Paramount Group Inc (PGRE) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Paramount Group's second quarter 2015 earnings conference call. At this time all participants are in a listen only mode, a question and answer session will follow the formal presentation. Please note that this conference call is being recorded today, August 7, 2015. I will now turn the call over to Jacques Cornet with ICR.

Thank you, operator, and good morning. By now everyone should have access to our second quarter 2015 earnings release and supplemental information. Both can be found on the Paramount website at www.paramount-group.com in the Investors section.

Before we begin our formal remarks, we need to remind everyone that the discussion today will include forward-looking statements. These forward-looking statements, which are usually identified by the use of the words such as will, expect, should, or other similar phrases, are not guarantees of future performance.

These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect, and, therefore, you should exercise caution in interpreting and relying on them. We refer all of you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. We encourage investors to review our regulatory filings, including the form 10-Q for the quarter ended June 30, 2015, when it is filed with the SEC.

During today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measure is available in our earnings release and our supplemental package.

Hosting the call today, we have Albert Behler, Chairman, Chief Executive Officer and President of the company; Michael Walsh, Executive Vice President, Chief Financial Officer and Treasurer; Ted Koltis, Executive Vice President, Leasing; Vito Messina, Senior Vice President, Asset Management; and Wilbur Paes, Senior Vice President and Chief Accounting Officer. Management will provide some opening remarks and will then open the call to questions.

With that I'll turn the call over to Albert Behler.

Thank you, Jacques. And good morning. We appreciate everyone joining us today. We are happy with how things are developing at Paramount, especially the leasing progress we made during the quarter and the momentum we carry into the second half of the year.

During the second quarter, we leased 200,000 square feet at rates that are indicative of our continuing efforts to unlock the growth and value in our portfolio as we continue to execute our strategy of delivering long-term cash NOI growth. We are taking advantage of our strong markets to increase in place below-market rents as leases expire.

Our results for the first half of the year included cash mark to markets of 15.7%, which highlight these efforts. We are successfully leasing up available space and are happy to report that we are now over 90% leased in Washington, D.C., up 970 basis points since the IPO. Additionally, we remain over 95% leased in New York and San Francisco.

To put our leasing efforts in perspective, we have leased nearly 900,000 square feet in the past nine months. Half of these leases have commenced and the rest will begin in the next six to nine months. Over time, the rent abatements associated with these leases will burn off, resulting in corresponding cash NOI and earnings growth. But we are far from done!

We are currently in active negotiations with various tenants for over 600,000 square feet of space. We continue towards our goal of leasing 1 million square feet for the year. As we have discussed before, our lease expirations are lumpy and we are mindful that we have 1 million square feet expiring in the next 12 months.

While we are aware of the near-term impact that these lease expirations will have on our earnings in the second half of 2015 and into 2016, we view this dynamic as a meaningful opportunity to capture additional growth as we mark these leases to market. We also continue to redevelop and reposition our properties where we can further capitalize on the quality of our buildings.

During the quarter we broke ground on our redevelopment project for the public plaza at 1633 Broadway. One Market Plaza's lobby and retail renovation continues to track on budget and on schedule for completion by the fall of 2015. We are excited about the renovation here and very proud of this asset. We encourage you to tour the property.

During the second quarter we raised an additional $95 million for Fund VIII, our real estate debt fund, bringing total commitments to approximately $580 million, of which we have invested $51 million. We stay involved and look at every real estate opportunity in our markets and this business gives us additional insight in evaluating equity investments for Paramount. We continue to uphold a disciplined acquisition strategy that has guided our decisions for the past 20-plus years.

Subsequent to the second quarter, Fund VII , our real estate equity fund, entered into an agreement to purchase 670 Broadway, a 77,000 square foot creative office building located in the NoHo section of Manhattan. The property is currently fully leased with below-market leases expiring in the next 12 months, creating a unique opportunity for us to reposition and re-lease the asset. It is important to note that this transaction was sourced off market, a testament to our deep industry relationships. With this acquisition, Fund VII will be fully invested.

