Paramount Group Inc (PGRE) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Paramount Group Second Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note that this conference call is being recorded today, August 4, 2017.

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

Thank you, operator, and good morning. By now, everyone should have access to our second quarter 2017 earnings release and the supplemental information.

Both can be found under the heading Financial Information Quarterly Results in the Investors 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 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 expect.

Therefore, you should exercise caution in interpreting and relying on them.

We refer you to our SEC filings for a more 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 second quarter 2017 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.

Thank you, Jacques, and good morning, everyone. Thank you for joining us today.

As you can see from our release yesterday evening, we had a very successful quarter of operating performance, and we continue to make progress on the leasing front. Our core FFO was $0.23 per share, and we have started to see some of the benefits of our previous leasing efforts as same-store cash NOI for the quarter was up 14.4% compared to the same period last year. Given these strong results, we are raising our 2017 core FFO guidance as well as our expectations for 2017 same-store cash NOI growth. Wilbur will cover this in greater detail.

Let me begin my remarks with leasing, which remains our primary focus. As I said over our previous 2 calls, 2017 will be a more even year when it comes to leasing. During the second quarter, we leased over 290,000 square feet, a very strong positive cash mark-to-markets of nearly 20%. This quarter's leasing was slightly ahead of last quarters, bringing our leasing effort to over 577,000 square feet for the first 6 months of the year. And we have started the third quarter on a very strong note by leasing another 106,000 square feet at 1633 Broadway.

Our year-to-date leasing volume is now over 680,000 square feet, which is slightly shy of the 750,000 square foot leasing goal we set out for the entire year. Based on our year-to-date activity and the deals in the pipeline, we are increasing our full-year goal to 1 million square feet.

While Ted will provide more details on leasing, I want to take a minute to give you my observations on each of our markets, beginning with New York. As I just mentioned, in July, we completed a 106,000 square foot lease at 1633 Broadway. This lease covered 2 of the former Deloitte floors on 35 and 36, which now leaves us with the remaining 106,000 square feet on floors 37 and 38. With this signing, leased occupancy at the building is now above 90%, and we are poised to increase this further.

At 1301 Sixth Avenue, leased occupancy increased by 230 basis points this quarter to 93.7%. During the quarter, we signed a 41,000 square foot lease for the 12th floor. And while this space was not one of former Commerzbank floors, it was previously vacant. We still have 61,000 square feet of Commerzbank vacancy to deal with and currently have a proposal out for that entire space, which would bring the leased occupancy in that building to over 97%.

Turning to 1325 Sixth Avenue, we are working to chip away at the 140,000 square foot block of ING space that came back to us earlier this year and currently have a 24,000 square foot lease out for signature. Over the last few years, a lot has been said about the Sixth Avenue submarket losing its cache. The facts, however, tell a different story.

If you look at 2017 leasing activity in Midtown, 3 of the 5 largest deals were on Sixth Avenue. Leasing activity along the Sixth Avenue corridor has remained solid, and we have been very successful.

Since our IPO in November of 2014, we have leased over 820,000 square feet at 1301 Sixth Avenue and 1325 Sixth Avenue. These leases have a weighted average lease term of about 13 years and were executed with high-quality tenants that moved to Sixth Avenue, many from other submarkets. We continue to see solid and persistent demand for Sixth Avenue space, and we will continue to grab our fair share of it.

Turning to 31 West 52nd Street. As we mentioned on our last call, 2 floors aggregating about 52,000 square feet expired in July. Leased occupancy in the building is now around 78%. These floors, which are adjacent to the existing vacant block, provide us with 167,000 square feet of space at top of the building.

With its boutique and discerning tenant base, along with a unique design, 31 West has been fully leased over the last 10 years. It has never had any real vacancy. This presents us with a terrific opportunity. We are also in the final design phase of our lobby upgrade, which will add to the opportunity to create significant long-term value at this asset.

In Washington, D.C., same-store leased occupancy ticked up another 80 basis points, and our portfolio is now 94.6% leased. We continue to outperform the market and expect to see additional progress at 2099 Pennsylvania Avenue and Liberty Place.

