Paramount Group Inc (PGRE) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Paramount Group fourth-quarter 2016 earnings conference call.

(Operator Instructions)

Please note, this conference call is being recorded today, February 23, 2017.

I will now like to turn the call over to Jacques Cornet with ICR.

Thank you, operator, and good morning. By now, everyone should have access to our fourth-quarter 2016 earnings release and the 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 words such as well, expect, should, or other similar phrases, are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Therefore, you should exercise caution in interpreting and relying on them. We refer you to our SEC filings for more a detailed discussion of the risks that could impact our future operating results and financial condition.

During the call, we will discuss our 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 fourth-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 will turn the call over to Albert.

Thank you, Jacque, and good morning, everyone. Our core FFO for the fourth quarter was $0.18 per share, bringing our full-year core FFO to $0.84 per share. Wilbur will cover our financial results in greater detail later on.

2016 was a very eventful year for us, whether it was on the leasing front, where we leased over 734,000 square feet of space, positioning us well in our goal to deliver long-term NOI growth; on the capital markets front where we refinanced $1.35 billion of debt on very attractive terms, thereby fortifying our balance sheet for years to come; or on the capital allocation front, where we completed the acquisition of One Front Street, a Class A office building in San Francisco that we acquired with below replacement cost. Let me spend a few minutes on each one of these items.

Leasing. In the fourth quarter, we leased over 240,000 square feet, bringing 2016 leasing activity to over 734,000 square feet, resulting in a year-end leasing occupancy of 92.7%. While this is up 140 basis points from the prior quarter, it is down 210 basis points from a year ago.

This was no surprise to us as we had been highlighting throughout the year the number of the large block known move outs during 2016. These move outs took place at 1633 Broadway, 1301 Sixth Avenue, and 31 West 52nd Street, and totaled 456,000 square feet. In addition, the last large block known move out took place in early January when ING vacated the 140,000 square feet they were occupying at 1325 Sixth Avenue.

Notwithstanding these significant lease expirations, we are poised to deliver sector-leading same-store growth over the next few years. As Wilbur will highlight later, we expect 2017 same-store cash NOI growth to be between 6% to 9%, and that does not include over $48 million of incremental cash NOI from the releasing of these large block spaces based on backfilling the 596,000 square feet at a blended rate of about $81 per square foot, a number that we have not had trouble achieving.

Just to put things in perspective, that $81 per square foot number includes space at the top of 1301 Sixth Avenue and 31 West 52nd Street, where asking rents are between $90 and $100 per square foot. While Ted will provide details on the kind of activity we are seeing for these spaces, we are delighted to welcome Swiss Re to our portfolio, where they leased about 68,000 square feet atop of 1301 Sixth Avenue, representing about 53% of the remaining [commencement] vacancy at a starting rent of $90 per square foot.

Shifting to Washington DC. In 2016, we significantly outperformed the market, a direct testament to the quality and location of our assets. We leased over 90,000 square feet in our Washington, DC, portfolio at an average starting rent of about $70 per square foot. The leased occupancy of our DC portfolio was 95.5% at year end, up another 130 basis points from last quarter and 530 basis points from last year.

Our goal here was to get the portfolio to over 95% leased, and we are thrilled to have achieved it. The activity here essentially took place in three buildings, 1899 Pennsylvania Avenue, which is now 100% leased, up 11.3 percentage points from a year ago; Liberty Place, which is now 89.9% leased, up 9.8 percentage points from a year ago; and 2099 Pennsylvania Avenue, which is now 82.3% leased, up 19.8 percentage points from a year ago.

In San Francisco, One Market Plaza continues to be very well leased, at 98.7% at year end. Now that we have added One Front Street to our portfolio, our focus will be to derisk the upcoming roll in that building.

Turning our attention to the capital markets. We were very active in 2016, refinancing at $1.35 billion on a long-term basis at a weighted average interest rate of 3.15%. In fact, since December of 2015 through the end of January 2017, we have completed $3.3 billion of property financings between 1633 Broadway, 31 West 52nd Street, 1301 Sixth Avenue, and One Market Plaza, excluding the $575 million recapitalization of 60 Wall Street.

It continues to be very evident to us that all lender types, life insurance companies, CMBS, and balance sheet, love our high quality assets and our proactive management style in maximizing the value of these assets. Wilbur will cover this in greater detail.

Lastly, let me spend a minute on our capital allocation strategy. When we announced the acquisition of One Front Street in September, it was met with mixed reviews. People were concerned about the funding strategy and leverage, all valid concerns which are not lost to us.

We have been doing this for the better part of 20 years, and we have been doing it well. While we might be new to the public markets, we certainly know value, and we know how to maximize it. We closed on One Front Street in December, a centrally located CBD asset that we acquired for $800 per square foot, or a mid-four going-in cap rate.