Our outlook remains positive on the markets in which we operate. We have seen an uptick in activity as demand remains strong and availability for Class A space in our markets remains limited. These factors provide a favorable dynamic as our leases expire. The Class A space that we have is among the best tower space in the market, allowing us to further capitalize on this trend .

To sum it up, we are proud of the progress we have made. Along with our current momentum, the company has a strong foundation to generate same-store NOI growth for several years in the future.

With that overview, I will now turn the wall over to Vito to discuss the second quarter leasing activity.

Thank you, Albert. In the second quarter, we leased 199,972 square feet at a weighted average initial rent of $71.84 per square foot and an average term of 11.1 years.

Tenant improvements and leasing commissions were $7.38 per square foot per annum or 10.3% of initial rent, in-line with first quarter leasing activities. This activity, offset by lease expirations, increased our portfolio-wide leased occupancy to 94.8% at June 30, 2015, up 20 basis points from the last quarter and basis points from year end.

Of the 199,972 square feet leased during the quarter, 138,232 square feet represents leases on second generation space, for which we achieved a positive mark to market of 15.4% on a cash basis and 19.0% on a GAAP basis. The majority of our second quarter leasing activity, or 138,975 square feet, was in New York at a weighted average initial rental rate of $78.58 per square foot and an average term of ten and a half years. Tenant improvements and leasing commissions were $7.43 per square foot per annum or 9.5% of initial rent.

Of the 137,975 square feet leased in New York, 126,306 square feet represented leases on second generation space for which we achieved a positive mark to market of 14.4% on a cash basis and 17.3% on a GAAP basis.

At 1325 Avenue of the Americas, the 15th and 16th floors became vacant effective June 30, 2015, and we were able to sign a lease for the entire 53,000 square feet with a new tenant whose lease begins at the end of the third quarter of this year.

Additionally, at 1633 Broadway we secured a lease with an existing subtenant on a direct basis on one full floor, or 52,000 square feet.

Turning to Washington, D.C., the portfolio is 90.2% leased as of June 30, 2015, up 170 basis points from the prior quarter and 970 basis points over the last three quarters. During the second quarter we leased 28,863 square feet in D.C., all of which was first generation space at 425 Eye Street. This activity brings that property's leased occupancy to 96.4%, up 750 basis points from the first quarter.

In San Francisco, our property was 97.8% leased as of June 30, 2015, up 110 basis points from the last quarter. During the second quarter, we leased 33,134 square feet, of which 11,926 square feet represented our share of second generation leases, for which we achieved a positive mark to market of 27.9% on a cash basis and 39.1% on a GAAP basis.

We continued to see strength in leasing trends and mark to market in this building. We expect to further benefit from these trends as over 14% of our leases roll through the end of 2016 at rental rates significantly below market. Our biggest tenant at One Market is Google, which has recently leased an additional 22,000 square feet and now leases approximately 18% of the building.

With that I'll turn the call over to Ted, who will provide an update of what we're seeing in each of our markets.

Thank you, Vito. What we are seeing is a healthy pipeline in all three markets. As Albert commented earlier, we have strong momentum heading into the second half of the year, with negotiations in various stages on over 600,000 square feet of available space.

In Manhattan, we remain focused on availabilities at 1633 Broadway and 1301 Avenue of the Americas. Strong market trends, notably in large block activity, correspond directly with our availabilities. As we have seen over the last year there continues to be growing activity for the larger deals in Midtown, as compared to a slowing for such deals in Midtown South and Downtown. Our assets are benefiting from this trend as well as low inventory levels along the West Side and Sixth Avenue submarkets.

On the West Side, activity remains solid, and we continue to see strong demand from growing TAMI tenants. At 1633 Broadway our large floor plates can provide for efficient open layouts, which are well suited to these type of tenants. We're also seeing increased activity from financial services tenants and from traditional tenants for our space.

On Sixth Avenue we continue to see consistent activity, especially on larger spaces. As we have mentioned before, the vacant floors at 1301 Avenue of the Americas and the space rolling next year are primarily at the top of the building. These are arguably the best available large blocks currently on Sixth Avenue. Similar to 1633 Broadway, we are in active negotiations on a number of situations at 1301 A of A.

