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Paramount Group, Inc. - Quarter Report: 2017 March (Form 10-Q)

fma 

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: March 31, 2017

 

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

 

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 and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).      Yes      No

 

Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

 

Accelerated Filer

Non-Accelerated Filer

(Do not check if smaller reporting company)

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 April 21, 2017, there were 231,379,820 shares of the registrant’s common stock outstanding.

 

 

 

 

 

 


 

 

 

Table of Contents

 

Item

 

 

 

Page Number

Part I.

 

Financial Information

 

 

Item 1.

 

Consolidated Financial Statements

 

 

 

 

Consolidated Balance Sheets (Unaudited) as of March 31, 2017 and December 31, 2016

 

3

 

 

Consolidated Statements of Income (Unaudited) for the three months ended
   March 31, 2017 and 2016

 

4

 

 

Consolidated Statements of Comprehensive Income (Unaudited) for the three months ended
   March 31, 2017 and 2016

 

5

 

 

Consolidated Statements of Changes in Equity (Unaudited) for the three months ended
   March 31, 2017 and 2016

 

6

 

 

Consolidated Statements of Cash Flows (Unaudited) for the three months ended
   March 31, 2017 and 2016

 

7

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

9

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

28

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

46

Item 4.

 

Controls and Procedures

 

48

 

 

 

 

 

Part II.

 

Other Information

 

 

Item 1.

 

Legal Proceedings

 

49

Item 1A.

 

Risk Factors

 

49

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

49

Item 3.

 

Defaults Upon Senior Securities

 

49

Item 4.

 

Mine Safety Disclosures

 

49

Item 5.

 

Other Information

 

49

Item 6.

 

Exhibits

 

49

Signatures

 

50

 

 

 

2

 


 

PART I – FINANCIAL INFORMATION

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS

 

PARAMOUNT GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

(Amounts in thousands, except share, unit and per share amounts)

 

 

 

 

 

 

 

ASSETS

March 31, 2017

 

 

December 31, 2016

 

Rental property, at cost

 

 

 

 

 

 

 

Land

$

2,091,535

 

 

$

2,091,535

 

Buildings and improvements

 

5,765,748

 

 

 

5,757,558

 

 

 

7,857,283

 

 

 

7,849,093

 

Accumulated depreciation and amortization

 

(359,583

)

 

 

(318,161

)

Rental property, net

 

7,497,700

 

 

 

7,530,932

 

Cash and cash equivalents

 

125,734

 

 

 

162,965

 

Restricted cash

 

75,198

 

 

 

29,374

 

Investments in unconsolidated joint ventures

 

35,959

 

 

 

6,411

 

Investments in unconsolidated real estate funds

 

23,913

 

 

 

28,173

 

Preferred equity investments

 

55,294

 

 

 

55,051

 

Marketable securities

 

25,617

 

 

 

22,393

 

Accounts and other receivables, net of allowance of $202 and $202

 

12,564

 

 

 

15,251

 

Deferred rent receivable

 

184,571

 

 

 

163,695

 

Deferred charges, net of accumulated amortization of $11,900 and $9,832

 

72,796

 

 

 

71,184

 

Intangible assets, net of accumulated amortization of $171,221 and $166,841

 

389,588

 

 

 

412,225

 

Assets held for sale

 

346,685

 

 

 

346,685

 

Other assets

 

39,895

 

 

 

22,829

 

Total assets (1)

$

8,885,514

 

 

$

8,867,168

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Notes and mortgages payable, net of deferred financing costs of $48,481 and $43,281

$

3,477,798

 

 

$

3,364,898

 

Revolving credit facility

 

200,000

 

 

 

230,000

 

Due to affiliates

 

27,299

 

 

 

27,299

 

Accounts payable and accrued expenses

 

88,250

 

 

 

103,896

 

Dividends and distributions payable

 

25,207

 

 

 

25,151

 

Deferred income taxes

 

1,276

 

 

 

1,467

 

Interest rate swap liabilities

 

-

 

 

 

22,446

 

Intangible liabilities, net of accumulated amortization of $58,536 and $55,349

 

145,138

 

 

 

153,018

 

Other liabilities

 

75,188

 

 

 

53,046

 

Total liabilities (1)

 

4,040,156

 

 

 

3,981,221

 

Commitments and contingencies

 

 

 

 

 

 

 

Paramount Group, Inc. equity:

 

 

 

 

 

 

 

Common stock $0.01 par value per share; authorized 900,000,000 shares; issued

   and outstanding 231,379,820 and 230,015,356 shares in 2017 and 2016, respectively

 

2,313

 

 

 

2,300

 

Additional paid-in-capital

 

4,139,423

 

 

 

4,116,987

 

Earnings less than distributions

 

(151,417

)

 

 

(129,654

)

Accumulated other comprehensive income

 

3,696

 

 

 

372

 

Paramount Group, Inc. equity

 

3,994,015

 

 

 

3,990,005

 

Noncontrolling interests in:

 

 

 

 

 

 

 

Consolidated real estate fund

 

67,205

 

 

 

64,793

 

Consolidated joint ventures

 

228,039

 

 

 

253,788

 

Operating Partnership (33,631,382 and 34,511,214 units outstanding)

 

556,099

 

 

 

577,361

 

Total equity

 

4,845,358

 

 

 

4,885,947

 

Total liabilities and equity

$

8,885,514

 

 

$

8,867,168

 

 

 

(1)

Represents the consolidated assets and liabilities of Paramount Group Operating Partnership LP, a Delaware limited partnership (the “Operating Partnership”). The Operating Partnership is a consolidated variable interest entity (“VIE”), of which we are the sole general partner and own approximately 87.3%.  As of March 31, 2017, the assets and liabilities of the Operating Partnership include $1,541,463 and $1,043,902 of assets and liabilities, respectively, of certain VIEs that are consolidated by the Operating Partnership. See Note 12, Variable Interest Entities.

 

See notes to consolidated financial statements (unaudited).

3

 


 

PARAMOUNT GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

 

 

 

 

 

For the Three Months Ended March 31,

 

(Amounts in thousands, except share and per share amounts)

2017

 

 

2016

 

REVENUES:

 

 

 

 

 

 

 

Rental income

$

155,390

 

 

$

141,252

 

Tenant reimbursement income

 

12,852

 

 

 

10,789

 

Fee and other income

 

12,994

 

 

 

20,877

 

Total revenues

 

181,236

 

 

 

172,918

 

EXPENSES:

 

 

 

 

 

 

 

Operating

 

65,971

 

 

 

62,945

 

Depreciation and amortization

 

62,992

 

 

 

74,812

 

General and administrative

 

13,581

 

 

 

13,961

 

Transaction related costs

 

275

 

 

 

935

 

Total expenses

 

142,819

 

 

 

152,653

 

Operating income

 

38,417

 

 

 

20,265

 

Income from unconsolidated joint ventures

 

1,937

 

 

 

1,496

 

Income (loss) from unconsolidated real estate funds

 

288

 

 

 

(326

)

Interest and other income, net

 

3,200

 

 

 

1,700

 

Interest and debt expense

 

(39,733

)

 

 

(37,119

)

Unrealized gain on interest rate swaps

 

1,802

 

 

 

6,860

 

Net income (loss) before income taxes

 

5,911

 

 

 

(7,124

)

Income tax expense

 

(4,282

)

 

 

(363

)

Net income (loss)

 

1,629

 

 

 

(7,487

)

Less net (income) loss attributable to noncontrolling interests in:

 

 

 

 

 

 

 

Consolidated real estate fund

 

88

 

 

 

674

 

Consolidated joint ventures

 

(1,291

)

 

 

(1,252

)

Operating Partnership

 

(54

)

 

 

1,571

 

Net income (loss) attributable to common stockholders

$

372

 

 

$

(6,494

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) PER COMMON SHARE - BASIC:

 

 

 

 

 

 

 

Income (loss) per common share

$

0.00

 

 

$

(0.03

)

Weighted average shares outstanding

 

230,924,271

 

 

 

212,403,593

 

 

 

 

 

 

 

 

 

INCOME (LOSS) PER COMMON SHARE - DILUTED:

 

 

 

 

 

 

 

Income (loss) per common share

$

0.00

 

 

$

(0.03

)

Weighted average shares outstanding

 

230,958,441

 

 

 

212,403,593

 

 

 

 

 

 

 

 

 

DIVIDENDS PER COMMON SHARE

$

0.095

 

 

$

0.095

 

 

 

See notes to consolidated financial statements (unaudited).


4

 


 

 

PARAMOUNT GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

 

 

 

 

 

For the Three Months Ended March 31,

 

(Amounts in thousands)

2017

 

 

2016

 

Net income (loss)

$

1,629

 

 

$

(7,487

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

Change in value of interest rate swaps

 

4,032

 

 

 

(29,867

)

Pro rata share of other comprehensive (loss) income of unconsolidated

   joint ventures

 

(222

)

 

 

107

 

Comprehensive income (loss)

 

5,439

 

 

 

(37,247

)

Less comprehensive (income) loss attributable to noncontrolling

 

 

 

 

 

 

 

interests in:

 

 

 

 

 

 

 

Consolidated real estate fund

 

88

 

 

 

674

 

Consolidated joint ventures

 

(1,291

)

 

 

(1,252

)

Operating Partnership

 

(540

)

 

 

7,359

 

Comprehensive income (loss) attributable to common stockholders

$

3,696

 

 

$

(30,466

)

 

 

See notes to consolidated financial statements (unaudited).

 

 

5

 


 

PARAMOUNT GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(UNAUDITED)

 

 

 

Common Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling Interests in

 

 

 

 

 

(Amounts in thousands, except per share amounts)

 

Shares

 

 

Amount

 

 

Additional

Paid-in-Capital

 

 

Earnings Less than Distributions

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

Consolidated Real Estate Funds

 

 

Consolidated Joint

Ventures

 

 

Operating

Partnership

 

 

Total

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2015

 

 

212,112

 

 

$

2,122

 

 

$

3,802,858

 

 

$

(36,120

)

 

$

(7,843

)

 

$

414,637

 

 

$

236,849

 

 

$

898,047

 

 

$

5,310,550

 

Deconsolidation of real estate fund

   investments upon adoption of ASU 2015-02

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(351,035

)

 

 

-

 

 

 

-

 

 

 

(351,035

)

Balance as of January 1, 2016

 

 

212,112

 

 

 

2,122

 

 

 

3,802,858

 

 

 

(36,120

)

 

 

(7,843

)

 

 

63,602

 

 

 

236,849

 

 

 

898,047

 

 

 

4,959,515

 

Net (loss) income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(6,494

)

 

 

-

 

 

 

(674

)

 

 

1,252

 

 

 

(1,571

)

 

 

(7,487

)

Common shares issued upon redemption of

   common units

 

 

830

 

 

 

8

 

 

 

14,419

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(14,427

)

 

 

-

 

Common shares issued under Omnibus

   share plan

 

 

95

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Dividends and distributions ($0.095 per share

   and unit)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(20,239

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(4,908

)

 

 

(25,147

)

Change in value of interest rate swaps

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(24,058

)

 

 

-

 

 

 

-

 

 

 

(5,809

)

 

 

(29,867

)

Pro rata share of other comprehensive

   income of unconsolidated joint ventures

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

86

 

 

 

-

 

 

 

-

 

 

 

21

 

 

 

107

 

Amortization of equity awards

 

 

-

 

 

 

-

 

 

 

747

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,098

 

 

 

3,845

 

Other

 

 

-

 

 

 

-

 

 

 

320

 

 

 

18

 

 

 

-

 

 

 

7

 

 

 

-

 

 

 

-

 

 

 

345

 

Balance as of March 31, 2016

 

 

213,037

 

 

$

2,130

 

 

$

3,818,344

 

 

$

(62,835

)

 

$

(31,815

)

 

$

62,935

 

 

$

238,101

 

 

$

874,451

 

 

$

4,901,311

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2016

 

 

230,015

 

 

$

2,300

 

 

$

4,116,987

 

 

$

(129,654

)

 

$

372

 

 

$

64,793

 

 

$

253,788

 

 

$

577,361

 

 

$

4,885,947

 

Net income (loss)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

372

 

 

 

-

 

 

 

(88

)

 

 

1,291

 

 

 

54

 

 

 

1,629

 

Common shares issued upon redemption of

   common units

 

 

1,304

 

 

 

13

 

 

 

21,803

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(21,816

)

 

 

-

 

Common shares issued under Omnibus

   share plan, net of shares withheld for taxes

 

 

61

 

 

 

-

 

 

 

-

 

 

 

(154

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(154

)

Dividends and distributions ($0.095 per share

   and unit)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(21,981

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,226

)

 

 

(25,207

)

Contributions from noncontrolling

     interests in joint ventures and funds

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,500

 

 

 

4,972

 

 

 

-

 

 

 

7,472

 

Distributions to noncontrolling

   interests

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(32,012

)

 

 

-

 

 

 

(32,012

)

Change in value of interest rate swaps

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,518

 

 

 

-

 

 

 

-

 

 

 

514

 

 

 

4,032

 

Pro rata share of other comprehensive loss

   of unconsolidated joint ventures

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(194

)

 

 

-

 

 

 

-

 

 

 

(28

)

 

 

(222

)

Amortization of equity awards

 

 

-

 

 

 

-

 

 

 

633

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,240

 

 

 

3,873

 

Balance as of March 31, 2017

 

 

231,380

 

 

$

2,313

 

 

$

4,139,423

 

 

$

(151,417

)

 

$

3,696

 

 

$

67,205

 

 

$

228,039

 

 

$

556,099

 

 

$

4,845,358

 

 

 

See notes to consolidated financial statements (unaudited).

 

6

 


 

PARAMOUNT GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

For the Three Months Ended March 31,

 

(Amounts in thousands)

2017

 

 

2016

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income (loss)

$

1,629

 

 

$

(7,487

)

Adjustments to reconcile net income (loss) to net cash provided by

   operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

62,992

 

 

 

74,812

 

Amortization of deferred financing costs

 

2,730

 

 

 

1,258

 

Straight-lining of rental income

 

(20,147

)

 

 

(19,869

)

Amortization of above and below-market leases, net

 

(3,008

)

 

 

3,619

 

Debt breakage costs

 

2,715

 

 

 

-

 

Unrealized gain on interest rate swaps

 

(1,802

)

 

 

(6,860

)

Realized and unrealized (gains) losses on marketable securities

 

(1,607

)

 

 

293

 

(Income) loss  from unconsolidated real estate funds

 

(288

)

 

 

326

 

Distributions of earnings from unconsolidated  real estate funds

 

62

 

 

 

79

 

Income from unconsolidated joint ventures

 

(1,937

)

 

 

(1,496

)

Distributions of earnings from unconsolidated joint ventures

 

24

 

 

 

1,584

 

Amortization of stock-based compensation expense

 

3,429

 

 

 

3,627

 

Other non-cash adjustments

 

(64

)

 

 

842

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts and other receivables

 

2,687

 

 

 

(1,362

)

Deferred charges

 

(6,654

)

 

 

(3,617

)

Other assets

 

(13,678

)

 

 

(26,038

)

Accounts payable and accrued expenses

 

(8,355

)

 

 

62,019

 

Deferred income taxes

 

(151

)

 

 

(714

)

Other liabilities

 

(861

)

 

 

1,023

 

Net cash provided by operating activities

 

17,716

 

 

 

82,039

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Investment in unconsolidated joint venture

 

(27,857

)

 

 

-

 

Changes in restricted cash

 

(24,439

)

 

 

(600

)

Additions to rental properties

 

(15,087

)

 

 

(33,193

)

Distributions of capital from unconsolidated real estate funds

 

3,845

 

 

 

-

 

Net cash used in investing activities

 

(63,538

)

 

 

(33,793

)

 

See notes to consolidated financial statements (unaudited).


