Q2 2024 Earnings Summary
- Improved same-store cash and GAAP NOI guidance: The company increased its same-store cash and GAAP NOI growth outlook by 100 basis points and 50 basis points, respectively, due to strong second quarter results and expectations of reduced operating expenses.
- Early signs of recovery in San Francisco market: Increased tenant demand, especially from AI and tech companies, is leading to more tour activity and proposals. The company is seeing increased activity on the Google block of floors they will be getting back next year.
- Strong leasing pipeline supporting occupancy improvement: The company has leases in negotiation and proposals in advanced stages for more than 300,000 square feet, much of which is on vacant or soon-to-be vacant space, giving confidence in achieving occupancy targets.
- Loss of major tenants leading to negative NOI in H2 2024 and increased vacancies: Clifford Chance, PGRE's second largest tenant, vacated in May 2024, resulting in negative same-store NOI expected in the second half of the year. Additionally, the impending lease expiration of Leerink at 1301 Avenue of the Americas will further impact occupancy.
- Significant lease expirations in 2025 with major tenants likely vacating large portions of their space: Google will vacate the entirety of One Market, approximately 340,000 square feet (168,000 square feet at share), and JPMorgan is expected to give back more than 50% of their 241,000 square feet at One Front Street. This represents substantial vacancy risk in 2025.
- Continued pressure on net effective rents, particularly in San Francisco due to high vacancy rates: San Francisco may take longer to recover, with high market vacancies leading to sustained pressure on rents. This could negatively impact revenue and profitability in the market.
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2025 Lease Expirations and Vacancies
Q: What are the large lease expirations and potential vacancies up to 2025?
A: Google and JPMorgan account for about 4% of our 2025 lease expirations. Google will vacate 340,000 sq ft, 168,000 sq ft at our share, in 2025. JPMorgan is expected to give back more than 50% of their 2025 expiring space of 241,000 sq ft, but we believe they will keep some portion. We are having constructive conversations with other tenants and expect to retain a good portion of the remaining 2025 expirations. -
Net Effective Rent Outlook
Q: Will net effective rents remain under pressure?
A: We believe we are at or near the bottom for net effective rents, with New York already improving, especially for Class A and Trophy assets. In San Francisco, the market may lag due to higher vacancy rates, but even there, rents for Class A properties may be close to the bottom. -
Same-Store NOI Guidance Increase
Q: What's driving the increase in same-store NOI expectations?
A: The increase is due to strong second-quarter results and anticipated reduced operating expenses in the second half. However, same-store NOI will be negative in the second half because of the vacancy of Clifford Chance, our second-largest tenant, and the impending lease expiration of Leerink at 1301. -
Funding Potential Acquisitions
Q: How will you fund potential acquisitions given your capital situation?
A: We plan to invest asset-light, using outside venture capital, and will not significantly use our own equity or liquidity. We're carefully evaluating opportunities in Class A and Trophy assets, noting the bid-ask spread is narrowing, but we will be very cautious before proceeding. -
San Francisco Market Improvements
Q: What are the early signs of improvement in the San Francisco market?
A: The demand pipeline is increasing, with venture capital funding flowing into San Francisco-based companies, particularly in AI. One-third of second-quarter leasing activity was from new tenants to the market. We see increased tour activity and proposals, making us more optimistic than six months ago. -
Interest Expense Guidance Update
Q: What assumptions are in your interest expense guidance after this quarter's increase?
A: We adjusted our assumptions based on current expectations of rate cuts for the remainder of the year, leading to an incrementally higher interest expense than previously guided. The rate cap and swap at 1301 expire in August, which is factored into our guidance. -
Non-Core Assets Off the Books
Q: When will the non-core assets at 111 Market Center be off the books?
A: We are still in negotiations and cannot predict the exact timing. The loan on 111 Sutter Street has been extended to December 2025, and discussions are ongoing for Market Center. -
Leasing Pipeline and Guidance
Q: How much visibility do you have on achieving your lease rate guidance?
A: We feel confident based on our strong pipeline. We need to lease over 200,000 sq ft of vacant or soon-to-be vacant space to reach the midpoint. We have more than 300,000 sq ft in advanced negotiations. -
Portfolio Diversification Strategy
Q: How do you balance tenant concentration risk with diversification benefits?
A: Our portfolio is diversified across sectors including tech, finance, and entertainment. Each building caters to different tenants, and we believe we've managed this balance well. -
Leasing Updates on Specific Properties
Q: Any updates on leasing at 712 Fifth Avenue and Showtime at 1633 Broadway?
A: We have more activity on the retail space at 712 Fifth Avenue than ever since marketing began. We've leased space to Harry Winston at rents nearly matching previous levels. We're carefully considering tenants in the luxury segment to fit the building's profile.
Research analysts covering Paramount Group.