a weighted average maturity of four years.

85% of our debt is fixed and has a weighted average interest rate of 3.6%. The remaining 15% is floating and has a weighted average interest rate of 4%. We have no debt maturing until the fourth quarter of 2021. And beyond that, our maturities are well laddered.

As Albert mentioned, we remain opportunistic in taking advantage of this locations in our share price. During 2019, we repurchased 7.2 million shares at a weighted average price of $13.22 per share or an aggregate of $94.6 million, thereby completing our $200 million share buyback program.

All in all, between the $105.4 million, we repurchased in 2018, and the $94.6 million, we repurchased in 2019, we have bought back 14.7 million shares or over 6% of our outstanding float at a weighted average price of $13.59 per share. Furthermore, this buyback will save us $5.9 million annually in dividends and distributions.

The Board continues to share our belief that strategically buying back shares in a leverage-neutral manner can be an effective component to our efforts to create long-term shareholder value and have authorized us to put in place another $200 million share repurchase program.

Lastly, we have also updated our investor deck, including our schedule of free rent and signed leases not yet commenced, which now sits at $41.3 million. This information can be found on our website at www.paramount-group.com. With that, operator, please open the lines for questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Vikram Malhotra with Morgan Stanley. Please go ahead..

Thanks for taking the questions. Just first, maybe Wilbur, on the guidance adjustment, I believe it had to do with basically TIs being converted to free rent.

Can you give us more color, walk us through exactly what happened? And then going forward, is there any follow-on impact into 2020?.

Sure. Basically, this was a deal that we had signed early in the year that gave the tenant an election to convert its free rent. I gave – given election to convert its tenant improvement allowance into free rent.

At the time we signed the deal, the anticipation was that the tenant would use it as a tenant improvement allowance, and the option for the tenant to convert this went into 2020.

And unexpectedly, they notified us that they would like to avail themselves of that option in the current year, and so that was a onetime effect that kind of affected 2019's numbers.

So had we known that sooner, we would have adjusted the guidance prior quarter, but that happened now, and we thought it's the right thing to do and adjust the guidance accordingly. So that's what happened. We don't expect this to have any impact into 2020..

But there's no like net cash because – impact, right, because you're just – there's no TI impact?.

The economic impact, Vikram, as you point out, is neutral because if you're looking at this from an FAD perspective, you would have either had a higher cash rent and a higher CapEx or a lower cash rent and lower CapEx. So your FAD is neutral..

Okay. Great. Then just on the Barclays space. I know the team mentioned you guys are – you're confident in leasing that up.

Can you give us just any more color what you're seeing more recently in the types of tenants? Are you still comfortable with kind of the loose goal you've put out of getting 50% done before they expire?.

Yes, Vikram, this is Albert. We haven't changed our approach there. We see a good array of different tenants, financial service as well as legal and TAMI. This space will not go in one lot, that would be very, very unusual. But it's – size-wise interesting because it's in an area of 300,000 square feet plus where there's only limited space available.

So we have very solid showings, and we have the availability, as we said on the last call that we could take back on a floor-by-floor basis that space early. And I think that avails us to lease it up swiftly, and that's why we are confident to have our goal achieved to lease more than 50% or 50% before expiration..

Okay. Great. And Albert, just if I can sneak one more in. There have been reports out that potentially you might be exploring the sale of a couple of buildings, in particular 1633, and I'm just wondering with the sting tax sort of expiring now and the shares still trading at big discount to consensus NAV.

Can you sort of walk us through how you're thinking about potentially attacking that gap over the next, call it, three to six months?.

Well, I don't think you expect me to go into too much detail, Vikram, here. And it's still speculative and too early to go into any detail. I think what's out in the reports is that we are looking at potentially selling 0.5 or up to 0.5% – 0.5 of 1633 and not the entire building and potentially 900 Third.

And that, I think currently reported, but not reported by the company, and it's too early to really go into details on that.

But we have said in the past, if we have created value in an asset and we could use those proceeds to use them for other needs, potentially buying back shares or investing in higher growth assets, we would consider those options. And we will act in the best interest of the shareholders at the time..

