Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Paramount Group First Quarter 2022 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, April 28th, 2022.

I will now turn the call over to Tom Hennessy, Vice President of Business Development and Investor Relations..

Thank you, Operator, and good morning, everyone. Before we begin, I would like to point everyone to our first quarter 2022 earnings release and supplemental information which were released yesterday. Both can be found under the heading Financial Information, Quarterly Results in the Investors section of the Paramount Group website at www.pgre.com.

Some of our comments will be forward-looking statements within the meaning of the Federal Securities Laws. Forward-looking statements which are usually identified by the 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 upon 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 first quarter 2022 earnings release and our supplemental information. Hosting the call today, we have Mr. Albert Behler, Chairman, Chief Executive Officer, and President of the company.

Wilbur Paes, Chief Operating Officer, Chief Financial Officer, and Treasurer. And Peter Brindley, Executive Vice President, Head of Real Estate. Management will provide some opening remarks and we will then open the call to questions. With that, I will turn the call over to Albert..

Thank you, Tom. And thank you, everyone for joining us this morning. Yesterday, we reported our core FFO for the first quarter of $0.25 per share with Same-store cash, NOI growing 3.9% year-over-year. As a result of our strong first quarter earnings, we are raising our full year 2022 core FFO guidance.

Wilbur will review our financial results and guidance in greater detail. During the quarter, we leased approximately 203,000 square feet, which was in line with our expectations and about 7.5% more than the leasing we accomplished in last year's first quarter.

As you may recall, we leased over a million square feet last year and as we had outlined in our guidance, we once again expect to lease over 1 million square feet this year. Of the 203,000^2 feet leased in the quarter, over 175,000 were leased in New York. The current quarter's leasing was highlighted by two important deals.

First, an AP 7,500 square foot renewal with Hilton at 13-25-6 Avenue for an 11 + year term. And second, our previously announced 15-year new lease with Din Tai Fung, covering over 26,000 square feet of retail space at the base of the glass cube at 1633 Broadway.

As I've said before, our approach to leasing up the glass cube at 1633 Broadway, was deliberate and admittedly, took longer than we would have liked, but we couldn't be happier with the outcome. This world-renowned restaurant will serve as a great amenity for the 2.5 million square feet of tenants working above and the additional nearly three points.

5 million square feet in the vicinity in all our roughly 6 million square feet campus between broadband Sixth Avenue will now be surrounded. [Indiscernible] secure rated, and desirable amenities like Equinoxe that promote health and wellness. A variety of food and beverage options. Including the entire Fung.

[Indiscernible], ocean prime and La grant Busheri. All this will be stitched together by us soon to be developed world-class amenity center at 1301 Sixth Avenue, which will provide state-of-the-art conference room spaces, grab and go food options and lounge areas for tenants to socialize and work.

We look forward to updating you on our plans for the amenity in the upcoming quarters. Now, let me spend a few minutes on what we are seeing in our markets.

While over the past year, tenants have taken a measured approach when assessing return to office timelines, we are beginning to hear more firms ' plans for returning to the office during the month ahead.

When you compare our two markets, New York and San Francisco, not surprisingly, the environment in San Francisco seems to be lagging behind New York. We see that in utilization and we see that in leasing activity. As you may recall, San Francisco had stricter pandemic related lockdowns than New York.

And it was also one of the last cities to remove mask mandates. So naturally, their return to office plans moved much slower compared to New York.

While these restrictions have served as a near-term headwind for the San Francisco office market, we are not worried about the market's medium and long-term prospects as job growth is robust, and VC funding continues at a record pace. Looking at our own portfolio, our reported results reinforce the current dynamics we are seeing in our markets.

Our positive results this quarter were driven by our New York portfolio as it represents about 70% of our overall business. 86% of this quarter's leasing was in New York. While our portfolio same-store cash NOI was up 3.9%, New York was up a remarkable 6.6%. And while portfolio leased occupancy was down 10 basis points, New York was up 40 basis points.

One theme however, that is consistent in both our markets, is a notable shift towards a flight to quality. Brand new buildings and buildings that have been invested in are performing considerably better than Class B products. This bodes extremely well for landlords such as Armand, who own and manage Class A and Trophy assets.

