Paramount Group Inc (PGRE) 2015 Q4 法說會逐字稿

Greetings and welcome to the Paramount Group, Inc. fourth-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to turn the conference over to your host, Mr. Jacques Cornet. Thank you. You may begin.

Thank you, operator, and good morning. By now, everyone should have access to our fourth-quarter and full-year 2015 earnings release and supplemental information. Both can be found under the heading, Financial Information, Quarterly Results, 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 within the meaning of the Federal Securities Laws. These forward-looking statements, which are usually identified by the use of the words, such as: will, except, 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 our subsequent Quarterly Reports on Form 10-Q 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-K for the year ended December 31, 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 measures is available in our fourth-quarter 2015 earnings release 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, 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 we'll then open the call to questions. With that, I will turn the call over to Albert Behler.

Thank you, Jacques, and good morning. We appreciate everyone joining us today. We ended 2015 with a very strong quarter, led by another terrific leasing effort. We accomplished a lot during 2015 and our aim to drive future NOI growth and value creation in our portfolio.

Here are some of the highlights. First, we not only met but significantly exceeded our leasing goal of 1 million square feet for 2015. During the fourth quarter, we leased nearly 650,000 square feet of space, bringing our full-year leasing activity to 1.4 million square feet. This resulted in an increase in our overall lease percentage to 95.3% at year end, up 240 basis points from the third quarter and 140 basis points from the prior year.

Second, we achieved very strong positive cash mark-to-market of 17.3% for the quarter and 15.6% for the year. Third, we completed a $1 billion refinancing of 1633 Broadway with an earn-out potential of an additional $250 million that not only extends our debt maturities and reduces interest costs but also enhances the strength of our balance sheet. As of December 31, 2015, our pro-rata share of debt had a weighted average interest rate of 4.4%, down nearly 100 basis points from a year ago.

And fourth, we continue to maintain a disciplined acquisition strategy and enhance the value of our portfolio by purchasing the remaining 35.8% of 31 West 52nd Street that we did not previously own. This acquisition gave us the ability to recapture the best space in the building to unlock a significant mark-to-market opportunity that would not otherwise have been available to us for the next 10 years.

We are very proud of our achievements in our first full year as a public Company and look to do more of the same in 2016 and beyond. Our leasing efforts have been extraordinary. And if you look at our supplemental package, you will notice that over the next five years, on average, we only have about 4.6% of our total square footage rolling with no more than 5.5% in any given year.

Over half of our 2015 leasing, on nearly 750,000 square feet, took place at our two largest buildings in New York. At 1633 Broadway, we leased over 425,000 square feet in 2015, with nearly 290,000 square feet in the fourth quarter. While we have another 220,000 square feet, or just over 8% of the building, set to expire in 2016, our recent leasing success, together with the Plaza redevelopment, which is now becoming more visible, has positioned as well to address the upcoming expirations.

At 1301 Sixth Avenue, we leased over 320,000 square feet in 2015, of which over 53% was completed in the fourth quarter, bringing the leased percentage of this building to 97%, up from 85.4% a year ago. Much of this leasing has also addressed the upcoming Commerzbank lease expiration.

Of the 288,000 square feet Commerzbank currently leases, over half has already been pre-leased to other tenants prior to their expiration. The remaining space will be vacated this year and we are confident our continued momentum at this 97%-leased building will help us capitalize on this opportunity as well.

In San Francisco, we leased 270,000 square feet in 2015, with cash mark-to-markets of over 50%. Now that we have addressed our near-term lease expirations, we have less than 5% of the building expiring through the end of 2017. The credit quality of our technology tenants at this building is second to none, with over 95% being investment-grade.

The newly renovated lobby looks great and will only become more appealing as the new storefronts and shops continue to open. All of this leasing activity and positive high double-digit marked-to-markets have positioned us well to continue to drive future cash NOI growth.

Let me just put this into perspective. We currently have over 1.35 million square feet that are either in a free-rent period or related to signed leases not yet commenced, so they are non-cash paying. This equates to over $87 million of contractual pro-rata annualized rent that will come online over time, through early 2017.

Mike will later provide further details on this amount as well as the timing. While the stock market has been very volatile in recent weeks, we remain confident in our business. From our perspective, actively owning and managing real estate portfolios in our markets for more than 20 years, we have successfully managed through all phases of multiple cycles.

As we always do, when there is a global unease, we are very diligent in efforts to monitor and compare the broader sentiments to what we observe each day in the trenches. As we begin 2016, we remain confident in our ability to lease our best-in-class space and are well-positioned to execute on our goals. We will continue to proactively manage our portfolio, with a focus on enhancing shareholder value.