Okay. Great. Congrats on the strong quarter..

Thank you..

Our next question is from Jason Green with Evercore. Please go ahead..

Good morning. Looking at the investor deck from a rent perspective, you're now, call it, 22%, San Francisco, and 76%, New York City.

All else equal, what's the end goal for allocation from a geographic perspective?.

There's really no angle, Jason. We are looking at it very opportunistically. And we have been buying, as it's very clear into San Francisco this year quite successfully and have recycled assets from Washington, D.C., into this markets because of the higher growth that comes with the assets in San Francisco.

That doesn't mean that we would not be able to adjust that program. We are not really aggressively doing this. We are looking for opportunities. And we look at it opportunistically. And we are looking at it on a case-by-case basis, but we will be very decisive if we see an opportunity in these markets..

And Jason, I would just add that your commentary about the 22%. That is obviously as of 3Q 2019 and does not reflect the Market Center acquisition. So that pie chart effectively will organically grow when we close that transaction..

Got it. And then on the share buybacks and authorizing additional $200 million program.

I guess, how do you think about the program given on the one end you're buying assets at a very attractive cap rate, but on the other hand the buybacks you've done to date haven't done all that much for the stock?.

So I mean, you can look at it from that way, but that's clearly not the right measure to look at it. I think we understand the value inherent in the stock. We understand where the market is trading assets at, at an implied price per foot, pick a number, 700 and below, and we have been consistently selling assets well north of that number.

The theory on the buyback is not to move the stock price, but it's a capital allocation view on long-term value creation. So we're not troubled by the fact that the buyback has not impacted the stock price significantly.

In fact, we're probably one of the few companies that can say that the buyback has been executed at a price below where our stock is currently trading. And there's not a lot of people who can say that. So we've been very, very selective, very opportunistic.

Albert had highlighted from the very beginning that it would be a dual approach and all capital allocation decisions are considered very carefully by the Board in how we want to take advantage. So there's no real change in our thinking..

Got it. Thank you very much..

Thank you..

Our next question is from Jamie Feldman with Bank of America Merrill Lynch. Please go ahead..

Great, thank you. So I guess, I mean, going back to 1633, my understanding is you probably need to refinance some debt or do some sort of recapitalization there. Whether you decide to sell 50% or refinancing, what's kind of the timing and kind of deadline where you have to make a decision either way.

And if you were to do the 50% sale, can you just talk through tax protection and whether that could be a special dividend? Or just how you would have to handle the proceeds?.

Well, there are two different things going on here, Jamie. We are actually looking to take advantage of the low interest rate environment to refinance the debt of the asset. That's one thing we are currently looking at, and that would be accretive. And we are parallel looking at potentially doing something else.

I wouldn't like to go into too much detail here. I mean, the cost of debt remains very attractive. And so we are looking at that option. And we could always do a 1031 exchange. As we have done in the past with Waterview and through the predecessor, we have done it successfully a couple of times.

So we will be very cautious and smart about how we do this..

Yes. I would just add, Jamie. You said you need to – there is no need, that the debt on 1633 today matures at the end of 2022, and it is at a 3.55% weighted average interest rate. We just see tremendous liquidity in the market. The asset is 100% leased on the office side. The weighted average term on existing lease is over 10 years.

So we, as a good capital allocators and stewards of capital, we continue to explore the possibility of reducing the interest rate of that on a very significant asset in this portfolio. So that's a separate approach. And as Albert said, opportunistically, we felt we've created value, we'll explore other opportunities.

From the tax protection point of view, the sting tax – and Vikram asked, there is a sting tax on any of these assets that burns off come November 24. So this is not a sting tax issue necessarily. It is going to be a taxable gain issue, which would then require a special dividend. The assets in the New York portfolio have a significant tax gain.

And hence, if we were ever to transact on anything like that, we would have to evaluate all the tax consequences, whether it's special dividend, whether it's 1031. And we'll do that in due course when the time permits and if the opportunity arises..

Okay. And to the extent you do have excess capital to put to work. I mean, clearly, you've sent the message you like San Francisco a lot. So I guess, two questions.

