Paramount Group Inc (PGRE) 2015 Q3 法說會逐字稿

Greetings and welcome to the Paramount group third-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference to your host Jacques Cornet of ICR. Thank you so you may begin.

Thank you, operator, and good morning.

By now everyone should have access to our third-quarter 2015 earnings re-lease and supplemental information. Both can be found under the heading financial information, quarterly results on the Paramount website at in the 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 within the meaning of the federal securities law. 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, including our most recent form 10-K, as updated by a subsequent quarterly reports on form 10-Q for more detailed discussion of the risks that could impact our future operating results and financial conditions. We encourage investors to review our regulatory filings, including the form 10-Q for the quarter ended September 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 third-quarter 2015 earnings re-lease and our supplemental information.

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 of 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 when 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 had a very productive quarter, and continue to make progress on the leasing front, which will unlock the significant embedded growth in our portfolio. Vito and Ted will discuss in more detail, but during the quarter we leased 390,000 square feet of space, and since the end of the third quarter, we have completed another 260,000 square feet of leasing. Including this additional leasing, we are happy to report that as of today we have leased over 1 million square feet and have exceeded our leasing goal for the year.

While we are very happy with the leasing velocity, we are just as excited about the double digit mark-to-market increases we have achieved on the re-leasing of this space. Our cash mark-to-markets for the quarter and the nine months over 13% and 14%, respectively. Since the IPO, we have received many questions from investors and analysts on our pending expirations, especially at 1633 Broadway.

To that end, we thought it would be appropriate to provide an update on the large leases that were set to expire in 2015. Bank of America, at 150,000 square feet. It was set to expire at the end of September. As of today we have re-leased 100% of this space. Bank of New York also had 150,000 square feet that was set to expire at the end of September. As of today we have extended or re-leased 100% of this space.

Morgan Stanley at 100,000 square feet, set to expire at the end of October. As of today, not only have we extended 100% of this space with Morgan Stanley, but we have also leased an additional 160 thousand square feet, all of it for a 15-year term. Kasowitz has 100,000 square feet that is set to expire at the end of November, and as of today, we have re-leased all but 15,000 square feet of this space.

These four leases, which have understandably been the focus of many investors' questions, are 97% re-leased as of today. I would like to point out that, while the leased occupancy at 1633 Broadway has dropped to below 90% at quarter end, it does not include the additional 160,000 square feet expansion by Morgan Stanley. This progress is a clear indication of tenants valuing the location and quality of our assets, and we're well-positioned to carry forward this leasing momentum into 2016.

As I mentioned last quarter, we understand the temporary impact that lease expirations will have on our earnings for the reminder of 2015 and into 2016. However, given our leasing success in 2015, the momentum we carry into 2016, and the quality of our portfolio, we are confident we will achieve meaningful long-term NOI growth as we mark our portfolio to market and increase occupancy.

On the capital allocation front, we utilized the cash on our balance sheet to acquire our joint venture partners interest in 31 West 52nd Street, and we already have good news to report. As I have said in the past, this property provides the largest office mark-to-market opportunity than any of our New York assets.

While the property had no near-term lease expirations when we announced the transaction, we have already been able to leverage our proactive management style and tenant relationships to unlock a large mark-to-market opportunity on nearly 110,000 square feet, or 15% of the space in this asset. We have successfully negotiated to move an existing tenant in the top five fours of this building that is significantly late below market to middle floors at 1633 Broadway.

Their new space at 1633 Broadway not only better suits their current needs, but this investment grade tenant is now paying market rent, and their original lease, which was set to expire in 2026 at 31 West, is now set to expire in 2032 at 1633 Broadway. We are now marketing the hundred 110,000 square feet at top of 31 West, and are confident that upon re-leasing this space, we will achieve cash mark-to-markets in excess of 50%. Capitalizing on opportunities such as this was the largest motivating factor in pursuing 100% ownership of this property.

In San Francisco, during the quarter we leased 67,000 square feet at starting rents in excess of $100 per square foot, and cash mark-to-market in excess of 66%. We wish we had more space to lease a 1 Market Plaza, and now that the lobby and retail renovation is substantially complete, with new public seating and 20 new and reconfigured storefronts and shops, we have made one of the best assets in San Francisco even better, as we look forward to some meaningful [lease-lull] in 2016. If any of you are in San Francisco, we encourage you to visit this phenomenal asset.