We expect to continue to benefit from this phenomenon as tenants in the market are seeking well operated, well located, well amenitized and environmentally conscious buildings for their employees. Turning to the transaction market, we are beginning to see an uptake in activity in New York.

The first quarter saw roughly 5 billion of transaction volume and New York, although it was driven by a few large assets in the market. Pricing for Class A and Trophy assets continues to be strong highlighting the importance of high-quality Class A office assets in desirable CBD markets.

The rising appetite of investors to pull the trigger on office acquisitions is a strong indicator that sentiment on the future of office real estate is returning to historical norms. For our part, we have always maintained a disciplined approach with our capital and continue to monitor the markets carefully.

We have always been opportunistic and we continued with that approach during the quarter as we completed the previously announced acquisition of 1600 Broadway, a 26,000 square foot retail condominium in the heart of Times Square.

The properties 100% leased to Mars as a flagship location for M&Ms World and was recently extended for 15 years, including a significant commitment by Mars to improve the space. We see this commitment by Mars as a testament to the long-term value of this iconic Times Square attraction and resilience of the New York market in general.

The purchase price was $191.5 million and the joint venture closed on a $98 million mortgage loans simultaneously with the acquisition. Our joint venture partner here, who is an existing partner in another San Francisco asset, will own 91% of the asset and we will own the remaining 9% and serve as the manager.

During the quarter, we also advanced our sustainability initiatives. Our sustainability initiatives are embedded into our business plan and are critical to our leasing program, especially in the current environment as tenants are increasingly looking to partner with owners that share their values.

As we recall, we have achieved 2021 energy style labels across our entire office portfolio, signifying that our assets perform within the top 25% in terms of energy efficiency nationwide as certified by the EPA. We now have a portfolio that is 100% lead, platinum, or gold with energy labels and [Indiscernible] certifications.

Our commitment to sustainability is undeniable and we continue to push to improve. In April, we announced that 111 Sutter Street, a [Indiscernible] gold certified building earned lead platinum status and was recognized as San Francisco's highest scoring lead project in 2021 a proud achievement. As has been the case since the pandemic began.

We continue to maintain sufficient Liquidity, which amounts to about 1.3 billion at the end of the quarter, with our portfolio of stable Trophy assets and our proven ability to allocate capital. We remain well positioned for the long term. Let me wrap up by saying operating goals continued to be clear.

Our primary focus is on the lease up of our available space and the reintegration of our tenants in a safe and healthy manner. With that, I will turn the call to Peter..

Thanks, Albert, and good morning. During the first quarter, we leased approximately 203,000 square feet for a weighted average lease term of 7.8 years. Our first quarter leasing activity was highlighted by the 175,000 square feet of leases we signed in New York.

The two most significant transactions during the quarter for the previously mentioned new lease with Din Tai Fung at 1633 Broadway, and a long-term renewal with the Hilton on two large floors at the base of 1325 Avenue of the Americas.

The Hilton utilizes these floors for event space, reinforcing the long-term expectation of a return to large-scale events. At quarter end our portfolio wide leased occupancy rate at share was 90.6% down 10 basis points quarter-over-quarter.

As we look ahead, our remaining lease expirations are manageable with approximately 7.2% at share expiring per annum through 2024, a direct result of our ongoing strategy to pre -lease space and de -risk future lease role.

Turning to our markets, Midtown's first quarter leasing activity of approximately 3.4 million square feet, excluding renewals, was the third consecutive quarter of leasing activity in excess of 3 million square feet, an indication of the recovery that is underway.

A significant portion of this quarter's leasing occurred during the month of March as more and more companies are returning to the office, resulting in Midtown's second highest quarterly leasing activity total since Q1 2020.

Renewal activity reached a modest 500,000 square feet during the quarter, 55% below the five-year quarterly average as tenant interest continues to shift from short term renewals to new long-term commitments. Financial services industry continues to drive the Midtown market, contributing 39% of leasing activity during the first quarter.

Despite Midtown's elevated availability rate, tenant touring activity for high quality direct space in the market continues to accelerate, particularly in well-located Class A buildings.

