Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Paramount Group Second Quarter 2023 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 is being recorded today, August 1, 2023.

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 second quarter 2023 earnings release, and supplemental information, which were released yesterday. Both can be found under the heading Financial 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 use of 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 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 as in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measure is available in our second quarter 2023 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 then we will open the call to questions.

With that, I will turn the call over to Albert..

A double-height atrium providing for ample natural light into the main lounge area, an elevated food and beverage offering and catering service, a grab-and-go cafe, a wellness studio, a game room, and a large training room, and a 200 plus person auditorium. The amenity center at 1301 will be available to all tenants in the Paramount campus.

The reception from the brokerage community and existing and prospective tenants alike has been stupendous. We look forward to sharing more with you in the coming months.

While our San Francisco portfolio continues to lag that of New York, the streets of San Francisco have become more vibrant in recent months and utilization figures have been consistently rising. Recent data suggest, there is an increase in demand driven by AI Companies.

Many of those are searching for larger block space in excess of 50,000 square feet. Turning to the transaction market. Activity remains subdued due to elevated interest rates volatile equity markets, and wide bid-ask spreads. To-date, there have been very few quality assets coming to market.

However, there has been some recent activities showing signs of optimism and supporting our view that, for the most part the underlying value of Class A and Trophy real estate remains intact. While that is certainly not reflected in the current public market stock prices of office REITs, including ours, we run our business with a long-term mindset.

Our strategy of investing in Class A and Trophy Buildings in coastal gateway markets is one that has stood the test of time. It will again. With that, I will turn the call to Peter..

Thanks, Albert, and good morning. During the second quarter, we leased approximately 72,000 square feet. Our second quarter leasing activity was weighted towards New York, with approximately 60,000 square feet leased, driven largely by the continued expansion of Wilson Sonsini at 31 West 52nd Street and a full floor lease at 903rd Avenue.

We continue to navigate challenging market conditions in both New York and San Francisco. This period of uncertainty has caused many companies to exercise caution when making long-term real estate decisions.

In general, much of the recent activity has been lease expiration driven as those tenants that do not need to make an immediate decision are in many cases choosing to hold off for the time being.

The results of these headwinds has been reduced leasing velocity in our two markets and negative absorption year-to-date, as reflected in the broader market statistics. We remain squarely focused on executing on our business plan and delivering exceptional services throughout our high-quality portfolio.

Companies in our two markets are increasingly prioritizing the highest quality assets with stable ownership, equipped with not only the operational knowhow of running a Class A building, but also the financial wherewithal to deliver on the financial commitments made as part of a lease transaction.

This trend is causing a reduction in competitive supply in our two markets, which newer to our benefit, as evidenced by the fact that we capture the second largest new lease in Midtown and the largest new direct lease in San Francisco in 2023.

We are increasingly encouraged by the utilization figures in our own portfolio and expect the return-to-work trend to result in increased leasing activity as sentiment improves. At quarter end, our same-store portfolio-wide leased occupancy rate at share was 89.6% down 20 basis points from last quarter and down 180 basis points year-over-year.

As we look ahead, our remaining lease expirations are manageable with 3.2% or approximately 252,000 square feet at share expiring by year end. Turning to our markets, Midtown second quarter leasing activity of approximately 2.5 million square feet, excluding renewals was flat quarter-over-quarter, but 27% below the five-year quarterly average.

Availability in Midtown remains elevated at 18.5%, but absorption was slightly positive during the second quarter as there were limited space additions.

We are encouraged by the increasing level of interest in our availabilities at 1301 Avenue of the Americas and 31 West 52nd Street, and we will aim to build on the success we have had at both properties.

Our New York portfolio is currently 90.5% leased on the same-store basis at share, up 30 basis points quarter-over-quarter, and down 150 basis points year-over-year, largely as a result of the known lease expiration with credit, I recall at 1301 Avenue of the Americas.

During the second quarter, we leased 59,800 square feet at a weighted average term of 11.3 years with an initial rent of approximately $74 per square foot. Our overall lease expiration profile in New York is manageable with 1.5% or approximately 86,100 square feet at share expiring by year-end.