Back in New York, we continue with our redevelopment project at 1633 Broadway. If any of you have been to the property recently, you have seen the progress we are making on the Public Plaza redevelopment. We also continue to progress on the subterranean space, and we are very excited by the project, and continue to see this space as bringing an iconic retail presence to the West Side market.

We continue to take a measured view, and plan to uphold the same disciplined acquisition strategy that has guided our decisions through various cycles for the past 20 plus years. From our perspective, this market provides very little room for error. And we remain conservative in our underwriting assumptions and in the deployment of capital.

During the quarter, we closed on the previously announced acquisition of 670 Broadway, and with that, our real estate equity fund, Fund 7, is fully invested. As we look at transactions, anything we do has to make sense versus internal operatives such as 31 West 52nd Street, and has to measure up in terms of total shareholder returns.

Overall, we made terrific strides in the third quarter. We are very encouraged by the steady progress to build upon a solid base, and will continue to work to produce same-store NOI growth for the long-term.

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

Thank you Robert.

In the third quarter, we leased 390,142 square feet at a weighted-average initial rent of $80.97 per square foot at an average term of 9.4 years. Tenant improvements and leasing commissions were $7.67 per square foot per annum, or 9.5 % of initial rent, in line with leasing activities from the prior two quarters of this year.

Overall our portfolio-wide leased occupancy was 92.9% as of September 30, as compared to 94.8% at June 30. The change was driven primarily by BNY and Bank of America lease expirations at 1633 Broadway. As Albert mentioned those spaces already been leased as of today. Taking into account leases signed subsequent to the quarter end, portfolio-wide leased occupancy grows from 92.9% to an excess of 94%. And most notably, the leased percentage at the end of the third quarter at 1633 Broadway climbs from 87.4% to approaching 93%.

Of the 390,142 square feet leased during the quarter, 325,217 square feet represents leases on second generation space, for which we achieved a positive mark-to-market of 13.4% on a cash basis, and 8.8% on a GAAP basis. During the quarter, the cash mark-to-market in our New York portfolio was effected by our renewals on a 25,000 square foot lease at 1325 Avenue of the Americas, where the prior per square foot rent is in excess of $100.

Excluding the impact of this lease, the cash mark-to-market for the portfolio for the third quarter would have been approximately 18%. The majority of our third-quarter leasing activity, or 306,824 square feet, was in New York at a weighted-average initial rent of $78.73 per square foot at an average term of 10 years. Tenant improvements in leasing commissions were $7.58 per square foot per annum, or 9.6% of initial rent.

Of the 306,824 square feet leased in New York, 281,525 square feet represent the leases on second generation space, for which we achieved a positive mark-to-market of 8.5% on a cash basis, and 4% on a GAAP basis. Excluding the impact of the previously mentioned lease renewal at 1325 Avenue of the Americas, the cash mark-to-market in the New York portfolio for the quarter would have been 13.1%.

Turning to Washington DC, the portfolio is 90.3% leased as of September 30, 2015, essentially unchanged from last quarter, though up 970 basis points over last year. During the third quarter, we leased 16,453 square feet in DC, all of which was second generation space at liberty place, for which we achieved a positive mark-to-market of 25.8% on a cash basis, and 26.8% on a GAAP basis.

In San Francisco, our property was 98.4% leased as of September 30, 2015, up 60 basis points from last quarter. During the third quarter we leased 66,865 square feet at a weighted-average rate of $100.68 per square foot, of which 27,239 square feet represented our share of second generation leases, for which we achieved a positive mark-to-market of 66.2% on a cash basis, and 59.2% on a GAAP basis.

Tenant improvements and leasing commissions remain low in this strong market at $6.69 per square foot per annum, or 6.6% of initial rent. From our perspective, leasing trends in San Francisco remain very strong.

Heading into 2016, we have approximately 200,000 square feet of leases, or 14% of the asset on the tower floors, set to expire primarily at the end of 2016 at below market rental rates. We remain confident in our ability to further capitalize on value inherent with this asset.

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

Thank you, Vito.

Overall, we continue to see a healthy pipeline of deals in all of our markets. As you heard, we ended the third quarter with strong leasing momentum that we have been able to carry through into the first month of the fourth quarter. In Manhattan, availability in the Midtown market remains tight, and availability in large block space is even tighter.