Tenants who are more discerning than ever before, are seeking high quality real estate to compel their employees to return to the office and enhance all of the benefits that can only be realized when people are working together in person.

Tenants ' increasing desire to raise the bar and improve the quality of their real estate has resulted in the flight to quality trend that continues to gain momentum in New York.

We continue to attract more than our fair share of activity in the market, which is attributable to not only to the quality of our assets, but also to the strength of the Sixth Avenue sub market, which is where we have our largest availability at 1301 Avenue of the Americas.

Sixth Avenue continues to maintain the lowest availability rate of any sub market in Midtown at 12.9%, 570 basis points below the broader Midtown availability rate.

Our offering at 1301 Avenue of the Americas includes the possibility of a significant welcome center on the avenue for a large tenant, prominent branding, large and efficient base floors, a 5,000 square foot tenant, dedicated outdoor terrace, and a soon to be world class amenity center in the building, all of which continue to resonate with prospective tenants.

We are at various stages of discussions with several tenants and look forward to updating you on our continued progress at 1301 Avenue of the Americas. Our New York portfolio is currently 90.8% leased on a same-store basis at share, up 40 basis points quarter-over-quarter and up 350 basis points year-over-year.

During the first quarter, we leased more than 175,000 square feet at a weighted average term of 8.3 years, much of which serve to reduce lease role in 2022 and 2023.

Our New York portfolio has 2.2% or approximately 132,000 square feet at share rolling in 2022, which includes approximately 80,000 square feet at share at 60 Wall Street, which will begin its redevelopment in June of this year.

Looking further out, our overall lease expiration profile in New York is manageable with 7.1% at share expiring per annum through 2024. Turning now to San Francisco. While San Francisco's leasing activity was muted during the first quarter, there were several key developments that contributed to recent increased tenant demand.

The statewide mask mandate was lifted during the quarter, and many San Francisco based companies announced their return to office plans, all of which as it resulted in an increase in utilization and will drive leasing activity going forward. In addition, venture capital funding in San Francisco remains robust.

San Francisco based companies raised more than $78 billion in venture capital in 2021, an all-time high and continue to attract significant capital having raised 16.5 billion through the first three months of 2022.

Venture capital backed companies accounted for 14 of the 26 deals completed in 2021 in excess of 50,000 square feet and will be a key demand driver going forward in 2022. Subleased availability remains elevated but has declined for the fourth consecutive quarter down more than 15% year-over-year.

The market for San Francisco 's premier assets remains tight and economics, particularly for view space and trophy assets remains strong. Similar to New York flight to quality is a trend that continues to gain momentum in San Francisco. At quarter end, our San Francisco portfolio was 90.1% leased on a same-store basis at share.

During the first quarter, we leased approximately 27,000 square feet at a weighted average term of 4.6 years with initial rents of approximately $100 per square foot. Our San Francisco portfolio has 3.6% or approximately 79,000 square feet at share rolling in 2022.

Looking further ahead, our overall lease expiration profile in San Francisco is manageable with 7.4% at share expiring per annum through 2024. Our San Francisco portfolio was well positioned to manage through the current environment. With that summary, I will turn the call over to Wilbur, who will discuss the financial results..

$0.01 from lease termination income which we recognized in the first quarter, $0.01 from better-than-expected portfolio operations, partially offset by $0.01 from higher interest expense on variable rate debt.

We continue to expect Same Store Cash NOI growth to be between 1% and 2%, notwithstanding that our first quarter results are trending ahead of these expectations. As we will be contending with tougher comps in the second half of the year.

On the same token, we expect GAAP, same-store NOI growth to be between 2.5% and 3.5%, not withstanding that our first quarter results are lagging these expectations as we expect to benefit from higher straight line rent commencements as the year progresses. Turning to our balance sheet.

We ended the quarter with $1.25 billion in Liquidity, comprised of $502 million of cash and cash equivalents and $750 million of capacity under our revolving credit facility. Outstanding debt at quarter-end was $3.7 billion at a weighted average interest rate of 3.3% and a weighted average maturity of 4.8 years.

