Paramount Group, Inc.

Thank you, Operator, and good morning, everyone. Before we begin, I would like to point everyone to our fourth quarter 2023 earnings release and supplemental information which we released yesterday. Both can be found under the heading Financial Results in the Investors section of the Paramount Group website at .pgre.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 uncertainty that could cause actual results to differ materially from what we expect. 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 the financial condition. During the call, we will discuss our non-GAP 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 GAP. The reconciliation of these measures to the most directly comparable GAP measure is available in our fourth quarter 2023 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 Payes, Chief Operating Officer, Chief Financial Officer and Treasurer, and Peter Brinley, Executive Vice President, 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, Tom, and thank you all for joining us today. Yesterday, we reported core FFO of 21 cents per share for the fourth quarter, bringing our total for the year to 87 cents per share, the high end of our most recent guidance range. We leased 174,000 square feet in the fourth quarter, bringing the full year leasing volume to 740,000 square feet roughly in line with midpoint of our guidance that was established at the beginning of 2023. To date, we are initiating 2024 core FFO per share guidance with a range between 73 and 79 cents per share, and the leasing guidance range between 650,000 and 900,000 square feet. Wilbur will review our financial results and guidance in greater detail. 2023 was an eventful year for Paramount. We began the year in rising interest rate environment and one with elevated inflation. We had the regional bank crisis early in the year in which two of our key tenants, SBB Securities and First Republic, who also happened to be our largest tenant, failed. We worked diligently to make good for a bad situation, and we did. We negotiated with JP Morgan Chase to assume 75 percent of space that was leased by First Republic under the same economic terms. The remaining 25 percent that they didn't assume was because it wasn't utilized and a large portion was supleased to other tenants. We then entered into a direct lease with the subtenants for most of the remaining space. All said, we took a potential $43 million problem and mitigated it down to $5 million. Concurrently with that negotiation in San Francisco, we also negotiated a new lease with the entity acquiring substantially all of the assets of SBB Securities. The new entity retained about 62 percent of the space previously leased by SBB Securities on a long-term basis and kept the remaining 38 percent on a short-term basis. We focused on protecting our balance sheet by making strategic decisions on which debt maturities we sought to extend, where modest debt paydowns and low or favorable interest rates and extended terms made sense like at 300 Mission Street and where investing additional capital to support the asset didn't make sense like at 111 Sutter Street. We deployed capital into Paramount Club, our -square-foot -the-art amenity center that will serve the Paramount campus. Paramount Club is set to open this spring, and it already served as a magnet in attracting our New York's most discerning tenants. We also reduced our dividend, enabling us to retain an additional $40 million in cash annually. Now, with 2023 behind us, we will carry that momentum into 2024, where our primary focus in 2024 will undoubtedly be on leasing. Our lease expiration profile over the next couple of years is elevated, and our goal is simple. We risk the roll. The biggest expiration in 2024 is Clifford Chancer's -square-feet lease at 31 West, which is set to expire at the end of May. As you know, we have already de-risked 106,000 square feet or over 32 percent of this space, and we are underway in dealing with the remaining availability. Peter will provide additional color on this in our leasing pipeline. Though headline vacancy rates in Manhattan remain elevated, it's important to understand each sub-market and the quality of the assets within each sub-market, as variations can be pronounced. For instance, the Sixth Avenue sub-market is among the lowest overall availability rates, over 500 basis points lower than the overall midtown office market. We have continued to capture more than our fair share of demand in this corridor, where a majority of our assets sit, and that is demonstrated by the same store leased occupancy rate of our New York portfolio, which is at 90.2 percent. The bulk of our current availabilities also happen to be on assets in this corridor, and we are poised to continue to capture more than our fair share in 2024. We believe this is to be reflective of the quality of our assets and our ability to execute in all different types of competitive market environments. We are confident that we will continue to benefit from the ongoing demand for high quality office space in the Sixth Avenue corridor. In San Francisco, the market continues to lag. Although there are green shoots in the form of record venture capital funding, AI-based leasing demand, and an improving return to the office statistics. We are long-term believers in the San Francisco market, and our focus here will be to remain a core portfolio of assets in this market that will flourish as the market recovers. Just last week, we announced the modification and extension of the loan at One Market Plaza, wherein we paid down less than 13% of the principal balance of the loan in return for a three-year extension and a favorable interest rate. One Market Plaza continues to raise the bar in San Francisco. In 2023, we signed two leases over $130 per square foot, and the asset is currently .7% leased. Turning to the transaction market, activity remains muted. However, we anticipate that 2024 will see increased activity. We believe the number of distressed assets coming to market will rise, and once interest rates begin to decline, as many expect, bid-ask spreads will begin to narrow. That said, equity markets have remained volatile, and there have been very few high-quality assets brought to the market. As always, we will be strategic and disciplined in allocating capital towards external growth opportunities. Lastly, we are very proud of the remarkable progress we made in our sustainability initiatives this year. Our dedication to sustainability and ESG as a whole is one of our fundamental operating tenets. We are leaders in the field, and we know that this has not only enabled us to reduce operating expenses, secure high-quality tenants, and ultimately increase portfolio value, but also minimize the environmental footprint we leave behind. For this reason, we were honored to receive the 2023 Energy Star Partner of the Year Award for the second consecutive year with Energy Star that enables for 100% of our portfolio. Additionally, we earned a five-star rating in the 2023 Graspee Real Estate Assessment for the fifth year in a row. We aim to build on these impressive achievements in 2024, as ESG will remain a priority in how we run our business. To close, our priorities for 2024 are clear. We are later focused on the lease-up of our available space. With our portfolio of stable trophy assets and our proven ability to allocate capital, we remain well-positioned for the long term. With that, I will turn the call over to Peter.