7

 


 

PARAMOUNT GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

(UNAUDITED)

 

 

For the Three Months Ended March 31,

 

(Amounts in thousands)

2017

 

 

2016

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from notes and mortgages payable

$

991,556

 

 

$

-

 

Repayments of notes and mortgages payable

 

(873,642

)

 

 

(354

)

Repayment of borrowings under revolving credit facility

 

(65,000

)

 

 

(20,000

)

Borrowings under revolving credit facility

 

35,000

 

 

 

40,000

 

Distributions to noncontrolling interests

 

(32,012

)

 

 

-

 

Dividends paid to common stockholders

 

(21,851

)

 

 

(20,151

)

Settlement of interest rate swap liabilities

 

(19,425

)

 

 

-

 

Contributions from noncontrolling interests

 

7,472

 

 

 

-

 

Debt issuance costs

 

(7,338

)

 

 

-

 

Distributions paid to common unitholders

 

(3,300

)

 

 

(4,917

)

Debt breakage costs

 

(2,715

)

 

 

-

 

Repurchase of shares related to stock compensation agreements

   and related tax withholdings

 

(154

)

 

 

-

 

Net cash provided by (used in) financing activities

 

8,591

 

 

 

(5,422

)

 

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(37,231

)

 

 

42,824

 

Cash and cash equivalents at beginning of period

 

162,965

 

 

 

143,884

 

Decrease in cash due to deconsolidation of real estate fund investments

 

-

 

 

 

(7,987

)

Cash and cash equivalents at end of period

$

125,734

 

 

$

178,721

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

Cash payments for interest

$

41,375

 

 

$

34,083

 

Cash payments for income taxes, net of refunds

 

1,090

 

 

 

417

 

 

 

 

 

 

 

 

 

NON-CASH TRANSACTIONS:

 

 

 

 

 

 

 

Dividends and distributions declared but not yet paid

$

25,207

 

 

$

25,147

 

Change in fair value of interest rate swaps

 

(4,032

)

 

 

29,867

 

Common shares issued upon redemption of common units

 

21,816

 

 

 

14,427

 

Additions to real estate included in accounts payable and accrued expenses

 

4,712

 

 

 

11,064

 

Purchases of marketable securities using restricted cash

 

1,615

 

 

 

170

 

Write-off of fully amortized and/or depreciated assets

 

2,306

 

 

 

2,795

 

(Decrease) increase due to deconsolidation of real estate fund investments:

 

 

 

 

 

 

 

Real estate fund investments

 

-

 

 

 

(416,438

)

Loans payable to noncontrolling interests

 

-

 

 

 

(45,662

)

Investments in unconsolidated real estate funds

 

-

 

 

 

27,292

 

Noncontrolling interests in consolidated real estate funds

 

-

 

 

 

(351,035

)

 

See notes to consolidated financial statements (unaudited).

 

 

8

 


PARAMOUNT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

1.

Organization and Business

 

 

As used in these consolidated financial statements, unless otherwise indicated, all references to “we,” “us,” “our,” the “Company,” and “Paramount” refer to Paramount Group, Inc., a Maryland corporation, and its consolidated subsidiaries, including Paramount Group Operating Partnership LP (the “Operating Partnership”), a Delaware Limited Partnership. We are a fully-integrated real estate investment trust (“REIT”) focused on owning, operating, managing, acquiring and redeveloping high-quality, Class A office properties in select central business district submarkets of New York City, Washington, D.C. and San Francisco. As of March 31, 2017, our portfolio consisted of 14 Class A office properties aggregating approximately 12.5 million square feet. We conduct our business through, and substantially all of our interests in properties and investments are held by, the Operating Partnership. We are the sole general partner of, and owned approximately 87.3% of, the Operating Partnership as of March 31, 2017.

 

 

2.

Basis of Presentation and Significant Accounting Policies

 

 

Basis of Presentation

 

The accompanying consolidated financial statements include the accounts of Paramount and its consolidated subsidiaries, including the Operating Partnership. All significant inter-company amounts have been eliminated. In our opinion, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and changes in cash flows have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted. These consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission (“SEC”) and 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, 2016, as filed with the SEC.

 

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 from those estimates. The results of operations for the three months ended March 31, 2017, are not necessarily indicative of the operating results for the full year.

 

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, 2016.

 

Recently Issued Accounting Literature

 

In May 2014, the Financial Accounting Standard’s Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, an update to ASC Topic 606, Revenue from Contracts with Customers. ASU 2014-09, as amended, supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of this guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services.  This guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This guidance is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years, and can be applied using a full retrospective or modified retrospective approach. We will adopt the provisions of ASU 2014-09 on January 1, 2018 using the modified retrospective approach. We have commenced our plan for implementing this guidance and do not believe that the adoption will have a material impact on our consolidated financial statements.

 


9

 


PARAMOUNT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

In February 2016, the FASB issued ASU 2016-02, an update to ASC Topic 842, Leases. ASU 2016-02 amends the existing guidance for lease accounting, including requiring lessees to recognize most leases on their balance sheets.  ASU 2016-02 requires lessees to apply a dual approach, classifying leases as either financing or operating and recording a right-of-use asset and a lease liability for all leases with a term greater than 12 months. ASU 2016-02 requires lessors to account for leases using an approach that is substantially similar to existing guidance for sales-type leases, direct financing leases and operating leases. ASU 2016-02 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2018, with early adoption permitted. We are currently evaluating the timing of adopting this standard. While we believe that the key changes in ASU 2016-02 relate to the separation of and allocation of consideration to, lease component (rental income) and non-lease components (revenue related to various services we provide), we continue to evaluate the other potential implications that this update will have on our consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, an update to ASC Topic 718, Compensation – Stock Compensation. ASU 2016-09 improves the accounting for share-based payments including income tax consequences and the classification of awards as either equity awards or liability awards. ASU 2016-09 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2016, with early adoption permitted. We adopted the provisions of ASU 2016-09 on January 1, 2017. This adoption did not have any impact on our consolidated financial statements.

 

In June 2016, the FASB issued ASU 2016-13, an update to ASC Topic 326, Financial Instruments – Credit Losses. ASU 2016-13 requires measurement and recognition of expected credit losses on financial instruments measured at amortized cost at the end of each reporting period rather than recognizing the credit losses when it is probable that the loss has been incurred in accordance with current guidance. ASU 2016-13 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2019, with early adoption permitted for fiscal years beginning after December 15, 2018. We are evaluating the impact of ASU 2016-13 but do not believe the adoption will have a material impact on our consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, an update to ASC Topic 230, Statement of Cash Flows to provide guidance for areas where there is diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2017, with early adoption permitted. We adopted the provisions of ASU 2016-15 retrospectively on January 1, 2017. This adoption did not have a material impact on our consolidated financial statements.

 

In October 2016, the FASB issued ASU 2016-17, an update to ASC Topic 810, Consolidation. ASU 2016-17 requires a reporting entity to consider only its proportionate indirect interest in the VIE held through a common control party in evaluating whether it is the primary beneficiary of a VIE. Currently, ASU 2015-02 requires the reporting entity to treat the common control party’s interest in the VIE as if the reporting entity held the interest itself.  ASU 2016-17 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2016. We adopted the provisions of ASU 2016-17 on January 1, 2017. This adoption did not have any impact on our consolidated financial statements.

 

In November 2016, the FASB issued ASU 2016-18, an update to ASC Topic 230, Statement of Cash Flows to provide guidance on classification and presentation of changes in restricted cash on the statement of cash flows. ASU 2016-18 requires that an entity’s reconciliation of the beginning-of-period and end-of-period total amounts shown on the statement of cash flows to include restricted cash with cash and cash equivalents. ASU 2016-18 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2017, with early adoption permitted. We will adopt the provisions of ASU 2016-18 on January 1, 2018. This adoption will impact the presentation of our statement of cash flows, as well as require additional disclosures to reconcile cash and cash equivalents and restricted cash on our balance sheet to our statement of cash flows.

 

In January 2017, the FASB issued ASU 2017-01, an update to ASC Topic 805, Business Combinations. ASU 2017-01 narrows the definition of a business and provides a framework for making reasonable judgments about whether a transaction involves an asset or a business. ASU 2017-01 clarifies that when substantially all the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. ASU 2017-01 also requires that a set cannot be considered a business unless it includes, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output. ASU 2017-01 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2017, with early adoption permitted for transactions (i.e., acquisitions or dispositions) that occurred before the issuance date or effective date of the standard if the transactions were not reported in financial statements that have been issued or made available for issuance. We adopted the provisions of ASU 2017-01 on October 1, 2016 and concluded that the acquisition of our One Front Street property in December 2016 did not meet the definition of a business and was treated as an asset acquisition.


10

 


PARAMOUNT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

In February 2017, the FASB issued ASU 2017-05, an update to ASC Topic 610, Other Income. ASU 2017-05 clarifies the scope and accounting for derecognition of a nonfinancial asset. ASU 2017-05 eliminates the guidance in ASC 360-20 specific to real estate sales and partial sales. ASU 2017-05 also defines “in-substance nonfinancial assets” and includes guidance on partial sales of nonfinancial assets. ASU 2017-05 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2017, with early adoption permitted for entities concurrently early adopting ASU 2014-09. We are evaluating the impact of ASU 2017-05 but do not believe that the adoption will have a material impact on our consolidated financial statements.

 

 

3.

Dispositions

 

 

Waterview

 

On January 12, 2017, we entered into an agreement to sell Waterview, a 636,768 square foot Class A office building in Rosslyn, Virginia, for $460,000,000. In accordance with provisions of ASC 360, Property, Plant and Equipment, we reclassified the assets of Waterview, which is in our Washington, D.C. segment, to “assets held for sale”.  The following table provides the details of the assets classified as held for sale.

 

(Amounts in thousands)

 

As of March 31, 2017

 

 

As of December 31, 2016

 

Land

 

$

78,300

 

 

$

78,300

 

Building and improvements, net

 

 

251,671

 

 

 

251,671

 

Deferred charges

 

 

14,512

 

 

 

14,512

 

Deferred rent receivable

 

 

2,202

 

 

 

2,202

 

Assets held for sale

 

$

346,685

 

 

$

346,685

 

 

On May 3, 2017, we completed the sale of Waterview and realized net proceeds of approximately $457,000,000. The sale resulted in a net gain of approximately $110,000,000, which will be recognized in the second quarter of 2017.

 

 

4.

Investments in Unconsolidated Joint Ventures

 

On January 24, 2017, a joint venture in which we have a 5.2% ownership interest, acquired 60 Wall Street, a 1.6 million square foot office tower in Manhattan, for $1.04 billion from certain of our real estate funds (see Note 5, Real Estate Fund Investments). In connection with the acquisition, the joint venture completed a $575,000,000 financing of the property. We began accounting for our investment in 60 Wall Street, under the equity method, from the date of the acquisition.

 

The following tables summarize our investments in unconsolidated joint ventures as of March 31, 2017 and December 31, 2016 and income from these investments for the three months ended March 31, 2017 and 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

(Amounts in thousands)

 

Paramount

 

 

As of

 

Our Share of Investments:

 

Ownership

 

 

March 31, 2017

 

 

December 31, 2016

 

712 Fifth Avenue

 

 

50.0%

 

 

$

4,842

 

 

$

2,912

 

60 Wall Street (1)

 

 

5.2%

 

 

 

27,852

 

 

 

-

 

Oder-Center, Germany (2)

 

 

9.5%

 

 

 

3,265

 

 

 

3,499

 

Investments in unconsolidated joint ventures

 

 

 

 

 

$

35,959

 

 

$

6,411

 

 

 

 

 

 

 

 

 

 

 

 

(Amounts in thousands)

 

Paramount

 

 

For the Three Months Ended March 31,

 

Our Share of Net Income (Loss):

 

Ownership

 

 

2017

 

 

2016

 

712 Fifth Avenue

 

 

50.0%

 

 

$

1,930

 

 

$

1,476

 

60 Wall Street (1)

 

 

5.2%

 

 

 

(5

)

 

 

-

 

Oder-Center, Germany (2)

 

 

9.5%

 

 

 

12

 

 

 

20

 

Income from unconsolidated joint ventures

 

 

 

 

 

$

1,937

 

 

$

1,496

 

 

 

(1)

Represents our share of earnings from the date of acquisition through March 31, 2017.

(2)

We account for our interest in Oder-Center, Germany on a one-quarter lag basis.

11

 


PARAMOUNT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

712 Fifth Avenue

 

As of March 31, 2017, we own a 50% interest in a joint venture that owns 712 Fifth Avenue, which is accounted for under the equity method. The following tables provide summarized financial information of 712 Fifth Avenue as of the dates and for the periods set forth below.

 

 

(Amounts in thousands)

As of

 

Balance Sheets:

March 31, 2017

 

 

December 31, 2016

 

Rental property, net

$

206,700

 

 

$

207,632

 

Other assets

 

46,173

 

 

 

40,701

 

Total assets

$

252,873

 

 

$

248,333

 

 

 

 

 

 

 

 

 

Notes and mortgages payable, net

$

246,092

 

 

$

245,990

 

Other liabilities

 

9,361

 

 

 

8,783

 

Total liabilities

 

255,453

 

 

 

254,773

 

Equity (1)

 

(2,580

)

 

 

(6,440

)

Total liabilities and equity

$

252,873

 

 

$

248,333

 

 

 

 

(1)

The carrying amount of our investment is greater than our share of the equity by approximately $6,130. This basis difference resulted from distributions in excess of the equity in net earnings of 712 Fifth Avenue.

 

 

 

 

(Amounts in thousands)

For the Three Months Ended March 31,

 

Income Statements:

2017

 

 

2016

 

Rental income

$

12,945

 

 

$

12,678

 

Tenant reimbursement income

 

1,308

 

 

 

1,116

 

Fee and other income

 

126

 

 

 

518

 

Total revenues

 

14,379

 

 

 

14,312

 

Operating expenses

 

5,966

 

 

 

5,617

 

Depreciation and amortization

 

2,920

 

 

 

3,008

 

Total expenses

 

8,886

 

 

 

8,625

 

Operating income

 

5,493

 

 

 

5,687

 

Interest and other income, net

 

24

 

 

 

14

 

Interest and debt expense

 

(2,825

)

 

 

(2,748

)

Unrealized gain on interest rate swaps

 

1,168

 

 

 

-

 

Net income

$

3,860

 

 

$

2,953

 

 

 

 


12

 


PARAMOUNT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

5.

Real Estate Fund Investments

 

 

Unconsolidated Real Estate Funds

 

We manage four Property Funds comprised of (i) Paramount Group Real Estate Fund II, L.P. (“Fund II”), (ii) Paramount Group Real Estate Fund III, L.P. (“Fund III”), (iii) Paramount Group Real Estate Fund VII, L.P. (“Fund VII”) and (iv) Paramount Group Real Estate Fund VII-H, L.P. (“Fund VII-H”). We also manage Paramount Group Real Estate Fund VIII L.P. (“Fund VIII”), our Alternative Investment Fund, which invests in mortgage and mezzanine loans and preferred equity investments.

 

As of December 31, 2016, Fund II and Fund III collectively owned a 62.3% interest in 60 Wall Street, a 1.6 million square foot office tower in Manhattan. On January 24, 2017, Fund II and Fund III, together with the other investors that owned the remaining 37.7% interest, sold their interests in 60 Wall Street to a newly formed joint venture, in which we have a 5.2% ownership interest. Accordingly, beginning on January 24, 2017, we began accounting for our investment in 60 Wall Street under the equity method (see Note 4, Investments in Unconsolidated Joint Ventures).

 

 

The following tables summarize our investments in these unconsolidated real estate funds as of March 31, 2017 and December 31, 2016, and income or loss recognized from these investments for the three months ended March 31, 2017 and 2016.  

 

 

As of

 

(Amounts in thousands)

March 31, 2017

 

 

December 31, 2016

 

Our Share of Investments:

 

 

 

 

 

 

 

Property funds

$

19,250

 

 

$

22,811

 

Alternative investment fund

 

4,663

 

 

 

5,362

 

Investments in unconsolidated real estate funds

$

23,913

 

 

$

28,173

 

 

 

 

For the Three Months Ended March 31, 2017

 

 

 

 

 

 

 

 

 

 

Alternative

 

(Amounts in thousands)

Total

 

 

Property Funds

 

 

Investment Fund

 

Our Share of Net Income:

 

 

 

 

 

 

 

 

 

 

 

Net investment income (loss)

$

53

 

 

$

(7

)

 

$

60

 

Net realized gains

 

179

 

 

 

179

 

 

 

-

 

Net unrealized income

 

96

 

 

 

78

 

 

 

18

 

Carried interest

 

(40

)

 

 

(40

)

 

 

-

 

Income from unconsolidated real estate funds (1)

$

288

 

 

$

210

 

 

$

78

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31, 2016

 

 

 

 

 

 

 

 

 

 

Alternative

 

(Amounts in thousands)

Total

 

 

Property Funds

 

 

Investment Fund

 

Our Share of Net (Loss) Income:

 

 

 

 

 

 

 

 

 

 

 

Net investment (loss) income

$

(539

)

 

$

(569

)

 

$

30

 

Net unrealized income (loss)

 

229

 

 

 

240

 

 

 

(11

)

Carried interest

 

(16

)

 

 

(16

)

 

 

-

 

(Loss) income from unconsolidated real estate funds (1)

$

(326

)

 

$

(345

)

 

$

19

 

 

 

(1)

Excludes asset management and other fee income from real estate funds, which is included as a component of “fee and other income” in our consolidated statements of income.

