Paramount Group's (PGRE) CEO Albert Behler on Q4 2016 Results - Earnings Call Transcript

| About: Paramount Group (PGRE)

Paramount Group (NYSE:PGRE)

Q4 2016 Results Earnings Conference Call

February 23, 2017, 10:00 AM ET

Executives

Jacques Cornet - ICR Managing Director

Albert Behler - Chairman, CEO & President

Ted Koltis - EVP, Leasing

Wilbur Paes - EVP, CFO & Treasurer

Analysts

Tom Lesnick - Capital One

Vincent Chao - Deutsche Bank

Nick Yulico - UBS

Blaine Heck - Wells Fargo

Jamie Feldman - Bank of America

Jed Reagan - Green Street Advisors

Brad Burke - Goldman Sachs

Sumit Sharma - Morgan Stanley

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Paramount Group Fourth Quarter 2016 Earnings Conference Call. At this time all participants are in a listen-only mode and a brief question and answer session will follow the formal presentation. Please note that this conference call is being recorded today, February 23, 2017.

I would now like to turn the call over to Jacques Cornet with ICR. Please go ahead.

Jacques Cornet

Thank you, Operator, and good morning. By now everyone should have access to our fourth quarter 2016 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 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 most directly comparable GAAP measure is available in our fourth quarter 2016 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 Ted Koltis, 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.

Albert Behler

Thank you Jacques, and good morning everyone.

Our core FFO for the fourth quarter was $0.18 per share bringing our full year core FFO to $0.84 per share. Wilbur will cover our financial results in greater detail later on.

2016 was a very eventful year for us. While that was on the leasing front, where we leased over 734,000 square feet of space positioning us well in our goal to deliver long term NOI growth, on the capital markets front, where we have refinanced $1.35 billion of debt on very attractive terms thereby fortifying our balance sheet for years to come or on the capital allocation front where we completed the acquisitions of One Front Street, Class A office building in San Francisco that they acquired lower basement cost.

Let me spend a few minutes on each one of these items. Leasing, in the fourth quarter we leased over 240,000 square feet bringing 2016 leasing activity to over 734,000 square feet resulting in a year end leasing occupancy of 92.7%. While this is an up 140 basis points from the prior quarter, it is down 210 basis points from a year ago. This was no surprise to us as we had been highlighting throughout the year the number of the large-block known move-outs during 2016.

These move-outs took place at 1633 Broadway, 1301 Sixth Avenue, and 31 West 52nd Street, and conclude 456,000 square feet. In addition, the last large-block known move-out took place early January when ING vacated the 140,000 square feet. They were occupying at 1325 6th Avenue.

Notwithstanding, these significant lease explorations they are placed to deliver sector leading same-store growth over the next few years. As Wilbur will highlight later, we expect 2017 same-store cash NOI growth to be between 6% and 9%. And that does not include over 48 million of incremental cash NOI from the releasing of these large block spaces based on backfilling the 596,000 square feet at the blended rate of about $81 per square foot, a number that we have not trouble achieving.

Just to put things in perspective, the $81 per square foot number includes space at the top of 1301 Sixth Avenue, and 31 West 52nd Street where asking rents are between $90 and $100 per square foot. While Ted will provide details on the kind of activity we are seeing for these spaces, we are delighted to welcome SwissRe to our portfolio where they leased about 68,000 square feet at the top of 1301 Sixth Avenue representing about 53% of the remaining common Commerzbank vacancy at the starting rent of $90 per square foot.

Shifting to Washington DC. In 2016, we significantly outperformed the market, a direct testament to the quality and location of our assets. We leased over 90,000 square feet in our Washington DC portfolio as an average starting rent of about $70 per square foot.

The leased occupancy of our DC portfolio was 95.5% at the year end, up another 130 basis points from last quarter and 530 basis points from last year. Our goal here was to get the portfolio to over 95% lease, and they are thrilled to have achieved it.

The activity here essentially took place in three buildings. 1899 Pennsylvania Avenue which is now 100% leased, up 11.3 percentage points from a year ago, Liberty Place, which is now 89.9% leased, up 9.8 percentage points from a year ago, and 2099 the Pennsylvania Avenue which is now 82.3% leased, up 19.8 percentage points from a year ago.

In San Francisco, One Market Plaza continues to be very well leased at 98.7% at the year end. Now that we have added One Front Street to our portfolio, our focus will be to derisk the upcoming role in that building.

Turing our attention to the capital markets. We were very active in 2016 refinancing at 1.35 billion on a long term basis at a weighted average interest rate of 3.15%. In fact, since December of 2015 through the end of January 2017, we have completed 3.3 billion of property financings between 1633 Broadway, 31 West 52nd Street, 1301 Sixth Avenue, and One Market Plaza excluding the 575 million recapitalization of 60 Wall Street.

It continues to be very evident to add that all lender types life insurance companies, CMBS and balance sheet love our high quality assets and our proactive management style in maximizing the value of these assets. Wilbur will cover this in greater detail.

