Q1 2024 Earnings Summary
- Strong leasing pipeline in New York, with over 500,000 square feet of active leasing discussions and growing tenant demand approaching 20 million square feet, comparable to 2018-2019 levels. Paramount is well-positioned to capture this demand due to their Class A and trophy buildings in prime locations.
- Debt-free balance sheet with strong liquidity, allowing Paramount to pursue high-quality acquisition opportunities through joint ventures without stressing their balance sheet, potentially leading to growth opportunities and enhanced returns.
- Leasing concessions have plateaued and remain stable, with potential for positive mark-to-market rents in Class A and trophy buildings' upper floors, and anticipated increase of 400,000 square feet of occupancy through leasing activity, supporting occupancy guidance.
- Significant upcoming lease expirations with key tenants and uncertainty about renewals could impact occupancy and revenue. For instance, Clifford Chance is vacating approximately 229,000 square feet, which is nearly 50% of 2024 lease expirations at 31 West 52nd Street. Additionally, 60% of 2025 lease expirations in San Francisco are made up of JPMorgan and Google, with uncertainty regarding their renewals. Uncertainty also surrounds Showtime, a large tenant at 1633 Broadway, as it's too early to say whether they will extend their lease.
- Negative mark-to-market rent trends in San Francisco and limited pricing power on lower floors may pressure rental income. The company reported negative mark-to-markets in San Francisco for the quarter. They acknowledged they don't have nearly the pricing power on base floors due to high availability. High concession levels remain at historical highs, potentially impacting net effective rents.
- Potential loss of assets due to impaired properties and maturing loans may reduce the asset base and affect portfolio performance. The company indicated that two assets, including 111 Sutter, are impaired and may potentially be handed back if loan extensions cannot be negotiated. This could lead to a reduction in assets under management.
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Leasing Pipeline and Major Expirations
Q: Can you cover upcoming move-outs and leasing to offset them?
A: Management highlighted that Clifford Chance's move-out of approximately 229,000 square feet at 31 West 52nd Street represents nearly 50% of 2024 lease expirations. However, they are optimistic about their pipeline, with over 500,000 square feet in discussions, much of it focused on backfilling Clifford Chance's space. In San Francisco, they acknowledged significant 2025 expirations with JPMorgan and Google but are working to mitigate the risk. -
Non-Core Assets and Loan Maturities
Q: What's the plan for non-core assets with upcoming loan maturities?
A: Management stated that for assets like 111 Sutter, they are in discussions with lenders but emphasized there is no risk to their balance sheet as debts are non-recourse. Possible outcomes include extending loans to preserve optionality or handing back the assets, which would de-lever their balance sheet without impacting earnings. -
Acquisition Strategy and Focus Markets
Q: Are you planning acquisitions, and in which markets?
A: They are not investing significant equity from their balance sheet but are open to joint ventures. Their focus remains on New York and San Francisco for potential opportunities, emphasizing quality assets rather than lower-tier properties. -
KPMG Lease Extension
Q: Why did KPMG renew for only 21 months?
A: Management explained that the 21-month extension at 55 Second Street was mutually acceptable, and it's too early to predict future outcomes. They maintain a good relationship with KPMG and were pleased with the deal. -
Showtime Lease Outlook
Q: Any updates on the potential extension of Showtime's lease?
A: While it's early, management is in constant communication with Showtime at 1633 Broadway and noted that tenants can change plans over time. There's potential demand from other tenants, but no definitive information yet. -
Mark-to-Market Rent Trends
Q: How will mark-to-market rents trend this year?
A: They expect opportunities for positive mark-to-market rents on upper floors of Class A buildings where they have pricing power. However, base floors with more availability may not see the same trend, making it case-by-case. -
JV Partners' Unlevered IRR Targets
Q: What unlevered IRRs are JV partners seeking?
A: JV partners are looking for unlevered IRRs in the range of 15% to 20%, depending on their capital sources. -
Retail Dispositions
Q: Are you considering retail asset sales soon?
A: Management is not commenting on specific dispositions but noted improved leasing at 712 Fifth Avenue, with luxury retailer Harry Winston expanding. They see rising rental rates and healthy demand but have nothing specific to announce.
Research analysts covering Paramount Group.