We had another tremendous leasing quarter in San Francisco, where we leased 159,000 square feet at cash mark-to-markets of over 55%. 109,000 square feet of this activity took place at One Market Plaza, where we signed 3 leases with starting rents of over $100 per square foot. Activity like this continues to support our view that this is the best asset in the market.

The remaining 50,000 square feet of leasing took place at One Front, where we are executing our leasing strategy quicker than forecasted when we originally purchased the building. It is only 7 months into our acquisition, and we are nearly halfway through the 5-year lease exploration opportunity we had when we bought the building. Since the acquisition, we have completed 230,000 square feet of leasing with cash mark-to-markets of over 30%.

Turning to the balance sheet. During the quarter, we completed a $300 million refinancing of 712 Fifth Avenue. This financing represents the final portion of the comprehensive refinancing efforts that we started about 20 months ago. This has resulted in lowering our average interest rate by 190 basis points from 5.4% to 3.5% today.

In addition, our maturities are well levered, and we have no debt maturities until 2021. In July, we increased our ownership interest in 50 Beale Street to about 31%, up from 3%. This property is a 661,000 square foot Class A office building located in San Francisco's south financial district, just adjacent to the Transbay terminal. The transaction values the building at $517.5 million or about $780 per square foot, just shy of the best square foot values at which we acquired One Front Street about 7 months ago.

At a time where we continue to see others in the San Francisco market willing to pay in excess of $1,200 per square foot for stabilized buildings with no immediately clear way to add value, we look for value-add opportunities. The building, which is currently 78.2% leased, included the assumption of $228 million of existing debt. Accordingly, we funded approximately $80 million for our share of equity capital.

Lastly, subsequent to quarter end, the Board of Directors authorized a $200 million share buyback program. We view the authorization as another tool available to us as we remain opportunistic and balanced in our approach to allocating capital.

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

Thanks, Albert, and good morning. Our leasing efforts in the quarter, net of expirations, resulted in a sequential increase in same-store leased occupancy of 70 basis points from 90.2% at March 31 to 90.9% at June 30. We continue to show steady progress with leasing, and as Albert said, we are upping our leasing target for the year to 1 million square feet.

Throughout the portfolio, we are seeing good activity where we have space to market, which right now is primarily in New York and San Francisco. Let's look at it market-by-market.

We'll start in New York. The leased occupancy of our New York portfolio increased by 40 basis points, driven by the lease up of vacant space at 1301 and is poised to increase further with the 1633 lease announced subsequent to quarter end.

At 1633 Broadway, with the lease we signed in July, we are now halfway through leasing up the former Deloitte block space with the 37 to 38 floors remaining. With the July activity, leased occupancy is now north of 90%, and interest for the remainder of that space remains healthy, as we are exchanging proposals and continuing with showings to a wide variety of user types.

Also during the quarter, we signed a lease for our new retail tenant, Princi. As we talked about last call, Princi is a joint venture between Starbucks and an Italian bakery that has been very successful in Europe.

At 1301 Avenue of the Americas, during the quarter, we signed a long-term 12-year lease with a boutique financial services company for approximately 41,000 square feet on the previously vacant 12th floor that Albert discussed. Most of the remaining available space is in the tower on floors 41 and 42 as well as part of 38. And we're in advanced proposal stage for these remaining floors and expect to have more leasing to announce the next time we speak. These last 2 floors plus include the final portion of the Commerzbank space. Closing on these floors would take the building's leased occupancy up over 97%, with no significant expirations until 2021.

At 1325 Avenue of the Americas, preparation and white boxing of the former ING space is due to be complete by the fall. Though many showings continue to look at this space in its as-is condition as well, we currently have a lease out for signature on 24,800 square feet on the 10th floor. And we continue to feel good about this space offering as an attractive price point for more value tenants in the Midtown market, especially given the strong activity along Sixth Avenue, as this is certainly the different price point compared to our other opportunities.

At 31 West 52nd Street, including the recent July expiration that Albert referred to, we have about 167,000 square feet available across the top 7 floors. This building is distinctive in a couple of ways. First is in the design. We think of it as a boutique-type, large office building of the highest quality. Second, given its prime location between Fifth and Sixth Avenues, 31 West attracts a fairly selective tenant base. Our objective is to maintain that nature of the building that attracts this tenant type, and as Albert mentioned, we are moving ahead with a lobby upgrade. Activity remains healthy, and tours and proposals are ongoing.

