Paramount Group Inc (PGRE) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Paramount Group, Inc. 2016 earnings conference call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note that this conference call is being recorded today, November 3, 2016. I will now turn the call over to Jacques Cornet with ICR.

Thank you, operator. And good morning. By now everyone should have access to our third quarter 2016 earnings release and supplemental information. Both can be found under the heading; Financial Information, Quarterly Results in the investor section of the Paramount website at www.paramount-group.com. Some of our comments today will be forward-looking statements within the meaning of the federal securities laws. Forward-looking statements which are usually identified by the use of such words such as will, expect, should, or other similar phrases, are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we would expect.

Therefore you should exercise caution in interpreting and relying on them. We refer you to our recent SEC filings including our most recent Form 10-K as updated by our subsequent quarterly reports including Form 10-Q for the quarter ended September 30th, 2016 which was filed with the SEC last night for more detailed discussion of the risks that could impact our future operating results and financial condition. During the 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 2016 earnings release and our supplemental information. Hosting the call today, we have Albert Behler, Chairman, Chief Executive Officer and President of the Company; Wilbur Paes, Executive Vice-President, Chief Financial Officer and Treasurer, and Ted Koltis, Executive Vice-President Leasing. Management will provide some opening remarks and we will then open the call to questions. With that, I'll turn the call over to Albert.

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

Thank you, Jacques. And good morning. We appreciate everyone joining us. For the third quarter we reported core FFO of $0.20 per share. Our portfolio-wide leased rate was 92.3% at quarter end, down 60 basis points from last quarter, primarily due to the plant move-out of Assured Guaranty at 31 West 52nd Street. With the exception of 31 West, every other building in our portfolio increased or maintained its Leased rate compared to last quarter. To that end we leased just under 190,000 square feet in the quarter at very healthy weighted average initial rents of $82.50 per square foot on office leases bringing our year-to-date leasing activity to approximately half a million square feet. The majority of the current quarters leasing was in NY where we leased approximately, 140,000 square feet at a strong initial rent of $84.93 per square foot on offices leases.

Two of the office leases that were signed in New York had starting cash rents of over $130.00 per square foot. While we would have been thrilled if our leasing activity for the quarter included some of the recently vacated space at 1633 Broadway or 1301 Sixth Avenue ,for that matter, it is important to note that this was large-block space that was leased by tenants 15 to 20 plus years ago. This space needed to be demolished, white boxed and brought into show condition for today's tenant.

So they appreciate the potential and efficiency of the floor plates and typically blocks of space like these take some time to retenant and do not lease until they are in show condition. That said, we continue to see good healthy activity across the board for all of our availabilities. Ted will provide more detail on our leasing pipeline later in the call. In Washington, D.C., we continue to outperform the market, a direct testament to the quality and location of our assets.

The leased occupancy of our D.C. portfolio was 94.3% at quarter end, up 210 basis points from last quarter and 400 basis points from year-end. Last quarter, we highlighted that the opportunity in our Washington, D.C. portfolio was at 2099 Pennsylvania Avenue. I'm happy to report that we signed two leases at 2099 totalling about 25,000 square feet effectively increasing the leased occupancy of the building to 73.8% from 62.1%.

While concessions in D.C. continue to be elevated, the current quarter statistics included a lease that took additional (inaudible) instead of free rent. Turning to San Francisco, the market continues to remain healthy and leased occupancy at One Market Plaza ticked up another 40 basis points from last quarter, to 98.8% at quarter end. The building is basically full, and while we do not have much space to lease, when we do, we continue to command very healthy rental rates. All three of the office leases signed this quarter at starting rents over $100 per square foot. While on San Francisco, let me spend a minute talking about the acquisition of One Front Street, which is expected to close in December.

We entered into an agreement to acquire this 650,000 square foot building for $521 million or about $800 per square foot. This unique asset which sits on the desirable Market Street corridor just a few blocks away from the transfer terminal is not only well positioned to succeed in the San Francisco marketplace but the attractive basis at which we were able to acquire the property will allow us to drive shareholder value in both the medium and the long-term. The building has several long-standing tenants, many of whom have consistently expanded that footprint in the building over the years. Ted refers to it as a sticky building. Once tenants are in that location, they don't want to leave.