As of September 30, market availability has decreased to 10.5%. Historically, when the availability has gone below the 10% threshold, there has been a double-digit percentage increase in rents, and we saw the resulting strength of this trend during the third quarter, and into the first month of the fourth quarter, as we were able to eliminate nearly all of our 2015 lease expirations.

As we continue towards year-end and into 2016, our focus in New York is not changing. We are working hard on remaining availabilities at 1633 Broadway and 1301 Avenue of the Americas, with emphasis now on the 2016 expiring space. The continuing strength of the Midtown market has us feeling very positive about being able to continue to manage the role with solid mark-to-market rates.

At 1633 Broadway, as we have discussed previously, the efficiency of our floor plate, and the market dynamics along Broadway keep us very well-positioned in this sub market. Our recent leasing activity certain reflects this. As Albert mentioned, during the third quarter and through the month of October we executed two leases across seven floors for approximately 350,000 square feet. One, an 88,000 square foot lease with a tenant that will be moving 31 West 52nd Street, and a long term renewal and expansion lease with Morgan Stanley, for roughly 260,000 square feet on five floors and a 15-year deal. Our remaining large block of space is higher up in the building, and expires in March 31, 2016.

At 1301 Avenue of the Americas, we continue to see consistent activity. Especially on larger spaces, and we are in advanced lease discussions on multiple available floors. As we've mentioned before, the vacant floors at 1301 AofA and the space rolling next year are primarily on the top floors of the building. These are arguably the best available large blocks currently on 6th Avenue.

Overall, we continue to see market tends lining up well with these availabilities. Along 5th Avenue sub-market, the market remains strong. During the previous quarter, we've completed more leasing at 712 5th Avenue at starting rents over $150 per square foot. Evidencing the continued strength.

The combination of the relative strength along 6th Avenue and 5th Avenue is another key driver of our recent transaction of 3159 W 52nd Street. Through our acquisition of the minority interest in 31 West and the priestly mentioned move of a tenant from this asset to 1633 Broadway, we now have over 110,000 square feet in 31 West that is newly available at the top of the building.

The unique location between 5th and 6th Avenues, and the quality and boutique nature of this building present a unique block space for us to offer to the market in an area of Midtown that continues to see higher prices and less availability. We don't see this environment changing in the near term, and are therefore confident that in the building that was 100% leased, we have strategically unlocked an opportunity to generate a significant increase in rate relative to the below market rate of the previous tenant, that had been locked in for 10 more years.

Turning to Washington DC, we continued to be very focused on our availabilities. The recent uptick in activity around the periphery of the CBD continues to benefit 435 I Street, while our Pennsylvania Avenue assets are also active in various stages of negotiation, reflecting the limited supply of trophy space that remains in the CBD.

At Liberty Place, the strength of government affairs office requirements continues to drive positive leasing. During the third quarter, we were able to complete two leases with existing tenants at significant positive mark-to-market rates. These deals lead to market with triple net rental terms, over $50 per square foot, up from a mid-$40's gross rent. But more importantly, they are an example of two key drivers of our leasing strategy: to significantly improve our rental rates, and also to retain our best tenants.

Broadly speaking, we have seen a consistent level of traffic and remain confident that we will be able to lease our available space at rates reflective of market position. Further the recent positive trends suggest that the market has strengthened overall, and with virtually no further expirations in the DC portfolio until 2019, we look forward to this continued strengthening.

Finally, in San Francisco, from our perspective availability remains very low, and in turn the market remains very healthy. With not much space to lease, we still had a productive quarter. And we're able to complete eight leases, five of which had additional starting rents over $100 per square foot.

The pending 200 square feet of lease expiration in 2016 are being marketed currently in this strong market where we'll be able to capture significant higher rents on this space. With the completion of the lobby and retail redevelopment, we have one of the best assets in a very strong market.

And with that, I will turn the call over to Mike, who will discuss the third quarter financial results in more detail.

Thanks, Ted.

Turning to the financials, our core FFO was $0.20 per share for the third quarter. FFO for the quarter was $0.24 before per share, and includes $12.3 million for our share of unrealized gains on interest rate swaps. Our portfolio ended the quarter at 91.1% occupied, 180 basis points lower than the prior quarter. Mostly due to known move outs at 1633 Broadway.

As discussed earlier, occupancy improves over time, as signed leases commence. We had $17.8 million of straight line rent, and $1.5 million of net above and below market lease revenues on a consolidated basis. $11.3 million of this quarter's straight line rent was attributable to free rent.