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

Thank you, Albert. In the fourth quarter, we leased 647,828 square feet at a weighted-average initial rent of $79.80 per square foot and an average term of 13 years. Tenant improvements and leasing commissions were $7.46 per square foot per annum, or 9.4% of initial rent, in line with 2015 leasing activity.

Overall, our portfolio-wide leased occupancy was 95.3% as of December 31, as compared to 92.9% at September 30. The change was driven primarily by leases at 1633 Broadway, 1301 Avenue of the Americas, and 1325 Avenue of the Americas. Of the 647,828 square feet leased during the quarter, 443,336 square feet represented leases on second-generation space, for which we achieved a positive mark-to-market of 17.3% on a cash basis, and 19.4% on a GAAP basis.

The majority of our fourth-quarter leasing activity, or 478,451 square feet, was in New York at weighted-average initial rents of $78.90 per square foot and an average lease term of 14.2 years. Tenant improvements and leasing commissions were $7.54 per square foot per annum, or 9.6% of initial rent. Of the 478,451 square feet leased in New York, 360,341 square feet represented leases on second-generation space for which we achieved a positive mark-to-market of 11.3% on a cash basis and 13.2% on a GAAP basis.

Turning to Washington DC. The portfolio remains 90.3% leased as of December 31, 2015, unchanged from last quarter though up 150 basis points over last year, with only 6,000 square feet of lease expirations through year-end 2018.

In San Francisco, our property was 98.4% leased as of December 31, 2015, unchanged from last quarter but up 160 basis points over last year.

During the fourth quarter, we leased 169,377 square feet at a weighted-average rate of $85.01 per square foot. Included in this amount was 59,575 square feet of leases on annex and storage space for which market rates were significantly lower than the remainder of our office space. Excluding this space, rental rates on the remainder of the office space averaged over $100 per square foot.

Of this quarter's leasing, 82,995 square feet represented our share of second-generation leases, for which we achieved a positive mark-to-market of 49.6% on a cash basis, and 54% on a GAAP basis. Tenant improvements and leasing commissions remain low in this market at $6.40 per square foot per annum, or 7.5% of initial rent.

All of the leases signed during the fourth quarter reduced the 200,000 square feet of leases previously disclosed as being set to expire primarily at the end of 2016. At this point, we have less than 27,000 square feet expiring in San Francisco through 2016 and less than 78,000 square feet of expirations through the end of 2017. With that, I will turn the call over to Ted, who will provide an update on what we are seeing in each of our markets.

Thanks, Vito. We certainly ended the year with strong leasing momentum. As many of you know, with our portfolio, the first quarter is seasonally the slowest quarter of the year but we do continue to see good tour activity. In Manhattan, availability in the Midtown Market remains at 10.4%. Heading into 2016, our attention in New York is unchanged.

We continue to work mostly on the re-leasing of our available space at 1633 Broadway and at 1301 Avenue of the Americas. At 1633 Broadway, we have a 200,000 square-foot block of tower floors, currently occupied by Deloitte, which will be vacant in April of this year.

As mentioned in the past, larger blocks can take some time to lease. At 1301 Avenue of the Americas, coming off of a strong fourth quarter, which included 173,000 square feet of leasing, we continue to see good activity given our large-block availability.

As previously detailed, we have approximately 125,000 square feet on the top five floors of the building coming vacant in June of this year, arguably, the best block of space along Sixth Avenue. Recent news around certain high-profile tenants remaining on Sixth Avenue is also good news for the submarket. Along Fifth Avenue, the market remains strong for high-quality view space. We continue to take advantage of that strength by setting high watermarks for starting rents at the top of 712 Fifth Avenue.

Turning to Washington DC. With not much space available, we continue to stay disciplined in leasing and focused on improving rental rates and acquiring the best tenants. Vacancy is at about 12% in the market, moderately lower than a year ago. Deals in Washington DC have been labored and negotiations time-consuming, but we are confident that the competitiveness of our space will result in solid leasing activity. We are in advanced discussions on several spaces across our portfolio in DC, which will positively impact our occupancy in 2016.

Finally in San Francisco, from our perspective, availability remains very low and thus, the market remains very healthy. With not much space to lease, we still had a productive quarter and we are pleased that we continue to achieve initial rents starting over $100 per square foot, demonstrating the quality of our asset and the strength of the San Francisco market. Over 60% of our 2015 San Francisco leasing activity, or nearly 170,000 square feet, took placed in the fourth quarter, highlighted by 100,000 square-foot early renewal with Capital Research Group as well as Google leasing one additional floor, bringing them to over 300,000 square feet of the building which represents approximately 19%. With the completion of the lobby and retail redevelopment, we have one of the best assets in a very strong market.