While the building is currently 99.4% leased, we have a fantastic opportunity to meaningfully increase the in-place NOI as the existing leases which are currently 20% below market set to roll about 100,000 square feet each year for the next five years. The upcoming lease roll is what makes this opportunity so attractive for us. Others in the San Francisco marketplace have been willing to pay over $1,200 per square foot for buildings where there is no immediately apparent way to add value. We have found an opportunity for value creation at One Front Street where many of the other market participants shied away from the leasing risk since they traditionally lacked the teams and experience to address it.

However, we can immediately leverage our tenant relationships, market knowledge, and operational know-how to increase value for shareholders in the medium term, all at a basis of only $800 per square foot. As we disclosed when we entered into the transaction we reiterate our commitment and continue to explore various strategic options with respect to the acquisition including bringing in a joint venture partner or partners at the asset; or selling another asset within our portfolio in a tax-efficient manner. We will provide investors updates on this process as appropriate.

As most of you know, in the next few weeks our option to acquire our previous asset's interest in 60 Wall Street is set to expire. As a reminder, two of our funds, of which we are the general partner, collectively own a 62.3% interest in 60 Wall and our economic interest vis-a-vis our fund's interest is 5.1%. While we continue to explore alternatives in regards to this option, should we decide to exercise it, we would do so only with significant joint venture partner involvement. And our intention is to not meaningfully increase our ownership interest in the asset above our current 5% level.

Turning to our balance sheet. Subsequent to the end of the quarter we announced an $850 million financing of 1301 Sixth Avenue at a weighted average initial rate of 2.77%. As you will recall, prior to this financing we were faced with two debt maturities in 2017 at 900 Third avenue and Waterview. In evaluating how to proceed with these maturities, we not only considered the rates and terms at which we could refinance these assets, but also thought creatively about how we might be able to utilize assets from our unencumbered pool instead to drive the best performance for the Company.

Through this analysis, it became clear that we would be able to achieve significantly better terms by financing 1301 Sixth Avenue and using the proceeds to pay down these 2017 maturities. Wilbur will go into more details but this execution was a fantastic team effort that continues to demonstrate lender's confidence in the Paramount team and 1301 Sixth Avenue itself. Taking a step back to look at the progress we have been able to make on our balance sheet over the past year, we have now successfully refinanced over 75% of our outstanding debt.

Additionally we have effectively lowered our weighted average interest rate from 5.35% a year ago down over 150 basis points to under 3.8% today. Looking forward over the shorter term, at the end of the quarter we had 89 million of contractual pro rata annualized cash rent attributable to either tenants in a free rent period or to leases signed but not yet commenced., up from 86 million last quarter. Wilbur will provide more details. To conclude my comments, let me say again; Leasing remains our number one focus. We continue to be confident in our ability to lease up our current vacancies at market rents to recognize the embedded value in our portfolio.

Following the leasing of these spaces, we move into a period where we will very low lease expirations. Through year-end 2020, our expirations average less than 4.2% or 430,000 square feet annually. Even taking into account the upcoming lease (inaudible) I highlight the at One Front Street, the average is still only 12.8% of our square footage, an extremely low amount of roll in a portfolio of our size. We look to continue to build momentum into 2017, putting us in a position to deliver outsize long term NOI and cash flow growth for our shareholders.

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

Thank you, Albert, and good morning. Let's take a look at each of our markets, beginning in New York. In New York, we see continued solid activity in our three large blocks of available space remains the focus. At 1633 Broadway, the 200,000 plus square feet on floors 35 to 38 that some refer to as the former Deloitte space has been in show condition since mid-summer. Because of the large, efficient floor plates we are seeing healthy activity from all types of perspective tenants; financial services, law, and other professional service firms but also a wide array of media and entertainment types as well.

On our last call, we talked about our expectations for tour activity to pick up once we had the space prepared to show, and we are now moving into the early proposal stage with the prospective tenants for various portions of the space. At 1301 Avenue of the Americas, we have the top of the building available, floors 41 through 45. It's about 130,000 square feet that came back to us in June, and we have spent the summer putting that space into a presentable condition. We are complete with this process now, and interest in this space is also healthy and coming from more traditional financial services and law firm-type tenants.

Following behind the process we highlighted at 1633 Broadway, we have hosted a number of tours with prospective tenants and expect to move to the proposal stage shortly. Once again, it's important to keep in perspective that these are large deals that generally follow a lengthy process after demolition of touring and then proposals and then lease negotiation before moving to execution. At 31 West 52nd street, as Albert touched on, during the quarter Assured Guaranty moved out of the 110,000 square feet in the top five floors of the building. As with the other expirations this year, the build-out here is dated with very large, generous offices and not a lot of glass. To optimize the appeal in today's marketplace we are going through the process of demolishing the space and expect to have it in show condition by the end of the fourth quarter.

