PGRE - Paramount Group

[thepupil]

Paramount Group Cut at Bank of America on High Vacancy Exposure

By Claire Miller

(Bloomberg) -- Bank of America downgraded office property operator Paramount Group to underperform from neutral, citing deteriorating markets as a headwind to leasing vacant space.

Analyst James Feldman sees immediate risk in New York City and longer term risk in San Francisco

“PGRE earns ~70% of rent in NYC and ~30% in San Francisco, two of the markets hit hardest this year”

Barclays and TD bank are set to move out of Paramount-managed New York City space in Dec. and April respectively, a combined loss of about 6.3% of rent

Anticipates future vacancy possibilities as Uber’s San Francisco lease expires in 2023

Law firm downsizing is a “high risk this cycle” as Paramount has the greatest “exposure to law firms among office peers”

Lowered price objective to $7.25 from $7.50

PGRE has 4 buys, 3 sells, 1 hold; avg PT $10: Bloomberg data

PGRE shares down 2.2% premarket

[aglittell]

Anecdotal data point here but figured I'd share as I'm long PGRE.

 

I recently graduated college and was planning to begin at a PE firm in July. Due to COVID, our offers were deferred six months. We found out last week that our team and offers that were originally based in CT will be moving to NYC in January. In mgmt's view, the talent pool is there along w/ proximity to deal-making environment. They will be continuing to increase their footprint there.

 

My recently graduated friends want to be in the city and will continue to recruit there. Very few of them would be willing to move to a tier 2 or 3 city. Again, anecdotally, I moved to SLC for an internship last summer at a BB IB. It was a great experience but I turned down the FT offer because there was no way I could see myself living in SLC as a 22 year old.

 

On the margin, I think there will be opportunistic firms and individuals to pick up some of the slack in a market like NYC or SF. Mr. market doesn't seem to agree with that line of thinking right now but time will tell.

[BG2008]

Anecdotal data point here but figured I'd share as I'm long PGRE.

 

I recently graduated college and was planning to begin at a PE firm in July. Due to COVID, our offers were deferred six months. We found out last week that our team and offers that were originally based in CT will be moving to NYC in January. In mgmt's view, the talent pool is there along w/ proximity to deal-making environment. They will be continuing to increase their footprint there.

 

My recently graduated friends want to be in the city and will continue to recruit there. Very few of them would be willing to move to a tier 2 or 3 city. Again, anecdotally, I moved to SLC for an internship last summer at a BB IB. It was a great experience but I turned down the FT offer because there was no way I could see myself living in SLC as a 22 year old.

 

On the margin, I think there will be opportunistic firms and individuals to pick up some of the slack in a market like NYC or SF. Mr. market doesn't seem to agree with that line of thinking right now but time will tell.

 

Thank you for your feedback.

 

Just out of curiosity, what bulge bracket IB is located in Salt Lake City?

[aglittell]

Anecdotal data point here but figured I'd share as I'm long PGRE.

 

I recently graduated college and was planning to begin at a PE firm in July. Due to COVID, our offers were deferred six months. We found out last week that our team and offers that were originally based in CT will be moving to NYC in January. In mgmt's view, the talent pool is there along w/ proximity to deal-making environment. They will be continuing to increase their footprint there.

 

My recently graduated friends want to be in the city and will continue to recruit there. Very few of them would be willing to move to a tier 2 or 3 city. Again, anecdotally, I moved to SLC for an internship last summer at a BB IB. It was a great experience but I turned down the FT offer because there was no way I could see myself living in SLC as a 22 year old.

 

On the margin, I think there will be opportunistic firms and individuals to pick up some of the slack in a market like NYC or SF. Mr. market doesn't seem to agree with that line of thinking right now but time will tell.

 

Thank you for your feedback.

 

Just out of curiosity, what bulge bracket IB is located in Salt Lake City?

 

GS has a pretty large presence there. I believe the company has three offices there now, with growing headcount. It was initially a cost center for primarily back-office functions, but now all major functions have teams there. It was a great place to live for 9 weeks, but too much of adjustment to live there full-time having grown up on the east coast.