Thanks, Albert, and good morning. During the fourth quarter, we leased approximately 174,000 square feet, with approximately 139,000 square feet leased in New York and approximately 35,000 square feet in San Francisco. The weighted average term of leases signed during the quarter was 10.2 years. During the fourth quarter, we signed a 49,000 square foot lease with Major League Baseball Players Association at 1325 Avenue de the Americas for an initial term of approximately 17 years. We also signed a 41,000 square foot lease with Smith, Gambrell, and Russell, a leading law firm for a term of approximately 11 years. Smith, Gambrell will relocate within 1301 Avenue de the Americas and expand their footprint by approximately 40%. These transactions demonstrate our ability to attract and retain high-quality tenants in our midtown portfolio and serve as two good examples of tenants expanding their existing footprint, a trend we are seeing more of in our own pipeline, particularly in New York. For the full year, we leased approximately 740,000 square feet for a weighted average lease term of 9.6 years. Tenants continue to prioritize the highest quality assets in our two markets, choosing to pursue well-located, amenity-rich buildings run by -in-class, well-regarded owners. Our portfolio is uniquely positioned to capitalize on these pronounced trends. We remain later focused on delivering exceptional services and executing on our business plan. At quarter end, our same-store portfolio-wide lease occupancy rate at share was 87.7%, down 40 basis points from last quarter and down 360 basis points year over year. As we look ahead, our 2024 lease expirations are manageable, with .8% of annualized rent, or approximately 764,000 square feet, at share expiring by year end. Our focus for 2024 is the renewal of tenants in our portfolio with expirations of the next several years and the lease up of currently vacant or -to-be vacant spaces. Our pipeline continues to strengthen. We currently have leases in negotiation and proposals in advanced stages for more than 300,000 square feet, a good portion of which is for vacant or -to-be vacant space. Beyond the 300,000 square feet, we have a healthy and growing pipeline with ongoing negotiations at various stages. Turning to our markets, Midtown's fourth quarter leasing activity of approximately 4.3 million square feet, excluding renewals, was up 49% quarter over quarter and 29% ahead of the five-year quarterly average. While availability in Midtown remains elevated at 18%, the likes of submarkets in Midtown's core have far less availability, covering at or close to equilibrium. The result of this has been improved economics in premier buildings, particularly on upper floors in these sought-after submarkets. Absorption in Midtown was positive during the fourth quarter and positive for the full year, first full year of positive absorption in Midtown since 2018. This was driven by leasing activity, largely by the financial services industry and by space withdrawals attributable to building purchases and residential conversions. Tour activity in our New York portfolio continues to increase as does our pipeline of prospective tenants, most notably for the remaining vacancy at 1301 Avenue of the Americas and the block of space we are currently marketing at 31 West 52nd Street. At 1301 Avenue of the Americas, our market-leading amenity center is set to open in May 2024 and continues to be a differentiator in our pursuit of leading companies. Our New York portfolio is currently .2% leased on a same-store basis at share, down 20 basis points quarter over quarter and down 190 basis points year over year. During the fourth quarter, we leased approximately 139,000 square feet with a weighted average term of 12.4 years with an initial rent of approximately $78 per square foot. In New York, lease expirations during 2024 will be 10% of annualized rent or approximately 572,000 square feet at share, driven largely by the known move out of Clifford Chance at 31 West 52nd Street. Shifting our focus to San Francisco. San Francisco recorded 1.5 million square feet of leasing during the fourth quarter, up 25% above the pandemic era quarterly average, but .8% below the quarterly average during the preceding 10-year period. For the full year, leasing activity in San Francisco remained muted with very little demand coming from the traditional technology companies. Despite a lackluster year of leasing transactions, we are optimistic that San Francisco remains a hotbed for premier tech talent with high growth potential. Return to office continues to accelerate and San Francisco based companies, particularly AI based companies, continue to attract significant venture capital funding. As a result, total square footage of tenants in the market continues to increase, moving closer to San Francisco's historical average. AI based companies contributed to approximately 25% of the leasing activity in 2023 and have become an increasingly large percentage of the demand pipeline in San Francisco, pursuing space of varying sizes in San Francisco's premier buildings. At year end, our San Francisco portfolio was .8% leased on a same store basis at share, down 120 basis points quarter over quarter, down 810 basis points year over year, driven by the known move out of Uber, which we have partially backfilled with the previously announced Waymo lease. Looking ahead, our San Francisco portfolio has .3% of annualized rent or approximately 192,000 square feet at share, expiring by year end. We look forward to updating you on our progress. With that summary, I will turn the call over to Wilbur, who will discuss the financial results.