One is, how do you feel about the supply pipeline coming in San Francisco and kind of a long-term prospects in that market as you do start to see some of the Central SOMA projects coming online? And then secondly, the tone on New York City has changed much, I think you had mentioned four million square feet of potential tech demand.

When do we start seeing you buy into value-add assets in New York and kind of keeping money here locally?.

On the first half of the question, in San Francisco, we see the market still being extremely robust in our area. Tenants are interested to take space way ahead of 2020, into 2021. So that market, as we have seen can change. But currently, we are not seeing any change here. And when it comes to New York, we will be opportunistic, as we had said before.

We – there is not much of attractive assets in New York City currently in the market because there's a lot of liquidity on the debt side. And as we talked about it before, many, many market participants prefer to recapitalize with first mortgage debt that's very attractive and mezzanine debt instead of selling an asset.

We know that these assets are extremely valuable, and the cost of transacting, including taxes are pretty high in New York City. So market potential – potential sellers will think about it twice before they put the asset into the market. But if there is an opportunity, we look at it opportunistically.

And we have sufficient capital through joint venture abilities that's looking for a home for their equity capital. We know in Europe and other parts of the world there's negative interest rate momentum. We actually see the hedging costs coming down between the dollar and the euro.

So there is increased activity and interest in putting capital to work in United States..

Okay.

And then last for me, just in case I may have missed it, but could you talk about what you think your mark-to-market is on your 2020 expiration?.

I mean, it's too soon to tell. I think, by and large, we think, again, it is going to be a high single-digit, low double-digit mark-to-market, consistent with where we are today or this quarter I should say. Year-to-date, we're in the really high double digits and close to 20%.

But I think 2020 will be closer to the high single-digit, low double-digit..

Okay, all right. Thank you..

You’re welcome..

[Operator Instructions] Our next question is from Derek Johnston with Deutsche Bank. Please go ahead..

Hey, good morning, everyone. Thank you. Just sticking with San Fran for a second here, I think year-to-date you said there were around 825,000 square feet that was signed.

What are you getting from these acquisitions? So Market Center and 55 Second Street as far as expirations are concerned, are they coming up here in the current lease expiration schedule because, obviously, there's a paucity of large block space available in San Fran. And just wondering if there's any near-term optionality there..

In both assets, I mean, 55 Second Street, as we had mentioned before, the building is currently pretty much leased, it's close to 95% leased. Over the next five years, we have about 80% rolling. And there's a significant mark-to-market potential – upside potential. The rental rates are currently about 15% below market.

And so there's an upside opportunity in that acquisition, when we come to Market Center, there will be opportunities that we don't want to go into in too much detail at this point. We're expecting to close on the asset before year-end. And we are expecting to do that together with a joint venture partner, as we have outlined before.

At 111 Sutter, we have a substantial upside here. We have 50% of below-market leases rolling in the next three years. And so there's upside to have in that market for sure..

Okay. That's helpful. And then, okay – when we look at fundamentals. Fundamentals have been better than expectations in office, both for PGRE as really as well as your peers. However, the NAV discounts and the negative investor sentiment really continues to persist.

So I guess the question is, what are investors and pundits getting wrong in office REITs right now..

Well, that's a very good questions, and we ask that question ourselves from time to time. So we are producing great results. We have, I would say, one of the best assets in the market. We are well established. We have a great team. I think it's a momentum that's currently not in favor of office in general. And as we all know, that can change.

So we are at five years being a public company, and we hope that this momentum will change. Currently, investors are much more focused on growth and technology.

And we have been putting a lot of work into establishing a fortress-like long-term lease to investment credit tenants portfolio with long leases and growth potential in San Francisco, for example, in nearly all of our leases we get increases of 3% per year. So there's growth embedded in this portfolio, and it's – with very long duration leases.

And that's what we're looking for because we know that things can change in the economy. And then I think the investors will hopefully appreciate us a little bit more..

Understood. And just one quick one, lastly.

What's the plan at 712 Fifth Avenue with occupancy at around 71%? Is the $200 million additional share repurchase more valuable than maybe repositioning that asset going forward?.

