Paramount Group Inc (PGRE) 2021 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Paramount Group Fourth Quarter 2021 Earnings Conference Call. (Operator Instructions) Please note that this conference call is being recorded today, February 23, 2022. I will now turn the call over to your host, Jacques Cornet of ICR. Thank you. You may begin.

Thank you, operator, and good morning, everyone. Before we begin, I'd like to point everyone to our fourth quarter 2021 earnings release and supplemental information, which were released yesterday. Both can be found under the heading Financial Information - Quarterly Results in the Investor 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 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 financial 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 fourth quarter 2021 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, Jacques, and thank you, everyone, for joining us this morning. We delivered another year of strong operating performance in 2021, and we carry that momentum into 2022 as we return to normalcy nationwide. While the emergence of the Omicron variant delayed the return to pre-pandemic life, it seems the worst is behind us, and tenants are once again returning to the office full time, albeit with some flexibility baked into their plans.

Yesterday, we reported core FFO for the fourth quarter of $0.24 per share, resulting in core FFO of $0.92 per share for the full year. These results reflect the quality and desirability of our Class A assets and strong tenant base. Today, we are initiating 2022 core FFO per share guidance with a range between $0.91 and $0.97 per share, well ahead of market consensus. Wilbur will review our financial results and our 2022 guidance in greater detail.

Yesterday, we also announced that the signing of Din Tai Fung for the Glass Cube at 1633 Broadway. The lease up of this space has been several years in the making, and we couldn't be happier with the outcome. While it took longer than we hoped, we remain disciplined in not leasing the space for the sake of leasing it.

But bearing in mind that this unique space sits in front of the building with 2.5 million square feet of office tenants above. Tenants that in most instances have chosen 1633 Broadway at the headquarter location. Their decision is always driven in large part because of the quality of the asset, the desirability of the location and the ability of their landlord to operate the asset in a Class A manner and surround it with the right type of amenities for their employees.

We welcome world renowned and Michelin Star rated Din Tai Fung to the Paramount portfolio. Their desire to select New York City as their first location on the East Coast, once again, cements the city as one of the premier destinations for retail across the globe.

Looking back at 2021, our results stand on their own. We met and/or exceeded almost all of our goals. On the leasing front, we executed on over 1 million square feet, 45% above the leasing we reported for last year. And our fourth quarter leasing was 137% above the fourth quarter of last year, highlighting the strength of our portfolio and the fact that the market is indeed trending back towards normal.

While we fell slightly shy of our goal to lease 50% of the Barclays vacancy, we exceeded our goal at 31 West, and leased 62% of the TD Bank vacancy. All said, we leased about 46% of that vacant space in 2021, a very fine outcome, especially considering the environment in which we executed. We also remain encouraged by the long-term commitments on both new and renewal leases signed in 2021, as demonstrated in our strong average lease term of 9.4 years compared to just 4 years in 2020.

The trends we see in our portfolio are also reflected in the Midtown Manhattan market more broadly. New York is recovering with gusto. The residential market is on fire with vacancy rates at record lows. The city is easing COVID restrictions and encouraging employers to bring their employees back and the labor market continues to tighten.

Leasing velocity increased across the Midtown market by over 45% year-over-year, and average asking rents are ticking up. We see these as positive signs for the resurgence of office space in New York City during 2022 and beyond.

In San Francisco, tenants continue to take a more gradual approach towards a return to offices. While our San Francisco leasing activity still favors renewals over new leases, we are beginning to see positive signs as leasing velocity increased by over 70% during 2021 compared to 2020. As we have seen throughout the pandemic, while asking rents have continued to come under pressure in San Francisco, landlords with high-quality assets continue to outperform and maintain rents at or above prior levels.

In other words, much like what's happening in New York, the flight to quality is noticeable. Our initial rent on leases signed during 2021 grew to about $100 per square foot in San Francisco compared to $94.50 during 2019 before the start of the pandemic. Our results continue to demonstrate the strength and resilience of our portfolio as we continue to benefit from the high quality of our assets.

As far as our leasing goals for 2022 go, we are targeting between 825,000 and 1,225,000 square feet, and we remain laser focused on our availabilities. Peter will provide additional details on what we are seeing in each of our markets.