Looking at the balance sheet, at quarter end, we had $418.1 million of cash, of which $230 million was deployed on October 1 to acquire the joint venture partnership interest in 31 West 52nd Street. In addition, we have $800 million of availability under our revolving credit facility. Outstanding consolidated debt of $2.9 billion is unchanged from last quarter, with an average interest rate of 5.5%.

In anticipation of our planned refinancing of the $926 million mortgage loan on 1633 Broadway maturing in December 2016, we have entered into forward starting swaps on a notional $1 billion, locking in our base rate at 1.79%. We expect to complete the refinancing by year-end, producing meaningful future interest savings when compared to a current rate of 5.35%. Our levered metrics are conservative, with an overall net debt to total enterprise value of 31.8%, and net debt to adjusted EBITDA of 6.0 times.

Moving to our earnings guidance, we are raising our full-year 2015 core FFO guidance to be between $0.80 and $0.82 per share, up a penny on both sides from our prior guidance of $0.79 and $0.81 per share. The increase is primarily due to the purchase of our partner's share of 31 West 52nd Street, which, as a consolidated asset, will shown as a decrease in the non-controlling interest line in the fourth quarter 2015 and forward. Our pro-rata share of cash NOI for the third quarter was $77.2 million, bringing our cash NOI year-to-date to $233 million.

Including the acquisition of our partners interest at 31 West 52nd Street, we project our fourth-quarter share of cash NOI to be $3 million to $6 million lower than the third quarter, due to lease expirations during the second half of 2015. Through three quarters, we have leased almost 750,000 square feet, with an average free rent period of 9.3 months.

This, combined with the leases signed since the end of the quarter will temporarily cause an above-normal rent abatement period, which will revert and become cash paying as we move into late 2016 and 2017. We will provide our initial 2016 earnings guidance on our year-end earnings call.

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

(Operator Instructions)

Vance Edelson, Morgan Stanley.

Good morning, and thanks for taking the questions.

If we think about 1633 Broadway and 1301 6th, most of what's been available to lease or will be available is in the top half of the towers, as you point out, which is a pretty favorable situation. Can you talk about the upside to in-place rents a little bit more as you sign these leases, on average, for each building? Is it $60's going to $70's or $70's going to $80's, or is that suddenly sounding too conservative, based on the momentum you're seeing?

Good morning, Vance.

Good morning, Vance. I think that might be a little bit conservative, because we are seeing -- just with each deal that we are doing, we just continue to see the numbers move higher. So, I feel like we're in a position where, certainly, as we get to 95% leased in the building, and higher, with less than 5% vacancy, we're also in a strong position to push rents even more.

Okay. Great to hear. And then, moving to the West Coast, if you could provide more of an update on the retail refresh at One Market? I was there earlier this week, and it looks like the heavy lifting is done, but still a bunch of workers putting the finishing touches on. And still, you don't see many stores that are open, facing into the lobby or the atrium. Do you think we will see more retail taking occupancy soon?

Vance, this retail and lobby renovation took quite a lot of effort here at Paramount, and we have spent by now $16 million. The total project is about $25 million, and we wanted to finish the construction first, and that is pretty typical. And Ted can talk a little bit more about the -- finishing up the leasing of the retail space.

We have transactions in progress. But we are really not rushing it. We are looking for the best use for these locations.

And if you have a chance to look at that renovation, it really came out very, very nicely. The food court will also be added with a new touchup and additional renovation done there. So, it will be a terrific addition to that asset.

Ted?

Yes. So, we have three leases that we've signed on the retail spaces, and we've delivered those spaces in the last few weeks to the tenants. Next time you go out there, I imagine you'll have seen not only construction starting in some of the retail spaces, but some of those retailers occupying those spaces already.

Okay, that is great progress. Last one for me: Now that you have bought in 31 West [51st], and given the obvious advantages of more strategic control and better refinancing flexibility, how eager are you to accomplish the same with 712 Fifth and One Market and 60 Wall?

Vance, as you know, we have been working on 31 West for quite some time. We currently have no other joint venture buy-out activities to report on.

Okay. Thanks very much.

Sure. You're welcome.

Jamie Feldman, Bank of America Merrill Lynch.

Great, thank you, and good morning. A lot of progress at 1633; congratulations on that. Can you walk us through now -- I know you touched on the expirations coming, but just to be very clear in terms of how many square feet are expiring at 1633, 1301 and 1325, and then what your expectations are in the pipeline of leasing for that space?