Shifting our focus to San Francisco leasing activity remains muted. However, we are encouraged, particularly given San Francisco remains a hotbed for Premier Tech talent with high growth potential. San Francisco based companies have raised a robust $20.5 billion in venture capital through the first half of the year.

Venture backed companies, particularly AI, have contributed to increased tenant demand in San Francisco, which is currently 4.7 million square feet up 23.5%quarter-over-quarter, and up 30.4% since year-end 2022. The average historical tenant demand in San Francisco is approximately seven million square feet.

Leading San Francisco based companies continue to announce their return to office plans, which has resulted in improved utilization figures in our own portfolio, a key ingredient for increased leasing activity.

Despite San Francisco’s elevated availability rate, the market for Premier assets remains tight and economics remains strong, particularly for view space in trophy assets.

At quarter end, our San Francisco portfolio was 87.2% leased on a same-store basis at share down 150 basis points, quarter-over-quarter, down 260 basis points, year-over-year, driven by the impact of the First Republic resolution. Looking ahead, our San Francisco portfolio has 7.8% or approximately 166,000 square feet at share expiring by year-end.

The majority of our 2023 lease roll will occur at Market Center, where Uber’s lease expired in July. We look forward to building on our most recent success at Market Center, where we sign the Waymo Lease, the largest new direct lease signed in San Francisco during the first half of the year. We look forward to updating you on our progress.

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

Non cash straight-line rent receivable write offs aggregating $0.06 per share related to the terminated SVB Securities lease and the surrendered JP Morgan space, which has already been reflected in our second quarter results.

Lower GAAP rental revenue in the second half of the year, aggregating $0.02 per share related to the agreements entered into with JP Morgan and the entity acquiring SVB Securities, partially offset by termination income of $0.02 per share in connection with and 86,000 square feet tenants lease termination at 1633 Broadway, a portion of which has already been reflected in our second quarter results.

We have provided in our supplimental package a very straightforward reconciliation of the impact of these three transactions on the operating and finance assumptions underlying our guidance. The bottom line is that our guidance is essentially unchanged from the prior quarter, except for the impact of these three transactions.

Lastly, while this does not have an impact on FFO, we did report a $24.7 million non-cash impairment loss on our investment in 60 Wall Street, essentially taking a full write down of our 5% investment in the asset.

We together with our partners, remain in discussions with the existing lender to modify and extend the loan, but have not yet reached a mutually agreeable long-term solution. With that operator, please open the lines for questions..

Thank you. [Operator Instructions] First question comes from the line of Camille Bonnel with Bank for America. Please go ahead..

Just wanted to start with the dividend reduction you made this quarter. While you do have some near-term headwinds, it does look well covered by your funds available for distribution.

So can you please elaborate a bit more on why 50% reduction versus 20% or 30% was appropriate?.

Hi, this is Albert Behler.

We think, we discussed it with the board, every quarter we discussing things with the board, and we came to a conclusion that it would make more sense under the circumstances of the current market environment to cut the dividend the way we cut it, and get additional cash into the company for opportunities for potential support and paying down some debt, giving the company more flexibility and thus being helpful for the shareholders in general..

And just to follow-up on that, any color on how you plan to use those additional proceeds?.

So Camille, again, just to add to what Albert said, you are looking at the fad payout ratio. Recognize that one that is a backward-looking metric, not a forward looking metric. And so, when you say it is well covered, you are certainly right, it is well covered based on today.

But as Albert said, that we are looking at our future plans, we are looking at the lease role that is coming up. We are looking at the TI dollars that we would need to spend, and also trying to be mindful of our balance sheet in the environment that we are.

As far as the - I’m sorry, can you repeat your second part of your question?.

Just trying to understand like where those - that extra cash flow is?.

Yes. So, so that is what I was referring to in terms of like the leasing costs and the TIs, Albert referred to in his prepared remarks, the amenities center, which is also underway. So we were looking at this holistically and trying to make sure we have ample liquidity for capital improvements, for TI dollars as well as potential pay downs of debt..

Got it. Then can you talk about the marketability of a market center just following the move out of Uber later or this month, it will become one of the lowest occupied buildings within the portfolio.

So just curious, knowing this, have tenants been asking for more incentives, and how is your leasing pipeline tracking there?.