Looking at the transaction market, there is not much that has changed since the last we spoke, but we are seeing some green shoots here in New York. While overall transaction volume during the fourth quarter was relatively muted, December volume was 4.5 billion, the highest it's been since the beginning of COVID, and there was another 8 billion under contract, suggesting a strong start to 2022.

Liquidity is ample, and pricing remains strong for top-quality assets. Inflation and rising construction costs will increase replacement costs, underscoring the inherent value of our portfolio. As always, we remain interested yet disciplined with our capital and monitor the markets carefully.

We are on the verge of completing with a joint venture partner, the acquisition of 1600 Broadway, a 26,000 square foot retail condominium in the heart of Times Square. The property is 100% leased to Mars as a flagship location for M&M's World and was recently extended for 15 years, including a $25 million commitment by Mars to improve the space. We see this commitment by Mars as a testament to the long-term value of this iconic Time Square attraction and resilience of the New York market in general.

The purchase price was $191.5 million, and the joint venture will close on a $98 million mortgage loan 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 a manager.

Lastly, I'd be remiss if I didn't highlight another element of our portfolio that we take great pride in, sustainability. We remain 100% committed to sustainability and ESG and are proud of our accomplishments in improving our portfolio, our markets and our environment.

Our sustainability efforts have continued to put us ahead of the pack. As we recently announced, we achieved 2021 Energy Star Labels across our entire office portfolio certified by the EPA and signifying that our assets perform within the top 25% in terms of energy efficiency nationwide.

Additionally, Paramount achieved a 5-star rating in the 2021 GRESB Real Estate Assessment for the third consecutive year and an A in public disclosure, securing the #1 ranking among its peer group of USA office properties for 2021.

To conclude, as we begin 2022, our priorities are straightforward. We are focused on the lease-up of our available space and the reintegration of our tenants in a safe and healthy manner. As has been the case since the pandemic began, we continue to maintain sufficient liquidity, which amounts to about $1.25 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. With that, I will turn the call to Peter.

Thanks, Albert, and good morning. During the fourth quarter, we leased approximately 207,000 square feet for a weighted average lease term of 8.2 years. For the full year, our leasing velocity was approximately 1,017,000 square feet, in line with our 5-year annual average. This is the direct result of the quality of our assets and a testament to the effort and ability of our team to execute in even the most challenging of environments.

Our fourth quarter leasing activity was highlighted by deals in San Francisco, which accounted for over 65% of the volume. We completed a new 76,000 square foot long-term lease with a leading global investment bank and a new 43,000 square foot long-term lease with a leading private equity firm, both at triple-digit starting rents at One Market Plaza. These transactions serve as good examples of the flight to quality trend that continues to gain momentum in our markets and continue to enure to our benefit given the quality of our portfolio.

At quarter end, our portfolio-wide leased occupancy rate at share was 90.7%, up 40 basis points quarter-over-quarter. As we look ahead, our remaining lease expirations are manageable with approximately 7.3% at share expiring per annum through 2024, a direct result of our ongoing strategy to pre-lease space and de-risk future lease roll.

Turning to our markets. In Midtown, we have realized improvement of key demand drivers throughout the year. Midtown's fourth quarter leasing activity of 5.5 million square feet, excluding renewals, was up 67% quarter-over-quarter and 44% above the 5-year quarterly average according to CBRE. In fact, leasing activity improved during each quarter throughout the year, capping off the year with a return to pre-pandemic levels in Q4.

Renewal activity reached a modest 846,000 square feet during the quarter, 29% below the 5-year quarterly average, as tenant interest continues to shift from short-term renewals to new longer-term commitments, as evidenced by the results in our New York portfolio.

Midtown's quarterly net absorption was positive for the second consecutive quarter, the direct result of leasing activity exceeding new space additions and the withdrawal of more than 1 million square feet of sublet space during the fourth quarter.

While subleased space availability currently comprises 22% of all available space in Midtown, slightly above the 5-year average of 21%, tenant touring activity for high-quality direct space in the market continues to accelerate, particularly in well-located Class A buildings. Our New York portfolio is currently 90.4% leased on a same-store basis at share, up 50 basis points quarter-over-quarter.

During the fourth quarter, we leased approximately 70,500 square feet at a weighted average term of 5.5 years. Of the 70,500 square feet leased in the quarter, 24,000 square feet represented swing space that was leased for less than a year, which affected the weighted average lease term. Excluding this space, the remaining 46,500 square feet was leased for a weighted average term of 8 years.