Sure. Jamie, at 1633, the 2016 expirations are about 220,000 square feet. Virtually all of that, as we've discussed in the past, is the Deloitte & Touche space.

At 1301 Avenue of the Americas, about 213,000 square feet. And again, those are the Commerzbank floors, top of the building, just like Deloitte & Touche at 1633, top of the building.

And then, I think you -- 1325 -- at 1325 -- there's really not much expiration in 1633 -- the lower floors, the ING space is actually -- I think it's [1117].

Okay, yes. I was thinking about the ING space.

Yes.

So, it sounds like Deloitte -- do you think Deloitte is moving out completely, at this point?

Yes, we do.

And Commerzbank is moving out. Then, ING, do you have an update there?

ING's renewal rate has come and gone, so we expect that they are moving out as well.

Okay, completely (multiple speakers). Sorry?

You might recall, Jamie, Commerzbank has been out of that space for quite some time. This was space that -- Commerzbank took over Dresdner Bank a couple of years ago, and this has been sub-leased space at 1301 for quite some time.

The Deloitte Touche space is also known to us that they will move out. It's -- both is terrific space in the best parts of the tower. And we're very excited about these opportunities.

Okay. So, I think in the past, you guys have been very good about providing just the leasing pipeline, maybe in terms of square feet or number of people you're talking to. Can you give us an update of how things feel? I know you have accomplished a lot in the last quarter, but just as we're heading into next year, what do the conversations look like for the available space?

At 1633, we are already speaking to some tenants about the Deloitte space. We have some preliminary conversation that have gone on there. We have even gotten into some detailed negotiations there, but nothing really to report yet.

And then, over at 1301 on the existing space, we are in multiple -- discussions with multiple tenants across multiple floors right now -- in actual lease negotiations with multiple tenants across multiple floors. And in terms of the 2016 space right now, it's more inquiries than anything else at 1301.

Okay. And then, can you give an update on the retail space at 1633 -- maybe the progress on the redevelopment, and then what kind of discussions you are having there?

The redevelopment -- you can really see there is a lot of progress made in the construction. Actually you can see now the cubicle -- the steel part has been erected over the last week. And we've been spending about $3.8 million so far, and it's on schedule to be finished in the fourth quarter of 2016.

We are marketing the retail location. And with rental rates going up further in New York in this part of the market, we're very confident that we will find the best tenant for the location. As we had mentioned over the last couple of calls, we are very selective in getting the right tenant mix into this asset; it is our headquarter building with a lot of very high-profile tenants -- office tenants in this building. We're very selective when we are going through the possible retail tenancy here.

Okay thank you.

Finally, you had some activity in your funds this quarter, both on the debt side and the equity side. Can you remind us how much capacity you have left in Funds VII and VIII, and what the pipeline looks like there?

With pleasure. As we reported last time, we did our last investment with 670 Broadway, so -- for Fund VII, that is our equity fund. So, Fund VII is fully invested.

Fund VIII, our mezzanine fund, we have raised currently close to $600 million, and we are still -- the activity is quite active there for additional money to be assembled. So, it might go to $700 million because our performance in the mezzanine funds has been quite good. And we have invested so far around $200 million of that fund.

Okay. And then, what does the investment pipeline look like there? How long do you think it takes to get to your $700 million?

We have a lot of activity. We are evaluating every year around 300 plus opportunities, transactions, equity and debt, in our team. We see a lot of deal flow, and as we had mentioned in the past, the mezzanine fund enables us to see a lot of transactions across our three markets -- here in New York and Washington and San Francisco. And we are evaluating this very, very carefully.

The mezz business is quite active, and we have a lot of deal flow. We want to be selective. And on the equity side as well, we will be, as I mentioned in my remarks, we will be very careful with spending shareholders' equity at this point.

Okay, great. Thank you.

You're welcome.

Vincent Chao, Deutsche Bank.

Good morning, everyone. I just want to go back to the expirations here -- the nearer term in the fourth quarter -- the 130,000. Does that still include some of the stuff that you have already released that you talked about earlier, or is that already out of those numbers?

The 120,000 that we have left in the fourth quarter rather, is space that has already been re-leased.

Okay, that's all done. Based on signings already, what amount of square footage is going to commence, maybe not to cash paying immediately, but what amount will commence in the fourth quarter?