The Fifth Avenue submarket continues to see higher prices and less availability. Inventory is extremely limited and we don't see this environment changing anytime soon and are therefore able to continue to increase rates.

Turning to Washington, D.C., we like where our assets fit competitively within the CBD and given our steady success over the last few quarters, we remain confident. There is a limited supply of trophy space and we expect our assets along Pennsylvania Avenue will benefit meaningfully from this market dynamic. In addition, as mentioned last quarter, we saw increased activity on the peripheries of the CBD and as a result 425 " Eye Street, in the NoMa District, had significant lease up during the quarter and continues to have strong activity on the limited space remaining there.

Turning to San Francisco, the market remains extremely healthy with very low inventory, especially along the Mission Street and Market Street corridors which directly benefits One Market Plaza. The redevelopment of the lobby and retail are nearing completion and will enhance our already strong competitive position. And although we don't have much space available until next year, we feel very good about our ability to capture higher rents when leases expire.

With that I will turn the call over to Mike, who will discuss the second quarter financial results in more detail.

Thanks, Ted. Turning to our financials our core FFO was $0.22 per share for the second quarter, including $0.02 per share of carry interest from our Fund business, due to changes in market value. FFO for the quarter was $0.25 per share and includes $16.8 million for our share of unrealized gains on interest rate swaps. This was partially offset by $5.9 million of transfer taxes, $2.3 million of acquisition and transaction-related costs and a $721,000 predecessor tax true-up.

Our portfolio ended at 92.9% occupied up 1.6% from the first quarter and included $16.1 million of straight line rent and $900,000 of net above and below market lease revenues on a consolidated basis. $10 million of this quarter straight line rent was attributable pre rent.

Turning to our balance sheet, we ended the quarter with ample liquidity, with $438 million in cash and $800 million dollars available under our revolving credit facility. Our outstanding consolidated debt of $2.9 billion is effectively unchanged from last quarter, with an average interest rate of 5.5%. Our next upcoming maturity in December 2016 is a $926 million mortgage loan on 1633 Broadway with a weighted average interest rate of 5.39%. We are currently exploring options to refinance this debt early. Our leverage metrics remain very conservative with overall net debt-to-total enterprise value of 30.6% and net debt-to adjusted EBITDA of 5.9 times.

In response to ongoing investor dialogue we continue to enhance our Supplemental Package to include additional information that we believe will be helpful. This quarter we provided additional disclosures for our consolidated and undisclosed joint ventures, OP level results and our pro rata share of maturing debt.

Moving to our earnings guidance, we expect full year 2015 core FFO attributable to Paramount Group, Inc., to be between $0.79 and $0.81 per share. Our pro rata share of cash NOI for the six months ended June 30, 2015, was $155.8 million. We expect our pro rata share of cash NOI for the second half of 2015 to be $7 million to $11 million lower than the first half primarily due to the 500,000 square feet of lease expiration in the second half of the year. This will be partially offset by the burn off of free rent from previously signed leases. Lastly, we assumed no one-time events for capital markets transactions in our guidance.

With that, operator, please open the lines for questions.

Thank you. (Operator Instructions). One moment please while we poll for questions. Our first question is from Vance Edelson from Morgan Stanley.

Terrific, good morning, guys.

Good morning, Vance.

Hi. At 2099 Pennsylvania Avenue, the lease percentages plateaued some, despite the shortage of trophy space in the neighborhood. So, how do you feel about the prospects for finding additional tenants there before year end?

Vance, we feel positive about finding prospects there. I mean, you know, the trophy market in D.C. is very tight, along Pennsylvania Avenue there really isn't any direct availability so we're seeing significant activity from tenants on that space. And we feel pretty good about where we stand.

Okay. Great to hear. And then, it looks like the first quarter 2016 expiration figure came down some. Does that suggest there was an early renewal? If you could just fill us in on that.

Hey, Vance, it's Vito. No, there was not an early renewal. It was a tenant that was expiring on the last day and it moves to the first day of the second quarter. And I think we tried to footnote that in the Supplemental as well.