Just to remind everyone, this was an expiration that we proactively created as we were able to meet our tenant's needs by moving them to 1633 Broadway. The lease on this space was not due to expire until 2026 and the in-place rent was in the mid-60s per square foot. We think the market rate is significantly higher. Turning to Washington, the market is in a bit of a holding pattern in advance of the election and the decision-making has slowed. But despite the tepid mood we signed leases during the quarter with initial rents just north of $70 per square foot.

We think this recent activity and our belief that we will have more leasing to report before year-end supports our long-held view of the importance of being in "A" locations in the CBD with trophy assets driving our performance. As Albert mentioned, our D.C. portfolio is 94.3% leased as of the end of September, up over 200 basis points from last quarter. And looking forward, we do not have much space and will continue to hold firm on rents. In San Francisco, One Market Plaza was 98.8% leased as of September. Up another 40 basis points from June. On the supply side along the Mission and Market Street corridors there is not much available in the near term.

In our results, we continue to see the underlying strength in the market with our plus $100 per square foot initial rents and moderate concession packages on completed deals during the quarter. Based on what we see in this market, we're very excited about bringing One Front Street into the fold. There's a strong desire to live and work in San Francisco. And what we have seen with Google at One Market is a great indicator that to recruit and keep the best and brightest these firms have to be in the CBD. We think that trend continues and we think it continues for a while, with the more mature tenants that have staying power. So in San Francisco we see available space as a great opportunity over the next several years and it's why we are so excited about One Front Street.

With that summary I'll turn the call over to Wilbur who will discuss the financial results in more detail.

Thanks, Ted. Yesterday, we reported core FFO of $0.20 per share, in line with the prior year's third quarter. Our third quarter results were ahead of our expectations, driven primarily by 3.4 million of lease termination income which was partially offset by a 1.7 million (inaudible) 141 above market lease write-off. Our pro rata share of gap NOI for the quarter was $95.3 million up $3.9 million or 4.3% from the prior year's third quarter but was down 4.9 million or 4.9% from the second quarter. Notwithstanding the 1.7 million net benefit realized from the lease termination income in the current quarter that I just mentioned.

This was largely due to the full effect of the Commerce Bank vacancy in the current quarter as well as the partial effect of the Assured Guaranty move-out which took place in August. The current quarter includes $23.2 million of straight line rent, of which $20.4 million was attributable to free rent. Our overall occupancy at the end of the quarter was 90%, down 50 basis points from the prior quarter. As expected, this was largely driven by the 110,000 square foot lease expiration of the Assured Guaranty space at 31 West 52nd street. With that space now vacant, the only large block known move-out remains at 1325 Avenue of the Americas where ING will vacate their space in January 2017.

Post the ING move-out our lease expirations are moderate and the benefits of our leasing efforts will come to fruition. As Albert mentioned, we have $89 million of contractual pro rata annualized cash rent, $73 million of which is attributable to tenants that are in a free rent period and the remaining $16 million of which relates to signed leases not yet commenced. Which as a reminder is not contributing towards earnings. $67 million of this $89 million is expected to become cash-paying by the end of the first quarter of 2017. Our mark to markets for the quarter were 29.7% on a GAAP basis and 6.1% on a cash basis.

The current quarter GAAP and cash mark to markets were impacted by the termination of a 36,600 square foot above market lease that was set to expire in 2017. In the current quarter, we terminated this lease and not only secured over $3 million in termination income but also released the space to an existing tenant at market rates. That too with a very low concession package. All in all, a very positive outcome. Excluding the impact of this lease, current quarter GAAP and cash mark to markets would have been a robust 31% and 22.6% respectively.

Turning to our balance sheet, we ended the quarter with over $850 million in liquidity comprised of $113 million of cash and restricted cash and $750 million of availability under our revolving credit facility. Our outstanding debt was $2.8 billion at a weighted average interest rate of 4.3% and a weighted average maturity of five years. 91.5% of our debt is fixed and has a weighted average interest rate of 4.5%. The remaining 8.5% is floating and has a weighted average interest rate of 2%. Our overall net debt to enterprise value is 38% and net debt to EBITDA is 7.3 times.

