Paramount Group Inc (PGRE) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Paramount Group Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded today, February 16, 2018.

I'll now turn the call over to Jacques Cornet with ICR. Thank you, you may begin.

Thank you, operator, and good morning. By now, everyone should have access to our fourth 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 measures is available in our fourth 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 Peter Brindley, 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, Jack, and good morning, everyone. Thank you for joining us today. We closed out a very strong year with an excellent quarter. Our same-store cash NOI was up 14.8% in the fourth quarter compared to the same period last year and up 10.6% for the full year. Our core FFO for the fourth quarter was $0.22 per share, bringing our full year 2017 core FFO to $0.89 per share. Wilbur will review our financial performance in greater detail.

Here are some of the highlights of 2017. We leased about 1.3 million square feet of space at positive cash mark-to-markets of 13%. We increased our same-store leased occupancy by 130 basis points to 93.5%, driven by 160 basis point increase in the same-store leased occupancy of our New York portfolio, which now sits at 92.3% leased. The bulk of our leasing in New York occurred at 2 buildings, 1633 Broadway and 1301 Sixth Avenue, which was the focal point and understandably sold, given the vacancy in these buildings and their contribution to our bottom line. A little over a year ago, 1633 Broadway was about 86% leased and 1301 Sixth Avenue was about 89% leased. Today, these buildings are leased at about 95.5% and 98%, respectively. The success we had in New York was a direct testament to the efforts of Peter Brindley and his leasing team. And as you know, Peter, who previously led our New York team is now in charge of leasing for the entire portfolio. We continued to outperform the market in Washington, D.C. and increased our same-store leased occupancy by another 280 basis points. In San Francisco, we have had tremendous success leasing over 375,000 square feet at One Front and positive mark-to-markets in excess of 28% further derisking the roll in that building. On the capital allocation front, we sold Waterview in Rosslyn, Virginia for $460 million, a record price for that market and redeployed those proceeds into San Francisco's CBD by acquiring One Front Street. We increased our ownership of 50 Beale in San Francisco to 31%, up from 3% at a price that valued the building at about $780 per square foot. These terms were quite favorable considering that others are paying in excess of $1,200 per square foot for stabilized buildings in San Francisco. We formed a joint venture with GIC to recapitalize 60 Wall Street in a $1 billion transaction, but did not increase our 5% economic interest in the assets. Finally, we completed a multi-year initiative to refinance our balance sheet and lever our maturities. Over a 2.5-year period, we have refinanced in excess of $3 billion, lowering our weighted average cost of debt capital by over 180 basis points to 3.5%. We now have no debt maturities until 2021. As we move into 2018, the year is shaping up to be another strong year for Paramount with sector leading same-store growth. Wilbur will provide details on our 2018 guidance.

On the leasing front, we are laser-focused on the large plot availabilities at 31 West 52nd Street and 1325 Sixth Avenue, which totaled about 280,000 square feet. That coupled with 180,000 square feet of leases expiring this year puts availability at about 460,000 square feet. We have set our 2018 leasing goal to be between 500,000 and 700,000 square feet. Additionally, we are expecting a 150 basis point increase in same-store lease occupancy, bringing our portfolio to 95% leased.

While Peter will provide details on our leasing efforts, let me spend a minute on each of our markets. Underlying fundamentals in New York remained strong, and we continue to see solid demand for our available space. 2017 was a year for the record books, as Midtown recorded its highest annual leasing total in more than a decade. Midtown leasing activity excluding renewals was 80 million square feet, of which 41% represented deals in excess of 50,000 square feet. That played right into our sweet spot and we benefited by completing large deals at 1633 Broadway and 1301 Sixth Avenue. In Washington, D.C., we remained in a very strong position given the quality of our portfolio, our leasing success and limited lease roll over the next 3 years. In San Francisco, we remain excited about the market and our opportunities there. We have increased our scale in this market opportunistically and are now one of the largest office landlords in San Francisco. During the last 1.5 years, we have fielded many questions from skeptics about the San Francisco market, but we stayed our course as we saw it differently. The San Francisco market remains healthy, operating conditions are favorable and rents continue to grow, albeit in single-digit as we move forward to 2018. Tenant demand remains elevated and with 2018 new construction north of 80% preleased and with CBD vacancy below 8%, we do not see the supply-demand dynamic for our assets changing anytime soon. This is why we were eager to increase our ownership interest in 50 Beale to 31% at an attractive price per square foot similar to One Front. We have begun our marketing process that have already seen progress with leasing in the fourth quarter and more on deck. In placements in this asset are about $57 per square foot, with asking rents for similar space in the mid-70s, providing us with tremendous upside. On the capital front, we recently formed the Paramount Gateway Office Club, a strategic real estate co-investment platform with third-party equity capital commitments of currently $600 million. The Club will serve as our investment vehicle for investments that fit within the specified return parameters. These parameters are of a co-plus nature. We are the general partner and investment manager of the Club and have the option, but not the obligation, to co-invest up to 51% in each transaction.

