Wilbur Paes: Sure Steve and I think I kind of alluded last quarter on this. Each process is bespoke. It depends on the quality of the asset. It depends on the quality of the sponsorship and in this case, obviously, One Market Plaza is arguably the best asset in San Francisco and it’s close to 95% leased in-place rent is north of $100 a foot. So, it has a great, great quality together backed with great sponsorship. I think we were very early on talking to our lenders in this instance. I think the sponsorship, the relationships all this play into the factor of getting a superb execution done.
Albert Behler: And that relationships, Wilbur mentioned it, relationships is a very important — it’s part of our culture at Paramount and we think that is very important for the long-term and we try to have the best relationships with our lenders. And I think the straightforwardness and the forthrightness and dealing with these situations have helped Wilbur and his team. And that’s the way how we approach things.
Steve Sakwa: Okay. Just last question maybe for Peter. Just on the leasing, I appreciate the color on kind of the pipeline. Just any color around the types of tenants that you’re speaking to? Is it broadening out at all from financial services and legal? And I guess I know you’ve got this big Google expiration coming up in 2025. The loan there got extended for three years. Does that is that sufficient to maybe allay any fears that maybe they had about kind of the ownership of that building as they think about space needs in San Francisco?
Peter Brindley: Certainly I think they acknowledge that it was really very important what we accomplished and it shows our investment and our commitment to that property. And we’ve had productive conversations and there’s not much really as I said earlier I can say as it relates specifically to Google. But I will generally say One Market in terms of the limited availability and vacancy that we do have happens to be active currently. And so we feel good about that. As it relates to the types of tenants we’re speaking to in New York. It’s predominantly financial services and legal. The legal industry in 2023 contributed 20% towards leasing velocity. They represent about 11%, 12% of our market in Midtown. So they continue to show up and we’re seeing them with proposals and tours and they’re generally very active.
In San Francisco, it’s predominantly tech that we’re communicating with and we’re speaking and trading paper with some smaller AI-based companies. It’s interesting. At this time last year, AI was not really much in terms of part of the tenants in the market pipeline and by year’s end they had contributed about 25% towards total leasing activity in 2023. So these requirements come about very quickly. We have our eyes wide open. We’re in front of every one of these requirements. When I refer to the 25% of course that was made up primarily of Anthropic and OpenAI but these are requirements that come about very quickly and we’re in front of them and we’re trading paper with them. So as Albert mentioned earlier, this is a market that can change very quickly.
And I think the team is doing a very nice job being in front of every single requirement and when we have an opportunity our buildings show very, very well. So we are hyper focused on leasing our vacant spaces and then of course dealing with the role that we have in front of us in San Francisco.
Steve Sakwa: Great. That’s it for me. Thanks.
Wilbur Paes: Thank you, Steve.
Operator: Next question Tom Catherwood with BTIG. Please go ahead.
Tom Catherwood: Thanks and good morning, everybody. Maybe going back to your comments about capital allocation and focusing on retaining tenants with expiring leases over the next few years. Do you have near-term plans to invest additional capital into select buildings to facilitate these expansions beyond just the normal course leasing expenses?
Albert Behler: Well, we have – as you know we have worked on the amenity center that we call the Paramount Club here at 1301 Sixth Avenue. It’s going to open in the second quarter of this year. Peter has talked about it a couple of times. We got some very positive feedback already from tenants. They are already booking space for events. And that’s something that’s really the team spent a lot of time on it to really structure it. So it’s helpful for the infrastructure of the Paramount buildings here in Midtown. So we are very focused on hospitality. We are very focused – but these are soft factors on security in these assets. Other than that, I think Tom, we talked about in the past, our assets are pretty well maintained and they are kept very modern and we do upgrades where they are necessary. And we have done that in San Francisco. We have a couple of amenity facilities in the various buildings there. And I think that’s why tenants like these kind of assets.
Tom Catherwood: Thank you. That’s it…
Wilbur Paes: Tom, just to add to what Albert said. Obviously, in terms of major CapEx, when you look at the portfolio, it’s really the amenity center that we have about $10 million-or-so left to spend. We had talked about that being roughly a $39 million project, of which $29 million has already been spent through year. So you got about a $10 million spend there. And the only other outside of regular TI CapEx is the — our share of the development on 60 Wall. And again, that’s going to get offset by the fee stream that we generate from that project.