For the full year, we leased approximately 779,000 square feet, our highest leasing total in New York since 2015, for a weighted average term of 9.7 years. Our New York portfolio has 2.9% or approximately 170,000 square feet at share rolling in 2022. Looking further out, our overall lease expiration profile in New York is manageable with 7.2% at share expiring per annum through 2024.

We continue to attract more than our fair share of the activity in the market, highlighting not only the quality of our assets, but the strength of the Sixth Avenue submarket, which is where we have our largest availability at 1301 Avenue of the Americas. While Midtown's overall availability rate sits at 17.6%, the Avenue continues to maintain the lowest availability rate of any submarket in Midtown at 12.6%. Not a surprise given tenants' increasing desire to be centrally located with superior access to transit.

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 space and a soon-to-be world-class Amenity Center in the building, all of which continue to resonate with prospective tenants. We look forward to updating you on our continued progress at 1301 Avenue of the Americas.

Turning now to San Francisco. Office leasing slowed during the fourth quarter relative to the third quarter. This slowdown was largely attributable to the Omicron variant as companies further delayed their return to work plans.

Despite the slowdown, San Francisco significantly exceeded its 2020 leasing total. Venture capital funding remains robust, as San Francisco-based companies received over $78 billion in funding during 2021, an all-time high. Companies backed by these funds continue to drive demand in San Francisco accounting for 14 of the 26 leases completed in 2021 in excess of 50,000 square feet.

Sublease availability remains elevated, but has declined for the third consecutive quarter, down 1.9% quarter-over-quarter as per JLL. The market for San Francisco's premier assets remains tight and economics, particularly for view space and trophy assets, remains strong, as evidenced by our fourth quarter transactions in San Francisco and our current leasing activity.

At quarter end, our San Francisco portfolio was 91.6% leased on a same-store basis at share, up 20 basis points quarter-over-quarter. During the fourth quarter, we leased more than 136,000 square feet at a weighted average term of 10.9 years with initial rents averaging $110 per square foot. This lease execution is a testament to the desirability of our assets and our ability to cater to the most discerning tenants in the world, many of whom are seeking high-quality real estate to enhance the work experience for their employees.

For the full year, we leased approximately 237,700 square feet at a weighted average term of 8 years with initial rents averaging approximately $100 per square foot. Our San Francisco portfolio has 5.4% or approximately 121,000 square feet at share rolling in 2022. Looking further ahead, our overall lease expiration profile in San Francisco is manageable with 7.6% at share expiring per annum through 2024. Our San Francisco portfolio is well positioned to manage through the current environment.

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

Thanks, Peter. Yesterday, we reported core FFO of $0.24 per share, bringing full year 2021 core FFO to $0.92 per share ahead of consensus and at the high end of the range of our revised guidance. Same-store cash NOI grew by 3.3% in the quarter, bringing full year same-store cash NOI growth to 2.4%.

During the fourth quarter, we executed 12 leases covering 206,952 square feet of space at a weighted average starting rent of $89.37 per square foot for a weighted average lease term of 8.2 years. Mark-to-markets on second-generation space were 18.7% on a GAAP basis and 10% on a cash basis.

Yesterday, we also initiated guidance for the full year of 2022. Let me spend a few minutes discussing the assumptions used in our guidance. We expect 2022 core FFO to range between $0.91 and $0.97 or $0.94 per share at the midpoint. The midpoint of our core FFO guidance is not only ahead of consensus by $0.02, but also higher than 2021 core FFO by $0.02.

The $0.02 per share increase in core FFO is comprised of the following: a $0.02 increase in NOI primarily due to higher straight-line rents from the lease-up of vacant space in 2021; a $0.01 increase in fee income primarily resulting from fees expected in connection with the pending acquisition of 1600 Broadway, partially offset by $0.01 from higher interest expense primarily due to higher rates on variable rate debt.

For 2022, same-store growth is expected to be between 2.5% and 3.5% on a GAAP basis and between 1% and 2% on a cash basis. We expect to lease between 825,000 and 1,225,000 square feet, and we expect to end the year with a same-store lease occupancy rate between 93.6% and 95% or 94.3% at the midpoint, which represents a 360 basis point increase over 2021.