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

Thanks, Ted. Turning to the financials. Our core FFO was $0.21 per share for the fourth quarter and $0.81 per share for the full year, in line with the midpoint of our guidance. FFO for the quarter was $0.29 per share and includes $21 million for our share of unrealized gains on interest-rate swaps.

Today, we will describe four items that had the largest impact on our fourth-quarter financial statements and the results of these changes. We will then add commentary necessary to understand and quantify our long-term growth and cash NOI and end with details of our 2016 earnings guidance.

First, as Albert described, is the completion of the refinancing of 1633 Broadway. This $1 billion seven-year loan bears a cash interest rate of 3.59% and a GAAP rate of 3.87%. The loan can be increased at our option by $250 million to $1.25 billion if certain performance hurdles are met. To date, we have drawn $14 million to fund releasing costs at the building. Incremental draws bear interest at LIBOR plus 175 basis points.

Second, we closed on the acquisition of our former joint-venture partner share of 31 West 52nd Street. In addition to cash utilization, we also assumed our partner's share of property level debt of $148 million.

Third, $193 million of interest-rate swaps at 903rd Avenue and 31 West 52nd Street expired during the fourth quarter, which lowered our interest expense at these properties as a portion of the above-market fixed-rate debt has now gone floating.

Lastly, during the quarter, we acquired one of the entities in our PGRESS Fund for $12 million, bringing our total investment to 25%. This transaction caused us to reclassify the fair value of the underlying preferred equity investment from real estate fund investments to preferred equity investments.

The fund, which currently yields 10.3%, has two remaining investments with an average maturity of June 2018 and the income will be included in the interest and other income net line in our financial statements. As a result of this quarter's operations, and the items just described, we ended the year with $145 million of cash.

In addition, we have $780 million of availability under our revolving credit facility. Our share of outstanding debt of $2.6 billion is $255 million greater than the last quarter, primarily due to the purchase of 31 West 52nd Street and the refinancing of 1633 Broadway.

This refinancing, combined with the expiration of the swaps, has reduced our weighted average interest rate 96 basis points from 5.35% to 4.39%. We have no debt maturities in 2016 and three maturities in 2017 totaling $898 million.

As with 1633 Broadway, we will work to refinance these maturities well in advance of their expirations. Our leverage metrics remain conservative, with overall net debt to total enterprise value of 34.5% and net debt to adjusted EBITDA of 6.9 times.

Our portfolio ended the quarter at 90.3% occupied, 80 basis points lower than the prior quarter, mostly due to planned lease expirations at 1633 Broadway. Our share of non-crash straight-line rent and net above- and below-market lease revenues was $21.6 million. $14.6 million of this quarter's straight-line rent was attributable to free rent.

Continuing on Albert's comments regarding the cash impact and timing of recently signed leases, we are in a transitionary time in our leasing cycle, where we have 1,354,000 square feet of tenants, or 13% of our total square footage that are either in a free rent period or have a signed lease that has not yet commenced.

Providing more color on the timing [of the] cash rents commencements, at year end, we have 857,000 square feet of leases in free rent periods. On a pro-rata basis, this is 747,000 square feet, representing $51 million of annualized free rent. Over 90% of these leases will begin paying cash by January 1, 2017.

In addition to these leases and free-rent periods, we have 497,000 square feet of signed leases that have not yet commenced. On a pro-rata basis this is 488,000 square feet. These leases will provide an incremental $36 million to our annual revenues once the leases commence and the associated free-rent periods burn off. Over 95% of this $36 million will be cash paying by the end of the first-quarter 2017.

Combining these tenants in free-rent periods and leases signed but not yet commenced results in an additional $87 million of contractual cash rent coming online in the near term. While we are providing this additional information today, we're not suggesting that you should add $87 million to our 2016 cash NOI guidance to arrive at a 2017 run rate.

As we renew or re-lease our modest 2016 and 2017 lease expirations, we will likely incur non-cash rent periods due to free rents and or downtime associated with these leases. However, we want to highlight the tremendous progress we have made locking in cash flow growth by leasing space.

Moving to the components of our 2016 earnings guidance provided in the press release. Our pro-rata share of GAAP NOI is projected to be $10 million to $15 million greater than 2015, or flat to up 1.5% on a same-store basis. Our pro-rata share of cash NOI for the fourth quarter was $75.3 million, bringing our full-year 2015 cash NOI to $308 million.