Lastly, let me spend a minute on our capital allocation strategy. When we announced the acquisition of One Front Street in September, it was meant with mixed reviews. People were concerned about the funding strategy and leverage, all leverage concerns which are not brought to us. We have been doing this for the better part of 20 years and we have been doing it well. And while we might be new to the public markets, we certainly know value and we know how to maximize it.

We closed our One Front Street in December. We centrally located CBD assets that we acquired for $800 per square foot or a mid full going in cap rate. Recently founded three at $505 on the San Francisco CBD sold at $1200 per square foot, also at a mid to full cap rate.

The big difference in value here has to do with the leasing risk at one front. There are over 500,000 square feet or 80% of the building is set to roll over the next five years. To do this deal and acquire it at this basis we have to move quick and it is and I'm very happy with it.

We were committed to funding it through a joint venture structure or through an asset sales. Although our preference was always to do it full carefully selling the right assets. Given the upside of One Front Street where expiring leases are on average 20% below market.

Looking at this month we announced the sale of Waterview, the long term lease single tenant assets for $460 million or about $720 per square foot at a record price for an asset in Rosslyn, Virginia. When you think about the value of this asset in comparison to what analysts have modeled in the NAV estimates and taking it a step further to what our stock is trading at, the disconnect is tremendous.

Let me clarify, the average consensus NAV estimate for Paramount is about $20 per share and in best consensus Waterview is valued on average at about $445 million. At year end, our stock was trading at 20% discount to consensus NAV, so the implied value of this asset based on our stock price was $356 million or a staggering 29% below the price we were able to achieve.

But that’s not where the story ends, we hit all this in a tax efficient manner by referring $393 million of taxes and by recycling capital from Broncylin, Virginia into San Francisco CBD where they expect to stabilize One Front in the mid-6s.

In addition, subsequent to quarter end, we announced the formation of a 95 joint venture with GIC, Singapore sovereign wealth fund to acquire 60 Wall Street to U.S. headquarter of Deutsche Bank. The joint venture purchased the asset for $1.04 billion or approximately $640 per square foot to a recapitalization with $575 million of new property level debt. Our economic interest in the assets essentially remains unchanged.

We also made tremendous progress on the sustainability that we recently announced that each building in our portfolio has achieved either a gold or platinum lead certification. To our knowledge, we are the only public resulted portfolio to have this distinction and we are very proud of that. This achievement is the testament to the quality of our assets and brings tangible benefits in our efforts to attract high quality tenants while helping lower operating costs.

Our goal for 2017 is simple lease, lease and lease some more. We know we have work to do in New York but we also laser focused on leasing space at One Front that has yet to expire and capture the upside in that assets. To that end our goal for 2017 is to lease over 750,000 square feet.

Going forward our lease explorations are very modest. In 2017 we had 569,000 square feet expiry of 5.3% of the portfolio and that includes the 140,000 square feet of ING space. The combination of leasing our existing vacancy and below average these expirations will allow us to unlock the significant embedded value in our portfolio.

Let me go through with some remarks on the macro environment. We are operating in what I would call a stable and improving environment. Growth continues to be positive albeit at a slower pace, employment continues to improve and we continue to see underlying strengths in each of our markets. While there has been increased optimism in our conversation with tenants particularly those in the financial sector, it is still too early to quantify the impact. That said, any D-regulation or the financial term of this industry and the prospects of increased fiscal spending should drive demand in our markets particularly in New York.

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

Ted Koltis

Thank you, Albert and good morning.

Overall our portfolio wide leased occupancy was 92.7% at December 31 up about 140 basis points from September 30, the same-store component of the change was driven primarily by the leases at 1301 Avenue of the Americas and New York and 2099 Pennsylvania Avenue in Washington.

Starting in New York, as Albert said we know we have work to do and at 1633 Broadway, we continue to market the 200,000 plus square feet on floors 35 to 38 that came available last April in addition to the 50,000 square feet vacant on the 25th floor.

As mentioned on our last call, we are moving into early proposal stage on some of this space and no discussions have advanced and we expect to announce progress on leasing the next time we speak. We continue to see the diverse level of activity from perspective tenants that include the traditional financial services companies, law and other professional service firms, as well as established media and entertainment firms which gravitate to the building and to the area.

Moving over to the 1301 Avenue of the Americas, during the fourth quarter we made progress on over half of the large space that came available last June. As Albert mentioned we leased 67,680 square feet on the top three floors for 43 to 45 at an initial starting rent of $90 per square foot. The top floor includes an oversided outdoor terrace with central park views that prove to be an attractive selling point in the market.

SwissRe is a new tenant for us and having executed on a 16 year lease term exemplifies the type of high quality tenant we have seen our portfolio attract and retain over recent years. We are now left with about 62,000 square feet on floors 41 and 42 and the building now stands at 93.7% occupancy. The level of market interest in this base is strong and we have seen a pick-up in activity post election. The interest is coming from traditional financial services and law firm type tenants that is typical users of space at 1301.