Thank you, Peter, and good morning, everyone. I will start off my prepared remarks by covering the details of our fourth quarter results and then get into the building blocks of our 2024 earnings guidance. Yesterday, we reported core FFO of 21 cents per share for the fourth quarter, which came in at the high end of our guidance range and one cent above consensus estimates. Same store growth in the fourth quarter, as expected, was negative 8% on a cash basis and negative .2% on a gap basis, driven by tougher comps and the previously talked about lease termination of an 83,000 square foot tenant at 1633 Broadway in our New York portfolio and the Uber lease exploration at Market Center in our San Francisco portfolio. During the fourth quarter, we completed 173,770 square feet of leasing at a weighted average starting rent of $80.17 per square foot. And for a weighted average lease term of 10.2 years. Mark to markets on 112,898 square feet of second generation space was negative .5% on a gap basis and negative .5% on a cash basis. Turning to a balance sheet, outstanding debt at year end was 3.66 billion at a weighted average interest rate of .9% and a weighted average maturity of 3.1 years. 87% of our debt is fixed and has a weighted average interest rate of 3.28%. The remaining 13% is floating and has a weighted average interest rate of 8.01%. Our liquidity position at year end remains strong at over 1.2 billion, comprised of 469.1 million of cash and restricted cash at share and the full 750 million of capacity under our revolver. As you all saw last week, we announced that we together with our partner had modified and extended the loan at One Market Plaza. We paid the loan balance down by 125 million of which our share was a little over 61 million. There was a minimal uptake in the rate and we pushed out the term by three years to 2027. Needless to say, this was a terrific outcome in a very challenging capital markets environment. As we have reiterated throughout the year, protecting our balance sheet has been and continues to remain our top priority. On the one hand, we have dealt with several near term maturities by opting to pay down a portion of the debt on certain assets like One Market Plaza and 300 Mission in exchange for favorable rates and extended terms. On the other hand, we have opted not to pay down any debt or invest additional capital in certain assets like 111 Sutter Street and now Market Center. 111 Sutter and Market Center have been dealt a hard blow with the timing of several key lease explorations coinciding with a tough leasing environment and upcoming debt maturities. In the case of 111 Sutter, at year end 2022, we wrote down our investment to zero. And in early 2023, we defaulted on the loan and negotiated a cashflow loan, whereby we did not invest any capital from our balance sheet. The loan is set to mature in May of 2024 and our position on the asset hasn't changed. In the fourth quarter of 2023, we also wrote down our investment in Market Center to zero. The occupancy at Market Center dropped significantly as a result of Uber's move out and currently sits at 55.1%. Furthermore, over 110,000 square feet is set to expire in 2024 and the debt is scheduled to mature in January 2025. These two assets are in workout mode. We do not know what an ultimate resolution will look like and there is a strong possibility that these assets may not be in the Paramount portfolio going forward. The value of these assets on our books have been taken down to zero and the fair value of the assets are significantly below the existing debt amounts. They are currently a drag on occupancy, a drag on earnings and a drag on leverage and we get no credit for it in our stock price. So all that said, we decided to remove these assets from our core and same store portfolio effective January 1, 2024 until we reach a resolution with our respective lenders on a solution that makes sense for all parties involved. To that end, we have provided additional disclosure in our supplemental package and our investor deck to help investors understand the impact those two assets currently have on portfolio operations. Now let me spend a minute on the assumptions used in deriving our 2024 Core FFO guidance. We expect 2024 Core FFO, which again, excludes the impact of the two non-core assets I described earlier, to range between 73 cents and 79 cents per share or 76 cents per share at the midpoint. In order to facilitate an apples to apples comparison between 23 and 24, we have also presented in our supplemental package, a 2023 Core FFO figure as adjusted, which is 86 cents per share and excludes one cent per share of earnings contribution from the two non-core assets. So on a comparable basis, Core FFO is expected to decrease by 10 cents per share from an adjusted figure of 86 cents in 23 to 76 cents, which represents the midpoint of our 2024 guidance. The 10 cents per share decrease in Core FFO is comprised of the following. An eight cent net decrease in cash NOI, driven primarily by significant lease explorations, a three cent decrease in termination income that is not budgeted for in 2024, a two cent decrease in interest fee and other income net of taxes, a four cent increase in interest expense, and a one cent increase in GNA. These negatives aggregating 18 cents per share are partially offset by an eight cent increase in straight line rent adjustments due to new lease commencements. Our same store growth is expected to range between negative 6% and negative 4% on a cash basis and negative .5% and negative .5% on a gap basis. We expect a lease between 650,000 and 900,000 square feet and we expect to end the year with the same store lease occupancy rate between .1% and 88.1%. For additional information on our 2024 guidance, please refer to our supplemental package and investor presentation, both of which are available on our website at .pgre.com. With that, operator, please open the lines for questions.