[CorpRaider]

Missed your chance at like three wives bro.  J/K, as a married man that sounds kind of horrible, TBH.

[BG2008]

Anecdotal data point here but figured I'd share as I'm long PGRE.

 

I recently graduated college and was planning to begin at a PE firm in July. Due to COVID, our offers were deferred six months. We found out last week that our team and offers that were originally based in CT will be moving to NYC in January. In mgmt's view, the talent pool is there along w/ proximity to deal-making environment. They will be continuing to increase their footprint there.

 

My recently graduated friends want to be in the city and will continue to recruit there. Very few of them would be willing to move to a tier 2 or 3 city. Again, anecdotally, I moved to SLC for an internship last summer at a BB IB. It was a great experience but I turned down the FT offer because there was no way I could see myself living in SLC as a 22 year old.

 

On the margin, I think there will be opportunistic firms and individuals to pick up some of the slack in a market like NYC or SF. Mr. market doesn't seem to agree with that line of thinking right now but time will tell.

 

Thank you for your feedback.

 

Just out of curiosity, what bulge bracket IB is located in Salt Lake City?

 

GS has a pretty large presence there. I believe the company has three offices there now, with growing headcount. It was initially a cost center for primarily back-office functions, but now all major functions have teams there. It was a great place to live for 9 weeks, but too much of adjustment to live there full-time having grown up on the east coast.

 

I have heard about this dynamic from friends who are more tied into the banks/HFs.  Can you expand on this a little more?  The understanding is that the BB have send a lot of their ops, middle office, and back office to Jacksonville, Delaware, SLC, and other cheaper US locations.  I guess paying someone $70-80k/year for ops in NYC never really made sense anyway.  NYC is meant for the high performers and the highest value add.  One of the reasons cited is that once you go to a SLC or Jacksonville, the employees basically becomes locked into that city as GS's $80k salary will likely make it the best job available in that community. 

[lemsinge]

This is also an anecdotal point, but am sharing as I am also a shareholder - my apartment building in Murray Hill is now offering 3mo free rent as of last week to new tenants, compared to the 2mo free rent I was offered when I moved in a month ago.

 

This personally got me a bit jittery as Murray Hill is typically a younger area with many working professionals, and this building is a "luxury" building. It has a 20 min walk to grand central, a nice rooftop, in building dry cleaning, etc, and is filled with young professionals. I assume that the vacancy in my building is a good proxy for the desire of young people to move back to the city and ultimately return to the office.

 

Perhaps I am over-analyzing this, but figured it's worth sharing.

[aglittell]

Anecdotal data point here but figured I'd share as I'm long PGRE.

 

I recently graduated college and was planning to begin at a PE firm in July. Due to COVID, our offers were deferred six months. We found out last week that our team and offers that were originally based in CT will be moving to NYC in January. In mgmt's view, the talent pool is there along w/ proximity to deal-making environment. They will be continuing to increase their footprint there.

 

My recently graduated friends want to be in the city and will continue to recruit there. Very few of them would be willing to move to a tier 2 or 3 city. Again, anecdotally, I moved to SLC for an internship last summer at a BB IB. It was a great experience but I turned down the FT offer because there was no way I could see myself living in SLC as a 22 year old.

 

On the margin, I think there will be opportunistic firms and individuals to pick up some of the slack in a market like NYC or SF. Mr. market doesn't seem to agree with that line of thinking right now but time will tell.

 

Thank you for your feedback.

 

Just out of curiosity, what bulge bracket IB is located in Salt Lake City?

 

GS has a pretty large presence there. I believe the company has three offices there now, with growing headcount. It was initially a cost center for primarily back-office functions, but now all major functions have teams there. It was a great place to live for 9 weeks, but too much of adjustment to live there full-time having grown up on the east coast.