In closing, demand of high-quality assets like ours continues to attract first-class tenants, and we see a healthy flow of global capital that views our markets as long-term safe havens. Our focus continues to be on leasing our available space and derisking our lease roll, unlocking the significant embedded growth in our portfolio. We are well positioned to deliver consistent internal growth and earnings, cash flows and common stock dividends. With the headwinds in the markets recently, we also would like to highlight the stable long-term lease terms across much of our portfolio, driving visibility and resilience for our cash flows.

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

Thank you, Albert, and good morning. We continue to be encouraged by the pace of activity and demand in the properties where we have availabilities. Strong market velocity and our ability to source, negotiate and close deals resulted in a year, whereby, we significantly exceeded our 2017 leasing goal. During the fourth quarter, we leased approximately 335,000 square feet to end the year with nearly 1.3 million square feet leased at positive cash mark-to-markets of 13%. We are building on this leasing momentum in the first quarter and expect continued progress throughout the year.

Let's review the fourth quarter highlights by market, beginning in New York. At 1301 Avenue of the Americas, we are 98% leased as a result of leasing the former Commerzbank space. At 1633 Broadway, we are now 95.4% leased with the execution of the 106,000 square-foot leased with MongoDB on the 37th and 38th floors. The MongoDB deal is yet another example of 1633 Broadway's ability to appeal to a diverse tenant base, including tech companies. TAMI tenants now comprise nearly 1 million square feet or 40% of the building tenant roster. At 31 West 52nd Street, the lobby renovation has begun and has been very well received as evidenced by our activity. We have 167,000 square feet available on the top 7 floors, which includes the Morgan Stanley floors. We are in advanced discussions with a current tenant to extend their lease and expand its footprint in the building by a full floor. I expect this will be completed soon. In addition, we are in various stages of proposals with several other prospective tenants, which contemplate a good portion of the available space. At 1325 Avenue of the Americas, we have 115,000 square feet of availability in the base of the building and tour activity has accelerated in the new year. We are actively trading proposals with several prospective tenants of varying sizes, all of which are seeking value and efficiency in an ideally located Class A property.

Shifting to Washington, D.C., we ended 2017 with the portfolio at 96.1% leased. Washington continues to be a challenging market, yet we have outperformed. Our strong performance in this market is largely due to the location of our assets, the quality of our properties and our product mix. Specifically, we do not have a single full floor available in our D.C. portfolio. Supply will outpace demand in the near term; however, we have no meaningful expirations in the next 3 years and remain very well positioned in the D.C. market.

In San Francisco, we have leased over 140,000 square feet during the fourth quarter at positive cash mark-to-markets of 20%. In this market, we have 3 great assets, each of which are distinct in their own way. One Market Plaza is an iconic asset, that is constantly in high demand and is currently 97.7% leased. This well-leased asset continues to command some of the highest rent in San Francisco from leading names across various industries. At One Front, we are ahead of our acquisition underwriting and are currently 99.3% leased. In 2017, we leased over 375,000 square feet at cash mark-to-markets of 28.7%. A significant portion of our leasing has come from existing tenants that have extended their leases, and in some cases, expanded their footprints in the building, which has served to substantially reduce much of the near-term role. At 50 Beale, we made steady progress during the fourth quarter. We ended the year at 82.6% leased, up 440 basis points from the prior quarter. We executed the lease for a full floor during the fourth quarter and have significant activity ongoing with several prospects. We expect to be able to show continued progress next quarter.