 


13

 


PARAMOUNT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

As of March 31, 2017, we own a 10.0% interest in Fund II, a 3.1% interest in Fund III, and a 7.5% interest in Fund VII, which are accounted for under the equity method. The following tables provide summarized financial information for Fund II, Fund III and Fund VII as of the dates and for the periods set forth below.

 

 

(Amounts in thousands)

As of  March 31, 2017

 

 

As of December 31, 2016

 

Balance Sheets:

Fund II

 

 

Fund III

 

 

Fund VII

 

 

Fund II

 

 

Fund III

 

 

Fund VII

 

Real estate investments

$

11,134

 

 

$

19,697

 

 

$

165,690

 

 

$

64,989

 

 

$

39,376

 

 

$

165,556

 

Cash and cash equivalents

 

931

 

 

 

2,185

 

 

 

878

 

 

 

1,297

 

 

 

2,221

 

 

 

741

 

Other assets

 

115

 

 

 

-

 

 

 

-

 

 

 

127

 

 

 

-

 

 

 

-

 

Total assets

$

12,180

 

 

$

21,882

 

 

$

166,568

 

 

$

66,413

 

 

$

41,597

 

 

$

166,297

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities

$

58

 

 

$

53

 

 

$

1,967

 

 

$

60

 

 

$

49

 

 

$

1,483

 

Total liabilities

 

58

 

 

 

53

 

 

 

1,967

 

 

 

60

 

 

 

49

 

 

 

1,483

 

Equity

 

12,122

 

 

 

21,829

 

 

 

164,601

 

 

 

66,353

 

 

 

41,548

 

 

 

164,814

 

Total liabilities and equity

$

12,180

 

 

$

21,882

 

 

$

166,568

 

 

$

66,413

 

 

$

41,597

 

 

$

166,297

 

 

 

 

For the Three Months Ended March 31,

 

(Amounts in thousands)

2017

 

 

2016

 

Income Statements:

Fund II

 

 

Fund III

 

 

Fund VII

 

 

Fund II

 

 

Fund III

 

 

Fund VII

 

Investment income

$

-

 

 

$

1,140

 

 

$

185

 

 

$

-

 

 

$

-

 

 

$

-

 

Investment expenses

 

196

 

 

 

10

 

 

 

476

 

 

 

687

 

 

 

52

 

 

 

530

 

Net investment (loss) income

 

(196

)

 

 

1,130

 

 

 

(291

)

 

 

(687

)

 

 

(52

)

 

 

(530

)

Net realized losses

 

(15,201

)

 

 

(5,253

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Net unrealized (losses) gains

 

(4,997

)

 

 

(2,989

)

 

 

134

 

 

 

1,425

 

 

 

625

 

 

 

1,106

 

(Loss) income from real estate

   fund investments

$

(20,394

)

 

$

(7,112

)

 

$

(157

)

 

$

738

 

 

$

573

 

 

$

576

 

 

 

 

6.

Preferred Equity Investments

 

 

As of March 31, 2017, we own a 24.4% interest in PGRESS Equity Holdings L.P., an entity that owns certain preferred equity investments.  The following is a summary of the preferred equity investments.

 

(Amounts in thousands, except square feet)

 

Paramount

 

 

Dividend

 

 

Initial

 

As of

 

Preferred Equity Investment

 

Ownership

 

 

Rate

 

 

Maturity

 

March 31, 2017

 

 

December 31, 2016

 

470 Vanderbilt Avenue (1)

 

 

24.4%

 

 

 

10.3%

 

 

Feb-2019

 

$

35,662

 

 

$

35,613

 

2 Herald Square (2)

 

 

24.4%

 

 

 

10.3%

 

 

Apr-2017

 

 

19,632

 

 

 

19,438

 

Total preferred equity investments

 

 

 

 

 

 

 

 

 

 

 

$

55,294

 

 

$

55,051

 

 

 

(1)

Represents a $33,750 preferred equity investment in a partnership that owns 470 Vanderbilt Avenue, a 650,000 square foot office building in Brooklyn, New York. The preferred equity has a dividend rate of 10.3%, of which 8.0% was paid in cash through February 2016 and the unpaid portion accreted to the balance of the investment.  Subsequent to February 2016, the entire 10.3% dividend is being paid in cash.

(2)

Represents a $17,500 preferred equity investment in a partnership that owns 2 Herald Square, a 369,000 square foot office retail property in Manhattan. The preferred equity has a dividend rate of 10.3%, of which 7.0% is paid currently and the remainder accretes to the balance of the investment. The preferred equity investment has two one-year extension options. On April 11, 2017, the partnership that owns 2 Herald Square failed to extend the maturity date or redeem the preferred equity investment, together with accrued and unpaid dividends and we are currently in active negotiation with the borrower to resolve the matter.

 


14

 


PARAMOUNT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

7.

Intangible Assets and Liabilities

 

 

The following summarizes our intangible assets (acquired above-market leases and acquired in-place leases) and intangible liabilities (acquired below-market leases) as of March 31, 2017 and December 31, 2016.

 

 

As of

 

(Amounts in thousands)

March 31, 2017

 

 

December 31, 2016

 

Intangible assets:

 

 

 

 

 

 

 

Gross amount

$

560,809

 

 

$

579,066

 

Accumulated amortization

 

(171,221

)

 

 

(166,841

)

 

$

389,588

 

 

$

412,225

 

Intangible liabilities:

 

 

 

 

 

 

 

Gross amount

$

203,674

 

 

$

208,367

 

Accumulated amortization

 

(58,536

)

 

 

(55,349

)

 

$

145,138

 

 

$

153,018

 

 

Amortization of acquired below-market leases, net of acquired above-market leases, resulted in an increase to rental income of $3,008,000 for the three months ended March 31, 2017 and a decrease to rental income of $3,619,000 for the three months ended March 31, 2016. The three months ended March 31, 2016 included $9,834,000 of expense, from the write-off of an above-market lease asset in connection with the termination of a tenant’s lease and $3,915,000 of income from the acceleration of a below-market lease liability in connection with a tenant’s lease modification. Estimated annual amortization of acquired below-market leases, net of acquired above-market leases, for each of the five succeeding years commencing January 1, 2018 is as follows.

 

(Amounts in thousands)

 

 

 

 

2018

 

$

14,220

 

2019

 

 

12,010

 

2020

 

 

9,625

 

2021

 

 

4,546

 

2022

 

 

1,181

 

Amortization of acquired in-place leases (a component of depreciation and amortization expense) was $17,774,000 and $30,692,000 for the three months ended March 31, 2017 and 2016, respectively. Estimated annual amortization of acquired in-place leases for each of the five succeeding years commencing January 1, 2018 is as follows.

(Amounts in thousands)

 

 

 

 

2018

 

$

54,581

 

2019

 

 

48,184

 

2020

 

 

41,073

 

2021

 

 

28,268

 

2022

 

 

23,654

 

 


15

 


PARAMOUNT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

8.

Debt

 

 

On January 19, 2017, we completed a $975,000,000 refinancing of One Market Plaza, a 1.6 million square foot Class A office and retail property in San Francisco, California.  The new seven-year interest-only loan matures in February 2024 and has a fixed rate of 4.03%.

 

The following is a summary of our outstanding debt.

 

 

 

Maturity

 

Fixed/

 

Interest Rate as of

 

As of

 

 

(Amounts in thousands)

 

Date

 

Variable Rate

 

March 31, 2017

 

March 31, 2017

 

 

December 31, 2016

 

 

Notes and mortgages payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1633 Broadway

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dec-2022

 

Fixed (1)

 

 

3.54

%

 

$

1,000,000

 

 

$

1,000,000

 

 

 

 

Dec-2022

 

L + 175 bps

 

 

2.73

%

 

 

30,100

 

(2)

 

13,544

 

(2)

 

 

 

 

 

 

 

3.52

%

 

 

1,030,100

 

 

 

1,013,544

 

 

One Market Plaza (49.0% interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Feb-2024

 

Fixed

 

 

4.03

%

 

 

975,000

 

 

 

860,546

 

 

 

 

n/a

 

n/a

 

n/a

 

 

 

-

 

 

 

12,414

 

 

 

 

 

 

 

 

 

4.03

%

 

 

975,000

 

 

 

872,960

 

 

1301 Avenue of the Americas

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nov-2021

 

Fixed

 

 

3.05

%

 

 

500,000

 

 

 

500,000

 

 

 

 

Nov-2021

 

L + 180 bps

 

 

2.61

%

 

 

350,000

 

 

 

350,000

 

 

 

 

 

 

 

 

 

2.87

%

 

 

850,000

 

 

 

850,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31 West 52nd Street

 

May-2026

 

Fixed

 

 

3.80

%

 

 

500,000

 

 

 

500,000

 

 

1899 Pennsylvania Avenue

 

Nov-2020

 

Fixed

 

 

4.88

%

 

 

87,179

 

(3)

 

87,675

 

 

Liberty Place

 

June-2018

 

Fixed

 

 

4.50

%

 

 

84,000

 

(3)

 

84,000

 

 

Total notes and mortgages

   payable

 

 

 

 

 

 

3.60

%

 

 

3,526,279

 

 

 

3,408,179

 

 

Less: deferred financing costs

 

 

 

 

 

 

 

 

 

 

(48,481

)

 

 

(43,281

)

 

Total notes and mortgages

   payable, net

 

 

 

 

 

 

 

 

 

$

3,477,798

 

 

$

3,364,898

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revolving Credit Facility

 

Nov-2018

 

L + 125 bps

 

 

2.23

%

 

$

200,000

 

(3)

$

230,000

 

 

 

 

(1)

Represents loan with variable interest rates that has been fixed by interest rate swaps. See Note 9, Derivative Instruments and Hedging Activities.

(2)

Represents amounts outstanding under an option to increase the loan balance up to $250,000, at LIBOR plus 175 basis points, if certain performance hurdles relating to the property are satisfied.

(3)

Repaid on May 4, 2017. See Note 22, Subsequent Events.


16

 


PARAMOUNT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

9.

Derivative Instruments and Hedging Activities

 

 

We manage our market risk on variable rate debt by entering into interest rate swaps to fix the rate on all or a portion of the debt for varying periods through maturity. These interest rate swaps are accounted for as derivative instruments and, pursuant to ASC Topic 815, are recorded on our consolidated balance sheets at fair value. Changes in the fair value of interest rate swaps are accounted for based on the hedging relationship and their designation and qualification. We have agreements with various derivative counterparties that contain provisions wherein a default on our indebtedness could be deemed a default on our derivative obligations, which would require us to either post collateral up to the fair value of our derivative obligations or settle the obligations for cash.  As of March 31, 2017, we did not have any obligations relating to our swaps that contained such provisions.

 

 

Interest Rate Swaps – Designated as Cash Flow Hedges

 

As of March 31, 2017, we have interest rate swaps with an aggregate notional amount of $1.0 billion that are designated as cash flow hedges. We also have entered into a forward starting interest rate swaps with an aggregate notional amount of $400,000,000 to extend the maturity of certain swaps for an additional year. Changes in the fair value of interest rate swaps that are designated as cash flow hedges are recognized in “other comprehensive income (loss)” (outside of earnings). We recognized other comprehensive income of $4,032,000 for the three months ended March 31, 2017 and losses of $29,867,000 for the three months ended March 31, 2016, from the changes in the fair value of these interest rate swaps. During the next twelve months, we estimate that $5,558,000 of the amounts recognized in accumulated other comprehensive income (loss) will be reclassified as an increase to interest expense. The table below provides additional details on our interest rate swaps that are designated as cash flow hedges.  

 

 

 

Notional

 

 

 

 

 

 

Strike

 

 

Fair Value as of

 

Property

 

Amount

 

 

Effective Date

 

Maturity Date

 

Rate

 

 

March 31, 2017

 

 

December 31, 2016

 

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1633 Broadway

 

$

1,000,000

 

 

Dec-2015

 

Dec-2020 to Dec-2022

 

 

1.79

%

 

$

2,890

 

 

$

-

 

1633 Broadway

 

 

400,000

 

 

Dec-2020

 

Dec-2021

 

 

2.35

%

 

 

62

 

 

 

139

 

Total interest rate swap assets designated as cash flow hedges (included

   in "other assets")

 

 

$

2,952

 

 

$

139

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1633 Broadway

 

$

1,000,000

 

 

Dec-2015

 

Dec-2020 to Dec-2022

 

 

1.79

%

 

$

-

 

 

$

1,219

 

Total interest rate swap liabilities designated as cash flow hedges

 

 

 

 

 

$

-

 

 

$

1,219

 

 

 

Interest Rate Swaps – Non-designated Hedges

 

As of March 31, 2017, we did not have any interest rate swaps that were not designated as hedges.  At December 31, 2016, we had interest rate swap liabilities that had a fair value of $21,227,000, which were terminated on January 19, 2017 in connection with the refinancing of One Market Plaza (see Note 8, Debt for additional details). Changes in the fair value of interest rate swaps that are not designated as hedges are recognized in earnings. We recognized unrealized gains of $1,802,000 and $6,860,000 for the three months ended March 31, 2017 and 2016, respectively, from the changes in the fair value of these interest rate swaps.

 


17

 


PARAMOUNT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

10.

Accumulated Other Comprehensive Income (Loss)

 

 

The following table sets forth changes in accumulated other comprehensive income, by component for the three months ended March 31, 2017 and 2016.

 

 

 

For the Three Months Ended March 31,

 

(Amounts in thousands)

 

2017

 

 

2016

 

Amount of income (loss) related to the effective portion of cash

   flow hedges recognized in other comprehensive loss  (1)

 

$

1,306

 

 

$

(26,839

)

Amounts reclassified from accumulated other

   comprehensive income into interest expense (1)

 

 

2,212

 

 

 

2,781

 

Amount of (loss) income related to unconsolidated joint

   ventures recognized in other comprehensive loss (1) (2)

 

 

(194

)

 

 

86

 

Amount of gain (loss) related to the ineffective portion of cash

   flow hedges and amount excluded from effectiveness testing

 

 

-

 

 

 

-

 

 

 

(1)

Net of amount attributable to the noncontrolling interests in the Operating Partnership.

 

(2)

Balance held in accumulated other comprehensive income (loss) relates to foreign currency translation adjustments. No amounts were reclassified from accumulated other comprehensive income (loss) during any of the periods set forth above.

 

 

 

11.

Noncontrolling Interests

 

 

Consolidated Real Estate Fund

 

Noncontrolling interests in our consolidated real estate fund consists of equity interests held by third parties in the Residential Development Fund (“Residential Fund”). As of March 31, 2017 and December 31, 2016, the noncontrolling interest in our consolidated real estate fund aggregated $67,205,000 and $64,793,000, respectively.  

 

 

Consolidated Joint Ventures

 

Noncontrolling interests in consolidated joint ventures consist of equity interests held by third parties in One Market Plaza and PGRESS Equity Holdings L.P. As of March 31, 2017 and December 31, 2016, noncontrolling interests in our consolidated joint ventures aggregated $228,039,000 and $253,788,000, respectively.  

 

 

Operating Partnership

 

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 March 31, 2017 and December 31, 2016, noncontrolling interests in the Operating Partnership on our consolidated balance sheets had a carrying amount of $556,099,000 and $577,361,000, respectively and a redemption value of $545,165,000 and $551,834,000, respectively.


18

 


PARAMOUNT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

12.

Variable Interest Entities (“VIEs”)

 

 

In the normal course of business, we are the general partner of various types of investment vehicles, which may be considered VIEs. We may, from time to time, own equity or debt securities through vehicles, each of which are considered variable interests. Our involvement in financing the operations of the VIEs is generally limited to our investments in the entity. We consolidate these entities when we are determined to be the primary beneficiary.