Recently, Foundry Suite at 505 Howard Street on the edge of the San Francisco CBD sold at $1,200 per square foot, also at a mid-four cap rate. The big difference in value here has to do with the leasing risk at One Front, where over 500,000 square feet, or 80% of the building, is set to roll over the next five years.

To do this deal and acquire it at this basis, we had to move quick, and we did, and are very happy with it. We were committed to funding it through a joint venture structure, or through an asset sale. Although our preference was always to do it through carefully selling the right asset given the upside on One Front Street where expiring leases are on average 20% below market.

Earlier this month, we announced the sale of Waterview, a long-term lease single-tenant asset, for $460 million, or about $720 per square foot, a record price for an asset in Rosslyn, Virginia. When you think about the value of this asset in comparison to what analysts have modeled in their NAV estimates, and taking it a step further to what our stock is trading at, the disconnect is tremendous.

Let me clarify. The average consensus NAV estimate for Paramount is about $20 per share, and in that consensus, Waterview is valued on average at about $445 million. At year end, our stock was trading at a 20% discount to consensus NAV. So the implied value of this asset based on our stock price was $356 million, or a staggering 29% below the price we were able to achieve.

But that's not where the story ends. We did all this in a tax-efficient manner by deferring $393 million of taxes and by recycling capital from Rosslyn, Virginia, into San Francisco CBD, where we expect to stabilize One Front in the mid sixes.

In addition, subsequent to quarter end, we announced the formation of a 95/5 joint venture with GIC, Singapore's sovereign wealth fund, to acquire 60 Wall Street, the US headquarter of Deutsche Bank. The joint venture purchased the asset for $1.04 billion, or approximately $640 per square foot, through a recapitalization of $575 million of new property-level debt. Our economic interest in the asset essentially remains unchanged.

We also made tremendous progress on the sustainability front, where we recently announced that each building in our portfolio has achieved either a Gold or Platinum LEED certification. To our knowledge, we are the only public real estate portfolio to have this distinction, and we are very proud of that. This achievement is a testament to the quality of our assets and brings tangible benefits in our efforts to attract high-quality tenants while helping lower operating costs.

Our goal for 2017 is simple, lease, lease, and lease some more. We know we have work to do in New York, but we are also laser focused on leasing space at One Front that has yet to expire and capture the upside in that asset. To that end, our goal for 2017 is to lease over 750,000 square feet.

Going forward, our lease expirations are very modest. In 2017, we have 569,000 square feet expiring, or 5.3% of the portfolio, and that includes the 140,000 square feet of ING space. The combination of leasing our existing vacancy and the below-average lease expirations will allow us to unlock the significant embedded value in our portfolio.

Let me conclude with some remarks on the macro environment. We are operating in what I would call a stable and improving environment. Growth continues to be positive, albeit at a slower pace. Employment continues to improve, and we continue to see underlying strength in each of our markets.

While there has been increased optimism in our conversations with tenants, particularly those in the financial sector, it is still too early to quantify the impact. That said, any deregulation of the financial service industry and the prospects of increased fiscal spending should drive demand in our markets, particularly in New York.

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

Thank you, Albert, and good morning. Overall, our portfolio-wide leased occupancy was 92.7% as of December 31, up about 140 basis points from September 30. The same-store component of the change was driven primarily by the leases at 1301 Avenue of the Americas in New York and 2099 Pennsylvania Avenue in Washington.

Starting in New York. As Albert said, we know we have work to do, and at 1633 Broadway, we continued to market the 200,000-plus square feet on floors 35 to 38 that came available last April, in addition to the 50,000 square feet vacant on the 25th floor.

As mentioned on our last call, we were moving into early proposal stage on some of the space, and those discussions have advanced. We expect to announce progress on leasing the next time we speak. We continue to see the diverse level of activity from prospective tenants that include the traditional financial services companies, law, and other professional service firms, as well as established media and entertainment firms which gravitate to the building and to the area.

Moving over to 1301 Avenue of the Americas. During the fourth quarter, we made progress on over half of the large block of space that came available last June. As Albert mentioned, we leased 67,680 square feet on the top three floors, floors 43 to 45, to Swiss Re at an initial starting rent of $90 per square foot. The top floor includes an oversized outdoor terrace with Central Park views that proved to be an attractive selling point in the market.

Swiss Re is a new tenant for us, and having executed on a 16-year lease term, exemplifies the type of high-quality tenants we have seen our portfolio attract and retain over recent years. We are now left with about 62,000 square feet on floors 41 and 42, and the building now stands at 93.7% occupancy. The level of market interest in this space is strong, and we have seen a pickup in activity post election. The interest is coming from traditional financial services and law firm-type tenants that are typical users of space at 1301.