Thank you. We will now 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. First question comes from Camille Bonnell with Bank of America. Please go ahead.

Good morning. Appreciate your comments, Wilbur, on Market Center and 111 Sutter. So just wanna better understand the motivations here because the refinancing risk has been known for a while. And if we look back to prior discussions around these assets, they've been highlighted as top quality and uniquely positioned within the market. So has something around the team's expectation for releasing these buildings just been pushed so far out that it just doesn't make sense to own anymore?

Sure. Camille, I mean, obviously we bought these assets because we do believe they are top quality assets. We invested in these assets in 2019 and the world has changed dramatically since then with COVID and interest, rising interest rate environment, inflation, et cetera, et cetera. And San Francisco continues to lag New York in terms of fundamentals. And we have limited resources and we gotta make relative bets. We have a certain amount of cash, we have a certain amount of ability to work these loans and we have to make the right capital allocation decisions on where we see fit to invest additional capital and where we deem it not. In the case of these two assets, they will also dealt a terrific, a terrible blow in the midst of this declining fundamental environment with significant lease expirations. They sit at 55% and in the case of Market Center, will probably go down to the 40% with the role in 24 and you have an impending debt maturity there. So, we sit here as a group on the capital allocation table and making a decision on which assets we think makes sense to invest the capital and which it doesn't. And so we decided the ultimate resolution of this will take some time to play out, but it muddies our core portfolio operations. So by excluding it from the get-go, investors are able to appreciate the impact on a go-forward basis should the resolution be where we end up handing the keys back to the lender.