In 31 West 52nd Street, we are marking the 115,000 square feet available on the top five floors. As of last month, we have completed our white boxing of the space and based on the success we have had with marketing the outdoor terrace at 1301, we are again covering a potential outdoor space opportunity with Central Park and the initial response from perspective tenants on this creative idea has been positive.

We are also about to kick-up a renovation that we will look to do lighting and ceiling upgrades that enhance and modernize the boutique atmosphere of this building. The prior lease on this top floor block of space included in place rents in the mid-60s per square foot whereas the market rate is significantly higher and we are asking north of $100 per square foot.

Similar to 1301, we have seen a pick-up in the level of activity post election year so majority of respective tenants being law firms and boutique financial service firms. At 1325 Avenue of the Americas we adjusted back 140,000 square feet of the old ING space in early January and work to whitebox that space has began.

As we began the leasing effort here, we consider the space to be an attractive price point for more value terms in the mid-cap market and is certainly in a different price point compared to other opportunities.

Shifting to Washington DC, post election we have seen to begin an increase in activity and as we indicated last call we have some leases out and during the fourth quarter we signed leases on just over 21,000 square feet with the majority of that being 1899 Pennsylvania Avenue. And with an overall DC portfolio lease percentage of 95.5% at year end with not a lot of space to lease and we continue to write our position in the market with a focus on A location in the CBD, with trophy assets driving our performance.

Finally, in San Francisco, as Albert highlighted, we added One Front Street to the mix during the fourth quarter, and we are very excited about the opportunity. One Market Plaza which remains an iconic property in San Francisco skyline is 98.7% leased as of year-end. And what we've seen with One Market Plaza and expanding to the broader market supply side of our mission and market street corridors if that there is not much space available in the near term.

And when there is lease role, we continue to see good activity ahead of exploration. In this environment, we are very excited to now have One Front Street in the hold. As we’ve discussed, since we announced the acquisition, the opportunity in this property is substantial, and there's an opportunity we are working to achieve right away.

Based on our initial months of owning and operating the property, we feel even more confident in our ability to address a good portion of the lease role sooner rather than later, and achieve an outcome that creates value for our shareholders.

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

Wilbur Paes

Thanks Ted.

Yesterday, we reported core FFO of $0.18 per share for the fourth quarter bringing our full year 2016 core FFO to $0.84 per share, or 3.7% better than our 2015 results. The 2016 core FFO of $0.84 however was at the lower end of our revised guidance, and was driven primarily by a true-up in income taxes and higher professional fees. Our share of cash NOI for the quarter was 77.2 million, up 1.9 million or 2.5% from the prior year’s fourth quarter.

Cash NOI for the full year was $309.1 million, up 800,000 from the prior year. If you recall, our original guidance had assumed that our full year 2016 cash NOI would be lower than 2015 by 10 million to 15 million. This was due to the large block lease explorations throughout 2016 as we have been highlighting all along. The better than expected cash NOI result in 2016 was driven by primarily by 17 plus million of termination income. In non-same-store item that be typical down factor in our guidance.

While the least rate of our portfolio was 92.7% at year end, or 210 basis points lower than the prior year, the overall occupancy of our portfolio was 90.4% at year end, up 110 basis points from the prior year.

This occupancy gain notwithstanding the significant lease exploration in 2016 was largely driven by our pack leasing efforts where tenants are now in occupancy. Over the past year, in every earnings call, we have talked about the 89 million of contractual pro rata annualized cash rank - for cash NOI that we had locked in, but wasn't in our 2016 cash NOI figures.

We tried to dimension how much of that 89 million became cash fail on an annualized basis. However, our investors want us to simplify the math. The wanted to know exactly how much of that 89 million would become cash paying in 2017. So we did simplify the math, and expect 57 million of the 89 million to become cash paying in 2017.

Our mark to markets for the quarter were 2% on a cash basis, and 1.5% on a GAAP basis. Mark-to-markets for the full year of 2016 were 3.6% cash, and 10.3% GAAP. But for the impact of 89,000 square feet of above market leases that were terminated in 2016, and subsequently released at market with very low concession packages, or part of online ad, our cash and after markets would have been over 10%.

Turning to our balance sheet. We ended the quarter with over 760 million in liquidity comprised of a 192 million of cash and restricted cash and 570 million of availability on their revolving credit facility.

Our outstanding debt was 3.3 billion at a weighted average interest rate of 3.7% and a weighted average maturity of 5.7 years. 80% of our debt is fixed at a weighted average interest rate of 4%, and the remaining 20% is floating at a weighted average interest rate of 2.3%. Subsequent to quarter end, we completed a 975 million refinancing of the 1.6 million square foot two tower class A One Market Plaza in San Francisco.

We have tremendous interest from the market as evidenced by the participation and execution of this deal. The new seven year interest only loan is fixed at 4.03% and matures in January 2024. We retained 23 million for our 49% share of the net proceeds after repaying the existing 872 million loan that had a weighted average interest rate of 6.12%.