Turning to our balance sheet. In December, we refinanced our existing revolving credit facility with a new $750 million credit facility. The reduction in sizing of the facility was commensurate with the reduction in our unencumbered asset pool as we sold unencumbered assets in Washington, D.C. over the past 4 years and recycled those proceeds into JV assets in San Francisco.

Our liquidity at quarter end amounted to over $1.25 billion comprised of $508 million of cash and restricted cash and the full $750 million of availability under our new revolving credit facility.

Our outstanding debt at quarter end was $3.66 billion at a weighted average interest rate of 3.3% and a weighted average maturity of 5 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 3.57%. We have no debt maturing in 2022. And beyond that, our maturities are well laddered.

Lastly, we have updated our investor deck, which can be found on our website at www.pgre.com. With that, operator, please open the lines for questions.

(Operator Instructions) Our first question comes from Steve Sakwa with Evercore.

Wilbur or Peter, I was wondering if you could just maybe talk a little bit more about the leasing activity as part of 2022 guidance. I know that that's a kind of a gross number and not an at-share number. And I realize there's a pretty big difference between your gross expirations and your at-share expirations.

And I guess where I'm trying to really get at is how much of your existing portfolio do you expect to renew this year? How much of this new leasing activity is for some of the JV assets versus the wholly owned? And where do you think occupancy may be at the end of the year?

Sure. Maybe I'll start and then Peter can certainly chime in. A lot of things to unpack in that question, Steve. So first, in terms of the lease volume that we projected on guidance, I'll call it, at [1,000,025] square feet at the midpoint is right in line with our historical average, including what we delivered in 2021.

When you look at the square footage expiring in 2022, you have a gross number of 2,000,000 square feet. At share, that number is about 290,000 square feet. This particular year, 2022, that is a wide gap between the gross square footage that is expiring versus the at share and that's primarily because of 60 Wall. That's a 1.6 million-plus square foot asset that is going to be taken out of service for redevelopment in June.

So in our 1 million square feet of leasing or 1,000,025 square feet of leasing, we do not factor any leasing from 60 Wall. So you do have other JV assets that we project leasing on but it does not include 60 Wall. So by and large, that biggest delta is excluded from the number. Now if we are successful in pre-leasing some stuff at 60 Wall, that will certainly help us in getting towards the high end of that guidance, which is the 1,225,000.

Of the 290,000 square feet that is at share that's expiring, because 60 Wall is in that number, 5% of the 1,600,000 on 60 Wall is about 80,000 square feet. So the true expiration in the portfolio at share is about 210,000 square feet excluding 60 Wall.

And I think the only large block space in that number is at 300 Mission. We have Bechtel, which is like a 90,000 square foot lease, and we own 31%. So at share, that's about under 30,000 square feet for us that's in that number. Other than that, there is no known move out, and it's a small space that we typically are going to endeavor to try to do our best to renew.

Okay. And do you have a sense for -- I appreciate the lease percentage at the end of the year. How would this do you think translate into occupancy at year-end, realizing that some of the leasing that you're doing is for maybe larger chunks of space may not actually take physical occupancy this year? But what do you think occupancy range is by year-end?

So we don't put out -- I think what you're talking about is the actual occupancy or the GAAP occupancy, if you will, for year-end. We've always guided as a -- leased occupancy, which, as you know, Steve, is a leading indicator, and then it's a matter of time before the tenant takes possession and that is reflected in GAAP occupancy.

I mean we set very, very robust goals this year, as we do every year. We saw a lot of the notes and some thinking this is a very ambitious goal, but that's what we do. 360 basis point increase in leased occupancy, that is an at-share number. That's not a 100% portfolio. So that's an at-share number.

So in order to achieve that, when you deduct leases expiring in the year, we need to do occupancy increasing leasing in excess of 0.5 million square feet at share to be able to achieve that. So that's a very rigorous goal that we set for ourselves, and we feel good about meeting that goal.

Great. Just one other question maybe for Albert. I didn't see any mention about share buybacks in the quarter. I know you're doing this small JV transaction where you're a 9% owner. But where does share buyback sort of fit in given the stock continues to trade at a large discount to I assume your own internal NAV estimate?

Steve, it's a fair question. As we discussed in the past, the buybacks have to be leverage neutral. And so we remain very disciplined on that basis. And the investment -- and it always gets discussed with the Board on a quarterly basis. The Paramount stock is doing on a relative basis pretty well.