Subsequent to quarter end we competed a two-tranche $850 million financing of the 1.8 million square foot 1301 Avenue of the Americas. This financing garnered tremendous interest in the marketplace as evidenced by the great execution and on very favorable terms. The 5-year interest-only loan has an initial weighted average interest rate of 2.77% based on a $500 million fixed rate tranche and a $350 million floating rate tranche. The net proceeds from the financing were used to unencumbered and repay the existing loans at 900 Third Avenue and Waterview, getting $844 million which was schedule to mature in 2017 and had a weighted average interest rate of 4.9%.

In connection to the financing, we retained net proceeds after transaction costs and debt repayments of $330 million which will be used to fund a portion of the One Front Street acquisition which is expected to close in December. With the closing of this transaction, we have once again taken advantage of the low interest rate environment and have now collectively refinanced over $2.35 billion over the last 12 months, thereby lowering our borrowing costs by over 150 basis points and staggering and extending our debt maturities.

Turning to (inaudible) -- based on our year-to-date performance including the third quarter lease termination income and the pending acquisition of One Front Street which we expect to close in December, we are raising and narrowing our full year 2016 core FFO guidance to be between $0.84 and $0.86 per share from our prior range of $0.81 to $0.85 per share. This change represents a $0.02 per share increase at the mid-point of our guidance consisting of $0.01 per share from the lease termination income in the third quarter and $0.01 per share from the acquisition of One Front Street.

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

Thank you. We will now be conducting a question and answer session. (Operator instructions). Our first question comes from Blaine Heck from Wells Fargo.

Thanks. Good morning. Ted, if I can start with you, can you just give a little bit more color on how you feel today about getting leases signed in the recent and upcoming move-outs versus maybe how you might have felt about it six months ago. Are you more confident you'll get those signed in the near future? And maybe if you can just put some numbers around the number of prospects or potential square feet looking at each space, that will be helpful.

Sure. Good morning. I would say I'm -- overall I think I speak for all of us here,--we're all as confident as we were six months ago on our spaces based on the activity that we're seeing. We're seeing good activity across really -- and the way we describe -- the way I described it I think on the last call is that a number of these spaces need to be prepped. And after that there's a process that follows. And generally we see 6 to 12 months after space is in a show condition where we see significant lease-up of that space, and there's nothing that we're seeing in the market in our level of activity that's really moving us away from that. I mean, I think availability remains very stable in Midtown, even with new product that's come on, sublease rates remain very low.

Job growth in New York remains very strong. And the diversity of tenants that we're seeing looking at the space just -- I think all those four factors continue to give us a real confidence in what we're seeing. And so, as expected, I think at 1633 Broadway being the space that was white-boxed and demolished first, we've seen the most amount of tour activity and now into proposal stage from a number of different tenants. There's tenants vying for kind of the same space, so I would rather not quantify in actual numbers because we've got some overlap there. And so I would rather not really put that out there. But we're in proposal stage with a number of tenants on the spaces. Some of those spaces overlap. And then they're from a few different industries. So it's a good thing. And 1301 kind of follows behind that. We've got -- we put the space into show condition now. As a result the last month or so we have had the most tour activity that we've had at 1301. And now -- so we expect to move into proposal stage there as well on some of those spaces.

Okay. That's helpful. And sorry if I missed it, but is there any update on the retail space at 1633 and maybe prospects for getting a deal done there in the near term?

On the retail, we have nothing to share to date. We are still working with a couple of potential tenants for that, asset for that location. And as we had said before, we want to be very selective. And that's the status there. But the renovation is complete and finished. It looks really fantastic if you have time to come by. We have a lot of interest also in the other retail space adjoining. We just want to make the right decision for the building.

Yeah, it looks great. Albert, can you talk a little bit more about the San Francisco market? There have been concerns of slowdown in leasing velocity there, and the effect of (inaudible) can you just comment on what you guys are seeing on the ground there and what you expect from the market?

We see the market quite strong. We have -- One Market Plaza is well positioned and we have very limited availability. We have done a lot of leasing over $100 a square foot. And besides rumors that the market is softening, we don't see it and we are relatively bullish about San Francisco.

Okay. And then just specifically at One Front Street, can you give us what the proportion of tech tenants versus more traditional non-tech fire tenants is?