Albert touched up on earlier how active we've been in the capital markets. Just to put things in perspective when you look back prior to December 2015 just about 14 months ago, our weighted average cost of debt capital was 5.35% and our weighted average maturities just under two years. Since then we've completed over 3.3 billion in financings lowering our cost of debt capital by 165 basis point to 3.7% and well laddering and extending our maturities to 5.7 year today, no small feat and we’ve done it to balance sheet lenders, life insurance companies and the CMBS market.

While interest rates are still at historic lows they are poised to increase further in 2017. We are very happy to have taken advantage of the interest environment in 2016 by refinancing 90% of our portfolio over the past 14 months.

Looking at our 2017 earnings guidance, we expect 2017 core FFO to be between $0.83 and $0.87 per share or $0.85 per share at the midpoint of our guidance. Our 2017 estimate of $0.85 per share when compared to the $0.84 per share for 2016 includes assumptions regarding increases and decreases in various items at the midpoint of our guidance as fully summarized in our press release.

We estimate that our share of cash NOI at the midpoint of our guidance will be $320 million or $11 million higher than 2016. Excluding the impact of non-same store adjustments including acquisition and disposition activity, as well as lease termination income our same-store cash NOI is expected to grow 6% to 9% which equates to about $0.08 per share.

Other assumptions in our 2017 guidance include an $0.08 increase in cash NOI from the acquisition of One Front Street and 60 Wall Street which was previously under the fund business structure and accounted for a fair value and therefore not included in cash NOI.

A $0.01 increase in fee income net of taxes, a $0.02 decrease in interest expenses as we look to delever our balance sheet by repaying over $400 million of outstanding debt including the $230 million outstanding under our revolver using proceeds from the sale of Waterview.

These positives are partially offset by a $0.07 decreased in cash NOI from the sale of Waterview which is expected to be completed early in the second quarter. A $0.06 decrease in lease termination income, a $0.03 decreased in streamlining FAS 141 lease revenue and a $0.02 increase in G&A almost all of which is non-cash resulted from a new layer of equity comp amortization.

In addition to my commentary and the data provided in our press release with respect to 2017 earnings guidance we’ve included a simple graphical chart in our investor presentation to help investors and analyst navigate through the various components of our guidance.

Our Investor Presentation also contains a slide on future NOI drivers that should with understanding the significant embedded growth in our portfolio. I encourage you to review this presentation which can be found on our website at www.paramount-group.com.

With that, Operator please open the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Tom Lesnick with Capital One. Please go ahead with your questions.

Tom Lesnick

Hi, thanks a good morning. First, I just wanted to clarify your comments about the free rent burn off that $67 million of the $89 million you were talking about and kind of the bridge where for from where we are today in cash NOI to the end of 1Q, it looks like you guys produced around 76 million of cash NOI in 4Q. What was the run rate at the end of the quarter on 12/31 and how much of that 67 million should we expects to hit in 1Q.

Wilbur Paes

Sure, Tom it’s Wilbur. Maybe we’ll walk through a couple of numbers and a couple of moving pieces there. The fourth quarter cash NOI was about $77 million. If you look at our supplemental on Page 9, it talks about $2.5 million of lease termination income in the number. So if would back out the $2.5 million of termination income you'd come with a fourth quarter run rate of $74.5 million, okay.

Annualizing that will get you about $298 million as your starting point. If you look to our lease expirations we have about $35 million coming off due to expirations in 2017. When you back that out and you add the $57 million you come about to the $320 million cash NOI guidance that we provided. This is just a rough math back of the envelope but should get you to that number.

Tom Lesnick

Okay, that’s very helpful. And then with respect to GAAP accounting how should we expect lease recognition to occur on the net and/or bleacher report in the first half of the 2017?

Wilbur Paes

Well I am not commenting on any specific tenants. I think your question to make sure I understand your question. You saw a drop in our straight-line rent revenue and that was really resulting from an adjustment we booked but straight lining and we typically recognize revenue in the space is ready for its intended use and tenant improvements are completed. There has been a big shift in the accounting in industry practice, not necessarily GAAP but industry practice on when you start to recognize revenue.

We took lumps in 2016 with respect to that. That’s why our straight lining sort of dropped off tremendously in the fourth quarter but the way to think about it is, we don't recognize revenue on a GAAP basis when tenants get possession but rather when the space is ready for its intended use.

Tom Lesnick

Okay, got it. That’s helpful. I guess turning to G&A real quick. Obvious pretty modest bump there in 4Q. Is that just the timing of stock based comp accruals since the IPO was also in the fourth quarter or is that due to something else? How should we be thinking about that run rate on a go-forward basis.

Wilbur Paes

We provided G&A guidance being $0.02 higher in 2017 versus 2016. All of that $0.02 really is driven largely by non-cash G&A amortization of equity comp. I mean if you look at on our history we’ve public call it stabilized in 2015 it’s a four year vest. So you expect until this fully cycles the four years a modest bump in non-cash G&A and that's probably how we’d like you to think about it. We mentioned in our supplemental on Page 9 the impact of the non-cash G&A versus the impact of the cash G&A so you can help with modeling.