 

 

Consolidated VIEs

 

We are the sole general partner of, and own approximately 87.3% of, the Operating Partnership as of March 31, 2017. 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 March 31, 2017 and December 31, 2016, the Operating Partnership held variable interests in the entities owning a real estate fund, preferred equity investments and a property that were determined to be VIEs. The Operating Partnership is required to consolidate its interest in these entities because it is deemed to be the primary beneficiary and has the power to direct the activities of these entities that most significantly affect economic performance and the obligation to absorb losses and rights to receive benefits that could potentially be significant to the entity. 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 table below summarizes the assets and liabilities of consolidated VIEs of the Operating Partnership.

 

 

 

As of

 

(Amounts in thousands)

 

March 31, 2017

 

 

December 31, 2016

 

Rental property, net

 

$

1,331,814

 

 

$

1,336,810

 

Cash and restricted cash

 

 

61,047

 

 

 

17,054

 

Preferred equity investments

 

 

55,294

 

 

 

55,051

 

Accounts and other receivables

 

 

584

 

 

 

5,966

 

Deferred rent receivable

 

 

37,339

 

 

 

32,103

 

Deferred charges, net

 

 

6,044

 

 

 

695

 

Intangible assets, net

 

 

48,922

 

 

 

52,139

 

Other assets

 

 

419

 

 

 

14,474

 

Total VIE assets

 

$

1,541,463

 

 

$

1,514,292

 

 

 

 

 

 

 

 

 

 

Notes and mortgages payable, net

 

$

967,833

 

 

$

872,960

 

Accounts payable and other accrued expenses

 

 

19,292

 

 

 

21,077

 

Intangible liabilities, net

 

 

45,650

 

 

 

48,654

 

Interest rate swap liabilities

 

 

-

 

 

 

21,227

 

Other liabilities

 

 

11,127

 

 

 

6,555

 

Total VIE liabilities

 

$

1,043,902

 

 

$

970,473

 

 

Unconsolidated VIEs

 

As of March 31, 2017, the Operating Partnership held variable interests in entities that own certain real estate funds that were deemed to be VIEs. The table below summarizes our investments in these unconsolidated real estate funds.  

 

 

 

As of March 31, 2017

 

 

 

 

 

 

 

Asset Management Fees

 

 

Maximum

 

(Amounts in thousands)

 

Investments

 

 

and other Receivables

 

 

Risk of Loss

 

Unconsolidated real estate funds

 

$

23,913

 

 

$

2,015

 

 

$

25,928

 


19

 


PARAMOUNT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

13.

Fair Value Measurements

 

 

ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value and establishes a framework for measuring fair value.  The objective of fair value is to determine the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price).  ASC Topic 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels: Level 1 – quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities; Level 2 – observable prices that are based on inputs not quoted in active markets, but corroborated by market data; and Level 3 – unobservable inputs that are used when little or no market data is available. The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, as well as consider counterparty credit risk in our assessment of fair value.  Considerable judgment is necessary to interpret Level 2 and 3 inputs in determining the fair value of our financial and non-financial assets and liabilities.  Accordingly, our fair value estimates, which are made at the end of each reporting period, may be different than the amounts that may ultimately be realized upon sale or disposition of these assets or settlement of these liabilities. 

 

 

Financial Assets and Liabilities Measured at Fair Value

 

Financial assets and liabilities that are measured at fair value on our consolidated balance sheets consist of marketable securities (which represent the assets in our deferred compensation plan, for which there is a corresponding liability on our consolidated balance sheets) and interest rate swaps. The table below aggregates the fair values of these financial assets and liabilities as of March 31, 2017 and December 31, 2016, based on their levels in the fair value hierarchy.

 

 

As of March 31, 2017

 

(Amounts in thousands)

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Marketable securities

$

25,617

 

 

$

25,617

 

 

$

-

 

 

$

-

 

Interest rate swap assets (included in "other assets")

 

2,952

 

 

 

-

 

 

 

2,952

 

 

 

-

 

Total assets

$

28,569

 

 

$

25,617

 

 

$

2,952

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2016

 

(Amounts in thousands)

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Marketable securities

$

22,393

 

 

$

22,393

 

 

$

-

 

 

$

-

 

Interest rate swap assets (included in "other assets")

 

139

 

 

 

-

 

 

 

139

 

 

 

-

 

Total assets

$

22,532

 

 

$

22,393

 

 

$

139

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap liabilities

$

22,446

 

 

$

-

 

 

$

22,446

 

 

$

-

 

Total liabilities

$

22,446

 

 

$

-

 

 

$

22,446

 

 

$

-

 

 

 

Interest Rate Swaps

 

Interest rate swaps are valued by a third-party specialist. The valuation of these interest rate swaps is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the interest rate swaps and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. Interest rate swaps are classified as Level 2.

 


20

 


PARAMOUNT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

Financial Assets and Liabilities Not Measured at Fair Value

 

Financial assets not measured at fair value on our consolidated balance sheets consists of preferred equity investments.  Estimates of the fair value of these investments are determined by the standard practice of modeling the contractual cash flows required under the investment and discounting it back to its present value at the appropriate current risk adjusted interest rate. The preferred equity investments are classified as Level 3.  Financial liabilities not measured at fair value include notes and mortgages payable and the revolving credit facility. Estimates of the fair value of these instruments are determined by the standard practice of modeling the contractual cash flows required under the instrument and discounting them back to their present value at the appropriate current risk adjusted interest rate, which is provided by a third-party specialist. For floating rate debt, we use forward rates derived from observable market yield curves to project the expected cash payments we would be required to make under the instrument. These instruments would be classified as Level 2.

 

The following is a summary of the carrying amounts and fair value of these financial instruments as of March 31, 2017 and December 31, 2016.

 

 

As of March 31, 2017

 

 

As of December 31, 2016

 

(Amounts in thousands)

Carrying Amount

 

 

Fair Value

 

 

Carrying Amount

 

 

Fair Value

 

Preferred equity investments

$

55,294

 

 

$

55,573

 

 

$

55,051

 

 

$

55,300

 

Total assets

$

55,294

 

 

$

55,573

 

 

$

55,051

 

 

$

55,300

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2017

 

 

As of December 31, 2016

 

(Amounts in thousands)

Carrying Amount

 

 

Fair Value

 

 

Carrying Amount

 

 

Fair Value

 

Notes and mortgages payable

$

3,526,279

 

 

$

3,511,376

 

 

$

3,408,179

 

 

$

3,371,262

 

Revolving credit facility

 

200,000

 

 

 

200,018

 

 

 

230,000

 

 

 

230,018

 

Total liabilities

$

3,726,279

 

 

$

3,711,394

 

 

$

3,638,179

 

 

$

3,601,280

 

 

 

 


21

 


PARAMOUNT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

14.

Fee and Other Income

 

 

The following table sets forth the details of our fee and other income.

 

 

 

 

 

 

For the Three Months Ended March 31,

 

 

(Amounts in thousands)

2017

 

 

2016

 

 

Fee income

 

 

 

 

 

 

 

 

Property management

$

1,610

 

 

$

1,521

 

 

Asset management

 

2,266

 

 

 

1,714

 

 

Acquisition and disposition

 

5,320

 

 

 

-

 

 

Other

 

360

 

 

 

182

 

 

Total fee income

 

9,556

 

 

 

3,417

 

 

Lease termination income

 

66

 

 

 

10,955

 

(1)

Other income (2)

 

3,372

 

 

 

6,505

 

 

Total fee and other income

$

12,994

 

 

$

20,877

 

 

 

 

 

 

(1)

Includes $10,861 from the termination of a lease with a tenant at 1633 Broadway.

 

 

(2)

Primarily comprised of income from tenant requested services, including overtime heating and cooling.  

 

 

 

15.

Interest and Other Income, net

 

 

The following table sets forth the details of interest and other income.

 

 

For the Three Months Ended March 31,

 

(Amounts in thousands)

2017

 

 

2016

 

Preferred equity investment income (1)

$

1,413

 

 

$

1,416

 

Interest and other income

 

85

 

 

 

80

 

Mark-to-market of investments in our

   deferred compensation plans (2)

 

1,702

 

 

 

204

 

Total interest and other income, net

$

3,200

 

 

$

1,700

 

 

 

 

(1)

Represents income from our preferred equity investments in PGRESS Equity Holdings L.P., of which our 24.4% share is $344 and $345 for the three months ended March 31, 2017 and 2016, respectively. See Note 6, Preferred Equity Investments.

 

 

(2)

The change resulting from the mark-to-market of the deferred compensation plan assets is entirely offset by the change in the deferred compensation plan liabilities, which is included in “general and administrative” expenses.

 

 

  

16.

Interest and Debt Expense

 

 

The following table sets forth the details of interest and debt expense.

 

 

 

 

 

 

For the Three Months Ended March 31,

 

(Amounts in thousands)

 

2017

 

 

2016

 

Interest expense

 

$

34,288

 

 

$

35,861

 

Debt breakage costs

 

 

2,715

 

 

 

-

 

Amortization of deferred financing costs

 

 

2,730

 

 

 

1,258

 

Total interest and debt expense

 

$

39,733

 

 

$

37,119

 

 

22

 


PARAMOUNT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

 

17.

Incentive Compensation

 

 

Stock-Based Compensation

 

We account for all stock-based compensation in accordance with ASC Topic 718, Compensation – Stock Compensation. As of March 31, 2017, we have 10,348,396 shares available for future grants under the 2014 Equity Incentive Plan (“Plan”), if all awards granted are full value awards, as defined in the Plan.  Stock-based compensation expense was $3,429,000 and $3,627,000 for the three months ended March 31, 2017 and 2016, respectively. Stock-based compensation expense for the three months ended March 31, 2016 includes $1,855,000 of expense related to the acceleration of vesting of stock awards in connection with a separation agreement.

 

2017 Performance Program

 

On January 30, 2017, the Compensation Committee approved the 2017 Performance Program, a multiyear performance-based long-term equity (“LTE”) compensation program. The purpose of the 2017 Performance Program is to further align the interests of our stockholders with that of management by encouraging our senior officers to create stockholder value in a “pay for performance” structure. Under the 2017 Performance Program, participants may earn awards in the form of Long Term Incentive Plan (“LTIP”) units of our Operating Partnership based on our Total Shareholder Return (“TSR”) over a three-year performance measurement period beginning on January 1, 2017 and continuing through December 31, 2019, on both an absolute basis and relative basis. 25.0% of the award is earned if we outperform a predetermined absolute TSR and the remaining 75.0% is earned if we outperform a predetermined relative TSR. Specifically, participants begin to earn awards under the 2017 Performance Program if our TSR for the performance measurement period equals or exceeds 18.0% on an absolute basis and is in the 30th percentile of the performance of the SNL Office REIT Index constituents on a relative basis, and awards will be fully earned if our TSR for the performance measurement period equals or exceeds 30.0% on an absolute basis and exceeds the 80th percentile of the performance of the SNL Office REIT Index constituents on a relative basis. Participants will not earn any awards under the 2017 Performance Program if our TSR during the performance measurement period does not meet either of these minimum thresholds. The number of LTIP units that are earned if performance is above the minimum thresholds, but below the maximum thresholds, will be determined based on linear interpolation between the percentages earned at the minimum and maximum thresholds. During the performance measurement period, participants will receive per unit distributions equal to one-tenth of the per share dividends otherwise payable to our common stockholders with respect to their LTIP units. If the LTIP units are ultimately earned based on the achievement of the designated performance objectives, participants will receive cash or additional LTIP units based on the additional amount the participants would have received if per unit distributions during the performance measurement periods for the earned LTIP units had equaled per share dividends paid to our common stockholders less the amount of distributions participants actually received during the performance measurement period.

 

If the designated performance objectives are achieved, awards earned under the 2017 Performance Program will also be subject to vesting based on continued employment with us through December 31, 2020, with 50.0% of each award vesting following the conclusion of the performance measurement period, and the remaining 50.0% vesting on December 31, 2020. The Company’s named executive officers, as defined, are required to hold earned awards for an additional one-year following vesting. The fair value of the awards granted under the 2017 Performance Program on the date of the grant was $10,520,000 and is being amortized into expense over the four-year vesting period using a graded vesting attribution method.

 


23

 


PARAMOUNT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

18.

Earnings Per Share

 

 

The following table provides a summary of net income (loss) and the number of common shares used in the computation of basic and diluted income (loss) per common share, which includes the weighted average number of common shares outstanding and the effect of dilutive potential common shares, if any.

 

 

For the Three Months Ended March 31,

 

(Amounts in thousands, except per share amounts)

2017

 

 

2016

 

Numerator:

 

 

 

 

 

 

 

Net income (loss) attributable to common stockholders

$

372

 

 

$

(6,494

)

Earnings allocated to unvested participating securities

 

(14

)

 

 

(9

)

Numerator for income (loss) per common share - basic

   and diluted

$

358

 

 

$

(6,503

)

Denominator:

 

 

 

 

 

 

 

Denominator for basic income (loss) per common share -

   weighted average shares

 

230,924

 

 

 

212,404

 

Effect of dilutive employee stock options and

   restricted share awards (1)

 

34

 

 

 

-

 

Denominator for diluted income (loss) per common

   share - weighted average shares

 

230,958

 

 

 

212,404

 

 

 

 

 

 

 

 

 

Income (loss) per common share - basic and diluted

$

0.00

 

 

$

(0.03

)

 

 

 

(1)

The effect of dilutive securities for the three months ended March 31, 2017 and 2016 excludes 35,998 and 52,592 weighted average share equivalents, respectively.

 

 

 

19.

Related Party

 

 

Due to Affiliates

 

As of March 31, 2017 and December 31, 2016, we had an aggregate of $27,299,000 of liabilities that were due to affiliates. These liabilities were comprised of a $24,500,000 note payable to CNBB-RDF Holdings, LP, which is an entity partially owned by Katharina Otto-Bernstein (a member of our Board of Directors), and a $2,799,000 note payable to a different entity owned by members of the Otto Family, both of which were made in lieu of certain cash distributions prior to the completion of our initial public offering. The notes are due in October 2017 and bear interest at a fixed rate of 0.50%. We recognized $34,000 of interest expense in connection with these notes, for each of the three months ended March 31, 2017 and 2016.

 

 

 Management Agreements

 

We provide property management, leasing and other related services to certain properties owned by members of the Otto Family. We recognized an aggregate of $202,000 and $208,000 for the three months ended March 31, 2017 and 2016, respectively, of fee income, in connection with these agreements, which is included as a component of “fee and other income” on our consolidated statements of income. As of March 31, 2017, amounts owed to us under these agreements aggregated $33,000, which are included as a component of “accounts and other receivables, net” on our consolidated balance sheet.

 

We also provide property management, asset management, leasing and other related services to our unconsolidated joint ventures and real estate funds. For the three months ended March 31, 2017 and 2016, we recognized $8,406,000 and $2,240,000, respectively, of fee income in connection with these agreements. As of March 31, 2017, amounts owed to us under these agreements aggregated $2,860,000, which are included as a component of “accounts and other receivables, net” on our consolidated balance sheet.


24

 


PARAMOUNT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Hamburg Trust Consulting GMBH (“HTC”)

 

We have an agreement with HTC, a licensed broker in Germany, to supervise selling efforts for our private equity real estate funds (or investments in feeder vehicles for these funds) to investors in Germany, including distribution of securitized notes of a feeder vehicle for Fund VIII. Pursuant to this agreement, we have agreed to pay HTC for the costs incurred to sell investments in this feeder vehicle, which primarily consist of commissions paid to third party agents, and other incremental costs incurred by HTC as a result of the engagement, plus, in each case, a mark-up of 10%. HTC is 100% owned by Albert Behler, our Chairman, Chief Executive Officer and President. For the three months ended March 31, 2017 and 2016, we incurred $36,000 and $103,000 of expense, respectively, in connection with these agreements, which is included as a component of “transaction related costs” on our consolidated statements of income.