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

Thanks, Peter. We had another very strong quarter of financial and operating performance. Our core FFO for the quarter was $0.22 per share, bringing the full year 2017 core FFO to $0.89 per share, right at the midpoint of our guidance. This represents a 6% increase in core FFO when compared to the prior year. Our earnings growth was once again driven by sector-leading same-store cash NOI growth of 14.8% in the quarter and 10.6% for the full year of 2017, which by the way, was just shy of the top end of our same-store cash NOI range. Our fourth quarter leasing that was highlighted by Albert and Peter earlier, resulted in a 120 basis point increase in same-store leased occupancy from the prior quarter and a 130 basis point increase from the prior year. The leasing success we had in 2017 will once again propel us in delivering sector-leading same-store growth in 2018 and beyond.

Looking ahead to 2018, we estimate that full year 2018 core FFO will be between $0.92 and $0.96 per share or $0.94 per share at the midpoint of our guidance. This represents an increase in core FFO earnings of $0.05 per share or 5.6% over 2017, and assumes increases in same-store cash NOI of 7% to 10% or 8.5% at the midpoint and increases in same-store GAAP NOI of 6.5% to 9.5% or 8% at the midpoint. The 8% increase in same-store GAAP NOI equates to $0.11 per share increase in core FFO earnings, which is partially offset by a $0.06 per share from the following. A $0.02 net decrease from acquisition and disposition activity, primarily the sale of Waterview in May of 2017 and the acquisition of a 31% interest in 50 Beale Street in July 2017. A $0.01 decrease in lease termination income, which is something we do not budget for. A $0.01 decrease in fee income net of income taxes, this decrease is primarily due to a onetime fee earned in 2017 in connection with the recapitalization of 60 Wall Street. A $0.01 increase in interest and debt expense and a $0.01 increase in general and administrative expenses, resulting primarily from the noncash amortization of a new layer of equity grants. As Albert touched upon earlier, same-store leased occupancy is expected to increase by 150 basis points to 95% at year-end. Our assumption is predicated on leasing 500,000 to 700,000 square feet in 2018, including substantially all of the remaining space at 31 West 52nd Street and 1325 Avenue of the Americas.

Turning to our balance sheet. We ended the quarter with over $1 billion in liquidity, comprised of $237 million of cash and restricted cash and $800 million of availability under our revolving credit facility. Our outstanding debt at quarter end was $3.1 billion at a weighted average interest rate of 3.5% and a weighted average maturity of 5.5 years. 87% of our debt is fixed and has a weighted average interest rate of 3.6%, the remaining 13% is floating and has a weighted average interest rate of 3.2%. We had no debt maturing until the fourth quarter of 2021. And beyond that, our maturities are well laddered. In January 2018, we extended and expanded our revolving credit facility, providing us with tremendous flexibility and additional liquidity. The new facility matures in January 2022 and has two 6-month extension options. The capacity was increased by $200 million to $1 billion and interest rate and facility fees were reduced by 10 basis points and 5 basis points, respectively. The [recast] of the facility was well received, and ultimately, oversubscribed, a direct testament to our lender group's confidence in us, our assets and our strategy.

We recently completed our 3-year anniversary of being a public company. During these 3 years, we have constantly sought the feedback of our investors on ways to improve our best-in-class transparent disclosure. And every year, we have enhanced our disclosure. This year is no different. Based on the feedback we received, we've added a new page in our supplemental package that lists the various assumptions underlying our core FFO guidance, which includes additional components we have not previously provided. In addition, our investor deck includes a graphical depiction of the commentary I provided earlier regarding increases and decreases and the various assumptions underlying our core FFO guidance. Furthermore, we have also provided an updated schedule of signed leases that have yet to become cash paying, which now sits at $70 million, $29 million of which becomes cash paying in 2018. These items can be found on our website at www.paramount-group.com. We hope you will find this additional information helpful.

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

(Operator Instructions) Our first question is from Blaine Heck from Wells Fargo.

Peter or Albert, at 1325 Sixth and 31 West 52nd, it seems as though you guys are getting pretty good activity on the space. Given what you're seeing there, do you think you'll be leasing those spaces floor by floor? Or is there strong enough interest from larger tenants for 1 or both of them? And then do you think you can have those spaces signed by mid-year or could it be later this year?