Touching on Washington, D.C. Our D.C. portfolio is 94.6% leased, an increase by 80 basis points on a same-store basis over the prior quarter, driven by additional leasing at Liberty Place and 2099 Pennsylvania Avenue. We do not have much available space, and so there's not much new to report on the leasing front.

It is the same story. We have great assets, no meaningful expirations in the next 4 years and only 1 full floor available in the portfolio at 2099 Pennsylvania Avenue, and we remain well positioned in the market.

In San Francisco, our portfolio is full at 98.2%, which is up 230 basis points from the prior quarter as we continue to renew and extend expiring leases at One Front Street. During the quarter, at One Market Plaza, we had some early renewals and signed leases for a total of over 109,000 square feet at market-leading rates.

Just to elaborate on the point Albert made about some of our leases, over $100 per square foot. We think the ability to sign leases at these rates over an extended period of time, as we've been able to do, sets one market apart in San Francisco and is an indicator of the underlying value inherent in this asset.

At One Front, we continue to execute on the opportunity. During the second quarter, we signed almost 50,000 square feet of renewals at cash mark-to-markets of nearly 70%. We have also been pleased with an average lease term of 8.5 years on these renewals. And we continue to have discussions with the remaining tenants that have expirations on the horizon.

Nevertheless, for the rest of this year, we anticipate signed renewal activity to moderate, given the timing of the remaining role is dated a bit further out, but it has certainly been an active first 7 months of ownership. Given this leasing success in San Francisco, we've eliminated over 60% of our 2018 lease expirations in this market since year-end, and we now face approximately 45,000 square feet of expirations in 2018.

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

Thanks, Ted. We had what I would characterize as a very strong quarter highlighted by solid financial and operating metrics. Our core FFO for the quarter was $0.23 per share and was driven by sector-leading same-store performance.

Over the past couple of quarters, we had been highlighting that the first quarter of 2017 would be an inflection point in our cash NOI and that the beginning of the second quarter, we anticipate tremendous same-store growth as free rent from past leasing efforts begins to burn off.

Our second quarter results certainly validate that expectation as our same-store cash NOI grew 14.4% when compared to the same period last year. As a reminder, same-store cash NOI does not include lease termination income. Cash NOI, which includes lease termination income as well as cash NOI from properties that were acquired or disposed in the comparable period, grew by 18.2% over the same period last year.

As Albert touched upon earlier, based on our results for the first half of the year as well as the outlook for the remainder of the year, we are raising our full year 2017 core FFO guidance to a range of $0.86 to $0.90 per share from our prior year range of $0.83 to $0.87 per share. That represents a $0.03 per share increase from the midpoint of our prior guidance, of which $0.02 results from improved operation and $0.01 is from the acquisition of 50 Beale Street in July.

In addition, we are increasing our same-store cash NOI assumption to be between 8% and 11% or 9.5% at the midpoint of our range versus our prior assumption of 7.5% at the midpoint. The second quarter was also very eventful in terms of transaction activity. Let me spend a minute on some of these items as well as the related accounting nuances.

On May 3, we closed on the sale of Waterview for $460 million, which resulted in a financial statement gain of $110.6 million. We retained net proceeds of approximately $457 million and used the net proceeds to delever our balance sheet by repaying approximately $371 million of debt, including the $200 million outstanding under our revolving credit facility.

On May 5, our consolidated residential fund sold 80% of the fully-entitled land at 75 Howard, a high-end residential condo project in San Francisco. In connection therewith, the fund recognized a $23.4 million net gain, of which our share, net of income taxes, was $1.7 million. Because this gain resulted from the sale of non-depreciable real estate, we have included it in the NAREIT-defined FFO but have excluded it from our core FFO.

On June 13, we completed a $300 million refinancing of 712 Fifth Avenue, our 50%-owned joint venture. The new 10-year, interest-only loan is fixed at 3.39%. The venture retained approximately $40 million after repaying the existing $247 million loan reserves and closing costs, which was distributed to partners on June 30.