It's Mike. We don't have that right now. It will go in stages, as we deliver the space. Morgan Stanley -- we talked about the renewal piece will just kick right in with the new deal. And as we deliver floors, it will take place over time.

Okay, thanks. Maybe could you just give us an update on 2099? The lease rates stayed the same there, but just curious how activity is at that building, and when you expect that to pick up a little bit?

Sure, we have the bottom five floors available there. It's about [50,000] square feet. And our activity level right now is -- I can tell you we're talking to multiple tenants. A number of them are [50,000]-foot tenants; so, if we land one of those guys, all the space is gone. But we have a couple of a single floor ones, too.

The DC market is still moving at a slower pace to get deals done, but we feel, where our assets are positioned, that we're in a good spot. We expect it to be leased in the next -- probably the next few quarters.

Got it. In terms of the tours and activity level from that perspective, has that changed much or just steady?

It is pretty steady. We want to be -- we are in a good position in DC, just because we really -- we have less than 7,000 square feet expiring until 2019, at this point. We want to be mindful of where our assets sit -- the quality of our assets, and then the deals that we're getting done.

Okay. And just maybe a question on the refi at 1633 Broadway -- just from an order of magnitude perspective, what does the pre-payment penalty look like?

The pre-payment penalty -- it's moving, especially as rates have moved. But it is probably in the mid-$30 million range as of right now.

Mid-$30 million, as of now. Okay. Thanks, guys.

You're welcome.

Nick Yulico, UBS.

Good morning, thanks. Mike, you gave the numbers on what the cash pro forma starts looking like -- cash NOI pro forma in the fourth quarter. Is there any way to get a sense for how much cash NOI is still -- it's in the bag, [to say the least], but it's not going to commence yet in the fourth quarter on an annual basis, if we want to add to that number?

The free rents we gave is $11 million, and we have leased a lot of space, so that number will go up a bit over time. And so, the rents kicks in on those spaces. I think, taken the comments we made as to where our occupancy will be, and grossing up for that, will give you an idea as to where the cash will be based on signed deals, because we give out forward-leased occupancy.

Okay. And then just going back to that -- 1633 is now about 93% leased in the fourth quarter. If we were to think about -- forget about the rollover in the building, but just at what point that 93% leased turns into a 93% occupied? Is it second quarter next year?

The spaces that we have leased will be delivered sometime in the first half of next year. Just keep in mind, the rollover that Vito talked about with the Deloitte floors.

Right, okay, so you basically get all that space, and then there is the Deloitte rollover. Okay, got it.

And just one last one: Albert, I'm wondering, as you look at the district, do you see portfolio you have? It sounds like you're getting close to just leasing that up over the next couple of quarters. Do you think about perhaps JV-ing some of those assets, since they are now -- been pretty stable and pricing is still pretty good for DC office sales?

As we had mentioned on the last calls, we are evaluating from time to time what assets could be ripe to be harvested, and you are right on the money. DC could be -- one or the other asset could be ripe to be sold partly over the next 24 months or so. And we will be looking at this from time to time.

Okay, thanks, Albert.

Sure. You're welcome.

Brendan Maiorana, Wells Fargo.

Thanks, good morning. Mike, maybe start with you -- I think 31 West 52nd probably adds about $1 million to NOI in the fourth quarter, and I think you said guidance would be -- cash NOI would be down $3 million to $6 million. Is the change in the cash NOI really just going from all the leasing that you did and a lot of that space converting from what was cash in the third quarter to free rent in the fourth quarter?

There are a couple of things. One, on page 14 we actually provide what the contribution is from 31 West. So, the FFO contribution, which is after interest expense, is almost $2 million in the third quarter. And excluding the leasing changes that we made, you should expect that to be the same.

The other is, yes, I think you're right that the rollover that we have and the free rent that we are providing on some of these transactions are going to, combined, cause that degradation over a short period of time. Last quarter we provided a range. The range is basically the same, with the exception of the addition of 31 West this quarter.

Okay, great. And then, how should we think about maybe timing of what to expect for re-leasing on the Deloitte & Touche space and the Commerz space? Is that something that, as you think about the business plan for 2016, that is -- not from a commenced basis, but something that can get leased during 2016 that we could see backfill in those spaces?

As you see, and Ted will add to this, as you can see from today's report we have been filling spaces pretty fast and rapidly. We have been in the market, as Ted was mentioning before, on both spaces in both locations. And we think that the market is strong, and we are quite confident that we can get them re-leased in 2016, yes.