First of all -- this is Albert. First of all, we have very good activity on both spaces. And it's -- in both cases, we have multi-floor tenant activities as well as single-floor tenant activities. And Peter and his team are extremely focused. And I think at this point, we are pretty comfortable that it should be done for sure in the course of 2018 and potentially in the first half of this year.

Yes, Blaine, I would add by saying, of course, at 31 West 52nd Street, we have block of 167,000 square feet, which is comprised of the top 7 floors. I expect a deal to be completed with an existing tenant to extend on 2 floors and expand on to the 23rd floor, which is the lowest floor in that block. Fairly soon beyond that, I would characterize that our activity is very good and it's with prospective tenants contemplating, what I would say, is the majority of the space. And typically, multi-floor tenants. I would say the same applies to 1325, where we are very active in the new year. Tenants contemplating a Class A property value opportunity, and our proposals are with prospective tenants considering several floors, not single floor occupants. So we, as Albert said, are very optimistic about the activity we have in those 2 properties -- on those 2 blocks which, of course, we're heavily focused on.

Would you say activity has picked up there this year thus far versus what you were seeing there last year?

Well, these floors have been in the market -- these spaces have been in the market since last year. And as we have said multiple times before, these are large deals, they take a long time and some of them have been active already in 2017. The activity is very solid, and it might have picked up a little bit from last year. But these deals have been in the work already before the beginning of 2018.

Okay. That's helpful. And then Albert, can you talk a little bit more about the rationale behind forming the Gateway Office Club. And what the actual investment parameters are for that Club versus kind of the parameters you'd look at for investments you'd make on balance sheet?

Blaine, happy to do so. As you know, we -- from the get-go, we left our fund business in place. And as you know, where our stock is trading, we are being very, very careful over the last couple of years in acquiring assets. And we only did it when it was really accretive and positive for our investors. And we just wanted to be ready for the right time and the right moment because I've made the experience over the last 20 years, that when the market is right to make an investment, very often the investors are getting gun-shy and they're not willing to commit. So we wanted to be ready for it. And the Club provides the public company, PGRE, with a lot of flexibility by not having to invest much of capital at all and going up to 51% if the opportunity is right.

Our next question is from Rob Simone from Evercore ISI.

On the Club fund, Albert, I was wondering if you could just elaborate on kind of -- within your existing markets, what might be at the top of the list in terms of priority? And if you're thinking of maybe expanding that list out? And then I have one follow-up after that.

No, we are looking at all of our 3 markets opportunistically. I would, at this point, say most probably Washington is on the lowest of the radar. But you never know, there might be an opportunity coming up and we would look at it seriously. So the San Francisco market is very attractive long term. All markets seem to be quite expensive at this point in time. So we are not going out today or tomorrow to actively buy assets. We will be very, very selective. Wanted to make sure that we increase shareholder value for the public company investors.

Great. And then just on capital allocation broadly, it kind of fits in with the Club fund discussion. You don't have any maturities over the next 3 years, you're trying to limit your equity exposure to assets. I guess, could you just talk broadly about where -- what your capital allocation priorities are? And where a potential stock buyback could fit in there?

Well we are looking at stock buybacks and investment potential all the time. We will make the determination and invest it in accordance with what is best for our investors.

Our next question is from Vikram Malhotra from Morgan Stanley.

Just wanted to get a sense, you mentioned activity is picking up across sort of the remaining assets. Would you have some sense sort of what you're expecting from mark-to-markets and maybe just incentives? I think maybe the deal that closed at 1633, it was more. Correct me if I'm wrong but my understanding, it's -- maybe more of a one-off, it seemed like the DIs ticked up a bit. But maybe just give your expectations for the other 2 buildings?

You're talking about leasing, Vikram, is that correct?

That's right. That's correct.

Leasing market. Okay, I think Peter, do you want to answer the gentleman?

So as it relates to concessions, if you're curious about what concessions would look like in connection with the activity I'm describing, is that right, Vikram?

Yes, I'm just -- I mean, at 1633, it seemed like the event period ticked up and maybe concessions ticked up in the latest deal you did. And just wondering if there was something unique about that specific deal? And given that the other 2 buildings you've had, you sort of publicly said it's probably going to take a little longer. Just wondering what your expectations are there for mark-to-market and concessions?