Hi Camille, this is Peter. Thanks for the question. I would say that our pipeline has improved from the year-end 2022. You heard in my remarks that, San Francisco’s leasing pipeline is up 30% relative to where it stood at the end of 2022, which was at the time very, very low relative to historical averages.

We have seen that reflected in the market by way of increased tours. It is still not where we would like it to be, and it is not nearly as far along as New York in terms of inquiries, but 555 market the building you are now referring to shows very well.

We, of course, announced the largest deal in San Francisco earlier this year with Waymo, and I think that has been helpful in terms of generating some momentum.

But at this point in time, it is still too early to give you much more than that by way of detail, other than to say big picture, San Francisco is showing some additional signs of life most recently with an increase in the tenant pipeline..

And one more follow-up on Market Center.

Are there any other large leases coming up for roll before the loan comes due in 2025?.

Nothing of size. Market Center typically is a smaller flow plate building. It is 555 market, it is a two building complex. 555 market is where Uber sat. And so that is why you had a large, but when you look at the portfolio and you look at our expiration profile, you have a lot of small attendance in and out, but nothing major..

The role at Market Center equates to roughly 80% of our expires over the balance of this year. And when you look to 2024, for example, you are looking at roughly 109,000 square feet of expiration. So, that is in addition to what Wilbur just now mentioned, at a 100%..

Thank you for taking my questions..

Thank you. Next question comes from the line of Blaine Heck with Wells Fargo. Please go ahead..

Several of your peers in New York have noted that the pace of leasing activities and properties with kind of middle of the market rents has picked up recently.

I guess, are you guys seeing the same and can you talk a little bit more about any changes in the number or size of prospects you have for your larger vacancies in New York?.

We have all been talking about flight equality, and there is no question that this market has been dominated. That is been a very pronounced trend in our market. We are, however, seeing tenants that have been pursuing opportunities with rents call it in the $70 and $80 a foot range. And so that I think, is on point. I agree with that sentiment.

We are seeing more of that as some tenants aim to elevate the quality of their real estate into a property owned by the likes of a paramount and pay in the neighborhood of $70 or $80 per square foot. I would say that our pipeline continues to increase. I would say that over the last 45 to 60 days, we have seen an increase in tour activity.

One of my colleagues remarked that we had nine tours at the end of last week, which in one day, which was really very encouraging. We have seen an increase in tour activity. I would dimension our pipeline as being increasingly improving. We currently have leases in negotiation or proposals in advanced stages totaling approximately 300,000 square feet.

And I would say that beyond that, we are trading paper and working very hard to advance some of these opportunities and that that pipeline is healthy as well. I would say in excess of the 300,000 square feet I just now mentioned as it relates to advanced stage activity.

So we feel like things are certainly improving and accelerated in New York, over and above San Francisco, but we are seeing improvement in both of our markets..

Second question kind of similar and related. I appreciate your thoughts on artificial intelligence in San Francisco.

I guess can you talk about the total magnitude of demand that you are seeing in the San Francisco market that is driven by AI in particular, and whether you think that level of demand will be enough to potentially start to turn the tide and maybe create somewhat of an inflection point in San Francisco..

So of the 4.7 million square feet in the pipeline currently, I would say roughly 20% is AI, if you will. Some of that demand is lease expiration driven as you would expect. I think quite honestly, we are seeing this all develop real time.

I think there is good reason for the excitement that you hear from us and others, as it relates to what this means San Francisco. But it is just too hard to say, just yet, what it means in terms of its contribution towards leasing activity going forward.

Right now, we know that it represents, like I said, roughly 20% of the pipeline I have now described a couple of times. And I think it will be interesting over the balance of this year to see how this comes together. We all know that, these companies have been heavily funded.

As I mentioned, Venture Capital, through the first half of the year is really very strong. AI companies are the recipient of this capital. Many of them are San Francisco based. And we think that, this is certainly a north of the benefit San Francisco more broadly and we will see how it develops in our own portfolio going forward..

Okay, great. Lastly for me, can you talk a little bit more about the lease termination at 1633 Wilbur? I think you gave the size, which was helpful. But if you can tell us, when you expect that lease or that space to be vacated, and anything about the profile of the tenant or color on their decision to leave would be helpful..