Yes, we've mentioned in previous quarters that the market is healthy. We've mentioned that our assets are well positioned; that we've got good activity. And I think what we have reported so far and closed, the deals reflects all of that as being true, and we don't see that -- we haven't seen that changing. So, we expect activity to be good on the space that we have rolling in 2016 as well.

Okay, and then, I apologize, I missed the timing of the tenant converting from 31 West 52nd over to 1633. When is that?

We're delivering the space to them in September of next year, is when they receive the space here.

They are leaving in August of next year at the 31 West 52nd. It's a terrific opportunity here. We are very, very happy that we were able to unlock this mark-to-market opportunity.

As you may recall, the tenant had space leased up to 2026 on these five floors. And we wouldn't have been able to do this without buying out our joint venture partner, and now we have 100% control. And then we very swiftly -- on October 1 we took 100% control, and we signed up this tenant for 1633 and could move them. I think the leasing team has done a terrific job here -- the whole team in getting this done.

Okay, great. And then just last one: So, looking at rent terms in New York -- you actually have a cash rent that is higher than a GAAP rent, which looks like you're giving about a month of free rent per year a term. And back of the envelope, looks like maybe a $5 bump mid-way through the term. Do you guys think about -- given the strength of the market -- think about pushing a little bit more in terms of -- not the initial rent, but maybe the concessions that are there to try to either increase the bump, or make the free rent a little bit lower?

Overall, just in terms of what we have given on concessions, we feel that we are at where the market is. And really, the way this market has moved in Midtown -- it's been a slowly growing rent market, with concessions remaining where they are.

I think that is probably the next phase for us, and really for the market, is to really start pushing down concessions. As I said, as we get closer to that 10% availability, and start to get into signal digits of availability, the rent growth is going to take care of itself, and I think the concessions is where we'll start looking next.

The only thing I would add to that -- to your comment about the cash rent, on the GAAP rent -- remember, at IPO, 11 of our 12 assets in the portfolio were mark-to-market. So, it is our expectation that our cash mark-to-market will be greater than our GAAP mark-to-market, because of the FAS 141 step-up that we got.

Okay, so you included in your expiring GAAP is FAS 141 markup?

Yes, that is correct.

Yes, that is helpful. Thank you.

And just one other clarification I want to make. He mentioned $5 rent bumps; we are seeing rent bumps of $6 and $7. We have been pushing on that.

Okay, great. Thanks, guys.

Thank you.

Jed Reagan, Green Street Advisors.

Good morning, guys. On the leases signed at 1633 Broadway and elsewhere in the portfolio, can you talk about whether any of those were short-term extensions, because it looked like your 2016 expirations went up a little bit versus last quarter?

Yes, there was -- at 1301, there was one short-term extension for 40,000 square feet on one floor. And that was -- I believe it was either a six- or a nine-month extension, through the end of the year.

Okay, thanks.

Jed, the other thing to keep in mind is going to be with -- at 31 West, the FSA expiration that got moved into 2016 at 31 West, 110,000 square feet. So, the net of that is going to be a net increase of about 70,000 square feet in 2016, as compared to what you have previously seen.

Okay, got it. Thank you for that.

And can you just talk about, also, the process a little bit that led to the JV buyout at 52nd Street? I know your partner had a forced-sale provision. So, did that come into play here, explicitly? And how did you get comfortable with the transaction pricing at north of $1,300 a foot?

Jed, it was a negotiated transaction. It made a lot of sense to us to do it this way.

Now, I think, as you can see how quickly we were able to unlock value here. We had a very, very good relationship since 2007 -- since we bought the asset. And it was just a different philosophy over how to manage and run this asset.

We are much more entrepreneurial, as you know, and more proactive. And the building had been 100% leased from the get-go. Actually we could have leased it 110%, 120% -- what the demand was in that terrific asset here. And we had numerous discussions over the last nine months, and finally ended up with this solution.

I will just mention one thing, just on the leasing side, because it is rare that you see a 100,000 foot tenant move from one building to another within someone's portfolio. I think that really speaks to our strategy and the relationship that we have with the tenants, that we are able to do things like that -- to unlock value in a 100% leased building.

That could not have been done with the current joint venture -- or with the previous joint venture partner. And that finally ended to the result that we bought them out.