And so it sounds like this is the one.

Camila, it also shows that we are really focusing on shareholders' value here than doing the right thing for the paramount shareholders. There's certain assets where it makes a hell of a lot of sense to invest more capital. And normally these situations, they get negotiated and we are starting that negotiation at Market Center. And we, you might recall, I mean, we are in the good situation as a company that we have a clean balance sheet without any debt and with cash available, and we want to keep that company strong. And that's like what Wilber was saying. We are focused on the assets where there's equity currently. Could there be equity in Market Center and 111 Sutter? Of course, if the market turns around, since San Francisco seems to be historically turning around quicker and more dramatic in both ways, up and down, we will see what time will bring. But currently it doesn't make sense to invest expensive shareholder capital.

Got it, so it sounds like this is more of a capital allocation decision. Looking though at how tight your concentration is in that market, and sorry, if I missed your earlier comments Peter, but how confident are you in backfilling or retaining the large lease expiry in one market, Front Street and one market Plaza through 2025?

Yes, Camille, good morning. So you're right, we do have significant lease role in 2025 in San Francisco, approximately 1.1 million square feet or 35% at share approximately. Roughly 65% of that role is made up of three tenants and those being KPMG, Google and JP Morgan. I will tell you that we enjoy a very, very good relationship with all three. We are in discussions with all three and there's not much more I can say beyond that.

Okay, and just finally, the mark to market on leasing during the quarter declined quite a bit. Has anything changed around how you're approaching your leasing strategy and overall how should we be thinking about the pace of leasing this year?

No, I think it's hard to look at it on a quarter by quarter basis. What I would say is that our properties, and I'll start in New York, are in sub markets, predominantly the Sixth Avenue sub market, which has an availability rate that's hovering close to equilibrium. And I think what we are seeing is, for the first time, a bit of pricing power on upper floors as an example. We do know that a disproportionate amount of Midtown's availability happens to be concentrated on lower floors. So when and where we have availability in our very high quality buildings, of course, we are starting to push on spaces that we're now marketing on upper floors.

Kamil, I will say on your mark to market comment, as Peter said, it does fluctuate quarter to quarter. It's a function of tenant mix that expires in that given quarter and leases that you execute. But if you look at the full year for 2023, mark to markets were flat on a gap basis and down less than 3% on a cash basis.

Thank you. Next question, Zikaram Malhotra with Mizuho. Please go ahead.

Thanks, Susan. I guess I just wanted to go back to the buildings that you mentioned, 111 Sutter Market Center. I guess in the K, you've also mentioned 712 Fifth and then 60 Wall in terms of the basis and then additional capital. So maybe just any thoughts on those other two properties. And I guess Wilbur, if you can clarify, if these buildings are given back, is there a tax implication in terms of the debt value versus you're writing them down to zero?

Sure, let me start with the first part of your question, Zikaram. You're talking about the basis being negative. There is an accounting convention for investments in equity method joint ventures upon which, when you get to zero or you get to negative basis, you discontinue the equity method of accounting. So you're no longer allowed to pick up your pro rata share of earnings from that venture and you only recognize earnings to the extent of cash flow distributions. So that's the comment with respect to 60 Wall and 117 Sutter. The impairments on these assets have taken our investment down to zero. In the case of 117 Sutter and Market Center, that's a deliberate decision for us not to invest additional capital in that. So that's a strategic decision versus the others are more an accounting convention. As far as the second part of your question, I'm sorry, Vikram, can you repeat that again?

Yeah, just are there any tax implications like if you give back the assets?

So there are. Essentially, the way you should think about it is, you acquire these assets for some number in 2019, if you hand the keys back, you're handing it effectively at the debt balance. So that's your proceeds. You'll have a delta between that and the basis of the asset, which in this case will generate tax losses given when these assets were acquired. So there's no punitive element of handing back the keys if that's where you were trying to. Yeah,

okay. Yeah, I was just trying to clarify like if the base is actually zero, so there's actually a tax bill, but you're actually clarifying that no, it's a punitive impact, so that's helpful. Just the second question on the...