Tom Lesnick

Got it. Thanks for that and then a last one from me. One of your competitors is developing a building right across the corner from 2099 Pen in DC. Given that that building is currently roughly 82% leased. How are you guys thinking about your willingness to be aggressive on lease terms because that leased up in advance of that development or what's your general thought process with respect to that submarket over the next few years.

Albert Behler

Hi Tom, this is Albert Behler. We have been doing - our team has been doing very well despite a weak market in Washington DC and we don't see any need to be aggressive on our rental rates. We have good activity and we’re confident and in total, the portfolio is leased as you could see 95.5% by year end. We have very little expirations for the next couple of years in DC, and this is one of the best buildings in the neighborhood in Pennsylvania Avenue, and we think we can get the rents that we deserve.

Tom Lesnick

All right, great. That is all I have got for now. I will hop back in the queue. Thanks again.

Operator

Our next question comes from the line of Vincent Chao with Deutsche Bank. Please proceed with your question.

Vincent Chao

Hi, good morning everyone. Just want to go back to the cash NOI discussion again here. I just want to make sure I got all the numbers straight.

I thought I heard you say $57 million of the $89 million coming in this year. I thought last quarter were about $67 million by the end of the first quarter. So I’m not sure if one of the annualized number and ones maybe just the actual amount you are going to expect to book in '17.

And then on the loss trend, the roll off, the $35 million, I guess, is that said that those tenants are moving out? There is no potential to obtain them, or is that still a possibility?

Wilbur Paes

Let me take your first part of your question, Vince, just to make sure. You are absolutely right. When we talked about $67 million in the past, that was an annualized number as of the end of the first quarter.

What we try to do based on feedback we received is simplify and say, hey, just how much of that 89 will impact 2017? So when you look at that, that number is the $57 million I touched upon earlier. With respect to your second question, and remind me again your second question you wanted to --

Vincent Chao

You have done the rough math of subtracting that.

Wilbur Paes

Yes I'm sorry, I'm sorry. With respect to your second question in terms of the expirations and the $35 million coming off, the only known move out that we have dimensioned is ING. That is 140,000 square feet that came back January 1. So my math, they were simply to take out that 35 million because even if you release, there will be a free rent component.

So typically you won't have that in cash paying in 2017 anyway.

Vincent Chao

Okay, even on renewal, you’d provide same figure?

Wilbur Paes

Yes.

Vincent Chao

Got it, got it. Okay all right. And then ING I think it was about $10 million, is that right?

Wilbur Paes

ING was 140,000 square feet. We showed you that I believe the lease expiration is 275,000 square feet coming off at a weighted average rate of 65, and change of - you have the math there.

Vincent Chao

Got it, okay, that is helpful. I guess moving onto just a different topics here. In terms of the Waterview obviously being used to pay for One Front, but I guess, we should be looking at that as just an opportunity to pay down some debt. I guess that what is assumed in the guidance is that there will be something as prepaid.

Wilbur Paes

Yes, I mean if you recall when we funded One Front, it was before the sale of Waterview. So we drew on our revolver. So currently at year end, 230 million outstanding under revolver. The sale of Waterview is expected to be completed in early second quarter.

So we are going to use those proceeds to repay the amounts under revolver as well as unencumbered Washington DC portfolio which we have debt on Liberty Place on 1899. And so we are essentially going to use all of those proceeds to de-lever the balance sheet.

Vincent Chao

Okay. So Liberty Place need to 99 come off. Okay, very helpful. And then I guess in terms of just on the investment side, given some of the movements in the tenure and obviously some post election questions, I guess, out there, curious if there has been any shift in the discussions in terms of foreign interest in New York City office or DC office assets?

Albert Behler

Yes, this is Albert. We see still a lot of interest by far in capital to invest in the safe haven environment of the United States especially in all markets in the coastal cities, high barrier to entry markets.

And if that question also relates to our appetite to invest further, we have been saying and I think we have been very disciplined over the last two and half years. We have been just looking opportunistically at potential investments. One Front was that kind of an opportunity that we saw, and we and we acted on it. We are not intending to pursue aggressively additional investments at this point in time.

Vincent Chao

Okay, thank you.

Operator

Our next question comes from the line of Nick Yulico with UBS. Please proceed with your question.

Nick Yulico

Hi everyone. Good morning, just going back to the Slide 11 on the presentation which is pretty helpful on the cash NOI. I guess my question is, the starting point there is what is in your FFO guidance, $320 million of cash NOI. Then you put the lease up of the four large block vacancies which, if I’m reading this correctly, looks like it assumes that that actually is not in your FFO guidance this year. Does it?

Albert Behler

That is absolutely correct.

Nick Yulico

Okay. And I guess I'm just wondering why. I mean, is it an issue that you don’t think it's likely to get released this year, or is that even if it gets released, you are just not going to have even any of the free rents commence from a GAAP standpoint this year?