At 31 West 52nd Street, we are marketing the 115,000 square feet available on the top five floors. As of last month, we had completed our white boxing of the space, and based on the success we had with marketing the outdoor terrace at 1301, we are again offering a potential outdoor space opportunity with Central Park views. The initial response from prospective tenants on this creative idea has been positive.

We are also about to kick off a lobby renovation that will look to do lighting and ceiling upgrades that enhance and modernize the boutique atmosphere of this building. The prior lease on this top-floor block of space included in-place rents in the mid $60s per square foot, whereas the market rate is significantly higher, and we are asking north of $100 per square foot. Similar to 1301, we have seen a pickup in the level of activity post election year, with the majority of prospective tenants being law firms and boutique financial service firms.

At 1325 Avenue of the Americas, we just took back 140,000 square feet of the old ING space in early January, and work to white box that space has begun. As we begin the leasing effort here, we consider this space to be an attractive price point for more value tenants in the Midtown market and is certainly in a different price point compared to other opportunities.

Shifting to Washington DC. Post election, we have seen the market begin an increase in activity. As we indicated last call, we have some leases out, and during the fourth quarter, we signed leases on just over 21,000 square feet, with the majority of that being at 2099 Pennsylvania Avenue. With an overall DC portfolio lease percentage of 95.5% at year end, we do not have a lot of space to lease, and we continue to like our position in the market with a focus on A locations in the CBD, with trophy assets driving outperformance.

Finally, in San Francisco, as Albert highlighted, we added One Front Street to the mix during the fourth quarter, and we are very excited about the opportunity. One Market Plaza, which remains an iconic property in the San Francisco skyline, is 98.7% leased as of year end. What we have seen with One Market Plaza and extending to the broader market supply side along the Mission and Market Street corridors is that there is not much space available in the near term. When there is lease roll, we continue to see good activity ahead of expirations.

In this environment, we are very excited to now have One Front Street in the fold. As we have discussed since we announced the acquisition, the opportunity in this property is substantial. It is an opportunity we are working to achieve right away.

Based on our initial months of owning and operating the property, we feel even more confident in our ability to address a good portion of the lease rolls sooner rather than later and achieve an outcome that creates value for our shareholders.

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

Thanks, Ted. Yesterday, we reported core FFO of $0.18 per share for the fourth quarter, bringing our full-year 2016 core FFO to $0.84 per share, or 3.7% better than our 2015 results. The 2016 core FFO of $0.84, however, was at the low end of our revised guidance and was driven primarily by a true up in income taxes and higher professional fees.

Our share of cash NOI for the quarter was $77.2 million, up $1.9 million, or 2.5% from the prior year's fourth quarter. Cash NOI for the full year was $309.1 million, up $800,000 from the prior year.

If you recall, our original guidance had assumed that our full-year 2016 cash NOI would be lower than 2015 by $10 million to $15 million. This was due to the large block lease expirations throughout 2016 that we had been highlighting all along. The better-than-expected cash NOI result in 2016 was driven by primarily $17 million-plus of termination income, a non-same-store item that we typically don't factor in our guidance.

While the lease rate of our portfolio was 92.7% at year end, or 210 basis points lower than the prior year, the overall occupancy of our portfolio was 90.4% at year end, up 110 basis points from the prior year. This occupancy gain, notwithstanding the significant lease expirations in 2016, was largely driven by our back leasing efforts, where tenants are now in occupancy.

Over the past year, in every earnings call, we have talked about the $89 million of contractual pro rata annualized cash rent, a surrogate for cash NOI, that we had locked in but wasn't in our 2016 cash NOI figures. We tried to dimension how much of that $89 million became cash paying on an annualized basis. However, our investors wanted us to simplify the math. They wanted to know exactly how much of that $89 million would become cash paying in 2017. So we did simplify it, the math, and expect $57 million of the $89 million to become cash paying in 2017.

Our mark to markets for the quarter were 2% on a cash basis and 1.5% on a GAAP basis. Mark to markets for the full year of 2016 were 3.6% cash and 10.3% GAAP. But for the impact of 89,000 square feet of above-market leases that were terminated in 2016 and subsequently released at market with very low concession packages -- all positives, I might add -- our cash and GAAP mark to markets would have been over 10%.

Turning to our balance sheet. We ended the quarter with over $760 million in liquidity, comprised of $192 million of cash and restricted cash and $570 million of availability under our revolving credit facility. Our outstanding debt was $3.3 billion at a weighted average interest rate of 3.7% and a weighted average maturity of 5.7 years. 80% of our debt is fixed at a weighted average interest rate of 4%, and the remaining 20% is floating at a weighted average interest rate of 2.3%.

