Paramount Announces Fourth Quarter 2017 Results

Leases 1,281,503 square feet in 2017

Initiates Guidance for Full Year 2018

NEW YORK--()--Paramount Group, Inc. (NYSE:PGRE) (“Paramount” or the “Company”) filed its Annual Report on Form 10-K for the year ended December 31, 2017 today and reported results for the quarter ended December 31, 2017.

Fourth Quarter Highlights:

  • Reported net loss attributable to common stockholders of $6.8 million, or $0.03 per diluted share, for the quarter ended December 31, 2017, compared to $6.5 million, or $0.03 per diluted share, for the quarter ended December 31, 2016.
  • Reported Core Funds from Operations (“Core FFO”) attributable to common stockholders of $51.6 million, or $0.22 per diluted share, for the quarter ended December 31, 2017, compared to $39.0 million, or $0.17 per diluted share, for the quarter ended December 31, 2016.
  • Leased 334,623 square feet, of which the Company’s share was 301,745 square feet that was leased at a weighted average initial rent of $74.44 per square foot. Of the square footage leased, 167,442 square feet represented second generation space, for which the Company achieved a positive mark-to-market of 3.3% on a cash basis and 0.3% on a GAAP basis.
  • Declared a fourth quarter cash dividend of $0.095 per common share on December 15, 2017, which was paid on January 12, 2018.

Transactions Subsequent to Fourth Quarter:

  • Amended its revolving credit facility, on January 10, 2018, to extend the maturity date from November 2018 to January 2022, with two six-month extension options and increase the capacity to $1.0 billion from $800.0 million. The interest rate on the extended facility, at current leverage levels, was lowered by 10 basis points from LIBOR plus 125 basis points to LIBOR plus 115 basis points, and the facility fee was reduced by 5 basis points from 25 basis points to 20 basis points.
  • Formed Paramount Gateway Office Club (the “Club”), a strategic real estate co-investment platform with aggregate third-party equity capital commitments of $600.0 million. The Club will serve as our investment vehicle for all investments that fit within its investment parameters, subject to our option to co-invest up to 51.0% in each transaction, until the four year anniversary of the final closing of the Club.

Financial Results

Quarter Ended December 31, 2017

Net loss attributable to common stockholders was $6.8 million, or $0.03 per diluted share, for the quarter ended December 31, 2017, compared to $6.5 million, or $0.03 per diluted share, for the quarter ended December 31, 2016.

Funds from Operations (“FFO”) attributable to common stockholders was $48.1 million, or $0.20 per diluted share, for the quarter ended December 31, 2017, compared to $41.0 million, or $0.18 per diluted share, for the quarter ended December 31, 2016. FFO attributable to common stockholders for the quarters ended December 31, 2017 and 2016 includes the impact of non-core items, which are listed in the table on page 9. The aggregate of these items, net of amounts attributable to noncontrolling interests, decreased FFO attributable to common stockholders for the quarter ended December 31, 2017 by $3.5 million, or $0.02 per diluted share, and increased FFO attributable to common stockholders for the quarter ended December 31, 2016 by $2.0 million, or $0.01 per diluted share.

Core FFO attributable to common stockholders, which excludes the impact of the non-core items listed on page 9, was $51.6 million, or $0.22 per diluted share, for the quarter ended December 31, 2017, compared to $39.0 million, or $0.17 per diluted share, for the quarter ended December 31, 2016.

Year Ended December 31, 2017

Net income attributable to common stockholders was $86.4 million, or $0.37 per diluted share, for the year ended December 31, 2017, compared to a net loss of $9.9 million, or $0.05 per diluted share, for the year ended December 31, 2016.

FFO attributable to common stockholders was $205.6 million, or $0.87 per diluted share, for the year ended December 31, 2017, compared to $195.1 million, or $0.89 per diluted share, for the year ended December 31, 2016. FFO attributable to common stockholders for the years ended December 31, 2017 and 2016 includes the impact of non-core items, which are listed in the table on page 9. The aggregate of these items, net of amounts attributable to noncontrolling interests, decreased FFO attributable to common stockholders for the year ended December 31, 2017 by $4.5 million, or $0.02 per diluted share, and increased FFO attributable to common stockholders for the year ended December 31, 2016 by $11.5 million, or $0.05 per diluted share.