You have the majority of the tenants in that building are non-tech. The majority are traditional tenants. But the building is -- it could be catering to technology tenants as well. We went through that process when One Market Plaza where we went through a releasing cycle. And we now have more tech tenants in that building than we ever had before. And it's a site core building, One Front is, and that caters very well to technology tenants. So we will be talking to both tenants, and as we mentioned before, it's currently pretty much fully leased and we will be, as soon as we close, talking to some of the existing tenants. We have good relationships there, and work on getting them extended and upgrading the property wherever it's needed. We are very excited about the opportunity, about the mark to market opportunity in this asset and we think it's a great, great addition to our portfolio.

Great. Thanks for the color.

Sure. You're welcome.

Our next question comes from Jamie Feldman of Bank of America.

Thank you. Good morning. I guess sticking with the New York question, we saw yesterday the news that NHL is going to be moving to the Hudson Yards off of Sixth Avenue. Ted or Albert, could you give us the your latest thoughts or discussions you're having from the front lines about how tenants are thinking about your buildings or your submarkets versus that part of town now, and just the price differential and what the thought process is that you're seeing.

Sure, Jamie. This is Ted. I mean, the NHL deal is an older deal, I think it's an older deal, but certainly I think what we're seeing along Sixth Avenue, I'm really encouraged by what we just saw from Major League Baseball, the deal that was just announced, which was a much larger deal than the NHL deal and I think more significant and indicative of what's happening along Sixth Avenue where you have landlords that are investing dollars into their buildings, and those dollars seeing results. So we undertook a renovation also on our lobby at 1301 and I think that we're seeing -- as a result we're seeing great activity on the building because of that. I mean, you've got 1155 (inaudible) that's spending a lot of money on their building. So really up and down Sixth, it's -- from my standpoint I'm seeing a very strong level of activity and I'm hearing a very strong level of activity from other landlords too on their blocks of space up and down the corridor. So I'm not -- I don't think it's a matter of concern. Again, when we talk about Hudson Yards and new construction, I just think that that's a great indication of how strong the Midtown market is, that it can absorb that type of new product growth and yet still have great activity throughout Midtown.

Okay. And then how do you think about pricing? Maybe for some of these buildings, you're talking about proposals. Like, how does the rent differential compare to other parts of town?

From my standpoint, from our blocks of space, we have a really wide range of pricing, so we have a lot of diversity there. You may have heard from some of our peers that commodities -- commodity space is really what's having the most leasing velocity. I mean, we have space from the $60 per square foot range all the way up into the triple digit range if you go across the four blocks of space that we have. So that diversity in product, from my standpoint, allows us to kind of see all parts of the market and I think that while it's true maybe that there might be some more activity in the $60 to $80 range than further up, I think that would be true in any market. In any market cycle. So we're not seeing anything that's too out of place with what we normally see in a good leasing market. And as far as new product pricing goes, I think the more economic deals so to speak were already made at Hudson Yards and I think that the next product that's coming on line there is going to be probably priced higher than what we may have on Sixth Avenue. So I think we're in a good position there as well.

Okay. And then you made the comment that San Francisco firms have to be in the CBD. Are you talking specifically about any leases you know in the market? Or maybe tell us what is the pipeline of the big tech companies or other companies that are looking at Downtown San Francisco? Maybe provide some color there?

Well, I mean, right now what we're seeing is any large technology Company that's a more mature tech Company that used to reside outside of the San Francisco CBD and have significant presence only outside is moving into the CBD in a significant way. I mean, I think, again, we bring up Google as an example. When Google took space at One Market, they had a number of expansion rights but they were not committed to taking any of that expansion space. And what we've seen is that they continue to take expansion space and fill it immediately. And that's a direct reflection on them feeling like they need to be in the CBD in order to recruit the best and brightest. And I think where the sublease availability in the San Francisco market is now down below 2%, and every -- in every instance in the last year plus where you've seen a large block of space could come on to the market-- sublease space come on to the market that's good built sublease space, it swallowed up right away and I think that that's an indicator of that trend. I mean, there's another -- Twitter is about to put another 100,000 feet of built space onto the market in San Francisco and I won't be surprised if that space is gone within six months.

Okay. I guess are you seeing any imminent deals from Apple-type tenants that we may see in the next couple of months?

Not (inaudible) comment on.

Okay. And I guess last -- I guess for Albert, can you just talk about capital flows and what you guys are seeing on the investment market in terms of cap rates and pricing and demand for assets?