Albert Behler: And we only have 5% in that asset. So that’s a long negotiation that was held with the lending team and with our partners and there will be a large amount of capital being invested. We talked about that and as Wilbur was saying that’s basically for Paramount, since our share is limited and it will be relatively benign.
Tom Catherwood: Got it. So I appreciate that. Let me just make sure I put this together and understand it. So going back to Peter’s comments on the 1.1 million square feet expiring in San Francisco through 2025. So there aren’t the major capital projects to get ahead of some of those expirations in One Front or One Market Plaza. I think the buildings are up for and then in that case it’s just the leasing costs from a capital allocation front.
Peter Brindley: That’s correct.
Tom Catherwood: Got it. Got it. Then maybe —
Peter Brindley : 1.1 million square feet in 2025 not through 2025.
Tom Catherwood: Got it. Thanks, Peter. Then maybe going over to the non-core portfolio and Wilbur I appreciated all the explanation of thought process and the capital allocation. But what is the risk of other assets heading in that direction especially given the impairment on 55 Second in 4Q?
Wilbur Paes: Look, I think each asset has to be looked at differently. We’ve said this at risk of sounding like a broken record, but the impairment that was taken on 55 Second end market center was taken at the joint venture level. It wasn’t us impairing our investment in the JV. They are two very different models for impairment. So there was a real estate impairment at the property level that we picked up our pro rata share, which caused our basis to go to zero. So in the case of 55 Second you run through the model, you run through lease expirations. And obviously, you have KPMG’s lease expiration that’s looming on that. And so all those things were factored in and you run through an undiscounted model and if the undiscounted cash flows are lower than the basis then you go to a step two approach, where you measure it on fair value and that’s how that impairment loss was derived. I would not take a GAAP impairment loss as an indication of strategy.
Tom Catherwood: Appreciate that color, Wilbur. Thank you for that. And kind of last one for me, Albert you mentioned very distinctly remaining disciplined on allocating capital. Along those lines though there’s a number of firms out either raising opportunistic funds or now deploying opportunistic funds. And over time that was very much part of Paramount’s DNA. What is your appetite for maybe expanding your involvement in this side of the fund business again?
Albert Behler: Well we — this is not new. We have been in the market to just now to raise our special opportunity fund. And that fund is — it’s focused especially on these opportunities. It’s a fund very similar to the previous funds. We had a special situation funds before the company went public in 2007, 2008 that special situation fund number one did very well for our investors. And we are out marketing that fund. I don’t want to say what kind of numbers we are expecting. We are hopeful currently that we have the first closing in the first half of this year. And then we take it from there. I think it’s a great opportunity, because I think, in the later part of this year and in 2025 there will be opportunities there. And we will take advantage of it.
Tom Catherwood: Appreciate all the answers. Thanks everyone.
Albert Behler: Thank you.
Operator: [Operator Instructions] Next question comes from Blaine Heck with Wells Fargo. Please go ahead.
Blaine Heck: Great. Thanks. Good morning. So just to be clear the core 2024 guidance excludes the income from 111 Sutter and Market Center, but also excludes the interest expense from those assets. So first is that correct? And second, I guess, I understand putting some NOI and discontinued operations, but I’m not sure I’ve ever seen the associated interest expense excluded. So can you just talk about how you came to that decision? And whether you guys will continue to in your presentation get both total FFO, including the impact from non-core assets along with the core FFO, excluding all impacts from those assets as long as they’re still in the portfolio?
Wilbur Paes: So to answer your first part that is correct. The core figures, exclude any contribution positive or negative from those assets. We have dimensioned it both for 2023 and 2024. To answer the second part of your question, it will absolutely be included in FFO. Hence, the alternative measure Core FFO where we are taking out, elements that distort the comparability of earnings period-over-period. And because a decision has been made on these assets not to invest additional capital, nor fund the interest expense shortfalls. It is entirely appropriate to remove that from your core operations and show it as the way we look at our business, so that investors can appreciate the comparability of results year-over-year. But it absolutely will be included in the Nareit definition of FFO.
