UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: September 30, 2019
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-36746
PARAMOUNT GROUP, INC.
(Exact name of registrant as specified in its charter)
Maryland
32-0439307
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
1633 Broadway, Suite 1801, New York, NY
10019
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (212) 237-3100
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class
Trading Symbol
Name of each exchange on which registered
Common stock of Paramount Group, Inc.,$0.01 par value per share
PGRE
The New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Accelerated Filer
Non-Accelerated Filer
Smaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 15, 2019, there were 227,433,050 shares of the registrant’s common stock outstanding.
Table of Contents
Item
Page Number
Part I.
Financial Information
Item 1.
Consolidated Financial Statements
Consolidated Balance Sheets (Unaudited) as of September 30, 2019 and December 31, 2018
3
Consolidated Statements of Income (Unaudited) for the three and nine months ended September 30, 2019 and 2018
4
Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 30, 2019 and 2018
5
Consolidated Statements of Changes in Equity (Unaudited) for the three and nine months ended September 30, 2019 and 2018
6
Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2019 and 2018
8
Notes to Consolidated Financial Statements (Unaudited)
10
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
29
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
61
Item 4.
Controls and Procedures
63
Part II.
Other Information
Legal Proceedings
64
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
65
Mine Safety Disclosures
Item 5.
Item 6.
Exhibits
Signatures
66
2
PART I – FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Amounts in thousands, except share, unit and per share amounts)
September 30, 2019
December 31, 2018
Assets
Real estate, at cost:
Land
$
2,018,805
2,065,206
Buildings and improvements
5,984,703
6,036,445
8,003,508
8,101,651
Accumulated depreciation and amortization
(764,151
)
(644,639
Real estate, net
7,239,357
7,457,012
Cash and cash equivalents
298,066
339,653
Restricted cash
25,372
25,756
Investments in unconsolidated joint ventures
231,983
78,863
Investments in unconsolidated real estate funds
11,582
10,352
Preferred equity investments
-
36,042
Accounts and other receivables, net of allowance of $593 in 2018
20,400
20,076
Deferred rent receivable
295,520
267,456
Deferred charges, net of accumulated amortization of $39,576 and $30,129
127,427
117,858
Intangible assets, net of accumulated amortization of $264,802 and $245,444
222,709
270,445
Other assets
107,334
132,465
Total assets (1)
8,579,750
8,755,978
Liabilities and Equity
Notes and mortgages payable, net of deferred financing costs of $26,266 and $32,883
3,576,734
3,566,917
Revolving credit facility
Accounts payable and accrued expenses
119,362
124,334
Dividends and distributions payable
25,307
25,902
Intangible liabilities, net of accumulated amortization of $98,829 and $89,200
78,836
95,991
Other liabilities
76,768
51,170
Total liabilities (1)
3,877,007
3,864,314
Commitments and contingencies
Paramount Group, Inc. equity:
Common stock $0.01 par value per share; authorized 900,000,000 shares; issued
and outstanding 227,865,810 and 233,135,704 shares in 2019 and 2018, respectively
2,279
2,329
Additional paid-in-capital
4,134,389
4,201,756
Earnings less than distributions
(276,659
(219,906
Accumulated other comprehensive (loss) income
(9,219
16,621
Paramount Group, Inc. equity
3,850,790
4,000,800
Noncontrolling interests in:
Consolidated joint ventures
363,211
394,995
Consolidated real estate fund
72,241
66,887
Operating Partnership (24,762,564 and 25,127,003 units outstanding)
416,501
428,982
Total equity
4,702,743
4,891,664
Total liabilities and equity
(1)
Represents the consolidated assets and liabilities of Paramount Group Operating Partnership LP, a Delaware limited partnership (the “Operating Partnership”). The Operating Partnership is a consolidated variable interest entity (“VIE”), of which we are the sole general partner and own approximately 90.2% as of September 30, 2019. The assets and liabilities of the Operating Partnership, as of September 30, 2019, include $1,966,042 and $1,275,702 of assets and liabilities, respectively, of certain VIEs that are consolidated by the Operating Partnership. See Note 14, Variable Interest Entities (“VIEs”).
See notes to consolidated financial statements (unaudited).
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended
For the Nine Months Ended
September 30,
(Amounts in thousands, except share and per share amounts)
2019
2018
Revenues:
Rental revenue
188,079
185,074
551,835
545,475
Fee and other income
10,238
7,522
26,857
22,811
Total revenues
198,317
192,596
578,692
568,286
Expenses:
Operating
71,648
69,811
207,601
206,435
Depreciation and amortization
63,058
64,610
188,772
194,541
General and administrative
16,319
14,452
51,457
44,278
Transaction related costs
786
450
1,704
863
Total expenses
151,811
149,323
449,534
446,117
Other income (expense):
(Loss) income from unconsolidated joint ventures
(1,332
472
(2,815
2,931
Income (loss) from unconsolidated real estate funds
206
(188
271
(268
Interest and other income, net
1,222
2,778
7,705
6,888
Interest and debt expense
(37,325
(37,105
(111,462
(109,996
Real estate impairment loss
(46,000
Gain on sale of real estate
1,140
36,845
Net income before income taxes
10,417
46,075
23,997
12,569
Income tax benefit (expense)
583
(1,814
(823
(2,171
Net income
11,000
44,261
23,174
10,398
Less net (income) loss attributable to noncontrolling interests in:
(3,051
(2,713
(8,253
(5,520
(109
(86
(256
(668
Operating Partnership
(758
(3,931
(1,419
(381
Net income attributable to common stockholders
7,082
37,531
13,246
3,829
Income per Common Share - Basic:
Income per common share
0.03
0.16
0.06
0.02
Weighted average shares outstanding
231,197,838
240,447,921
232,974,210
240,365,882
Income per Common Share - Diluted:
231,229,939
240,489,138
233,004,917
240,391,184
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
Other comprehensive (loss) income:
Change in value of interest rate swaps
(4,131
3,392
(28,502
23,738
Pro rata share of other comprehensive income (loss)
of unconsolidated joint ventures
41
(262
(143
(105
Comprehensive income (loss)
6,910
47,391
(5,471
34,031
Less comprehensive (income) loss attributable to
noncontrolling interests in:
(106
(30
(205
(612
(362
(4,233
1,335
(2,622
Comprehensive income (loss) attributable to
common stockholders
3,391
40,415
(12,594
25,277
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Accumulated
Noncontrolling Interests in
Additional
Earnings
Other
Consolidated
(Amounts in thousands, except per share
Common Shares
Paid-in-
Less than
Comprehensive
Joint
Real Estate
Total
and unit amounts)
Shares
Amount
Capital
Distributions
(Loss) Income
Ventures
Fund
Partnership
Equity
Balance as of June 30, 2019
234,124
2,341
4,214,193
(260,939
(5,525
365,278
81,949
416,092
4,813,389
3,051
109
758
Common shares issued upon redemption of
common units
1
16
(16
Common shares issued under Omnibus
share plan, net of shares withheld for taxes
(7
Repurchases of common shares
(6,252
(62
(82,455
(82,517
Dividends and distributions ($0.10 per share
and unit)
(22,795
(2,512
(25,307
Contributions from noncontrolling interests
23
Distributions to noncontrolling interests
(5,118
(3,731
(400
Pro rata share of other comprehensive income
37
Amortization of equity awards
644
4,566
5,210
Acquisition of noncontrolling interest
(9,840
1,991
(1,991
Balance as of September 30, 2019
227,866
Balance as of June 30, 2018
240,529
2,403
4,297,823
(215,353
28,647
403,686
57,816
430,726
5,005,748
2,713
86
3,931
176
2,990
(2,992
(237
(3
(3,566
(3,569
(24,046
(2,550
(26,596
8,253
(6,465
3,070
322
Pro rata share of other comprehensive loss
(186
(56
(20
736
3,915
4,651
3,346
(1
(3,346
Balance as of September 30, 2018
240,461
2,402
4,301,329
(201,868
31,530
399,934
66,099
429,986
5,029,412
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY - CONTINUED
Balance as of December 31, 2018
233,136
256
1,419
1,407
14
23,992
(24,006
49
(317
(314
(6,726
(67
(88,938
(89,005
Dividends and distributions ($0.30 per share
(69,682
(7,527
(77,209
14,989
(40,037
(25,757
(2,745
(83
(51
(9
1,984
15,982
17,966
(4,405
4,405
Balance as of December 31, 2017
240,427
4,297,948
(133,693
10,083
404,997
14,549
425,797
5,022,084
Basis adjustment upon adoption of ASU 2017-05
529
6,557
7,086
Balance as of January 1, 2018
(133,164
21,106
5,029,170
5,520
668
381
203
3,459
(3,461
68
(213
(72,149
(7,694
(79,843
44,381
(10,583
21,492
2,246
(44
(5
2,206
14,003
16,209
1,282
(171
(1,281
7
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30,
Cash Flows from Operating Activities:
Adjustments to reconcile net income to net cash provided by
operating activities:
Straight-lining of rental revenue
(33,407
(45,671
Amortization of stock-based compensation expense
17,859
15,245
Amortization of above and below-market leases, net
(8,555
(12,611
Amortization of deferred financing costs
8,450
8,267
Receipt of accrued interest on preferred equity investment
2,339
Realized and unrealized gains on marketable securities
(2,395
(802
Distributions of earnings from unconsolidated joint ventures
2,852
4,910
Loss (income) from unconsolidated joint ventures
2,815
(2,931
Distributions of earnings from unconsolidated real estate funds
1,288
232
(Income) loss from unconsolidated real estate funds
(271
268
46,000
(1,140
(36,845
Other non-cash adjustments
(153
308
Changes in operating assets and liabilities:
Accounts and other receivables
(324
877
Deferred charges
(16,620
(20,637
25,963
(31,148
(5,457
700
1,457
3,067
Net cash provided by operating activities
206,647
134,168
Cash Flows from Investing Activities:
Due from affiliates
(181,000
Repayment of amounts due from affiliates
181,000
Proceeds from sale of real estate
150,307
349,013
Investments in and contributions of capital to unconsolidated joint ventures
(148,896
(25,491
Additions to real estate
(70,094
(85,621
Redemption of preferred equity investment
33,750
Real estate acquisition deposits
(25,000
Sales of marketable securities
15,738
16,352
Purchases of marketable securities
(11,945
(13,192
Contributions of capital to unconsolidated real estate funds
(3,860
(2,254
Distributions of capital from unconsolidated real estate funds
1,613
Escrow deposits and loans receivable for Residential Development Fund
(15,680
Net cash (used in) provided by investing activities
(58,387
223,127
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Cash Flows from Financing Activities:
Borrowings under revolving credit facility
195,000
Repayment of borrowings under revolving credit facility
(195,000
Dividends paid to common stockholders
(70,243
(70,944
Distributions paid to common unitholders
(7,561
(7,514
Proceeds from notes and mortgages payable
3,200
16,700
Acquisition of noncontrolling interest in consolidated real estate fund
(1,000
Repurchase of shares related to stock compensation agreements
and related tax withholdings
Debt issuance costs
(260
(6,351
Net cash used in financing activities
(190,231
(38,093
Net (decrease) increase in cash and cash equivalents and restricted cash
(41,971
319,202
Cash and cash equivalents and restricted cash at beginning of period
365,409
250,425
Cash and cash equivalents and restricted cash at end of period
323,438
569,627
Reconciliation of Cash and Cash Equivalents and Restricted Cash:
Cash and cash equivalents at beginning of period
219,381
Restricted cash at beginning of period
31,044
Cash and cash equivalents at end of period
538,725
Restricted cash at end of period
30,902
Supplemental Disclosure of Cash Flow Information:
Cash payments for interest
104,616
101,989
Cash payments for income taxes, net of refunds
2,049
1,541
Non-Cash Transactions:
28,502
(23,738
Dividends and distributions declared but not yet paid
26,596
Common shares issued upon redemption of common units
24,006
3,461
Additions to real estate included in accounts payable and accrued expenses
13,342
32,790
Note payable issued in connection with the acquisition of noncontrolling
interest in consolidated real estate fund
8,771
Write-off of fully amortized and/or depreciated assets
5,292
3,141
Basis adjustment to investment in unconsolidated joint ventures upon
adoption of ASU 2017-05
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization and Business
As used in these consolidated financial statements, unless otherwise indicated, all references to “we,” “us,” “our,” the “Company,” and “Paramount” refer to Paramount Group, Inc., a Maryland corporation, and its consolidated subsidiaries, including Paramount Group Operating Partnership LP (the “Operating Partnership”), a Delaware limited partnership. We are a fully-integrated real estate investment trust (“REIT”) focused on owning, operating, managing, acquiring and redeveloping high-quality, Class A office properties in select central business district submarkets of New York City, San Francisco and Washington, D.C. As of September 30, 2019, our portfolio consisted of 13 Class A office properties aggregating approximately 12.4 million square feet. We conduct our business through, and substantially all of our interests in properties and investments are held by, the Operating Partnership. We are the sole general partner of, and owned approximately 90.2% of, the Operating Partnership as of September 30, 2019.
2.
Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements are unaudited and have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in conjunction with the instructions to Form 10-Q of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures required by GAAP for complete financial statements have been condensed or omitted. These consolidated financial statements include the accounts of Paramount and its consolidated subsidiaries, including the Operating Partnership. In the opinion of management, all significant adjustments (which include only normal recurring adjustments) and eliminations (which include intercompany balances and transactions) necessary to present fairly the financial position, results of operations and changes in cash flows have been made. The consolidated balance sheet as of December 31, 2018 was derived from audited financial statements as of that date, but does not include all information and disclosures required by GAAP. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC.
Significant Accounting Policies
There are no material changes to our significant accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.
Use of Estimates
We have made estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates. The results of operations for the three and nine months ended September 30, 2019, are not necessarily indicative of the operating results for the full year.
Reclassifications
Certain prior year balances have been reclassified to conform to current year presentation.
Recently Issued Accounting Pronouncements Not Materially Impacting Our Financial Statements
In June 2016, the FASB issued ASU 2016-13, an update to ASC Topic 326, Financial Instruments – Credit Losses. ASU 2016- 13 requires measurement and recognition of expected credit losses on financial instruments measured at amortized cost at the end of each reporting period rather than recognizing the credit losses when it is probable that the loss has been incurred in accordance with current guidance. In November 2018, the FASB issued ASU 2018-19, which clarified that receivables arising from operating leases are not within the scope of ASC Topic 326, and instead, impairment of receivables arising from operating leases should be accounted for under the scope of ASC Topic 842, Leases. In May 2019, the FASB issued ASU 2019-05, which provides transition relief for entities adopting ASU 2016-13 by allowing entities to elect the fair value option on certain financial instruments. ASU 2016-13 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2019, with early adoption permitted. We do not believe the adoption of ASU 2016-13 will have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, an update to ASC Topic 820, Fair Value Measurements. ASU 2018-13 modifies the disclosure requirements in ASC Topic 820, by (i) removing certain disclosure requirements related to transfers between Level 1 and Level 2 of the fair value hierarchy and the valuation processes for Level 3 fair value measurements, (ii) modifying existing disclosure requirements related to measurement uncertainty and (iii) adding new disclosure requirements related to changes in unrealized gains or losses for the period included in other comprehensive income for recurring Level 3 fair value measurements and disclosures related to the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2019, with early adoption permitted. We do not believe the adoption of ASU 2018-13 will have an impact on our consolidated financial statements.
In December 2018, the FASB issued ASU 2018-20, an update to ASC Topic 842, Leases. ASU 2018-20 allows lessors to make an accounting policy election not to evaluate whether sales taxes and similar taxes imposed by a governmental authority on a specific lease transaction and collected by the lessor from the lessee are the primary obligation of the lessor. A lessor that makes this election must exclude from the consideration in the contract and from variable payments not included in the consideration in the contract all taxes within the scope of the election and make additional disclosures. ASU 2018-20 requires a lessor to exclude lessor costs paid directly by a lessee to third parties on the lessor’s behalf from variable payments, but lessor costs that are paid by the lessor and reimbursed by the lessee are required to be included in variable payments. The effective date of ASU 2018-20 is required to coincide with the effective date of ASU 2016-02. We adopted the provisions of ASU 2018-20 on January 1, 2019 in conjunction with the adoption of ASU 2016-02. This adoption did not have an impact on our consolidated financial statements.
Recently Issued Accounting Pronouncements Impacting or Potentially Impacting Our Financial Statements
In February 2016, the FASB issued ASU 2016-02, an update to ASC Topic 842, Leases. ASU 2016-02 amends the existing guidance for lease accounting by requiring lessees to, among other things, (i) recognize most leases on their balance sheets, (ii) classify leases as either financing or operating, and (iii) record a right-of-use asset and a lease liability for all leases with a term greater than 12 months. ASU 2016-02 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2018, with early adoption permitted. We adopted the provisions of ASU 2016-02 on January 1, 2019, using the alternative modified retrospective method, also known as the transition relief method, permitted under ASU 2018-11 which allows companies to not recast comparative periods in the period of adoption. Accordingly, we have applied the provisions of the standard on January 1, 2019, the date of adoption. Upon adoption of this ASU, we recorded a $4,184,000 right-of-use asset and a lease liability for leases in which we are a lessee, which are included as components of “other assets” and “other liabilities”, respectively, on our consolidated balance sheet.
11
While accounting for lessors under ASU 2016-02 is substantially similar to existing lease accounting guidance, lessors are required to separate payments received pursuant to a lease between lease components (payments received towards the leased space) and non-lease components (payments received towards common area maintenance activities). In July 2018, the FASB issued ASU 2018-11, which provided lessors with a practical expedient to not separate lease and non-lease components, if certain criteria are met. Upon the adoption of ASU 2016-02, we elected this practical expedient and accordingly, have combined lease and non-lease components into rental revenue on our consolidated statements of income. We account for both components under ASC Topic 842. ASU 2016-02 also requires companies to account for the impairment of receivables arising from operating leases (previously recorded as bad debt expense, a component of “operating expenses”), as a reduction to “rental income”. Accordingly, beginning on January 1, 2019, impairment of receivables arising from operating leases have been recorded as a reduction of rental income and are no longer reflected as bad debt expense.
Furthermore, ASU 2016-02 also updates the definition of initial direct costs for both lessees and lessors to include only incremental costs of a lease that would not have been incurred if the lease had not been obtained. This ASU also provides a package of practical expedients which permits companies not to reassess under ASC Topic 842, its prior conclusions about lease identification, lease classification and initial direct costs. Upon adoption of ASU 2016-02, we elected this practical expedient and accordingly, effective January 1, 2019, we no longer capitalize internal leasing costs.
In October 2018, the FASB issued ASU 2018-17, an update to ASC Topic 810, Consolidations. ASU 2018-17 requires reporting entities to consider indirect interests held by related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety in determining whether a decision-making fee is a variable interest. ASU 2018-17 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2019, with early adoption permitted. We are evaluating the impact of ASU 2018-17 on our consolidated financial statements.
3.
Acquisitions
Market Center
On August 16, 2019, we entered into an agreement to acquire Market Center, a two-building Class A office complex comprising 753,000 square feet, in San Francisco, California, for $722,000,000. The complex consists of 555 Market Street and 575 Market Street comprising 280,000 square feet and 473,000 square feet, respectively. In connection therewith, we made a $25,000,000 deposit, which is included in “other assets” on our consolidated balance sheet. The transaction, which is subject to customary closing conditions, is expected to close by the end of the fourth quarter of 2019. We intend to bring in a joint venture partner at the asset and plan to use the proceeds from the sale of Liberty Place (discussed below) to fund our share of the acquisition.
4.
Dispositions
Liberty Place
On September 26, 2019, we sold Liberty Place, a 172,000 square foot office building in Washington, D.C., for $154,500,000. In connection therewith, we recognized a gain of $1,140,000, which is included in “gain on sale of real estate” on our consolidated statements of income for the three and nine months ended September 30, 2019. We intend to use the proceeds from the sale to fund our share of the acquisition of Market Center (discussed above).
2099 Pennsylvania Avenue
On August 9, 2018, we sold 2099 Pennsylvania Avenue, a 209,000 square foot office building in Washington, D.C. for $219,900,000. In connection therewith, we recognized a gain of $35,836,000, which is included in “gain on sale of real estate” on our consolidated statements of income for the three and nine months ended September 30, 2018.
425 Eye Street
On September 27, 2018, we sold 425 Eye Street, a 373,000 square foot office building in Washington, D.C. for $157,000,000. In connection therewith, we recognized a gain of $1,009,000, which is included in “gain on sale of real estate” on our consolidated statements of income for the three and nine months ended September 30, 2018.
12
5.
Investments in Unconsolidated Joint Ventures
On February 7, 2019, we completed the acquisition of 111 Sutter Street, a 293,000 square foot office building in San Francisco, California. Simultaneously with closing, we brought in a joint venture partner to acquire 51.0% of the equity interest. We have retained the remaining 49.0% equity interest and manage and lease the asset. The purchase price was $227,000,000. In connection with the acquisition, the joint venture completed a $138,200,000 financing of the property. The four-year loan is interest only at LIBOR plus 215 basis points and has three one-year extension options. We began accounting for our investment in 111 Sutter Street, under the equity method, from the date of the acquisition.
Prior to 2019, our consolidated Residential Development Fund (“RDF”), in which we have a 7.4% interest, owned a 25.0% economic interest in One Steuart Lane, a residential condo development project (the “project”) in San Francisco, California. Accordingly, prior to 2019, our economic interest in the project was 1.85%. In March 2019 and again in September 2019, RDF acquired an additional 10.0% economic interest in the project, in two separate transactions, for an aggregate of $19,110,000. Subsequent to these transactions, RDF’s economic interest in the project increased to 35.0% and our economic interest (based on our 7.4% ownership) increased to 2.6%. We continue to consolidate our 7.4% interest in RDF and reflect the 92.6% interest we do not own, as “noncontrolling interests” in our consolidated financial statements.
On August 21, 2019, we acquired a 44.1% equity interest in a joint venture that owns 55 Second Street, a 384,000 square foot Class A office building in San Francisco, California. The transaction valued the property at $401,700,000. In connection with the acquisition, the joint venture assumed the existing $137,500,000 mortgage loan and upsized it by an additional $50,000,000. The $187,500,000 mortgage loan is interest-only at a fixed rate of 3.88% and matures in October 2026. We began accounting for our investment in 55 Second Street, under the equity method of accounting from the date of the acquisition.
The following tables summarize our investments in unconsolidated joint ventures as of the dates thereof and the income or loss from these investments for the periods set forth below.
Paramount
As of
Our Share of Investments:
Ownership
712 Fifth Avenue (1)
50.0%
111 Sutter Street
49.0%
42,625
55 Second Street (2)
44.1%
95,874
60 Wall Street (2)
5.0%
20,425
22,353
One Steuart Lane (2)
35.0% (3)
69,545
52,923
(4)
Oder-Center, Germany (2)
9.5%
3,514
3,587
Our Share of Net (Loss) Income:
373
558
1,290
3,166
(1,266
(3,387
(5)
(336
(138
(116
(436
(291
(6
(18
34
30
60
74
As of September 30, 2019, our basis in the partnership that owns 712 Fifth Avenue, was negative $18,647 resulting from distributions made to us in excess of our share of earnings recognized. Accordingly, we no longer recognize our proportionate share of earnings from the venture because we have no further obligation to fund additional capital to the venture. Instead, we only recognize earnings to the extent we receive cash distributions from the venture.
(2)
As of September 30, 2019, the carrying amount of our investments in 55 Second Street, 60 Wall Street, One Steuart Lane and Oder-Center is greater than our share of equity in these investments by $499, $2,728, $969 and $4,786, respectively, and primarily represents the unamortized portion of our capitalized acquisition costs. Basis differences allocated to depreciable assets are being amortized into “(loss) income from unconsolidated joint ventures” over the estimated useful life of the related assets.
(3)
Represents RDF’s economic interest in One Steuart Lane.
Includes a $7,086 basis adjustment which was recorded upon the adoption of ASU 2017-05 on January 1, 2018.
Represents our share of earnings from the date of acquisition through September 30, 2019.
13
The following tables provide the combined summarized financial information of 712 Fifth Avenue, 111 Sutter Street, 55 Second Street and 60 Wall Street as of the dates and for the periods set forth below.
Balance Sheets:
1,645,769
1,055,240
Intangible assets, net
121,687
97,658
95,341
84,864
Total assets
1,862,797
1,237,762
Notes and mortgages payable, net
1,192,646
866,079
Intangible liabilities, net
25,610
24,580
15,177
Total liabilities
1,242,836
881,256
619,961
356,506
For the Three Months Ended September 30,
Income Statements:
39,359
34,088
111,981
102,666
267
125
617
371
39,626
34,213
112,598
103,037
Operating expenses
17,065
13,090
46,060
38,873
17,156
11,898
46,166
35,888
34,221
24,988
92,226
74,761
179
192
478
559
(12,673
(9,820
(36,046
(28,209
Net (loss) income before income taxes
(7,089
(403
(15,196
626
Income tax benefit
Net (loss) income
(7,087
(15,194
6.
Investments in Unconsolidated Real Estate Funds
We are the general partner and investment manager of Paramount Group Real Estate Fund VII, LP (“Fund VII”) and its parallel fund, Paramount Group Real Estate Fund VII-H, LP (“Fund VII-H”), our Property Funds. On January 25, 2019, Fund VII and Fund VII-H sold their only remaining asset, 0 Bond Street, a 65,000 square foot creative office building in the NoHo submarket of Manhattan, for $130,500,000.
We also manage Paramount Group Real Estate Fund VIII, LP (“Fund VIII”) and Paramount Group Real Estate Fund X, LP (“Fund X”), our Alternative Investment Funds, which invest in mortgage and mezzanine loans and preferred equity investments. As of September 30, 2019, Fund VIII has invested $615,897,000 of the $775,200,000 of capital committed and Fund X, which completed its initial closing in December 2018 with $172,000,000 of capital commitments, has invested $40,000,000. As of September 30, 2019, our ownership interest in Fund VIII and Fund X was approximately 1.3% and 8.7%, respectively.
At September 30, 2019 and December 31, 2018, our investments in the above mentioned unconsolidated real estate funds aggregated $11,582,000 and $10,352,000, respectively, and we recognized income of $206,000 and $271,000 for the three and nine months ended September 30, 2019, respectively, and losses of $188,000 and $268,000, for the three and nine months ended September 30, 2018, respectively.
7.
Preferred Equity Investments
We owned a 24.4% interest in PGRESS Equity Holdings LP (“PGRESS”), an entity that owned a preferred equity investment in a partnership that owned 470 Vanderbilt, a 686,000 square foot office building in Brooklyn, New York. The preferred equity had a dividend rate of 10.3%, of which 8.0% was paid in cash through February 2016 and the unpaid portion accreted to the balance of the investment. Subsequent to February 2016, the entire 10.3% dividend was paid in cash. On March 1, 2019, the partnership that owned 470 Vanderbilt redeemed the preferred equity investment for $36,089,000 consisting of the investment balance and accrued interest.
8.
Intangible Assets and Liabilities
The following tables summarize our intangible assets (acquired above-market leases and acquired in-place leases) and intangible liabilities (acquired below-market leases) and the related amortization as of the dates and for the periods set forth below.
Intangible assets:
Gross amount
487,511
515,889
Accumulated amortization
(264,802
(245,444
Intangible liabilities:
177,665
185,191
(98,829
(89,200
(component of "rental revenue")
2,552
3,887
8,555
12,611
Amortization of acquired in-place leases
(component of "depreciation and amortization")
11,917
14,865
37,580
44,879
The following table sets forth annual amortization of acquired above and below-market leases, net and amortization of acquired in-place leases for each of the five succeeding years commencing from January 1, 2020.
For the Year Ending December 31,
Above and
Below-Market
Leases, Net
In-Place Leases
2020
6,224
37,848
2021
3,549
27,879
2022
1,079
23,381
2023
4,588
18,714
2024
5,633
14,470
15
9.
Debt
The following table summarizes our outstanding debt.
Interest Rate
Maturity
Fixed/
as of
Date
Variable Rate
Notes and mortgages payable:
1633 Broadway
Dec-2022
Fixed (1)
3.54
%
1,000,000
L + 175 bps
3.85
50,000
46,800
3.55
1,050,000
1,046,800
One Market Plaza (3)
Feb-2024
Fixed
4.03
975,000
1301 Avenue of the Americas
Nov-2021
3.05
500,000
L + 180 bps
3.93
350,000
3.41
850,000
31 West 52nd Street
May-2026
3.80
300 Mission Street (3)
Oct-2021
3.65
228,000
Total notes and mortgages payable
3.69
3,603,000
3,599,800
Less: deferred financing costs
(26,266
(32,883
Total notes and mortgages payable, net
$1.0 Billion Revolving Credit Facility
Jan-2022
L + 115 bps
n/a
Represents loans with variable interest rates that have been fixed by interest rate swaps. See Note 10, Derivative Instruments and Hedging Activities.
Represents amounts borrowed to fund leasing costs at the property. The loan balance can be increased by an additional $200,000 upon the satisfaction of certain performance hurdles related to the property.
Our ownership interest in One Market Plaza and 300 Mission Street (formerly 50 Beale Street) is 49.0% and 31.1%, respectively.
10.
Derivative Instruments and Hedging Activities
Interest Rate Swaps – Designated as Cash Flow Hedges
We have interest rate swaps with an aggregate notional amount of $1.0 billion that are designated as cash flow hedges. We also have entered into forward starting interest rate swaps with an aggregate notional amount of $400,000,000 to extend the maturity of certain swaps for an additional year. Changes in the fair value of interest rate swaps that are designated as cash flow hedges are recognized in “other comprehensive (loss) income” (outside of earnings). We recognized other comprehensive loss of $4,131,000 and $28,502,000 for the three and nine months ended September 30, 2019, respectively, and other comprehensive income of $3,392,000 and $23,738,000 for the three and nine months ended September 30, 2018, respectively, from the changes in fair value of these interest rate swaps. See Note 12, Accumulated Other Comprehensive (Loss) Income. During the next twelve months, we estimate that $1,422,000 of the amounts recognized in accumulated other comprehensive (loss) income will be reclassified as an increase to interest expense.
The following table summarizes the fair value of our interest rate swaps that are designated as cash flow hedges.
Fair Value as of
Interest rate swap assets designated as cash flow hedges (included in "other assets")
16,859
Interest rate swap liabilities designated as cash flow hedges (included in
"other liabilities")
11,691
48
We have agreements with various derivative counterparties that contain provisions wherein a default on our indebtedness could be deemed a default on our derivative obligations, which would require us to either post collateral up to the fair value of our derivative obligations or settle the obligations for cash. As of September 30, 2019, the fair value of the derivative obligations with such provisions aggregated $8,473,000.
11.
Stock Repurchase Program
On August 1, 2017, we received authorization from our Board of Directors to repurchase up to $200,000,000 of our common stock from time to time, in the open market or in privately negotiated transactions. Prior to 2019, we had repurchased 7,555,601 common shares at a weighted average price of $13.95 per share, or $105,383,000 in the aggregate. During 2019, we repurchased an additional 7,158,804 common shares at a weighted average price of $13.22 or $94,617,000 in the aggregate. As a result, we completed our $200,000,000 stock repurchase program by repurchasing 14,714,405 common shares at a weighted average price of $13.59 per share.
Of the 7,158,804 common shares repurchased in 2019, 6,726,203 common shares were repurchased as of September 30, 2019 at a weighted average price of $13.23 per share, or $89,005,000 in the aggregate. The remaining 432,601 common shares were repurchased in October 2019, at a weighted average price of $12.97 per share, or $5,612,000 in the aggregate.
On November 5, 2019, we received authorization from our Board of Directors to repurchase up to an additional $200,000,000 of our common stock, from time to time, in the open market or in privately negotiated transactions. The amount and timing of future repurchases, if any, will depend on a number of factors, including, the price and availability of our shares, trading volume and general market conditions. The stock repurchase program may be suspended or discontinued at any time.
17
12.
Accumulated Other Comprehensive (Loss) Income
The following table sets forth changes in accumulated other comprehensive (loss) income by component for the three and nine months ended September 30, 2019 and 2018, including amounts attributable to noncontrolling interests in the Operating Partnership.
Amount of (loss) income related to the effective portion of cash flow
hedges recognized in other comprehensive (loss) income
(2,958
4,161
(23,804
24,363
Amounts reclassified from accumulated other comprehensive
(loss) income (decreasing) increasing interest and debt expense
(1,173
(769
(4,698
(625
Amount of income (loss) related to unconsolidated joint
ventures recognized in other comprehensive (loss) income (1)
No amounts were reclassified from accumulated other comprehensive (loss) income during any of the periods set forth above.
13.
Noncontrolling Interests
Consolidated Joint Ventures
Noncontrolling interests in consolidated joint ventures consist of equity interests held by third parties in One Market Plaza, 300 Mission Street and PGRESS Equity Holdings LP. As of September 30, 2019 and December 31, 2018, noncontrolling interests in our consolidated joint ventures aggregated $363,211,000 and $394,995,000, respectively.
Consolidated Real Estate Fund
Noncontrolling interests in our consolidated real estate fund consists of equity interests held by third parties in RDF. As of September 30, 2019 and December 31, 2018, the noncontrolling interest in our consolidated real estate fund aggregated $72,241,000 and $66,887,000, respectively.
Noncontrolling interests in the Operating Partnership represent common units of the Operating Partnership that are held by third parties, including management, and units issued to management under equity incentive plans. Common units of the Operating Partnership may be tendered for redemption to the Operating Partnership for cash. We, at our option, may assume that obligation and pay the holder either cash or common shares on a one-for-one basis. Since the number of common shares outstanding is equal to the number of common units owned by us, the redemption value of each common unit is equal to the market value of each common share and distributions paid to each common unitholder is equivalent to dividends paid to common stockholders. As of September 30, 2019 and December 31, 2018, noncontrolling interests in the Operating Partnership on our consolidated balance sheets had a carrying amount of $416,501,000 and $428,982,000, respectively, and a redemption value of $330,580,000 and $315,595,000, respectively.
18
14.
Variable Interest Entities (“VIEs”)
In the normal course of business, we are the general partner of various types of investment vehicles, which may be considered VIEs. We may, from time to time, own equity or debt securities through vehicles, each of which are considered variable interests. Our involvement in financing the operations of the VIEs is generally limited to our investments in the entity. We consolidate these entities when we are deemed to be the primary beneficiary.
Consolidated VIEs
We are the sole general partner of, and owned approximately 90.2% of, the Operating Partnership as of September 30, 2019. The Operating Partnership is considered a VIE and is consolidated in our consolidated financial statements. Since we conduct our business through and substantially all of our interests are held by the Operating Partnership, the assets and liabilities on our consolidated financial statements represent the assets and liabilities of the Operating Partnership. As of September 30, 2019 and December 31, 2018, the Operating Partnership held interests in consolidated VIEs owning properties, a real estate fund and preferred equity investments that were determined to be VIEs. The assets of these consolidated VIEs may only be used to settle the obligations of the entities and such obligations are secured only by the assets of the entities and are non-recourse to the Operating Partnership or us. The following table summarizes the assets and liabilities of consolidated VIEs of the Operating Partnership.
1,685,697
1,699,618
Cash and restricted cash
71,581
63,450
69,544
Accounts and other receivables, net
4,642
2,107
55,888
51,926
Deferred charges, net
23,461
14,160
33,511
45,818
21,718
16,635
Total VIE assets
1,966,042
1,982,679
1,198,421
1,197,644
41,784
24,183
22,474
31,582
13,023
Total VIE liabilities
1,275,702
1,253,414
Unconsolidated VIEs
As of September 30, 2019, the Operating Partnership held variable interests in entities that own our unconsolidated real estate funds that were deemed to be VIEs. The following table summarizes our investments in these unconsolidated real estate funds and the maximum risk of loss from these investments.
Investments
Asset management fees and other receivables
549
722
Maximum risk of loss
12,131
11,074
19
15.
Fair Value Measurements
Financial Assets and Liabilities Measured at Fair Value
Financial assets and liabilities that are measured at fair value on our consolidated balance sheets consist of marketable securities and interest rate swaps. The following table summarizes the fair values of these financial assets and liabilities as of the dates set forth below, based on their levels in the fair value hierarchy.
As of September 30, 2019
Level 1
Level 2
Level 3
Marketable securities (included in "other assets")
21,263
Interest rate swap liabilities (included in "other liabilities")
As of December 31, 2018
22,660
Interest rate swap assets (included in "other assets")
39,519
Financial Assets and Liabilities Not Measured at Fair Value
Financial assets and liabilities not measured at fair value on our consolidated balance sheets consists of preferred equity investments, notes and mortgages payable and the revolving credit facility. The following table summarizes the carrying amounts and fair value of these financial instruments as of the dates set forth below.
Carrying Amount
Fair Value
Preferred equity investments (1)
36,339
Notes and mortgages payable
3,671,118
3,617,961
______________
On March 1, 2019, the preferred equity investment was redeemed. See Note 7, Preferred Equity Investments.
20
16.
Revenues
Our revenues consist of rental revenues and revenues from contracts with customers. The following table sets forth the details of our revenues.
Fee and other income:
Fee income:
Property management
1,692
1,476
4,933
4,468
Asset management
2,665
2,222
7,273
5,655
Acquisition, disposition and leasing
2,104
3,435
1,750
698
1,730
1,080
Total fee income
7,159
4,079
17,371
12,953
Other income (2)
3,079
3,443
9,486
9,858
Total fee and other income
Includes $20,295 and $52,982 for the three and nine months ended September 30, 2019, respectively, of variable rental revenue, primarily related to tenant reimbursements.
Primarily comprised of (i) tenant requested services, including overtime heating and cooling and (ii) parking income.
Rental Revenue
Rental revenue is recognized in accordance with ASC Topic 842, Leases, and consists of (i) cash rents, which represents revenue each tenant pays in accordance with the terms of its respective lease and that is recognized on a straight-line basis over the non-cancellable term of the lease, and includes the effects of rent steps and rent abatements under the leases, (ii) amortization of acquired above and below-market leases, net, (iii) tenant reimbursements, which are recoveries of all or a portion of the operating expenses and real estate taxes of the property and is recognized in the same period as the expenses are incurred and (iv) lease termination income. Our leases, which comprise the lease-up of office, retail and storage space to tenants, primarily under non-cancellable operating leases, have terms generally ranging from five to fifteen years. Most of our leases provide tenants with extension options at either fixed or market rates and few of our leases provide tenants with options to early terminate, but such options generally impose an economic penalty on the tenant upon exercising.
The following table is a schedule of future undiscounted cash flows under non-cancelable operating leases in effect as of September 30, 2019, for the three month period from October 1, 2019 through December 31, 2019 and each of the five succeeding years commencing January 1, 2020.
151,552
621,135
615,208
590,421
562,482
530,413
Thereafter
2,700,941
5,772,152
21
Revenue from Contracts with Customers
Revenue from contracts with customers, which is primarily comprised of (i) property management fees, (ii) asset management fees, (iii) fees relating to acquisitions, dispositions and leasing services and (iv) other fee income, is recognized in accordance with ASC Topic 606, Revenue From Contracts With Customers. Fee income is generated from the various services we provide to our customers and is disaggregated based on the types of services we provide pursuant to ASC Topic 606.
Fee income is recognized as and when we satisfy our performance obligations pursuant to contractual agreements. Property management and asset management services are provided continuously over time and revenue is recognized over that time. Fee income relating to acquisitions, dispositions and leasing services is recognized upon completion of the acquisition, disposition or leasing services as required in the contractual agreements. The amount of fee income to be recognized is stated in the contract as a fixed price or as a stated percentage of revenues, contributed capital or transaction price. Fee income is reported in a non-operating segment, and therefore is shown as a reconciling item to net income in Note 23, Segments.
17.
Interest and Other Income, net
The following table sets forth the details of interest and other income, net.
Interest income, net
1,072
858
4,190
2,862
Mark-to-market of investments in our
deferred compensation plans (1)
150
990
3,061
1,280
Preferred equity investment income (2)
930
454
2,746
Total interest and other income, net
The change resulting from the mark-to-market of the deferred compensation plan assets is entirely offset by the change in deferred compensation plan liabilities, which is included as a component of “general and administrative” expenses on our consolidated statements of income.
Represents income from our preferred equity investments in PGRESS Equity Holdings LP, of which our 24.4% share is $227 for the three months ended September 30, 2018 and $111 and $669 for the nine months ended September 30, 2019 and 2018, respectively. On March 1, 2019, our only remaining preferred equity investment was redeemed. See Note 7, Preferred Equity Investments.
18.
Interest and Debt Expense
The following table sets forth the details of interest and debt expense.
Interest expense
34,501
34,353
103,012
101,729
2,824
2,752
Total interest and debt expense
37,325
37,105
111,462
109,996
22
19.
Incentive Compensation
Stock-Based Compensation
We account for all stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation. As of September 30, 2019, we have 8,338,280 shares available for future grants under the 2014 Equity Incentive Plan (the “Plan”), if all awards granted are full value awards, as defined in the Plan. Stock-based compensation expense was $5,174,000 and $4,330,000 for the three months ended September 30, 2019 and 2018, respectively, and $17,859,000 and $15,245,000 for the nine months ended September 30, 2019 and 2018, respectively.
2018 Performance-Based Awards Program (“2018 Performance Program”)
On January 14, 2019, the Compensation Committee of our Board of Directors (the “Compensation Committee”) approved the 2018 Performance Program. Under the 2018 Performance Program, participants may earn awards in the form of Long Term Incentive Plan (“LTIP”) units based on our Total Shareholder Return (“TSR”) over a three-year performance measurement period beginning on January 1, 2019 and continuing through December 31, 2021, on both an absolute basis and relative basis. Awards granted to our Chief Executive Officer, under the 2018 Performance Program include an additional performance feature requiring threshold TSR performance on both an absolute and a relative basis in order for any awards to be earned. If the designated performance objectives are achieved, awards earned under the 2018 Performance Program are subject to vesting based on continued employment with us through December 31, 2022, with 50.0% of each award vesting upon the conclusion of the performance measurement period, and the remaining 50.0% vesting on December 31, 2022. Furthermore, our Named Executive Officers are required to hold earned awards for an additional year following vesting. The fair value of the awards granted under the 2018 Performance Program on the date of the grant was $8,106,000 and is being amortized into expense over the four-year vesting period using a graded vesting attribution method.
2015 Performance-Based Awards Program (“2015 Performance Program”)
On March 18, 2019, the Compensation Committee determined that the performance goals set forth in the 2015 Performance Program were not satisfied during the performance measurement period, which ended on March 17, 2019. Accordingly, all of the 1,109,358 outstanding LTIP units that were granted on March 18, 2016, were forfeited, with no awards being earned. This award had a grant date fair value of $10,914,000 and a remaining unrecognized compensation cost of $589,000 as of September 30, 2019, which will be amortized over a weighted-average period of 0.5 years.
20.
Earnings Per Share
The following table summarizes our net income and the number of common shares used in the computation of basic and diluted income per common share, which includes the weighted average number of common shares outstanding and the effect of dilutive potential common shares, if any.
(Amounts in thousands, except per share amounts)
Numerator:
Earnings allocated to unvested participating securities
(17
(27
(54
(63
Numerator for income per common share - basic
and diluted
7,065
37,504
13,192
3,766
Denominator:
Denominator for basic income per common share -
weighted average shares
231,198
240,448
232,974
240,366
Effect of dilutive stock-based compensation plans (1)
32
31
25
Denominator for diluted income per common share -
231,230
240,489
233,005
240,391
Income per common share - basic and diluted
The effect of dilutive securities excludes 26,936 and 27,322 weighted average share equivalents for the three months ended September 30, 2019 and 2018, respectively, and 27,112 and 26,452 weighted average share equivalents for the nine months ended September 30, 2019 and 2018, respectively, as their effect was anti-dilutive.
21.
Related Parties
Management Agreements
We provide property management, leasing and other related services to certain properties owned by members of the Otto Family. We recognized fee income of $212,000 and $200,000 for the three months ended September 30, 2019 and 2018, respectively, and $632,000 and $624,000 for the nine months ended September 30, 2019 and 2018, respectively, in connection with these agreements, which is included as a component of “fee and other income” on our consolidated statements of income. As of December 31, 2018, we were owed $51,000 under these agreements, which is included as a component of “accounts and other receivables, net” on our consolidated balance sheet. There were no amounts owed to us under these agreements as of September 30, 2019.
We also provide property management, asset management, leasing and other related services to our unconsolidated joint ventures and real estate funds. We recognized fee income of $4,880,000 and $3,235,000 for the three months ended September 30, 2019 and 2018, respectively, and $12,938,000 and $10,329,000 for the nine months ended September 30, 2019 and 2018, respectively, in connection with these agreements. As of September 30, 2019 and December 31, 2018, amounts owed to us under these agreements aggregated $2,573,000 and $1,836,000, respectively, which are included as a component of “accounts and other receivables, net” on our consolidated balance sheets.
24
Hamburg Trust Consulting GMBH (“HTC”)
We have an agreement with HTC, a licensed broker in Germany, to supervise selling efforts for our private equity real estate funds (or investments in feeder vehicles for these funds) to investors in Germany, including distribution of securitized notes of feeder vehicles for Fund VIII and Fund X. Pursuant to this agreement, we have agreed to pay HTC for the costs incurred to sell investments in these feeder vehicles, which primarily consist of commissions paid to third party agents, and other incremental costs incurred by HTC as a result of the engagement, plus, in each case, a mark-up of 10%. HTC is 100% owned by Albert Behler, our Chairman, Chief Executive Officer and President. We incurred expense of $72,000 and $69,000 for the three months ended September 30, 2019 and 2018, respectively, and $758,000 and $129,000 for the nine months ended September 30, 2019 and 2018, respectively, in connection with this agreement, which is included as a component of “transaction related costs” on our consolidated statements of income. As of September 30, 2019 and December 31, 2018, we owed $72,000 and $40,000, respectively, to HTC under this agreement, which are included as a component of “accounts payable and accrued expenses” on our consolidated balance sheets.
Mannheim Trust
A subsidiary of Mannheim Trust leases office space at 712 Fifth Avenue, our 50.0% owned unconsolidated joint venture, pursuant to a lease agreement which expires in April 2023. Dr. Martin Bussmann (a member of our Board of Directors) is also a trustee and a director of Mannheim Trust. During the three months ended September 30, 2019 and 2018, we recognized $90,000 and $92,000, respectively, and during the nine months ended September 30, 2019 and 2018, we recognized $271,000 and $273,000, respectively, for our share of rental income pursuant to this lease.
Kramer Design Services (“Kramer Design”) has entered into agreements with 712 Fifth Avenue, our 50.0% owned unconsolidated joint venture, to, among other things, create and design marketing materials with respect to the vacant retail space at 712 Fifth Avenue. Kramer Design is owned by the spouse of Albert Behler, our Chairman, Chief Executive Officer and President. During the three and nine months ended September 30, 2019, we recognized expense of $183,000 and $286,000 for our share of the fees incurred in connection with these agreements.
On August 21, 2019, we acquired a 44.1% equity interest in a joint venture that owns 55 Second Street, a 384,000 square foot Class A office building in San Francisco, California. The transaction valued the property at $401,700,000 and included $187,500,000 of mortgage debt. In connection with the acquisition, Imperial Associates, LP, an entity owned by the members of the Otto family, purchased a 2.3% equity interest for $5,000,000.
22.
Commitments and Contingencies
Insurance
We carry commercial general liability coverage on our properties, with limits of liability customary within the industry. Similarly, we are insured against the risk of direct and indirect physical damage to our properties including coverage for the perils such as floods, earthquakes and windstorms. Our policies also cover the loss of rental income during an estimated reconstruction period. Our policies reflect limits and deductibles customary in the industry and specific to the buildings and portfolio. We also obtain title insurance policies when acquiring new properties. We currently have coverage for losses incurred in connection with both domestic and foreign terrorist-related activities. While we do carry commercial general liability insurance, property insurance and terrorism insurance with respect to our properties, these policies include limits and terms we consider commercially reasonable. In addition, there are certain losses (including, but not limited to, losses arising from known environmental conditions or acts of war) that are not insured, in full or in part, because they are either uninsurable or the cost of insurance makes it, in our belief, economically impractical to maintain such coverage. Should an uninsured loss arise against us, we would be required to use our own funds to resolve the issue, including litigation costs. We believe the policy specifications and insured limits are adequate given the relative risk of loss, the cost of the coverage and industry practice and, in consultation with our insurance advisors, we believe the properties in our portfolio are adequately insured.
Other Commitments and Contingencies
We are a party to various claims and routine litigation arising in the ordinary course of business. Some of these claims or others to which we may be subject from time to time, including claims arising specifically from the formation transactions, in connection with our initial public offering, may result in defense costs, settlements, fines or judgments against us, some of which are not, or cannot be, covered by insurance. Payment of any such costs, settlements, fines or judgments that are not insured could have an adverse impact on our financial position and results of operations. Should any litigation arise in connection with the formation transactions, we would contest it vigorously. In addition, certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could adversely impact our results of operations and cash flow, expose us to increased risks that would be uninsured, and/or adversely impact our ability to attract officers and directors.
The terms of our mortgage debt and certain side letters in place include certain restrictions and covenants which may limit, among other things, certain investments, the incurrence of additional indebtedness and liens and the disposition or other transfer of assets and interests in the borrower and other credit parties, and require compliance with certain debt yield, debt service coverage and loan to value ratios. In addition, our revolving credit facility contains representations, warranties, covenants, other agreements and events of default customary for agreements of this type with comparable companies. As of September 30, 2019, we believe we are in compliance with all of our covenants.
718 Fifth Avenue - Put Right
Prior to the formation transactions, an affiliate of our predecessor owned a 25.0% interest in 718 Fifth Avenue, a five-story building containing 19,050 square feet of prime retail space that is located on the southwest corner of 56th Street and Fifth Avenue in New York, (based on its 50.0% interest in a joint venture that held a 50.0% tenancy-in-common interest in the property). Prior to the completion of the formation transactions, this interest was sold to its partner in the 718 Fifth Avenue joint venture, who is also our joint venture partner in 712 Fifth Avenue, New York, New York. In connection with this sale, we granted our joint venture partner a put right, pursuant to which the 712 Fifth Avenue joint venture would be required to purchase the entire direct or indirect interests then held by our joint venture partner or its affiliates in 718 Fifth Avenue at a purchase price equal to the fair market value of such interests. The put right may be exercised at any time with the actual purchase occurring no earlier than 12 months after written notice is provided. If the put right is exercised and the 712 Fifth Avenue joint venture acquires the 50.0% tenancy-in-common interest in the property by our joint venture partner, we will own a 25.0% interest in 718 Fifth Avenue based on current ownership interests.
Transfer Tax Assessments
During 2017, the New York City Department of Finance issued Notices of Determination (“Notices”) assessing additional transfer taxes (including interest and penalties) in connection with the transfer of interests in certain properties during our 2014 initial public offering. We believe, after consultation with legal counsel, that the likelihood of a loss is reasonably possible, and while it is not possible to predict the outcome of these Notices, we estimate the range of loss could be between $0 and $42,500,000. Since no amount in this range is a better estimate than any other amount within the range, we have not accrued any liability arising from potential losses relating to these Notices in our consolidated financial statements.
26
23.
Segments
Our reportable segments are separated by region based on the three regions in which we conduct our business: New York, San Francisco and Washington, D.C. Our determination of segments is aligned with our method of internal reporting and the way our Chief Executive Officer, who is also our Chief Operating Decision Maker, makes key operating decisions, evaluates financial results and manages our business.
The following tables provide Net Operating Income (“NOI”) for each reportable segment for the periods set forth below.
For the Three Months Ended September 30, 2019
New York
San Francisco
Washington, D.C.
Property-related revenues
191,158
122,365
61,999
7,064
(270
Property-related operating expenses
(71,648
(49,825
(18,068
(2,802
(953
NOI from unconsolidated joint ventures
4,973
2,776
2,106
91
NOI (1)
124,483
75,316
46,037
4,262
(1,132
For the Three Months Ended September 30, 2018
188,517
118,539
57,568
12,685
(275
(69,811
(48,257
(15,206
(4,782
(1,566
4,448
4,356
92
123,154
74,638
42,362
7,903
(1,749
For the Nine Months Ended September 30, 2019
561,321
362,202
177,614
21,707
(202
(207,601
(144,432
(51,893
(8,558
(2,718
14,569
10,319
4,019
231
368,289
228,089
129,740
13,149
(2,689
For the Nine Months Ended September 30, 2018
555,333
347,720
164,811
43,569
(767
(206,435
(140,710
(44,370
(16,363
(4,992
13,757
13,514
243
362,655
220,524
120,441
27,206
(5,516
NOI is used to measure the operating performance of our properties. NOI consists of rental revenue (which includes property rentals, tenant reimbursements and lease termination income) and certain other property-related revenue less operating expenses (which includes property-related expenses such as cleaning, security, repairs and maintenance, utilities, property administration and real estate taxes). We use NOI internally as a performance measure and believe it provides useful information to investors regarding our financial condition and results of operations because it reflects only those income and expense items that are incurred at the property level. Other real estate companies may use different methodologies for calculating NOI and, accordingly, our presentation of NOI may not be comparable to other real estate companies.
27
The following table provides a reconciliation of NOI to net income attributable to common stockholders for the periods set forth below.
NOI
Add (subtract) adjustments to arrive to net income:
Fee income
Depreciation and amortization expense
(63,058
(64,610
(188,772
(194,541
General and administrative expenses
(16,319
(14,452
(51,457
(44,278
(4,973
(4,448
(14,569
(13,757
Other, net
(1,912
(166
(4,248
1,800
Less: net (income) loss attributable to noncontrolling
interests in:
The following table provides the total assets for each of our reportable segments as of the dates set forth below.
Total Assets as of:
5,473,479
2,534,510
150,001
421,760
5,583,022
2,388,094
305,980
478,882
28
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements, including the related notes included therein.
Forward-Looking Statements
We make statements in this Quarterly Report on Form 10-Q that are considered “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are usually identified by the use of words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “seeks,” “should,” “will,” and variations of such words or similar expressions. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and are including this statement for purposes of complying with those safe harbor provisions. These forward-looking statements reflect our current views about our plans, intentions, expectations, strategies and prospects, which are based on the information currently available to us and on assumptions we have made. Although we believe that our plans, intentions, expectations, strategies and prospects as reflected in or suggested by those forward-looking statements are reasonable, we can give no assurance that the plans, intentions, expectations or strategies will be attained or achieved. Furthermore, actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors that are beyond our control including, without limitation:
•
unfavorable market and economic conditions in the United States and globally and in New York City, San Francisco and Washington, D.C.;
risks associated with our high concentrations of properties in New York City, San Francisco and Washington, D.C.;
risks associated with ownership of real estate;
decreased rental rates or increased vacancy rates;
the risk we may lose a major tenant;
limited ability to dispose of assets because of the relative illiquidity of real estate investments;
intense competition in the real estate market that may limit our ability to acquire attractive investment opportunities and increase the costs of those opportunities;
insufficient amounts of insurance;
uncertainties and risks related to adverse weather conditions, natural disasters and climate change;
risks associated with actual or threatened terrorist attacks;
exposure to liability relating to environmental and health and safety matters;
high costs associated with compliance with the Americans with Disabilities Act;
failure of acquisitions to yield anticipated results;
risks associated with real estate activity through our joint ventures and private equity real estate funds;
general volatility of the capital and credit markets and the market price of our common stock;
exposure to litigation or other claims;
loss of key personnel;
risks associated with security breaches through cyber attacks or cyber intrusions and other significant disruptions of our information technology (IT) networks and related systems;
risks associated with our substantial indebtedness;
failure to refinance current or future indebtedness on favorable terms, or at all;
failure to meet the restrictive covenants and requirements in our existing debt agreements;
fluctuations in interest rates and increased costs to refinance or issue new debt;
risks associated with variable rate debt, derivatives or hedging activity;
risks associated with the market for our common stock;
regulatory changes, including changes to tax laws and regulations;
failure to qualify as a real estate investment trust (“REIT”);
compliance with REIT requirements, which may cause us to forgo otherwise attractive opportunities or liquidate certain of our investments; or
any of the other risks included in this Quarterly Report on Form 10-Q or in our Annual Report on Form 10-K for the year ended December 31, 2018, including those set forth in Item 1A entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.
Accordingly, there is no assurance that our expectations will be realized. Except as otherwise required by the U.S. federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. A reader should review carefully our consolidated financial statements and the notes thereto, as well as Item 1A entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.
Critical Accounting Policies
There are no material changes to our critical accounting policies disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.
Recently Issued Accounting Literature
A summary of our recently issued accounting literature and their potential impact on our consolidated financial statements, if any, are included in Note 2, Basis of Presentation and Significant Accounting Policies, to our consolidated financial statements in this Quarterly Report on Form 10-Q.
Business Overview
We are a fully-integrated REIT focused on owning, operating, managing, acquiring and redeveloping high-quality, Class A office properties in select central business district submarkets of New York City, San Francisco, and Washington, D.C. We conduct our business through, and substantially all of our interests in properties and investments are held by, Paramount Group Operating Partnership LP, a Delaware limited partnership (the “Operating Partnership”). We are the sole general partner of, and owned approximately 90.2%, of the Operating Partnership as of September 30, 2019.
On February 7, 2019, we completed the acquisition of 111 Sutter Street, a 293,000 square foot office building in San Francisco, California. Simultaneously with closing, we brought in a joint venture partner to acquire 51.0% of the equity interest. We have retained the remaining 49.0% equity interest and manage and lease the asset. The purchase price was $227,000,000. In connection with the acquisition, the joint venture completed a $138,200,000 financing of the property. The four-year loan is interest only at LIBOR plus 215 basis points and has three one-year extension options.
On August 16, 2019, we entered into an agreement to acquire Market Center, a two-building Class A office complex comprising 753,000 square feet, in San Francisco, California, for $722,000,000. The complex consists of 555 Market Street and 575 Market Street comprising 280,000 square feet and 473,000 square feet, respectively. The transaction, which is subject to customary closing conditions, is expected to close by the end of the fourth quarter of 2019. We intend to bring in a joint venture at the asset and plan to use the proceeds from the sale of Liberty Place (discussed below) to fund our share of the acquisition.
On August 21, 2019, we acquired a 44.1% equity interest in a joint venture that owns 55 Second Street, a 384,000 square foot Class A office building in San Francisco, California. The transaction valued the property at $401,700,000. In connection with the acquisition, the joint venture assumed the existing $137,500,000 mortgage loan and upsized it by an additional $50,000,000. The $187,500,000 mortgage loan is interest-only at a fixed rate of 3.88% and matures in October 2026.
On September 26, 2019, we sold Liberty Place, a 172,000 square foot office building in Washington, D.C., for $154,500,000. In connection therewith, we recognized a gain of $1,140,000. We intend to use the proceeds from the sale to fund our share of the acquisition of Market Center (discussed above).
Leasing Results - Three Months Ended September 30, 2019
In the three months ended September 30, 2019, we leased 209,016 square feet, of which our share was 160,022 square feet that was leased at a weighted average initial rent of $83.16 per square foot. This leasing activity, offset by lease expirations in the three months, and including the occupancy impact of the acquired and sold properties discussed below, decreased leased occupancy by 20 basis points to 96.5% at September 30, 2019 from 96.7% at June 30, 2019. Same store leased occupancy (properties owned by us during both reporting periods), which excludes the occupancy impact from the acquisition of 55 Second Street and the disposition of Liberty Place, decreased by 10 basis points to 96.5% at September 30, 2019 from 96.6% at June 30, 2019. Of the 209,016 square feet leased in the three months, 93,003 square feet represented our share of second generation space (space that had been vacant for less than twelve months) for which we achieved rental rate increases of 11.1% on a cash basis and 13.8% on a GAAP basis. The weighted average lease term for leases signed during the three months was 7.1 years and weighted average tenant improvements and leasing commissions on these leases were $10.08 per square foot per annum, or 12.1% of initial rent.
New York:
In the three months ended September 30, 2019, we leased 115,052 square feet in our New York portfolio, of which our share was 111,884 square feet that was leased at a weighted average initial rent of $73.29 per square foot. This leasing activity, offset by the lease expirations in the three months, decreased our leased occupancy and same store leased occupancy by 50 basis points to 96.1% at September 30, 2019 from 96.6% at June 30, 2019. Of the 115,052 square feet leased in the three months, 64,497 square feet represented our share of second generation space for which rental rate increased by 2.5% on a cash basis and decreased by 2.8% on a GAAP basis. The weighted average lease term for leases signed during the three months was 6.1 years and weighted average tenant improvements and leasing commissions on these leases were $9.31 per square foot per annum, or 12.7% of initial rent.
San Francisco:
In the three months ended September 30, 2019, we leased 89,854 square feet in our San Francisco portfolio, of which our share was 44,028 square feet that was leased at a weighted average initial rent of $102.17 per square foot. This leasing activity, partially offset by lease expirations in the three months, and including the occupancy impact of the acquisition of 55 Second Street, increased our leased occupancy by 90 basis points to 98.2% at September 30, 2019 from 97.3% at June 30, 2019. Same store leased occupancy, which excludes the occupancy impact from the acquisition of 55 Second Street, increased by 130 basis points to 98.6% at September 30, 2019 from 97.3% at June 30, 2019. Of the 89,854 square feet leased in the three months, 24,396 square feet represented our share of second generation space for which we achieved rental rate increases of 29.9% on a cash basis and 47.7% on GAAP basis. The weighted average lease term for leases signed during the three months was 9.4 years and weighted average tenant improvements and leasing commissions on these leases were $11.05 per square foot per annum, or 10.8% of initial rent.
Washington, D.C.:
In the three months ended September 30, 2019, we leased 4,110 square feet in our Washington, D.C. portfolio, at a weighted average initial rent of $91.11 per square foot. This leasing activity, partially offset by lease expirations in the three months, and including the occupancy impact of the sale of Liberty Place, decreased leased occupancy by 370 basis points to 90.4% at September 30, 2019 from 94.1% at June 30, 2019. Same store leased occupancy, which excludes the occupancy impact from the sale of Liberty Place, remained at 90.4% leased at September 30, 2019, in-line with leased occupancy at June 30, 2019. All of the square feet leased in the three months represented second generation space for which we achieved rental rate increases of 1.0% on a cash basis and 4.9% on GAAP basis. The weighted average lease term for leases signed during the three months was 3.3 years and weighted average tenant improvements and leasing commissions on these leases were $11.04 per square foot per annum, or 12.1% of initial rent.
The following table presents additional details on the leases signed during the three months ended September 30, 2019. It is not intended to coincide with the commencement of rental revenue in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The leasing statistics, except for square feet leased, represent office space only.
Three Months Ended September 30, 2019
Total square feet leased
209,016
115,052
89,854
4,110
Pro rata share of total square feet leased:
160,022
111,884
44,028
Initial rent (1)
83.16
73.29
102.17
91.11
Weighted average lease term (in years)
7.1
6.1
9.4
3.3
Tenant improvements and leasing commissions:
Per square foot
71.58
56.98
104.06
36.81
Per square foot per annum
10.08
9.31
11.05
11.04
Percentage of initial rent
12.1
12.7
10.8
Rent concessions:
Average free rent period (in months)
5.1
5.9
3.5
4.0
Average free rent period per annum (in months)
0.7
1.0
0.4
1.2
Second generation space: (2)
Square feet
93,003
64,497
24,396
Cash basis:
81.48
68.29
114.70
Prior escalated rent (3)
73.33
66.60
88.27
90.19
Percentage increase
11.1
2.5
29.9
GAAP basis:
Straight-line rent
81.73
63.31
129.53
87.07
Prior straight-line rent
71.82
65.11
87.69
82.98
Percentage increase (decrease)
13.8
(2.8
%)
47.7
4.9
Represents the weighted average cash basis starting rent per square foot and does not include free rent or periodic step-ups in rent.
Represents space leased that has been vacant for less than twelve months.
Represents the weighted average cash basis rents (including reimbursements) per square foot at expiration.
33
Leasing Results - Nine Months Ended September 30, 2019
In the nine months ended September 30, 2019, we leased 1,258,775 square feet, of which our share was 905,210 square feet that was leased at a weighted average initial rent of $90.65 per square foot. This leasing activity, partially offset by lease expirations in the nine months, and including the occupancy impact of the acquired and sold properties discussed below, increased leased occupancy by 10 basis points to 96.5% at September 30, 2019 from 96.4% at December 31, 2018. Same store leased occupancy (properties owned by us during both reporting periods), which excludes the occupancy impact from the acquisition of 111 Sutter Street and 55 Second Street and the disposition of Liberty Place, increased by 30 basis points to 96.7% at September 30, 2019 from 96.4% at December 31, 2018. Of the 1,258,775 square feet leased in the nine months, 761,257 square feet represented our share of second generation space (space that had been vacant for less than twelve months) for which we achieved rental rate increases of 17.6% on a cash basis and 18.4% on a GAAP basis. The weighted average lease term for leases signed during the nine months was 9.1 years and weighted average tenant improvements and leasing commissions on these leases were $10.50 per square foot per annum, or 11.6% of initial rent.
In the nine months ended September 30, 2019, we leased 416,760 square feet in our New York portfolio, of which our share was 390,105 square feet that was leased at a weighted average initial rent of $83.81 per square foot. This leasing activity, partially offset by lease expirations during the nine months, increased our leased occupancy and same store leased occupancy by 10 basis points to 96.1% at September 30, 2019 from 96.0% at December 31, 2018. Of the 416,760 square feet leased in the nine months, 271,547 square feet represented our share of second generation space for which rental rates decreased by 0.2% on a cash basis and 2.6% on a GAAP basis. The decrease was primarily due to a prior tenant’s lease, which was previously extended on a short-term basis for which we had achieved above-market rents during the short-term extension period. The weighted average lease term for leases signed during the nine months was 9.1 years and weighted average tenant improvements and leasing commissions on these leases were $10.15 per square foot per annum, or 12.1% of initial rent.
In the nine months ended September 30, 2019, we leased 824,570 square feet in our San Francisco portfolio, of which our share was 497,660 square feet that was leased at a weighted average initial rent of $95.63 per square foot. This leasing activity, offset by lease expirations in the nine months, and including the occupancy impact of the acquisition of 111 Sutter Street and 55 Second Street, increased our leased occupancy by 20 basis points to 98.2% at September 30, 2019 from 98.0% at December 31, 2018. Same store leased occupancy, which excludes the occupancy impact from the acquisition of 111 Sutter Street and 55 Second Street, increased by 180 basis points to 99.8% at September 30, 2019 from 98.0% at December 31, 2018. Of the 824,570 square feet leased in the nine months, 474,907 square feet represented our share of second generation space for which we achieved rental rate increases of 29.2% on a cash basis and 30.5% on GAAP basis. The weighted average lease term for leases signed during the nine months was 9.2 years and weighted average tenant improvements and leasing commissions on these leases were $10.81 per square foot per annum, or 11.3% of initial rent.
In the nine months ended September 30, 2019, we leased 17,445 square feet in our Washington, D.C. portfolio, at a weighted average initial rent of $88.97 per square foot. This leasing activity, offset by lease expirations in the nine months, and including the occupancy impact of the sale of Liberty Place, decreased leased occupancy by 760 basis points to 90.4% at September 30, 2019 from 98.0% at December 31, 2018. Same store leased occupancy, which excludes the occupancy impact from the sale of Liberty Place, decreased by 960 basis points to 90.4% from 100.0% at December 31, 2018. Of the 17,445 square feet leased in the nine months, 14,803 represented our share of second generation space for which we achieved rental rate increases of 3.5% on a cash basis and 7.5% on GAAP basis. The weighted average lease term for leases signed during the nine months was 6.9 years and weighted average tenant improvements and leasing commissions on these leases were $7.91 per square foot per annum, or 8.9% of initial rent.
The following table presents additional details on the leases signed during the nine months ended September 30, 2019. It is not intended to coincide with the commencement of rental revenue in accordance with GAAP. The leasing statistics, except for square feet leased, represent office space only.
Nine Months Ended September 30, 2019
1,258,775
416,760
824,570
17,445
905,210
390,105
497,660
90.65
83.81
95.63
88.97
9.1
9.2
6.9
95.81
92.11
99.92
54.59
10.50
10.15
10.81
7.91
11.6
11.3
8.9
5.8
3.4
0.6
761,257
271,547
474,907
14,803
91.43
83.29
96.01
89.22
77.74
83.45
74.31
86.24
17.6
(0.2
29.2
95.47
78.90
104.88
88.19
80.60
80.99
80.34
82.07
18.4
(2.6
30.5
7.5
35
Financial Results - Three Months Ended September 30, 2019 and 2018
Net Income, FFO and Core FFO
Net income attributable to common stockholders was $7,082,000, or $0.03 per diluted share, for the three months ended September 30, 2019, compared to $37,531,000, or $0.16 per diluted share, for the three months ended September 30, 2018. Net income attributable to common stockholders for the three months ended September 30, 2019 included $1,030,000, or $0.00 per diluted share, of gain on sale of real estate and net income attributable to common stockholders for the three months ended September 30, 2018 included $32,222,000, or $0.13 per diluted share, of gain on sale of real estate, net of “sting” taxes.
Funds from Operations (“FFO”) attributable to common stockholders was $58,776,000, or $0.25 per diluted share, for the three months ended September 30, 2019, compared to $55,606,000, or $0.23 per diluted share, for the three months ended September 30, 2018. FFO attributable to common stockholders for the three months ended September 30, 2019 and 2018 includes the impact of non-core items, which are listed in the table on page 60. The aggregate of these items, net of amounts attributable to noncontrolling interests, increased FFO attributable to common stockholders for the three months ended September 30, 2019 by $236,000, or $0.00 per diluted share, and decreased FFO attributable to common stockholders for the three months ended September 30, 2018 by $2,142,000, or $0.01 per diluted share.
Core Funds from Operations (“Core FFO”) attributable to common stockholders, which excludes the impact of the non-core items listed on page 60, was $58,540,000, or $0.25 per diluted share, for the three months ended September 30, 2019, compared to $57,748,000, or $0.24 per diluted share, for the three months ended September 30, 2018.
Same Store Results
The table below summarizes the percentage increase (decrease) in our share of Same Store NOI and Same Store Cash NOI, by segment, for the three months ended September 30, 2019 versus September 30, 2018.
Same Store NOI
1.8
1.1
(9.2
Same Store Cash NOI
4.2
2.1
11.4
(9.7
See pages 52-60 “Non-GAAP Financial Measures” for a reconciliation of these measures to the most directly comparable GAAP measure and the reasons why we believe these non-GAAP measures are useful.
36
Financial Results - Nine Months Ended September 30, 2019 and 2018
Net income attributable to common stockholders was $13,246,000, or $0.06 per diluted share, for the nine months ended September 30, 2019, compared to $3,829,000, or $0.02 per diluted share, for the nine months ended September 30, 2018. Net income attributable to common stockholders for the nine months ended September 30, 2019 included $1,030,000, or $0.00 per diluted share, of gain on sale of real estate and net income attributable to common stockholders for the nine months ended September 30, 2018, included $32,222,000, or $0.13 per diluted share, of gain on sale of real estate, net of “sting” taxes, and a $41,618,000, or $0.17 per diluted share, real estate impairment loss.
FFO attributable to common stockholders was $168,209,000, or $0.72 per diluted share, for the nine months ended September 30, 2019, compared to $168,194,000, or $0.70 per diluted share, for the nine months ended September 30, 2018. FFO attributable to common stockholders for the nine months ended September 30, 2019 and 2018 includes the impact of non-core items, which are listed in the table on page 60. The aggregate of these items, net of amounts attributable to noncontrolling interests, decreased FFO attributable to common stockholders for the nine months ended September 30, 2019 and 2018 by $683,000 and $2,416,000, respectively, or $0.00 and $0.01 per diluted share, respectively.
Core FFO attributable to common stockholders, which excludes the impact of the non-core items listed on page 60, was $168,892,000, or $0.72 per diluted share, for the nine months ended September 30, 2019, compared to $170,610,000, or $0.71 per diluted share, for the nine months ended September 30, 2018.
The table below summarizes the percentage increase (decrease) in our share of Same Store NOI and Same Store Cash NOI, by segment, for the nine months ended September 30, 2019 versus September 30, 2018.
3.0
2.6
(7.2
7.8
4.5
17.4
(5.2
Results of Operations - Three Months Ended September 30, 2019 and 2018
The following pages summarize our consolidated results of operations for the three months ended September 30, 2019 and 2018.
Change
3,005
2,716
5,721
1,837
(1,552
1,867
336
2,488
(1,804
394
(1,556
(220
(35,705
(35,658
2,397
(33,261
(338
(23
3,173
(30,449
38
Our revenues, which consist primarily of rental revenue and fee and other income, were $198,317,000 for the three months ended September 30, 2019, compared to $192,596,000 for the three months ended September 30, 2018, an increase of $5,721,000. Below are the details of the increase (decrease) by segment.
Acquisitions / Dispositions
(5,051
Same store operations
8,254
4,216
4,421
(383
(198
Increase (decrease) in rental revenue
4,014
4,425
(5,434
216
443
317
Increase in fee income
3,080
Other income
(157
(207
(Decrease) increase in other income
(364
(187
Increase (decrease) in fee and other income
3,085
Total increase (decrease) in revenues
3,826
4,431
(5,621
Represents revenues attributable to 2099 Pennsylvania Avenue and 425 Eye Street in Washington, D.C. (sold in August 2018 and September 2018, respectively) for the months in which they were not owned by us in both reporting periods.
Primarily due to an increase in occupancy at 31 West 52nd Street and 1325 Avenue of the Americas.
Primarily due to an increase in occupancy at 300 Mission Street (formerly 50 Beale Street) and higher tenant reimbursement income resulting primarily from the new “gross receipts” tax in 2019 (see note 2 on page 40).
39
Expenses
Our expenses, which consist primarily of operating, depreciation and amortization, general and administrative and transaction related costs, were $151,811,000 for the three months ended September 30, 2019, compared to $149,323,000 for the three months ended September 30, 2018, an increase of $2,488,000. Below are the details of the increase (decrease) by segment.
(1,999
3,896
1,620
2,870
(613
Bad debt expense
(60
(52
(8
Increase (decrease) in operating
1,568
(1,980
(1,501
Operations
1,365
(1,503
(40
127
(Decrease) increase in depreciation
and amortization
(1,541
Stock-based compensation
844
Mark-to-market of investments
in our deferred compensation plan
(840
1,863
Increase in general and
administrative
Increase in transaction related costs
Total increase (decrease) in expenses
2,933
1,359
(3,521
1,717
Represents expenses attributable to 2099 Pennsylvania Avenue and 425 Eye Street in Washington, D.C. (sold in August 2018 and September 2018, respectively) for the months in which they were not owned by us in both reporting periods.
Primarily due to the new “gross receipts” tax in 2019, which is partially offset by higher reimbursement income (see note 3 on page 39).
Represents the change in the mark-to-market of investments in our deferred compensation plan liabilities. This change is entirely offset by the change in plan assets which is included in “interest and other income, net”.
40
(Loss) Income from Unconsolidated Joint Ventures
In the three months ended September 30, 2019, we recognized a $1,332,000 net loss from unconsolidated joint ventures compared to $472,000 of net income in the three months ended September 30, 2018, a decrease in income of $1,804,000. This decrease resulted primarily from (i) $1,266,000 for our share of net loss from 111 Sutter Street, which was acquired in February 2019, and (ii) $336,000 for our share of net loss from 55 Second Street, which was acquired in August 2019, primarily due to depreciation and amortization expense on these properties.
Income (Loss) from Unconsolidated Real Estate Funds
Income from unconsolidated real estate funds was $206,000 for the three months ended September 30, 2019, compared to a loss of $188,000 for the three months ended September 30, 2018, an increase in income of $394,000.
Interest and other income was $1,222,000 for the three months ended September 30, 2019, compared to $2,778,000 for the three months ended September 30, 2018, a decrease of $1,556,000. This decrease resulted from:
Decrease in the value of investments in our deferred compensation plan (which
is offset by a decrease in "general and administrative")
(716
Total decrease
Interest and debt expense was $37,325,000 for the three months ended September 30, 2019, compared to $37,105,000 for the three months ended September 30, 2018, an increase of $220,000. This increase resulted primarily from higher interest on variable rate debt at 1301 Avenue of the Americas and 1633 Broadway due to an increase in average LIBOR rates in the current year’s three months compared to prior year’s three months.
Gain on Sale of Real Estate
In the three months ended September 30, 2019, we recognized a $1,140,000 gain on sale of Liberty Place, which was sold in September 2019 and in the three months ended September 30, 2018, we recognized a $36,845,000 gain on sale of real estate, comprised of (i) a $35,836,000 gain on sale of 2099 Pennsylvania Avenue, which was sold for $219,900,000 in August 2018 and (ii) a $1,009,000 gain on sale of 425 Eye Street, which was sold for $157,000,000 in September 2018.
Income Tax Benefit (Expense)
Income tax benefit was $583,000 for the three months ended September 30, 2019, compared to an income tax expense of $1,814,000 for the three months ended September 30, 2018, a decrease in expense of $2,397,000. The decrease was primarily due to a true-up of the prior year tax provision in the three months ended September 30, 2019 and $1,248,000 of “sting” taxes in connection with the sale of real estate in the three months ended September 30, 2018.
Net Income Attributable to Noncontrolling Interests in Consolidated Joint Ventures
Net income attributable to noncontrolling interest in consolidated joint ventures was $3,051,000 for the three months ended September 30, 2019, compared to $2,713,000 for the three months ended September 30, 2018, an increase of $338,000. This increase resulted from:
Higher income attributable to 300 Mission Street ($390 in 2019,
compared to $126 in 2018)
264
Total increase
338
Net Income Attributable to Noncontrolling Interests in Consolidated Real Estate Fund
Net income attributable to noncontrolling interests in consolidated real estate fund was $109,000 for the three months ended September 30, 2019, compared to $86,000 for the three months ended September 30, 2018, an increase of $23,000.
Net Income Attributable to Noncontrolling Interests in Operating Partnership
Net income attributable to noncontrolling interests in Operating Partnership was $758,000 for the three months ended September 30, 2019, compared to $3,931,000 for the three months ended September 30, 2018, a decrease in income attributable to noncontrolling interests of $3,173,000. This decrease resulted from lower net income subject to allocation to the unitholders of the operating partnership for the three months ended September 30, 2019.
42
Results of Operations - Nine Months Ended September 30, 2019 and 2018
The following pages summarize our consolidated results of operations for the nine months ended September 30, 2019 and 2018.
6,360
4,046
10,406
1,166
(5,769
7,179
841
3,417
(5,746
539
817
(1,466
11,428
Income tax expense
1,348
12,776
(2,733
412
(1,038
9,417
43
Our revenues, which consist primarily of rental revenue and fee and other income, were $578,692,000 for the nine months ended September 30, 2019, compared to $568,286,000 for the nine months ended September 30, 2018, an increase of $10,406,000. Below are the details of the increase (decrease) by segment.
(20,596
26,550
15,199
12,094
(640
(103
406
361
45
15,560
12,139
(21,236
465
1,618
1,685
650
4,418
(641
269
(1,078
664
(372
(626
5,086
14,482
12,803
(21,862
4,983
__________________________________________________________
Primarily due to an increase in occupancy at 31 West 52nd Street, 1325 Avenue of the Americas and 1633 Broadway.
Primarily due to an increase in occupancy at 300 Mission Street (formerly 50 Beale Street) and One Market Plaza, and higher tenant reimbursement income resulting primarily from the new “gross receipts” tax in 2019 (see note 2 on page 45).
44
Our expenses, which consist primarily of operating, depreciation and amortization, general and administrative and transaction related costs, were $449,534,000 for the nine months ended September 30, 2019, compared to $446,117,000 for the nine months ended September 30, 2018, an increase of $3,417,000. Below are the details of the increase (decrease) by segment.
(8,204
9,604
3,948
7,531
399
(2,274
(234
(226
3,722
7,523
(7,805
(7,692
1,923
4,760
(3,136
(176
475
(7,868
2,614
1,781
2,784
Increase in general
and administrative
8,482
4,387
(15,673
6,221
Primarily due to the new “gross receipts” tax in 2019, which is partially offset by higher reimbursement income (see note 3 on page 44).
In the nine months ended September 30, 2019, we recognized a $2,815,000 net loss from unconsolidated joint ventures compared to $2,931,000 of net income in the nine months ended September 30, 2018, a decrease in income of $5,746,000. This decrease resulted primarily from (i) $3,387,000 for our share of net loss from 111 Sutter Street, which was acquired in February 2019 (primarily due to depreciation and amortization expense), and (ii) $1,876,000 of lower income from 712 Fifth Avenue, resulting from lower cash distributions in the nine months ended September 30, 2019 (since we only recognize earnings from 712 Fifth Avenue to the extent we receive cash distributions from the joint venture).
Income from unconsolidated real estate funds was $271,000 for the nine months ended September 30, 2019, compared to a loss of $268,000 for the nine months ended September 30, 2018, an increase in income of $539,000.
Interest and other income was $7,705,000 for the nine months ended September 30, 2019, compared to $6,888,000 for the nine months ended September 30, 2018, an increase of $817,000. This increase resulted from:
Increase in the value of investments in our deferred compensation plan (which
is offset by an increase in "general and administrative")
(964
Interest and debt expense was $111,462,000 for the nine months ended September 30, 2019, compared to $109,996,000 for the nine months ended September 30, 2018, an increase of $1,466,000. This increase resulted primarily from higher interest on variable rate debt at 1301 Avenue of the Americas and 1633 Broadway due to an increase in average LIBOR rates in the current year’s nine months compared to prior year’s nine months.
Real Estate Impairment Loss
In the nine months ended September 30, 2018, we wrote down the value of certain real estate assets in our Washington, D.C. portfolio. Accordingly, we recorded a $46,000,000 real estate impairment loss based on the excess of the carrying value over the estimated fair value.
In the nine months ended September 30, 2019, we recognized a $1,140,000 gain on sale of Liberty Place, which was sold in September 2019 and in the nine months ended September 30, 2018, we recognized a $36,845,000 gain on sale of real estate, comprised of (i) a $35,836,000 gain on sale of 2099 Pennsylvania Avenue, which was sold for $219,900,000 in August 2018 and (ii) a $1,009,000 gain on sale of 425 Eye Street, which was sold for $157,000,000 in September 2018.
46
Income Tax Expense
Income tax expense was $823,000 for the nine months ended September 30, 2019, compared to $2,171,000 for the nine months ended September 30, 2018, a decrease of $1,348,000. The decrease was primarily due to $1,248,000 of “sting” taxes in connection with the sale of real estate in the nine months ended September 30, 2018.
Net income attributable to noncontrolling interest in consolidated joint ventures was $8,253,000 for the nine months ended September 30, 2019, compared to $5,520,000 for the nine months ended September 30, 2018, an increase of $2,733,000. This increase resulted from:
Higher income attributable to 300 Mission Street ($1,289 in 2019,
compared to a loss of $1,566 in 2018)
2,855
(122
2,733
Net income attributable to noncontrolling interests in consolidated real estate fund was $256,000 for the nine months ended September 30, 2019, compared to $668,000 for the nine months ended September 30, 2018, a decrease of $412,000.
Net income attributable to noncontrolling interests in Operating Partnership was $1,419,000 for the nine months ended September 30, 2019, compared to $381,000 for the nine months ended September 30, 2018, an increase in income attributable to noncontrolling interests of $1,038,000. This increase resulted from higher net income subject to allocation to the unitholders of the Operating Partnership for the nine months ended September 30, 2019.
47
Liquidity and Capital Resources
Liquidity
Our primary sources of liquidity include existing cash balances, cash flow from operations and borrowings available under our revolving credit facility. We expect that these sources will provide adequate liquidity over the next 12 months for all anticipated needs, including scheduled principal and interest payments on our outstanding indebtedness, existing and anticipated capital improvements, the cost of securing new and renewal leases, dividends to stockholders and distributions to unitholders, and all other capital needs related to the operations of our business. We anticipate that our long-term needs including debt maturities and the acquisition of additional properties will be funded by operating cash flow, mortgage financings and/or re-financings, the issuance of long-term debt or equity and cash on hand.
Although we may be able to anticipate and plan for certain of our liquidity needs, unexpected increases in uses of cash that are beyond our control and which affect our financial condition and results of operations may arise, or our sources of liquidity may be fewer than, and the funds available from such sources may be less than, anticipated or required.
As of September 30, 2019, we had $1.32 billion of liquidity comprised of $298,066,000 of cash and cash equivalents, $25,372,000 of restricted cash and $1.0 billion of borrowing capacity under our revolving credit facility. As of September 30, 2019, our outstanding consolidated debt aggregated $3.60 billion. We had no amounts outstanding under our revolving credit facility as of September 30, 2019 and none of our debt matures until 2021. We may refinance our maturing debt when it comes due or refinance or repay it early depending on prevailing market conditions, liquidity requirements and other factors. The amounts involved in connection with these transactions could be material to our consolidated financial statements.
Revolving Credit Facility
Our $1.0 billion revolving credit facility matures in January 2022 and has two six-month extension options. The interest rate on the facility, at current leverage levels, is LIBOR plus 115 basis points and has a 20 basis points facility fee. We also have an option, subject to customary conditions and incremental lender commitments, to increase the capacity under the facility to $1.5 billion at any time prior to the maturity date of the facility. The facility contains certain restrictions and covenants that require us to maintain, on an ongoing basis, (i) a leverage ratio not to exceed 60%, however, the leverage ratio may be increased to 65% for any fiscal quarter in which an acquisition of real estate is completed and for up to the next three subsequent consecutive fiscal quarters, (ii) a secured leverage ratio not to exceed 50%, (iii) a fixed charge coverage ratio of at least 1.50, (iv) an unsecured leverage ratio not to exceed 60%, however, the unsecured leverage ratio may be increased to 65% for any fiscal quarter in which an acquisition of real estate is completed and for up to the next three subsequent consecutive fiscal quarters and (v) an unencumbered interest coverage ratio of at least 1.75. The facility also contains customary representations and warranties, limitations on permitted investments and other covenants
Dividend Policy
On September 13, 2019, we declared a regular quarterly cash dividend of $0.10 per share of common stock for the third quarter ending September 30, 2019, which was paid on October 15, 2019 to stockholders of record as of the close of business on September 30, 2019. This dividend policy, if continued, would require us to pay out approximately $25,300,000 each quarter to common stockholders and unitholders.
Off Balance Sheet Arrangements
As of September 30, 2019, our unconsolidated joint ventures had $1.22 billion of outstanding indebtedness, of which our share was $332,303,000. We do not guarantee the indebtedness of our unconsolidated joint ventures other than providing customary environmental indemnities and guarantees of specified non-recourse carve outs relating to specified covenants and representations; however, we may elect to fund additional capital to a joint venture through equity contributions (generally on a basis proportionate to our ownership interests), advances or partner loans in order to enable the joint venture to repay this indebtedness upon maturity.
During 2017, the New York City Department of Finance issued Notices of Determination (“Notices”) assessing additional transfer taxes (including interest and penalties) in connection with the transfer of interests in certain properties during our 2014 initial public offering. We believe, after consultation with legal counsel that the likelihood of a loss is reasonably possible, and while it is not possible to predict the outcome of these Notices, we estimate the range of loss could be between $0 and $42,500,000. Since no amount in this range is a better estimate than any other amount within the range, we have not accrued any liability arising from potential losses relating to these Notices in our consolidated financial statements.
Inflation
Substantially all of our leases provide for separate real estate tax and operating expense escalations. In addition, many of the leases provide for fixed base rent increases. We believe inflationary increases in expenses may be at least partially offset by the contractual rent increases and expense escalations described above. We do not believe inflation has had a material impact on our historical financial position or results of operations.
Cash Flows
Cash and cash equivalents and restricted cash were $323,438,000 and $365,409,000 as of September 30, 2019 and December 31, 2018, respectively, and $569,627,000 and $250,425,000 as of September 30, 2018 and December 31, 2017, respectively. Cash and cash equivalents and restricted cash decreased by $41,971,000 for the nine months ended September 30, 2019 and increased by $319,202,000 for the nine months ended September 30, 2018. The following table sets forth the changes in cash flow.
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Operating Activities
Nine months ended September 30, 2019 – We generated $206,647,000 of cash from operating activities for the nine months ended September 30, 2019, primarily from (i) $195,149,000 of net income (before $173,115,000 of noncash adjustments and $1,140,000 of gain on sale of real estate), (ii) $4,140,000 of distributions from unconsolidated joint ventures and real estate funds, (iii) $2,339,000 from the receipt of accrued interest on preferred equity investment, and (iv) $5,019,000 of net changes in operating assets and liabilities. Noncash adjustments of $173,115,000 were primarily comprised of depreciation and amortization, straight-lining of rental revenue, amortization of above and below market leases and amortization of stock-based compensation.
Nine months ended September 30, 2018 – We generated $134,168,000 of cash from operating activities for the nine months ended September 30, 2018, primarily from (i) $176,167,000 of net income (before $156,614,000 of noncash adjustments, $46,000,000 of real estate impairment loss and $36,845,000 of gain on sale of real estate) and (ii) $5,142,000 of distributions from unconsolidated joint ventures and real estate funds, partially offset by (iii) $47,141,000 of net changes in operating assets and liabilities. Noncash adjustments of $156,614,000 were primarily comprised of depreciation and amortization, straight-lining of rental income, amortization of above and below market leases and amortization of stock-based compensation.
50
Investing Activities
Nine months ended September 30, 2019 – We used $58,387,000 of cash for investing activities for the nine months ended September 30, 2019, primarily due to (i) $148,896,000 for investments in and contributions of capital to unconsolidated joint ventures, (ii) $70,094,000 for additions to real estate, which were comprised of spending for tenant improvements and other building improvements, (iii) $25,000,000 for real estate acquisition deposit and (iv) $2,247,000 of net contributions to our unconsolidated real estate funds, partially offset by (v) $150,307,000 of proceeds from sale of real estate, (vi) $33,750,000 from the redemption of a preferred equity investment, and (vii) $3,793,000 from the net sales of marketable securities (which are held in our deferred compensation plan).
Nine months ended September 30, 2018 – We generated $223,127,000 of cash from investing activities for the nine months ended September 30, 2018, primarily from (i) $349,013,000 of proceeds from the sales of real estate and (ii) $3,160,000 from the net sales of marketable securities (which are held in our deferred compensation plan), partially offset by, (iii) $85,621,000 for additions to real estate, which were comprised of spending for tenant improvements and other building improvements, (iv) $25,491,000 for investments in unconsolidated joint ventures, (v) $15,680,000 for escrow deposits and loans receivable for RDF and (vi) $2,254,000 for contributions to our unconsolidated real estate funds.
Financing Activities
Nine months ended September 30, 2019 – We used $190,231,000 of cash in financing activities for the nine months ended September 30, 2019, primarily due to (i) $89,005,000 for the repurchases of common shares, (ii) $77,804,000 for dividends and distributions paid to common stockholders and unitholders, (iii) $40,037,000 for distributions to noncontrolling interests, (iv) $1,000,000 for acquisition of noncontrolling interest in consolidated real estate funds (v) $314,000 for the repurchase of shares related to stock compensation agreements and related tax withholdings and (vi) $260,000 for the payment of debt issuance costs, partially offset by (vii) $14,989,000 of contributions from noncontrolling interests and (viii) $3,200,000 of proceeds from notes and mortgages payable.
Nine months ended September 30, 2018 – We used $38,093,000 of cash for financing activities for the nine months ended September 30, 2018, primarily due to (i) $78,458,000 for dividends and distributions paid to common stockholders and unitholders, (ii) $10,583,000 for distributions to noncontrolling interests, (iii) $6,351,000 for the payment of debt issuance costs and (iv) $3,569,000 for the repurchase of common shares, partially offset by, (v) $44,381,000 of contributions from noncontrolling interests and (vi) $16,700,000 of proceeds from notes and mortgages payable.
51
Non-GAAP Financial Measures
We use and present NOI, Same Store NOI, FFO and Core FFO, as supplemental measures of our performance. The summary below describes our use of these measures, provides information regarding why we believe these measures are meaningful supplemental measures of our performance and reconciles these measures from net income or loss, the most directly comparable GAAP measure. Other real estate companies may use different methodologies for calculating these measures, and accordingly, our presentation of these measures may not be comparable to other real estate companies. These non-GAAP measures should not be considered a substitute for, and should only be considered together with and as a supplement to, financial information presented in accordance with GAAP.
Net Operating Income (“NOI”)
We use NOI to measure the operating performance of our properties. NOI consists of rental revenue (which includes property rentals, tenant reimbursements and lease termination income) and certain other property-related revenue less operating expenses (which includes property-related expenses such as cleaning, security, repairs and maintenance, utilities, property administration and real estate taxes). We also present Cash NOI which deducts from NOI, straight-line rent adjustments and the amortization of above and below-market leases, including our share of such adjustments of unconsolidated joint ventures. In addition, we present PGRE's share of NOI and Cash NOI which represents our share of NOI and Cash NOI of consolidated and unconsolidated joint ventures, based on our percentage ownership in the underlying assets. We use NOI and Cash NOI internally as performance measures and believe they provide useful information to investors regarding our financial condition and results of operations because they reflect only those income and expense items that are incurred at property level.
The following tables present reconciliations of our net income (loss) to NOI and Cash NOI for the three and nine months ended September 30, 2019 and 2018.
Reconciliation of net income (loss) to NOI and
Cash NOI:
Net income (loss)
8,905
10,361
3,040
(11,306
Add (subtract) adjustments to arrive at NOI and
40,052
19,821
2,362
823
23,818
12,383
1,124
(583
(7,159
(1,222
(236
(986
1,912
(235
1,602
545
Less NOI attributable to noncontrolling interests in:
(18,765
Paramount's share of NOI
105,718
27,272
Less:
Straight-line rent adjustments (including our share
of unconsolidated joint ventures)
(11,484
(8,593
(2,941
72
(22
(including our share of unconsolidated joint ventures)
(2,768
436
(3,223
Cash NOI
110,231
67,159
39,873
4,353
(1,154
Less Cash NOI attributable to noncontrolling
(16,680
Paramount's share of Cash NOI
93,551
23,193
52
8,464
8,856
41,026
(14,085
38,687
21,324
3,903
696
23,573
1,149
1,814
1,812
(4,079
(2,778
(203
(181
(2,394
166
(442
608
(18,303
104,858
24,059
(1,742
(15,752
(9,254
(4,292
(2,184
(3,724
534
(3,928
(330
103,678
65,918
34,142
5,389
(1,771
(14,968
88,717
19,174
(1,764
53
27,178
26,495
7,202
(37,701
120,002
59,257
7,087
2,426
71,444
36,822
3,196
804
(17,371
(7,705
(595
(7,110
4,248
(854
3,723
1,379
(54,513
313,799
75,227
(2,666
(34,119
(27,142
(7,243
(8,713
1,391
(10,163
59
325,457
202,338
112,334
13,451
(47,048
278,432
65,286
(2,643
54
25,058
21,763
3,277
(39,700
115,242
62,393
14,955
1,951
69,585
36,823
3,588
2,171
2,161
(12,953
(6,888
(548
(6,159
(1,800
(2,875
1,075
(50,991
311,684
69,450
(5,496
(45,802
(30,259
(13,736
(1,822
(12,122
1,624
(12,319
(1,427
304,731
191,889
94,386
23,957
(5,501
(41,599
263,152
52,787
(5,481
55
The tables below set forth the reconciliations of our share of NOI to our share of Same Store NOI and Same Store Cash NOI for the three and nine months September 30, 2019 and 2018. These metrics are used to measure the operating performance of our properties that were owned by us in a similar manner during both the current and prior reporting periods, and represents our share of Same Store NOI and Same Store Cash NOI from consolidated and unconsolidated joint ventures based on our percentage ownership in the underlying assets. Same Store NOI also excludes lease termination income, impairment of receivables arising from operating leases and certain other items that vary from period to period. Same Store Cash NOI excludes the effect of non-cash items such as the straight-line rent adjustments and the amortization of above and below-market leases.
Paramount's share of NOI for the three
months ended September 30, 2019 (1)
Acquisitions (2)
(2,106
Lease termination income (including our share
(751
172
174
(2
Paramount's share of Same Store NOI for
the three months ended September 30, 2019
103,033
75,490
24,413
months ended September 30, 2018 (1)
Dispositions (3)
(3,209
(506
(28
(478
56
the three months ended September 30, 2018
101,199
74,662
23,585
4,694
Increase (decrease) in Same Store NOI
1,834
828
(432
610
% Increase (decrease)
See page 52 “Non-GAAP Financial Measures – NOI” for a reconciliation to net income in accordance with GAAP and the reasons why we believe these non-GAAP measures are useful.
Represents our share of NOI attributable to acquired properties (111 Sutter Street and 55 Second Street in San Francisco) for the months in which they were not owned by us in both reporting periods.
Represents our share of NOI attributable to sold properties (2099 Pennsylvania Avenue and 425 Eye Street in Washington, D.C.) for the months in which they were not owned by us in both reporting periods.
Paramount's share of Cash NOI for the three
(1,606
Paramount's share of Same Store Cash NOI
for the three months ended September 30, 2019
91,366
67,333
20,834
(568
for the three months ended September 30, 2018
87,699
65,942
18,700
4,821
Increase (decrease) in Same Store Cash NOI
3,667
2,134
(468
Represents our share of Cash NOI attributable to acquired properties (111 Sutter Street and 55 Second Street in San Francisco) for the months in which they were not owned by us in both reporting periods.
Represents our share of Cash NOI attributable to sold properties (2099 Pennsylvania Avenue and 425 Eye Street in Washington, D.C.) for the months in which they were not owned by us in both reporting periods.
57
Paramount's share of NOI for the nine months
ended September 30, 2019 (1)
(4,019
(3,097
(2,346
448
473
(25
the nine months ended September 30, 2019
307,131
226,216
70,432
ended September 30, 2018 (1)
(13,033
(750
(272
230
226
the nine months ended September 30, 2018
298,131
220,478
68,976
14,173
9,000
5,738
1,456
(1,024
2,830
58
Paramount's share of Cash NOI for the nine
(3,117
for the nine months ended September 30, 2019
272,666
200,465
61,393
(9,773
for the nine months ended September 30, 2018
252,859
191,843
52,313
14,184
19,807
8,622
9,080
(733
2,838
Funds from Operations (“FFO”) and Core Funds from Operations (“Core FFO”)
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 net income or loss, calculated in accordance with GAAP, adjusted to exclude depreciation and amortization from real estate assets, impairment losses on certain real estate assets and gains or losses from the sale of certain real estate assets or from change in control of certain 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. Neither FFO nor Core FFO is intended to be a measure of cash flow or liquidity. Please refer to our consolidated financial statements, prepared in accordance with GAAP, for purposes of evaluating our financial condition, results of operations and cash flows. The following table presents a reconciliation of net income to FFO and Core FFO for the periods set forth below.
Reconciliation of net income to FFO and Core FFO:
Real estate depreciation and amortization (including our
share of unconsolidated joint ventures)
67,461
66,533
199,595
200,404
FFO
77,321
73,949
221,629
219,957
Less FFO attributable to noncontrolling interests in:
(12,142
(12,432
(35,167
(33,479
(6,294
(5,825
(17,997
(17,616
FFO attributable to common stockholders
58,776
55,606
168,209
168,194
Per diluted share
0.25
0.23
0.72
0.70
Non-core items:
Our share of (distributions from 712 Fifth Avenue in
excess of earnings) and earnings in excess of distribution
(976
398
(1,037
81
715
1,968
1,798
2,586
Core FFO
77,060
76,315
222,390
222,624
Less Core FFO attributable to noncontrolling interests in:
(6,269
(6,049
(18,075
(17,867
Core FFO attributable to common stockholders
58,540
57,748
168,892
170,610
0.24
0.71
Reconciliation of weighted average shares outstanding:
Effect of dilutive securities
32,101
41,217
30,707
25,302
Denominator for FFO and Core FFO per diluted share
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and interest rates. Our future earnings, cash flows and fair values relevant to financial instruments are dependent upon prevalent market interest rates. Our primary market risk results from our indebtedness, which bears interest at both fixed and variable rates. We manage our market risk on variable rate debt by entering into swap agreements to fix the rate on all or a portion of the debt for varying periods through maturity. This in turn, reduces the risks of variability of cash flows created by variable rate debt and mitigates the risk of increases in interest rates. Our objective when undertaking such arrangements is to reduce our floating rate exposure and we do not enter into hedging arrangements for speculative purposes. Subject to maintaining our status as a REIT for Federal income tax purposes, we may utilize swap arrangements in the future.
The following table summarizes our consolidated debt, the weighted average interest rates and the fair value as of September 30, 2019.
Property
Rate
Fixed Rate Debt:
1633 Broadway (1)
3.54%
1,006,257
3.05%
499,303
3.80%
516,120
One Market Plaza
4.03%
1,016,452
300 Mission Street
3.65%
230,262
Total Fixed Rate Debt
3.66%
728,000
1,475,000
3,203,000
3,268,394
Variable Rate Debt:
3.85%
50,313
3.93%
352,411
Total Variable Rate Debt
3.92%
400,000
402,724
Total Consolidated Debt
3.69%
1,078,000
All of this debt has been swapped from floating rate debt to fixed rate debt. See table below.
In addition to the above, our unconsolidated joint ventures had $1.22 billion of outstanding indebtedness as of September 30, 2019, of which our share was $332,303,000.
The following table summarizes our fixed rate debt that has been swapped from floating rate to fixed as of September 30, 2019.
Notional
Strike
Effective Date
Maturity Date
Dec-2015
Dec-2020
1.65
(163
300,000
Dec-2021
1.82
(2,282
1.95
(5,081
2.35
(4,165
Total interest rate swap liabilities designated as cash flow hedges (included in "other liabilities")
(11,691
Represents interest rate swaps designated as cash flow hedges. Changes in the fair value of these hedges are recognized in “other comprehensive (loss) income” (outside of earnings).
The following table summarizes our share of total indebtedness and the effect to interest expense of a 100 basis point increase in LIBOR.
(Amounts in thousands, except per share amount)
Balance
Weighted
Average
Interest
Effect of 1% Increase in Base Rates
Paramount's share of consolidated debt:
Variable rate
3.92
4,000
396,800
4.17
Fixed rate (1)
2,548,658
3.59
2,948,658
3.63
2,945,458
3.67
Paramount's share of debt of non-consolidated entities
(non-recourse):
97,758
4.32
978
28,808
4.91
Fixed rate
234,545
3.57
152,071
332,303
3.79
180,879
Noncontrolling interests' in the Operating Partnership share of above
(481
Total change in annual net income
4,497
_____
Our fixed rate debt includes floating rate debt that has been swapped to fixed. See table on page 61.
Our variable rate debt outstanding as of September 30, 2019 is based on LIBOR, which is expected to remain available through the end of 2021, but may be discontinued or otherwise become unavailable thereafter. In the event that LIBOR is discontinued, the interest rate for our variable rate debt and interest rate swaps, including interest rates for our variable rate debt and interest rate swaps of our unconsolidated joint ventures following such event will be based on an alternative variable rate as specified in the applicable documentation governing such debt or swaps or as otherwise agreed upon. Such an event would not affect our ability to borrow or maintain already outstanding borrowings or swaps, but the alternative variable rate could be higher and more volatile than LIBOR prior to its discontinuance.
62
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and regulations, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
As of September 30, 2019, the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of our disclosure controls and procedures. Based on the foregoing evaluation, as of the end of the period covered by this Quarterly Report, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports filed or submitted under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes to our internal control over financial reporting in connection with the evaluation referenced above that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
From time to time, we are a party to various claims and routine litigation arising in the ordinary course of business. As of September 30, 2019, we do not believe that the results of any such claims or litigation, individually or in the aggregate, will have a material adverse effect on our business, financial position, results of operations or cash flows.
ITEM 1A.
RISK FACTORS
Except to the extent additional factual information disclosed elsewhere in this Quarterly Report on Form 10-Q relates to such risk factors (including, without limitation, the matters discussed in Part I, “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations”), there were no material changes to the risk factors disclosed in Part I, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
None.
Recent Purchases of Equity Securities
The following table summarizes our purchases of equity securities in the three months ended September 30, 2019.
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plan
Maximum Approximate Dollar Value Available for Future Purchase
July 2019
419,513
13.68
82,390,000
August 2019
4,715,557
13.17
4,715,041
20,315,000
September 2019
1,117,149
13.16
5,612,000
_____________________________________
Of the 4,715,557 common shares repurchased in August 2019, 516 common shares represent shares surrendered by employees for the satisfaction of tax withholding obligations in connection with the vesting of restricted common stock.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
ITEM 4.
MINE SAFETY DISCLOSURES
ITEM 5.
OTHER INFORMATION
ITEM 6.
EXHIBITS
Exhibits required by Item 601 of Regulation S-K are filed herewith or incorporated herein by reference and are listed in the following Exhibit Index:
EXHIBIT INDEX
ExhibitNumber
Exhibit Description
31.1*
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.SCH*
Inline XBRL Taxonomy Extension Schema.
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase.
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase.
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase.
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase.
104
Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101.*)
_______________________________
*
Filed herewith
**
Furnished herewith
†
Indicates management contract or compensatory plan or arrangement
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Paramount Group, Inc.
Date: November 6, 2019
By:
/s/ Wilbur Paes
Wilbur Paes
Executive Vice President, Chief Financial Officer and Treasurer
(duly authorized officer and principal financial and accounting officer)