Because 712 Fifth Avenue was one of the assets that was not stepped up to fair value at the time of our IPO, our historical basis in the asset became negative by approximately $15 million as a result of the $20 million distribution we received. In accordance with GAAP, we were required to treat the excess distributions as income. So while this income is once again included in NAREIT-defined FFO, we have excluded it from our core FFO.

And lastly, on July 17, we increased our economic interest in 50 Beale Street to 31.1%. This was done through a series of transactions, which included a direct ownership by Paramount and an indirect ownership through a newly-formed joint venture. What it means from an accounting standpoint is that 50 Beale, which was previously owned by certain Paramount funds and accounted for as an investment in unconsolidated funds, will now be consolidated into our financial statements from the date of acquisition. And the 68.9% that we do not own will be reflected as noncontrolling interest.

Turning to our balance sheet. We ended the quarter with about $1.1 billion in liquidity, comprised of $297 million of cash and restricted cash and $800 million of availability under our revolving credit facility. With the refinancing of 712 Fifth Avenue now behind us, we have completed our refinancing strategy and fortified our balance sheet.

Think about it. Over the last 20 months or so, we have refinanced over $3 billion of debt and lowered our weighted average cost of debt capital by about 190 basis points. Our outstanding debt at quarter-end was $3.04 billion at a weighted average interest rate of 3.5% and a weighted average maturity of 6.1 years.

We have tackled all of our near-term maturities and have no debt maturing until the fourth quarter of 2021. And beyond that, our maturities are well laddered. 87% of our debt is fixed at a weighted average interest rate of 3.6%, and the remaining 13% is floating at a weighted average interest rate of 2.9%.

Lastly, in our continued effort to improve our best-in-class transparent disclosure, we have increased disclosure surrounding same-store activity in our supplemental package. In addition, we have included a schedule of free rent burn off in our investor deck. Both of these items are available on our website, and we hope you find the added information helpful.

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

(Operator Instructions) .

Our first question comes from the line of Rob Simone with Evercore.

Ted, I was wondering if you could maybe share some composition, facts around the types of tenants that are currently exchanging proposals on 1633? And then as a follow-up on -- after that, I just have a follow-up on the buyback for Albert.

Yes, sure, Rob. So 1633, we -- again, that building -- I've talked about this in the past. I mean, that building sees with really a wide variety of tenants. But I think what we've seen mostly recently is more kind of business services and creative-type tenants, tenants that are kind of in the newer technology type uses. So that that's been the bulk of our activity there. I'd say less so, the traditional financial service and law firms that we had seen in the past gravitate to 1633. It's definitely more of a creative-type TAMI use. So we have a few -- we have a number of tenants that have toured and a number of proposals that are looking at the remaining space.

Great. And, Albert, on the buyback, I know a lot of this has been a frequently discussed topic. I was just wondering if you guys could maybe share what changed in the board's thinking in approving the program now?

We have been discussing that, as I mentioned before on a quarterly basis, and the buyback has been approved by the board. We'll only use it on a leverage-neutral basis. And as the cash earnings grow, the board's view is to provide management with all additional options that would be available.

Our next question comes from the line of Vikram Malhotra with Morgan Stanley.

Congrats on getting 1633, the leases done there. Just a quick question on the lease. Can you just share any economics? And then just more broadly what you're seeing in the proposals, both on TI free rents and just maybe what the roll-up was on 1633?

So the deal at 1633, it's a mid-70 start on that deal that we announced and that we just completed prior -- I mean, after the second quarter. I think that overall, the proposals that we've been getting -- I mean, we've been -- we've talked about for that block of space, that we think it's a high 70s, low 80s type ask and then a deal somewhere close to there. So the market, I think, has supported that type of ask, and we're getting results out of it.

Okay. And then just sort of the TI free rents, are they kind of in line with what we've been seeing recently?

They are in line with what we've been seeing recently. I think they're not really much different than where they've been since about the same time last year, I'd say.

Okay. And so just remind me, the 70 start, what -- I'm forgetting what -- where was the rent on expiration of Deloitte space?