 

I have heard about this dynamic from friends who are more tied into the banks/HFs.  Can you expand on this a little more?  The understanding is that the BB have send a lot of their ops, middle office, and back office to Jacksonville, Delaware, SLC, and other cheaper US locations.  I guess paying someone $70-80k/year for ops in NYC never really made sense anyway.  NYC is meant for the high performers and the highest value add.  One of the reasons cited is that once you go to a SLC or Jacksonville, the employees basically becomes locked into that city as GS's $80k salary will likely make it the best job available in that community.

 

I was in a front office position in SLC. My base for the exact same work on the same team as the people in NYC would've been 30% lower. It would've been a good comp salary for SLC. If the banks can receive the same level of output from front office workers and charge the same fees to clients, that 30% goes straight to the bottom-line. This works if the employer has a deep talent pool in the market to recruit from (debatable in SLC) or if the experience / allure of working for the company can attract someone like myself from the east coast to stay in that market (it could not).

[realassetsvalue]

San Francisco Comp from a couple weeks ago. Allianz bought 45% of CXP's 221 Main St in San Fran - South Financial District. Missed it as not looking at my CBD office REITs has been a defense mechanism for the past couple of months.

 

Deal values building at $400m, $1,050 PSF, 5.5% cap rate based on Q2 2020 annualized cash NOI. This is in the midst of the bloodbath that is the leasing market with sub-lease availability through the roof.

 

Fully leased, major tenants include DocuSign and Prosper Marketplace. DocuSign occupy 152k sq ft and are 43% of the rent with 4.1 years left on their lease. Prosper occupy 50k sq ft and are 14% of the rent with 2.7 years left on their lease. Both are paying Rent PSF of $85 - $90.

 

Source: https://ir.columbia.reit/overview-news-and-events/newsroom/newsroom-details/2020/Columbia-Property-Trust-and-Allianz-Real-Estate-Expand-Joint-Venture-to-Include-221-Main-Street-in-San-Francisco/default.aspx

 

Can anyone think of any reason why PGRE's San Fran assets would be worth less than this mark (i.e. $1,000 PSF / a 5.5% cap)?

 

As another data point although less direct, as per Alexandria's release today, they sold the 6 storey retail redevelopment site in SoMa to IKEA for ~$875 PSF vacant.

 

Meanwhile PGRE still trades at $525 PSF and a 7.4% cap... Earnings out next week I believe - lets see what comes down the pipe.

[thepupil]

Can anyone think of any reason why PGRE's San Fran assets would be worth less than this mark (i.e. $1,000 PSF / a 5.5% cap)?

 

i have One Front at $1.7 / share ($650 / foot). This is conservative given it's 100% occupied w/ decent term and First Republic is the bulk of the building. It's less than what they paid ($800/foot) and they've added value to the property over ownership through leasing to First Republic. I estimate NOI in the low $30's ($50mm of annualized rental revenue) so this would be about a 7.0% cap. unsure how to get more precision on the NOI there's no disclosure and no mortgage document since there's no loan. 

 

In a bear case, I'm arbitrarily knocking it down another 50% to $325 / foot, which would be a 14% cap rate. At that point, you're really just acknowledging that there's some bearish scenario that goes beyond prediction (urban death spiral). 

 

For perspective PGRE trades 5% above my bear case and these are the types of assumptions I'm using.

 

I have One Market at $1100 / foot which is about a 6.0% cap. I'm more generous to this building as I believe the quality to be exceptional. Bear case is more like $880 / foot / $200mm to PGRE (they'll get about $100mm in cash flow after debt service before the loan come due, so almost no residual value).

 

I don't bother with the SF JV assets and assume they are all worthless / part of the upside. they paid $1.6/share or whatever pre-covid, so it's not a huge swing factor, probably not all worthless.

 

I'm a little guilty of letting price dictate the inputs here but absent better news/I have to to avoid risking and losing additional $ on PGRE lol. 

 

At $1000 / foot One Front would be at slightly below a 5.0 cap and would be worth 43% of the market cap given it has no debt. that seems too good to be true.

