2016 Annual Report
One Market Plaza, San Francisco
One Market Plaza, San Francisco
Dear Shareholders,
When we elected to go public in 2014, our goal was simple: provide investors with a
platform to invest in a focused REIT with properties in high barrier to entry, supply
(cid:70)(cid:82)(cid:81)(cid:86)(cid:87)(cid:85)(cid:68)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:68)(cid:79)(cid:86)(cid:82)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:86)(cid:76)(cid:74)(cid:81)(cid:76)(cid:262)(cid:70)(cid:68)(cid:81)(cid:87)(cid:3)(cid:72)(cid:80)(cid:69)(cid:72)(cid:71)(cid:71)(cid:72)(cid:71)(cid:3)(cid:74)(cid:85)(cid:82)(cid:90)(cid:87)(cid:75)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:82)(cid:80)(cid:72)(cid:17)(cid:3)
Over the last two years, we have made tremendous strides in achieving that goal,
(cid:79)(cid:72)(cid:68)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:21)(cid:17)(cid:20)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:86)(cid:84)(cid:88)(cid:68)(cid:85)(cid:72)(cid:3)(cid:73)(cid:72)(cid:72)(cid:87)(cid:3)(cid:68)(cid:87)(cid:3)(cid:68)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:229)(cid:87)(cid:82)(cid:229)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:20)(cid:20)(cid:17)(cid:23)(cid:8)(cid:17)(cid:3)(cid:43)(cid:82)(cid:90)(cid:72)(cid:89)(cid:72)(cid:85)(cid:15)(cid:3)
(cid:71)(cid:88)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:86)(cid:68)(cid:80)(cid:72)(cid:3)(cid:87)(cid:76)(cid:80)(cid:72)(cid:15)(cid:3)(cid:90)(cid:72)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:85)(cid:76)(cid:72)(cid:81)(cid:70)(cid:72)(cid:71)(cid:3)(cid:68)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:69)(cid:82)(cid:89)(cid:72)(cid:229)(cid:68)(cid:89)(cid:72)(cid:85)(cid:68)(cid:74)(cid:72)(cid:3)(cid:79)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:72)(cid:91)(cid:83)(cid:76)(cid:85)(cid:68)-
(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:15)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:234)(cid:90)(cid:72)(cid:79)(cid:79)(cid:229)(cid:83)(cid:88)(cid:69)(cid:79)(cid:76)(cid:70)(cid:76)(cid:93)(cid:72)(cid:71)(cid:235)(cid:3)(cid:79)(cid:68)(cid:85)(cid:74)(cid:72)(cid:229)(cid:69)(cid:79)(cid:82)(cid:70)(cid:78)(cid:3)(cid:78)(cid:81)(cid:82)(cid:90)(cid:81)(cid:3)(cid:80)(cid:82)(cid:89)(cid:72)(cid:229)(cid:82)(cid:88)(cid:87)(cid:86)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:75)(cid:88)(cid:85)(cid:87)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)
(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:263)(cid:82)(cid:90)(cid:3)(cid:76)(cid:81)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:15)(cid:3)(cid:68)(cid:86)(cid:3)(cid:68)(cid:3)(cid:86)(cid:88)(cid:69)(cid:86)(cid:87)(cid:68)(cid:81)(cid:87)(cid:76)(cid:68)(cid:79)(cid:3)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:79)(cid:72)(cid:68)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:72)(cid:73)(cid:73)(cid:82)(cid:85)(cid:87)(cid:86)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:68)(cid:86)(cid:87)(cid:3)(cid:87)(cid:90)(cid:82)(cid:3)
(cid:92)(cid:72)(cid:68)(cid:85)(cid:86)(cid:3)(cid:75)(cid:68)(cid:71)(cid:3)(cid:92)(cid:72)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:69)(cid:72)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:83)(cid:68)(cid:92)(cid:76)(cid:81)(cid:74)(cid:17)
But the good news is: we are now entering a transition period of stronger cash
(cid:49)(cid:50)(cid:44)(cid:3)(cid:74)(cid:85)(cid:82)(cid:90)(cid:87)(cid:75)(cid:15)(cid:3)(cid:68)(cid:86)(cid:3)(cid:85)(cid:72)(cid:70)(cid:72)(cid:81)(cid:87)(cid:79)(cid:92)(cid:3)(cid:86)(cid:76)(cid:74)(cid:81)(cid:72)(cid:71)(cid:3)(cid:79)(cid:72)(cid:68)(cid:86)(cid:72)(cid:86)(cid:3)(cid:69)(cid:72)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:83)(cid:68)(cid:92)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:81)(cid:3)(cid:21)(cid:19)(cid:20)(cid:26)(cid:17)(cid:3)(cid:55)(cid:75)(cid:76)(cid:86)(cid:3)(cid:74)(cid:76)(cid:89)(cid:72)(cid:86)(cid:3)(cid:88)(cid:86)(cid:3)