87% of our debt is fixed and has a weighted average interest rate of 3.26%. The remaining 13% is floating and has a weighted average interest rate of 3.74%. We have no debt maturing in 2022 and only 5% of our share of debt maturing in 2023.

Lastly, we have updated our investor deck and our schedule of free rent, which increased by 49% from our February investor deck and now sits at $51.8 million. Our investor deck can be found on our website at www.pgre.com. With that, Operator, please open the lines for questions..

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Your first question comes from Steve Sakwa with Evercore..

Thanks. Good morning. I guess first Albert, and I don't know how much detail you can go into on kind of the Monarch bid, but I'm just curious how you and the board have sort of thought about some of these strategic alternatives that have come up and maybe what steps.

And things new or are you doing to try and close the gap that you sort of see out there between where you think is and where the stocks rates?.

Okay. Thank you, Steve, for that question I thought you would ask that kind of a question and if it's really -- Our board takes these kinds of things very seriously. And so, they did also on the Monarch situation.

And we have been very straightforward and upfront, I think with the public, I think it's too early to speculate and comment on what the board is really going to do in the future. We consistently review our strategy.

Inboard meetings and we had our financial advisors in this case engage to value the company again, because we have over to about 18 months before, as you might recall and we updated figures and had a very open and frank discussion. And we came to the conclusion unanimously that this is not the right time at this point in the cycle.

We've been doing a lot of leasing and we're doing the operations work that's required to increase value in this portfolio and that's why we came to the conclusion at that time. That's my answer on that..

Okay. Thanks. And maybe one for Peter on leasing. I know you guys are still working on finalizing the backfilling of Barclays, but my understanding is in '24, you've got Clifford Chance, and I think that they've now definitively signed in the new locations. So, I think that maybe a bigger backfill for you.

So, I'm just curious if you can share any thoughts there. And then I believe Uber is a large lease expiration in the early part of '23. And I'm just wondering if you could tour a talk about what you're seeing for that upcoming expiration as well. Thanks..

Sure. Steve, I'll start with 1301. We feel like we're making really nice progress on that Barclays block. In fact, we're in advanced negotiations now for another full floor. Recall, they're 68,000 square feet each and we look forward to updating you on our progress on that floor.

Beyond just that floor alone, we do have other activity on what will be the remaining three floors, call it 200,000 square feet at that point, which obviously when we started with 500,000 square feet, we think is significant progress. We're seeing the types of tenants that you would expect in Paramount's portfolio, credit worthy dynamic tenants.

In many cases and in the case that I'm referring to now represents expansion. So those are the types of discussions that we're now having. As it relates to 31 West 22nd Street. It's a trophy building. The building itself shows beautifully, has all the attributes of new construction in as good a location as there is.

So, whatever ultimately happens with Clifford, we are already at this point having discussions with prospective tenants that are circling if you will, inquiring about the opportunity and the availability in May of 2024. At Market Center, we have some nice activity on those 234,000 square feet that rolls in 2023.

The Uber space you referred to; we have some nice activity via several proposals. That building is extremely well located, there is a number of attributes that tenants that are now in the market are attracted to.

And it's too soon at this point for me to go beyond anything that I've just now said, but suffice it to say we feel optimistic about how that block is positioned relative to current demand..

And maybe just one follow-up and then I'll yield.

On the Barclays space, the deal that you're working plus the others, how would you compare the rents or maybe the net effect of rent today versus maybe where you thought they would be at the time you getting the space back?.

I think we're right there actually on the economics. I think we'll know concessions are slightly elevated but we think we've done just fine. Rents we also think have held firm for these floors. The building is well located. There's an amenity center that will soon be in that building.

And so those are the types of things that we've done to ensure that the economics on this deal that I'm now referring to are what we had expected for now sometime..

Great. Thanks. That's it for me..

Thanks, Steve..

Next question is Vikram Malhotra with Mizuho..

Thanks so much for taking the question. Just maybe on that last question around the pipeline. Obviously, last quarter and this quarter, you've outlined pretty solid increase in the occupancy through all the leasing. And Peter, you gave a little bit more color on activity on specific building.

I'm just wondering if you can add to this in terms of your confidence on the pipeline, maybe any more attributes around the pipeline, what you think you can close near term in terms of what is actually close to the finish line and where maybe the heavy lifted.