 

 

 

 

 

 

 

[bonkers]

My primary worry with PGRE is the 1301 Avenue of the Americas that will be losing Barclays in two months. 0.5 M sq.ft. vacant space that could remain vacant who knows how long, 2-3 years in a bad scenario?

 

Additionally, the debt on the building (850 M) needs to be refinanced by 2021 Q4. If there is no major tenant before that - and I don't believe there will - what will the banks do, give some short-term bridge loan? On the other hand, perhaps that could make the whole building easier to sell, even if that would probably be their least desired option.  :o

[thepupil]

Yep, my biggest concern is they do something non economic to keep that building. If they hand back the keys, the REIT becomes even more subscale, but there is a chance  that’ll be the right thing to do.

 

 

[Spekulatius]

$5.7 - new lows. Is the fat lady singing yet?

[thepupil]

fat lady is very much singing. it's repetitive but your downside (absent management foolishness) should be somewhat curtailed here given the 25% in net cash (haircutting contracted DC asset by 50%), 35% in unlevered buildings (at 70% haircut), and 2 stakes in very well leased trophy assets, one of which has financing/leasing locked in for a very long time. 1633 alone should produce something like 1/3 of the market cap in cash before the loan comes due in 9 years.

 

at more normal haircuts (slightly wide of the limited market data/comps we ahve), the market cap is covered by the cash and the 3 unlevered buildings...

 

as you've noted though, there's a case the better play is to just average down into BXP's super high quality diverse ultra low cost of capital portfolio. you don't get the same granularity (ie "this unlevered building is worth 15-30% of the market cap") like you do w/ PGRE but as BXP falls. it's not as cheap, but BXP's 10 year bonds trade <2.4% yield and they are doing 20 year leases with Volkswagen and MSFT and blah blah blah. BXP's leasing this Q is somewhat confidence inspiring as to state of office, moreso than SLG's, maybe that's a "ex-NYC thing" or just a "we ahve some life sciences and a more sparkly portfolio" thing.

 

i'm pretty much out of bullets in office and to a slightly lesser extent urban real estate. the positions are established and will need bonus/savings /dividend inflows to add, but probably won't except for JBGS... have a high pain tolerance, but the urban death spiral/ "I am Legend" scenario is still some part of the probability tree, so i think most inflows will go to non urban RE stuff.

 

 

[CorpRaider]

The "I Am Legend scenario" LOL.

[fareastwarriors]

The "I Am Legend scenario" LOL.

 

Hahah

Too good .

[thepupil]

the apocalypse will take a while to get here at this rate...of course, 2021 has more expiries.

 

very short leases though.

 

This leasing activity, offset by lease expirations in the quarter, decreased same store leased occupancy (properties owned by us during both reporting periods in a similar manner and not classified as discontinued operations) by 10 basis points to 95.6% at September 30, 2020 from 95.7% at June 30, 2020. All of the square footage leased in the third quarter represented second generation space (space that had been vacant for less than twelve months) for which the Company achieved a positive mark-to-market of 3.6% on a cash basis and 9.5% on a GAAP basis. The weighted average lease term for leases signed during the third quarter was 3.2 years and weighted average tenant improvements and leasing commissions on these leases were $0.47 per square foot per annum, or 0.6% of initial rent.

 

 

 

[thepupil]

as you've noted though, there's a case the better play is to just average down into BXP's super high quality diverse ultra low cost of capital portfolio. you don't get the same granularity (ie "this unlevered building is worth 15-30% of the market cap") like you do w/ PGRE but as BXP falls. it's not as cheap, but BXP's 10 year bonds trade <2.4% yield and they are doing 20 year leases with Volkswagen and MSFT and blah blah blah. BXP's leasing this Q is somewhat confidence inspiring as to state of office, moreso than SLG's, maybe that's a "ex-NYC thing" or just a "we ahve some life sciences and a more sparkly portfolio" thing.

 

there's a BXP VIC article today that basically says

a) 7% + cap rate, low rates, staggered maturities, private market transactions point to closer to pre-covid cap rates for well leased

b) HSD - even low double digit carry in terms of divvy+NOI growth (driven by pre-let development)

c) any re-rating = 20's IRR's reminiscent of RTC deals but in liquid low leverage form.

 

not worth another thread, just pointing out. COBF is more oversupplied with office REIT threads than NYC is with class A space.

 

[BG2008]

Given that the Office REITs are down quite a bit this year.  It looks like we maybe due some year end tax loss harvesting.

[KJP]

Because I have too much free time, I took a look at what would happen over the next few years if Paramount signs no new leases and leased square footage rolls off at schedules provided for NY and SF in the latest supplemental.  To simplify things, I made the following assumptions: 

 

1) Treat NY as one big building with 6.225 million currently leased square feet (current Paramount share) with annual rents at $79.16 sq ft (current NY weighted average)

2) Treat SF as one big building with 2.35 million currently leased square feet (current Paramount share) with annual rents at $84.72 sq ft (current SF weighted average)

3) Assume 2021 OpEx of $255 million (implied Rent-to-NOI conversion of 61%) and then keep it at $255 million annually (i.e., no OpEx decline with increasing vacancy so continually falling Rent-to-NOI conversion)

4) Assume constant annual interest of $117 million ($3.6 billion in mortgage debt at 3.25%)

5) Assume constant $60 million in annual SG&A (i.e., no economizing despite increasing vacancy)

6) $20 million per year in cash capital expenditures (e.g., periodic lobby refurbishment)

7) $35 million in other income (management fees, etc.) in 2021 and then declining 5% annually thereafter

 

That, of course, is not going to be reality, because it is both overly draconian (no new leases), ignores the upcoming 1301 AoA maturity, and ignores real differences in building quality.  Nevertheless, that very simple model spits out cash flow to equity of over $500 million over the next three years.  (Cash flow declines rapidly after that because the substantial operating leverage of buildings and the increasing vacancy.)  Meanwhile, the current market value of the equity is about $1.4 billion, and if the DC sale closes and the revolver is paid off, the company would have no recourse debt and $400 million in cash, for an EV (excluding non-recourse debt) of only $1 billion. 

 

Anyone see major errors in these (admittedly overly simplified and fanciful) numbers?

 

 

 

 

[thepupil]

Bloomberg) --Long Pond Capital took a new position in Paramount Group Inc. in the third quarter, buying 4.5 percent of the company's outstanding stock.

 

Lots of overlap with long pond. Real estate securities = small ish world

 

https://whalewisdom.com/filer/long-pond-capital-lp#tabholdings_tab_link

[thepupil]

$9.50 bid for the company

 

Paramount Board of Directors Unanimously Rejects Unsolicited Proposal from Bow Street

Proposal Significantly Undervalues Paramount, is Inadequate and Not in the Best Interest of Stockholders

The Paramount Board Remains Open to All Opportunities to Enhance Stockholder Value; Will Continue to Act in the Best Interest of All Stockholders

Business Wire

NEW YORK -- November 16, 2020

Paramount Group, Inc. (NYSE: PGRE) (“Paramount” or the “Company”) today announced that its Board of Directors has unanimously rejected an unsolicited proposal received from Bow Street LLC (“Bow Street”) on November 4, 2020 to acquire all of the Company’s outstanding shares for between $9.50 and $10.00 per share in cash.

Consistent with its fiduciary duties, the Paramount Board engaged extensively with Bow Street and carefully reviewed and considered Bow Street’s proposal. As part of this, the Company had several discussions with and hosted representatives of Bow Street at Paramount’s offices so that Bow Street could present its proposal directly to a majority of Paramount’s Board members. Following this presentation and a thorough evaluation of Bow Street’s proposal conducted in consultation with financial and legal advisors, the Board unanimously determined that the proposal is inadequate, significantly undervalues Paramount and is not in the best interest of the Company and all its stockholders.

In making its determination, the Board considered, among other things, Paramount’s successful recent portfolio transformation, trophy and Class A assets in premier markets, leading, fully integrated operating platform, and the outsized but temporary impact the COVID-19 pandemic is currently having on the real estate industry. The Board also considered recent news regarding promising COVID-19 vaccine candidates, and noted that Paramount’s stock price has increased by approximately 40% since such news was first announced on November 9, 2020.

“The Paramount Board is open to all opportunities to enhance stockholder value, and we engaged extensively with Bow Street and carefully considered its proposal with this in mind,” said Albert Behler, Chairman, Chief Executive Officer and President of Paramount. “While we are pleased Bow Street recognizes that Paramount’s value significantly exceeds the value implied by current trading prices, the Board determined that Bow Street’s proposal is wholly inadequate, opportunistic in its timing and significantly undervalues the Company and its compelling prospects for long-term value creation. Among other things, Bow Street’s proposed pricing range is materially lower than our pre-COVID-19 trading levels and significantly undervalues our assets based on their intrinsic value. Importantly, we remain open-minded about all opportunities to create additional value and will continue to take actions that are in the best interest of Paramount and all of its stockholders.”

The Paramount Board and management team are focused on capitalizing on the Company’s best-in-class operating platform to reposition its portfolio of trophy and Class A assets and drive enhanced operational and financial performance and stockholder value. In recent years, the Company has successfully transformed its portfolio by harvesting capital from stabilized assets and recycling that capital into share repurchases and higher-growth opportunities. Paramount has a proven track record of leveraging its best-in-class, fully integrated operating platform to reposition and increase the value of these assets, re-leasing space to high credit-quality tenants at attractive mark-to-markets to improve the properties’ growth profiles and attractiveness to the market. The Company has also prudently structured acquisitions as joint ventures, enabling it to minimize downside risk while providing Paramount with the opportunity to further enhance returns through fees generated by managing and leasing the assets. The Paramount Board and management team are confident the Company is well-positioned to drive long-term value-creation.

The full text of the letter sent by the Paramount Board of Directors to Bow Street is below:

November 16, 2020

Mr. Akiva Katz 

Mr. Howard Shainker 

Managing Partners 

Bow Street LLC 

595 Madison Avenue 

New York, New York 10022

Dear Akiva and Howard:

This will respond on behalf of our Board of Directors to your proposal provided on November 4, 2020 and set forth in your presentation to the Board on November 5, 2020.

Our Board has fully and carefully reviewed and considered your proposal, with the benefit of advice from our external financial and legal advisors. The Board has unanimously determined that your proposal is inadequate and significantly undervalues Paramount Group, Inc. (“Paramount”).

Our Board and management team remain open-minded, and we will continue to thoroughly consider all opportunities to enhance stockholder value. As always, we are committed to advancing the best interests of Paramount and all of our stockholders.

Very truly yours,

Albert P. Behler 

[Gregmal]

shit, and here I thought all this stuff was dead or on its way to zero...

 

 

In other news...

 

[winjitsu]

shit, and here I thought all this stuff was dead or on its way to zero...

 

Almost +50% from... last weeks low.

[thepupil]

don't hate on me guys...but I'm trimming marginally, about 10% of position.

 

1. Bow Street isn't a real PE firm. has put in offers on CLI without financing before.

 

2. the family thinks this stock is worth $20 and that values aren't down much during covid. they may be right (I wouldn't go that far at all), but that's a big impediment to any deal getting done

 

3. my VNO calls are singing and i'm just taking a little off the table.

 

I think the only way this is actually the catalyst is if it bring in another party to the table.

 

George Soros I am not.

 

a reasonable question would be "it's only up 13% since the beggining of thread...were you playing for 13%". the answer is absolutely not, but i'd say my confidence in the office REITs has not increased over time and i've been a wussy trimmer during the vaccine run-up. Don’t get me wrong, still plenty of exposure, I just think the risk/reward on these changes a lot as they run because the downside protection of XYZ building or whatever decreases.

 

It’s probably a mistake and maybe the rational thing is to buy more. It’s down 30% YTD and up 45% in a month, hows that for some vol in “leased up core office assets.