Due to the timing of our cash commencements, we project our share of 2016 cash NOI to be $10 million to $15 million lower than the 2015 amount. Again, we would like to highlight the $87 million of contractual cash rent that is scheduled to come online in the coming quarters.

In 2015, we generated $10 million of fee-income and an additional $14 million of fee- and fund-income through adjustments to our non-controlling interest totaling $24 million. Our 2016 guidance assumes a decrease in our fee-and-fund income of $6 million to $8 million, primarily due to unrealized gains and promote on our fund investments in the second-quarter 2015 and fees associated with the purchase of 670 Broadway in the fourth-quarter 2015 that are nonrecurring in nature.

We expect our G&A expense, excluding the first-quarter 2015 severance costs, to increase $8 million to $10 million based on currently budgeted amounts. 70% of this increase is due to non-cash equity compensation charges.

As a new Company that, to date, only has one tranche of equity compensation and amortization included in 2015, this will increase annually until we have reached a full run rate. The remaining increase is due to costs associated with the transformation from a private to public entity.

Taking into account my earlier comments regarding our debt portfolio, we estimate interest expense will be $7 million to $11 million lower than 2015. All other core FFO items not addressed are projected to be in line with our 2015 results. Aggregating all of these items, we are providing full-year 2016 core FFO guidance of between $0.80 and $0.84 per share.

As we've described, signed leases not yet cash paying will contribute an annualized $87 million of cash rent in the near term. This, combined with our modest lease expirations over the next five years, provides a clear path to strong cash flow growth.

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

Thank you. At this time we will be conducting a question-and-answer session.

(Operator Instructions)

Our first question comes from the line of Ross Nussbaum with UBS.

Thanks. It's Nick Yulico here with Ross. Mike, on the guidance, I was just hoping you could give a bit on parameters on how we should be modeling occupancy for the portfolio through the year and ending 2016 occupancy from a GAAP standpoint?

Good morning, Nick and Ross.

How are you doing, guys. I would look at it that we have given some good guidance on our GAAP NOI. And based on the expiration schedule that we have in the supplemental, there are some new move outs that will occur during the second quarter and later during the year.

So we are at 90% now. With some minor improvement as we said, our same store is flat to up 1.5%. That would imply a minor change from flat to up a little bit.

Okay. That's helpful. And then you talked about the $87 million of cash rent in the future. If I look at this simplistically, your 2016 and 2017 lease expirations add up to about $85 million all together for those two years. Essentially, in a bearish scenario, if you just didn't lease up anything that was expiring this year or next year, you'd basically have flat annualized -- your 2015 cash NOI would be similar to your 2017 cash NOI. Is that a fair way to look at it?

I think that, I mean, I would look at what we gave you. And it provides the information to understand the transitionary period that our portfolio is in. We do have the expirations in 2016 and we also have some in 2017 that will have some downtime. But I think, there will be renewals and there will be new transactions that are done, so I think that you need to look at this more on a portfolio basis than a binary, we do nothing.

Got it. And then can you just remind us lastly about the 2017 lease expirations? What are the major buildings there? I think it's mostly New York; I think 900 Third might be one of the assets; it has one of the larger expirations. Thanks everyone.

Yes, so at 900 Third, we have three floors that are expiring in 2017. But the largest expiration we have in 2017 is at 1325 Avenue of the Americas. It's at the base of the building, the ING space, floors 5 and 6 and then a partial 7 and then 8 through 11. So that's about 150,000 square feet there, in a block of space. But we're already talking to tenants about that space and actually have some advanced discussions on a portion of it.

Thanks, everyone.

Thank you.

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

Good morning, guys.

Good morning, Jed.

One of your competitors talked recently about Midtown tenants, especially in the financial services sector getting more cautious on leasing so far this year and then in general, sort of set an expectation that job growth and leasing in Manhattan went slowly this year. To what extent have you seen any signs of that impacting your portfolio? What is your outlook for Midtown over the next year or two in general?

Let me start and then Ted will chime in. It's really too early to draw any conclusions on 2016. We had a very strong end of 2015 and the public markets, of course, have been challenging in the beginning of 2016. But our underlying trends have not shifted. As you know, we are long-term investors and we have dealt with these kinds of situations before.

As you know, also, the first quarter is seasonally the slowest for our portfolio. We normally do the bulk of our leasing at the fourth quarter of the year. But the team is very, very active currently. Ted?