I'll start with concessions. Concessions in Midtown, just to say, is $93 per square foot for years -- for term 10 years or more, which is up 15% year-over-year. We're seeing concessions, which of course are elevated over the last couple of years. But we're seeing them start to stabilize, and the activity that we are contemplating at both 31 West and 1325 are very much in line with what we -- which we consider to be market currently in Midtown. So we don't see that we're having to give concessions over and above the concessions that we're now familiar with, as market to secure the activity that we're now talking about at those 2 buildings.

And Vikram, you were saying that we seem to have difficulties in attracting tenants. That's not the case at all. I was saying, in multiple times before, that at 31 West 52nd Street, we wanted to make sure that we get the mark-to-market. Remember, we took out Assured Guaranty from 31 West 52nd Street, who paid about $68 at the time. That rent was locked in until 2026. We will be having a significant rental rate increase over that. And we wanted to make sure that we do the right thing for our investors long term. And that's going to -- what's happening in 31 West 52nd Street. And 1325, those floors are lower in the building and we will be getting attractive market rates there.

Okay. And just to clarify, what I meant is...

Vikram, just to add to Albert's comments. The mark-to-market question that you have with respect to 31 West as Albert said, the expiring rent on that was a $68 sort of number, and we expect to be north of $90 on that space. So when you do the math, it's going to be over a 35% mark-to-market. That said, recognize that, that space has been vacant for longer than 12 months. So when that space gets leased, it will not show up in our mark-to-market statistics. So it's important to understand in our portfolio the embedded growth is being driven largely by occupancy increases. Our New York portfolio today sits at 94% -- 92.4%. So as this stock gets leased, you're experiencing the growth in cash NOI, which does not necessarily translate in the statistics that are reported on a quarterly basis in the mark-to-market figures.

That's fair. What I had meant is that last year when you had originally laid out the plan to market all the spaces, you had mentioned the 2 buildings would may take a little longer versus like 1633 and 1301. So that's what I was just differentiating between those 2. But it sounds like you have great activity, and hopefully by the first half, you get it all done. Albert, just wanted to get your sense on pricing across New York and sort of demand just from your conversations maybe with investors in Europe. It seems like there was a disconnect maybe 6 months ago, lot of the public REITs called it out. Just wanted to get your sense of where you -- what sort of demand you're seeing or concessions you're having? And where do you think that disconnect is today in terms of transaction prices?

Well, transactions were clearly lower in 2017 and, but I've mentioned before, I think a big impact has that the interest rates and the possibility of refinancing assets for potential sellers of property were tremendous last year. We know this very distinctively because we are in the markets with our mezzanine funds and the rates have been driven down tremendously for mezzanine investments. So for a potential seller, it might make a lot of sense to not sell an asset, but rather recapitalize or refinance. And that's a phenomenon that we saw in many, many cases in 2017. But the interest of foreign capital, maybe with the exception of the Chinese, which was heavily discussed, capital is very active still and that's why we could form our club as well.

Got it. And just one, if I may. I just want to get your -- if you can give any color. Are you looking at any of the HNA assets that may be on the market, and specifically, did you look at 1180?

I don't like to comment on that.

Our next question is from Jamie Feldman from Bank of America Merrill Lynch.

Just to clarify on the Club, so if you were to do an acquisition today, would you -- would that be through the Club or would that be on your own balance sheet?

Well, the majority of it depends on the investment criteria. So the Club has some value-add component and we would consider those kind of investments for the Club. But as I mentioned before, we have a lot of optionality in favor of the public investors because we have the flexibility to invest a small amount of capital or go up to 51% and control the entire investment. And I think under the circumstances where we are pricing today, I think that gives us a lot of flexibility.

And what obligation do you have to buy through the Club as opposed to on balance sheet?

As I mentioned, it went through -- it depends on the investment criteria. But also for the public company, we would not consider a ultra core investment, especially not at this point in the cycle.

Okay, so it sounds like it's ultra core or value add -- like what is the -- that's the parameters?

No, I mentioned we would not buy anything ultra core. As you could see, last year, we sold an ultra core investment, the Waterview investment. This very limited growth, and reinvested that capital in One Front Street in San Francisco, which gave us tremendous upside over a couple of years and you saw through the execution that we did there, that this was money well transferred out of D.C. into San Francisco. And I said before, we would not do a core investment period at all, neither for the public company not for the fund. The fund, however, is interested only in value add.