Subsequent to quarter end, we completed a $975 million refinancing of the 1.6-million square foot two-tower Class A One Market Plaza in San Francisco. We had tremendous interest from the market as evidenced by the participation and execution of this deal. The new seven-year interest-only loan is fixed at 4.03% and matures in January 2024. We retained $23 million for our 49% share of the net proceeds after repaying the existing $873 million loan that had a weighted average interest rate of 6.12%.

Albert touched upon earlier how active we have been in the capital markets. Just to put things in perspective, when you look back prior to December 2015, just about 14 months ago, our weighted average cost of debt capital was 5.35%, and our weighted average maturities just under two years. Since then, we have completed over $3.3 billion in financings, lowering our cost of debt capital by 165 basis points to 3.7% and well laddering and extending our maturities to 5.7 years today. No small feat. And we have done it through balance sheet lenders, life insurance companies, and the CMBS market.

While interest rates are still at historic lows, they are poised to increase further in 2017. We are very happy to have taken advantage of the interest rate environment in 2016 by refinancing 90% of our portfolio over the past 14 months.

Looking at 2017 earnings guidance, we expect 2017 core FFO to be between $0.83 to $0.87 per share, or $0.85 per share at the midpoint of our guidance. Our 2017 estimate of $0.85 per share, when compared to the $0.84 per share for 2016, includes assumptions regarding increases and decreases in various items at the midpoint of our guidance as fully summarized in our press release.

We estimate that our share of cash NOI at the midpoint of our guidance will be $320 million, or $11 million higher than 2016. Excluding the impact of non-same-store adjustments, including acquisition and disposition activity as well as lease termination income, our same-store cash NOI is expected to grow 6% to 9%, which equates to about $0.08 per share.

Other assumptions in our 2017 guidance include an $0.08 increase in cash NOI from the acquisition of One Front Street and 60 Wall Street, which was previously under the [Front] business structure and accounted for at fair value, and therefore not included in cash NOI; a $0.01 increase in fee income net of taxes; a $0.02 decrease in interest expense as we look to delever our balance sheet by repaying over $400 million of outstanding debt, including the $230 million outstanding under our revolver, using proceeds from the sale of Waterview.

These positives are partially offset by a $0.07 decrease in cash NOI from the sale of Waterview, which is expected to be completed early in the second quarter; a $0.06 decrease in lease termination income; a $0.03 decrease in streamlined and FAS 141 lease revenue; and a $0.02 increase in G&A, almost all of which is non-cash resulting from a new layer of equity comp amortization.

In addition to my commentary and the data provided in our press release with respect to 2017 earnings guidance, we have included a simple graphical chart in our investor presentation to help investors and analysts navigate through the various components of our guidance. Our investor presentation also contains a slide on future NOI drivers that should help with understanding the significant embedded growth in our portfolio. I encourage you to review this presentation, which can be found on our website at www.paramount-group.com.

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

(Operator Instructions)

Tom Lesnick, Capital One.

Hi. Thanks, and good morning.

Good morning, Tom.

First, I just wanted to clarify your comments about the free run burn off, that $67 million of the $89 million you were talking about, then the bridge for -- from where we are today in cash NOI to the end of 1Q. It looks like you guys produced around $76 million of cash NOI in 4Q. What was the run rate at the end of the quarter on 12/31? And how much of that $67 million should we expect to hit in 1Q?

Sure. Tom, it's Wilbur. Maybe I'll walk through a couple of numbers and a couple of moving pieces there. The fourth quarter cash NOI was about $77 million.

If you look at our supplemental on page 9, it talks about a $2.5 million of lease termination income in that number. So if you were to back out the $2.5 million of termination income, you'd come with a fourth-quarter run rate of $74.5 million. Annualizing that will get you to about $298 million as your starting point.

If you look to our lease expirations, we have about $35 million coming off due to expirations in 2017. When you back that out and you add the $57 million, you will come about to the $320 million cash NOI guidance that we provided. This is just rough math, back of the envelope, but should get you to that number.

Okay. That's very helpful. And then with respect to GAAP accounting, how should we expect lease recognition to occur on Gannett and/or Bleacher Report in first half of 2017?

We are not commenting on any specific tenants. I think your question -- make sure I understand your question.

You saw a drop in our straight-line rent revenue, and that was really resulting from an adjustment rebook. But straight lining, and we typically recognize revenue when the space is ready for its intended use and tenant improvements are completed.

There has been a big shift in the accounting industry practice, not necessarily GAAP, but industry practice on when you start to recognize revenue. We took our lumps in 2016 with respect to that.