Yes, I can't say. We continue to have a steady number of showings. So prospects at all our properties where we have vacancy and so, really, in these six weeks so far of this year, we haven't seen anything that suggests anything unusual given what we've seen in other years in the first quarter and the level of activity.

Okay, thanks. And how is your leasing pipeline looking in Manhattan currently? Can you -- and specifically on the Deloitte and Commerzbank space, if you can give a little bit more color on the backfill prospects there and then just overall, do you think the 1 million square foot leasing target for 2016 is a realistic goal, as you said, for 2015?

It's really, Jed, there's no 1 million square foot target for 2016. We had that goal for 2015. But we had two strong leasing years. We don't have really that much space expiring. We are pretty well leased in our properties and we only have 560,000 square feet expiring this year. And we have active showings at 1301 Sixth Avenue and as we mentioned in our remarks, we already pre-leased some of the Commerzbank space and are currently, as you know, 97% leased in that property.

At 1633 Broadway, the majority is the Deloitte & Touche space at four floors because the best floors in the building tower floors and there is activity on those floors as well. As you know as well, these large tenant requirements and normally get active once the current tenant leaves the space. And so you shouldn't expect that it will be re-leased immediately when Deloitte & Touche leaves that space.

Agreed. We did four deals last year of over 100,000 square feet. We are certainly used to doing larger tenant transactions. We know they take a little bit longer. Sometimes they are more complex deals. But the space that we have at 1301 Sixth Avenue and at 1633 Broadway are both large tenant type blocks of space and the ones that are out there we're seeing them. We're seeing that activity.

Okay, great. Any update on the retail space at 1633 Broadway and maybe prospects for getting a deal done there this year?

We're certainly hopeful we will get a deal done there this year. As we've said in the past, we are very selective about what's going on there. I think we've also mentioned that with the construction that's going on, we feel every day that goes by, as we see that progress, we feel that we have better and better product to put out to the market.

So the combination of being selective and having a better product as time goes by and certainly also the retail market continuing to get stronger, we feel we are in a pretty good position to make a great deal there. And when we have that information, we will share it with you guys.

Thanks so much.

Our next question comes from James Feldman with Bank of America.

Good morning, Jamie.

Thank you and good morning. So Mike, can you talk a little bit more about what's included in your guidance for some of the largest expirations in 2016?

From our -- I think and Ted can talk to this better than I can but some of the larger expirations we already know are known move-outs. The biggest ones are in the second quarter of 2016 so those will go vacant.

As I think I mentioned this in our prepared remarks, over at 1633 Broadway, it is the Deloitte space floors, 35 to 38; that's about 200,000 square feet. We know that Deloitte is moving out of that space over at 1301 Sixth Avenue the bulk of the availability there, coming available as the Commerzbank space. Commerzbank has subleased all of their space as well so no opportunity there to renew them as a direct tenant. And as a result and we know that a lot of that space, what's left of it anyway since we've leased up half of it already, what's left of it is coming back to us.

Okay. So I guess what I'm asking is so the space that is -- the space that expires, you're not assuming any leasing by year end or any NOI contribution or even if on a GAAP basis.

So the -- as you look at the expiration schedule, that's more of an exposure schedule. As we've said and we've footnoted, we've leased about half of that space so that is part of the original comments that we made. Of the remaining space we are assuming that, that will go down and be down for a period of time. We're not saying exactly when we think we'll re-lease it.

Okay. And then I know you guys on prior calls have given really good color on just the volume of large leases out there. And so as you think about the Deloitte space, the Commerzbank space, and even the ING space and then 31 West 52nd Street, can you just talk about maybe the number of discussions you're having or just how that pipeline feels right now versus maybe this time last year?

I'd say it's pretty similar to where we were last year. I think what was unusual for us last year, we did a 100,000 square foot deal in the first quarter last year with -- over at 1301 Sixth Avenue and I think that, that is a bit of anomaly. That is not something that we usually see and expect is deals of that size getting done so soon in the year. So I think what we're seeing now and where we're at, we have good activity still from a variety of different types of tenants at the -- at each of our large blocks of space.

As I mentioned earlier, I think we already have some of our expiring space that we've re-leased also even that were in the process of re-leasing over at 1325 Avenue of the Americas, even. So we're looking forward and being proactive on space that is coming up even further down the road and not just what's coming up now in the next three to six months.

Okay. And then I know you guys said 1.4 million square feet leased last year. Do you know how much of that was new space versus renewal?

The renewal and expansion of existing tenants was about 65%. New tenants across the board was about 30%, 28%, thereabouts as far as new tenants and then there were just some -- we proactively shifted some tenants from one building to another and that was about 6%.