 

Mannheim Trust

 

Dr. Martin Bussmann (a member of our Board of Directors) is also a trustee and a director of Mannheim Trust, a subsidiary of which leases office space at 712 Fifth Avenue, our 50.0% owned unconsolidated joint venture. The Mannheim Trust is for the benefit of Dr. Bussmann’s children. Prior to December 5, 2016, the Mannheim Trust leased 6,790 square feet. On December 5, 2016, the joint venture entered into a new lease agreement for 5,593 square feet, which became effective in January 2017. The new lease expires in April 2023. For the three months ended March 31, 2017 and 2016, we recognized $94,000 and $102,000, respectively, for our share of rental income from this lease.

 

 

20.

Commitments and Contingencies

 

 

Insurance

 

We carry commercial general liability coverage on our properties, with limits of liability customary within the industry. Similarly, we are insured against the risk of direct and indirect physical damage to our properties including coverage for the perils such as floods, earthquakes and windstorms. Our policies also cover the loss of rental income during an estimated reconstruction period. Our policies reflect limits and deductibles customary in the industry and specific to the buildings and portfolio. We also obtain title insurance policies when acquiring new properties. We currently have coverage for losses incurred in connection with both domestic and foreign terrorist-related activities. While we do carry commercial general liability insurance, property insurance and terrorism insurance with respect to our properties, these policies include limits and terms we consider commercially reasonable. In addition, there are certain losses (including, but not limited to, losses arising from known environmental conditions or acts of war) that are not insured, in full or in part, because they are either uninsurable or the cost of insurance makes it, in our belief, economically impractical to maintain such coverage. Should an uninsured loss arise against us, we would be required to use our own funds to resolve the issue, including litigation costs. We believe the policy specifications and insured limits are adequate given the relative risk of loss, the cost of the coverage and industry practice and, in consultation with our insurance advisors, we believe the properties in our portfolio are adequately insured.

 

Other Commitments and Contingencies

 

We are a party to various claims and routine litigation arising in the ordinary course of business. Some of these claims or others to which we may be subject from time to time, including claims arising specifically from the formation transactions, in connection with our initial public offering, may result in defense costs, settlements, fines or judgments against us, some of which are not, or cannot be, covered by insurance. Payment of any such costs, settlements, fines or judgments that are not insured could have an adverse impact on our financial position and results of operations. Should any litigation arise in connection with the formation transactions, we would contest it vigorously. In addition, certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could adversely impact our results of operations and cash flow, expose us to increased risks that would be uninsured, and/or adversely impact our ability to attract officers and directors.

 

The terms of our mortgage debt and certain side letters in place include certain restrictions and covenants which may limit, among other things, certain investments, the incurrence of additional indebtedness and liens and the disposition or other transfer of assets and interests in the borrower and other credit parties, and require compliance with certain debt yield, debt service coverage and loan to value ratios. In addition, our revolving credit facility contains representations, warranties, covenants, other agreements and events of default customary for agreements of this type with comparable companies. As of March 31, 2017, we believe we are in compliance with all of our covenants.

25

 


PARAMOUNT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

718 Fifth Avenue - Put Right

 

Prior to the formation transactions, an affiliate of our Predecessor owned a 25.0% interest in 718 Fifth Avenue, a five-story building containing 19,050 square feet of prime retail space that is located on the southwest corner of 56th Street and Fifth Avenue in New York, (based on its 50.0% interest in a joint venture that held a 50.0% tenancy-in-common interest in the property). Prior to the completion of the formation transactions, this interest was sold to its partner in the 718 Fifth Avenue joint venture, who is also our partner in the joint venture that owns 712 Fifth Avenue, New York, New York. In connection with this sale, we granted our joint venture partner a put right, pursuant to which the 712 Fifth Avenue joint venture would be required to purchase the entire direct or indirect interests held by our joint venture partner or its affiliates in 718 Fifth Avenue at a purchase price equal to the fair market value of such interests. The put right may be exercised at any time after September 10, 2018 with 12 months written notice and the actual purchase occurring no earlier than September 10, 2019. If the put right is exercised and the 712 Fifth Avenue joint venture acquires the 50.0% tenancy-in-common interest in the property that will be held by our joint venture partner following the sale of its interest to our joint venture partner, we will own a 25.0% interest in 718 Fifth Avenue.

 

 

 

21.

Segments Disclosure

 

 

Our reportable segments are separated by region based on the three regions in which we conduct our business: New York, Washington, D.C. 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 NOI for each reportable segment for the three months ended March 31, 2017 and 2016.

 

 

 

For the Three Months Ended March 31, 2017

 

(Amounts in thousands)

 

Total

 

 

New York

 

 

Washington, D.C.

 

 

San Francisco

 

 

Other

 

Property-related revenues

 

$

171,680

 

 

$

105,324

 

 

$

23,787

 

 

$

41,939

 

 

$

630

 

Property-related operating expenses

 

 

(65,971

)

 

 

(44,759

)

 

 

(8,924

)

 

 

(10,605

)

 

 

(1,683

)

NOI from unconsolidated joint ventures

 

 

4,823

 

 

 

4,753

 

 

 

-

 

 

 

-

 

 

 

70

 

NOI (1)

 

$

110,532

 

 

$

65,318

 

 

$

14,863

 

 

$

31,334

 

 

$

(983

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31, 2016

 

(Amounts in thousands)

 

Total

 

 

New York

 

 

Washington, D.C.

 

 

San Francisco

 

 

Other

 

Property-related revenues

 

$

169,501

 

 

$

119,303

 

 

$

19,982

 

 

$

29,619

 

 

$

597

 

Property-related operating expenses

 

 

(62,945

)

 

 

(44,137

)

 

 

(8,275

)

 

 

(7,173

)

 

 

(3,360

)

NOI from unconsolidated joint ventures

 

 

4,428

 

 

 

4,347

 

 

 

-

 

 

 

-

 

 

 

81

 

NOI (1)

 

$

110,984

 

 

$

79,513

 

 

$

11,707

 

 

$

22,446

 

 

$

(2,682

)

 

 

(1)

Net Operating Income (“NOI”) is used to measure the operating performance of our properties. NOI consists of property-related revenue (which includes rental income, tenant reimbursement income and certain other income) less operating expenses (which includes building expenses such as cleaning, security, repairs and maintenance, utilities, property administration and real estate taxes). We use NOI internally as a performance measure and believe it provides useful information to investors regarding our financial condition and results of operations because it reflects only those income and expense items that are incurred at the property level. Other real estate companies may use different methodologies for calculating NOI, and accordingly, our presentation of NOI may not be comparable to other real estate companies.


26

 


PARAMOUNT GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The following table provides a reconciliation of NOI to net income (loss) attributable to common stockholders for the three months ended March 31, 2017 and 2016.

 

For the Three Months Ended March 31,

 

(Amounts in thousands)

2017

 

 

2016

 

NOI

$

110,532

 

 

$

110,984

 

Add (subtract) adjustments to arrive to net income (loss):

 

 

 

 

 

 

 

Fee income

 

9,556

 

 

 

3,417

 

Depreciation and amortization expense

 

(62,992

)

 

 

(74,812

)

General and administrative expenses

 

(13,581

)

 

 

(13,961

)

Transaction related costs

 

(275

)

 

 

(935

)

NOI from unconsolidated joint ventures

 

(4,823

)

 

 

(4,428

)

Income from unconsolidated joint ventures

 

1,937

 

 

 

1,496

 

Income (loss) from unconsolidated real estate funds

 

288

 

 

 

(326

)

Interest and other income, net

 

3,200

 

 

 

1,700

 

Interest and debt expense

 

(39,733

)

 

 

(37,119

)

Unrealized gain on interest rate swaps

 

1,802

 

 

 

6,860

 

Net income (loss) before income taxes

 

5,911

 

 

 

(7,124

)

Income tax expense

 

(4,282

)

 

 

(363

)

Net income (loss)

 

1,629

 

 

 

(7,487

)

Less: net (income) loss attributable to

   noncontrolling interests in:

 

 

 

 

 

 

 

Consolidated real estate fund

 

88

 

 

 

674

 

Consolidated joint ventures

 

(1,291

)

 

 

(1,252

)

Operating Partnership

 

(54

)

 

 

1,571

 

Net income (loss) attributable to common stockholders

$

372

 

 

$

(6,494

)

 

 

The following table provides the selected balance sheet data for each of our reportable segments as of March 31, 2017.

 

(Amounts in thousands)

 

As of March 31, 2017

 

Balance Sheet Data:

 

Total

 

 

New York

 

 

Washington, D.C.

 

 

San Francisco

 

 

Other

 

Total assets

 

$

8,885,514

 

 

$

5,589,690

 

 

$

1,068,604

 

 

$

1,926,290

 

 

$

300,930

 

Total liabilities

 

 

4,040,156

 

 

 

2,449,369

 

 

 

214,273

 

 

 

1,050,151

 

 

 

326,363

 

Total equity

 

 

4,845,358

 

 

 

3,140,321

 

 

 

854,331

 

 

 

876,139

 

 

 

(25,433

)

 

 

22.

Subsequent Events

 

 

On May 3, 2017, we completed the sale of Waterview for $460,000,000 and realized net proceeds of approximately $457,000,000. The sale resulted in a net gain of approximately $110,000,000, which will be recognized in the second quarter of 2017.

 

On May 4, 2017, we used the net proceeds from the Waterview sale to repay the $200,000,000 outstanding under our revolving credit facility, the $87,179,000 loan on 1899 Pennsylvania Avenue, and the $84,000,000 loan on Liberty Place.

 

 

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:

 

 

unfavorable market and economic conditions in the United States and globally and in New York City, Washington, D.C. and San Francisco;  

 

risks associated with our high concentrations of properties in New York City, Washington, D.C. and San Francisco;  

 

risks associated with ownership of real estate;  

 

decreased rental rates or increased vacancy rates;  

 

the risk we may lose a major tenant;  

 

limited ability to dispose of assets because of the relative illiquidity of real estate investments;  

 

intense competition in the real estate market that may limit our ability to acquire attractive investment opportunities and increase the costs of those opportunities;  

 

insufficient amounts of insurance;  

 

uncertainties and risks related to adverse weather conditions, natural disasters and climate change;  

 

risks associated with actual or threatened terrorist attacks;  

 

exposure to liability relating to environmental and health and safety matters;  

 

high costs associated with compliance with the Americans with Disabilities Act;  

 

failure of acquisitions to yield anticipated results;  

 

risks associated with real estate activity through our joint ventures and private equity real estate funds;  

 

general volatility of the capital and credit markets and the market price of our common stock;  

 

exposure to litigation or other claims;  

 

loss of key personnel;  

 

risks associated with security breaches through cyber attacks or cyber intrusions and other significant disruptions of our information technology (IT) networks and related systems;  

 

risks associated with our substantial indebtedness;  

 

failure to refinance current or future indebtedness on favorable terms, or at all;  

 

failure to meet the restrictive covenants and requirements in our existing debt agreements;  

28

 


 

 

fluctuations in interest rates and increased costs to refinance or issue new debt;  

 

risks associated with variable rate debt, derivatives or hedging activity;

 

risks associated with future sales of our common stock by our continuing investors or the perception that our continuing investors intend to sell substantially all of the shares of our common stock that they hold;  

 

risks associated with the market for our common stock;  

 

failure to qualify as a real estate investment trust (“REIT”);  

 

compliance with REIT requirements, which may cause us to forgo otherwise attractive opportunities or liquidate certain of our investments; or  

 

any of the other risks included in this Quarterly Report on Form 10-Q or in our Annual Report on Form 10-K for the year ended December 31, 2016, including those set forth in Item 1A entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.

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. The 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, 2016.

 

 

Critical Accounting Policies

 

There are no material changes to our critical accounting policies disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

 

Recently Issued Accounting Literature

 

A summary of our recently issued accounting literature and their potential impact on our consolidated financial statements, if any, are included in Note 2, Basis of Presentation and Significant Accounting Policies, to our consolidated financial statements in this Quarterly Report on Form 10-Q.

 

 

Business Overview

 

We are a fully-integrated REIT focused on owning, operating, managing, acquiring and redeveloping high-quality, Class A office properties in select central business district submarkets of New York City, Washington, D.C. and San Francisco. We conduct our business through, and substantially all of our interests 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 87.3% of the Operating Partnership as of March 31, 2017.

 

Acquisitions

 

On January 24, 2017, a joint venture, in which we have a 5.2% ownership interest, acquired 60 Wall Street, a 1.6 million square foot office tower in Manhattan, for $1.04 billion. In connection with the acquisition, the joint venture completed a $575,000,000 financing of the property.


29

 


 

Dispositions

 

On May 3, 2017, we completed the sale of Waterview for $460,000,000 and realized net proceeds of approximately $457,000,000. The sale resulted in a net gain of approximately $110,000,000, which will be recognized in the second quarter of 2017.

 

 

Financings

 

On January 19, 2017, we completed a $975,000,000 refinancing of One Market Plaza, a 1.6 million square foot Class A office and retail property in San Francisco, California. The new seven-year interest-only loan matures in February 2024 and has a fixed rate of 4.03%. We retained $23,470,000 for our 49.0% share of net proceeds, after the repayment of the existing loan, closing costs and required reserves.

 

On May 4, 2017, we used the net proceeds from the Waterview sale to repay the $200,000,000 outstanding under our revolving credit facility, the $87,179,000 loan on 1899 Pennsylvania Avenue, and the $84,000,000 loan on Liberty Place.

 

 

Leasing Results - Three Months Ended March 31, 2017

 

In the three months ended March 31, 2017, we leased 285,506 square feet at a weighted average initial rent of $70.42 per square foot. This leasing activity was offset by lease expirations during the three months that decreased portfolio wide leased occupancy by 190 basis points to 90.8% at March 31, 2017 from 92.7% at December 31, 2016. The decrease in leased occupancy was driven by lease expirations in our New York and San Francisco portfolios. Of the 285,506 square feet leased in the three months, 219,247 square feet represents second generation space (space that has been vacant for less than twelve months) for which we achieved rental rate increases of 18.3% on a GAAP basis and 18.5% on a cash basis. The weighted average lease term for leases signed during the three months was 8.9 years and weighted average tenant improvements and leasing commissions on these leases were $7.58 per square foot per annum, or 10.8% of initial rent.

 

 

New York:

 

In the three months ended March 31, 2017, we leased 93,304 square feet in our New York portfolio, at a weighted average initial rent of $68.61 per square foot. This leasing activity was offset by lease expirations during the three months that decreased leased occupancy by 220 basis points to 88.5% at March 31, 2017 from 90.7% at December 31, 2016. Of the 93,304 square feet leased in the three months, 39,982 square feet represents second generation space for which we achieved rental rate increases of 12.2% on a GAAP basis and 6.2% on a cash basis. The weighted average lease term for leases signed during the three months was 10.2 years and weighted average tenant improvements and leasing commissions on these leases were $8.81 per square foot per annum, or 12.8% of initial rent.

 

 

Washington, D.C.:

 

In the three months ended March 31, 2017, we leased 4,996 square feet in our Washington, D.C. portfolio, at a weighted average initial rent of $59.87 per square foot. This leasing activity, partially offset by lease expirations during the three months, increased leased occupancy by 30 basis points to 95.8% at March 31, 2017 from 95.5% at December 31, 2016.  All of the space leased in the three months was previously vacant. The weighted average lease term for leases signed during the three months was 8.9 years and weighted average tenant improvements and leasing commissions on these leases were $5.19 per square foot per annum, or 8.7% of initial rent.

 

 

San Francisco:

 

In the three months ended March 31, 2017, we leased 187,206 square feet in our San Francisco portfolio at a weighted average initial rent of $71.74 per square foot. This leasing activity was offset by lease expirations during the three months that decreased leased occupancy by 310 points to 95.9% as of March 31, 2017, from 99.0% at December 31, 2016. Of the 187,206 square feet leased during the year, 179,265 square feet represents second generation space for which we achieved rental rate increases of 19.7% on GAAP basis and 21.5% on a cash basis. The weighted average lease term for leases signed during the year was 8.1 years and weighted average tenant improvements and leasing commissions on these leases were $6.80 per square foot per annum, or 9.5% of initial rent.


30

 


 

The following is a tabular disclosure of leasing statistics for leases signed during the three months ended March 31, 2017. 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”).

 

Three Months Ended March 31, 2017

Total

 

 

New York

 

 

Washington, D.C.