Yes, the capital flow is still quite healthy. Our acquisition team is having good meetings with potential joint venture partners and investors, and that is very solid. As I mentioned on other calls before, in the first three months of this year it slowed down a little bit, I think impacted by the public markets development but it's very healthy right now and we don't see a slowdown there. Especially with the -- in the interest rate environment, especially where it sits in Europe. If you have very low returns on fixed income, there's a lot of capital that looks for yield, and I think that's -- a lot of that is going to be pushed into the United States real estate.

Have you seen any change this quarter? You've seen the retail up, clearly.

I don't want to go into this quarter to last quarter. We have good and healthy discussions. That's what I can say.

Okay. All right. Thanks, everyone.

Sure. Thank you.

Operator instructions. Your next question comes from Rob Simone of Evercore ISI.

Hey, guys. I was just wondering if you could comment on what, if any, debt investments you're kind of seeing out in the markets for your funds.

We'll be doing most probably another close to $150 million to $200 million before the end of this year. So that's healthy activity. Our debt team is looking at investment especially in the New York market, more than -- because we are focused just on New York, Washington and potentially San Francisco. And the majority of the activities are in New York. Lesser in Washington and San Francisco. But it's a very healthy market.

Great. That's really helpful. And after that call it, $150 million to $200 million, what's the capacity within that debt fund before you guys would consider going out and potentially raising another fund?

We will have approximately $300 to $400 million left.

Okay. Great. Thanks, guys.

Sure.

Our next question comes from Tom Lesnick of Capital One.

Hey, good morning, guys.

Good morning, Tom.

I guess, first, with respect to the cash NOI bridge over the next couple of quarters, I think historically you guys had talked about a fairly significant amount of gap rent that will become cash-paying by the end of first quarter 2017 as well as some signed leases that haven't commenced yet. Could you provide an update on that and just kind of walk us through the bridge for both 4Q and 1Q?

Hey, Tom. As we said in our prepared remarks we still have right now $89 million of contractual pro rata cash rent that stems from signed leases not yet commenced and the burn-off of free rent. Of that number $73 million is attributable to tenants that are in a free rent period and the remaining $16 million are signed leases not commenced. And we basically outlined this time that $67 million of that total $89 million should become cash-paying by the end of the first quarter of 2017. If you're looking at a cash NOI run-rate, our cash NOI for the quarter was $72 million and change and that included the termination income. So if you go to back that out, you're in the high 60s and that's effectively one of the lower points as we head into fourth quarter because in this quarter the other thing to bear in mind is the Assured Guaranty did not have a full effect in the third quarter which will have a full effect in the fourth quarter.

Got it. That's helpful. So I guess all else equal, even with the ING space expiring at the end of the year, it's fair to say that on a cash basis, NOI should be moving higher over the next couple of quarters?

Yes, I think that's -- well, we're not giving guidance for 2017 yet, I think that's a fair assumption. The fourth quarter would be the low point and then you have the ING effect in the first quarter.

Got it. That's helpful. My second question with respect to the D.C. leasing environment, it looks like you guys got some leasing done at 2099 Ten, as well as Two Liberty Place, but (inaudible) were relatively elevated at roughly 20% of initial rents. Is that just the cost of business right now in D.C., or were there specific issues with those spaces that required higher upfront costs?

Well, that's a bit of an anomaly because we traded some TI for free rent. So that's just kind of a one-quarter thing. I think that we're still seeing concessions in D.C. not really trend anywhere different from where they have been over the last year. So they're still at record levels in D.C., especially on trophy product.

Is currently over 94% leased at this point, and we have very limited expirations until 2021. So we have a rock solid portfolio in D.C. in the best locations on and around Pennsylvania Avenue. So we feel pretty good about this.

Okay. Great. Thanks, guys.

You're welcome.

Our next question comes from Vikram Malhotra of Morgan Stanley.

Hi, this is Semet in for Vikram. How are you guys doing?

Good morning.

Thank you for the update on the vacancies, and the color, Ted. I guess it does sound like there's a bit of time before these leases -- or in general these large leases get signed. I'm just wondering, when you think about 2017, what sort of ballast or what are the sources of ballast to FFO and not just cash NOI that we should expect going forward?

Semet, it's Wilbur. At this point we're not giving 2017 guidance yet. We tried to outline where NOI is for the quarter. We tried to outline what the burn-off of free rent -- our intention is to give full 2017 guidance when we report our fourth quarter results, recognizing that there's a lot of situations that are fluid right now.