Okay. And then my last question, on the debt loan through the fund, just maybe if you could talk about your view of the mezzanine loan business right now and appetite for risk? And what kind of yields you could get versus thinking about where we might be in the cycle and the risk to those loans?

We see a lot of -- we have a lot of activity, Jamie, there but we are very selective. As you know, we are only looking at mezzanine debt for our funds that -- for properties that we ultimately would also own and manage. So we are very selective.

And the activity has increased because it looks like some of the debt providers are a little bit more selective and then the CMBS market is more restricted than it was in the last year. And that is good for our business.

Okay. Do you worry about the credit risk, the increasing credit risk here? How do you think about that as you're balancing that with the ability to put capital to work?

Well, we are very selective as I mentioned before. We are looking at the ownership restructure of the asset and the asset itself. It's not clear -- it's not only financial underwriting so we look at the entire asset. And we are not normally financing to very high levels. We normally don't go beyond 75% to 80%.

Okay. All right. Thank you.

Sure. You're welcome.

Our next question comes from Brad Burke with Goldman Sachs.

Hey, good morning and congratulations on the leasing progress this quarter and sorry if I missed this, but I was just hoping for an update on how you're thinking about the embedded rent on expirations, how those compare against the market rates? And then a bit of a follow-up to Jed's question, just looking for your view, if you have one, on how you think asking rents will trend in Midtown this year?

Well, I think as we reported, our cash basis mark-to-market was 17.3% in the fourth quarter. And for the entire year, on about 900,000 square feet of second-generation space, we were a little over 15.5%, 15.6%. Very strong mark-to-markets for the quarter and for the year. And we continue to see a lot of leasing activity in 2016.

As we have said, time and time again, our mark-to-markets are going to be lumpy depending on individual leases and transactions and so on and so forth but we feel good about where we are.

So we should think about Q4 in 2015 as being a reasonable proxy for the remainder of the near-term lease expirations?

I think -- we are looking to double-digit returns for mark-to-markets for 2016.

Okay. And any color on what that would assume in terms of market rent growth?

It really depends on the market. I mean, we are active in three markets, in Manhattan and Washington and in San Francisco. San Francisco, I think, has seen three wonderful years of tremendous growth rates. We don't have much of expirations there. We still believe that San Francisco will grow further.

The Washington DC market, where our properties are right in the CBD, that market is stabilizing. We see some growth on rent there as well. We are quite optimistic that this market has turned its corner. Here in Manhattan, you would see single-digit improvements. That is our assumption at this point.

Okay. Thank you. And then just last one for me, Mike. I know you said you're going to focus on refinancing ahead of the maturity and so I was just hoping for an update on how you're thinking about incremental cost of debt, whether that's changed at all since what we saw you were able to do at 1633 Broadway.

So, as we said, we expect to be in the market. We are looking at 31 West 52nd Street today. That was part of our acquisition of the asset was to move the tenants and capture that space and also the ability to refinance the asset. So we are looking at that today. As far as rates go, we all know that the underlying indexes have come down; spreads have widened a little bit. But the all-in borrowing cost to us, we believe, has remained fairly consistent over the past several months. And we still look forward to the opportunity to reduce the interest rate on that loan.

Okay. Thank you very much.

Okay, thanks.

Our next question comes from Sumit Sharma with Morgan Stanley.

Hi, everybody. Congratulations on a great quarter. So for my first question, I am going to ask something that no one has asked before, which is going to be about the retail lobby in 1633 Broadway. No, I'm just kidding. (Laughter)

Market is really the question. Historically, free rent concessions were at five months to six months in general in Midtown Manhattan in 2005 to 2009. They've crept up in 9 to 10 months in Midtown and sort of stayed there while some of the other submarkets in New York City actually decreased.

Could you provide some insight as to how much of this is just a structural thing where nine months has now become market convention or maybe it's related to installment, timeframes and so forth. Where do you see this number going forward in your leasing assumptions from here?

Well, in general, I think the biggest proxy really to understand what happens with concessions and even rents, really, is to look at availability. In Midtown, what we find is, where we're at now, just over 10% availability, really until we get into the single digits of availabilities is when you'll really start to see concessions being pushed down in a significant way and rent spiking in a significant way.

But where we are now, and we don't see that changing drastically in the near future is roughly in a market that's sits in just in low double-digit availability rate where tenants and landlords are both jockeying at the table to get the best terms they can.