Vikram, from my end, we've got to 712. 712 is an asset. There's no negative with that asset as such. The asset is a prime asset in Paramount's portfolio. It has been bought a long time ago, and Wilbur, I think, answered that question, but I don't want investors to get away from this. It's 712 is in any kind of financial distress.

That's helpful. I guess, Albert, just sticking with you, if some of your peers have decided to buy out JV Stakes and take, I guess, operational execution opportunities down the road, hoping for a lease up or just redevelopment, I'm wondering, either in the fund business or in general, how are you thinking about deploying select capital towards some of these JV Stakes or even mezzanine investments like you do have a debt book? So if you can just clarify, is the time right now, what are you watching for, if not?

I think it's too early to really go into this in detail. We like to treat our partners as real partners. We wouldn't take advantage of them unless they really decide against a certain going-forward situation, and we have the opportunity to buy a piece at below market level. We will be, again, in each and every case, very, very selective because I said over and over on these calls that our cash is very valuable to us and we don't wanna spread it out amongst other assets if it's not crystal clear that we can generate superior returns to our shareholders.

Okay, great, and last one, if I can just clarify, Peter, did you say there were 300,000 square feet of deals under LOI or is that sort of a pipeline that you're pursuing towards the leasing goal that you laid out?

My, Vikram, my reference to 300,000 square feet was specifically related to leases in negotiation or proposals in very advanced stages. Beyond that, we have a pipeline that we feel good about as well. It is growing and as I mentioned in my remarks, it is healthy and better than it was a year ago, I would say, but specifically leases out or proposals in advanced stages, that was my reference to the 300,000.

And could you break that up just roughly between New York and San Fran? It's roughly 50-50. Okay, thank you. Thank you.

Next question, Steve Sacklaw with Evercore ISI, please go ahead.

Yeah, thanks. I guess, Albert, we've seen a couple of very high profile retail transactions along Fifth Avenue at sort of high popping pricing. I know you still have some vacancy from the old Henry Bendel space, and I'm just curious how you're sort of thinking about some of those street retail positions that you own today.

Well, we have quite a presence on Fifth Avenue, as you rightfully said. 712 is right in the mix, and Peter and his team have been cautiously marketing the, I would call it leftover space from Henry Bendel. You might recall that we leased a relatively small space of that former Henry Bendel space to Harry Winston at roughly the price that the entire Henry Bendel space brought for the investors. The retail market is clearly picking up not only on the investment side, but also on the demand side in the luxury area. And we are also in discussions with various opportunities with regard to the assets that maybe hold 1%, which is 745 Fifth Avenue. It's an asset management opportunity for Paramount. And I don't wanna go into more details. Of course, we have watched the transactions that just happened between end of last year and early this year. So we think it's great news that Fifth Avenue is in that location, which is a world leading retail location is picking up significantly. It's good for Paramount, it's good for New York, and it's good for our shareholders.

Okay, thanks Wilbur. The refinancing that you and your partner did at one market was certainly great. I guess we were certainly surprised, I guess pleasantly at the rate that you guys were able to achieve. And I can understand the banks and the CNBS folks sort of pushing problems out. I guess I was just really surprised that the rate was basically flat to where the old rate was, which is certainly sort of a below market rate today. Any color you can sort of offer on how the banks and lenders are thinking about resetting these loans if they're willing to push them out?

Steve, and I think I kind of alluded last quarter on this. Each process is bespoke. It depends on the quality of the asset, it depends on the quality of the sponsorship. In this case, obviously, One Market Plaza is arguably the best asset in San Francisco, and it's close to 95% least. In-place rent is north of $100 a foot. So it has a great, great quality, together back with great sponsorship. I think we were very early on talking to our lenders in this instance. I think the sponsorship, the relationships, all display into the factor of getting a superb execution done.

And then relationships, Wilbur mentioned it. Relationships is a very important, it's part of our culture at Paramount, and we think that it's very important for the long term. And we try to have the best relationships with our lenders. And I think the straightforwardness and the forthrightness and dealing with these situations have helped Wilbur and his team. And that's the way how we approach things.

