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, 2022
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
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, an 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 14, 2022, there were 219,823,849 shares of the registrant’s common stock outstanding.
Table of Contents
Item
Page Number
Part I.
Financial Information
Item 1.
Consolidated Financial Statements
3
Consolidated Balance Sheets (Unaudited) as of September 30, 2022 and December 31, 2021
Consolidated Statements of Income (Unaudited) for the three and nine months
ended September 30, 2022 and 2021
4
Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 30, 2022 and 2021
5
Consolidated Statements of Changes in Equity (Unaudited) for the three and nine months ended September 30, 2022 and 2021
6
Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2022 and 2021
8
Notes to Consolidated Financial Statements (Unaudited)
10
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
28
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
58
Item 4.
Controls and Procedures
60
Part II.
Other Information
Legal Proceedings
61
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Item 6.
Exhibits
62
Signatures
63
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, 2022
December 31, 2021
Assets
Real estate, at cost:
Land
$
1,966,237
Buildings and improvements
6,152,652
6,061,824
8,118,889
8,028,061
Accumulated depreciation and amortization
(1,248,059
)
(1,112,977
Real estate, net
6,870,830
6,915,084
Cash and cash equivalents
469,398
524,900
Restricted cash
40,456
4,766
Investments in unconsolidated joint ventures
428,785
408,096
Investments in unconsolidated real estate funds
14,558
11,421
Accounts and other receivables
19,865
15,582
Deferred rent receivable
340,540
332,735
Deferred charges, net of accumulated amortization of $65,144 and $70,666
123,864
122,177
Intangible assets, net of accumulated amortization of $239,733 and $252,142
97,371
119,413
Other assets
90,813
40,388
Total assets (1)
8,496,480
8,494,562
Liabilities and Equity
Notes and mortgages payable, net of unamortized deferred financing costs of $18,856 and $22,380
3,839,144
3,835,620
Revolving credit facility
-
Accounts payable and accrued expenses
152,371
116,192
Dividends and distributions payable
18,564
16,895
Intangible liabilities, net of accumulated amortization of $99,689 and $105,790
39,037
45,328
Other liabilities
24,171
25,495
Total liabilities (1)
4,073,287
4,039,530
Commitments and contingencies
Paramount Group, Inc. equity:
Common stock $0.01 par value per share; authorized 900,000,000 shares; issued and outstanding 222,461,093 and 218,991,795 shares in 2022 and 2021, respectively
2,224
2,190
Additional paid-in-capital
4,210,442
4,122,680
Earnings less than distributions
(589,623
(538,845
Accumulated other comprehensive income
51,320
2,138
Paramount Group, Inc. equity
3,674,363
3,588,163
Noncontrolling interests in:
Consolidated joint ventures
407,402
428,833
Consolidated real estate fund
79,248
81,925
Operating Partnership (15,822,806 and 21,740,404 units outstanding)
262,180
356,111
Total equity
4,423,193
4,455,032
Total liabilities and equity
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)
2022
2021
Revenues:
Rental revenue
179,250
170,851
526,415
518,625
Fee and other income
7,897
8,280
29,934
23,941
Total revenues
187,147
179,131
556,349
542,566
Expenses:
Operating
72,845
67,131
207,320
197,821
Depreciation and amortization
58,284
57,522
171,306
175,752
General and administrative
13,150
13,257
45,501
46,039
Transaction related costs
105
87
381
503
Total expenses
144,384
137,997
424,508
420,115
Other income (expense):
(Loss) income from unconsolidated joint ventures
(5,797
223
(15,326
(20,810
Income from unconsolidated real estate funds
300
276
625
604
Interest and other income, net
1,580
138
2,607
2,510
Interest and debt expense
(36,949
(36,266
(106,804
(105,919
Income (loss) before income taxes
1,897
5,505
12,943
(1,164
Income tax expense
(673
(873
(1,559
(2,448
Net income (loss)
1,224
4,632
11,384
(3,612
Less net (income) loss attributable to noncontrolling interests in:
(4,179
(3,768
(12,383
(16,924
1,309
(3,123
2,677
(3,179
Operating Partnership
109
204
(204
2,139
Net (loss) income attributable to common stockholders
(1,537
(2,055
1,474
(21,576
(Loss) Income per Common Share - Basic:
(Loss) income per common share
(0.01
0.01
(0.10
Weighted average shares outstanding
224,864,791
218,706,356
222,228,605
218,689,696
(Loss) Income per Common Share - Diluted:
222,262,748
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
Other comprehensive income:
Change in value of interest rate swaps and interest rate caps
9,796
995
34,450
Pro rata share of other comprehensive income of unconsolidated joint ventures
5,707
928
19,109
5,677
Comprehensive income
16,727
6,555
64,943
3,060
Less comprehensive (income) loss attributable to noncontrolling interests in:
(3,191
(914
30
(4,581
1,541
Comprehensive income (loss) attributable to common stockholders
(306
50,656
(15,514
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
Income (Loss)
Ventures
Fund
Partnership
Equity
Balance as of June 30, 2022
225,625
2,255
4,228,674
(570,577
36,840
412,189
80,557
261,416
4,451,354
Net (loss) income
4,179
(1,309
(109
Common shares issued upon redemption of common units
77
1
1,271
(1,272
Common shares issued under Omnibus share plan, net of shares withheld for taxes
(4
Repurchases of common shares
(3,237
(32
(21,281
(21,313
Dividends and distributions ($0.0775 per share and unit)
(17,270
(1,294
(18,564
Distributions to noncontrolling interests
(8,966
9,150
646
5,330
377
Amortization of equity awards
331
3,863
4,194
Reallocation of noncontrolling interest
1,447
(1,447
(235
Balance as of September 30, 2022
222,461
Balance as of June 30, 2021
218,962
2,189
4,113,889
(507,321
(8,478
442,428
79,085
358,331
4,480,123
3,768
3,123
(6
(14
Dividends and distributions ($0.07 per share and unit)
(15,327
(1,570
(16,897
(11,054
905
90
843
84
305
3,928
4,233
3,474
(3,474
271
Balance as of September 30, 2021
218,956
4,117,939
(524,717
(6,730
435,142
82,209
357,185
4,463,217
Balance as of December 31, 2021
218,992
12,383
(2,677
6,607
66
108,418
(108,484
99
(284
Dividends and distributions ($0.2325 per share and unit)
(51,733
(4,395
(56,128
(33,814
31,635
2,815
17,547
1,562
970
14,022
14,992
(345
345
Balance as of December 31, 2020
218,817
2,188
4,120,173
(456,393
(12,791
437,161
79,017
346,379
4,515,734
16,924
3,179
(2,139
165
(165
129
(215
(214
Dividends and distributions ($0.21 per share and unit)
(45,981
(4,702
(50,683
Contributions from noncontrolling interests
121
(19,616
5,156
13
508
916
13,628
14,544
(3,586
3,586
(552
552
7
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30,
Cash Flows from Operating Activities:
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Straight-lining of rental revenue
(7,808
(7,925
Amortization of stock-based compensation expense
14,853
14,421
Loss from unconsolidated joint ventures
15,326
20,810
Amortization of deferred financing costs
4,614
7,306
Distributions of earnings from unconsolidated real estate funds
624
535
Distributions of earnings from unconsolidated joint ventures
34
3,950
Amortization of above and below-market leases, net
(589
(2,335
(625
(604
Realized and unrealized gains on marketable securities
(1,271
Other non-cash adjustments
1,084
2,330
Changes in operating assets and liabilities:
(4,283
6,118
Deferred charges
(12,286
(12,664
(21,764
(30,014
4,646
12,830
(2,099
2,433
Net cash provided by operating activities
174,417
188,060
Cash Flows from Investing Activities:
Additions to real estate
(71,284
(74,134
Due from affiliates
(59,000
Repayment of amounts due from affiliates
59,000
Investments in and contributions of capital to unconsolidated joint ventures
(11,252
(11,750
Contributions of capital to unconsolidated real estate funds
(4,642
(3,198
Distributions of capital from unconsolidated real estate funds
1,506
3,959
Purchases of marketable securities
(21,562
Sales of marketable securities
18,305
Net cash used in investing activities
(85,672
(88,380
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Cash Flows from Financing Activities:
Dividends paid to common stockholders
(49,793
(45,970
Distributions paid to common unitholders
(4,666
(4,612
(20,000
Repurchase of shares related to stock compensation agreements and related tax withholdings
Proceeds from notes and mortgages payable
888,566
Repayment of notes and mortgages payable
(850,000
Debt issuance costs
(10,593
Purchase of interest rate caps
(140
Net cash used in financing activities
(108,557
(42,458
Net (decrease) increase in cash and cash equivalents and restricted cash
(19,812
57,222
Cash and cash equivalents and restricted cash at beginning of period
529,666
465,324
Cash and cash equivalents and restricted cash at end of period
509,854
522,546
Reconciliation of Cash and Cash Equivalents and Restricted Cash:
Cash and cash equivalents at beginning of period
434,530
Restricted cash at beginning of period
30,794
Cash and cash equivalents at end of period
494,569
Restricted cash at end of period
27,977
Supplemental Disclosure of Cash Flow Information:
Cash payments for interest
102,534
98,917
Cash payments for income taxes, net of refunds
2,177
Non-Cash Transactions:
108,484
Dividends and distributions declared but not yet paid
16,897
Write-off of fully amortized and/or depreciated assets
8,736
43,232
Additions to real estate included in accounts payable and accrued expenses
42,052
17,842
Transfer of deposit to investment in unconsolidated joint ventures
6,230
Repurchase of common shares included in accounts payable and accrued expenses
1,313
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, a Delaware limited partnership (the “Operating 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 and San Francisco. 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 93.4% of, the Operating Partnership as of September 30, 2022.
As of September 30, 2022, we own and/or manage a portfolio aggregating 14.0 million square feet comprised of:
Additionally, we have an investment management business, where we serve as the general partner of real estate funds for institutional investors and high net-worth individuals.
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, 2021 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, 2021, 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, 2021.
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, 2022, are not necessarily indicative of the operating results for the full year.
Recently Issued Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, which adds Accounting Standards Codification (“ASC”) Topic 848, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides temporary optional expedients and exceptions to ease financial reporting burdens related to applying current GAAP to modifications of contracts, hedging relationships and other transactions in connection with the transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. In January 2021, the FASB issued ASU 2021-01 to clarify that certain optional expedients and exceptions apply to modifications of derivative contracts and certain hedging relationships affected by changes in the interest rates used for discounting cash flows, computing variation margin settlements, and for calculating price alignment interest. ASU 2020-04 is effective beginning on March 12, 2020 and may be applied prospectively to such transactions through December 31, 2022 and ASU 2021-01 is effective beginning on January 7, 2021 and may be applied retrospectively or prospectively to such transactions through December 31, 2022. We will apply ASU 2020-04 and ASU 2021-01 prospectively as and when we enter into transactions to which these updates apply.
In August 2020, the FASB issued ASU 2020-06, an update to ASC Topic 470, Subtopic - 20, Debt - Debt with Conversion and Other Options, and ASC Topic 815, Subtopic - 4, Derivatives and Hedging - Contracts in Entity's Own Equity. ASU 2020-06 simplifies the guidance for certain financial instruments with characteristics of liability and equity, including convertible instruments and contracts on an entity’s own equity by reducing the number of accounting models for convertible instruments and amends guidance in ASC Topic 260, Earnings Per Share, relating to the computation of earnings per share for convertible instruments and contracts on an entity’s own equity. ASU 2020-06 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2021, with early adoption permitted for fiscal years that begin after December 15, 2020. We adopted the provisions of ASU 2020-06 on January 1, 2022. This adoption did not have an impact on our consolidated financial statements.
11
On February 24, 2022, a joint venture, in which we own a 9.2% interest, acquired a 26,000 square foot retail condominium at 1600 Broadway in Manhattan for $191,500,000. In connection with the acquisition, the joint venture obtained a 10-year, $98,000,000 interest-only loan that has a fixed rate of 3.45%. The property, which is located in the heart of Times Square, is 100% leased to Mars, Inc. for a 15-year term and serves as the New York flagship location for M&M’s World. We account for our investment in 1600 Broadway under the equity method of accounting from the date of 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%
Market Center
67.0%
197,050
185,344
55 Second Street (2)
44.1%
85,988
88,284
111 Sutter Street
49.0%
33,012
35,182
1600 Broadway (2)(3)
9.2%
9,369
60 Wall Street (2)
5.0%
20,630
19,230
One Steuart Lane (2)
35.0% (4)
79,355
76,428
Oder-Center, Germany (2)
9.5%
3,381
3,628
Our Share of Net Income (Loss):
431
(10,697
(2,811
(2,228
(7,661
(9,272
(825
(702
(2,296
(2,171
(748
(685
(2,207
(1,874
(38
(23
18
42
52
(1,516
3,363
(3,303
3,138
96
26
137
14
12
The following tables provide the combined summarized financial information of our unconsolidated joint ventures as of the dates thereof and for the periods set forth below.
Balance Sheets:
2,410,055
2,246,152
Cash and cash equivalents and restricted cash
214,815
216,910
Intangible assets, net
74,927
58,590
For-sale residential condominium units (1)
322,696
359,638
85,360
46,646
Total assets
3,107,853
2,927,936
Notes and mortgages payable, net
1,833,023
1,791,404
Intangible liabilities, net
12,700
18,397
58,134
61,097
Total liabilities
1,903,857
1,870,898
1,203,996
1,057,038
Income Statements:
41,145
57,998
153,181
171,721
Other income (2)
15,250
92,360
65,276
93,698
56,395
150,358
218,457
265,419
Operating (2)
34,234
102,949
129,035
153,526
17,734
26,432
68,140
80,899
51,968
129,381
197,175
234,425
Interest and other income (loss)
471
(27
487
(83
(13,967
(17,503
(47,900
(45,135
(Loss) income before income taxes
(9,069
3,447
(26,131
(14,224
(11
(17
(54
(9,080
3,430
(26,185
(14,256
We are the general partner and investment manager of Paramount Group Real Estate Fund VIII, LP (“Fund VIII”) and Paramount Group Real Estate Fund X, LP and its parallel fund, Paramount Group Real Estate Fund X-ECI, LP, (collectively, “Fund X”), our Alternative Investment Funds, which invest in mortgage and mezzanine loans and preferred equity investments. While Fund VIII’s investment period has ended, Fund X’s investment period ends in December 2025. As of September 30, 2022, Fund X has $192,000,000 of capital committed, of which $139,637,000 has been invested and $43,016,000 has been reserved for future funding. Our ownership interest in Fund VIII and Fund X was approximately 1.3% and 7.8%, respectively, as of September 30, 2022.
As of September 30, 2022 and December 31, 2021, our share of the investments in the unconsolidated real estate funds aggregated $14,558,000 and $11,421,000, respectively. We recognized $300,000 and $276,000 for our share of income in the three months ended September 30, 2022 and 2021, respectively, and $625,000 and $604,000 for our share of income in the nine months ended September 30, 2022 and 2021, respectively.
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 thereof and for the periods set forth below.
Intangible assets:
Gross amount
337,104
371,555
Accumulated amortization
(239,733
(252,142
Intangible liabilities:
138,726
151,118
(99,689
(105,790
Amortization of above and below-market leases, net (component of "rental revenue")
(84
722
589
2,335
Amortization of acquired in-place leases (component of "depreciation and amortization")
5,401
6,413
16,344
20,183
The following table sets forth 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, 2023.
(Amounts in thousands)For the Year Ending December 31,
Above and Below-Market Leases, Net
In-Place Leases
2023
5,151
17,705
2024
6,091
14,248
2025
4,745
10,451
2026
2,872
7,896
2027
2,560
7,252
The following table summarizes our consolidated outstanding debt.
Interest Rate
Maturity
Fixed/
as of
Date
Variable Rate
Notes and mortgages payable:
1633 Broadway (1)
Dec-2029
Fixed
2.99
%
1,250,000
One Market Plaza (1)
Feb-2024
4.03
975,000
1301 Avenue of the Americas
Aug-2026
Fixed (2)
2.46
500,000
L + 356 bps (3)
5.56
360,000
3.76
860,000
31 West 52nd Street
Jun-2026
3.80
300 Mission Street (1)
Oct-2023
3.65
273,000
Total notes and mortgages payable
3.58
3,858,000
Less: unamortized deferred financing costs
(18,856
(22,380
Total notes and mortgages payable, net
$750 Million Revolving Credit Facility
Mar-2026
SOFR + 115 bps
n/a
15
We have entered into interest rate swap agreements with an aggregate notional amount of $500,000,000 to fix LIBOR at 0.46% through August 2024. We also entered into interest rate cap agreements with an aggregate notional amount of $360,000,000 to cap LIBOR at 2.00% through August 2023. These interest rate swaps and interest rate caps are designated as cash flow hedges and therefore changes in their fair values are recognized in other comprehensive income or loss (outside of earnings). We recognized other comprehensive income of $9,796,000 and $34,450,000 for the three and nine months ended September 30, 2022, respectively, and $995,000 for the three and nine months ended September 30, 2021, from the changes in fair value of these derivative financial instruments. See Note 9, Accumulated Other Comprehensive Income. During the next twelve months, we estimate that $26,010,000 of the amounts to be recognized in accumulated other comprehensive income will be reclassified as a decrease to interest expense.
The tables below provide additional details on our interest rate swaps and interest rate caps that are designated as cash flow hedges.
Notional
Effective
Benchmark
Strike
Fair Value as of
Property
Rate
Jul-2021
Aug-2024
LIBOR
0.46
34,449
6,691
Total interest rate swap assets designated as cash flow hedges (included in "other assets")
Aug-2023
2.00
6,987
306
Total interest rate cap assets designated as cash flow hedges (included in "other assets")
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 settle our derivative obligations for cash. As of September 30, 2022, we did not have any obligations relating to our interest rate swaps or interest rate caps that contained such provisions.
Stock Repurchase Program
On November 5, 2019, 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. During 2022, we repurchased 6,498,232 common shares at a weighted average price of $6.41 per share, or $41,674,000 in the aggregate, of which 3,237,392 shares were repurchased in the three months ended September 30, 2022 at a weighted average price of $6.58 per share, or $21,313,000 in the aggregate, and the remaining 3,260,840 shares were repurchased in October 2022 at a weighted average price of $6.24 per share, or $20,361,000 in the aggregate. During 2020, we repurchased 13,813,158 common shares at a weighted average price of $8.69 per share, or $120,000,000 in the aggregate. Accordingly, we have $38,326,000 available for future repurchases under the existing program. 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, general market conditions and available funding. The stock repurchase program may be suspended or discontinued at any time.
16
The following table sets forth changes in accumulated other comprehensive income by component for the three and nine months ended September 30, 2022 and 2021, respectively, including amounts attributable to noncontrolling interests in the Operating Partnership.
Amount of income related to the cash flow hedges recognized in other comprehensive income (1)
12,134
671
36,786
Amounts reclassified from accumulated other comprehensive income (decreasing) increasing interest and debt expense (1)
(2,338
324
(2,336
Amount of income (loss) related to unconsolidated joint ventures recognized in other comprehensive income (loss) (2)
6,150
(88
18,046
2,693
Amounts reclassified from accumulated other comprehensive income (decreasing) increasing loss from unconsolidated joint ventures (2)
(443
1,016
1,063
2,984
Consolidated Joint Ventures
Noncontrolling interests in consolidated joint ventures consist of equity interests held by third parties in 1633 Broadway, One Market Plaza and 300 Mission Street. As of September 30, 2022 and December 31, 2021, noncontrolling interests in our consolidated joint ventures aggregated $407,402,000 and $428,833,000, respectively.
Consolidated Real Estate Fund
Noncontrolling interests in our consolidated real estate fund consists of equity interests held by third parties in our Residential Development Fund. As of September 30, 2022 and December 31, 2021, the noncontrolling interest in our consolidated real estate fund aggregated $79,248,000 and $81,925,000, 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, 2022 and December 31, 2021, noncontrolling interests in the Operating Partnership on our consolidated balance sheets had a carrying amount of $262,180,000 and $356,111,000, respectively, and a redemption value of $98,576,000 and $181,315,000, respectively, based on the closing share price of our common stock on the New York Stock Exchange at the end of each period.
17
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 93.4% of, the Operating Partnership as of September 30, 2022. 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, 2022 and December 31, 2021, the Operating Partnership held interests in consolidated VIEs owning properties and a real estate fund 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.
3,375,154
3,415,735
151,870
198,154
12,502
6,801
194,540
197,794
Deferred charges, net
51,063
53,013
53,275
62,380
22,494
15,551
Total VIE assets
3,940,253
4,025,856
2,489,395
2,487,871
66,663
54,738
23,942
27,674
5,416
6,427
Total VIE liabilities
2,585,416
2,576,710
Unconsolidated VIEs
As of September 30, 2022, 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
Maximum risk of loss
14,569
11,430
Financial Assets Measured at Fair Value
The following table summarizes the fair value of our financial assets that are measured at fair value on our consolidated balance sheets as of the dates set forth below, based on their levels in the fair value hierarchy.
As of September 30, 2022
Level 1
Level 2
Level 3
Interest rate swap assets (included in "other assets")
Interest rate cap assets (included in "other assets")
41,436
As of December 31, 2021
6,997
Financial Liabilities Not Measured at Fair Value
Financial liabilities not measured at fair value on our consolidated balance sheets consist of 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
Notes and mortgages payable
3,544,332
3,893,252
19
We lease office, retail and storage space to tenants, primarily under non-cancellable operating leases which generally have terms 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. Rental revenue is recognized in accordance with ASC Topic 842, Leases, and includes (i) fixed payments of 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) variable payments of 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, (iii) amortization of acquired above and below-market leases, net and (iv) lease termination income.
The following table sets forth the details of our rental revenue.
For the Three Months Ended September 30,
Rental revenue:
162,444
158,400
480,766
478,670
Variable
16,806
12,451
45,649
39,955
(1)
Total rental revenue
The following table is a schedule of future undiscounted cash flows under non-cancellable operating leases in effect as of September 30, 2022, for the three-month period from October 1, 2022 through December 31, 2022, and each of the five succeeding years and thereafter commencing January 1, 2023.
160,622
631,729
644,393
599,023
503,600
438,968
Thereafter
2,242,109
5,220,444
20
The following table sets forth the details of our fee and other income.
Fee income:
Asset management
3,166
3,280
9,138
10,175
Property management
1,849
2,176
6,171
6,457
Acquisition, disposition, leasing and other
117
1,105
7,785
2,800
Total fee income
5,132
6,561
23,094
19,432
Other income (1)
2,765
1,719
6,840
4,509
Total fee and other income
The following table sets forth the details of interest and other income, net.
Interest income, net
221
1,008
Mark-to-market of investments in our deferred compensation plans (1)
1,502
Total interest and other income, net
The following table sets forth the details of interest and debt expense.
Interest expense
35,412
33,600
102,190
98,613
1,537
2,666
Total interest and debt expense
36,949
36,266
106,804
105,919
21
Stock-Based Compensation
Our Amended and Restated 2014 Equity Incentive Plan provides for grants of equity awards to our executive officers, non-employee directors and employees in order to attract and motivate talent for which we compete. In addition, equity awards are an effective management retention tool as they vest over multiple years based on continued employment. Equity awards are granted in the form of (i) restricted stock and (ii) long-term incentive plan (“LTIP”) units, which represent a class of partnership interests in our Operating Partnership and are typically comprised of performance-based LTIP units, time-based LTIP units and time-based appreciation only LTIP (“AOLTIP”) units. We account for all stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation. We recognized stock-based compensation expense of $4,149,000 and $4,192,000 for the three months ended September 30, 2022 and 2021, respectively, and $14,853,000 and $14,421,000 for the nine months ended September 30, 2022 and 2021, respectively, related to awards granted in prior periods, including the equity awards granted on January 13, 2022 (“2022 Equity Grants”) described below.
2022 Equity Grants
2022 Performance-Based Awards Program (“2022 Performance Program”)
On January 13, 2022, the Compensation Committee of our Board of Directors (the “Compensation Committee”) approved the 2022 Performance Program, a multi-year performance-based long-term incentive compensation program. Under the 2022 Performance Program, participants may earn awards in the form of LTIP units based on our achievement of rigorous Net Operating Income (“NOI”) goals over a three-year performance measurement period beginning on January 1, 2022 and continuing through December 31, 2024. The amount of LTIP units otherwise earned based on the achievement of the NOI goals would then be increased or decreased based on our Total Shareholder Return (“TSR”) versus that of our New York City office REIT peers (comprised of Vornado Realty Trust, SL Green Realty Corp. and Empire State Realty Trust) but the modifier will not result in a total payout exceeding 100% of the units granted. Additionally, if our TSR is negative over the three-year performance measurement period, then the number of LTIP units that are earned under the 2022 Performance Program will be reduced by 30.0% of the number of such awards that otherwise would have been earned. Furthermore, awards earned under the 2022 Performance Program are subject to vesting based on continued employment with us through December 31, 2025, with 50.0% of each award vesting upon the conclusion of the performance measurement period, and the remaining 50.0% vesting on December 31, 2025. Lastly, our Named Executive Officers are required to hold earned awards for an additional year following vesting. Awards granted under the 2022 Performance Program had a fair value of $7,188,000 on the date of the grant, which is being amortized into expense over the four-year vesting period using a graded vesting attribution method.
Time-Based Unit Awards Program (LTIP Units, AOLTIP Units and Restricted Stock)
On January 13, 2022, we also granted an aggregate of 626,942 LTIP units, 2,703,499 AOLTIP units and 120,243 shares of Restricted Stock to our executive officers and employees that will vest over a period of three to four years. The fair value of LTIP units, AOLTIP units and restricted stock on the date of grant were $5,313,000, $5,831,000, and $1,119,000, respectively, and these awards are being amortized into expense on a straight-line basis over the vesting period.
Completion of the 2019 Performance-Based Awards Program (“2019 Performance Program”)
On December 31, 2021, the performance measurement period for the 2019 Performance Program ended. On January 13, 2022, the Compensation Committee determined that the performance goals set forth in the 2019 Performance Program were not met. Accordingly, all of the LTIP units that were granted on January 14, 2019, were forfeited, with no awards being earned. These awards had a grant date fair value of $8,106,000 and a remaining unrecognized compensation cost of $238,000 as of September 30, 2022, which will be amortized over a weighted-average period of 0.25 years.
22
The following table summarizes our net (loss) income and the number of common shares used in the computation of basic and diluted (loss) 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
(21
(64
Numerator for (loss) income per common share - basic and diluted
(1,558
(2,072
1,410
(21,630
Denominator:
Denominator for basic loss per common share - weighted average shares
224,865
218,706
222,229
218,690
Effect of dilutive stock-based compensation plans (1)
Denominator for diluted loss per common share - weighted average shares
222,263
(Loss) income per common share - basic and diluted
23
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 $272,000 and $270,000 for the three months ended September 30, 2022 and 2021, respectively, and $1,021,000 and $1,497,000 for the nine months ended September 30, 2022 and 2021, 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 September 30, 2022 and December 31, 2021, amounts owed to us under these agreements aggregated $53,000 and $484,000, respectively, which are included as a component of “accounts and other receivables” on our consolidated balance sheets.
We also provide asset management, property management, leasing and other related services to our unconsolidated joint ventures and real estate funds. We recognized fee income of $4,277,000 and $5,737,000 for the three months ended September 30, 2022 and 2021, respectively, and $20,075,000 and $16,239,000 for the nine months ended September 30, 2022 and 2021, 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 September 30, 2022 and December 31, 2021, amounts owed to us under these agreements aggregated $2,966,000 and $2,883,000, respectively, which are included as a component of “accounts and other receivables” on our consolidated balance sheets.
Hamburg Trust Consulting HTC GmbH (“HTC”)
We have an agreement with HTC, a licensed broker in Germany, to supervise selling efforts for our joint ventures and 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 X. Pursuant to this agreement, we have agreed to pay HTC for the costs incurred plus a mark-up of 10%. HTC is 100% owned by Albert Behler, our Chairman, Chief Executive Officer and President. We incurred costs aggregating $105,000 and $127,000 for the three months ended September 30, 2022 and 2021, respectively, and $621,000 and $372,000 for the nine months ended September 30, 2022 and 2021, respectively, in connection with this agreement. As of September 30, 2022 and December 31, 2021, we owed $123,000 and $523,000, 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. We recognized $91,000 in each of the three months ended September 30, 2022 and 2021, respectively, and $273,000 and $272,000 for the nine months ended September 30, 2022 and 2021, respectively, for our share of rental income pursuant to this lease.
Due from Affiliates
During the nine months ended September 30, 2022, Fund X borrowed $59,000,000 from us at an interest rate of Secured Overnight Financing Rate (“SOFR”) plus 220 basis points, which was repaid, together with $418,000 of accrued interest.
24
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 agreements 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, 2022, we believe we are in compliance with all of our covenants.
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 $55,800,000. 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.
25
Our reportable segments are separated by region, based on the two regions in which we conduct our business: New York and San Francisco. 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, 2022
New York
San Francisco
Property-related revenues
182,015
117,431
64,667
Property-related operating expenses
(72,845
(52,421
(19,496
(928
NOI from unconsolidated joint ventures (excluding One Steuart Lane)
11,540
3,556
7,837
147
NOI (1)
120,710
68,566
53,008
(864
For the Three Months Ended September 30, 2021
172,570
109,842
63,527
(799
(67,131
(47,545
(18,646
(940
11,627
2,875
8,665
117,066
65,172
53,546
(1,652
For the Nine Months Ended September 30, 2022
533,255
349,136
185,798
(1,679
(207,320
(148,779
(55,369
(3,172
34,359
9,902
24,162
295
360,294
210,259
154,591
(4,556
For the Nine Months Ended September 30, 2021
523,134
329,870
195,673
(2,409
(197,821
(142,370
(52,651
(2,800
32,510
8,445
24,054
357,823
195,945
167,076
(5,198
The following table provides a reconciliation of NOI to net (loss) 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
(58,284
(57,522
(171,306
(175,752
General and administrative expenses
(13,150
(13,257
(45,501
(46,039
(11,540
(11,627
(34,359
(32,510
Other, net
195
189
244
101
The following table provides the total assets for each of our reportable segments as of the dates set forth below.
Total Assets as of:
5,346,628
2,684,864
464,988
5,336,210
2,696,131
462,221
27
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:
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, 2021.
Critical Accounting Estimates
There are no material changes to our critical accounting estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.
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.
29
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 and San Francisco. 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 93.4% of, the Operating Partnership as of September 30, 2022.
Acquisitions
On February 24, 2022, a joint venture, in which we own a 9.2% interest, acquired a 26,000 square foot retail condominium at 1600 Broadway in Manhattan for $191,500,000. In connection with the acquisition, the joint venture obtained a 10-year, $98,000,000 interest-only loan that has a fixed rate of 3.45%. The property, which is located in the heart of Times Square, is 100% leased to Mars, Inc. for a 15-year term and serves as the New York flagship location for M&M’s World.
Leasing Results - Three Months Ended September 30, 2022
In the three months ended September 30, 2022, we leased 288,554 square feet, of which our share was 215,922 that was leased at a weighted average initial rent of $82.76 per square foot. This leasing activity, offset by the lease expirations in the three months, caused our leased occupancy and same store leased occupancy (properties owned by us in a similar manner during both reporting periods) to remain at 91.4% at September 30, 2022, in-line with the lease occupancy reported at June 30, 2022. Of the 215,922 square feet leased, 204,178 square feet represented our share of second generation space (space that had been vacant for less than twelve months) for which rental rates decreased by 10.5% on a cash basis and increased by 2.7% on a GAAP basis. The weighted average lease term for leases signed during the three months was 12.5 years and weighted average tenant improvements and leasing commissions on these leases were $11.92 per square foot per annum, or 14.4% of initial rent.
In the three months ended September 30, 2022, we leased 253,774 square feet in our New York portfolio, of which our share was 197,828 square feet that was leased at a weighted average initial rent of $79.95 per square foot. This leasing activity, partially offset by lease expirations in the three months, increased leased occupancy and same store leased occupancy by 10 basis points to 92.1% at September 30, 2022 from 92.0% at June 30, 2022. Of the 197,828 square feet leased, 190,828 square feet represented our share of second generation space for which rental rates decreased by 11.6% on a cash basis and increased 1.5% on a GAAP basis. The weighted average lease term for leases signed during the three months was 12.9 years and weighted average tenant improvements and leasing commissions on these leases were $11.97 per square foot per annum, or 15.0% of initial rent.
In the three months ended September 30, 2022, we leased 34,780 square feet in our San Francisco portfolio, of which our share was 18,094 square feet that was leased at a weighted average initial rent of $113.53 per square foot. This leasing activity, offset by lease expirations in the three months, decreased leased occupancy and same store leased occupancy by 50 basis points to 89.3% at September 30, 2022 from 89.8% at June 30, 2022. Of the 18,094 square feet leased in the three months, 13,350 square feet represented our share of second generation space for which we achieved rental rate increases of 1.6% on a cash basis and 14.7% on a GAAP basis. The weighted average lease term for leases signed during the three months was 7.3 years and weighted average tenant improvements and leasing commissions on these leases were $10.86 per square foot per annum, or 9.6% of initial rent.
31
The following table presents additional details on the leases signed during the three months ended September 30, 2022. 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, 2022
Total square feet leased
288,554
253,774
34,780
Pro rata share of total square feet leased:
215,922
197,828
18,094
Initial rent (1)
82.76
79.95
113.53
Weighted average lease term (in years)
12.5
12.9
7.3
Tenant improvements and leasing commissions:
Per square foot
148.56
154.86
79.72
Per square foot per annum
11.92
11.97
10.86
Percentage of initial rent
14.4
15.0
9.6
Rent concessions:
Average free rent period (in months)
14.3
15.1
5.8
Average free rent period per annum (in months)
1.1
1.2
0.8
Second generation space: (2)
Square feet
204,178
190,828
13,350
Cash basis:
80.78
78.41
114.63
Prior escalated rent (3)
90.28
88.71
112.78
Percentage (decrease) increase
(10.5
%)
(11.6
1.6
GAAP basis:
Straight-line rent
79.32
76.54
119.02
Prior straight-line rent
77.23
75.38
103.72
Percentage increase
2.7
1.5
14.7
The following table presents same store leased occupancy as of the dates set forth below.
Same Store Leased Occupancy (1)
91.4
92.1
89.3
As of June 30, 2022
92.0
89.8
32
Leasing Results - Nine Months Ended September 30, 2022
In the nine months ended September 30, 2022, we leased 741,605 square feet, of which our share was 556,299 that was leased at a weighted average initial rent of $77.12 per square foot. This leasing activity, partially offset by lease expirations in the nine months, increased leased occupancy by 70 basis points to 91.4% at September 30, 2022 from 90.7% at December 31, 2021. Same store leased occupancy (properties owned by us in a similar manner during both reporting periods), increased by 80 basis points to 91.4% at September 30, 2022 from 90.6% at December 31, 2021. Of the 556,299 square feet leased, 441,499 square feet represented our share of second generation space (space that had been vacant for less than twelve months) for which rental rates decreased by 6.6% on a cash basis and increased 1.3% on a GAAP basis. The weighted average lease term for leases signed during the nine months was 10.0 years and weighted average tenant improvements and leasing commissions on these leases were $10.72 per square foot per annum, or 13.9% of initial rent.
In the nine months ended September 30, 2022, we leased 582,268 square feet in our New York portfolio, of which our share was 473,507 square feet that was leased at a weighted average initial rent of $72.12 per square foot. This leasing activity, partially offset by lease expirations in the nine months, increased leased occupancy by 170 basis points to 92.1% at September 30, 2022 from 90.4% at December 31, 2021. Same store leased occupancy increased by 180 basis points to 92.1% at September 30, 2022 from 90.3% at December 31, 2021. Of the 473,507 square feet leased, 380,233 square feet represented our share of second generation space for which rental rates decreased by 8.5% on a cash basis and 2.0% on a GAAP basis. The weighted average lease term for leases signed during the nine months was 10.5 years and weighted average tenant improvements and leasing commissions on these leases were $10.85 per square foot per annum, or 15.0% of initial rent.
In the nine months ended September 30, 2022, we leased 159,337 square feet in our San Francisco portfolio, of which our share was 82,792 square feet that was leased at a weighted average initial rent of $105.71 per square foot. This leasing activity, offset by lease expirations in the nine months, decreased leased occupancy and same store leased occupancy by 230 basis points to 89.3% at September 30, 2022 from 91.6% at December 31, 2021. Of the 82,792 square feet leased in the nine months, 61,266 square feet represented our share of second generation space for which we achieved rental rate increases of 1.9% on a cash basis and 15.9% on a GAAP basis. The weighted average lease term for leases signed during the nine months was 7.1 years and weighted average tenant improvements and leasing commissions on these leases were $9.61 per square foot per annum, or 9.1% of initial rent.
33
The following table presents additional details on the leases signed during the nine months ended September 30, 2022. 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, 2022
741,605
582,268
159,337
556,299
473,507
82,792
77.12
72.12
105.71
10.0
10.5
7.1
107.35
114.21
68.09
10.72
10.85
9.61
13.9
9.1
11.1
12.2
5.0
0.7
441,499
380,233
61,266
76.29
70.92
109.64
81.67
77.50
107.60
(6.6
(8.5
1.9
75.00
68.83
113.25
74.05
70.24
97.70
Percentage increase (decrease)
1.3
(2.0
15.9
90.6
90.3
91.6
Financial Results - Three Months Ended September 30, 2022 and 2021
Net Income, FFO and Core FFO
Net loss attributable to common stockholders was $1,537,000, or $0.01 per diluted share, for the three months ended September 30, 2022, compared to $2,055,000, or $0.01 per diluted share, for the three months ended September 30, 2021.
Funds from Operations (“FFO”) attributable to common stockholders was $53,366,000, or $0.24 per diluted share, for the three months ended September 30, 2022, compared to $50,318,000, or $0.23 per diluted share, for the three months ended September 30, 2021. FFO attributable to common stockholders for the three months ended September 30, 2022 and 2021 includes the impact of other non-core items, which are listed in the table on page 57. The aggregate of the non-core items, net of amounts attributable to noncontrolling interests, decreased FFO attributable to common stockholders for the three months ended September 30, 2022 by $883,000, or $0.00 per diluted share, and increased FFO attributable to common stockholders for the three months ended September 30, 2021 by $249,000, respectively, or $0.00 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 57, was $54,249,000, or $0.24 per diluted share, for the three months ended September 30, 2022, compared to $50,069,000, or $0.23 per diluted share, for the three months ended September 30, 2021.
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, 2022 versus September 30, 2021.
Same Store NOI
6.3
(0.4
Same Store Cash NOI
0.4
6.2
(11.0
See pages 49-57 “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.
35
Financial Results - Nine Months Ended September 30, 2022 and 2021
Net income attributable to common stockholders was $1,474,000, or $0.01 per diluted share, for the nine months ended September 30, 2022, compared to net loss attributable to common stockholders of $21,576,000, or $0.10 per diluted share, for the nine months ended September 30, 2021. Net loss attributable to common stockholders for the nine months ended September 30, 2021 includes a $10,688,000 contribution to an unconsolidated joint venture that was expensed in accordance with GAAP.
FFO attributable to common stockholders was $161,561,000, or $0.73 per diluted share, for the nine months ended September 30, 2022, compared to $139,135,000, or $0.64 per diluted share, for the nine months ended September 30, 2021. FFO attributable to common stockholders for the nine months ended September 30, 2021 includes a $10,688,000 contribution to an unconsolidated joint venture that was expensed in accordance with GAAP. FFO attributable to common stockholders for the nine months ended September 30, 2022 and 2021 also includes the impact of other non-core items, which are listed in the table on page 57. The aggregate of the non-core items, net of amounts attributable to noncontrolling interests, decreased FFO attributable to common stockholders for the nine months ended September 30, 2022 and 2021 by $899,000 and $9,114,000, respectively, or $0.00 and $0.04 per diluted share, respectively.
Core FFO attributable to common stockholders, which excludes the impact of the non-core items listed on page 57, was $162,460,000, or $0.73 per diluted share, for the nine months ended September 30, 2022, compared to $148,249,000, or $0.68 per diluted share, for the nine months ended September 30, 2021.
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, 2022 versus September 30, 2021.
4.1
8.2
(3.3
3.2
(5.1
36
Results of Operations - Three Months Ended September 30, 2022 and 2021
The following pages summarize our consolidated results of operations for the three months ended September 30, 2022 and 2021.
Change
8,399
(383
8,016
5,714
762
(107
6,387
(6,020
1,442
(683
Income before income taxes
(3,608
200
Net income
(3,408
Less net (income) loss attributable to noncontrolling
interests in:
(411
4,432
(95
Net loss attributable to common stockholders
518
37
Revenues
Our revenues, which consist of rental revenue and fee and other income, were $187,147,000 for the three months ended September 30, 2022, compared to $179,131,000 for the three months ended September 30, 2021, an increase of $8,016,000. Below are the details of the increase or decrease by segment.
Same store operations
9,750
9,272
478
(1,351
(2,287
474
462
Increase in rental revenue
6,985
952
(114
(327
(988
Decrease in fee income
(1,429
Other income
1,046
188
254
Increase in other income
(Decrease) increase in fee and other income
(1,175
Total increase (decrease) in revenues
7,589
1,140
(713
38
Expenses
Our expenses, which consist of operating, depreciation and amortization, general and administrative and transaction related costs, were $144,384,000 for the three months ended September 30, 2022, compared to $137,997,000 for the three months ended September 30, 2021, an increase of $6,387,000. Below are the details of the increase or decrease by segment.
5,727
4,876
851
(13
Increase (decrease) in operating
Operations
1,940
(1,416
(2)
238
Increase (decrease) in depreciation and amortization
Mark-to-market of investments
in our deferred compensation plan
83
(3)
(190
Decrease in general and administrative
Increase in transaction related costs
Total increase (decrease) in expenses
6,816
(565
136
(Loss) Income from Unconsolidated Joint Ventures
Loss from unconsolidated joint ventures was $5,797,000 for the three months ended September 30, 2022, compared to income of $223,000 in the three months ended September 30, 2021, a decrease in income of $6,020,000. This decrease resulted from:
One Steuart Lane
(4,879
(1,141
Total decrease in income
Income from Unconsolidated Real Estate Funds
Income from unconsolidated real estate funds was $300,000 for the three months ended September 30, 2022, compared to $276,000 for the three months ended September 30, 2021, an increase in income of $24,000.
39
Interest and Other Income, net
Interest and other income was $1,580,000 for the three months ended September 30, 2022, compared to $138,000 for the three months ended September 30, 2021, an increase in income of $1,442,000. This increase resulted from:
Higher yields on short-term investments
1,195
Mark-to-market of investments in our deferred compensation plan in 2021 (1)
164
Total increase in income
Interest and Debt Expense
Interest and debt expense was $36,949,000 for the three months ended September 30, 2022, compared to $36,266,000 for the three months ended September 30, 2021, an increase of $683,000. This increase resulted primarily from higher interest on variable rate debt due to an increase in average LIBOR rates in the current year's three months compared to prior year's three months, partially offset by lower amortization of deferred financing costs in connection with the refinancing of 1301 Avenue of the Americas in July 2021.
Income Tax Expense
Income tax expense was $673,000 for the three months ended September 30, 2022, compared to $873,000 for the three months ended September 30, 2021, a decrease of $200,000. This decrease resulted primarily from lower taxable income attributable to our taxable REIT subsidiaries in the current year’s three months.
Net Income Attributable to Noncontrolling Interests in Consolidated Joint Ventures
Net income attributable to noncontrolling interests in consolidated joint ventures was $4,179,000 for the three months ended September 30, 2022, compared to $3,768,000 for the three months ended September 30, 2021, an increase in income allocated to noncontrolling interests of $411,000. This increase in income resulted primarily from higher income attributable to One Market Plaza.
Net Loss (Income) Attributable to Noncontrolling Interests in Consolidated Real Estate Fund
Net loss attributable to noncontrolling interests in consolidated real estate fund was $1,309,000 for the three months ended September 30, 2022, compared to net income attributable to noncontrolling interests of $3,123,000 for the three months ended September 30, 2021, a decrease in income allocated to noncontrolling interest of $4,432,000. This decrease in income resulted primarily from lower gain on sale of residential condominium units at One Steuart Lane resulting from fewer units sold in the current year’s three months.
Net Loss Attributable to Noncontrolling Interests in Operating Partnership
Net loss attributable to noncontrolling interests in the Operating Partnership was $109,000 for the three months ended September 30, 2022, compared to $204,000 for the three months ended September 30, 2021, a decrease in loss allocated to noncontrolling interests of $95,000. This decrease in loss resulted from lower net loss subject to allocation to the unitholders of the Operating Partnership for the three months ended September 30, 2022.
40
Results of Operations - Nine Months Ended September 30, 2022 and 2021
The following pages summarize our consolidated results of operations for the nine months ended September 30, 2022 and 2021.
7,790
5,993
13,783
9,499
(4,446
(538
(122
4,393
5,484
97
(885
14,107
889
14,996
4,541
5,856
(2,343
Net income (loss) attributable to common stockholders
23,050
41
Our revenues, which consist of rental revenue and fee and other income, were $556,349,000 for the nine months ended September 30, 2022, compared to $542,566,000 for the nine months ended September 30, 2021, an increase of $13,783,000. Below are the details of the increase or decrease by segment.
12,023
18,454
(6,431
(4,233
(415
(4,285
467
Increase (decrease) in rental revenue
18,039
(10,716
(1,037
(286
4,985
(4)
Increase in fee income
3,662
2,331
1,227
841
263
Increase in fee and other income
3,925
19,266
(9,875
4,392
Our expenses, which consist of operating, depreciation and amortization, general and administrative and transaction related costs, were $424,508,000 for the nine months ended September 30, 2022, compared to $420,115,000 for the nine months ended September 30, 2021, an increase of $4,393,000. Below are the details of the increase or decrease by segment.
9,127
6,409
2,718
372
Increase in operating
651
(5,264
167
(Decrease) increase in depreciation and amortization
(1,502
964
Decrease in transaction related costs
7,060
(2,546
(121
43
Loss from Unconsolidated Joint Ventures
Loss from unconsolidated joint ventures was $15,326,000 for the nine months ended September 30, 2022, compared to $20,810,000 in the nine months ended September 30, 2021, a decrease in loss of $5,484,000. This decrease resulted from:
712 Fifth Avenue
10,697
(6,441
1,228
Total decrease in loss
Income from unconsolidated real estate funds was $625,000 for the nine months ended September 30, 2022, compared to $604,000 for the nine months ended September 30, 2021, an increase in income of $21,000.
Interest and other income was $2,607,000 for the nine months ended September 30, 2022, compared to $2,510,000 for the nine months ended September 30, 2021, an increase in income of $97,000. This increase resulted from:
1,692
(93
Interest and debt expense was $106,804,000 for the nine months ended September 30, 2022, compared to $105,919,000 for the nine months ended September 30, 2021, an increase of $885,000. This increase resulted primarily from higher interest on variable rate debt due to an increase in average LIBOR rates in the current year's nine months compared to prior year's nine months, partially offset by lower amortization of deferred financing costs in connection with the refinancing of 1301 Avenue of the Americas in July 2021.
Income tax expense was $1,559,000 for the nine months ended September 30, 2022, compared to $2,448,000 for the nine months ended September 30, 2021, a decrease of $889,000. This decrease resulted primarily from lower taxable income attributable to our taxable REIT subsidiaries in the current year’s nine months.
44
Net income attributable to noncontrolling interests in consolidated joint ventures was $12,383,000 for the nine months ended September 30, 2022, compared to $16,924,000 for the nine months ended September 30, 2021, a decrease in income allocated to noncontrolling interests of $4,541,000. This decrease resulted from:
Lower income attributable to 300 Mission Street ($2,141 of income in 2022, compared to $7,411 in 2021)
(5,270
729
Total decrease in income attributable to noncontrolling interests
(4,541
Net loss attributable to noncontrolling interests in consolidated real estate fund was $2,677,000 for the nine months ended September 30, 2022, compared to net income attributable to noncontrolling interests in consolidated real estate fund of $3,179,000 for the nine months ended September 30, 2021, a decrease in income allocated to noncontrolling interest of $5,856,000. This decrease resulted primarily from lower gain on sale of residential condominium units at One Steuart Lane resulting from fewer units sold in the current year’s nine months and a lower loss in the prior year’s nine months due to the capitalization of expenses at One Steuart Lane (which was under development during the first half of last year).
Net (Income) Loss Attributable to Noncontrolling Interests in Operating Partnership
Net income attributable to noncontrolling interests in the Operating Partnership was $204,000 for the nine months ended September 30, 2022, compared to net loss attributable to noncontrolling interests of $2,139,000 for the nine months ended September 30, 2021, an increase in income allocated to noncontrolling interests of $2,343,000. This increase in income resulted from higher net income subject to allocation to the unitholders of the Operating Partnership for the nine months ended September 30, 2022.
45
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. As of September 30, 2022, we had $1.26 billion of liquidity comprised of $469,398,000 of cash and cash equivalents, $40,456,000 of restricted cash and $750,000,000 of borrowing capacity 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, share repurchases and all other capital needs related to the operations of our business.
We anticipate that our long-term needs including debt maturities and potential acquisitions will be funded by operating cash flow, third-party joint venture capital, mortgage financings and/or re-financings, and the issuance of long-term debt or equity and existing cash balances. 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.
Consolidated Debt
As of September 30, 2022, our outstanding consolidated debt aggregated $3.86 billion. We had no amounts outstanding under our revolving credit facility and we have no debt maturing until October 2023. We may refinance our maturing debt when it comes due 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 $750,000,000 revolving credit facility matures in March 2026 and has two six-month extension options. The interest rate on the facility is 115 basis points over the Secured Overnight Financing Rate (“SOFR”) with adjustments based on the terms of advances, plus a facility fee of 20 basis points. The facility also features a sustainability-linked pricing component such that if we meet certain sustainability performance targets, the applicable per annum interest rate will be reduced by one basis point. The facility contains certain restrictions and covenants that require us to maintain, on an ongoing basis, (i) a leverage ratio not to exceed 60%, which 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 coverage ratio of at least 1.50, (iv) an unsecured leverage ratio to not to exceed 60%, which 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 15, 2022, we declared a quarterly cash dividend of $0.0775 per share of common stock for the third quarter ended September 30, 2022, which was paid on October 14, 2022 to stockholders of record as of the close of business on September 30, 2022. This dividend policy, if continued, would require us to pay out approximately $18,300,000 each quarter to common stockholders and unitholders.
Off Balance Sheet Arrangements
As of September 30, 2022, our unconsolidated joint ventures had $1.74 billion of outstanding indebtedness, of which our share was $623,785,000. In 2023, $105,508,000, representing our share of unconsolidated debt, is scheduled to mature. We do not guarantee the indebtedness of our unconsolidated joint ventures other than providing customary environmental indemnities and guarantees of non-recourse carve-outs; 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.
46
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 $55,800,000. 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.
47
Cash Flows
Cash and cash equivalents and restricted cash were $509,854,000 and $529,666,000 as of September 30, 2022 and December 31, 2021, respectively, and $522,546,000 and $465,324,000 as of September 30, 2021 and December 31, 2020, respectively. Cash and cash equivalents and restricted cash decreased by $19,812,000 for the nine months ended September 30, 2022 and increased by $57,222,000 for the nine months ended September 30, 2021. 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, 2022 – We generated $174,417,000 of cash from operating activities for the nine months ended September 30, 2022, primarily from (i) $209,545,000 of net income (before $198,161,000 of non-cash adjustments) and (ii) $658,000 of distributions from unconsolidated joint ventures and real estate funds, partially offset by (iii) $35,786,000 of net changes in operating assets and liabilities. Non-cash adjustments of $198,161,000 were primarily comprised of depreciation and amortization, straight-lining of rental revenue, amortization of above and below-market leases, net and amortization of stock-based compensation.
Nine months ended September 30, 2021 – We generated $188,060,000 of cash from operating activities for the nine months ended September 30, 2021, primarily from (i) $204,872,000 of net income (before $208,484,000 of non-cash adjustments) and (ii) $4,485,000 of distributions from unconsolidated joint ventures and real estate funds, partially offset by (iii) $21,297,000 of net changes in operating assets and liabilities. Non-cash adjustments of $208,484,000 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.
Investing Activities
Nine months ended September 30, 2022 – We used $85,672,000 of cash for investing activities for the nine months ended September 30, 2022, primarily for (i) $71,284,000 for additions to real estate, which were comprised of spending for tenant improvements and other building improvements, (ii) $11,252,000 for investments in an unconsolidated joint venture, and (iii) $3,136,000 of contributions of capital to unconsolidated real estate funds, net of distributions received.
Nine months ended September 30, 2021 – We used $88,380,000 of cash for investing activities for the nine months ended September 30, 2021, primarily for (i) $74,134,000 for additions to real estate, which were comprised of spending for tenant improvements and other building improvements, (ii) $11,750,000 of contributions to an unconsolidated joint venture and (iii) $3,257,000 of net purchases of marketable securities (which are held in our deferred compensation plan), partially offset by (iv) $761,000 of distributions of capital from unconsolidated real estate funds, net of contributions made.
Financing Activities
Nine months ended September 30, 2022 – We used $108,557,000 of cash for financing activities for the nine months ended September 30, 2022, primarily for (i) $54,459,000 for dividends and distributions to common stockholders and unitholders, (ii) $33,814,000 for distributions to noncontrolling interests, (iii) $20,000,000 for the repurchases of common shares and (iv) $284,000 for the repurchase of shares related to stock compensation agreements and related tax withholdings.
Nine months ended September 30, 2021 – We used $42,458,000 of cash for financing activities for the nine months ended September 30, 2021, primarily for (i) $850,000,000 for the repayment of notes and mortgages payable in connection with the refinancing of 1301 Avenue of the Americas, (ii) $50,582,000 for dividends and distributions to common stockholders and unitholders, (iii) $19,616,000 for distributions to noncontrolling interests, (iv) $10,593,000 for the payment of debt issuance costs in connection with the refinancing of 1301 Avenue of the Americas, (v) $214,000 for the repurchase of shares related to stock compensation agreements and related tax withholdings, and (vi) $140,000 for the purchase of interest rate caps, partially offset by (vii) $888,566,000 of proceeds from notes and mortgages payable (including $860,000,000 from the refinancing of 1301 Avenue of the Americas) and (viii) $121,000 of contributions from noncontrolling interests.
48
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 Paramount’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 net income or loss to NOI and Cash NOI for the three and nine months ended September 30, 2022 and 2021.
Reconciliation of net income (loss) to NOI and Cash NOI:
2,701
10,276
(11,753
Add (subtract) adjustments to arrive at NOI and Cash NOI:
39,155
17,918
1,211
23,392
12,794
763
673
668
Loss (income) from unconsolidated joint ventures
5,797
(7
4,384
1,420
(5,132
(1,580
(236
(201
(1,143
(195
Less NOI attributable to noncontrolling interests in:
(21,222
(2,383
(18,839
Paramount's share of NOI
99,488
66,183
34,169
Less:
Straight-line rent adjustments (including our share
of unconsolidated joint ventures)
(3,969
1,514
(5,453
(30
Amortization of above and below-market leases, net (including our share of unconsolidated joint ventures)
(790
708
(1,498
Cash NOI
115,951
70,788
46,057
(894
Less Cash NOI attributable to noncontrolling interests in:
(19,988
(2,775
(17,213
Paramount's share of Cash NOI
95,963
68,013
28,844
49
3,063
9,204
(7,635
37,215
19,334
973
22,458
12,760
1,048
873
865
(Income) loss from unconsolidated joint ventures
(223
(449
3,615
(3,389
(6,561
Interest and other (income) loss, net
(138
(33
(108
(189
(21,809
(2,573
(19,236
95,257
62,599
34,310
1,260
1,848
(558
(1,622
406
(2,028
116,704
67,426
50,960
(1,682
(21,174
(2,635
(18,539
95,530
64,791
32,421
50
18,732
27,705
(35,053
115,439
52,782
3,085
66,465
38,054
2,285
1,559
1,548
12,164
(23,094
(2,607
(282
(280
(2,045
(244
(63,340
(55,532
296,954
202,451
99,059
(8,288
883
(9,201
(3,115
1,597
(4,712
348,891
212,739
140,678
(4,526
(61,194
(8,459
(52,735
287,697
204,280
87,943
51
Reconciliation of net (loss) income to NOI and Cash NOI:
(3,021
34,089
(34,680
114,788
58,046
2,918
65,056
37,653
3,210
2,448
2,431
10,645
13,317
(3,152
(19,432
(2,510
(2,442
(101
(70,767
(7,685
(63,082
206
287,262
188,260
103,994
(4,992
(9,800
211
(10,041
(5,087
1,044
(6,131
342,936
197,200
150,904
(5,168
(64,313
(7,599
(56,714
278,829
189,601
94,190
(4,962
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 ended September 30, 2022 and 2021. 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, 2022 (1)
Acquisitions / Redevelopment (2) (3)
(155
2,893
2,029
864
Paramount's share of Same Store NOI for the
three months ended September 30, 2022
102,226
68,057
September 30, 2021 (1)
Acquisitions / Redevelopment (3)
(693
Lease termination income
1,642
(10
1,652
three months ended September 30, 2021
96,173
61,873
34,300
Increase (decrease) in Same Store NOI
6,053
6,184
(131
% Increase (decrease)
53
Paramount's share of Cash NOI for the three months
ended September 30, 2022 (1)
(154
894
Paramount's share of Same Store Cash NOI for the
96,703
67,859
ended September 30, 2021 (1)
(861
1,672
1,682
96,308
63,897
32,411
Increase (decrease) in Same Store Cash NOI
395
3,962
(3,567
54
Paramount's share of NOI for the nine months ended
(366
(1,875
6,470
2,135
(221
4,556
Paramount's share of Same Store NOI for the nine
months ended September 30, 2022
301,183
202,345
98,838
(924
(1,745
(161
(1,584
4,686
(103
(203
4,992
months ended September 30, 2021
289,279
187,072
102,207
11,904
15,273
(3,369
55
Paramount's share of Cash NOI for the nine months
(396
4,105
(200
4,526
nine months ended September 30, 2022
289,531
201,809
87,722
(1,148
4,507
(245
(210
4,962
nine months ended September 30, 2021
280,443
188,047
92,396
9,088
13,762
(4,674
56
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 (loss) to FFO and Core FFO for the periods set forth below.
Reconciliation of net income (loss) to FFO and Core FFO:
Real estate depreciation and amortization (including our
share of unconsolidated joint ventures)
68,009
67,717
201,069
207,122
FFO
69,233
72,349
212,453
203,510
Less FFO attributable to noncontrolling interests in:
(13,408
(13,895
(39,868
(47,422
1,304
(3,127
2,659
(3,183
(3,763
(5,009
(13,683
(13,770
FFO attributable to common stockholders
53,366
50,318
161,561
139,135
Per diluted share
0.24
0.23
0.73
0.64
Non-core items:
Adjustments to equity in earnings for contributions to (distributions from) an unconsolidated joint venture
709
(938
294
8,977
FFO attributable to One Steuart Lane, including after-tax net gain on sale of residential condominium units
1,509
(3,267
3,283
Non-cash write-off of deferred financing costs
761
126
420
432
Core FFO
71,577
68,958
216,450
210,413
Less Core FFO attributable to noncontrolling interests in:
(94
(9
(381
(65
(3,826
(4,985
(13,741
(14,677
Core FFO attributable to common stockholders
54,249
50,069
162,460
148,249
0.68
Reconciliation of weighted average shares outstanding:
Effect of dilutive securities
28,555
44,880
34,143
41,461
Denominator for FFO and Core FFO per diluted share
224,893,346
218,751,236
218,731,157
57
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 interest rate swap agreements to fix the rate or interest rate cap agreements to limit exposure to increases in rates, 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, 2022.
Fixed Rate Debt:
300 Mission Street
3.65%
265,128
One Market Plaza
4.03%
942,331
3.80%
456,034
1301 Avenue of the Americas (1)
2.46%
497,990
1633 Broadway
2.99%
1,024,296
Total Fixed Rate Debt
3.37%
1,000,000
3,498,000
3,185,779
Variable Rate Debt:
1301 Avenue of the Americas (2)
5.56%
358,553
Total Variable Rate Debt
Total Consolidated Debt
3.58%
1,360,000
In addition to the above, our unconsolidated joint ventures had $1.74 billion of outstanding indebtedness as of September 30, 2022, of which our share was $623,785,000.
The tables below provide additional details on our interest rate swaps and interest rate caps as of September 30, 2022.
The following table summarizes our share of total indebtedness and the effect to interest expense of a 100 basis point increase in variable rates.
(Amounts in thousands, except per share amount)
Balance
WeightedAverageInterestRate
Effect of 1% Increase in Base Rates
Paramount's share of consolidated debt:
Variable rate
3,600
3.67
Fixed rate
2,687,665
3.25
3,047,665
3.52
3.30
Paramount's share of debt of non-consolidated
entities (non-recourse):
111,427
4.83
1,114
108,963
3.27
512,358
503,598
623,785
612,561
Noncontrolling interests' share of above
(311
Total change in annual net income
4,403
0.02
On December 31, 2021, the Financial Conduct Authority (“FCA”) ceased the publication of the one-week and two-month LIBOR rates. The remaining LIBOR rates will continue to be published through June 30, 2023, after which the interest rate for our variable rate debt and derivative instruments, including interest rates for our variable rate debt and derivative instruments of our unconsolidated joint ventures, will be based on an alternative variable rate as specified in the applicable documentation governing such debt or derivative instruments or as otherwise agreed upon. While we expect LIBOR to be available in substantially its current form until at least the end of June 2023, if sufficient banks decline to make submission to the LIBOR administrator, it is possible that LIBOR may become unavailable prior to that point, which could increase our risk associated with the transition to an alternative variable rate. As of December 31, 2021, banks are no longer issuing any new LIBOR debt. The discontinuation of LIBOR and the related transition to an alternative rate would not affect our ability to borrow or maintain already outstanding borrowings or swaps, however, future changes may result in interest rates and/or payments that are higher or lower than if LIBOR were to remain available in its current form. As of September 30, 2022, all of our outstanding variable rate notes and mortgages payable and derivative instruments are indexed to LIBOR and we will continue to monitor and evaluate the related risks.
59
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, 2022, 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, 2022, 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, 2021.
ITEM 2.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 purchase of equity securities in the three months ended September 30, 2022.
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 2022
268,910
6.96
268,231
78,133,000
August 2022
September 2022
2,969,161
6.55
58,687,000
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
3.1
Sixth Amended and Restated Bylaws of Paramount Group, Inc., effective July 26, 2022, incorporated by reference to Exhibit 3.1 to the Registrant's Form 8-K filed with the SEC on July 26, 2022.
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
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:
October 26, 2022
By:
/s/ Wilbur Paes
Chief Operating Officer, Chief Financial Officer and Treasurer
Wilbur Paes
(duly authorized officer and principal financial officer)
/s/ Ermelinda Berberi
Senior Vice President, Chief Accounting Officer
Ermelinda Berberi
(duly authorized officer and principal accounting officer)