 

 

San Francisco

 

 

Total square feet leased

 

285,506

 

 

 

93,304

 

 

 

4,996

 

 

 

187,206

 

 

Pro rata share of total square feet leased:

 

279,746

 

 

 

91,728

 

 

 

4,996

 

 

 

183,022

 

 

 

Initial rent (1)

$

70.42

 

 

$

68.61

 

 

$

59.87

 

 

$

71.74

 

 

 

Weighted average lease term (in years)

 

8.9

 

 

 

10.2

 

 

 

8.9

 

 

 

8.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenant improvements and leasing commissions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per square foot

$

67.27

 

 

$

90.06

 

 

$

46.12

 

 

$

55.38

 

 

 

Per square foot per annum

$

7.58

 

 

$

8.81

 

 

$

5.19

 

 

$

6.80

 

 

 

Percentage of initial rent

 

10.8

%

 

 

12.8

%

 

 

8.7

%

 

 

9.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rent concessions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average free rent period (in months)

 

3.8

 

 

 

6.4

 

 

 

4.7

 

 

 

2.3

 

 

 

Average free rent period per annum (in months)

 

0.4

 

 

 

0.6

 

 

 

0.5

 

 

 

0.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second generation space: (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Square feet

 

219,247

 

 

 

39,982

 

 

 

-

 

 

 

179,265

 

 

 

GAAP basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Straight-line rent

$

66.19

 

 

$

61.76

 

 

$

-

 

 

$

67.25

 

 

 

 

Prior straight-line rent

$

55.97

 

 

$

55.04

 

 

$

-

 

 

$

56.20

 

 

 

 

Percentage increase

 

18.3

%

 

 

12.2

%

 

 

-

 

 

 

19.7

%

 

 

Cash basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Initial rent (1)

$

70.28

 

 

$

64.22

 

 

$

-

 

 

$

71.74

 

 

 

 

Prior escalated rent (3)

$

59.32

 

 

$

60.48

 

 

$

-

 

 

$

59.04

 

 

 

 

Percentage increase

 

18.5

%

 

 

6.2

%

 

 

-

 

 

 

21.5

%

 

 

(1)

Represents the weighted average cash basis starting rent per square foot and does not include free rent of periodic step-ups in rent.

(2)

Represents space leased that has been vacant for less than twelve months.

(3)

Represents the weighted average cash basis rents (including reimbursements) per square foot at expiration.


31

 


 

 

Financial Results - Three Months Ended March 31, 2017 and 2016

 

Net Income, FFO and Core FFO

 

Net income attributable to common stockholders was $372,000, or $0.00 per diluted share, for the three months ended March 31, 2017, compared to a net loss of $6,494,000, or $0.03 per diluted share, for the three months ended March 31, 2016. Funds from Operations (“FFO”) attributable to common stockholders was $51,589,000, or $0.22 per diluted share, for the three months ended March 31, 2017, compared to $49,248,000, or $0.23 per diluted share, for the three months ended March 31, 2016. FFO attributable to common stockholders for the three months ended March 31, 2017 and 2016 includes the impact of non-core items, which are listed in the table on page 45.  The aggregate of these items, net of amounts attributable to noncontrolling interests, decreased FFO attributable to common stockholders by $121,000, or $0.00 per diluted share, for the three months ended March 31, 2017 and increased FFO attributable to common stockholders by $256,000, or $0.00 per diluted share, for the three months ended March 31, 2016.  Core Funds from Operations (“Core FFO”) attributable to common stockholders, which excludes the impact of the non-core items listed on page 45, was $51,710,000, or $0.22 per diluted share, for the three months ended March 31, 2017, compared to $48,992,000, or $0.23 per diluted share, for the three months ended March 31, 2016.  

 

See page 45 “Non-GAAP Financial Measures – FFO and Core FFO” for a reconciliation to net income in accordance with GAAP and the reasons why we believe these non-GAAP measures are useful.

 

 

Same Store NOI

 

The table below summarizes the percentage (decrease) increase in our share of Same Store NOI and Same Store Cash NOI, by segment, for the three months ended March 31, 2017 versus March 31, 2016.

 

 

(Amounts in thousands)

 

Total

 

New York

 

Washington, D.C.

 

San Francisco

Same Store NOI

 

(5.9%)

 

(14.1%)

 

27.0%

 

6.0%

Same Store Cash NOI

 

(5.1%)

 

(12.7%)

 

25.8%

 

(0.3%)

 

 

See page 41 “Non-GAAP Financial Measures – NOI” and page 43 “Non-GAAP Financial Measures – Same Store NOI” for a reconciliation to net income in accordance with GAAP and the reasons why we believe these non-GAAP measures are useful.

 


32

 


 

Results of Operations

 

The following pages summarize our consolidated results of operations for the three months ended March 31, 2017 and 2016.

 

 

 

 

 

 

 

 

For the Three Months Ended March 31,

 

 

 

 

 

(Amounts in thousands)

2017

 

 

2016

 

 

Change

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

$

155,390

 

 

$

141,252

 

 

$

14,138

 

 

Tenant reimbursement income

 

12,852

 

 

 

10,789

 

 

 

2,063

 

 

Fee and other income

 

12,994

 

 

 

20,877

 

 

 

(7,883

)

 

 

Total revenues

 

181,236

 

 

 

172,918

 

 

 

8,318

 

EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

Operating

 

65,971

 

 

 

62,945

 

 

 

3,026

 

 

Depreciation and amortization

 

62,992

 

 

 

74,812

 

 

 

(11,820

)

 

General and administrative

 

13,581

 

 

 

13,961

 

 

 

(380

)

 

Transaction related costs

 

275

 

 

 

935

 

 

 

(660

)

 

 

Total expenses

 

142,819

 

 

 

152,653

 

 

 

(9,834

)

Operating income

 

38,417

 

 

 

20,265

 

 

 

18,152

 

 

Income (loss) from unconsolidated real estate funds

 

288

 

 

 

(326

)

 

 

614

 

 

Income from unconsolidated joint ventures

 

1,937

 

 

 

1,496

 

 

 

441

 

 

Interest and other income, net

 

3,200

 

 

 

1,700

 

 

 

1,500

 

 

Interest and debt expense

 

(39,733

)

 

 

(37,119

)

 

 

(2,614

)

 

Unrealized gain on interest rate swaps

 

1,802

 

 

 

6,860

 

 

 

(5,058

)

Net income (loss) before income taxes

 

5,911

 

 

 

(7,124

)

 

 

13,035

 

 

Income tax expense

 

(4,282

)

 

 

(363

)

 

 

(3,919

)

Net income (loss)

 

1,629

 

 

 

(7,487

)

 

 

9,116

 

Less net (income) loss attributable to noncontrolling

 

 

 

 

 

 

 

 

 

 

 

 

interests in:

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated real estate fund

 

88

 

 

 

674

 

 

 

(586

)

 

Consolidated joint ventures

 

(1,291

)

 

 

(1,252

)

 

 

(39

)

 

Operating Partnership

 

(54

)

 

 

1,571

 

 

 

(1,625

)

Net income (loss) attributable to common stockholders

$

372

 

 

$

(6,494

)

 

$

6,866

 


33

 


 

Revenues

 

Our revenues, which consist primarily of rental income, tenant reimbursement income, and fee and other income, were $181,236,000 for the three months ended March 31, 2017, compared to $172,918,000 for the three months ended March 31, 2016, an increase of $8,318,000. Below are the details of the increase (decrease) by segment.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Amounts in thousands)

 

Total

 

 

New York

 

 

Washington, D.C.

 

 

San Francisco

 

 

Other

 

 

Rental income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions (1)

 

$

9,678

 

 

$

-

 

 

$

-

 

 

$

9,678

 

 

$

-

 

 

Same store operations

 

 

(1,852

)

 

 

(7,152

)

(2)

 

2,413

 

 

 

2,854

 

 

 

33

 

 

Other, net

 

 

6,312

 

 

 

6,312

 

(3)

 

-

 

 

 

-

 

 

 

-

 

 

Increase (decrease) in rental income

 

$

14,138

 

 

$

(840

)

 

$

2,413

 

 

$

12,532

 

 

$

33

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenant reimbursement income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions (1)

 

$

982

 

 

$

-

 

 

$

-

 

 

$

982

 

 

$

-

 

 

Same store operations

 

 

1,081

 

 

 

237

 

 

 

655

 

 

 

189

 

 

 

-

 

 

Increase in tenant

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

reimbursement income

 

$

2,063

 

 

$

237

 

 

$

655

 

 

$

1,171

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fee and other income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property management

 

$

89

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

89

 

 

Asset management

 

 

552

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

552

 

 

Acquisition and disposition

 

 

5,320

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,320

 

 

Other

 

 

178

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

178

 

 

Increase in fee income

 

 

6,139

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6,139

 

 

Acquisitions (1)

 

 

160

 

 

 

-

 

 

 

-

 

 

 

160

 

 

 

-

 

 

Lease termination income

 

 

(10,889

)

 

 

(10,824

)

(4)

 

-

 

 

 

(65

)

 

 

-

 

 

Other income

 

 

(3,293

)

 

 

(2,552

)

 

 

737

 

 

 

(1,478

)

 

 

-

 

 

(Decrease) increase in other income

 

 

(14,022

)

 

 

(13,376

)

 

 

737

 

 

 

(1,383

)

 

 

-

 

 

(Decrease) increase in fee and

   other income

 

$

(7,883

)

 

$

(13,376

)

 

$

737

 

 

$

(1,383

)

 

$

6,139

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total increase (decrease) in

   revenues

 

$

8,318

 

 

$

(13,979

)

 

$

3,805

 

 

$

12,320

 

 

$

6,172

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Represents One Front Street, which was acquired in December 2016.

(2)

Primarily due to a decrease in occupancy.

(3)

Primarily due to a $9,834 of non-cash write-off, in the three months ended March 31, 2016, related to the termination of a tenant’s above-market lease at 1633 Broadway, partially offset by $3,915 of income, in the three months ended March 31, 2016, from the accelerated amortization of a below-market lease liability in connection with a tenant’s lease modification.

(4)

Decrease primarily due to $10,861 of income for the three months ended March 31, 2016, in connection with a tenant's lease termination at 1633 Broadway.


34

 


 

Expenses

 

Our expenses, which consist primarily of operating, depreciation and amortization, general and administrative, and transaction related costs, were $142,819,000 for the three months ended March 31, 2017, compared to $152,653,000 for the three months ended March 31, 2016, a decrease of $9,834,000. Below are the details of the increase (decrease) by segment.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Amounts in thousands)

 

Total

 

 

New York

 

 

Washington, D.C.

 

 

San Francisco

 

 

Other

 

 

Operating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions (1)

 

$

3,327

 

 

$

-

 

 

$

-

 

 

$

3,327

 

 

$

-

 

 

Same store operations

 

 

172

 

 

 

1,095

 

 

 

649

 

 

 

105

 

 

 

(1,677

)

 

Bad debt expense

 

 

(473

)

 

 

(473

)

 

 

-

 

 

 

-

 

 

 

-

 

 

Increase (decrease) in operating

 

$

3,026

 

 

$

622

 

 

$

649

 

 

$

3,432

 

 

$

(1,677

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions (1)

 

$

6,476

 

 

$

-

 

 

$

-

 

 

$

6,476

 

 

$

-

 

 

Operations

 

 

(18,296

)

 

 

(14,130

)

(2)

 

(2,461

)

 

 

(1,947

)

 

 

242

 

 

(Decrease) increase in depreciation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and amortization

 

$

(11,820

)

 

$

(14,130

)

 

$

(2,461

)

 

$

4,529

 

 

$

242

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operations

 

$

(661

)

 

$

-

 

 

$

-

 

 

$

-

 

 

$

(661

)

 

Stock-based compensation

 

 

1,657

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,657

 

 

Mark-to-market of investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

in our deferred compensation plan

 

 

1,498

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,498

 

(3)

Severance costs

 

 

(2,874

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,874

)

(4)

Decrease in general

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and administrative

 

$

(380

)

 

$

-

 

 

$

-

 

 

$

-

 

 

$

(380

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Decrease in transaction related costs

 

$

(660

)

 

$

-

 

 

$

-

 

 

$

-

 

 

$

(660

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total (decrease) increase in expenses

 

$

(9,834

)

 

$

(13,508

)

 

$

(1,812

)

 

$

7,961

 

 

$

(2,475

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Represents One Front Street, which was acquired in December 2016.

 

(2)

Decrease primarily due to lower amortization of in-place lease assets due to the expiration of such leases and acceleration of amortization of tenant improvements and in-place lease assets in the three months ended March 31, 2016, in connection with a tenants’ lease modifications.

 

(3)

Represents the change in the mark-to-market of investments in our deferred compensation plan liabilities. This change is entirely offset by the change in plan assets which is included in “interest and other income, net”.

 

(4)

Represents severance costs in the three months ended March 31, 2016 in connection with a separation agreement.

 

(5)


35

 


 

Income from Unconsolidated Joint Ventures

 

Income from unconsolidated joint ventures was $1,937,000 for the three months ended March 31, 2017, compared to $1,496,000 for the three months ended March 31, 2016, an increase of $441,000. This increase resulted primarily due to $584,000 of higher unrealized gain on interest rate swaps on 712 Fifth Avenue in the three months ended March 31, 2017.

 

 

Income (loss) from Unconsolidated Real Estate Funds

 

Income from unconsolidated real estate funds was $288,000 for the three months ended March 31, 2017, compared to a loss of $326,000 for the three months ended March 31, 2016, an increase of $614,000. This increase resulted from:

 

(Amounts in thousands)

 

 

 

Increase in investment income

$

592

 

Increase in net realized gain

 

179

 

Decrease in unrealized loss

 

(133

)

Decrease in carried interest

 

(24

)

Total increase in our share of net income

$

614

 

 

 

Interest and Other Income, net

 

Interest and other income was $3,200,000 for the three months ended March 31, 2017, compared to $1,700,000 for the three months ended March 31, 2016, an increase of $1,500,000. This increase resulted from an increase in the value of investments in our deferred compensation plan, which is offset by an increase in “general administrative” expenses.

 

 

Interest and Debt Expense

 

Interest and debt expense was $39,733,000 for the three months ended March 31, 2017, compared to $37,119,000 for the three months ended March 31, 2016, an increase of $2,614,000. This increase resulted from:

 

(Amounts in thousands)

 

 

 

 

$850 million financing of 1301 Avenue of the Americas in October 2016

 

$

6,278

 

$484 million of debt repayment and defeasance (900 Third Avenue and

   Waterview in October 2016)

 

 

(5,999

)

$975 million refinancing of One Market Plaza in January 2017

 

 

(3,202

)

Debt breakage costs in connection with the refinancing of One Market Plaza

 

 

2,715

 

Amortization of deferred financing costs

 

 

1,472

 

Other, net (primarily related to revolving credit facility)

 

 

1,350

 

Total increase

 

$

2,614

 

 


36

 


 

 

Unrealized Gain on Interest Rate Swaps

 

Unrealized gain on interest rate swaps represent the change in the fair value of the interest rate swap derivative instruments that are not designated as hedges. Unrealized gain on interest rate swaps was $1,802,000 for the three months ended March 31, 2017, compared to an unrealized gain of $6,860,000 for the three months ended March 31, 2016, a decrease of $5,058,000. This decrease was primarily due to (i) $3,557,000 of lower unrealized gains in 2017 relating to swaps aggregating $840,000,000 on One Market Plaza that were settled upon the refinancing in January 2017, (ii) $860,000 of unrealized gains in 2016 relating to swaps aggregating $237,600,000 on 31 West 52nd Street that were settled upon the refinancing in May 2016 and (iii) $641,000 of unrealized gains in 2016 relating to swaps aggregating $162,000,000 on 900 Third Avenue that were settled upon the repayment in October 2016.

 

 

Income Tax Expense

 

Income tax expense was $4,282,000 for the three months ended March 31, 2017, compared to $363,000 for the three months ended March 31, 2016, an increase of $3,919,000. This increase was primarily due to higher fee income on our taxable REIT subsidiaries.

 

 

Net Loss Attributable to Noncontrolling Interests in Consolidated Real Estate Fund

 

Net loss attributable to noncontrolling interests in consolidated real estate fund was $88,000 for the three months ended March 31, 2017, compared to $674,000 for the three months ended March 31, 2016, a decrease in loss attributable to the noncontrolling interests of $586,000.