So maybe I will take the first part of the question and then let, Peter comment about the profile of the tenant. But, we expect that tenant to be out in the fourth quarter. So call it towards the middle of October, if you will.

And, essentially, that termination income that we got and the guidance adjustment of $0.02 that we did is net of the lost rent in the fourth quarter from that tenant. So in our guidance, originally, we had contemplated that tenants would be paying, and being in the portfolio for the full-year.

So the loss of contribution for one quarter, offset by the termination income that we will be receiving is what is reflected in the guidance. As I said, it was 86,000 square feet on 8.6 million square foot portfolio, that is the 1% reduction that we did in the guidance, because it is happening at the back end of the year.

And as you know, by the time the tenant leaves, we prep the space demolish white box. We took a very realistic approach to understanding whether that there was a possibility of that getting leased this year and, hence, we made the adjustment..

And, Blaine, I would only add that it is as simple as, in our portfolio, specifically, some tenants have expressed interest in growing and others have decided that they just simply have too much space relative to what it is that they require. And this tenant unfortunately fell into, the second bucket where they just had too much space.

The good news is that, our largest building, 1633 Broadway is for all intents and purposes fully leased. And so we are in touch with existing tenants in the building, some of whom in the past have raised their hand and inquired about additional space.

And so it remains to be seen what that ultimately yields that reach out, but suffice it to say, we have got a tremendous asset. We are getting back floors that I think will be desirable. And unfortunately, we did incur termination and so we move forward..

Very helpful..

1633, remember, is 99. 7% leased. This expiration has a, roughly 350 basis point impact on that occupancy. So just to put it in perspective, even post this termination that is a 96.2% plus lease asset..

Got it. thank you guys..

Thank you. Next question comes from the line of Jay Poskitt with Evercore ISI. Please go ahead..

I was wondering if you could just provide a little bit more color on what some of those AI tenants in San Francisco are looking for in terms of geography, in terms of space needs. And then Peter, to your point to about the pipeline being up about 30%, you mentioned 20% of that is kind of AI driven, which I would imagine is new demand.

But what percentage of that is just from renewals being pulled forward as well?.

Hard for me to quantify, Jay. The percentage of demand, if you will, that is lease expiration driven or driven largely by renewals, I do think it is a healthy percentage of it. AI companies have been really all over the board in terms of the submarket they are considering.

We have seen them locate in the neighborhoods, if you will, some of the neighborhood non-CBD submarkets, but we also have seen them touring in our assets as well.

Some of the requirements have real infrastructure requirements and we have become a magnet for those tenants that want to capitalize on a building that can deliver on those robust infrastructure requirements. I think, we will have a heck of a lot more to say about the profile of AI demand and how it comes together in the coming quarters.

I think it is still early. We all have read about the largest AI users of space, if you will, but I do think that they are proactively thinking about setting themselves up in the right building currently, and that is why we are having some conversations with them. But I would say it is still early days on the AI front just yet..

Okay. That is helpful. Thank you, Peter. And then just another question as well on the debt expirations, I was wondering if there is any update on 300 Mission Street or just any of the upcoming debt maturities as well? Thank you..

Sure. Yes, as I said this is a very, very challenging market for the office sector. We are in the market and I said previously that we are exploring all paths both with the new financing as well as existing lenders. I would venture to say most likely, this could - this would be in the extension bucket versus a full refi bucket, if you will.

And so, those discussions are fluid and ongoing. I do expect a good result here. But given that those discussions are fluid beyond what I said, it would not be appropriate to comment..

Great thanks. I appreciate the color. That is all for me..

Next question comes from the line of Ronald Kamdem with Morgan Stanley..

[Tamim] (Ph) on for Ronald. Just first question on the JP Morgan lease. So, it is my understanding JP Morgan has a lease nearby, One Front Street.

Just - if you guys could talk at all about JP Morgan’s long-term plans with that space, if any insight there would be helpful?.

Yes, Peter and I had a lot of discussion with JP Morgan, and that First Republic at a campus of buildings in San Francisco. We went very early into it, and discussed it with them.