Fair enough. Okay. So we also heard -- I mean, after 51301, which I take it as you point out you used the funds to pay down the costs at 900 Third and Waterfront, and then also pay out a chunk of the One Front Street acquisition. We also heard that you're in the market for another mortgage loan of -- at I guess One Market Square along with the joint venture partner. I mean, assuming that it goes through, and 50% of that, based on your share, comes across to you, I guess what are the possible uses of funds that you're looking at there, given that I think --debt maturities are fairly limited?

Yes, we don't want to comment on that potential refinancing at this point. And we might get to that -- back to that in a quarter or so.

Wonderful. Okay. I guess that's it. Thank you so much.

Thank you.

Our next question comes from Tom Catherwood of BTIG.

Thank you. Good morning.

Good morning, Tom.

Just some clarity on the New York leasing numbers this quarter. If I look at page 32, obviously you guys did almost 130,000 square feet in New York. Of that 130,000 square feet, how much of that was the lease for the parking space -- parking garage at 1633 Broadway? Or was that 140,000 all office?

Well, we don't really want to go into details which one was office and which one was garage at this point.

Okay. But the long story short is that the office portion of whatever was leased this quarter was -- I think it was, what, almost $85 per square foot?

That is correct.

Okay. And then second, Ted, you had mentioned in your prepared remarks that you kind of weren't concerned about subleasing in New York City. We've heard some stories of new blocks coming on the market over the past few months. Is your thoughts that these blocks just don't compete with your product, or that the overall amount of sublease space in New York City isn't greater than historic averages?

Well, I mean, the overall amount right now is around historical lows, actually, in Midtown. So I think -- I mean, would it compete? It might. But that really depends on term. I mean, that's really the biggest driver of whether a sublease competes with our space or not. Because our space is large block space, headquarters-type space, that generally is a long-term deal. So most of the time, unless you have a large block sublease that has some term on it, it usually does not compete.

Understood. Thanks, guys.

Thank you.

Our next question comes Vincent Chao of Deutsche Bank.

Good morning, everyone. Earlier you said that you have a diversity of -- available in the portfolio, but i was just curious if you could share some stats in terms of the breakdown, greater than 100,000 square foot space. Like, how much of the availability is in that range? I'm sorry, over $100 per square foot asking, versus below.

It's about 25% of it, I would say, is above-- triple digit ask over the space. So the majority is below. And it's -- I said it ranges from the 60s to triple digits so it's probably pretty evenly spread over that range of price.

Got it. Okay. And I know you also said that you're seeing -- not really seeing any abnormal trends in the market but have you noticed or seen any diminishing of demand for those higher asking rent spaces? Maybe it's not 100, maybe it's 130, but has there been any softening of the high end from your perspective?

We haven't seen it but we don't have a lot of space available at that -- 712 Fifth is really our -- 712 Fifth is our asset where we see that type of demand. And we've done deals in excess of $130 per square foot in this last quarter even. So we don't have a lot of product there. So we're still able to drive good price at that property and in that market.

Okay. Thanks. And just last one, on the -- thanks for the clarity on the cash -- will be cash flow here by the end of the first quarter of 2017. I'm just curious, the rest of the $22 million or so, should we expect that to come in by the end of 2017 or will some of that bleed into 2018?

Basically it's spread across the rest of 2017.

Okay. Thank you.

Thank you.

(Operator instructions). Our next question comes from Jed Reagan of Green Street Advisors.

Good morning, guys. I guess following up on the last question there, and I guess just a little more broadly in terms of Midtown fundamentals, are you seeing any upward pressure on concessions or downward pressure on rents as we've kind of moved later in the year?

Okay, so I mean working backwards, on rents, not seeing downward pressure. We feel that we're still getting what we would typically get, a small discount off of an asking rent, which is typical in the market. Concessions, really, I would say are on a deal by deal basis depending on the term. But we haven't had to reach with outsize concessions on any deal that we have been looking at right now.

Have you been able to push rents at all? Or is it more of just kind of a flattish type of environment?

It's been pretty flat so far, I would say. But I guess in a bit of a change from what we're hearing, we were pushing rents at 712 Fifth on those deals, that I mentioned, a couple of deals that we did there, we were able to push rents higher, higher than we thought we would get.

Okay.

It's a mixed bag.

As we look out to 2017, are there any other expected move-outs besides ING?

No. Jed, this is Wilbur, other than that, that's the large block. In 2017 we have 472,000 square feet expiring. The bulk of that, or 300 plus thousand square feet is in the first quarter and ING is really the large block non-move-out. Other than that, there's just expirations across the portfolio.