If you can just unpack it a little bit more so we just get confidence around the lease-up trajectory over the next call it six to 12 months..

Vikram, it's a very good question, but you know us now since a couple of years. This team has always executed on leasing as predicted and forecasted. We did a million square feet last year. The pipeline is pretty good for this year. We are forecasting another million square feet for this year.

And what is in the pipeline and we are talking in various stages of discussion and negotiation with potential tenants, is in the million square feet. You know in New York, it takes sometimes longer, especially on the larger leases. We had similar discussions a couple of years ago. It just takes long time to execute these larger leases.

So, it's very hard to predict quarter-by-quarter, but we are very confident to achieve our guidance..

Okay. Fair enough. Albert, maybe just sticking with you on just the overall demand from your conversations with maybe your fund partners or just other private investors in the U.S. and Europe.

What's the relative appetite for office properties in New York versus San Francisco? And just given the move in rates, any thoughts on any potential move in cap rates?.

Well, you have -- the changes in cap rates will come most probably was changing. In the debt market, we don't see that really at this point in time because a significant amount of equity capital that is looking for a home.

At this point, you would talk more with opportunistic investors who would like to take advantage of the current situation of the market and you're looking at some core investors who would like to see cash flow.

And those are the investors who are looking at an asset that we closed on this quarter like 1600 Broadway, which was the great opportunity for us and something that the investors really, really wanted to get as a long-term safe, cash-flowing income producing transaction. The equity capital is there as relative debt capital.

And it really depends on what kind of pocket they are looking at. And I would say New York is currently a little bit more on paper than San Francisco. But I think that's -- that will change pretty soon. I am personally convinced that San Francisco long term is a very, very good market to be invested in..

Okay, thanks for the color and then Wilbur just last one for you, in the guidance I see that you kept the fee income the same at $29 million to $30 million but you did have higher fee income this quarter. And if one were sort of straight-lining it, you would have probably had to have reduced your estimates going forward. So just two questions.

One, what -- what drove that higher number this quarter and second in the guide, have you included any fees from the recent retail deal that you closed, the JV?.

Sure. And Vikram, if I were to unpack that question and you go back to when we initially provided guidance and the range for fees, we did highlight that fee income was going to be higher relative to last year primarily because of that transaction.

And to your point, all that happened is that fee income was recognized in the first quarter because that retail transaction closed.

So, you're right, for the full year, that would mean if you have straight-lined your fee income relative to the midpoint of the guidance we provided, there was some acceleration in Q1 and there should be some deceleration in the upcoming quarters, but the overall number was baked into our guidance, and hence it did not change..

Great, thanks so much..

Sure..

Thanks. Vikram..

Next question, Ronald Kamdem with Morgan Stanley..

Hey, just a couple of quick ones, just starting with CapEx, put some really great disclosure, the 18.5 total CapEx in the quarter, and then about 10 million in redevelopment CapEx this quarter.

Is that the right run rate that we should think about for the rest of the year? Is there any new or different project or thing coming on and off that we should think about on the CapEx front for this year?.

So, Ron, I'll tell you this, the CapEx schedule you're referring to in the supplemental, that's done on a cash basis. From quarter-to-quarter, they could be fluctuations, because it's the timing of spend for TIs and what have you. So, it's hard for us to say, that's an appropriate run rate.

But if you look year-over-year, we've had a fairly consistent amount of CapEx in our portfolio. So, I would tend to stay away from quarter-to-quarter metrics, but look at it from a year-over-year basis..

Got it. That's helpful. And then just want to hit on the dividend, saw the 11% raise in the quarter. Maybe just some commentary on what the thinking was into that and marry that with how you're thinking about sort of capital allocations, buybacks, which has been -- which you guys have done in the past.

How should we think about that?.

You know that we reduced our dividend during the pandemic and this was over tremendous precaution at the time. We are monitoring our capital carefully and you know that we have close to $500 million on balance sheet cash and we have an unused credit line.

We see that we managed the leasing as well as the capital and also the cash flow from existing tenants at a very high level. And I have to give kudos to my team. I think we performed on the payments under the contracts that we have in the top end of our peer group.