the opportunity to provide our investors with sector leading same store cash NOI
(cid:74)(cid:85)(cid:82)(cid:90)(cid:87)(cid:75)(cid:3)(cid:76)(cid:81)(cid:3)(cid:21)(cid:19)(cid:20)(cid:26)(cid:17)(cid:3)(cid:36)(cid:71)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:79)(cid:92)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:79)(cid:72)(cid:68)(cid:86)(cid:72)(cid:229)(cid:88)(cid:83)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:89)(cid:68)(cid:70)(cid:68)(cid:81)(cid:87)(cid:3)(cid:86)(cid:83)(cid:68)(cid:70)(cid:72)(cid:3)(cid:79)(cid:72)(cid:73)(cid:87)(cid:3)(cid:69)(cid:72)(cid:75)(cid:76)(cid:81)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:86)(cid:72)(cid:3)
(cid:79)(cid:68)(cid:85)(cid:74)(cid:72)(cid:229)(cid:69)(cid:79)(cid:82)(cid:70)(cid:78)(cid:3)(cid:78)(cid:81)(cid:82)(cid:90)(cid:81)(cid:3)(cid:80)(cid:82)(cid:89)(cid:72)(cid:229)(cid:82)(cid:88)(cid:87)(cid:86)(cid:3)(cid:90)(cid:76)(cid:79)(cid:79)(cid:3)(cid:73)(cid:88)(cid:85)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:72)(cid:3)(cid:88)(cid:86)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:86)(cid:76)(cid:74)(cid:81)(cid:76)(cid:262)(cid:70)(cid:68)(cid:81)(cid:87)(cid:3)(cid:86)(cid:68)(cid:80)(cid:72)(cid:3)(cid:86)(cid:87)(cid:82)(cid:85)(cid:72)(cid:3)
(cid:74)(cid:85)(cid:82)(cid:90)(cid:87)(cid:75)(cid:3)(cid:83)(cid:85)(cid:82)(cid:86)(cid:83)(cid:72)(cid:70)(cid:87)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:82)(cid:80)(cid:72)(cid:17)(cid:3)
Markets
Our approach is steadfast and focused on our three core markets of New York,
(cid:58)(cid:68)(cid:86)(cid:75)(cid:76)(cid:81)(cid:74)(cid:87)(cid:82)(cid:81)(cid:15)(cid:3)(cid:39)(cid:17)(cid:38)(cid:17)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:54)(cid:68)(cid:81)(cid:3)(cid:41)(cid:85)(cid:68)(cid:81)(cid:70)(cid:76)(cid:86)(cid:70)(cid:82)(cid:17)(cid:3)(cid:50)(cid:88)(cid:85)(cid:3)(cid:86)(cid:88)(cid:69)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:86)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:86)(cid:72)(cid:3)(cid:80)(cid:68)(cid:77)(cid:82)(cid:85)(cid:3)(cid:70)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)
(cid:68)(cid:80)(cid:82)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:87)(cid:85)(cid:82)(cid:81)(cid:74)(cid:72)(cid:86)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:80)(cid:82)(cid:86)(cid:87)(cid:3)(cid:68)(cid:87)(cid:87)(cid:85)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:56)(cid:17)(cid:54)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:70)(cid:82)(cid:80)(cid:69)(cid:76)(cid:81)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:87)(cid:85)(cid:68)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)
supply given the high barriers to entry, strong economic characteristics and the large
(cid:83)(cid:82)(cid:82)(cid:79)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:83)(cid:85)(cid:82)(cid:86)(cid:83)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:87)(cid:72)(cid:81)(cid:68)(cid:81)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:71)(cid:76)(cid:89)(cid:72)(cid:85)(cid:86)(cid:72)(cid:3)(cid:76)(cid:81)(cid:71)(cid:88)(cid:86)(cid:87)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3)(cid:71)(cid:72)(cid:80)(cid:68)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:75)(cid:76)(cid:74)(cid:75)(cid:229)(cid:84)(cid:88)(cid:68)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:82)(cid:73)(cid:262)(cid:70)(cid:72)(cid:3)
(cid:86)(cid:83)(cid:68)(cid:70)(cid:72)(cid:3)(cid:80)(cid:68)(cid:78)(cid:72)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:83)(cid:82)(cid:85)(cid:87)(cid:73)(cid:82)(cid:79)(cid:76)(cid:82)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:76)(cid:70)(cid:88)(cid:79)(cid:68)(cid:85)(cid:79)(cid:92)(cid:3)(cid:90)(cid:72)(cid:79)(cid:79)(cid:3)(cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:72)(cid:71)(cid:17)(cid:3)(cid:44)(cid:81)(cid:3)(cid:68)(cid:71)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:90)(cid:72)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:90)(cid:72)(cid:79)(cid:79)(cid:3)(cid:83)(cid:85)(cid:72)-