Core FFO attributable to common stockholders, which excludes the impact of the non-core items listed on page 9, was $210.1 million, or $0.89 per diluted share, for the year ended December 31, 2017, compared to $183.6 million, or $0.84 per diluted share, for the year ended December 31, 2016.

Portfolio Operations

Quarter Ended December 31, 2017

During the quarter ended December 31, 2017, the Company leased 334,623 square feet, of which the Company’s share was 301,745 square feet that was leased at a weighted average initial rent of $74.44 per square foot. This leasing activity, partially offset by lease expirations in the quarter, increased leased occupancy and same store leased occupancy (properties owned by the Company in both reporting periods) by 120 basis points to 93.5% at December 31, 2017 from 92.3% at September 30, 2017. Of the 334,623 square feet leased in the fourth quarter, 167,442 square feet represented second generation space (space that had been vacant for less than twelve months) for which the Company achieved positive mark-to-markets of 3.3% on a cash basis and 0.3% on a GAAP basis. The weighted average lease term for leases signed during the fourth quarter was 8.0 years and weighted average tenant improvements and leasing commissions on these leases were $9.93 per square foot per annum, or 13.3% of initial rent.

Year Ended December 31, 2017

During the year ended December 31, 2017, the Company leased 1,281,503 square feet, of which the Company’s share was 1,161,176 square feet that was leased at a weighted average initial rent of $77.42 per square foot. This leasing activity, partially offset by lease expirations in the year, increased leased occupancy by 80 basis points during the year to 93.5% at December 31, 2017 from 92.7% at December 31, 2016. Same store leased occupancy (properties owned by the Company in both reporting periods) increased by 130 basis points to 93.6% at December 31, 2017 from 92.3% at December 31, 2016. Of the 1,281,503 square feet leased in the year, 761,860 square feet represented second generation space (space that had been vacant for less than twelve months) for which the Company achieved positive mark-to-markets of 13.1% on a cash basis and 8.7% on a GAAP basis. The weighted average lease term for leases signed during the year was 9.0 years and weighted average tenant improvements and leasing commissions on these leases were $9.39 per square foot per annum, or 12.1% of initial rent.

Guidance

The Company is providing Estimated Core FFO Guidance for the full year of 2018, which is reconciled below to estimated net income attributable to common stockholders per diluted share in accordance with GAAP. The Company estimates that net income attributable to common stockholders will be between $0.02 and $0.06 per diluted share. The estimated net income attributable to common stockholders per diluted share is not a projection and is being provided solely to satisfy the disclosure requirements of the U.S. Securities and Exchange Commission.

The Company estimates 2018 Core FFO to be between $0.92 and $0.96 per diluted share. The Estimated Core FFO of $0.94 per diluted share at the midpoint of the Company’s Guidance for 2018, when compared to Core FFO of $0.89 per diluted share for 2017, assumes, among other items, increases and decreases in the Company’s share of the following components: (i) an increase in Same Store Cash NOI of 7.0% to 10.0%, resulting in an incremental $0.10 per diluted share and (ii) an increase in non-cash straight-line rent and amortization of above and below-market lease revenue of $0.01 per diluted share, partially offset by (iii) a net decrease in Cash NOI of $0.02 per diluted share from the disposition of Waterview, partially offset by the acquisition of a 31.1% interest in 50 Beale Street, (iv) a decrease in lease termination income of $0.01 per diluted share, (v) a decrease in fee income, net of income taxes, of $0.01 per diluted share, (vi) an increase in interest and debt expense of $0.01 per diluted share and (vii) an increase in general and administrative expenses of $0.01 per diluted share (resulting from the amortization of a new layer of equity grants).