 

 

Net Income Attributable to Noncontrolling Interests in Consolidated Joint Ventures

 

Net income attributable to noncontrolling interest in consolidated joint ventures was $1,291,000 for the three months ended March 31, 2017, compared to $1,252,000 for the three months ended March 31, 2016, an increase of $39,000. This increase resulted from higher income subject to allocation to noncontrolling interests in One Market Plaza.

 

 

 

Net (Income) Loss Attributable to Noncontrolling Interests in Operating Partnership

Net income attributable to noncontrolling interests in Operating Partnership was $54,000 for the three months ended March 31, 2017, compared to net loss attributable to noncontrolling interest in Operating Partnership of $1,571,000 for the three months ended March 31, 2016, an increase in income attributable to noncontrolling interests of $1,625,000. This increase resulted from higher income subject to allocation to the unitholders of the Operating Partnership in the months ended March 31, 2017.

 


37

 


 

Liquidity and Capital Resources

 

Our primary sources of liquidity include existing cash balances, cash flow from operations and borrowings available under our revolving credit facility. We expect that these sources will provide adequate liquidity over the next 12 months for all anticipated needs, including scheduled principal and interest payments on our outstanding indebtedness, existing and anticipated capital improvements, the cost of securing new and renewal leases, dividends to stockholders and distributions to unitholders, and all other capital needs related to the operations of our business. We anticipate that our long-term needs including debt maturities and the acquisition of additional properties will be funded by operating cash flow, mortgage financings and/or re-financings, and the issuance of long-term debt or equity.

 

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.

 

 

Liquidity

 

As of March 31, 2017, we had $800,932,000 of liquidity comprised of $125,734,000 of cash and cash equivalents, $75,198,000 of restricted cash and $600,000,000 of borrowing capacity under our revolving credit facility. As of March 31, 2017 our outstanding consolidated debt (including amounts outstanding under our revolving credit facility) aggregated $3.726 billion.  None of our debt matures in 2017 and $284,000,000 of our debt matures in 2018.

 

On May 3, 2017, we completed the sale of Waterview for $460,000,000 and realized net proceeds of approximately $457,000,000. On May 4, 2017, we used the net proceeds from the Waterview sale to repay the $200,000,000 outstanding under our revolving credit facility, the $87,179,000 loan on 1899 Pennsylvania Avenue, and the $84,000,000 loan on Liberty Place.

 

We may refinance the remainder of our maturing debt when it comes due or refinance or repay it early depending on prevailing market conditions, liquidity requirements and other factors. The amounts involved in connection with these transactions could be material to our consolidated financial statements.

 

 

Dividend Policy

 

On March 15, 2017, we declared a regular quarterly cash dividend of $0.095 per share of common stock for the first quarter ending March 31, 2017, which was paid on April 14, 2017 to stockholders of record as of the close of business on March 31, 2017. This dividend policy, if continued, would require us to pay out approximately $25,207,000 each quarter to common stockholders and unitholders.

 

 

Off Balance Sheet Arrangements

As of March 31, 2017, our unconsolidated joint ventures had $842,829,000 of outstanding indebtedness, of which our share was $155,176,000. We do not guarantee the indebtedness of unconsolidated joint ventures other than providing customary environmental indemnities and guarantees of specified non-recourse carveouts relating to specified covenants and representations; however, we may elect to fund additional capital to a joint venture through equity contributions (generally on a basis proportionate to our ownership interests), advances or partner loans in order to enable the joint venture to repay this indebtedness upon maturity.

 

 


38

 


 

Insurance

 

We carry commercial general liability coverage on our properties, with limits of liability customary within the industry. Similarly, we are insured against the risk of direct and indirect physical damage to our properties including coverage for the perils such as floods, earthquakes and windstorms. Our policies also cover the loss of rental income during an estimated reconstruction period. Our policies reflect limits and deductibles customary in the industry and specific to the buildings and portfolio. We also obtain title insurance policies when acquiring new properties. We currently have coverage for losses incurred in connection with both domestic and foreign terrorist-related activities. While we do carry commercial general liability insurance, property insurance and terrorism insurance with respect to our properties, these policies include limits and terms we consider commercially reasonable. In addition, there are certain losses (including, but not limited to, losses arising from known environmental conditions or acts of war) that are not insured, in full or in part, because they are either uninsurable or the cost of insurance makes it, in our belief, economically impractical to maintain such coverage. Should an uninsured loss arise against us, we would be required to use our own funds to resolve the issue, including litigation costs. We believe the policy specifications and insured limits are adequate given the relative risk of loss, the cost of the coverage and industry practice and, in consultation with our insurance advisors, we believe the properties in our portfolio are adequately insured.

 

 

Other Commitments and Contingencies

 

We are a party to various claims and routine litigation arising in the ordinary course of business. Some of these claims or others to which we may be subject from time to time, including claims arising specifically from the formation transactions, in connection with our initial public offering, may result in defense costs, settlements, fines or judgments against us, some of which are not, or cannot be, covered by insurance. Payment of any such costs, settlements, fines or judgments that are not insured could have an adverse impact on our financial position and results of operations. Should any litigation arise in connection with the formation transactions, we would contest it vigorously. In addition, certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could adversely impact our results of operations and cash flow, expose us to increased risks that would be uninsured, and/or adversely impact our ability to attract officers and directors.

 

The terms of our mortgage debt and certain side letters in place include certain restrictions and covenants which may limit, among other things, certain investments, the incurrence of additional indebtedness and liens and the disposition or other transfer of assets and interests in the borrower and other credit parties, and require compliance with certain debt yield, debt service coverage and loan to value ratios. In addition, our revolving credit facility contains representations, warranties, covenants, other agreements and events of default customary for agreements of this type with comparable companies. As of March 31, 2017, we believe we are in compliance with all of our covenants.

 

 

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.


39

 


 

Cash Flows

Cash and cash equivalents were $125,734,000 and $162,965,000 as of March 31, 2017 and December 31, 2016, respectively, a decrease of $37,231,000. The following table sets forth the changes in cash flow.

 

 

 

For the Three Months Ended March 31,

 

(Amounts in thousands)

2017

 

 

2016

 

Net cash provided by (used in):

 

 

 

 

 

 

 

Operating activities

$

17,716

 

 

$

82,039

 

Investing activities

 

(63,538

)

 

 

(33,793

)

Financing activities

 

8,591

 

 

 

(5,422

)

 

 

Operating Activities

 

Three months ended March 31, 2017 – We generated $17,716,000 of cash from operating activities for the three months ended March 31, 2017, primarily from (i) $44,642,000 of net income (after $43,013,000 of noncash adjustments), partially offset by (ii) $27,012,000 of net changes in operating assets and liabilities. Noncash adjustments of $43,013,000 were primarily comprised of depreciation and amortization and straight-lining of rental income. The changes in operating assets and liabilities were primarily due to an increase in prepaid real estate taxes.  

 

Three months ended March 31, 2016 – We generated $82,039,000 of cash from operating activities for the three months ended March 31, 2016, primarily due to (i) $49,065,000 of net income (after $56,552,000 of noncash adjustments), (ii) $31,311,000 from the net changes in operating assets and liabilities and (iii) $1,663,000 of distributions from unconsolidated joint ventures and real estate funds.  Noncash adjustments of $56,552,000 were primarily comprised of depreciation and amortization, straight-lining of rental income and unrealized gain on interest rate swaps.  The net changes in operating assets and liabilities were primarily due to an increase in income taxes payable, partially offset by an increase in real estate taxes.

 

 

Investing Activities

 

Three months ended March 31, 2017 – We used $63,538,000 of cash for investing activities for the three months ended March 31, 2017, primarily due to (i) $27,857,000 for the investment in an unconsolidated joint venture, (ii) $24,439,000 increase in restricted cash, (iii) $15,087,000 of additions to rental properties, which was comprised of spending for tenant improvements and other building improvements, partially offset by (iv) $3,845,000 of distributions from unconsolidated real estate funds and joint ventures.

 

Three months ended March 31, 2016 – We used $33,793,000 of cash for investing activities for the three months ended March 31, 2016, primarily due to $33,193,000 of additions to rental properties, which was comprised of spending for tenant improvements and other building improvements.

 

 

Financing Activities

 

Three months ended March 31, 2017 – We generated $8,591,000 of cash from financing activities for the three months ended March 31, 2017, primarily from (i) $991,556,000 of proceeds from notes and mortgages payable, primarily from the refinancing of One Market Plaza, (ii) $35,000,000 of borrowings under the revolving credit facility and (iii) $7,472,000 of contributions from noncontrolling interests, partially offset by (iv) $873,642,000 of repayments of notes and mortgages payable, primarily for the repayment of One Market Plaza loan, (v) $65,000,000 of repayments of the amounts borrowed under the revolving credit facility, (vi) $32,012,000 for distributions to noncontrolling interests, (vii) $25,151,000 of dividends and distributions paid to common stockholders and unitholders, (viii) $19,425,000 for the settlement of swap liabilities, (ix) $7,338,000 for the payment of debt issuance costs and (x) $2,715,000 of debt breakage costs in connection with the repayment of One Market Plaza loan.

 

Three months ended March 31, 2016 – We used $5,422,000 of cash for financing activities for the three months ended March 31, 2016, primarily due to (i) $25,068,000 of dividends and distributions paid to common stockholders and unitholders and (ii) $20,000,000 of repayments of the amounts borrowed under the revolving credit facility, partially offset by (iii) $40,000,000 of borrowings under the revolving credit facility.


40

 


 

Non-GAAP Financial Measures

 

We use and present NOI, Cash 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.

 

NOI

 

We use NOI to measure the operating performance of our properties.  NOI consists of property-related revenue (which includes rental income, tenant reimbursement income and certain other income) less operating expenses (which includes building 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 our pro rata 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 these metrics 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 the property level. Other real estate companies may use different methodologies for calculating NOI and Cash NOI, and accordingly, our presentation of NOI and Cash NOI may not be comparable to other real estate companies.

 

The following tables present reconciliations of net income (loss) to NOI and Cash NOI for the three months ended March 31, 2017 and 2016.

 

 

For the Three Months Ended March 31, 2017

 

(Amounts in thousands)

Total

 

New York

 

Washington, D.C.

 

San Francisco

 

Other

 

Reconciliation of net income (loss) to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOI and Cash NOI:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

1,629

 

$

1,490

 

$

7,580

 

$

1,631

 

$

(9,072

)

Add (subtract) adjustments to arrive at NOI

   and Cash NOI:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

62,992

 

 

39,031

 

 

5,281

 

 

18,049

 

 

631

 

General and administrative

 

13,581

 

 

-

 

 

-

 

 

-

 

 

13,581

 

Interest and debt expense

 

39,733

 

 

22,001

 

 

2,011

 

 

13,478

 

 

2,243

 

Transaction related costs

 

275

 

 

-

 

 

-

 

 

-

 

 

275

 

Income tax expense

 

4,282

 

 

-

 

 

-

 

 

5

 

 

4,277

 

NOI from unconsolidated joint ventures

 

4,823

 

 

4,753

 

 

-

 

 

-

 

 

70

 

Income from unconsolidated real estate funds

 

(288

)

 

-

 

 

-

 

 

-

 

 

(288

)

Income from unconsolidated joint ventures

 

(1,937

)

 

(1,925

)

 

-

 

 

-

 

 

(12

)

Fee income

 

(9,556

)

 

-

 

 

-

 

 

-

 

 

(9,556

)

Interest and other income, net

 

(3,200

)

 

(32

)

 

(9

)

 

(27

)

 

(3,132

)

Unrealized gain on interest rate swaps

 

(1,802

)

 

-

 

 

-

 

 

(1,802

)

 

-

 

NOI

 

110,532

 

 

65,318

 

 

14,863

 

 

31,334

 

 

(983

)

Less NOI attributable to noncontrolling interests in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated real estate fund

 

(141

)

 

-

 

 

-

 

 

-

 

 

(141

)

Consolidated joint ventures

 

(12,029

)

 

-

 

 

-

 

 

(12,029

)

 

-

 

Paramount's share of NOI

$

98,362

 

$

65,318

 

$

14,863

 

$

19,305

 

$

(1,124

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOI

$

110,532

 

$

65,318

 

$

14,863

 

$

31,334

 

$

(983

)

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Straight-line rent adjustments (including our share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of unconsolidated joint ventures)

 

(20,511

)

 

(13,968

)

 

(1,063

)

 

(5,541

)

 

61

 

Amortization of above and below-market leases,

   net (including our share of unconsolidated

   joint ventures)

 

(2,881

)

 

2,140

 

 

(547

)

 

(4,474

)

 

-

 

Cash NOI

 

87,140

 

 

53,490

 

 

13,253

 

 

21,319

 

 

(922

)

Less Cash NOI attributable to noncontrolling

   interests in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated real estate fund

 

(141

)

 

-

 

 

-

 

 

-

 

 

(141

)

Consolidated joint ventures

 

(7,882

)

 

-

 

 

-

 

 

(7,882

)

 

-

 

Paramount's share of Cash NOI

$

79,117

 

$

53,490

 

$

13,253

 

$

13,437

 

$

(1,063

)

41

 


 

 

 

 

For the Three Months Ended March 31, 2016

 

(Amounts in thousands)

Total

 

New York

 

Washington, D.C.

 

San Francisco

 

Other

 

Reconciliation of net (loss) income to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOI and Cash NOI:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

$

(7,487

)

$

8,089

 

$

(433

)

$

470

 

$

(15,613

)

Add (subtract) adjustments to arrive at NOI

   and Cash NOI:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

74,812

 

 

53,161

 

 

7,742

 

 

13,520

 

 

389

 

General and administrative

 

13,961

 

 

-

 

 

-

 

 

-

 

 

13,961

 

Interest and debt expense

 

37,119

 

 

16,942

 

 

5,133

 

 

13,793

 

 

1,251

 

Transaction related costs

 

935

 

 

-

 

 

-

 

 

-

 

 

935

 

Income tax expense (benefit)

 

363

 

 

-

 

 

(716

)

 

28

 

 

1,051

 

NOI from unconsolidated joint ventures

 

4,428

 

 

4,347

 

 

-

 

 

-

 

 

81

 

Loss from unconsolidated real estate funds

 

326

 

 

-

 

 

-

 

 

-

 

 

326

 

Income from unconsolidated joint ventures

 

(1,496

)

 

(1,476

)

 

-

 

 

-

 

 

(20

)

Fee income

 

(3,417

)

 

-

 

 

-

 

 

-

 

 

(3,417

)

Interest and other income, net

 

(1,700

)

 

(49

)

 

(19

)

 

(6

)

 

(1,626

)

Unrealized gain on interest rate swaps

 

(6,860

)

 

(1,501

)

 

-

 

 

(5,359

)

 

-

 

NOI

 

110,984

 

 

79,513

 

 

11,707

 

 

22,446

 

 

(2,682

)

Less NOI attributable to noncontrolling interests in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated real estate fund

 

450

 

 

-

 

 

-

 

 

-

 

 

450

 

Consolidated joint ventures

 

(11,269

)

 

-

 

 

-

 

 

(11,269

)

 

-

 

Paramount's share of NOI

$

100,165

 

$

79,513

 

$

11,707

 

$

11,177

 

$

(2,232

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOI

$

110,984

 

$

79,513

 

$

11,707

 

$

22,446

 

$

(2,682

)

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Straight-line rent adjustments (including our share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of unconsolidated joint ventures)

 

(19,970

)

 

(16,688

)

 

(622

)

 

(2,719

)

 

59

 

Amortization of above and below-market leases, net

 

3,619

 

 

8,169

 

 

(553

)

 

(3,997

)

 

-

 

Cash NOI

 

94,633

 

 

70,994

 

 

10,532

 

 

15,730

 

 

(2,623

)

Less Cash NOI attributable to noncontrolling

   interests in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated real estate fund

 

450

 

 

-

 

 

-

 

 

-

 

 

450

 

Consolidated joint ventures

 

(7,844

)

 

-

 

 

-

 

 

(7,844

)

 

-

 

Paramount's share of Cash NOI

$

87,239

 

$

70,994

 

$

10,532

 

$

7,886

 

$

(2,173

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


42

 


 

Same Store NOI

 

The tables below set forth the reconciliations of our share of NOI to Same Store NOI and Same Store Cash NOI for the three months ended March 31, 2017 and 2016. 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 Cash NOI excludes the effect of non-cash items such as the straight-lining of rental revenue and the amortization of above and below-market leases.