That's why our straight mining dropped off tremendously in the fourth quarter. But the way to think about it is, we don't recognize revenue on a GAAP basis when tenants get possession, but rather when the space is ready for its intended use.

Got it. Okay. That's helpful.

And then turning to G&A real quick. Obviously, a pretty modest bump there in 4Q. Is that just the timing of stock-based comp accruals since the IPO was also in fourth quarter, or was that due to something else? How should we be thinking about that run rate on a go-forward basis?

We provided G&A guidance being $0.02 higher in 2017 versus 2016. All of that $0.02 really is driven largely by non-cash G&A amortization of equity comp.

If you were to look at our history, we've been public, call it, stabilized since 2015. It's a four-year vest, so you would expect until this fully cycles for four years a modest bump in non-cash G&A and that's probably how we would like you to think about it. We dimension in our supplemental on page 9 the impact of the non-cash G&A versus the impact of the cash G&A, so you can help with modeling.

Got it. Thanks for that. And then last one from me. One of your competitors is developing a building right across the corner from 2099 Penn in DC. Given that that building is currently roughly 82% leased, how are you guys thinking about your willingness to be aggressive on lease terms to get that leased up in advance of that development, or what's your general thought process with respect to that submarket over the next few years?

Hey, Tom. This is Albert Behler. Our team has been doing very well despite a weak market in Washington, DC, and we don't see any need to be aggressive on our rental rates. We have good activity, and we are confident.

In total, the portfolio is leased, as you can see, 95.5%. By year-end, we have very little expirations for the next couple of years in DC, and this is one of the best buildings in the neighborhood on Pennsylvania Avenue, and we think we can get the rent that we deserve.

All right. Great. That's all I've got for now. I will hop back in the queue. Thanks again.

Sure.

Vincent Chao, Deutsche Bank.

Good morning, everyone. Just want to go back to the cash NOI discussion again here. I just want to make sure I got all the numbers straight.

I thought I heard you say $57 million of the $89 million coming in this year. I thought last quarter we were talking $67 million by the end of the first quarter, so I'm not sure if one is an annualized number and one is maybe just the actual amount you're going to expect to book in 2017.

And then on the lost rent, the roll-offs, the $35 million, is that set that those tenets are moving out, there's no potential to retain them, or is that still a possibility?

So we will take the first part of your question, Vin, just to make sure. You are absolutely right. When we talked about $67 million in the past, that was an annualized number as of the end of the first quarter.

What we tried to do based on feedback we received is simplify and say, hey, just how much of that $89 million will impact 2017? So when you look at that, that number is the $57 million I touched upon earlier.

With respect to your second question, and -- remind me again, your second question that you wanted to --

You had done the rough math of subtracting out $35 million (multiple speakers)--

I'm sorry. With respect to your second question in terms of the expirations and the $35 million coming off, the only known move out that we have dimensioned is ING. That's the 140,000 square feet that came back January 1. So my math there was simply to take out the $35 million because even if you re-lease, there will be a free rent component, so typically you won't have that in cash paying in 2017 anyway.

Okay. Even on a renewal, you'd provide some free rent?

Yes.

Got it. Okay. All right. And the ING I think was about $10 million. Is that right?

(Inaudible) ING is 140,000 square feet. We show you, I believe, in the lease expiration, there's 275,000 square feet coming off at a weighted average rate of $65 and change a foot, so you have the math there.

Got it. Got it. Okay. That's helpful. Moving on just to a different topic here. In terms of the Waterview, obviously, being used to pay for One Front, but I guess we should be looking at that as just an opportunity to pay down some debt. Is that is what is assumed in the guidance is that there will be something that's prepaid?

Yes. If you recall, when we funded One Front, it was before the sale of Waterview, so we drew on our revolver. So currently at year end, you have $230 million outstanding on the revolver. The sale of Waterview is expected to be completed in early second quarter, so we're going to use those proceeds to repay the amounts on the revolver as well as unencumber our Washington, DC, portfolio which we have that on Liberty Place and 1899, and so we are, essentially, going to use all of those proceeds to delever the balance sheet.

Okay. So Liberty Place and 1899 come off. Okay. Very helpful.

And then in terms of just the -- on investment side, given some of the movements in the 10-year and, obviously, some post-election questions out there, curious if there has been any shift in the discussions in terms of foreign interest in New York City office or DC office assets?

Yes. This is Albert. We see still a lot of interest by foreign capital to invest in the safe haven environment of the United States, especially in our markets in the coastal cities, high barrier-to-entry markets.

And we -- if that question also relates to our appetite to invest further, we have been saying, and I think we have been very disciplined over the last 2 1/2 years. We have been just looking opportunistically at potential investments. One Front was that kind of an opportunity that we saw, and we acted on it. We are not intending to pursue aggressively additional investments at this point in time.