So we had this opportunistic investment opportunity at M&M with a very small equity investment that we thought made a hell of a lot of sense for our shareholders. It's an asset that we had a preemptive opportunity to underwrite. And the investor wanted to put money out in the market, and we are making a very nice return for our shareholders as being a part owner and manager and being compensated well for that.

Steve, I just wanted to add. I mean, look, as Albert said, we spend a lot of time discussing this with the Board in terms of capital allocation. This particular investment is a very insignificant amount of capital from PGRE's balance sheet. And as Albert suggests, this is more of a strategic investment for us and our partner, which certainly enures to the benefit of shareholders.

That said, when you look at the share buyback -- and the reason we didn't do a whole lot in 2021 or any in 2021 is because, if you recall, we also cut our dividend in the middle of COVID. We reduced the dividend, and we had the impending vacancy of Barclays and TD Bank that was going to take out $40 million of cash on the system. We deliberated this with the Board at great length, and it didn't seem prudent at that time if you're cutting your dividend, to then use that capital to go buy back stock.

So now we have better visibility. 2021 is behind us. As we look in 2022, we're going to continue to take every capital allocation decision very deliberately with the Board and try to see where things shape up.

Okay. I guess last question for me. Just on the transaction side, Albert, I know you've look to sell some small stakes in buildings and there's a lot of tax issues. Do you currently have any assets on the market? Are you currently exploring additional asset sales either in whole or in part?

Well, we are looking at this opportunistically. As I said in the past, if -- and the market has been -- the transactions that I mentioned in my earnings script, we -- the market has been relatively slow on the transaction side. So we want to get good value for our shareholders. I can't tell you that we're in the market to sell an asset currently. But that's clearly one of the considerations we have.

If the private market and the public market have a big difference currently, and we are watching it very carefully. And we are seeing that foreign investors are much more actively looking at the United States again. And so we have our hands on the pulse so to speak, but we want to be careful about getting the best return for our shareholders.

Our next question is from Jamie Feldman with Bank of America.

I guess just sticking with the percent lease guidance or the lease occupancy guidance. Can you give a little bit more color as to which assets you think you'll make the most traction? I mean you've got obviously a good amount of space at 1301, 900 Third. I'm just curious kind of where you think you can -- I mean, and 712 Fifth. I'm just curious where you think you'll make the most traction next year? Or maybe you can just give color on how you kind of feel today?

Sure. Maybe I'll start a little bit, Jamie, and then Peter might chime in. Again, if you go back to what I said, in order to achieve that leased occupancy guidance, you need to lease in excess of 0.5 million square feet at share. And that has to be existing vacant space, right? Because otherwise, you're not moving the needle. A renewal is not helping that figure.

So when you look at the existing vacant space in the portfolio, you're going to have to make a significant dent in 1301, as you point out, the Barclays block or the remaining space we have there. So that's factored in the guidance as well as vacancy at 712 as you point out, there's vacancy across the portfolio. But you have to make a significant dent in the 1301 and 31 West space to be able to achieve that.

So can you talk about what your leasing goal is at 1301?

I mean our goal always is to make sure all the space is leased. Last year, Albert set a 50% goal, and I think he addressed it in his prepared remarks that we did -- that was an ambitious goal, and we came within striking distance. We fell shy at 1301 slightly. And then we exceeded 31 West, which was not factored in that goal given the timing of when that space came back. So again, the goal always is, and Peter knows this, and he's smiling. The goal is to lease all of the space.

Jamie, our goal is to lease all 272,000 square feet of floors, 2 through 5. I will tell you our offering has evolved during this period of time. And right now, what's truly resonating is not only the Welcome Center, which allows for tremendous branding on 52nd and Sixth, but we've also identified a way to activate what equates to about 5,000 square feet of outdoor space.

And that, coupled with the Amenity Center, really, I think, at this point, has resonated. And we are projecting that we will lease that space. We do have activity and that's a big part of why we are where we are with our projections.

Can you talk more about the activity? Like maybe how has it changed in the last couple of months?

I would say we've seen professional service companies, consulting firms, but largely financial service companies. We have had conversations with tech. But I would say that the most sort of advanced discussions are with financial service companies, which is not surprising, because throughout 2021, we saw financial services leading the way in terms of a recovery in Midtown, contributing 36% towards total leasing velocity in Midtown.