Okay, just last question maybe for Peter. Just on the leasing, I appreciate the color on the pipeline. Just any color around the types of tenants that you're speaking to, is it broadening out at all from financial services and legal? And I guess, I know you've got this big Google exploration coming up in 25. The loan there got extended for three years. Does that, is that sufficient to maybe allay any fears that maybe they had about kind of the ownership of that building as they think about space needs in San Francisco?

Certainly, I think they acknowledge that it was really very important what we accomplished and it shows our investment and our commitment to that property. And we've had productive conversations and there's not much really, as I said earlier, I can say as it relates specifically to Google. But I will generally say one market in terms of the limited availability and vacancy that we do have happens to be, active currently. And so we feel good about that. As it relates to the types of tenants we're speaking to in New York, it's predominantly financial services and legal, the legal industry in 2023 contributed 20% towards leasing velocity. They represent about 11, 12% of our market in Midtown. So they continue to show up and we're seeing them with proposals and tours and they're generally very active. In San Francisco, it's predominantly tech that we're communicating with and we're speaking and trading paper with some smaller AI-based companies. It's interesting, at this time last year, AI was not really much in terms of part of the tenants in the market pipeline. And by year's end, they had contributed about 25% towards total leasing activity in 2023. So these requirements come about very quickly. We have our eyes wide open. We're in front of every one of these requirements. When I refer to the 25%, of course, that was made up primarily of Anthropic and OpenAI. But these are requirements that come about very quickly and we're in front of them and we're trading paper with them. So as Albert mentioned earlier, this is a market that can change very quickly. And I think the team is doing a very nice job being in front of every single requirement. And when we have an opportunity, our building show very, very well. So we are hyper-focused on leasing our vacant spaces and then of course, dealing with the role that we have in front of us in San Francisco.

Great, that's it for me, thanks. Thank

you, Steve.

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

Thanks and good morning, everybody. Maybe going back to your comments about capital allocation and focusing on retaining tenants with expiring leases over the next few years, do you have near-term plans to invest additional capital into select buildings to facilitate these expansions beyond just the normal course leasing expenses?

Well, we have, as you know, we have worked on the amenity center that we call the Paramount Club here at 1301 6th Avenue. It's going to open in the second quarter of this year. Peter has talked about it a couple of times. We got some very positive feedback already from tenants. They are already booking space for events. And that's something that's really, the team has spent a lot of time on it to really structure it. So it's helpful for the infrastructure of the Paramount buildings here in Midtown. So we are very focused on hospitality. We are very focused, but these are soft factors on security in these assets. Other than that, I think, Tom, we talked about in the past, our assets are pretty well maintained and they're kept very modern and we do upgrades where they are necessary. And we have done that in San Francisco. We have a couple of amenity facilities in the various buildings there. And I think that's why tenants like these kinds of assets. Appreciate that. Tom, maybe just

to add to what Albert says, obviously in terms of major CAPEX, when you look at the portfolio, it's really the amenity center that we have about 10 million or so left to spend. We had talked about that being roughly a $39 million project of which 29 has already been spent through year. So you got about a 10 million spend there. And the only other outside of regular TI CAPEX is the R-share of the development on 60 wall. And again, that's gonna get offset by the fee stream that we generate from that project.

And you only have 5% in that asset. So that's a long negotiation that was held with the lending team and with our partners. And there will be a large amount of capital being invested. We talked about that. And as Wilber was saying, that's basically for Paramount since our share is limited and it will be relatively benign.

Got it, appreciate that. Let me just make sure I put this together and understand it. So going back to Peter's comments on the 1.1 million square feet expiring in San Francisco through 25. So there aren't then major capital projects to get ahead of some of those expirations in one front or one market plaza. They think the buildings are up for it. And then in that case, it's just the leasing costs from a capital allocation front.

That's correct.

Got it, got it. Then maybe going over- 1.1

million square feet in 2025, in 2025, not through 2025.

Got it, thanks Peter. Then maybe going over to the non-core portfolio. Wilber, I appreciate it all the explanation thought process from the capital allocation, but what is the risk of other assets heading in that direction, especially given the impairment on 55 second in 4Q?