Okay. Thank you.

You're welcome.

Nick Yulico, UBS.

Hey, everyone. Just going back to the slide 11 on the presentation, which is pretty helpful on the cash NOI, my question is, the starting point there is what's in your FFO guidance, $320 million of cash NOI. Then you put the lease up of the four large block vacancies, which, if I am reading this correctly, looks like it assumes that that actually is not in your FFO guidance this year?

That is absolutely correct.

Okay. I'm just wondering why. It seems -- is an issue that you don't think it gets -- it's likely to get re-leased this year, or is it even if it gets released, you are just not going to have even any of the free rent commence from a GAAP standpoint this year?

Let me just clarify. That $48 million is not in our cash NOI guidance. You said it's not in our FFO. I want to make sure we understand the distinction. This was, basically, just trying to show the cash NOI drivers, not necessarily the FFO impact resulting from the re-leasing of this space.

So for the space that you have already leased here, that free rent, or if there is cash rent, would be in your FFO guidance. Is that right?

If there was, if it came out -- if the question is, the space that we've already re-leased, will that be contributing towards FFO for the calendar year 2017? The answer is yes.

Okay. But to the extent that you re-lease more of the space and free rent commences this year, is any of that in your guidance range for FFO?

Albert touched upon in his prepared remarks that our goal is to lease 750,000 square feet. Obviously, that includes these large block spaces, so to that extent, it is in our assumptions and it is in our guidance.

Okay. Okay, that's helpful. Just going back to the cash mark to market on re-leasing, it was 5% in the third quarter, went to about 1% in the fourth quarter. What drove that down? And then how should we think about this year, what you are planning for on a cash mark-to-market basis for the New York space that gets re-leased?

This is Albert again. Included in 2016 leasing, there were two above-market leases that were terminated and subsequently re-leased at market rates. So excluding these leases, the GAAP cash basis mark to market were over 10% to the positive for the entire year. Does that help?

Okay, yes. That's helpful for last year. What about for this year as we are just thinking about the [states] still?

This year, we have been saying all along that we think we can be definitely positive in the double-digit, low- to mid-double-digit area.

Okay.

Nick, the only thing I'd say, mark to market, quarter to quarter, obviously, is a function of the space that expires. So there will be fluctuations. And when we talk the double-digit mark to market that Albert referred to, that's what we are targeting for the full year.

Okay. That's helpful. Thanks, everyone.

Blaine Heck, Wells Fargo.

Thanks. Good morning. Ted, I appreciate the commentary on leasing in New York, but wanted to touch on 1633 again. It seems like you are in a similar position as you were last call.

Can you just talk about weather you've seen any of the prior tenet prospects drop out of contention? And then for the tenants you are talking to, are they full floor users, multiple floor users, or any of them looking for the full space?

Sure. You characterize it as we are in the same position. I think I would say that a lot of these proposals have moved forward, and in fact, you may have seen in the papers, we do have a lease out. That's all I can really say about 1633 in terms of what we have going on, specifically with leases out.

We do have a lease out right now. But activity remains strong, it remains strong across our portfolio, and certainly, even after the election, too, I feel like we have seen an uptick in activity and maybe even garnered some more proposals from tenants.

So we've got business services-type users, tech users, financial services. They all continue to look at 1633 and I'd say that none of them that we talked about on the last call have dropped off. It's just a process of them going through proposal stage with us. And it varies from single floor to the whole block are the types of -- in terms of size.

As we have set on previous calls, these large block spaces, it takes a lot of time to negotiate a lease on those. I would like to remind you of that. But we have tremendous confidence that the leasing will be done at 1633 as well as 1301 at the other vacancies we have.

Okay. That's great clarification. And then, Albert, you touched on your focus to derisk of the upcoming renewal on One Front Street. Can you -- or maybe this is for Ted -- just go through some of the major upcoming expirations there and give maybe some color on your confidence of renewal or move out?

Well, it's a little early. We mentioned before that there's a lot of roll coming over the next couple of years. So it will be about 100,000 square feet per year. We met with all the tenants and had very good discussions, but it's too early to establish any specific targets there. We are very excited about this asset, and we are confident that we can also achieve here our goals.

Okay. Great. Thanks guys.

You're welcome.

Jamie Feldman, Bank of America.

Great. Thanks. Good morning, everyone. Going back to the 750,000 square feet, can you talk to us about how much of that is leases that are already signed versus leases you expect to sign?

The 750,000 square feet of leasing activity is for the full year 2017.

So it is new leases being signed.

So then maybe renewals versus new is maybe a better way to ask it.

I wouldn't say it that way. It's 750,000 in total for the entire portfolio.