For the Year Ending December 31, 2018:

  Low     High

Estimated net income attributable to common stockholders per diluted share

$       0.02 $       0.06

Pro rata share of real estate depreciation and amortization, including the Company's share of unconsolidated joint ventures

        0.90         0.90
Estimated Core FFO per diluted share $       0.92 $       0.96
 

Except as described above, these estimates reflect management’s view of current and future market conditions, including assumptions with respect to rental rates, occupancy levels and the earnings impact of the events referenced in this release and otherwise to be referenced during the conference call referred to below. These estimates do not include the impact on operating results from possible future property acquisitions or dispositions, capital markets activity or unrealized gains or losses on real estate fund investments. The estimates set forth above may be subject to fluctuations as a result of several factors, including the straight-lining of rental income and the amortization of above and below-market leases. There can be no assurance that the Company’s actual results will not differ materially from the estimates set forth above.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the Federal securities laws. You can identify these statements by our use of the words “assumes,” “believes,” “estimates,” “expects,” “guidance,” “intends,” “plans,” “projects” and similar expressions that do not relate to historical matters. You should exercise caution in interpreting and relying on forward-looking statements because they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond the Company’s control and could materially affect actual results, performance or achievements. These factors include, without limitation, the ability to enter into new leases or renew leases on favorable terms, dependence on tenants’ financial condition, the uncertainties of real estate development, acquisition and disposition activity, the ability to effectively integrate acquisitions, the costs and availability of financing, the ability of our joint venture partners to satisfy their obligations, the effects of local, national and international economic and market conditions, the effects of acquisitions, dispositions and possible impairment charges on our operating results, regulatory changes, including changes to tax laws and regulations, and other risks and uncertainties detailed from time to time in the Company’s filings with the Securities and Exchange Commission. The Company does not undertake a duty to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Non-GAAP Financial Measures

FFO is a supplemental measure of our performance. We present FFO in accordance with the definition adopted by the National Association of Real Estate Investment Trusts (“Nareit”). Nareit defines FFO as GAAP net income or loss adjusted to exclude net gains from sales of depreciated real estate assets, impairment losses on depreciable real estate and depreciation and amortization expense from real estate assets, including our share of such adjustments of unconsolidated joint ventures. FFO is commonly used in the real estate industry to assist investors and analysts in comparing results of real estate companies because it excludes the effect of real estate depreciation and amortization and net gains on sales, which are based on historical costs and implicitly assume that the value of real estate diminishes predictably over time, rather than fluctuating based on existing market conditions. In addition, we present Core FFO as an alternative measure of our operating performance, which adjusts FFO for certain other items that we believe enhance the comparability of our FFO across periods. Core FFO, when applicable, excludes the impact of certain items, including, transaction related costs, realized and unrealized gains or losses on real estate fund investments, unrealized gains or losses on interest rate swaps, severance costs and gains or losses on early extinguishment of debt, in order to reflect the Core FFO of our real estate portfolio and operations. In future periods, we may also exclude other items from Core FFO that we believe may help investors compare our results.

FFO and Core FFO are presented as supplemental financial measures and do not fully represent our operating performance. Other REITs may use different methodologies for calculating FFO and Core FFO or use other definitions of FFO and Core FFO and, accordingly, our presentation of these measures may not be comparable to other real estate companies. Neither FFO nor Core FFO is intended to be a measure of cash flow or liquidity. Please refer to our financial statements, prepared in accordance with GAAP, for purposes of evaluating our financial condition, results of operations and cash flows.

A reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure can be found in this press release and in our Supplemental Information for the quarter ended December 31, 2017, which is available on our website.

Investor Conference Call and Webcast

The Company will host a conference call and audio webcast on Friday, February 16, 2018 at 10:00 a.m. Eastern Time (ET), during which management will discuss the fourth quarter results and provide commentary on business performance. A question and answer session with analysts and investors will follow the prepared remarks.

The conference call can be accessed by dialing 877-407-0789 (domestic) or 201-689-8562 (international). An audio replay of the conference call will be available from 1:00 p.m. ET on February 16, 2018 through February 23, 2018 and can be accessed by dialing 844-512-2921 (domestic) or 412-317-6671 (international) and entering the passcode 13675205.

A live audio webcast of the conference call will be available through the “Investors” section of the Company’s website, www.paramount-group.com. A replay of the webcast will be archived on the Company’s website.

About Paramount Group, Inc.