Yes, that asset, we have repositioned. If you have time, we would love to show you the new lobby that just opened up and got finished. I would say that's the most beautiful redevelopment in New York or one of the most – and we get some very, very positive comments on it.

And we are having a lot of activity on the office side, and you will see that, hopefully, over the next quarters. And with regard to the retail space that's available since Henri Bendel moved out early in the year that we actually were waiting for because the lease was substantially below market rent.

And I mentioned early on that this will take a while, might take up to two years. The market, in general, the retail market in – on Fifth Avenue and Madison Avenue is not in the best shape currently. So the timing for getting this space back is not ideal.

But we have interest in this space, and we are looking for the best option that would fit into this significant and fantastic asset..

Thanks again, everyone..

You’re welcome..

Our next question is from Tayo Okusanya with Mizuho. Please go ahead..

Hi good morning. I just wanted to follow up your comments about the Bendel Space and Fifth Avenue.

Can you just talk a little bit about again your interaction with retailers, what – who are interested in the space exactly? What they're willing to kind of take the space for? I mean are you trying to low ball or have very aggressive lease terms simply because of all the vacancies that's on Fifth? Or are you having more constructive conversations with people who are looking at it long term?.

Well, we are having discussions with interested parties. They are more in the upper end of retail, more in the luxury retail group. And you keep in mind that the rent for that space was $9.6 million only.

And if you would just lease the ground floor at market rent and not the entire space, which is only like 10,000 square feet of close to 85,000 square feet, you would get the same return as what you got from Henri Bendel. So we are quite optimistic, but we want to make sure that we get the right use for the – for this space..

Thank you..

You’re welcome..

Our next question is from Daniel Ismail with Green Street Advisors. Please go ahead..

Great, thank you. Good morning. Just a question on new submarkets.

As you guys are evaluating potential new acquisition opportunities, are you taking a look at any additional new submarkets outside of your current footprint?.

Are you talking about new submarkets outside of New York, D.C., and San Francisco? Or submarkets of these three cities?.

The latter..

Okay. We are constantly evaluating the markets that are outside of the three cities. I would say, in D.C., we are most concerned about going into certain markets outside of the CBD. In New York, we have never bought anything on the equity side outside of the Manhattan Island.

And we are observing what's happening for sure, and we have been involved in mezzanine investments outside of the Manhattan Island. We're observing, but we haven't been active so far. Manhattan itself is – it's a large enough market where we have opportunities between Downtown, Midtown, Midtown South potentially.

It's the largest market in the United States. That's where our expertise is. And I think that, that has been the discipline of this company that we are focusing on the markets that we know well, and there's enough space for us to invest in and operate in.

When it comes to San Francisco, as you could see, over the last 12 months, we have been successful in buying value-add opportunities in the CBD market. We are, of course, observing the other markets too, but we haven't done anything actively there..

And within your current footprint, it seems like the push for carbon emissions and other green new deals, whatever you want to call it, seems to be picking up steam.

Has that impacted your underwriting at all?.

Well, we are looking at each acquisition, what the impact with regard to carbon footprint is across the portfolio. You might recall that we have been very active early on. All of our properties are LEED certified and either Gold or Platinum. And I think we are the only office suite in that segment that can say that.

So we are for sure looking at each acquisition what impact that has..

Okay. And then just last one for me.

With respect to the buyback program and potential sales down the road, could we see you guys deploy some of that capital into paying down debt in the near future?.

We want to use – that could be one of the uses of the cash, but currently that is very attractive. And we clearly always said, and we – I can reiterate, we would not increase that for using the buyback option that we have. We said we use the sales of assets to potentially acquire shares in the company.

And we want to be opportunistic, and we want to do it leverage, for sure leverage neutral..

Great, thanks guys..

You’re welcome..

This concludes the question-and-answer session. I would like to turn the conference back over to Albert Behler for any closing remarks..

Thanks, everyone, for joining us today. We look forward to providing an update on the continued progress when we report our fourth quarter results in February. Bye..

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day..