Paramount Group (PGRE) Key Takeaways:
- Still no tenant taking space in the lower floors of 1301 AoA - would be very surprised if any tenants make a long-term commitment to a portion of that ~500ksf block in the near-term, given that the pace of reopening was not set to accelerate until post-Labor Day anyway, and we now have the Delta variant to deal with and see the likes of Google/Apple pushing back the return to office. Expect this to be a long-term lift, with it being very possible that there is no cash revenue booked on that space until well into 2023 at the earliest. The question is, therefore, why hang around in the stock on the long side for that to play out when you can gain exposure to the reopening through the Coastal Gateway Apartment names with much better economics/clarity and greater exposure to favorable style factors? We have been Long Bias AVB & EQR, and continue to recommend that clients play derivatives of the "return to office" trade. We do not yet know what the net reduction in days spent at the office (and related demand for office square feet) will be, but we do know that employees will need to live in close to split time between the home and company office
- Consistent with what we have seen from other REITs including EQR, the pace of recovery in SF is lagging well-behind NYC, but fortunately PGRE has only ~2.5% of overall space/rent expiring next year in that market. Expect the pending expiration of former Uber space at Market Center to be raised more often in coming quarters
- On the positive side expect news on the 1301 AoA refinancing next week potentially. Recall the issue is a pending 4Q21 $850 million debt maturity at a time when the asset is ~70% leased and occupied, so the timing is obviously not optimal. The risk was that the refinancing would require a partial paydown of principal, aka the ~$500 million of cash on the balance sheet at quarter-end wasn't the "real" cash balance. It now looks like the refinancing should get done without a required paydown which is a positive, and the question turns to what does PGRE do with the cash
- We would NOT recommend buying back stock, which may surprise some as it is the typical ask by the sell-side for stocks trading meaningfully below "NAV." The track record and timing has been terrible for the entire space (PGRE and SLG included in office) and the capital is probably more valuable kept in-pocket until the pace of recovery or lack thereof becomes more clear. NAVs are inherently subjective, and right now "buying below NAV" is more subjective than ever in office and could result in effectively decapitalizing the company if done in any size. As a matter of fact, the only reason to own the stock right here is on a potential takeout (low probability we think), with the most productive use of that cash being rolled into any transaction. It is very hard to have any visibility into a positive ROC scenario or sustained Core FFO earnings growth, which the market is placing a premium on
Please call or e-mail with any questions.
Rob Simone, CFA
Managing Director
Twitter: @HedgeyeREITs
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