Okay, got it. And then for Mike, you mentioned exploring options to refinance early the $926 million of debt coming to you next year. Can you give us some feel for what the interest rate savings might be and what the timing might be? Are we talking about the next quarter or two or might this drag into next year?

We're actively working on it. The current rate is 5.39% and it depends on, you know, what tenure we go to for this particular refinancing and we're evaluating that currently.

Okay. Great. I'll get back in the queue. Thanks.

Our next question is from Jamie Feldman, Bank of America Merrill Lynch.

Thank you, and good morning.

Good morning, Jamie.

I guess, Mike, in term of the guidance you had mentioned $7 million to $11 million less. Can you talk us through what you're thinking on some of the larger leases. I know Morgan Stanley, you know, maybe just talk through the big lease expirations and what's in the guidance.

We gave the guidance of where we think our share of cash NOI will be, based on the lease expirations that we have. I think talking about the individual leases themselves is more for Ted and Vito to handle.

Sure. Well, as we said in the past, we have expirations beginning 7/1 at 1633, two floors in the base of the building that expired on 7/1/2015. And then as we had talked about again in the past, you have B of A on 150,000 square feet that expires 9/1/15, Morgan Stanley, October 31, 2015, and Kasowitz Benson for two floors there on November 30, 2015.

Just to add to that, you know, as you heard we renewed one of the existing subtenants on the B of A floors, we continue to market the rest of the floors. We're in various stages of negotiations with several prospects on those floors. I will say that we are continuing to talk to existing tenants, such as Morgan Stanley about staying in the space and remaining in the space, and we feel very good about where we stand in negotiations on several of those spaces.

Okay. But I guess other than the subtenant lease, in terms of the large leases you're expiring at the end of the quarter since last quarter it sounds like nothing has really changed? I'm sure you're having a lot of conversations but, I mean --.

Yes, we're having a lot of conversations. We're not sitting still. Things are moving forward. We just don't have anything definitive to report yet.

Okay, all right. Perfect.

Jamie, it's more than conversations. I mean, we are in various proposal stages with, as I mentioned in my remarks, for about 600,000 square feet and the majority of those are on 1633 and 1301.

Okay. And then I guess back to the guidance, again, the unrealized gain, how did you model that for the rest of the year?

The volatility of that number.

Yeah, Jamie, it's nearly impossible to come up with what we think the change in market value is going to be for our share of Fund business. So in the guidance we have not assumed that there is anything in way of increases or decreases in the fair value of our Fund business. So the only thing we have, is if you look at, I think it's page 14, you'll see our share. If you were to back that out and use that run rate, that's probably a good starting point.

So you're saying the second quarter run rate or just that it's flat, it's zero for the rest of the year?

The carried interest component, we're assuming is zero for the rest of the year.

And we're not projecting any future increases or decreases in the market value. So you would not, in our guidance, have any unrealized gain projections. Whatever is in the number is through the six months.

Got. Okay. And then any, just latest thoughts on capital markets? I know you had the one acquisition through the fund but are you seeing any change in underwriting or demand for assets or maybe increase in demand for assets as we're heading closer to the rate hike.

Well, Jamie, with regard to acquisitions, there's really nothing definite that we can report at this point. As we mentioned on earlier calls, we are constantly seeing deals and analyzing them for the company, as well as for Fund VIII, Fund VII, as we had mentioned is now fully invested, and we want to remain selective and disciplined in our approach, and we are comparing external to internal, including joint venture interests.

Okay. And then just a final question from me, can you remind us when the redevelopment as the base of 1633 will be done?

Yes. We broke ground, as we had mentioned on the last call, in May. And we expect completion of that space in fourth quarter of 2016.

Okay. And then any update on conversations for that space?

Well, we have a lot of conversations, but we want to be very selective on the retail tenancy and as this is our headquarter building with a tremendous exposure to upscale office tenants and we want to keep it in first class shape and so we're very selective. We have a lot of interest for the space. The good news is that in the meantime retail rents are still climbing up.

Okay. All right. Thank you.