And then I guess for Peter. Can you just talk about the difference in the leasing market for a large block versus more kind of smaller boutique-type spaces. I mean, our understanding is there's a decent amount of space available in that second category that's the smaller boutique. I'm just curious to your thoughts given what you're trying to get done?

Well, I think in 2017, we saw the best leasing velocity in Midtown that we've seen since 2006. And as Albert said, 41% of that 18 million square feet was comprised of deals in excess of 50,000 square feet. So it certainly was a year of the big deal. And if you look really look at the market in a more granular way, you realize that a lot of that activity occurred on the west side. I think the Plaza District has been a little bit slower availability, exceeds the broader Midtown average of 11.2%. Plaza District is currently at 14% availability, so and velocity has been down a little bit in the Plaza District. So as it relates to the boutique space, the last 3 months, I would say, activity has picked up a little bit. But that's not where the lion's share of this great velocity has been realized in the last year, it's been predominantly on the west side, large floor place and, of course, we participated in that trend over the last year with a significant deal on MongoDB.

Okay. And then finally, I'm sorry if I missed it and we can follow up offline if I did. Did you talk about the 180,000 square feet expiring this year, like what are the largest pieces of that?

Sure. There is no large deal in that, Jamie. It's basically spread across -- there's not a single channel that's 25,000 square foot or more.

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

Just to follow up on Jamie's question. I'm just trying to understand sort of the risk profile of investments you'd consider for the Club versus on balance sheet. Am I understanding right that if you had maybe a particularly risky deal, say it was 75% vacant, that would be too risky for the Club and that would go on balance sheet or just where is the threshold between ones that wouldn't fit into the Club?

Jed, that's very hard to define. I would really do it on asset-by-asset basis. And as I've mentioned before, at this point in time, the -- we would do only -- very cautiously, we would invest on balance sheet for the time being.

Okay. That's helpful. And what's the time horizon for deploying that capital?

We have between 2 and -- between now and 4 years from now to invest that capital. And what's typical in those kind of relationships is that you get an extension if you need it.

Okay. Appreciate that. You guys had a pretty significant roll down in New York City last quarter. I'm just wondering if there is more prints like that, that are possible ahead? And if you can just remind us where the mark-to-markets are in your portfolio at this point, maybe specifically by market, if you could run it through that way?

Sure. Jed, you're talking about the New York portfolio in the fourth quarter in terms of the cash mark-to-market roll down. We did 189,000 square feet of leasing in New York. Only 65,000 square feet of that 189,000 represented second-generation space where this roll down occurred. There was one tenant at 900 Third Avenue, that lease was done pre the great recession, okay, in the base of that building that had an $87 rent. So needless to say, we extended that tenant a very good market rent, but it certainly wasn't $87 that contributed to that roll down. Mark-to-market is a function of tenant mix and product where you have these spaces leased. So occasionally, you will have a pocket like that, that ends up rolling down. But what you don't see in our portfolio is because the second-generation is such a fraction of the overall leasing that's done, sometimes it gets overshadowed by the actual velocity of leasing that's being done. Obviously, we've given guidance for 2018 in terms of where we think leasing will be. We've not talked about mark-to-markets in my commentary earlier, when another question was asked. We said recognize the mark-to-market will be there in our New York portfolio, specifically 31 West 52nd Street, where we anticipate over 35%-plus. But once again, it won't get reported in our statistics because that space has been vacant for more than 12 months.

Sure. Okay. I appreciate that. I mean I guess, if I could sort of ask it just a slightly a different way, I mean the kind of 11% 2017 figure, you think that's fairly representative of the kind of numbers you could put up this year?

Yes, I think the -- if you look at the overall mark-to-market for the portfolio, it was 13% on a cash basis. I think that's basically what we would expect.

Okay. Great. And then just last one from me. Could you talk about how the cash NOI growth might trend over the course of this year on a quarterly basis, I mean, do you expect there to be sort of a deceleration trend? And then do you feel like 2019 could still be in that kind of upper single digits range, if you get your leasing goals this year?