So, was that a specific sticking point and issue of contention, that specific lease opportunity, or was it -- that was one of a broader series of issues?

No, it was a general discussion; it was not stuck with just this leasing situation. We wanted to do something more proactive, and that is what we wanted to pursue, and it was a very amicable relationship at the end.

Okay, thank you for that color. And then just last one for me: It looks like your signed rents last quarter in San Francisco were around $100 a foot. Is that where market is in that building, at this point? Or should we think of that as more of an anomaly for last quarter?

We have signed five leases over $100, or at $100 plus. And if you recall, this asset, because of its location and its quality, has been always substantially receiving higher rents -- substantially higher than the rest of the market. And we think that it's not the end of it. And Ted can answer this.

I certainly wouldn't call these deals outliers. I would call them the norm for what rents we get at One Market Plaza.

Fair enough. Thank you.

You're welcome.

(Operator Instructions)

Rich Anderson, Mizuho Securities.

Thanks, good morning. Regarding the great results that you reported on 1633, would you say the pivot to more of a cash flow story and, by extension, a dividend growth story, has become a closer in -- it was going to happen sooner rather than later? Or do you think that the certainty that you have gotten on the downside, being ING and Deloitte and Commerzbank, maybe keeps you in the same ballpark, in terms of all this leasing activity actually turning into cash flow?

I think this is pretty much in line with what we had also when we went on our IPO roadshow -- what we had forecasted over the next couple of years. I think we've been quite successful here. But the timing is -- everything is on track, pretty much.

And I'll just say -- just on a leasing side, we have said this before, these are large blocks of space. So, it's big tenant type of space that takes time to get done. So really, to say -- to predict an increase of timing on leasing of large blocks is always a little bit more difficult. But certainly, we'd love to have the cash flow be higher in terms of rents, and we're always going to be pushing on that.

It will be converting into additional cash flow over the next couple of years, of course.

Of course, got you. And can you speak a little bit about bifurcating the demand that you're seeing by industry? You guys are unique in the sense that you have a diverse portfolio, not terribly influenced or subject to the technology sectors. Just wondering if you could talk about, if tech demand is increasing, decreasing? And what sectors you are really seeing the majority of the growth coming out of, in New York in particular?

I wanted to say it's different from market to market, between New York, Washington and San Francisco. We have seen a lot more activity lately in the financial services segment that has been pretty quiet for the last couple of years. And now you see quite a lot of activity. And as you can see from our leasing success here at 1633 in our last quarter, that a lot of these tenants were financial services tenants. And we think that is prevalent in especially the markets where we are, in New York.

(Multiple speakers). I feel like we are getting our share of tech, which -- the type of tech that is sort of a more mature tech that goes to a more established type company. And some great examples are the lease that we did with Visa at One Market. They are a tech group, but it is Visa. So you don't really think of them as a tech company, but that is a tech type deal, and we are seeing those types of deals in our portfolio.

Great, and I should know this, but I don't recall if you have any business with WeWork. But do you have an opinion about that business model, and your willingness to do future business with them?

No, we don't like to comment about our tenants and potential tenants. But we don't have any lease with WeWork, at this point.

Okay. Thank you.

You're welcome.

Gabriel Hilmoe, Evercore ISI.

Thanks, good morning. Ted, I apologize if I missed this, and I know they are completely different spaces, but did you give the rent differential on the tenant that is moving out of 31 West 52nd and going to 1633?

We didn't give an exact number, but we think it is probably close to a 50% mark-to-market. (multiple speakers).

So what they are paying at 1633 is an uplift from what they're paying at 31 West 52nd?

At 1633, it's a different rent. It's a normal market rent that they are paying at 1633. And the upside here is definitely at 31 West 52nd, where we are expecting a plus/minus 50% mark-to-market opportunity.

Okay. And then, Mike, any update just on refinancing timing around 31 West 52nd? I think that expires in 2017?

Right now, we are focused on taking care of 1633 Broadway, which we announced. And right on the heels of that, or during that, we are going to explore refinancing 31 West 52nd, and taking advantage of the current interest rate environment, even considering the recent movement.

Thank you.

Sure, you're welcome.

Thank you. It appears we have no additional questions at this time. I would like to turn the floor back over to Mr. Behler for any additional concluding comments.

Thank you, all, for joining us this morning. We look forward to updating everyone on our progress when we report our fourth-quarter and year-end results in February of 2016. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time.