So that sort of jives with what we're seeing specifically at the asset at 1301. But we do expect tech to become more active in the year ahead. We have had conversations. Obviously, those are large floors. The outdoor space is appealing. It's as central as it gets in Midtown. So we think we appeal to a wide universe of prospective tenants. But for the time being, to answer your question specifically, it's financial services that -- that seem to be latching on, I would say, in the most meaningful way.

And you asked about 712 Fifth Avenue, that's a building, as you know, that's catering more towards smaller tenants because the floor size is about 10,000 square feet. So there's pretty good activity, and we are optimistic about 712 for the rest of the year. The smaller tenants are more decisive in this market. The larger tenants seem to take a little bit more, and it's totally understandable. They have to make sure they have consensus on where they want to go with their space needs.

And then I guess the tenant sizes of 1301, I mean how would you characterize the average tenant size?

I mean it's from a 60,000 square foot tenant, which is 1 floor, 68,000 to be precise to a multi-floor activity. So we have everything. We are trying not to break up a floor for 2 tenants. And we're also focusing on some of the tower floors that might come back in -- that will come back from Crédit Agricole later in the decade. So we are able to offer a pretty wide range between 30,000 and 68,000 square feet.

Okay. And Paramount published an 8-K yesterday changing the bylaws for Board seats talking about stricter requirements to get on the Board. Can you talk more about that decision? Maybe can you explain the change and then talk more about that decision?

Yes. It's a fair question, but it's something that's very shareholder friendly. We have discussed it since we went public. And the Board decided to amend the bylaws. We have had plenty of discussions with our large shareholders, and there was a request to be more open and flexible. And we wanted to make sure that our shareholders got heard and that's why we are pursuing this.

Yes. And Jamie, maybe just to add to your question about the background, I mean, if you look at last year's shareholder voting results, our Chair of the NCG Committee received less than a majority support. And the Board tasked management to conduct a shareholder outreach because of that.

He had -- according to our current governance, he had offered to tender his resignation, which the Board rejected, and then task management. And we had filed an 8-K last year highlighting that -- that the Board task management were reaching out to all your large shareholders to conduct an outreach to figure out the reasons for that less than majority support.

And we did that, as Albert said, and we heard. And this was one of the things that came up. And you'll see other shareholder-friendly corporate governance changes that come up as a result of that outreach, which will be more fully articulated and described in our proxy statement.

The reason for the 8-K filing, with respect to proxy access, is a technical matter because we were filing our 10-K. And technically, if you did not file this 8-K what it could render, it could render your 10-K invalid, and you would have to file a 10-K amendment 2 or 3 days later. And so we tried to get it all done simultaneously avoiding that 10-KA, if you will.

So just to be clear, can you just explain what the change is?

So currently, Paramount's bylaws do not permit shareholders to nominate a slate to -- existing to the Board, and you cannot use our materials to do it. You can certainly do that. You'd have to run your things separately.

What proxy access does is allows you to do that through our materials. And it's designed for shareholders that are in the stock for some period of time to benefit those shareholders. The construct that we adopted is no different than the construct that's prevalent in the market and amongst all our peers.

Okay. And the construct is you have to have a 3% stake for 3 years to nominate 2 directors, is that correct?

That's correct.

And you're saying before that a shareholder couldn't even nominate a director?

Well, they could. You certainly could nominate a director. You cannot use our proxy materials to do that. Now you can.

I see. Okay. And this was purely driven by the weak voting last year. There's nothing else going on in the market? Or any other reason you guys would do this?

No, there's no other reason.

Okay. Thank you for the clarification. And then finally for me, can you just talk about the economics of the Din Tai Fung lease? Congratulations on getting that done by the way. How should we think about the earnings impact?

Yes. Look, as Albert touched upon, this deal one just got done. I don't think it's appropriate for us to talk about the economics on the call. But I will tell you this is less about this moving the needle on a building that generates in excess of $100 million of NOI.

This is more about us curating the right amenity for the 2.5 million square feet that is above that space. And so we are very focused on making sure we have the right amenities in our building. This is something that is very important to our tenants.

And there's going to be more to come. Peter highlighted and Albert highlighted, we're working also on an Amenity Center at 1301. We have 6 million square feet that surround this Paramount portfolio all within walking distance. And the idea here is to make sure that all of our assets have appropriate amenities for the tenants that we do business with.