Okay, understood. Thank you for the color. And in terms of -- I guess you made a lot of meaningful progress on the leasing-related heavy lifting, especially in context of your goals after the IPO. So I know it's too early to call for a mission accomplished and all of that, but what do you view is next in PGRE's evolution. I mean, as -- with asset prices rising in DC and arguably peaking in New York City, do you see any opportunities to, A, harvest assets in those markets or make any acquisitions? It's entirely an original question, as you can see.

Yes. Well, Sumit, we still see value embedded in our portfolio and we -- the prices have risen. But demand for rents is going to follow. We see strong activity still from foreign buyers who are looking for Class A and trophy investments, and investments in a safe haven environment. So while we are very cautiously ourselves looking at future acquisitions, at this point in time, we think there is somewhat gross for our portfolio before we would look at selling an asset.

Okay. And any opportunities from the fund side or any assets that you have first, sort of a limited interest but first rights of refusal, that sort of thing specifically? With reference to 60 Wall Street coming encumbered in 2017-ish timeframe, I believe?

Yes, well, that's -- but there is really nothing new to report. We reported on that over the last couple of quarters. But there is really not -- no news.

Okay. Thank you so much. One last question. If I missed this, I apologize. But with regards to 2017's maturities, how much of the 19 -- $900 million or so could be refinanced earlier in terms of, is it prepayable or do you have swaps in place that could meaningfully decrease the interest expense on that?

Well, we are looking at all of our debt maturities that -- for 2017. As you have seen with the refinancing of 1633 Broadway, we normally don't like to wait until the end of the year expiration of a debt position. So we are evaluating what the right timing is.

And we -- most, and as you know, we are in the market to refinance 31 West 52nd Street and we see a lot of activity still for assets that have our high-class profile for debt financings. So 31 West 52nd Street is something that we are really considering very seriously to refinance early. And the other refinances are of smaller scale and we will look at that more seriously in the second half of 2016.

Thank you so much for the color and answering my questions. And congratulations on a great quarter but I must confess you did close Cozy which breaks my heart. (Laughter)

Sorry, Sumit. Thank you.

(Operator Instructions)

Our next question comes from the line on Tom Lesnick with Capital One Securities.

Good morning, everyone.

Good morning, Tom.

I guess first on G&A, obviously you explain the increase for 2016 but as you look out further and the scalability of the business, should we expect similar layering year after year or how should we think about G&A going forward?

Hi, Tom. This is Wilbur. We obviously can't comment beyond 2017. As you know, the equity comp is going to be discussed heavily with the compensation committee. We're going to be very, very prudent in managing our cost structure and see how the business goes.

Okay. I appreciate that. And then obviously, with regards to the actual leasing CapEx in the quarter, it looks quite a bit elevated relative to prior quarters. Just wondering if there is anything significant or one-time in that or -- and how we should be thinking about the cadence of leasing CapEx on a dollar basis going forward?

Well, the quarter leasing CapEx was elevated, I think it was $42 million this quarter largely, in part, because of the timing of cash payments for this CapEx versus the rent commencement according to GAAP. So, the $46 million if you go to page 26 in our supplemental, you will see $25 million of that $46 million is being driven by lease commissions and another $10 million is being driven by tenant improvements. It is really timing.

Got it. So I guess what would you think of as a more normalized run rate we could use for 2016?

I think --

It will be lumpy. I look at the $25 million of leasing commissions we paid and we're just thrilled to actually pay those because it's due to all of the successful leasing that we did. The way that tenants request their reimbursement because most of the tenants fund their -- they pay for their own costs and ask for our reimbursements can be rather lumpy.

I think I would focus more on what Vito went through and the expenditures that we have and that, that number will go down dramatically over the next few years as the leasing commissions are already paid on the majority of the $1.4 million. We'll complete the buildout and those tenants will actually move in and start paying cash rent and our expiration schedule, as Albert said, averages around -- a little over 4.5% over the next several years so that number will be coming down dramatically.

Got it. I appreciate that insight. And then just one last one. I'm sorry if I missed this but was there a plan prepayment penalty with 1633 Broadway and if so, where did that show up in the accounting for 4Q?

So we had a cash prepayment penalty, Tom. The way that our GAAP financial statements work is our hedges are mark-to-market on a quarterly basis. So that when we repaid that, it just relieved a liability in our financial statements and did not impact our bottom line. In the future, the loan for 1633 Broadway is an effective hedge and any changes in fair value will flow through other comprehensive income.

Got it. That's really helpful. All right. Thanks guys.

Thank you.

Our next question is from Rich Anderson with Mizuho Securities.