I know. I'm just trying to think about how you are thinking about tenants that are already in the portfolio versus tenants you are trying to attract to the portfolio.

It's a mix of tenants, I would say. As you recall, we had, in our last year, the opportunity of moving a short guarantee from one asset to another asset because it really had different space demands, and we are very proud of having the opportunity with tenants who really like Paramount and its portfolio to stay with Paramount if they think that the current space is not sufficient for them. So there might be an opportunity here and there as well in our portfolio for this year.

Okay. So there's no way to really -- maybe I'm missing something, but is there a way to quantify how much of your leasing outlook would be --?

We didn't give the leasing percentage. I know what you're trying to probably do is to figure out how much is occupancy increasing leasing versus, leasing that continues to just be there. We have not provided that as a component of our guidance.

Okay. So my next question is probably useless also. Just thinking about year and occupancy, do you have a number for that in your guidance?

No, we do not provide a year-end targeted occupancy for 2017.

Okay.

Obviously, we have all the moving pieces in terms of the amount of leased square footage that's expiring, so we've certainly given you the various components where you can do the math and layer that in, but we have not provided a set target.

Okay. That makes sense. And then can you just talk about maybe on an AFFO basis, walk us through the components like CapEx and where you think AFFO could end the year based on your guidance?

Sure. We are well aware that our AFFO is on the high end. This is not something that's lost on us. We knew that going into 2016, and it will be on the high end in 2017.

Ours is a capital-intensive business, and 2017 will be another capital-intensive year given the amount of leasing we have to do for the large block. And the AFFO, as you know, typically, you are going to fund the [PIs] and the leasing commissions well ahead of this coming into our earnings. So 2017, it will be elevated, but beyond that, we see a really good trajectory on where the earnings start to come in and the CapEx is effectively flushed out for the earnings growth that we're going to see in years to come.

Can you give an estimate for CapEx this year based on the leasing you think you will do?

No, we didn't give an estimate for CapEx this year in the components. And just to clarify, we said CapEx will be elevated again in 2017, which will result in the AFFO being high -- low.

Okay. Just finally, maybe talk about the decision, the 60 Wall Street recap, the decision to stay in the asset, and is there any potential for further investments at GIC?

You mean investments with GIC in our portfolio?

Either in your portfolio or additional assets.

Well, I don't --

And with relationship going forward.

We have a very good relationship, of course, with GIC. Otherwise, they wouldn't have made that investment. It's a large equity investment. We are very proud of the relationship, and I'm looking forward to a long relationship. I can't prognosticate at this point whether there will be additional transactions other than 60 Wall.

With regard to the first part of your question, why did we stay in? We believe in that asset. We think there's potential in 60 Wall. We invested in 60 Wall at a very attractive price, and in addition, we generate management fees for the Company.

Okay. Thank you.

Jed Reagan, Green Street Advisors.

Good morning, guys. Maybe just following up on Jamie's question on 60 Wall, how did you settle on the 5% stake is the right number. To your comments just then, if you are a believer in asset, why not maybe a larger stake on balance sheet for Paramount?

Well, we are very comfortable with the 5%. We initially had 5% invested as a general partner of two funds of the predecessor, and that's a good position to be in. And that might change over time if there's an opportunity, but I don't want to project that at this point.

Okay. On the $48 million of incremental NOI associated with those larger vacancies in New York, would it be fair to expect that you have those leases substantially [backed total] lease on a GAAP basis by the end of 2018?

I think that's very fair. Our goal is to get it done by the end of 2017.

Okay. All of that space?

Yes.

Okay. And then the 750,000 of leasing to do this year, would that be -- would you expect that to be back-end waited, or would that be a steady flow over the course of the year?

That's very hard to say, Jed. As I mentioned before on this call, these large block leases are very hard to prognosticate. We've said in the past there's a lot of our leases are back ended, back year ended. I would think in this year it will be more steady during the year because of the activity that we see.

Okay. That's helpful. And just generally on the Manhattan market, have you seen market rents and concessions changing recently? Has there been, even in the last three months since the last time we talked, has there been a softening trend in terms of some of those metrics? What's your outlook for 2017?

Concessions really are, in each deal, are very specific to the deal. They are a function of term. They are a function of credit, a function of the size of the deal.

I think what you are seeing is between 10% to 12% of first year's rent in New York being the market for concessions, and I think we are right in line with that market. We are seeing some deals that are longer term, and longer term demands more concessions to get the deal done. And I think our deal with Swiss Re that we announced exemplifies that.

That 10% to 12%, has that meaningfully changed versus, say, 12 months ago?

It's probably trending a little closer to 12%, but I wouldn't say it's meaningfully different in the last 12 months.