I mean, over the years, Jamie, you might recall, we had other opportunities to rent a Din Tai Fung space, as I might call it now, to other tenants. And we have seen they have mostly failed in the market. And I think our judgment was right not to put them in front of our headquarter building.

There was always a big concern that this -- the use should be an asset, an amenity to the tenant base. And we are very convinced that this, with a terrific design spearheaded by David Rockwell Group, will be a tremendous amenity to the office tenant.

Okay. So it sounds like from an earnings perspective, we probably shouldn't model much. Is that the right way to think about it?

Yes. I would say this is not going to -- this is going to be less than $0.01 of earnings, if --.

Okay. And sorry, just to go back to my last question because I had a couple of people e-mail me on the response. So you're making a comment that this is more shareholder-friendly now to have the restrictions in place. But before I don't think there were restrictions. I guess I just want to make sure I understand your point.

Well, before there was no ability for a shareholder to use our proxy material, at all, period. And now they could use it, but they have to have a 3% share interest for a longer period of time.

This is only to use our proxy and not them run their own thing. And we've talked about this at great length. This is not the right forum to talk about this, Jamie. I mean you're looking for an education on proxy access, we should take that separately offline.

Okay. No, I was just getting clarification because I think a couple of people were confused. But that's fine. I appreciate your thoughts.

Our next question comes from Vikram Malhotra with Mizuho Group.

So I just -- I'm sure we can take the 8-K language offline. But I just wanted to clarify the specific requirements the 3%, 3 years. Is that pretty common across your peer set?

Yes. It's pretty common.

That's the standard, that's the market standard, Vikram.

Okay. I guess just you talked a little bit about using funds and potential acquisitions, maybe even dispositions. I'm just wondering specifically on the fund business, some of your peers have talked about being maybe more asset light going forward. And I'm wondering kind of the deal you did at Times Square, which I know is not in the fund business, but you have a smaller stake. Just how are you envisioning use of the funds or the fund business going forward?

Well, I think the fund business is more of an asset light, if you want to say that, model. And I think we have said it for years, especially under the current market environment. This is great for our shareholders that we have access to third-party investors and increase the assets under management and the fee income for our shareholders.

So I think that's the direction. As we had communicated before that we will use in the future also in the office segment. I mean we have done this with 60 Wall and with other assets as well.

Okay. That's helpful. And then just as we sort of see a pickup in activity, more return to work, can you just update us on your thoughts as you're leasing up this space? What's the appetite to offer sort of a co-working like service internally or maybe even leverage third-party co-working companies as you lease up?

Well, we take this on an asset-by-asset or building-by-building decision. So each building has a different character. And as we mentioned, at 1301, we are planning on a larger Amenity Center that will be catering to our entire Midtown portfolio. So you could see that a combination of that could be co-working, but we take it on a case by case. We are not making a business out of it.

Okay. And then just last one, maybe, Wilbur, you mentioned about the dividend adjustment during COVID. With the leasing progress you've done last year and now this year as you anticipated, is it reasonable to think that the dividend will only be revisited post the lease up?

No, I think, look, dividend is discussed with the Board quarterly, and it's revisited, like I said, quarterly as the progress is made. I mean we have made quite a bit of progress relative to the lease expiration that took place in 2020. And we will once again discuss that in the Board.

But the dividend was rightsized to a point, right? To reflect the taxable income and the cash flow that was being generated. And I think as this leasing progress continues to move forward, one should envision that that would translate in increased taxable income, which would then translate into an increased dividend.

So I'm not forecasting anything, but it just seems logical that that would be the case. And that's, as I said, a Board decision, and we visit that with the board periodically.

Our next question is from Ronald Kamdem with Morgan Stanley.

Just 2 quick ones. One, just on the same-store NOI guidance for the cash numbers. Maybe can you talk about sort of the components for the 1.5% at the midpoint? How does free rent factor into that, rent escalators and so forth? Just a little bit more color on the components.

Sure. Again, I think you saw a couple of notes. I think some people thought that that number on the cash side was a little bit lower than what they would have forecasted, But on the flip side, 2021 was a lot higher than people forecasted. When you look at that number, part of that reason is because of the pre-leasing success that we've had in 2021.