Thank you, Jamie.

Our next question is from Jed Reagan, Green Street Advisors.

Good morning guys.

Good morning, Jed.

You talked about the 600,000 feet of leasing in the pipeline. I'm just curious how that compares to maybe this time last quarter and then also, I think, Ted had a touched on pick up in financial services activity. I wonder if you can give a little bit more color on that and, you know, if that includes the big banks and where are you seeing that.

Sure. I will say that I think the 600,000 is probably a little bit stronger this quarter than it was in the last quarter, in terms of where we are with proposal stage, and the depth of our conversations. And specifically, too, with regard to financial services tenants, we are seeing more tours and proposals from financial services tenants on both properties, specifically really 1301 has seen an uptick in that activity.

Is that more sort of smaller, boutique kind of asset management type firms or does that include the big banks?

It includes, it definitely includes the big banks and it's probably, you know, mid-tier type financial services as well. Just due to the size of the floor plans and the blocks.

Okay, that's helpful. And then the 670 Broadway deal, I realize that's pretty small and through the Fund, but just wondering if you can talk a little bit more about the economics behind that deal, maybe a cap rate and then some of the attributes that made that deal attractive to you guys. And then also just how you determined to acquire that building through the Fund and not, you know, kind of fully on balance sheet for Paramount.

Yeah, well, let me first answer the question why not for Paramount. It really was a relatively small-sized asset, and the whole building quality would not have fit, really, the Paramount portfolio. But the Fund VII has a different goal.

It's more opportunistic focused and we see substantial upside as we had reported the majority of the tenancy is moving out of that building, we will upgrade and renovate it and we have a lot of interest for retail as well as office tenants for the property. It's in a unique location and we are quite proud that we could buy it on an off-market situation.

Can you quantify the mark to market potential on in place rents?

It's substantial. Let's leave it at that. These, partly, were long -- old leases that, and especially on the retail end of the property, that market, the NoHo market has really changed drastically over the last couple of years, and so you will see a substantial increase in the rents in that property.

Okay. That's helpful. And just as a follow-up to that, you know, now that you've fully deployed Fund VII, are you thinking about your rebooting another equity fund at this point?

We're not planning on doing any other new funds at this point. As we had mentioned Fund VIII , which is a mezzanine debt fund, we raised additional funds for this. We are now at $580 million, the goal might be up to $700 million but that's a mezzanine debt fund and we want to focus that. Besides the focus, the main focus, of course, is on Paramount growing our asset base and finding the right asset(s), which is not easy in this relatively expensive market.

Should we think of Fund VIII as sort of the last for the fund business or might you still at some point in the future, you know, consider additional funds?

I wouldn't totally say that there would be no funds in the future, and we always have made that same statement. But for the time being, it will take a while to deploy that fire power and we will focus on PGRE investments in the meantime.

Okay, thanks very much.

Our next question is from Brendan Maiorana from Wells Fargo.

Thanks. Good morning.

Hi.

Hi, guys.

Good morning.

Good morning. So, Albert, you mentioned you felt pretty confident in the million square foot leasing goal for the year. I think you guys have done 355 year-to-date and then you guys have talked about kind of the 600 of prospects, it sounds like it's pretty far along. You know, is it fair to think there's some leasing that's going to happen that's not in that prospect pool that will get you to the million?

As we had mentioned, I think it was the first earnings call, it's very common that, especially for larger leases, that they are executed in the fourth quarter of the year. So we are very confident that we achieve this one million square feet as planned. And as Ted had mentioned before, there's a lot of activity, especially for our building 1633 Broadway and 1301. And we are very confident that this can be achieved, maybe over achieved.

Okay great. And are there -- so I think you guys detailed a couple of the big tenants that are -- expirations that are expected or potential move-outs. Are there, you know, is there some renewal activity in the balance of the 500,000 square feet that expires this year that's maybe not part of that 600(k) but is likely to renew?

Well, we -- at this point we don't want to really go into specifics because we are in various negotiations stages and I propose you appreciate that. There's confidentiality agreed upon between parties, and there's some potential that some of the tenants that you might be considering a move-out will stay ultimately.