It was in the upper 70s on a fully-escalated basis. That was the expiring rent. But bear in mind, Vikram, that this space has now been vacant for more than 12 months. So when it does appear next quarter, it will not show up in the mark-to-market statistics.

Yes. No. That's fair. And then just one more question. The 1 million square feet goal, I'm assuming that -- so that includes the renewals in the back half of the year. Does that include any known move-outs or any kind of early renewals?

Yes. It includes the entire package for the entire portfolio, Vikram. We want to be cautious in what we put out there. So we're very confident with the projections. We have a good number of tenants. I know what you're focusing on. We have a good number of tenants looking at the existing vacancies. And the team has done a great push at 1301, especially, but also 1633, and we are focusing on 1325 and 31 West. So these are the 2 last assets. And after that, in 2018, '19 and the following years, we have very few expirations. So we're very excited about this opportunity, and we want to make the best for our shareholders of it.

And Vikram, just to add to Albert's point and your question on the known move-out, we included for the rest of the year the 52,000 square feet that's moving out of 31 West. Albert highlighted that in his prepared remarks as well. So that's the only known move-out that we have talked about.

Our next question comes from the line of Jamie Feldman with Bank of America Merrill Lynch.

Congrats also for the leasing progress. So I guess, the change in the leasing pipeline up to 1 million, is that incremental space to the portfolio? Or is that adding renewals that you think you'll get done earlier?

Yes. We just answered the question a minute ago, Jamie. You might not have heard, when Vikram was on. It's across the portfolio. It's renewals and new space. So all included.

Okay. You guys have the debt on 2 Herald Square. Can you talk about maybe an update on what you're thinking there and how that's playing out?

It's really not a company investment. It's an investment of our mezzanine fund and a preferred equity investment there. That's the only comment we would like to make at this point.

Okay. And then shifting gears to San Francisco, can you maybe talk about -- I mean, I know rents have kind of moderated there. Rent growth has moderated. But with some of the larger developments getting leased up, there's talk that maybe they could start moving again. Can you just talk about your thoughts on rent growth in that market over the next year or so?

Sure. I mean, they have moderated. It's been just around 2% year-over-year. So that's the first time that I think we haven't been in double digits for the last 3 years. But certainly, the market remains very supply constrained. I mean, as availability creeping down maybe below 8% in that market and with what we're hearing is just more and more of the larger box and certainly of the spec construction being leased up prior to it even delivering. Certainly, if you're a large tenant looking for space in the CBD, you really don't have a lot of choices. And those larger deals could drive rents higher. We definitely think that, that could happen. We could see it maybe grow a little bit higher than just the 2% that we've seen year-over-year.

Okay. And then thinking about the share buyback, do you -- is this also a sign you're just -- you're seeing fewer investment opportunities on the acquisition front?

No, that's not really correlated. This is a decision by the board. As I've mentioned before, it's quarterly, discussed on a quarterly basis. We will be, however, very cautious with any potential acquisitions, as we had mentioned before, because of -- assets are trading. We are only looking at really accretive opportunistic investments in all 3 markets if we would do any investment whatsoever.

Our next question comes from the line of Jed Reagan with Green Street.

I guess, maybe just following up on that question. Can you give initial yield on 50 Beale and what kind of stabilized yields you think you can eventually achieve there? And then is there any color on the leasing profile in terms of expected near-term move-outs or in-place rents versus market rents?

Yes. Currently the asset, Jed, is leased 78.2%. So the -- going in cash basis is not really that meaningful. It's in the 3s, but the all-in stabilized should be somewhere between 6% and 7%, similar to One Front. It's an asset in a great location that has upside for the future. And it was owned by a -- majority-wise by a fund that is managed by Paramount. And there was an opportunity that some of the fund investors wanted to divest from the asset. They have achieved a decent return. And we see some substantial upside for the future, but longer term. And we are in the market for all the space that's currently vacant, and we have very good showings. And Ted might add to this.

Sure. Just as Albert said, 78.2% leased. So we have a block of space of just over 100,000 square feet in the low rise of the building. And you may have heard my comment earlier. I mean, 100,000-foot blocks in the CBD are rare right now unless you're willing to go into new construction. And of course, that's at a bit more of a premium. I mean, as Albert said, we think this is similar to a One Front. So rents, in-place rents are somewhere in the mid-50s. We think that they should be in the low-to-mid 70s at the end of the day, upon re-lease, and that still stands at a discount to what the new product is. And yet this sits on Mission Street between Fremont and Beale. So anyone who knows San Francisco knows that's very centrally located.