So, the board feel comfortable to increase the dividend and we are on a quarterly basis reviewing whether we do buyback or what we do with dividends. That's something that the board decides at that level, on a quarterly basis..

Yes. Ron, I would only see when you looked at two hours point when the dividend was reduced, it was in the midst of the pandemic and it was on the heels of your largest tenant’s exploration in Barclays where $30 million on a building that we own 100% was coming out of the system and then you had a sizable exploration also from the Td Bank floor.

So as obviously that was done out of an abundance of caution and as we've started to execute on our business plan, and look at the run rate and the taxable income, as well as the growth in cash flow that's what gave the board ample comfort to increase the dividend this past quarter..

Great. And just my last one, just thinking about sort of the legal services, tenants and stuff in the portfolio, maybe can you comment on how are they sort of trending relative to the other industry types in terms of office utilization and so forth, thanks..

Hi Ron, it's, Peter, I would say it varies from firm to firm. At this point in terms of utilization. So, it's hard to say. I will say there's a renewed interest, it seems from a number of law firms in terms of seeking quality real estate in order to recruit and retain a common theme that we've seen throughout other industry as well.

But as I relate to utilization from law from to law firm, it's really, I think firm specific..

As an additional comment, we talked to a lot of our tenants and law firm tenants, and they're all realizing, especially the successful one, that the long-term model is the model that you have to be in the office and that you have to work out of the office at least most of the time.

Some of the associates can get a lot of their things done in alternative ways, but they know that long-term growth of their business is coming from being there, being together, working together, and being collaborative..

Right. That's it for me. Thanks..

Thank you..

Thank you. Next question, Blaine Heck with Wells Fargo..

Great. Thanks. Good morning. Wilbur, you referred to this in your remarks, but there was a pretty significant jump in the incremental NOI you guys have yet to see from signed leases not commenced during the quarter, now stands at $39 million from $23 million last quarter.

Can you just walk us through kind of the biggest drivers of that $16 million increase? Is it just the Hilton and 1633 cube leases, or was there anything else that changed in the stats?.

No, sure. I mean, it's really driven by our San Francisco portfolio.

If you saw the occupancy in San Francisco or the difference between leased and occupied, there's a sizable gap now at One Front Street namely, and that's because there was a deal that was pre -leased in San Francisco where an expiring tenant moved out and somebody, I guess, the largest tenant, the First Republic had taken that space and they have some free rent that starts to kick in and that's what's driving that number..

Okay. That's helpful. Second question just maybe for Albert. Can you just talk a little bit more about the decision to purchase the retail property at 1600 Broadway? I know it's in your JV. But maybe just your thoughts around three great town, the city going forward, that'd be helpful..

Generally, we are very careful with street retail in New York. We have very limited exposure ourselves. And this was an unusual opportunity. And the -- we had a relationship with this seller since many, many years. And so, we could be very proactive in underwriting.

And we had an investor who was was really very interested in this long term, very stable, and growing cash flow from the lease income, as well as the signage income. And it was a great opportunity for us to develop that relationship.

And we have also in the past trended towards small asset-light, that means focusing on what we know and being in the operations of these kind of assets.

And it was very attractive for our shareholders, on the income side and very limited cash investments or equity investments, and the returns will be -- will be very good for our shareholders’ long term. And it's an investor with whom we have now done our second deal, and we're quite excited about that relationship..

Normally, we would not have looked at a retail investment is standing on its own in this kind of format, but this was very unusual. I think street retail will come back; you can see it in certain parts of the New York market already. If you walk around in Downtown as well as Midtown, the tourism business is back.

If you walk around the streets, you hear a lot of foreign languages, especially lately. So, I think street retail is for sure not dead and will definitely come back and that's I think the future. It might not be the sky-high rents that some of the assets commanded over the last couple of years, but definitely street retail is not a dead business..

Got it. Thanks, guys..

Thank you..

Thank you. I will now turn the call over to Albert Behler for closing remarks..

Thank you all for joining us today. We really do look forward to providing an update on our continued progress when we report our second quarter results. Goodbye..

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation..