Paramount Group, Inc.

Thank you for standing by. Welcome to the Paramount Group first quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note that this conference call is being recorded today, April 29th, 2021. I will now turn the call over to Sumit Sharma, Vice President of Business Development and Investor Relations. Please go ahead.

Thank you, Operator, and good morning. Before we begin, I'd like to point everyone to our first quarter 2021 earnings release and supplemental information, which were released yesterday. Both can be found under the heading Financial Information, Quarterly Results in the Investors section of the Paramount Group website at www.paramount-group.com. Some of our comments will be forward-looking statements within the meaning of the federal securities laws. forward-looking statements which are usually identified by the use of the words such as will, expect, should, or other similar phrases are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect, including, without limitation, the negative impact of the coronavirus, COVID-19, on the U.S. regional and global economies and our tenants' financial condition and results of operation. Therefore, you should exercise caution in interpreting and relying on them. We refer you to our SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. During the call, we will discuss our non-GAAP measures, which we believe can be useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly compatible GAAP measure is available in our first quarter 2021 earnings release and our supplemental information. Hosting the call today, we have Mr. Albert Baylor, Chairman, Chief Executive Officer and President of the company, Wilbur Pace, Chief Operating Officer, Chief Financial Officer and Treasurer, and Peter Brindley, Executive Vice President and Head of Real Estate. Management will provide some opening remarks. and we will then open the call to questions. With that, I will turn the call over to Albert.

Thank you, Sumit, and thank you everyone for joining this morning. We hope that everyone is staying safe and healthy. We are cautiously optimistic that we are moving closer towards the end of this pandemic as vaccines are being distributed nationwide. I am very proud of how the Paramount team has performed during these unprecedented times. Yesterday, we reported core FFO for the first quarter of 23 cents per share. We are reaffirming our 2021 core FFO per share guidance between 82 to 88 cents per share. Wilbur will review our financial results in our 2021 guidance in greater detail. Since the onset of the pandemic, our results have demonstrated the strength of our assets as we have benefited from the high quality of our portfolio and blue-chip tenant roster with very limited exposure to retail. This manifested itself through our superior rent collections throughout 2020 and continues to do so, demonstrating our disciplined investment approach and the overall resiliency of our portfolio. We see early signs of a recovery as the vaccination rate continues to climb driven by government's aggressive public health and safety mandate. In New York, over 40% of the population has received their first vaccine dose, while about 30% have been fully vaccinated. That number is even higher in San Francisco, where about 60% of its population has received their first dose and about 40% have been fully vaccinated. These numbers continue to grow at an impressive rate, and we see this as a very positive sign for the impending return to the workplace and normalcy. With every passing day, we see more reasons for optimism in the markets where we operate. as companies begin to announce plans to return to the office. In speaking with our tenants, most of them are eager to come back to the offices they called home for so many years. As I highlighted last quarter, we continue to maintain an ongoing dialogue with our tenants regarding their plans to return to the office and offering our assistance if needed. Based on these discussions, We are convinced that the second half of 2021 will be the time when comfort levels return to normalcy and offices repopulate. It will most probably be post-Labor Day, however, when we see a meaningful uptick in physical occupancy. We look forward to welcoming our tenants back to the office and are ready to accommodate their evolving space needs. During the quarter, we leased a total of 188,000 square feet. The majority of this quarter's leasing activity was comprised of renewals, like most of last year. In New York, the activity was driven by the renewal of the Gershwin Theater, leased at 1633 Broadway. Although not a needle mover in terms of its contribution to Paramount's bottom line, this 20-year lease speaks to the conviction that tourism and Broadway will return to New York City with gusto. While Peter will go into greater detail on what we are seeing on the leasing front, let me spend a minute sharing my observations. We are finally beginning to see real activity, notwithstanding that the market is nowhere close to pre-pandemic levels of activity. Serious inquiries our plentiful and in-person tours have increased. Brokers are informing tenants that now is the time to act as landlords fight for every deal in the market. As you know, subsequent to the quarter end, we signed a 54,000 square foot lease with Bracewell LLP at 31 West 52nd. Bracewell is a leader in legal service and government affairs. This trophy asset, with its desirable location, efficient center core design, minimal columns, and newly renovated lobby appealed to them and lined up very well with their space needs. We look forward to welcoming Bracewell to 31 West and the Paramount portfolio. The execution of this lease underscores our ability to continue to transact at the highest level in the most difficult of times. It is that the same ability and focus that enables us to speak with confidence when it comes to leasing our remaining availabilities, specifically in our New York portfolio. Post the execution of the Bracewell lease, we have an additional 77,000 square feet of the former TD Bank space at 31 West that will become vacant next week. and the 498,000 square feet block at 1301 Avenue of the Americas. 1301 continues to be our primary focus for several reasons. Not only are we in the market to lease the asset, but we are also in the market to refinance it as the $850 million mortgage loan matures in November this year. The reception from lenders is stellar. and Wilbur will update you on the status. We also recently announced our plan to create a brand new amenity center at 1301, which will further add to the appeal of this asset. More to report on this in the coming quarters. Turning to the transaction market, overall transaction volumes remained low in this quarter. despite the small uptick in the fourth quarter of 2020 as bidder offer spreads remain wide. Core assets that are well leased with a blue chip tenant roster and longer weighted average lease terms continues to command superior pricing. We believe the market continues to be in a period of price discovery with opportunistic buyers unable to find the bargains they expect as sellers are maintaining their asking price. Looking ahead, our long-term strategy remains unchanged. To manage our portfolio to the highest standards and allocate shareholder capital in a prudent manner to achieve the highest risk-adjusted returns with an eye towards creating long-term value for our shareholders. Our priority remains the lease-up of our availabilities as well as the reintegration of our current tenants in a safe and healthy manner. As before, we continue to maintain sufficient liquidity, which amounted to $1.5 billion at the end of the quarter, and we remain well capitalized and positioned for the long term. With that, I will turn the call to Peter.

Thanks, Albert, and good morning, everyone. During the first quarter, we leased in excess of 188,000 square feet, including approximately 156,000 square feet of theater space at 1633 Broadway. This long-term lease, while not included in our office leasing statistics, is notable in two ways. Not only does it de-risk our 2022 lease role in New York, but it also underscores the growing optimism for the eventual return of consumer and tourist demand in midtown Manhattan. The Gershwin Theater at 1633 Broadway is the largest on Broadway and home to Wicked, one of the most successful Broadway productions of all time. Aside from the theater lease, we completed approximately 30,000 square feet of leasing at a weighted average starting rent of $76.08 per square foot. Most of our leasing activity this quarter was once again renewal-based, and serve to further reduce lease role in 2021 and beyond. Our remaining lease expiration profile is manageable with approximately 6.3% expiring per annum at our share on a square footage basis through 2023. This is the direct result of our ongoing strategy to pre-lease space and de-risk future lease role. As our press release last night stated, and as Albert noted, we signed a 54,000 square foot lease subsequent to quarter end with Bracewell at 31 West 52nd Street. Bracewell will occupy the entire 18th and 19th floors for an initial term of approximately 16 years. Importantly, this lease backfills over 40% of the upcoming 131,000 square feet of vacancy at 31 West 52nd Street, which is scheduled to expire on April 30th, 2021. A leader in their field, Bracewell fits the high-quality tenant profile that is a signature of Paramount's portfolio and reflects the desirability of the location, the appeal of the asset, and the ability of our team to transact with a quality tenant, even in the current environment. In Midtown, first quarter leasing activity of 1.9 million square feet, excluding renewals, was 51% below the five-year quarterly average, according to CBRE. Renewals of approximately 1.2 million square feet were executed during the quarter, accounting for a disproportionately high percentage of total leasing velocity, consistent with our overall portfolio. The leasing mix typically shifts toward renewals during uncertain times And as expected, tenants continue to take a wait-and-see approach toward relocating, expanding, or making significant investments in new and longer-term space commitments. Sublease availability in Midtown now comprises 25% of all availability above Midtown's five-year average of 21%, but below the peak ratio realized during previous recessions. Despite these current headwinds, we remain encouraged by the ever-increasing tour activity we are experiencing in our portfolio and expect that the number of new space inquiries, in-person tours, and active negotiations for our available space will increase further as the vaccine is rolled out more broadly and people return to work in larger numbers during the second half of 2021. Our New York portfolio is 87.3% leased on a same-store basis, down 780 basis points quarter over quarter, largely as a result of the Barclays lease at 1301 Avenue of the Americas. As we have stated previously, 1301 Avenue of the Americas remains our primary focus as we market this block of space. In connection with our marketing of the building, and as Albert mentioned previously, we've recently announced plans to develop an amenity center on the concourse level of the building adding to the building's overall desirability. Our offering at 1301 is compelling, especially in today's environment, and we are getting more than our fair share of activity in the market, as evidenced by the increasing number of tours we have had and subsequent exchange of proposals. Prospective tenants we are engaging with currently represent a variety of industries, and in many instances, have chosen to capitalize on the market conditions and upgrade the quality of their offices. We are also marketing the TD Bank space at 31 West 52nd Street as we look to build on the momentum we created by executing the Bracewell deal. We expect to benefit from the ongoing diversification of Midtown Senate base and the flight to quality trend as tenants pursue the most well-located, highest quality assets and managers. We look forward to updating you on our progress in future quarters. Turning now to San Francisco. San Francisco realized limited leasing activity during the first quarter, contributing to a 310 basis point quarter over quarter increase in total vacancy as per JLL. Once again, a disproportionately high percentage of the leasing transactions were renewals as tenants have taken a wait-and-see approach toward relocations, expansions, and longer-term space commitments. This is a direct result of the city's shutdown of nonessential offices, which had endured for more days during the pandemic than any other city in the United States. However, things have begun to change, with San Francisco moving into the state of California's orange tier, allowing for nonessential offices to reopen at 25% capacity. Since then, we have seen an uptick in the number of tours and the number of new requirements. In fact, we are tracking 23 tenants with new requirements of 50,000 square feet or more in San Francisco in just the last 60 days. Despite this pause in the market, we remain long-term believers in the resiliency of the San Francisco market. In the first quarter alone, San Francisco-based companies set a record by receiving $20 billion of venture capital funding, 40 of which raised in excess of $100 million. This is particularly noteworthy given that this comes on the heels of robust VC funding in 2020. Ongoing investment in San Francisco-based companies, a string of successful IPOs, and increased unique job postings, particularly in large tech, have led to renewed optimism in San Francisco. Our San Francisco portfolio is 92% leased on a same-store basis down 370 basis points quarter over quarter. During the first quarter, we leased approximately 30,000 square feet, a weighted average term of 3.9 years with initial rents averaging approximately $76 per square foot. Our San Francisco portfolio has 1.8% or just 41,420 square feet at share rolling in 2021. Looking ahead, our overall lease expiration profile in San Francisco is manageable, with approximately 7.7% expiring per annum at our share on a square footage basis through 2023. Needless to say, our San Francisco portfolio is well positioned to manage through the current environment. With that summary, I will turn the call over to Wilbur, who will discuss the financial results.

Thank you, Peter. Yesterday, we reported core FFO of 23 cents per share, which was one cent ahead of consensus. As expected, current quarter's core FFO was four cents per share lower than prior years as a result of the January 1, 2021 Barclays lease expiration at 1301 Avenue of the Americas. This lease expiration was also the primary driver of the negative 2.6% same-store cash NOI growth in the quarter. During the first quarter, we executed seven leases covering 188,641 square feet of space, including 156,000 square feet that was leased to the Gershwin Theater at 1633 Broadway. While we have always reported the leasing velocity for all types of space in our portfolio, Our leasing statistics have only focused on the office space. As such, office leasing in the quarter amounted to 32,685 square feet that was leased at a weighted average initial rent of $76.08 per square foot for a weighted average lease term of 3.9 years. Of the 32,685 square feet leased in the quarter, 18,211 square feet represented our share of second generation space for which the mark to markets were negative 8.6% on a cash basis and negative 15.9% on a gap basis. All of the office leasing in the quarter took place in San Francisco where lease terms are generally much shorter than that of New York. However, this quarter's weighted average lease term was even shorter than usual and was driven by an 18-month short-term renewal of a 13,900 square foot lease at Share at Market Center. Moving to guidance, we reaffirmed our outlook for the full year of 2021. While there have been some tweaks to the building blocks that form the basis for our guidance, which has been outlined in our supplemental package, not much has changed in our overall outlook. We still expect core FFO to range between 82 and 88 cents per share, or 85 cents per share at the midpoint, and we continue to expect same-store results to be negative this year, driven by the two large known move-outs of Barclays and TD Bank. Our goal for 2021 still remains to lease between 600,000 and 900,000 square feet this year, and end the year with a same-store lease occupancy rate between 88 and 90%. Turning to our balance sheet, we ended the quarter with $1.49 billion in liquidity, comprised of $488 million of cash and restricted cash and the $4 billion of borrowing capacity under our revolving credit facility. Our outstanding debt at quarter end was $3.6 billion and has a weighted average interest rate of 3.2%, and a weighted average maturity of 4.7 years. This, of course, includes the debt at 1301 that is set to mature in November of this year. Excluding the 1301 debt, the weighted average interest rate is 3.4% and the weighted average maturity is 5.9 years. As Albert touched upon, we are currently in the market to refinance this debt. The reception we received from lenders has been remarkable, notwithstanding that the asset is currently only 71% leased. We expect to fully refinance the $850 million maturing debt prior to our next quarterly call, during which we will provide you with additional details. With that, operator, please open the lines for questions.

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Vikram Mahatra with Morgan Stanley. Please go ahead.

Thanks so much for taking the question. Good morning, everyone. You outlined the incremental, the new leaves you signed ahead of the expiration at TD. Congrats on getting that done. I know it's a tough environment. Can you maybe just talk about additional prospects for that space and the Barclays space?

Sure. Thanks for the question, Vikram. We are trading paper at 31 West 52nd Street on those TD floors. You obviously noted that we completed the deal most recently with Bracewell, which we are really very excited about. But we are trading paper on the balance of those floors with, I would say, predominantly law firms and financial service firms. And in one or two instances, they're with financial service firms looking to take additional space. So we feel generally very good about the activity there. As it relates to the Barclays block, I would say that tour activity has picked up markedly since the beginning of the year. Because of those floors, the large base floors, we're predominantly appealing to both financial services and tech. I would say financial services has been even more active in the early going of 2021, but we are trading paper on those floors with a handful of prospective tenants and we feel good about our offering, how we've priced it, and we think we are doing very well in tracking in the right direction.

Thanks so much. And then just maybe one more. Obviously, there's a lot of discussion about how post-COVID work from home or agile workspaces may evolve. Can you maybe just talk about both San Francisco and New York, what you're hearing in terms of, you know, new requirements as it pertains to, you know, square footage, incentives, and specifically, you know, has Paramount been either, has seen any potential restructuring either positively or actually been a beneficiary of any of this?

Yeah, Peter will chime in in a second. We are quite optimistic about actually some of the tenants wanting to increase their space. for reasons that are based on their business picking up. And that goes for San Francisco as well as for New York. But you don't have the quantity of tenants looking for space, but the ones who are looking are serious and they want to do deals. And we think, our opinion is that the tenants will come back. A lot of what is announced today has a certain purpose in mind. And we think that you can't keep up a culture in a company. You can't train long-term. You can, I would call it, muddle along for a while. But the ones who come to the office early will be the big winners in this.

Yes, no question that flexibility matters. will be part of the future. But I think we continue to hear more and more from tenants about the importance of the office. And Vikram, I think you'll find this interesting. In speaking with my colleagues at JLL in San Francisco, things are really ramping up pretty quickly since that city began to open up in March. In fact, they're tracking 36 tenants looking for space, tenants in excess of 50,000 square feet. And I think what's of particular interest here is that 26 of them are expansion-based requirements, which I think is probably not what you would have thought, but things are really starting to move in the right direction there. And fundamentally what I would say is that tenants acknowledge that in order for them to innovate and be as productive as they all would like to be, I think that the narrative and sentiment and belief is that they do, in fact, need to get people back into the office. And I think that's what we've believed all along, and I think we're starting to see that play out just now.

Great, thanks so much.

Next question, Blaine Heck with Wells Fargo. Please go ahead.

Great, thanks. Good morning. So 1301 is obviously the focus, and I appreciate all the commentary on that and the prepared remarks. Peter, I thought it was interesting that you mentioned that many of the tenants you're talking to are looking to upgrade their space. I'm presuming some of that is driven by more affordable rents. So is there any way you can quantify the change in rent you've seen there and elsewhere that might be driving those tenants to kind of take advantage and upgrade their space? And then, you know, as you're thinking about bringing tenants in that maybe couldn't afford your space before, how are you thinking about tenant credit underwriting? Do you think you'll have to get any looser on that side of things?

I would say, fortunately, our portfolio has served as a function as a magnet for good credit. So typically, we always underwrite every prospective tenant. But fortunately, we have appealed to credit tenants as evidenced by our tenant roster, as you well know. We haven't changed our pricing all that much at 1301. We still expect this to be a single-digit positive mark to market relative to Barclay's outgoing escalated rent. We feel very good about our activity at the rent level that we're communicating with prospective tenants on. There's no question that concessions have been elevated. I do think they've begun to stabilize, albeit at higher levels, historically high levels. But our fundamental belief is that as velocity starts to come back, as we expect it will based on the number of tours that we've had, that will start to eventually improve on the economics over a period of time. But we are prepared to hit the market. Our objective is to lease our buildings to credit tenants. And on the rent front, to answer your question, I don't expect a material change relative to what we've been communicating all along on the rent front.

Got it. Okay, that's helpful. And then maybe sticking with you, first of all, you know, congrats on getting the lease done with Bracewell. Can you give us any more detail on that? Obviously, it's a very long-term lease, so keeping that in mind. Can you give any sense of what the mark-to-market is relative to TD? Any detail on the concession package? And then, you know, when should we expect commencement on a gap-in-cash basis?

Okay. Okay. Thanks, Blaine. I appreciate that. We realized the positive mark to market with that deal for the two floors. I would say concessions were generally in line with what we're seeing in the market, which is on a free rent basis, call it 1.2 to 1.5 months of free rent per year of lease term. And TI would be approximately, call it $10 per square foot per year of lease term, give or take. So we were generally in line with where we're seeing concessions currently. We felt good about the rent. We felt very good about the tenant, and we're looking to having a very productive long-term relationship with them.

Blayne, and an additional comment. TD took that space over different times, and not all rent is at the same level. So there are floors where the rent is a little higher than what currently is going to be occupied by Bracewell. Just as an additional comment here.

Great, that's helpful. Maybe one more while I have you, Albert. Can you just talk about what you're seeing on the fund side of things, whether you're seeing any opportunities open up to make new investments? I think you've talked about before that core deals are definitely getting relatively strong bids, but there aren't too many value-add type opportunities. Is that hindering your ability to put capital to work, or do you think some of those situations might open up here?

It doesn't look like it's open up very soon. There's a lot of liquidity in the markets on the debt side, mezzanine debt side. And there are very few players who want to sell an asset currently. There's no real distress in the market. And I think it's something that will Market participants were a little bit too optimistic and looking for potential attractive buys. That is not there. And it might not happen because of the interest rate environment and because of the liquidity that's available in the market with regard to debt and equity. But our team is searching what's happening in the market, so we will be We are looking at transactions, but it's very, very competitive, which is, I think, in general, good.

Got it. That's helpful. Thanks, guys.

Sure. Welcome.

Next question, Jamie Feldman with Bank of America. Please go ahead.

Great. Thank you, and good morning. I was hoping to get more color on the San Francisco demand you talked about, Peter. Is this all in the CBD, or is this in the Bay Area overall, and can you talk more about Are these companies that are a result of the funding we've seen this year? Any more color you can bribe would be really helpful.

Sure. I think it's predominantly San Francisco-based. That's how we think about it. But it's predominantly San Francisco-based. As I mentioned in my remarks, venture capital funding for the first three months of the year were at an all-time high. coming off a very productive year in 2020. So a lot of these companies are being invested in, 40 of which, as I mentioned, received in excess of $100 million. Very successful IPOs allowing for these venture capital firms to reinvest in these companies in San Francisco. And these are many of the companies that we're seeing looking for additional space. We'd like to see some of that sublease space absorbed in San Francisco, which we believe we will in the near term. But a number of these tenants are discerning, right? They want the ability to have renewal rights and expansion options, all of which become impossible as a sub-tenant. So, you know, we're competing for deals. In one case, in one of our buildings, one of our availabilities, we've got three tenants vying for the floor. So we're seeing activity in San Francisco, which is really very encouraging.

Okay, thank you. And then I assume from your discussion, Wilbur's discussion of the guidance targets that you still are comfortable with 1301 50% lease by year end, or that space by year end?

Yes, we are.

Okay, great. And then also just, I guess, finally for me, can you talk about just tenant expansions versus contractions? I know you talked about some of the Bracewell, you know, the Bracewell economics, but, you know, what space are they coming from, and is it an expansion or contraction, or even as you're looking at tenants for 1301, just how should we think about kind of the drag overall on the market, even if you're able to lease up your space, what do you think it does to the market overall?

Yeah, Jamie, Bracewell is a tenant that goes back with Paramount a long time. You might recall in our track record when we went public, we owned the building 1177 6th Avenue. For a couple of years, they were a tenant of Paramount at that building. And that company liked, apparently, Paramount a lot. And they wanted to be in a Paramount building again. And so I think that speaks for how we are treating our tenants and how we operate our buildings. And I think that's a focus in the future, that the tenants really are looking more for the landlord how the landlord operates their buildings, how safe can their employees be in those buildings, and I think they're very comfortable with the space, and they want to be a long-term tenant there.

Yeah. Jamie, I think it's difficult to say what absorption will look like for the balance of the year. I think you'll have and realize some absorption just by way of sublease space being delisted. We've seen it most recently in a building of ours where a tenant in excess of 100,000 square feet had subleased or listed for sublease the entirety of their space, and most recently delisted all but what equates to less than 10% of their initial offering. And I think we will see more of that, and that'll contribute to absorption in our market. Beyond that, it's really difficult at this point to say if tenants are taking more or less space. Every requirement's a little different. When I think about the composition of our pipeline, I would say generally, Majority of our demand is such that tenants are taking more space than they have currently, but that may vary from owner to owner. I don't know. We feel very good about the quality of our tenants that are inquiring about taking additional space. We, of course, need to convert, but that's the status of the pipeline today.

Okay. And sorry, just one more. Just thinking about the decision to refinance 1301 now, Sounds like you think you'll get it done by this time next quarter versus wait until you get it leased up. Can you just talk about maybe how the debt markets look to make that decision or how you guys made that decision?

Yeah, we want to be, and Wilbur will add to this, we made a decision that it's a large refinancing and you never want to wait until the end. You know that we only to asset financings and historically we always started like two years ago, two years before expiration of a financing to search for a good opportunity to refinance. It's clearly risk reduction and you don't know how these markets are and the markets are currently very liquid and you wanna take advantage of that and that's why we started at this point in time.

Yeah, the only thing I would say, Jamie, to your question, I don't think when we're talking to the lenders, if the question somehow is implying, had you successfully leased the building today, would that affect the ability to refinance? The answer is no, because there are assumptions on that space, the market. Participants know the space well. They know where rents are. That's all priced into that refinancing discussion. So, you know, the general market was concerned given the size of the debt and the impending vacancy of Barclays and our ability to refinance. And the thing that you should take away and the rest of the people should take away is we're going to fully refinance the entire $850 million, and we'll have news to report on that before our next call.

Okay. Can you give some color on how lenders are willing to finance vacancy or underwrite vacancy? Like, what are they assuming for rents and capex costs?

It's basically what is in the market today, right? I mean, Peter covered a little bit of where concessions are today, where rents are. He also alluded to we think this is going to be a roll-up relative to what Barclays were paying. So there's no exorbitant assumptions. It's basically what is the data that's available today, and that's what they're pricing in. The other thing that lenders really, really focus on is sponsorship. Sponsorship in these kind of things matters. People know who we are, and so we think we're going to have a very successful outcome there.

Okay. All right. Thank you for the color.

Sure. You're welcome.

Next question, Steve Sakawa with Evercore. Please go ahead.

Thanks. A lot of my questions have been answered on leasing, but just maybe a couple of things, Wilbur. As it relates to guidance, a couple of the line items like G&A, interest expense kind of changed. Any color on kind of why G&A went down and interest expense went up?

So, Steve, a lot of the thing in G&A was more non-cash. At the time we released guidance, We didn't have all of our equity grants granted and how that translates into GNA to the bottom line. There were some tweaks that we made on GNA. Interest expense, again, was changed a little bit based on our expectation of the timing of the refinancing of 1301, where at the time we released guidance, we thought that was further out. Given where we are in the market and the reception we received, that changed some of the interest expense assumptions. And the fee and other income also changed slightly because based on what we see getting done in our fee business, between now and year end. So net-net, as you point out, there was no real change to the bottom line core FFO number or the midpoint. There were some tweaks within these line items that moved up or down.

Okay. And then other question, I don't want to get too technical, but when you look at the straight line rent adjustment and the above and below market leases, you know, relative to what it came in the first quarter, can you just kind of speak to kind of why there's a big flip in the next three quarters?

Sure. And one of the things that is obviously inherently challenging with our portfolio, given its average lease size being close to 50,000 square feet and weighted average terms being longer, straight landing will be chunky. The straight line adjustment, which you are referring to, will be chunky and not your typical bell curve that is expected of And then you add to that the complexity of the fact that when we went public, you had leases in place that needed to get re-straight-lined. So part of that is gonna cause a lot of the burn-off now that we're five years, over the five-year mark of being public. So I would anticipate straight-lining starting to turn negative as we go into the rest of the year. So the big positive that you're referring to is in the first quarter, And I would expect that to turn sharply negative and be in line with the guidance range that we provided for straight line. As you'll see, that is south of the number where we are today for the full year.

Great. And then last question, you know, just sort of buyback activity. I know you guys haven't been, you know, active on the acquisition front and pricing's been high for years. good quality assets and there hasn't been a lot of distress. So how are you sort of looking at the buyback activity versus, you know, acquisition activity?

I think we want to keep it opportunistic as in the past. So we have both options open. I think we will be very, very conservative with regard to acquisitions. As I mentioned in the previous calls, our cash is very very valuable and we will treat it that way.

Great, that's it for me, thanks.

Thanks, Steve.

Next question, Tom Catherwood with BTIG. Please go ahead.

Thank you and good morning, everyone. Peter, I appreciated the color on the improved demand in San Francisco and it raises a question that is likely a few quarters too early, but I think it's important to at least think about If my memory serves me, you have some tenants in your San Francisco portfolio that are pretty materially below market, especially some that have been pulling back or rejiggering some of their footprint in the San Francisco market. Are there opportunities to kind of creatively recapture some of this below market space to meet some of the growth and demand that you referenced? Or is the focus just filling up the vacancy you have in the portfolio right now?