And when do you think you could stabilize that asset to that sort of 6% to 7% range? And then maybe for Albert, just kind of bigger picture strategically. I mean, did the acquisition signal any kind of thought of geographic shift or sort of changing the long-term mix of how you want your portfolio situated?

To your first question, we think this can be near- to mid-term stabilized, because we have a good activity, as I mentioned before. It's really not saying anything about where we want to focus our entire portfolio. As I mentioned before, we want to be opportunistic in our investment approach. So we would be looking at acquisitions potentials in New York and San Francisco as well as in Washington, D.C. But also, as I had mentioned before, we are not very acquisitive at this point in time, but the market is. We are looking for value opportunities all the time. And when we find low-hanging fruits, as I call it, like this one, we want to be willing. And we are ready to pick it up, but we're very cautious about future investments.

Okay. Appreciate that. And in terms of the share buyback program, do you have a target share price or discount to NAV where you think the buybacks make sense? And maybe just generally how compelling you think the opportunity is as you sit here today?

Yes. We have this quarterly discussion whether we wanted to -- with the board, whether the buyback should be initiated and -- but there is no price set for initiating it.

Okay. Fair enough. Just last one for me. The 1 million square foot leasing guidance indicates maybe another 400,000 or so of leasing the rest of the year. Any sense of how much of that you anticipate coming from New York versus your other markets?

I would say the majority will come out of New York, for sure.

Our next question comes from the line of Rich Anderson with Mizuho.

At 31 West 52nd Street, I think you mentioned 52,000 of known move-outs. Is that in the 167,000 that's currently available? Or is that in addition to?

That is in the 167,000. It used to be 115,000. And you got 2 floors back that are contiguous to the 115,000, which now creates 167,000 square foot block.

Okay. I just wanted to clarify.

In terms of the 1633 leasing, you mentioned mid-70s on the starting rent. I recall Deloitte paying above 80. So maybe check my math on that.

But the second sort of related question is you mentioned the activity on Sixth Avenue being strong still. How much of that is a function of just a downtick in the asking rents that is maybe formulating some incremental interest in Sixth Avenue?

Well, there's no real downtick with regard to -- that's not what we said, and that's not what we mean to say. And here at 1633, this was rent that was in the high 70s, not in the low 80s when Deloitte Touche left the space, and that's more than a year ago. So -- and that was space that really had a major uptick just recently before Deloitte left because they extended it by about 2 years before they left the building. And I think the landlord was in an extremely strong position at that point. And that's not really what a normal market transaction would have generated for that space.

With regard to Sixth Avenue, it's not that we still see Sixth Avenue being active. Sixth Avenue is very active, and we got very good pricing on the deals that we did.

Okay. Fair enough. And then on -- excuse 1 Beale (sic) [50 Beale]. So that seems to have come together fast. I was just looking back at your previous comments last quarter. And you were saying you weren't kind of very active in the acquisition market. So would you agree that, that kind of came together quickly?

And second related question, does your increased ownership and consolidating the asset and all that give you more flexibility to address the vacancies there than the prior ownership?

Well, 50 Beale was an asset that was owned by -- the majority was owned by a fund. And the fund investors or limited partners decided that they'd made a very decent return, and they wanted to exit the fund. And we see long-term upside in this asset. And that's why we saw an opportunity to basically invest a bigger equity stake in 50 Beale because -- and Ted has talked about this just a minute ago. The market -- the neighborhood is really improving substantially. There's a lot of activity. And 50 Beale is a terrific building with good bones. It's a column 3 asset developed by the Bechtel Company, and we see more upside potential that wasn't available before.

But do you feel more -- obviously, you're mathematically more in control. But do you have greater opportunity to lease up now that you're at 31% versus 3%?

No. It really doesn't really make any difference. I mean, we had full discretion as a general partner of the fund before, and it will not impact the leasing either way.