Wilbur Paes

Nick let me just clarify. That $48 million is not in our cash NOI guidance. You said it’s not in our FFO. So I want to make sure we understand the distinction. This was basically just trying to show the cash NOI drivers, not necessarily the FFO impact resulting from the releasing of the space.

Nick Yulico

Okay. So for the space that you’ve already leased here, that free rent or if there is cash rent, would be in your FFO guidance. Is that right?

Wilbur Paes

If there was, if it came out, the question is the space the revolver is released, will that be contributing towards FFO for the calendar year 2017, the answer is yes.

Nick Yulico

Okay. But the extent that you release more of the space and free rent commences this year, is any of that in your guidance range for FFO?

Wilbur Paes

Albert touched upon in his prepared remarks that our goal is to lease 750,000 square feet. Obviously that includes these large block spaces. So to that extent, it is in our assumptions and it is in our guidance.

Nick Yulico

Okay. That’s helpful. And then just going back to the cash mark-to-market on releasing, it was 5% in the third quarter, went to above 1% in the fourth quarter. What sort of drove that down, and then how should we think about this year? What your planning for cash mark-to-market basis for the New York space that gets released?

Albert Behler

This is Albert again. Included in 2016 leasing, there were above market leases that were terminated, and subsequently released at market rates. So, excluding these leases, the GAAP cash basis mark-to-market were over a 10% to the positive for the entire year. Does this help?

Nick Yulico

Okay. That’s helpful for last year and then what about, I mean for this year as we’re just thinking about the space is still…

Albert Behler

This year we have been seeing all along that we think we can be definitely positive in the double digit, low to mid double digit area.

Nick Yulico

Okay.

Albert Behler

Nick, the only thing I would tell you mark-to-market, quarter-to-quarter obviously is a function of the space that it expires. So there will be fluctuations. And when we talk the double digit mark-to-market that Albert referred to, that’s what we’re targeting for the full year.

Nick Yulico

Okay, that’s helpful. Thanks everyone.

Albert Behler

Sure.

Operator

Our next question comes from the line of Blaine Heck with Wells Fargo. Please go ahead with your question.

Blaine Heck

Thanks, good morning. Ted, I appreciate the commentary on leasing in New York, but want you to touch on 1633 again. It seems like you are in a similar position as you were in last call. So, can you just talk about whether you obtain any of the prior tenant prospectus that drop out of contention?

And then I guess for the tenant you are talking to, are they full floor users, multiple floor users, are any of them looking for the full space?

Ted Koltis

I mean, you characterize as were kind of it in the same position. I think we're I would say that a lot of these proposal have moved forward and in fact you may have seen in the papers. We do have a lease out I meant that’s all I can really say about 1633 in terms of what we have going on. Specifically with leases out, we do have a lease out right now.

But activity remains strong. It remains strong across our portfolio and certainly even after the election to I feel like we’ve see an uptick in activity then garnered some more proposals from client. So we’ve got business services type users, tech users, financial services. They all continue to look at 1633 and I’d say that none of them that we talked about in last call have dropped off. It’s just a process of them going through proposal stage with us. And it varies from a single floor to the whole block are the types of in the terms of size.

Albert Behler

I think I’ve said on previous call. These large block spaces it take a lot of time to negotiate a lease on those and I’d like to remind you of that but we have tremendous confidence that the leasing will be done at 1633 as well as 1601 with the other vacancies we have.

Blaine Heck

Okay. That’s great clarification. And then Albert you touched on your focus to de-risk the upcoming roll on One Front Street. Can you or maybe this is for Ted just go through some of the major upcoming expirations there and give maybe some color on your confidence of renewal or move out.

Ted Koltis

Well it’s a little early. We mentioned before that there is a lot of role coming over the next couple of year so will be about 100,000 square feet per year. We met with all the tenants and had very good discussions but it's too early to do establish any specific targets there. We’ve very excited about this asset and we’re confident that we can also achieve here our goals.

Blaine Heck

Okay, great. Thanks.

Operator

Our next question comes from the line of Jamie Feldman with Bank of America. Please go ahead with your questions.

Jamie Feldman

Great, thanks. Good morning everyone. So I guess going back to the 750,000 square feet, can you talk to us about how of that lease has been already signed versus leases you expect to sign.

Albert Behler

The 750,000 square feet of leasing activity for the full year of 2017.

Ted Koltis

So it’s new leases being signed.

Jamie Feldman

Okay. So that maybe kind of renewals versus new. It’s maybe a better way to ask it.

Ted Koltis

I wouldn’t say that way. It’s 750,000 in total for the entire portfolio.

Jamie Feldman

I guess I am just trying to think about how do you think about tenants that are already in the portfolio versus tenants you are attract to the portfolio.

Ted Koltis

It’s a mix of tenants I would say. As you recall we had in our last year the opportunity of moving a short guarantee from one asset to another because they really had different space demands and we’re very proud of having the opportunity with tenants who really Paramount and its portfolio to say with Paramount. If they think the current space is not sufficient for them so there might be an opportunity here and there as well in our portfolio for this year.