Hi, Mizuho. Thank you. So Mike, if I could just ask you somewhat related to that last question. Should we be in the process of modeling, looking at non-controlling interest and gain on swaps and straight-line rent as basically equivalent to 2015 for now until some of the noise dies down?

Hi, Rich. This is Wilbur. The non-controlling interest line will change drastically in 2016 versus 2015 for a couple of reasons. One, we acquired the non-controlling interest in 31 West 52nd Street. So that was there for three quarters in 2015. But that is not going to be there in 2016, as you will notice in our supplemental, we dropped off on page 14, 31 West 52nd Street as a consolidated joint venture.

In addition, there's some new accounting pronouncement and you will see additional color when we file our 10-K regarding consolidation of fund investments. Today, when you see our real estate fund investments on our balance sheet, it shows up at 100% with the non-controlling interest down below.

As a result of this new accounting guidance, we're going to be forced to deconsolidate a lot of our funds and it will be treated akin to an equity method joint venture investment. So that would drastically change our financials. So within the non-controlling interest line item will get a lot simpler because the only thing it should have in there is one market [bottle].

Right. Okay. But I'm thinking about it on a net basis. So it will be addressed someplace else in your financial statements, right? So, just trying to connect the dots between NAREIT FFO and your core FFO and it's tough to do with all these moving parts. (multiple speakers) Go ahead.

On a net basis, on an economic basis, we're going to be the same. The benefit that we get will be the same.

All right.

Rich, that is why we highlighted the way we provided the guidance on a net basis, aggregating our fund business and our fee income, because I agree, it is a bit confusing but as Wilbur describes, it becomes much simpler beginning the first quarter of 2016. And our difference between NAREIT defined FFO and core FFO is typically just our interest of fair value adjustment on our interest rate swaps that are not affected.

Right and so what are you thinking about given some of the transactions you've had for that number? What are you thinking about there for 2016?

I don't -- we don't want to predict where interest rates are going to go. They fluctuate so much. And just think about this, so 1633 Broadway, because that hedge is effective. We have 3.87% and that is our fixed rate. It is just because as a private entity, we did not need to identify these hedges so the accounting is a little bit convoluted. As we refinance these assets, we will identify these hedges going forward.

Okay. I'm looking forward to next quarter. And then on a straight-line basis, straight-line rent, what should we be assuming there?

That's a difference between the cash NOI guidance and the GAAP NOI guidance that we gave.

Okay. Okay. Excuse me, I must have missed that. And then the loan on the -- the fund date loan, does this contribute, the 700 8th Avenue, does this contribute further out onto your pipeline of potentially future equity ownership in that asset? Or how should we be thinking about that investment from the fund?

Well, this is a different business basically, it's a mezzanine debt business. You shouldn't tie it into the activities, the basic activities of PGRE. It's a different business.

But that could, at some point down the road, a transaction could happen and flip it into a different type of ownership format. Is that not true? Or do you -- would you -- don't consider any of the fund activity as something that could come your way down the road?

Well, we are a lender on these kind of investments and that is our position there. And that is the way we understand that business. It's -- we are generating interesting -- interest income for our investors. They are cash return driven. We see a lot of transactions that way, but we are clearly not a hostile lender.

Okay. Fair enough. And then lastly, you kind of alluded to this a little bit but someone brought up some of the comments of your peers, is there -- about New York City. Is there something that you can put your finger on about the content, or contributions of your portfolio that make you different, and hence, maybe somewhat less influenced by some of the events going on in New York City from an office-demand perspective? Do you think the makeup of your portfolio is different enough to reduce some of that volatility that maybe others are seeing?

Well, we have on average, we have very long-term leases. We have very few expirations after 2016. As we mentioned in our remarks, we have between 4.5% to 5.5% expiring per annum over the next couple of years thereafter. And I would venture to say that our assets are of higher quality, as some of the assets in the industry and our management style is very proactive.

So we want to make sure that we have done this over the last 25 years and longer that we try to take advantage of managing our assets directly that we control them and be proactive in serving the needs of our tenants. So I think that helps us keeping our portfolio, hopefully, at very high occupancy levels.

Okay. All right.

Because as we have seen in the past, when you have high quality, it is easier to lease a high-quality asset. There is always demand for something like that. And that has worked out well for us.

Okay. Thank you.

You're welcome.

There are no further questions. At this time, I would like to turn the call back to Albert Behler for closing remarks.

Well, thank you all for joining us this morning. We look forward to updating everyone on our progress when we report our first-quarter results in May of this year. Thank you.

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