Look, I think each asset has to be looked at differently. We've said this at risk of sounding like a broken record, but the impairment that was taken on 55 second and market center was taken at the joint venture level. It wasn't us impairing our investment in the JV. They're two very different models for impairment. So there was a real estate impairment at the property level that we picked up our pro rata share, which caused our basis to go to zero. So in the case of 55 second, you run through the model, you run through lease expirations, and obviously you have KPMG's lease expiration that's looming on that. And so all those things were factored in and you run through an undiscounted model. And if the undiscounted cash flows are lower than the basis, then you go to a step two approach where you measure it on fair value. And that's how that impairment loss was derived. I would not take a gap impairment loss as an indication of strategy.

Appreciate that color, Wilber. Thank you for that. And kind of last one for me, Albert, you mentioned very distinctly remaining disciplined on allocating capital. Along those lines, though, there's a number of firms out either raising opportunistic funds or now deploying opportunistic funds. And over time, that was very much part of Paramount's DNA. What is your appetite for maybe expanding your involvement in this side of the fund business again?

Well, this is not new. We have been in the market to just now to raise our special opportunity fund. And that fund is significant, it's focused especially on these opportunities. It's a fund very similar to the previous funds. We had a special situation funds before the company went public in 2007, 2008. That special situation fund number one did very well for our investors and we are out marketing that fund. I don't wanna say what kind of numbers we are expecting. We are hopeful currently that we have the first closing in the first half of this year and then we take it from there. I think it's a great opportunity because I think in the later part of this year and in 2025, there will be opportunities there and we will take advantage of it.

Appreciate all the interest. Thanks everyone. Thank you.

Once again, if you would like to ask a question, please press star one on your telephone keypad. Next question comes from Blaine Heck with Wells Fargo. Please go ahead.

Great, thanks. Good morning. So just to be clear, the core 2024 guidance excludes the income from 111 Sutter and Market Center, but also excludes the interest expense from those assets. So first, is that correct? And second, I guess I understand putting some NOI and just continued operations, but I'm not sure I've ever seen the associated interest expense excluded. So can you just talk about how you came to that decision and whether you guys will continue to, in your presentation, get both total FFO, including the impact from non-core assets, along with the core FFO, excluding all impacts from those assets, as long as they're still in the portfolio.

So to answer your first part, that is correct. The core figures exclude any contribution, positive or negative, from those assets. We have dimensioned it both for 2023 and 2024. To answer the second part of your question, it will absolutely be included in FFO, hence the alternative measure, core FFO, where we are taking out elements that distort the comparability of earnings period over period. And because a decision has been made on these assets, not to invest additional capital, nor fund the interest expense shortfalls, it is entirely appropriate to remove that from your core operations and show it as the way we look at our business, so that investors can appreciate the comparability of results year over year, but it absolutely will be included in the NAVIC definition of FFO.

Okay, yeah, I've definitely seen some of your peers carve out non-core portfolios. One of them did that late last year, but they're still including the interest expense on debt secured by those assets and guidance. So I'm not sure I've seen that part of it before, but helpful commentary.

That peer that you're referring to does not present two measures of FFO, just to be clear.

Okay, all right, that's helpful. And then just second question, you're sitting on a relatively large cash balance at $428 million, as you guys talked about, the $10 million for common area development, with Tom's question, and you'll have leasing costs as well, but past those, can you just talk about potential uses for that capital in the near term? Are you guys interested in share repurchases here, or do you have better opportunities to pay down debt?

Blaine, this is Albert. We have been saying over and over on these calls that we wanna be very selective in what we do with our capital, especially in times like these. These are very unusual times. We wanna protect our cash on balance sheet. I think that's in the best interest of shareholders. There could be things coming up that require cash, and there could be opportunities to pay down debt, but we wanna keep our optionality. I think there's nothing more important, and we have the wonderful opportunity that our balance sheet is crystal clear. We don't have any debt on balance sheet. I say this again, and we don't wanna get in a situation where the company gets into any kind of distress. So we will be very, very selective in using that cash. Okay, great, thank you guys. Thank you, Blaine.

I would now like to turn the floor over to Albert Baylor for closing comments.

Thank you. Thank you all for joining us today. We look forward to give you all an update on our continued progress when we report our first quarter 2024 results. Goodbye.

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