Our primary focus is to realize the best outcome from an economic standpoint and a credit worthiness of tenant standpoint for our existing vacancies. And of course for the space that's scheduled to roll in the near term. There are at times opportunistic ways in which you can take back space and assemble, for example, a block of space and transact with a large user that makes sense. But fundamentally to answer your question, Our focus is squarely on the vacancy.

And Tom, I would just say, you know, to Peter's comments and these tenants in the market in San Francisco, this is a lot of new data relative to COVID, right? It's not like there is a flurry. One should not misconstrue the activity in the market today versus pre-COVID levels. It's the activity in the market today versus COVID levels, and these are green shoots. But that does not necessarily mean you have a flurry of tenants where you can kind of rejigger and capture below-market space and try to grow these tenants. We obviously have an eye towards that any time the opportunity presents itself, but I just wanted to clarify maybe that point.

Absolutely fair, and that's why I said it was likely – A couple quarters too early, I just think of the kind of creative deals you've done in the past, moving tenants between 31 West 52nd and 1633, so we'll keep it on the list to look out for in the future. One last one for me, and I know retail obviously is a small part of your portfolio, but it seems that there has been a pickup. recently with retail tenants coming back into the market with some spaces getting taken up and just in general more interest there. Have you seen this in kind of the few availabilities in your portfolio and kind of what is your thought on getting to some of those in the near term?

Tom, I think retail remains relatively slow. I think we still need to see the consumer return and people return in greater numbers. We have very little retail. We have very important retail, as you know, at 712, and we are showing the space. But fundamentally, I would answer your question by saying retail remains slow and probably will remain as such until more people come back to our markets.

Understood. Thanks, everyone. Thank you.

Once again, if you would like to ask another question, please press star one on your telephone keypad. Our next question comes from Omoteo Akusanya with Mizuho. Please go ahead.

Yes. Good morning, everyone. So my question has to do more around a macro topic of kind of, you know, corporate taxes and the Biden administration really kind of trying to raise taxes on corporations. If somehow or the other that actually happens, what is kind of the implications for again your tenants who are getting all corporations and how does one kind of think about that you know the potential impact you know to their cash flows and what it means for their abilities to kind of you know pay rents going forward you could just kind of you know talk us through just thoughts or your preliminary thoughts on that would appreciate it yeah I think that it's a little early to think about these are proposals they have not been negotiated

I don't expect that it will come out exactly the way it's proposed. And I don't think it will inhibit our tenants in their basic business. And I think it's too early to really say what the end outcome here is.

Can you think of any other time in the past when we did have a big increase in corporate taxes and what happened to office tenant demand?

Everybody is thinking about the past. It's normally not impacting the office demand directly at all. The vibrancy of the markets of New York and San Francisco have been very, very strong. And you always should expect that business participants will find ways to keep their business going and improving it and creating maybe something else, especially in San Francisco where you always innovate and have new tech companies with new ideas. I'm not so worried about this at all. Great.

Thank you, Albert.

Sure.

We have a follow-up from Jamie Feldman with Bank of America. Please go ahead.

Hey, thanks for taking the follow-up. I just wanted to clarify. So the 6,000 to 900,000 square feet of leasing guidance, is that pro rata PGRE share or is that consolidated? And does it include the Gershwin lease?

Yeah, when we disclose guidance and leasing volume, Jamie, we've typically disclosed leasing volume at 100%. And so to answer your question, yes, it does include the leasing velocity that was reported in the first quarter, which included the Gershwin Theater.

Okay. So you're saying it's not pro-rata share, it's total?

No, occupancy that's disclosed. When you look at the same store occupancy figure that we provided, 88 to 90, that's a pro rata share. We've always disclosed leasing volume at 100%.

Okay, great. Thank you for clarifying.

Sure.

Thank you. I would like to turn the floor over to Albert for closing remarks.

Thank you all for joining us today. We look forward to providing an update on the progress when we report our second quarter results during the summer of this year. Stay safe.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.