Jamie Feldman

Okay. So there is no way to really – I mean I am missing something but is there a way to quantify how your outlook, leasing outlook would be.

Albert Behler

We didn’t give the leasing percent I know what you are probably do is to figure out, how much is occupancy increasing leasing versus leasing that continues to just be there. We have not provided that as a component of our guidance.

Jamie Feldman

Okay. So I guess my next question is probably results - like just think about year-end occupancy, do you have a number for that in your guidance?

Albert Behler

No, we do not provide a year-end targeted occupancy for 2017.

Jamie Feldman

Okay.

Albert Behler

Obviously we have all the moving pieces in terms of the lease square footage that's expiring so we certainly given you the various components where you can do the math and layer that in but we’ve not provided a set target.

Jamie Feldman

Okay. That makes sense. And then can you just talk about maybe on an AFFO basis walk us through the components like CapEx and where you think AFFO could end the year based on your guidance.

Albert Behler

Sure, we’re well aware that AFFO is on the high end. This is not something that’s lost on us. We knew that going into 2016 and it will be on the high end in 2017. Ours is a capital intensive business and then 2017 will be another capital intensive year given the amount of leasing we have to do for the large block. And AFFO as you know typically you are going to fund the PIs and the leasing commissions well ahead of this coming into our earnings. So 2017 it will be elevated but the beyond that we see a really good trajectory on where the earnings have to come in and CapEx is effectively flushed out for the earnings growth that we’re going to see in years to come.

Jamie Feldman

Okay. Any estimate for CapEx this year based on the leasing you think you’ll do?

Albert Behler

No, we didn’t give an estimate for CapEx this year in the components but just – and just to clarify when we said CapEx will be elevated again in 2017 which will result in the AFFO being high low.

Jamie Feldman

Okay. And then I guess finally maybe talk about the decision the 6060 Wall Street recap, the decision to stay in the asset and is there any potential for further investments to GIC?

Ted Koltis

You mean investment with GIC in our portfolio?

Jamie Feldman

In your portfolio or additional assets.

Ted Koltis

Well I don’t…

Jamie Feldman

With the relationship going forward.

Ted Koltis

Well we have a very different relationship with GIC and otherwise it wouldn’t have made that investment. It’s a large equity investment. They are very proud of the relationship and I am looking forward to a long relationship. I can’t prognosticate at this point whether there will be additional transactions other than 60 Wall and with regard to the first part of your question, why we did stay in. We believe in that asset. We think there is potential in 60 Wall. We invested in 60 Wall at a very attractive price and in addition we generate management fees for the company.

Jamie Feldman

Okay. All right, thank you.

Operator

Our next question comes from the line of Jed Reagan with Green Street Advisors. Please proceed with your question

Jed Reagan

Hi, good morning guys. I guess maybe just following up on Jamie question on 60 Wall, how did you settle on the 5% stake is the right number to your comments [indiscernible] if you are a believer in the asset why not maybe a larger stake on balance sheet for Paramount?

Ted Koltis

Well you we’re very comfortable with the 5%. We initially had 5% invested as a general partner of two funds of the predecessor and that’s a good position to be in and that might change over time if there is an opportunity but I don’t want to project that at this point.

Jed Reagan

Okay. On the 48 million of incremental NOI associated with those larger vacancies in New York would it be fair to expect that you have those leases substantially back those lease on a GAAP basis by the end of 2018?

Albert Behler

I think that’s very firm that our goal is to get it done by end of 2017.

Jed Reagan

Okay. All of that's based.

Albert Behler

Yes.

Jed Reagan

Okay. And then the 750 of leasing due this year would that be, you expect that to be back end weighted or would that be a kind of a steady flow over the course of the year?

Ted Koltis

Well it’s very hard to say Jed, as I mentioned before on this call these large block leases are very hard to prognosticate. We said in the past a lot of leases are back ended, back year ended. I would think in this year it will be more steady during the year because of the activity that we see.

Jed Reagan

Okay. That’s helpful. And just kind of generally on the Manhattan market, have you seen market rents and concessions changing recently, has there been even in the last three months since the last time we talked, has there been a softening trend in terms of some of those metrics? And what's your outlook for 2017?

Ted Koltis

Concessions really are, in each deal, are very specific to the deal. I mean, there are functions of term, there are function of credit, function of the size of the deal. So I think what you are seeing is between 10% to 12% of first years rent in New York being kind of the market for concessions and I think we are right in line with that market. We are seeing some deals that are longer term, and longer term demands more concessions to get the deal done, and I think our deal with SwissRe that we announced exemplifies that.

Jed Reagan

That 10 to 12, is that meaningfully changed versus say 12 months ago?

Ted Koltis

I mean, it’s probably trending a little closer to 12, but I wouldn’t say it’s meaningfully different in the last 12 months.

Jed Reagan

Okay. And then maybe one other one on leasing. 1633 Retail, any update there and expectations for when you might have some news?