 

 

 

 

For the Three Months Ended March 31, 2017

 

 

 

(Amounts in thousands)

 

Total

 

 

New York

 

 

Washington, D.C.

 

 

San Francisco

 

 

Other

 

 

 

Paramount's share of NOI for the three

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   months ended March 31, 2017

 

$

98,362

 

 

$

65,318

 

 

$

14,863

 

 

$

19,305

 

 

$

(1,124

)

 

 

Acquisitions (1)

 

 

(8,039

)

 

 

(546

)

 

 

-

 

 

 

(7,493

)

 

 

-

 

 

 

Lease termination income (including our

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

share of unconsolidated joint ventures)

 

 

(66

)

 

 

(66

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

Other, net

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

Paramount's share of Same Store NOI for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

the three months ended March 31, 2017

 

$

90,257

 

 

$

64,706

 

 

$

14,863

 

 

$

11,812

 

 

$

(1,124

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31, 2016

 

 

 

(Amounts in thousands)

 

Total

 

 

New York

 

 

Washington, D.C.

 

 

San Francisco

 

 

Other

 

 

 

Paramount's share of NOI for the three

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

months ended March 31, 2016

 

$

100,165

 

 

$

79,513

 

 

$

11,707

 

 

$

11,177

 

 

$

(2,232

)

 

 

Acquisitions

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

Lease termination income (including our

   share of unconsolidated joint ventures)

 

 

(11,000

)

 

 

(10,968

)

(2)

 

-

 

 

 

(32

)

 

 

-

 

 

 

Other, net

 

 

6,785

 

 

 

6,785

 

(3)

 

-

 

 

 

-

 

 

 

-

 

 

 

Paramount's share of Same Store NOI for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

the three months ended March 31, 2016

 

$

95,950

 

 

$

75,330

 

 

$

11,707

 

 

$

11,145

 

 

$

(2,232

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Decrease) increase in Same Store NOI

 

$

(5,693

)

 

$

(10,624

)

 

$

3,156

 

 

$

667

 

 

$

1,108

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% (Decrease) increase

 

 

(5.9

%)

 

 

(14.1

%)

 

 

27.0

%

 

 

6.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Represents our share of NOI attributable to (i) 60 Wall Street, in New York, which was acquired in January 2017 and (ii) One Front Street, in San Francisco, which was acquired in December 2016.

(2)

Includes $10,861 of cash income from the termination of a tenant’s lease at 1633 Broadway.

(3)

Primarily represents the non-cash write-off primarily related to the above-market lease asset from the termination of a tenant’s lease at 1633 Broadway.


43

 


 

 

 

 

 

 

For the Three Months Ended March 31, 2017

 

 

 

(Amounts in thousands)

 

Total

 

 

New York

 

 

Washington, D.C.

 

 

San Francisco

 

 

Other

 

 

 

Paramount's share of Cash NOI for the three

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

months ended March 31, 2017

 

$

79,117

 

 

$

53,490

 

 

$

13,253

 

 

$

13,437

 

 

$

(1,063

)

 

 

Acquisitions (1)

 

 

(6,224

)

 

 

(614

)

 

 

-

 

 

 

(5,610

)

 

 

-

 

 

 

Lease termination income (including our

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

share of unconsolidated joint ventures)

 

 

(66

)

 

 

(66

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

Other, net

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

Paramount's share of Same Store Cash NOI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for the three months ended March 31, 2017

 

$

72,827

 

 

$

52,810

 

 

$

13,253

 

 

$

7,827

 

 

$

(1,063

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31, 2016

 

 

 

(Amounts in thousands)

 

Total

 

 

New York

 

 

Washington, D.C.

 

 

San Francisco

 

 

Other

 

 

 

Paramount's share of Cash NOI for the three

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

months ended March 31, 2016

 

$

87,239

 

 

$

70,994

 

 

$

10,532

 

 

$

7,886

 

 

$

(2,173

)

 

 

Acquisitions

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

Lease termination income (including our

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

share of unconsolidated joint ventures)

 

 

(11,000

)

 

 

(10,968

)

(2)

 

-

 

 

 

(32

)

 

 

-

 

 

 

Other, net

 

 

473

 

 

 

473

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

Paramount's share of Same Store Cash NOI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for the three months ended March 31, 2016

 

$

76,712

 

 

$

60,499

 

 

$

10,532

 

 

$

7,854

 

 

$

(2,173

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Decrease) increase in Same Store Cash NOI

 

$

(3,885

)

 

$

(7,689

)

 

$

2,721

 

 

$

(27

)

 

$

1,110

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% (Decrease) increase

 

 

(5.1

%)

 

 

(12.7

%)

 

 

25.8

%

 

 

(0.3

%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Represents our share of NOI attributable to (i) 60 Wall Street, in New York, which was acquired in January 2017 and (ii) One Front Street, in San Francisco, which was acquired in December 2016.

 

(2)

Includes $10,861 of cash income from the termination of a tenant’s lease at 1633 Broadway.

 

 

 


44

 


 

FFO and 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 GAAP net income or loss adjusted to exclude net gains from sales of depreciated real estate assets, impairment losses on depreciable real estate and depreciation and amortization expense from 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 transaction related costs, unrealized gains or losses on interest rate swaps, severance costs and defeasance and debt breakage costs, 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. Other REITs may use different methodologies for calculating FFO and Core FFO or use other definitions of FFO and Core FFO and, accordingly, our presentation of these measures may not be comparable to other real estate companies.  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 Three Months Ended March 31,

 

(Amounts in thousands, except share and per share amounts)

2017

 

 

2016

 

Reconciliation of net income (loss) to FFO and Core FFO:

 

 

 

 

 

 

 

 

Net income (loss)

$

1,629

 

 

$

(7,487

)

 

Real estate depreciation and amortization (including our

 

 

 

 

 

 

 

 

 

share of unconsolidated joint ventures)

 

64,840

 

 

 

76,351

 

 

FFO

 

66,469

 

 

 

68,864

 

 

Less FFO attributable to noncontrolling interests in:

 

 

 

 

 

 

 

 

 

Consolidated real estate fund

 

(140

)

 

 

448

 

 

 

Consolidated joint ventures

 

(7,195

)

 

 

(8,147

)

 

 

Operating Partnership

 

(7,545

)

 

 

(11,917

)

 

FFO attributable to common stockholders

$

51,589

 

 

$

49,248

 

 

Per diluted share

$

0.22

 

 

$

0.23

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FFO

$

66,469

 

 

$

68,864

 

 

Non-core items:

 

 

 

 

 

 

 

 

 

Debt breakage costs

 

2,715

 

 

 

-

 

 

 

Unrealized gain on interest rate swaps (including our

 

 

 

 

 

 

 

 

 

 

share of unconsolidated joint ventures)

 

(2,386

)

 

 

(6,860

)

 

 

Transaction related costs

 

275

 

 

 

935

 

 

 

Severance costs

 

-

 

 

 

2,874

 

 

Core FFO

 

67,073

 

 

 

65,813

 

 

Less Core FFO attributable to noncontrolling interests in:

 

 

 

 

 

 

 

 

 

Consolidated real estate fund

 

(140

)

 

 

448

 

 

 

Consolidated joint ventures

 

(7,661

)

 

 

(5,414

)

 

 

Operating Partnership

 

(7,562

)

 

 

(11,855

)

 

Core FFO attributable to common stockholders

$

51,710

 

 

$

48,992

 

 

Per diluted share

$

0.22

 

 

$

0.23

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of weighted average shares outstanding:

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

230,924,271

 

 

 

212,403,593

 

 

Effect of dilutive securities

 

34,170

 

 

 

4,366

 

 

Denominator for FFO and Core FFO per diluted share

 

230,958,441

 

 

 

212,407,959

 


45

 


 

 

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

 

Market risk is the risk of loss from adverse changes in market prices and interest rates. Our future earnings, cash flows and fair values relevant to financial instruments are dependent upon prevalent market interest rates. Our primary market risk results from our indebtedness, which bears interest at both fixed and variable rates. We manage our market risk on variable rate debt by entering into swap agreements to fix the rate on all or a portion of the debt for varying periods through maturity. This in turn, reduces the risks of variability of cash flows created by variable rate debt and mitigates the risk of increases in interest rates. Our objective when undertaking such arrangements is to reduce our floating rate exposure and we do not enter into hedging arrangements for speculative purposes. Subject to maintaining our status as a REIT for Federal income tax purposes, we may utilize swap arrangements in the future.  

The following table summarizes our consolidated debt, the weighted average interest rates and the fair value as of March 31, 2017.

 

Property

 

Rate

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

Thereafter

 

 

Total

 

 

Fair Value

 

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed Rate Debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1633 Broadway(1)

 

 

3.54%

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

1,000,000

 

 

$

1,000,000

 

 

$

1,001,831

 

 

1301 Avenue of the Americas

 

 

3.05%

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

500,000

 

 

 

-

 

 

 

500,000

 

 

 

486,384

 

 

31 West 52nd Street

 

 

3.80%

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

500,000

 

 

 

500,000

 

 

 

481,298

 

 

1899 Pennsylvania Avenue(2)

 

 

4.88%

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

87,179

 

 

 

-

 

 

 

-

 

 

 

87,179

 

 

 

89,331

 

 

Liberty Place(2)

 

 

4.50%

 

 

 

-

 

 

 

84,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

84,000

 

 

 

84,814

 

 

One Market Plaza

 

 

4.03%

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

975,000

 

 

 

975,000

 

 

 

986,105

 

Total Fixed Rate Debt

 

 

3.72%

 

 

$

-

 

 

$

84,000

 

 

$

-

 

 

$

87,179

 

 

$

500,000

 

 

$

2,475,000

 

 

$

3,146,179

 

 

$

3,129,763

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable Rate Debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1633 Broadway

 

 

2.73%

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

30,100

 

 

$

30,100

 

 

$

30,055

 

 

1301 Avenue of the Americas

 

 

2.61%

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

350,000

 

 

 

-

 

 

 

350,000

 

 

 

351,558

 

 

Revolving Credit Facility(2)

 

 

2.23%

 

 

 

-

 

 

 

200,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

200,000

 

 

 

200,018

 

Total Variable Rate Debt

 

 

2.49%

 

 

$

-

 

 

$

200,000

 

 

$

-

 

 

$

-

 

 

$

350,000

 

 

$

30,100

 

 

$

580,100

 

 

$

581,631

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Consolidated Debt

 

 

3.53%

 

 

$

-

 

 

$

284,000

 

 

$

-

 

 

$

87,179

 

 

$

850,000

 

 

$

2,505,100

 

 

$

3,726,279

 

 

$

3,711,394

 

 

 

(1)

This debt has been swapped from floating rate debt to fixed rate debt. See table below.

(2)

We repaid these loans on May 4, 2017.

 

 

In addition to the above, our unconsolidated joint ventures had $842,829,000 of outstanding indebtedness as of March 31, 2017, of which our share was $155,176,000.

 

The following table summarized our fixed rate debt that has been swapped from floating rate to fixed as of March 31, 2017.

 

 

 

Notional

 

 

 

 

 

 

Strike

 

 

Fair Value as of

 

Property

 

Amount

 

 

Effective Date

 

Maturity Date

 

Rate

 

 

March 31, 2017

 

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

1633 Broadway (1)

 

$

1,000,000

 

 

Dec-2015

 

Dec-2020 - Dec-2022

 

 

1.79

%

 

$

2,890

 

1633 Broadway (1)

 

 

400,000

 

 

Dec-2020

 

Dec-2021

 

 

2.35

%

 

 

62

 

Total interest rate swap assets

 

 

 

 

 

$

2,952

 

 

 

(1)

Represents interest rate swaps designated as cash flow hedges. Changes in the fair value of these hedges are recognized in “other comprehensive income (loss)” (outside of earnings).


46

 


 

 

The following table summarizes our pro rata share of total indebtedness and the effect to interest expense of a 100 basis point increase in LIBOR.

 

 

 

March 31, 2017

 

 

December 31, 2016

 

(Amounts in thousands, except per share amount)

 

Balance

 

 

Weighted Average Interest Rate

 

 

Effect of 1% Increase in Base Rates

 

 

Balance

 

 

Weighted Average Interest Rate

 

Paramount's share of consolidated debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable rate

 

$

580,100

 

 

 

2.49

%

 

$

5,801

 

 

$

599,627

 

 

 

2.29

%

Fixed rate (1)

 

 

2,648,929

 

 

 

3.66

%

 

 

-

 

 

 

2,593,343

 

 

 

3.99

%

 

 

$

3,229,029

 

 

 

3.45

%

 

$

5,801

 

 

$

3,192,970

 

 

 

3.67

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Paramount's share of debt of non-consolidated entities

     (non-recourse):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable rate

 

$

85,650

 

 

 

2.96

%

 

$

857

 

 

$

55,750

 

 

 

2.72

%

Fixed rate (1)

 

 

69,526

 

 

 

5.74

%

 

 

-

 

 

 

69,692

 

 

 

5.74

%

 

 

$

155,176

 

 

 

4.21

%

 

$

857

 

 

$

125,442

 

 

 

4.40

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling interests' in the Operating Partnership share of above

 

 

 

 

 

 

$

(849

)

 

 

 

 

 

 

 

 

Total change in annual net income

 

 

 

 

 

 

 

 

 

$

5,809

 

 

 

 

 

 

 

 

 

Per diluted share

 

 

 

 

 

 

 

 

 

$

0.03

 

 

 

 

 

 

 

 

 

 

 

(1)

Our fixed rate debt includes floating rate debt that has been swapped to fixed. See table above.

 

 

 


47

 


 

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. 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, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of March 31, 2017, 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 at the end of the period covered by this Report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded, as of that time, 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.

 

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.  

 

 

 

48

 


 

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 March 31, 2017, 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 2Management’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, 2016.

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Recent Sales of Unregistered Securities

 

For the three months ended March 31, 2017, we issued an aggregate of 1,304,038 shares of common stock in exchange for 1,304,038 common units of our Operating Partnership held by certain limited partners. 115,000 of these shares were issued in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended. We relied on the exemption under Section 4(a)(2) based upon factual representations received from the limited partners who received the shares of common stock.

 

Recent Purchases of Equity Securities

 

Period

 

Total number of shares repurchased

 

 

Average price paid per common share

 

 

Total number of shares purchased as part of publically announced plans or programs

 

Maximum number (or approximate dollar value) of shares that may yet be purchased

January 1, 2017 - January 31, 2017

 

 

-

 

 

$

-

 

 

n/a

 

n/a

February 1, 2017 - February 28, 2017

 

 

-

 

 

 

-

 

 

n/a

 

n/a

March 1, 2017 - March 31, 2017

 

 

9,249

 

(1)

$

16.66

 

 

n/a

 

n/a

______________________________

(1)

Represents shares of common stock surrendered by employees for the satisfaction of tax withholding obligations in connection with the vesting of restricted common stock.

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

None.

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

None.

 

 

ITEM 5.

OTHER INFORMATION

 

None.

 

 

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 attached Exhibit Index.


49

 


 

 

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: May 4, 2017

 

 

By:

/s/ Wilbur Paes

 

 

 

 

Wilbur Paes

 

 

 

 

Executive Vice President, Chief Financial Officer and Treasurer

(duly authorized officer and principal financial and accounting officer)

 

 

 

 


50

 


 

 

 

EXHIBIT INDEX

Exhibit
Number

 

Exhibit Description

 

 

 

 

 

 

 

 

 

 

10.1*

 

Second Amendment to Amended and Restated Limited Partnership Agreement of Paramount Group Operating Partnership LP, dated as of February 22, 2017.

 

 

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.INS*

 

XBRL Instance Document.

 

 

101.SCH*

 

XBRL Taxonomy Extension Schema.

 

 

101.CAL*

 

XBRL Taxonomy Extension Calculation Linkbase.

 

 

101.DEF*

 

XBRL Taxonomy Extension Definition Linkbase.

 

 

101.LAB*

 

XBRL Taxonomy Extension Label Linkbase.

 

 

 

101.PRE*

 

XBRL Taxonomy Extension Presentation Linkbase.

 

 

_______________________

*

 

Filed herewith.

**

 

Furnished herewith.

 

 

51