Okay. And then just as you -- maybe one other one on leasing. 1633 retail, any update their and expectations for when you might have some news?

There is no update to share at this point. There is activity. As we have said over and over, we want to be very selective, but I can't give you any update on this. We are working with potential tenants on that space, but nothing is finalized at this point.

Sure. Okay. And then just a last one for me. As you think about your portfolio as mainly Manhattan focused at this point, do you expect to diversify that increasingly to your other markets, or do you like the geographic mix where it stands today?

We have been saying all the time that we are opportunistically pursuing it in our three markets, but really just in our three markets where we are, New York, Washington, and San Francisco. Washington seems to be a little bit more top-heavy, a little bit more expensive, so I wouldn't expect that we would look at anything there. But I would've said that if you would've asked me 12 months ago about San Francisco, and then we had this great opportunity with One Front. So we are really opportunistic about approaching our markets, and there's no specific percentage share that we want in each of the three markets.

That's helpful. Thanks very much, guys.

Brad Burke, Goldman Sachs.

Hey. Good morning, guys. Another question on your future cash NOI glide path. You [held] with the upside, obviously, from commencing leases that have already been signed and then leasing up the four big blocks of space. Looking at your lease percentage right now, it's 92.7, and those four big blocks would add a little bit more than 6 percentage points to occupancy.

So, first, is it correct to look at this illustration as implying occupancy levels that are in the high 98% range? Second, how should we think about the long-term stabilized level of occupancy that you think is reasonable for your portfolio?

Sure. Brad, the first thing I'd just touch upon is that in your starting point of 92.7%, remember, there is lease expirations that are coming out, namely, the ING space that's a known move out. So the 92.7% we would expect to drop again at the end of the first quarter, right? So there's moving pieces. So when you start to add this, you will tend up to be higher, but it wouldn't get to the 98%.

To add to this, historically, our portfolio in the predecessor has always been leased pretty stable at the high 90% levels, 97%, 98%. I'm very confident that we should achieve this over time.

If you look at the portfolio other than the assets where we just had our recent rolls in 2016, they are pretty much at 96% plus, somewhere between 96% and 99% leased. And we should achieve that. That's why we are investing in these kind of assets.

Okay. And then just another one on the guidance. When you increase your guidance for 2016, $0.01 of that was attributed to One Front Street, which was closing in December.

I look at that as implying more than $0.08 of FFO growth in 2017 for One Front Street, not to mention 60 Wall. I realize that it's a little tricky to extrapolate a single month, but is there any reason to think that the FFO contribution from that acquisition is decelerating in 2017 versus the initial run rate in 2016?

So to dimension your point, when we increased the guidance in 2016 and allocated $0.01 to One Front, that was on an FFO basis. The components of our guidance for 2017 and the $0.08 that you reference, that's the cash NOI component of it. So we are comparing two different things.

Okay. That's it for me. Thank you.

Thank you.

(Operator Instructions)

Morgan Stanley.

Good morning. This is Sumit for Vikram. How are you guys doing?

Good. Doing well.

Great. Thank you for all the clarification on the free rent stuff. I'm actually going to ask another question on that just so that we are crystal on this. Going back to Vincent Chao's question earlier on how much we should expect in terms of burn off in Q1 2017, $67 million was the number reported the last time, and backing into stuff and taking out the $16.8 million that was already burned off per slide 11, I guess we are looking at $50 million burning off just backing into stuff?

Let me help clarify. One, the slide 11 -- the $67 million that was quoted before as burning off was not a quarter. That was a $67 million annualized number that was going to begin to burn off as of the end of the first quarter of 2017.

I see, okay.

So a lot of the analysts had trouble with that and said, hey, can you simplify the math for us and just tell us how much of your $89 million that you've been telegraphing all along will physically burn off in the year 2017? Too that end, we clarified and said off that $89 million, which is still locked in today, $57 million will be realized in 2017.

What you see on slide 11 is the delta between the $57 million and $89 million that because it's not coming in 2017, it will come in future years. Therefore, it's a contributor to the future cash NOI drivers.

We make okay. That's totally fine. Got it. Also, last quarter, you disclosed how much of straight-line rents were related to free rents. Do you have that number for this quarter?

We did not disclose that. As I mentioned earlier, this quarter, straight line was clouded by some true up adjustments, essentially. We booked $0.02 of adjustments in straight lining, which is why it was significantly lower than our quarterly run rate. So it was too many moving pieces for us to mention that.

Okay. Thank you so much.

You're welcome.

We reached the end of our question-and-answer session. I would like to turn the floor back to Mr. Behler for closing comments.

Thank you all for joining us today. We look forward to providing an update on our continued progress when we report our first-quarter and year-end results in May. Thank you.

Thank you, ladies and gentlemen. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.