Ted Koltis

There’s no update to share at this point. There’s activity, as we’ve said, over and over we want to be very selective but I can’t give you any update on this. We are working with potential tenants on this space but nothing is finalized at this point.

Jed Reagan

Okay. And then just the last one for me. You think about your portfolio is mainly Manhattan focus at this point. Do you expect to diversify that increasing to your other markets? Or do you kind of like the geographic mix where it stands today?

Ted Koltis

We have been saying all the time that we are opportunistically pursuing it in our three markets, but really just in our three markets where are New York, Washington, and San Francisco. Washington seems to be a little bit more top heavy, a little bit more expensive. So I wouldn’t expect that we would look as anything there.

But I would have said that if you would have asked me 12 months ago about San Francisco and then we had this great opportunity with One Front. So we are really opportunistic about approaching all markets, and there’s no specific percentage share that we want in each of the three markets.

Jed Reagan

Okay. That’s helpful. Thanks very much guys.

Operator

Our next question comes from the line of Brad Burke with Goldman Sachs. Please proceed with your question.

Brad Burke

Hi, good morning guys. Another question on your future cash NOI guide path, obviously from commencing leases that have already been signed and then leasing up the four big blocks of space. And looking at your lease percentage, right now it’s 92.7. And those four big blocks would add 6 percentage points, little bit more than 6 percentage points of occupancy. So first is, is it correct to look at this illustration is implying occupancy levels that are in the high 98% range?

And second, how should we think about the long term stabilized level of occupancy that you think is reasonable for your portfolio?

Wilbur Peas

Brad, first thing, I just touch upon is that in your starting point of 92.7, remember, there’s lease exploration that are coming out, namely the ING space, that’s non-move out. So the 92.7, we would expect to drop again at the end of the first quarter. So there's moving pieces.

When you start to add this, it won’t tend up to be higher, but it wouldn’t get to the 98%.

Albert Behler

Historically, to add to this is, historically, our portfolio in the previous year as always been leased pretty stable at the high 90% level, 97%, 98%. And I am very confident that we should achieve this over time.

If you look at the portfolio other than the assets, we adjusted our recent goals in 2016. They are pretty much 96 plus, somewhere between 96% and 99% leased and we should achieve that.

That’s why we are investing in this kind of assets.

Brad Burke

Okay. And then just another one on the guidance. When you increased your guidance for 2016, a penny of that was attributed to One Front Street which was closing in December. I look at that as implying more than the $0.08 of FFO growth in 2017 for One Front Street and not to mention 60 Wall.

So I realized that it’s a little tricky to extrapolate a single month. But is there any reason to think that the FFO contribution from that acquisition is decelerating in 2017 versus the initial run rate in 2016?

Albert Behler

So to dimension your point, when we increased the guidance in 2016 and allocated $0.01 to One Front that was on an FFO basis. The component of our guidance for 2017, and the $0.08 that you referenced, that’s the cash NOI component of it. So we are comparing two different things.

Brad Burke

Okay. That’s it for me. Thank you.

Operator

[Operator Instructions] Our next question comes from the line of Sumit Sharma with Morgan Stanley. Please go ahead with your questions.

Sumit Sharma

Hi, good morning. This is Sumit for Vikram. Thank you for all the clarification on the fervent stuff but I am actually going to ask another question on that just so that - we are crystal on this. Going back to Vincent Charles's question earlier on how much we should expect in terms of burn off in 1Q 2017. 67 was the number quoted the last time? And I guess backing into stuff and taking out the 16.8 million that was already burnt off for Slide 11, I guess we are looking at 50 million burning off just backing into stuff.

Wilbur Paes

So, Sumit, let me help to clarify. One, the Slide 11 - the 67 million that was quoted before as burning off was not a quote. That was a $67 million annualized number that was going to begin to burn off as of the end of the first quarter of 2017.

So a lot of the analyst had trouble with that, and said, hi, can you simplify the math for us and just tell us how much of your 89 million that you’ve been telegraphing all along will physically burn off in the year 2017?

To that end, we clarified and said, of that 89 million, which is still locked in to date, 57 million will be realized in 2017. What you see on Slide 11 is the delta between the 57 and the 89 because it’s not coming in 2017, it will come in future years. Therefore it’s a contributor to future cash NOI drivers.

Sumit Sharma

Okay. That's truly fine, got it. Also last quarter you disclosed how much of straight line rents were related to free rents. Do you have that number for this quarter?

Wilbur Paes

We did not disclose that. As I mentioned earlier, this quarter straight line was clouded by some true-up adjustment essentially. We booked $0.02 of adjustments in straight lining which is why it was significantly lower than our quarterly run rate. So it was too many moving pieces versus dimension there.

Sumit Sharma

Okay. Thank you so much.

Operator

Thank you. We reached the end of our question-and-answer session. I’d like to turn the floor back over to Mr. Behler for closing comments.

Albert Behler

Thank you all for joining us today. We look forward to providing an update on our continued progress when we report our first quarter and year end results in May. Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time, and thank you for your participation.

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