So -- what I mean by that is, obviously, if you're renewing leases, there is a free rent component when you're doing the only renewal of leases that would not have otherwise expired in 2022. That free rent has affected some of that cash rent that you would otherwise have received in 2022. And that's why that number is lower than what perhaps you guys might have had in your models.

Got it. That's sort of helpful. And the second question was just when you think about the office utilization today and as that starts to recover, is there any sort of variable expenses that we should be thinking about? And the other side of that is, is there sort of -- what's the upside left from potential variable income or variable revenues just as that utilization recovers?

So Ron, 96.5% of our business is office centric and you've seen all through the pandemic, we have been collecting 96%, 97%, 98%, 99% of our rents. And so on the variable side of the business, I don't think there's a whole lot that's yet to come. Operating expenses will trend up as office utilization increases, but that will be more than offset by or at least significantly offset by recoveries from tenants through the pass up of those operating expense increases.

In terms of variable business, I think the other 3.5% is really the theater space and some of the retail space, which, as we lease that space up, that will come back. And the theaters have already started operating in full swing. In fact, both our theaters in the fourth quarter had robust attendance. And so that is factored in our 2022 projections.

The next question is from Tom Catherwood with BTIG.

For the fourth quarter leasing costs, interesting to see that the cost per square foot per year in New York and San Francisco were roughly in line, despite the kind of material difference in starting rent. How are leasing costs trending at different rent price points? Or is that not the right way to think about it? Is it less correlated to rent and more tied to other factors, which, Peter, you seem to allude to in your prepared remarks?

Tom, the market is a little bit in a difficult spot, and I encourage the team to get the space leased and occupied. And we -- I don't think that's a trend. We think that 2022 will get better, especially in New York. And this -- the fourth quarter might be a little bit of an aberration.

Yes. The fourth quarter number, Tom, that you're looking at the 17%, I think, in New York, which is what you might be referring to as being elevated, that did include a turnkey lease as well, as Albert said -- I mean, so that is factored in the number, which is why it's elevated. And then obviously, as you pointed out, it is a function of your starting rent as well. And yes --.

So totally fair, I'm sorry, I could have been more clear on the question. I was more looking at the dollar value less the percent of starting rent.

And when we look at the dollar value, they're right on top of each other, which it's interesting to see -- kind of implies that maybe the cost of improving the space for a tenant is relatively consistent across Class A and maybe the starting rent doesn't matter as much as a factor of what that tenant improvement cost is going to be. Just want to see if there's any correlation there? Or maybe it was tied to something else?

No, I wouldn't take that as kind of a recipe. So I think that might be an aberration.

Totally fair. And to follow-up on that, maybe for Wilbur. You mentioned more than 500,000 square feet of vacancy leasing this year, which is going to require a material investment in those tenant improvements. What are you expecting as far as TI spend this year compared to '21? And is vacancy leasing going to impact this year? Or is that likely 2023 spend?

So that is likely 2023 spend, Tom, to be quite candid because as you lease through the year, you might get some of it at the tail end of 2022. Because remember, it's the tenants that are spending their dollars first then sending us proof of that spend and then us reimbursing them, right?

So it's going to be a function of how quickly you lease that space during the year, when that space gets handed over to tenants, when the tenants start their build out, and when do they [requisition] for the reimbursement.

So we do anticipate some of that hitting in 2022 and then that carrying forward in 2023. But we also anticipate paying out the dollars that we successfully leased in '21 in '22. So talking purely about capital spend, I think capital spend in 2022 will be at least twice as much of that as what you did in '21 because '21, a lot of the capital spend was for leases that got executed in '20 and '20 was a light leasing year for PGRE and the rest of the market.

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

Wilbur, maybe just following back up to the corporate governance changes. I believe you mentioned there are potential shareholder-friendly governance changes with the upcoming proxy season. I'm just curious if you can elaborate on that, and if that would include any opting [out of] (inaudible)?

As Wilbur had said, this isn't something -- it's more a tactical thing that we had to do this filing. And we don't want to go into more details, you will get the proxy and there will be more, as Wilbur, I think, phrased it positive statements in there. So I would like to leave it at that.

This concludes our question-and-answer session. At this time, I'd like to turn the call back over to Albert Behler for closing comments.

We look forward to providing an update on this continued progress and report our first quarter results. Thank you.

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