Yes, no, no. I didn't want to sort of get into tenant specifics. I was just wondering if -- there's probably 600,000 square feet that you guys talked about that's the pipeline, those are probably large tenants. Are there, you know, is there some renewal activity, just in maybe some of your bread and butter smaller tenants that's likely to happen and maybe that's not part of that larger pool of 600 (k) that could happen. I'm not sure whether or not that's the case.

Yes, well, there's clearly a pool of also smaller tenants who would renew in our portfolio.

Okay, great. And then this one might be for Mike. So you mentioned $10 million of free rent. I think that's up a little bit from where it was last quarter, which is good. So that's $20 million sort of annualized for the back half of the year. How should we think of that -- how much of that is likely to come online in the remaining six months compared to the overall NOI decline that you've highlighted of the, I think, $7 million to $11 million the back half of the year.

The $10 million is probably a good run rate for the rest of the year and it will burn off in 2015 but more will burn off in 2016. I would expect that, you know, as we sign the leases that we're talking about, that that will get replaced as well. But it will turn itself into cash in the, you know, in the next six to 12 months.

Okay, but it sounds like you don't expect a lot of that to turn into cash in the back half of the year so the downdraft in NOI isn't really being offset much by leases commencing on a cash basis?

It's more driven by the expirations that we have in the second half of the year. You know, as you look at the schedule and the items that Vito talked about, you know, with a lot ofthose spaces, there will either be a free rent period or there will be down time and that's what we've taken into consideration in our numbers.

Okay, yep. Very helpful. All right, thanks, guys.

Thank you.

Our next question is from Nick Yulico from UBS.

Hi, Nick.

Hi, thanks. If I look at, you know, 1633 Broadway, 1301 Avenue of the Americas and 1325 Avenue of the Americas, all together you have about one million square feet expiring, you know, call it in the next year. What are you thinking about as far as the rent, you know, mark to market on that space at this point in those different buildings, where, you know, it's a markup or flat?

I think what we've achieved for the first two quarters is very, very healthy and we're hoping that we're going continue to achieve those time of numbers.

Overall it should be a positive, I would say but it's tough to pin what that number would be, what that percentage would be.

Okay. I guess maybe, I mean, building specific like 1301 Avenue of the Americas, you guys have expirations next year in rented in around the $70 range, where do you have sort of rents pegged in that building today for that type of --?

Well, I can tell thought asking rents on the space that we have available start with eights and nines. So...

Okay. And then at 1633 Broadway? I mean, that space, like, the Deloitte space, they were paying $75, $76, what are your thoughts on that?

Yeah, we would expect to do better.

Okay, all right. Thanks, that's helpful. And then I think Ross had a follow-up question.

Yeah, hey, guys, good morning. I had two questions on your FFO to core FFO reconciliation. The $2.3 million of acquisition and transaction-related costs, what exactly did that relate to if Paramount didn't actually acquire anything on its own this quarter?

So the majority of it had to do with some costs associated with raising the $95 million for Fund 8, and there were some transaction-related costs associated with looking at several deals that we viewed.

You guys thought that was an appropriate add back to get to core, even though raising funds for, is sort of part of the business?

It's more -- it's one time in nature, Ross, so we decided that, you know, it was appropriate to break it out there.

And then the same question on those transfer taxes. Can you discuss what that $5.9 million was, the sale of shares by a former partner.

Yeah, this was an IPO-related situation. A partner of ours had the option to sell shares and PGRE agreed to cover a portion of the taxes. It's a one-time item, it's unique, and there's no additional liabilities for taxes for the future.

So there's nothing else like that left from any other former partners, IPO-related? This is all we're going to see again?

Yes, that's correct.

Okay. Thank you.

You're welcome.

(Operator Instructions). Our next question is from Rich Anderson from Mizuho Securities.

Thanks, good morning.

Good morning.

Good morning. On the Fund 7, you know, sort of closeout deal, I recall that there was $57 million remaining there to invest. Can you just kind of -- how did you -- how were you able to, you know, kind of waiver that up to $112 million or maybe I'm just missing something?