And I think the outcome is fantastic and kudos to our leasing team in San Francisco and Peter to achieve what was achieved because I know, some of the analysts think the results are not great results for the quarter, but the results could have been much worse if JP Morgan would’ve come out of the building.

So I think we developed a nice relationship, and it is too early to say where things end up for them - and I don’t want to be talking for JP Morgan than once the long-term in San Francisco, but you can imagine by them making that investment in First Republic, which was clearly a bank that had a lot of very strong customer relationships with the positive for them.

And they want to keep, I think, a strong foothold in San Francisco. And I think it speaks for them needing space and Peter and I are in front of them and working with them to make sure that they are satisfied with the space needs..

And then, yes. You guys talked about 60 Wall Street a little bit and how you are in discussions with the lender.

What about one 11 Sutter? Any updates there and just how you are thinking about the trade-offs between putting in incremental capital and just continuing to let that loan sit there?.

Sure. I will start with One Eleven Sutter. One Eleven Sutter effectively was resolved on a short term basis last quarter. What we did there is we negotiated a cash flow loan essentially, where Paramount will not be putting any capital from its balance sheet into the asset. And so the lender is now funding all of the stabilization costs for that asset.

And we took the maturity out to 2024. Any shortfalls and any monies funded by the lender will acree to the existing principle balance of the loan. And we will take a look at where we stand in 2024, how the markets are, and whether it makes sense for us to have another discussion then, and negotiation then.

But right now, that is effectively an option for us where we get to manage the asset, we get the fees and we will look to see how the market develops with respect to that asset. In the case of 60 Wall, as you all know, it is a redevelopment play. There is a significant amount of capital that the joint venture is willing to invest in that asset.

But it has to make sense. It has to make sense vis-a-vis the loan term. And up to this point, we had not been able to get to terms with the lender on what I asked was, and so the loan went into default. And we have basically disclosed that as such.

We will accrue interest on the default rate, but recognize that we will never get paid until we reach a resolution or we hand back the key. So, the goal is to try to reach a resolution so we can develop that asset into what we believe could be a world-class opportunity downtown..

Thank you guys..

Thank you. Next question comes from the line of Dylan Burzinski with Green Street..

I appreciate the comments on debt markets remaining challenging for the office sector. But just curious in your guys’ conversation with lender. And this is something that we have heard from brokers is that, LTVs aren’t really being focused on given the uncertainty associated with what the V is, but debt yields are now in focus.

Just curious sort of what debt yields lenders are sort of targeting these days..

Look, Dylan, I you are right that, LTVs will always be an equation, but people struggling with the V part of that equation, I can’t tell you it is just one metric. That yield is an item. There is other things that lenders are focused on.

People are focused on structure in these loans because lenders want to make sure that, the landlord is invested, whether it is putting capital up in terms of reserves up front and what have you. So there is not one item that is the hot button. It is a series of items that are being focused on..

I appreciate the color on that. And then I think last quarter, you guys had mentioned that, the market is possibly improving for making acquisitions. Just curious how you guys are thinking about that today..

I think it is still quite early. But it looks like the market is trying to find the right value. We and as a company, as I mentioned, or we mentioned, in the last quarter and before, we would be very careful with - on to execute on these acquisitions. We see what is available to be acquired. We would focus on Class A and - only.

But, I don’t see the market, yet the wide asset for us to spend time on. And if you would do it, as I have said before, it would be in a joint venture fashion.

Very similar to what we had done on 1600 Broadway, where we put a very small amount of capital into the acquisition and bought the assets for major bank of funds that they wanted to really, buy the asset for long-term cash flow appreciation. So I think it might be still a little early and it is not developing quarter-by-quarter.

I know you guys look on quarter-by-quarter. We look in a little bit longer terms. And, I think, the market might have to find the right value in the next couple of quarters for something to make sense..

Great. Thanks for the details guys..

Thank you..

Thank you. There are no further questions at this time. I would like to turn the floor back over to Albert Behler for closing comments..

Thank you, everyone, for joining us here today. We really look forward to providing an update on the continued progress we can report in our third quarter of 2023 results. Thank you, and, have a good day. Goodbye..

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