Okay. That's helpful. And on the $89 million in cash rents commencing, just kind of reading your guys' comments, is it safe to assume that most of that's going to be of at least the kind of 60ish million that's commencing soon, is that more of a 1Q, 2017 commencement, rather than a 4Q, 2016, Is that a fairway to read it?

The thing we kind of highlighted, at the end of the first quarter of 2017, so that's when the $67 million becomes cash-paying. So I wouldn't call it 1Q but more like the end of 1Q 2017.

Right. How much of that do you expect to get by the end of this year?

Remainder of 2016, we have basically told you in our guidance where we think cash NOI for 2016 was going to be which would be about $10 million to $15 million lower than the 2015 amount and we're still trending there.

Okay. That's helpful. In terms of the One Front Street funding would you look to sell a JV position in other buildings or would those be outright asset sales if you did go that route?

Jed, we -- as we had mentioned before, we will be exploring various alternatives and we are doing either a sale, and that means most probably a 1031 exchange as we have mentioned before, and we will be then -- how the tax rules work, it will be 100% sale. And if we do a joint venture, then we are expecting to do a 49% or 49% joint ventures and keep 51% for the Company.

Okay. And then just curious how you're thinking about any additional acquisition opportunities at this point. Is there a pipeline of attractive deals you're exploring?

No. We have really -- as we mentioned all along, and we have been very, very selective in our acquisition analysis and pursuit. And we have done the buyout of our joint venture partner last year in 31 West 52nd street. And this year it's now One Front. We are selecting and looking at a lot of possibilities. It's close to 100 possibilities per year. But we are mainly focusing on mezzanine debt, financing, with our debt funds and we would only very selectively entertain an acquisition.

Okay. Great. Thanks very much.

Thank you.

Our next question is a follow-up from Jamie Feldman of Bank of America.

Thank you. Can you talk about your expected leasing costs or CapEx spend to get to that $89 million of the cash rent?

Jamie, the 89 million of cash rent is already locked in. The bulk of the spending for that has happened. As you know, leasing commissions are typically paid and the leases are signed. TIs when tenants are building out their space. So a lot of the spending for that has been done and incurred in 2016. There's still going to be trickle-over effect that goes into 2017. So it's hard to say what number relates to that $89 million.

Okay. And then I guess for One Front, what would you say -- I know you mentioned an 800 per foot acquisition cost but what would you say your all-in basis would be once it's stabilized? Like how do you think about capital needs there?

Well, you know it's stabilized right now. And we are cash flowing. So we really -- we might be doing early renewals. We are not really wanting to go into the details of it. It's too early. We haven't even closed on the asset. And it's a property that has been very well run by the predecessor and it has been institutional ownership for a long, long time. So we will approach the capital spending over the next couple of years, and it will be opportunistic. So it has to be a value creation for us, and we will be paying the standard TIs and LCs in the San Francisco market.

Okay. So you don't expect any kind of redevelopment program, it's more leasing?

That's correct at this point. We initially also said that we ultimately might look into spending some capital on the lobby. But that's not in the near term. More in the longer term. And it has worked very well at One Market Plaza, as you have seen. It helped really to upgrade the quality of the asset. It made it very attractive to major office standards. So our team has experienced that since 2008 and has a good track record there.

And do you expect to expand your San Francisco team now that you're growing there?

Well, our San Francisco team has been quite strong already, historically. You might know that we are managing a Fund VII property called 50 Beale. That we bought opportunistically in September of 2014. At that time it was 90% leased. Currently it's close to 100% leased. And there again we are looking at putting in a certain amount of capital to reinvigorate the property, finishing and freshening up the lobby. So we have a lot of boots on the ground in San Francisco. We are very comfortable that the team is capable to do One Front, especially since we have not that much of a role at One Market Plaza. We wish we had more space at One Market space to lease. And 50 Beale is easily managed by the staff there. And Ted and his team are already hats on, focusing on One Front, and really focused on getting early renewals in that property.

Okay. Would you want to move beyond the urban core there, if you found opportunity?

We are really focused, as in all our three markets, on the CBD.

Okay. All right, great. Thank you.

Thank you, Jamie.

Ladies and gentlemen, we have reached the end of our question and answer session. I would like to turn the call back to Mr. Albert Behler for closing comments.

Well, thank you all for joining us today. We are really looking forward to providing an update on our continued progress. When we report our fourth quarter and year-end results in February of 2017. Bye-bye.

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