Well, we are partly financing the acquisition of the debt.

Okay.

And that fund has normally -- having leverage of up to 60%, 65%.

Okay.

So that's how the number work out.

Fair enough, okay. On the leasing activity and specifically the $15.4 million -- I'm sorry, 15.4% cash releasing spread, 11-year term, how did that compare to your going in expectations? Were you kind of in line with that? Or do you think you did better than you thought you would going into those deals?

No. I think it was in line with our expectations.

Okay. Second or third question, on D.C., I mean, what would be the word or words you would just use to describe that market? I mean, is it recovering, bottoming, accelerating? What's the word for D.C. right now?

I'd say there's a cautious recovery going on in D.C. right now. We're starting --.

A cautiouss recovery.

Yes. .

And the D.C. market is not a D.C. market. Our properties are in the best locations in the CBD of Washington, right around Pennsylvania Avenue. We have no expirations coming up in the course of the year, and we see some increased activity for the properties that still have availabilities. So we are quite optimistic.

But that's part of the Paramount strategy. We are focusing on CBDs. We have never over the last 20 years bought a suburban property because of the high volatility and it's not part of our long-term strategy.

Great. And then the last question. Sounds like your guidance just doesn't really assume much in the way of doing anything with the bulky expirations that are coming the second half of the year, but even if you are having -- have some success there, with the various expirations on the docket, should I assume, then, that there's not really any upside to guidance anyway because of just this time lag between signing a deal and getting stuff done or do you feel like maybe you're being a little conservative about the outlook and maybe there could be some upside if you actually are able to make good on some of the activity that's going on?

So for the bulk of the activity that Vito and Albert and Ted have described, there would be some downtime between leases and these leases are expiring in the second half of the year. So to be able to deliver the space to the tenant and commence revenue recognition is somewhat difficult and it would either be, you know, later in the year or in the first/second quarter of 2016.

So to have meaningful upside in that I think would be hard. Where you would get it, if you were to get it, would be from any type of lease renewal in the mark to markets that we've talked about accelerating in the straight line.

Perfect. Thanks very much.

You're welcome.

Our next question is from Gabriel Hilmoe from Evercore ISI.

Thanks. Good morning.

Good morning, Gabe.

I guess, Albert, I think you had mentioned you've done around 900,000 square feet of leasing and about half of that commenced in the last nine months. But maybe this is a question for Vito as well, but can you give us a sense of how that other half commences into the portfolio, just in terms of timing?

Yeah, it's going to be into the second half of 2015 and early 2016.

Can you maybe break out just the magnitude of kind of what's hitting in the back half and then kind of what's coming in the first half of 2016.

It's Mike, I think what you're seeing, and you saw some of it this quarter, which is we have -- we provide two pieces of occupancy numbers. We provide lease and occupied and you saw an improvement in our occupied number, and then as we talked about, we have 500,000 square feet in the second half that is set to expire and unless there are renewals, as I just talked about, that there will be some downtime in between. So that occupied number you would expect would go down in the second half of 2015. And as these leases become revenue producing pick back up in 2016.

Okay, that's helpful. And maybe just sticking with that, Mike, the NOI guidance for the back half is helpful but can you give us maybe a sense where, you know, what kind of occupancy rate is kind of baked in maybe for year end, just given the FFO range that you put out?

Well, as I just said, I think looking at that 500,000 square feet, you know, that's 5% of our portfolio that is, a portion of that will most likely be down from an occupied percentage as we get towards the end of the year. With some of it, you know, we're working on some renewals as well. So it will be a blend of that.

And then also the 900,000 square feet that you just mentioned, some of that will actually -- we'll deliver the space to tenants and come online. We're not providing the exact number but that's the range of where you would expect things to come out.

Okay, appreciate it. Thank you.

You're welcome.

Ladies and gentlemen, we have reached the end of the question and answer session. I'll now turn the floor back to Albert Behler for closing remarks.

Thank you all very much for joining us today, this morning. We look forward to updating everyone on our progress when we report our third quarter results in early November. I wish everyone a good end of the summer.

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