Headquartered in New York City, Paramount Group, Inc. is a fully-integrated real estate investment trust that owns, operates, manages, acquires and redevelops high-quality, Class A office properties located in select central business district submarkets of New York City, Washington, D.C. and San Francisco. Paramount is focused on maximizing the value of its portfolio by leveraging the sought-after locations of its assets and its proven property management capabilities to attract and retain high-quality tenants.

Paramount Group, Inc.

Consolidated Balance Sheets

(Unaudited and in thousands)

 
ASSETS:   December 31, 2017   December 31, 2016
Real estate, at cost
Land $ 2,209,506 $ 2,091,535
Buildings and improvements   6,119,969   5,757,558
8,329,475 7,849,093
Accumulated depreciation and amortization   (487,945 )   (318,161 )
Real estate, net 7,841,530 7,530,932
Cash and cash equivalents 219,381 162,965
Restricted cash 31,044 29,374
Investments in unconsolidated joint ventures 44,762 6,411
Investments in unconsolidated real estate funds 7,253 28,173
Preferred equity investments, net 35,817 55,051
Marketable securities 29,039 22,393
Accounts and other receivables, net 17,082 15,251
Deferred rent receivable 220,826 163,695
Deferred charges, net 98,645 71,184
Intangible assets, net 352,206 412,225
Assets held for sale - 346,685
Other assets   20,076   22,829
Total assets $ 8,917,661 $ 8,867,168
 
LIABILITIES:
Notes and mortgages payable, net $ 3,541,300 $ 3,364,898
Revolving credit facility - 230,000
Due to affiliates 27,299 27,299
Accounts payable and accrued expenses 117,630 103,896
Dividends and distributions payable 25,211 25,151
Intangible liabilities, net 130,028 153,018
Other liabilities   54,109   76,959
Total liabilities   3,895,577   3,981,221
 
EQUITY:
Paramount Group, Inc. equity 4,176,741 3,990,005
Noncontrolling interests in:
Consolidated joint ventures 404,997 253,788
Consolidated real estate fund 14,549 64,793
Operating Partnership   425,797   577,361
Total equity   5,022,084   4,885,947
Total liabilities and equity $ 8,917,661 $ 8,867,168
 

Paramount Group, Inc.

Consolidated Statements of Income

(Unaudited and in thousands, except share and per share amounts)

 
  For the Three Months Ended   For the Year Ended
December 31, December 31,
2017   2016 2017   2016
REVENUES:
Property rentals $ 142,639 $ 127,041 $ 554,907 $ 498,057
Straight-line rent adjustments 10,924 14,725 54,453 82,568

Amortization of above and below-market leases, net

  5,359   2,943   19,523   9,536
Rental income 158,922 144,709 628,883 590,161
Tenant reimbursement income 13,657 11,842 52,418 44,943
Fee and other income   7,678   10,251   37,666   48,237
Total revenues 180,257 166,802 718,967 683,341
 
EXPENSES:
Operating 68,440 63,076 266,136 250,040
Depreciation and amortization 67,894 60,975 266,037 269,450
General and administrative 16,953 14,175 61,577 53,510
Transaction related costs   976   679   2,027   2,404
Total expenses 154,263 138,905 595,777 575,404
 
Operating income 25,994 27,897 123,190 107,937
 
Income from unconsolidated joint ventures 1,042 2,122 20,185 7,413
(Loss) income from unconsolidated real estate funds (90 ) 2,042 (6,143 ) (498 )
Interest and other income (loss), net 2,951 1,905 (9,031 ) 6,934
Interest and debt expense (36,194 ) (39,732 ) (143,762 ) (153,138 )
Loss on early extinguishment of debt - (4,608 ) (7,877 ) (4,608 )
Gain on sale of real estate - - 133,989 -
Unrealized gain on interest rate swaps   -   10,153   1,802   39,814
Net (loss) income before income taxes (6,297 ) (221 ) 112,353 3,854
Income tax expense   (935 )   (2,602 )   (5,177 )   (1,785 )
Net (loss) income (7,232 ) (2,823 ) 107,176 2,069

Less net (income) loss attributable to noncontrolling interests in:

Consolidated joint ventures (664 ) (5,361 ) 10,365 (15,423 )
Consolidated real estate fund 398 497 (19,797 ) 1,316
Operating Partnership   705   1,198   (11,363 )   2,104

Net (loss) income attributable to common stockholders

$ (6,793 ) $ (6,489 ) $ 86,381 $ (9,934 )
Per share:
Basic $ (0.03 ) $ (0.03 ) $ 0.37 $ (0.05 )
Diluted $ (0.03 ) $ (0.03 ) $ 0.37 $ (0.05 )
 
Weighted average common shares outstanding:
Basic   239,997,181   223,221,284   236,372,801   218,053,062
Diluted   239,997,181   223,221,284   236,401,548   218,053,062
 

Paramount Group, Inc.

Reconciliation of Net Income to FFO and Core FFO

(Unaudited and in thousands, except share and per share amounts)

 
  For the Three Months Ended   For the Year Ended
December 31, December 31,
2017   2016 2017   2016
Reconciliation of Net (Loss) Income to FFO and Core FFO:
Net (loss) income $ (7,232 ) $ (2,823 ) $ 107,176 $ 2,069
Real estate depreciation and amortization (including
our share of unconsolidated joint ventures) 69,915 62,451 273,938 275,653
Gain on sale of Waterview   -   -   (110,583 )   -
FFO 62,683 59,628 270,531 277,722
Less FFO attributable to noncontrolling interests in:
Consolidated joint ventures (9,965 ) (11,294 ) (19,748 ) (41,320 )
Consolidated real estate fund   398   272   (20,132 )   419
FFO attributable to Paramount Group Operating Partnership 53,116 48,606 230,651 236,821

Less FFO attributable to noncontrolling interests in Operating Partnership

  (4,995 )   (7,572 )   (25,093 )   (41,681 )
FFO attributable to common stockholders $ 48,121 $ 41,034 $ 205,558 $ 195,140
Per diluted share $ 0.20 $ 0.18 $ 0.87 $ 0.89
 
FFO $ 62,683 $ 59,628 $ 270,531 $ 277,722
Non-core items:
Severance costs 2,626 - 2,626 2,874
Transaction related costs 976 679 2,027 2,404

Our share of earnings from 712 Fifth Avenue in excess of distributions received and (distributions in excess of basis)

176 - (14,205 ) -

Realized and unrealized loss (gain) from unconsolidated real estate funds

99 (1,911 ) 6,380 607

After-tax net gain on sale of residential condominium land parcel

- - (21,568 ) -
Valuation allowance on preferred equity investment - - 19,588 -
Loss on early extinguishment of debt - 4,608 7,877 4,608

Unrealized gain on interest rate swaps (including our share of unconsolidated joint ventures)

  -   (10,930 )   (2,750 )   (41,869 )
Core FFO 66,560 52,074 270,506 246,346
Less Core FFO attributable to noncontrolling interests in:
Consolidated joint ventures (9,965 ) (6,114 ) (35,022 ) (23,890 )
Consolidated real estate fund   398   272   156   419

Core FFO attributable to Paramount Group Operating Partnership

56,993 46,232 235,640 222,875

Less Core FFO attributable to noncontrolling interests in Operating Partnership

  (5,360 )   (7,202 )   (25,568 )   (39,296 )
Core FFO attributable to common stockholders $ 51,633 $ 39,030 $ 210,072 $ 183,579
Per diluted share $ 0.22 $ 0.17 $ 0.89 $ 0.84
 
Reconciliation of weighted average shares outstanding:
Weighted average shares outstanding 239,997,181 223,221,284 236,372,801 218,053,062
Effect of dilutive securities   37,360   23,141   28,747   15,869
Denominator for FFO and Core FFO per diluted share   240,034,541   223,244,425   236,401,548   218,068,931

Contacts

Paramount Group, Inc.
Wilbur Paes, 212-237-3122
Executive Vice President, Chief Financial Officer
ir@paramount-group.com
or
Christopher Brandt, 212-237-3134
Vice President, Investor Relations
ir@paramount-group.com
or
Media:
212-492-2285
pr@paramount-group.com

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