Let me take that 2 parts. One, we don't want to comment on 2019 because we're not giving guidance on 2019. That said, in our prepared remarks, we felt we will be delivering sector leading same-store growth beyond 2018. So that's the commentary on 2019. With respect to your question about quarterly increase, we ended the quarter with about $83 million of cash NOI. We expect that to get ramped up quarterly as you go into 2018. So there is not going to be any deceleration. From a same-store cash NOI growth perspective, if you look at the range that we provided of 7% to 10%, I will say that if you were to do the math, the first quarter will be the highest of that, just recognizing the 2017's first quarter was the trough. So just the way the math works, you would expect first quarter to be higher than the other quarters. But in terms of a pure cash NOI number, there should not be any deceleration.

Our next question comes from Vincent Chao from Deutsche Bank.

Just going back to the Club here. Just curious you kind of alluded to foreign interest in the U.S. building high [assuming] back to the Club. Just curious if you could talk a little bit about the breadth of the investor base and maybe where they're coming from?

You're talking specifically about the investors who invested in the Club at this point?

Yes.

They are foreign investors, they are non-U. S. investors. If you look back at the history of our company, that's where we've raised our private equity over the last 15 years, especially. And we are a trusted partner with these investors, and we have a history with those investors. And there is quite a high demand for investment capital that looks for boots on the ground that has experience in leasing and the management and that's how we attract our investors.

I got it. And you have $600 million I think raised so far, I guess, is there a cap on that? I mean, how much would you be willing to increase that to? And I was just curious are the -- the regions that you're going to be looking at investment opportunity and consistent with your current portfolio? Or would you look outside of your existing...?

Well, we look at opportunities for our investors, it would be more outside of the portfolio at this point. And but we are very opportunistic there. And we are still in the fundraising mode and we are looking to -- the target is somewhere below $1 billion, right around $1 billion. But that's not -- it's not a requirement. So we could stop at $600 million. And so we are investing in the same markets or looking for an investment in the same markets that we are active in, that means New York, Washington and San Francisco. Most probably, Washington at a lower probability at this point. But we're looking at New York and San Francisco. And as I said before, this doesn't mean that we would pull a trigger tomorrow and we have to invest this capital. These are very prudent institutional investors who know that one has to be ready if the time is right and that's why we did it. So nobody should expect us to make -- to get the money out quickly, only to get the money to work. We have been very prudent in the past to invest the capital for the public investors as well as the fund investors and we want to stay that way.

Okay. And maybe going back to your comments about the transaction markets overall being depressed in 2017. You alluded to some attractive refinancing opportunities in the market that also maybe sapped away a little bit -- the seller demand. But I was just curious, some of your peers have talked about just increasing ownership by the largest landlords or the institutional crowd here in this New York City in particular, which could weigh on activity just going forward. I was just curious if you guys feel the same way, do you think that transaction volumes could just stay depressed because of a changing mix of ownership?

So I would tell you over the last 20 years, there has been a more stable ownership -- a trend for more stable ownership in -- especially in New York City because it has been very attractive -- an attractive investment market for a capital that wants to invest in long-term stable real estate. So many of the properties today are in financially very well capitalized hands. But it also will make it a more expensive market in the future, I would say. And it's -- as long as you don't have any aberration, I could see that this market will not have that much of opportunities. But we want to be ready and we have seen in the past, as you could see, we have done a transaction 1 or 2 per year and that might happen again here in New York as well as in San Francisco.

(Operator Instructions) And our next question comes from Bill Grant from Morgan Stanley.

I have a capital allocation question for you. Albert, you'd mentioned in a response to the previous question, one of the questions about the new Gateway Office Club. You had said that all markets seem expensive at this time. So can you just elaborate this, what about the PGRE selling assets at this time, you sold asset last year, Waterview, more of that activity. And as opposed to putting the assets into acquisitions, just putting the proceeds into a share buyback program that's currently kind of in place. I don't think you've executed on it. That's my question.

Yes, Bill, totally understood, we leave all options open and they're all available. And if we find an opportunity to acquire an asset, and we can do something what we have done in the past with Waterview, do a smart 10/31 exchange, for example or potentially selling parts of an asset to a joint venture potential, joint venture partner. We are looking at it as well. We haven't talked about that today. But that's always available as an option. But we want to make sure that we do the best to -- for our investors -- public investors.

This concludes the question-and-answer session. I'd like to turn the floor back over to Mr. Behler for any closing comments.

Well, thank you all for joining us today here. And we look forward to providing an update on our continued progress when we report our first quarter results in early May. Bye-bye.

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