Okay. Fair enough. And then I probably ask this -- some form of question. You kind of answered it already, but just want to make it absolute certain. The investment there isn't a reflection of you trying to dilute your -- or diversify away from New York. It's just an opportunity that came up period, end of story, not a broader thesis about where Paramount is going.

Yes, that's correct. We invest opportunistically. This was an opportunity that arose, and we took advantage of it. And that might happen in one of the other assets in New York. So as I call it, the low-hanging fruits are the one that -- where you know the assets very well and you want to take advantage if it's available. I mean, the basis is very attractive at $780 a square foot in a market where you have assets trading where there's no upside. It's sometimes $1,200 and more than $1,200 a square foot. We think that's a great opportunity for the investors.

Okay. And then the buyback, what's the likelihood that you'll actually have some activity there in the third quarter?

I don't like to comment on that question.

Our next question comes from the line of Vincent Chao with Deutsche Bank.

I know this has been a topic on many of the calls here. But just wanted to get your thoughts in terms of the investment flows into New York but also your other markets, San Francisco as well. And if you have yet to observe any pullback in Chinese flows and whether or not you think other regions will be able to take up the slack if it does slow down.

Well, we haven't seen any pullback. There might be a little slowdown on the Chinese side, as we can read in the papers as well. But there's a lot of interest in investments in our kind of assets, especially in the 3 markets, the gateway markets that we are invested in. And it's coming across the board from different parts of the world, and there's no slowdown.

Okay. And then just maybe, Wilbur, a question on the guidance for the cash same-store NOI going up here pretty nicely. Normally, I guess, at this point, we would expect to see sort of GAAP increases as opposed to cash, just given timing of leases coming on line. But I guess, to the extent this is more driven by renewals or something like that. I was just curious if you could give some color on what's driving that upside.

Sure. As we've mentioned it before, a lot of the same-store cash NOI growth is really driven by the past leasing efforts in 2015 and late 2014, where these leases have started to become cash paying. Now the increase in guidance was ahead of our own expectations in terms of same-store cash NOI growth because we also achieved some operating expense savings, which is contributing to that increase. And the last piece of that is you could have -- at the time we put out guidance originally, you had certain lease expirations that could have been renewed short term that could again be incremental to cash NOI for 2017.

(Operator Instructions) Our next question is a follow-up question from Rob Simone with Evercore.

Wilbur, just a housekeeping question for you. On the residential development fund in 75 Howard, I noticed that there are actually balances in both the consolidated and unconsolidated funds at this point. So just trying to get a sense of like where the majority of the earning stream or all the earning stream is going to show up going forward.

So Rob, that's a very astute observation. It's a tricky quarter, because from an accounting standpoint that transaction happened mid-quarter. Going forward, the way you should think about it is essentially, the fund now owns a 20% investment because they sold 80%. That investment is deconsolidated and accounted for as an investment in unconsolidated -- our investment in joint ventures, unconsolidated joint ventures. So you'll see that in our unconsolidated joint ventures section. But the way to think about it is PGRE's ownership is 7.4% of the 20%. So the economic interest that PGRE has is about 1.5%. So it's really insignificant, won't be contributing towards earnings in any way.

Our next question, a follow-up question, from Jed Reagan from Green Street.

On the OpEx savings you referenced, Wilbur, can you talk a little bit more about the sources of that? And should we think about that as maybe sort of onetime in nature? Are those kind of permanent, lasting savings?

Sure, Jed. It's a combination of things. We had a savings, driven primarily by lower utility costs this quarter. Part of it has to do with timing of RNM as well. So it's a mixed bag, really.

Okay. And then I know you guys haven't provided disposition guidance per se. But I believe you're exploring a JV sale in at least one of the assets earlier this year. And just wondering if that's something you're still exploring, either a partial or a whole interest in selling an asset in the coming quarters?

Well, we are always evaluating opportunities. And so we -- that's always on the agenda for us. And if an asset has really appreciated over what we can achieve through our day-to-day operations, we are looking at potentially doing a joint venture sale or sale of an asset.

Mr. Behler, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Great. Thank you. Thank you all for joining us today. We look forward to providing an update on our continued progress when we report our third quarter results in November. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.