pared to meet this demand given our fully integrated approach to asset and property
management which encompasses our leasing department and construction services,
(cid:68)(cid:86)(cid:3)(cid:90)(cid:72)(cid:79)(cid:79)(cid:3)(cid:68)(cid:86)(cid:3)(cid:76)(cid:81)(cid:229)(cid:75)(cid:82)(cid:88)(cid:86)(cid:72)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:76)(cid:81)(cid:74)(cid:15)(cid:3)(cid:68)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:79)(cid:72)(cid:74)(cid:68)(cid:79)(cid:3)(cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:86)(cid:17)(cid:3)
Leasing
(cid:47)(cid:72)(cid:68)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:234)(cid:70)(cid:82)(cid:85)(cid:72)(cid:235)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:17)(cid:3)(cid:55)(cid:82)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:83)(cid:82)(cid:76)(cid:81)(cid:87)(cid:15)(cid:3)(cid:76)(cid:81)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:15)(cid:3)(cid:90)(cid:72)(cid:3)(cid:79)(cid:72)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:26)(cid:22)(cid:23)(cid:15)(cid:19)(cid:19)(cid:19)(cid:3)
(cid:86)(cid:84)(cid:88)(cid:68)(cid:85)(cid:72)(cid:3)(cid:73)(cid:72)(cid:72)(cid:87)(cid:15)(cid:3)(cid:82)(cid:85)(cid:3)(cid:68)(cid:69)(cid:82)(cid:88)(cid:87)(cid:3)(cid:25)(cid:17)(cid:27)(cid:8)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:83)(cid:82)(cid:85)(cid:87)(cid:73)(cid:82)(cid:79)(cid:76)(cid:82)(cid:17)(cid:3)(cid:49)(cid:82)(cid:87)(cid:90)(cid:76)(cid:87)(cid:75)(cid:86)(cid:87)(cid:68)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:79)(cid:72)(cid:68)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:72)(cid:73)(cid:73)(cid:82)(cid:85)(cid:87)(cid:86)(cid:15)(cid:3)
(cid:87)(cid:75)(cid:72)(cid:3)(cid:79)(cid:72)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:70)(cid:70)(cid:88)(cid:83)(cid:68)(cid:81)(cid:70)(cid:92)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:83)(cid:82)(cid:85)(cid:87)(cid:73)(cid:82)(cid:79)(cid:76)(cid:82)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:28)(cid:21)(cid:17)(cid:26)(cid:8)(cid:15)(cid:3)(cid:71)(cid:82)(cid:90)(cid:81)(cid:3)(cid:21)(cid:20)(cid:19)(cid:3)(cid:69)(cid:68)(cid:86)(cid:76)(cid:86)(cid:3)(cid:83)(cid:82)(cid:76)(cid:81)(cid:87)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)
(cid:72)(cid:81)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:85)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:86)(cid:68)(cid:80)(cid:72)(cid:3)(cid:87)(cid:76)(cid:80)(cid:72)(cid:3)(cid:68)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3)(cid:68)(cid:74)(cid:82)(cid:17)(cid:3)(cid:44)(cid:73)(cid:3)(cid:92)(cid:82)(cid:88)(cid:3)(cid:72)(cid:91)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:81)(cid:72)(cid:90)(cid:79)(cid:92)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:71)(cid:3)
(cid:50)(cid:81)(cid:72)(cid:3)(cid:41)(cid:85)(cid:82)(cid:81)(cid:87)(cid:3)(cid:54)(cid:87)(cid:85)(cid:72)(cid:72)(cid:87)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:68)(cid:80)(cid:72)(cid:3)(cid:86)(cid:87)(cid:82)(cid:85)(cid:72)(cid:3)(cid:79)(cid:72)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:70)(cid:70)(cid:88)(cid:83)(cid:68)(cid:81)(cid:70)(cid:92)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:28)(cid:21)(cid:17)(cid:21)(cid:8)(cid:15)(cid:3)(cid:71)(cid:82)(cid:90)(cid:81)(cid:3)(cid:21)(cid:25)(cid:19)(cid:3)(cid:69)(cid:68)(cid:86)(cid:76)(cid:86)(cid:3)
(cid:83)(cid:82)(cid:76)(cid:81)(cid:87)(cid:86)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:68)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3)(cid:68)(cid:74)(cid:82)(cid:17)(cid:3)(cid:55)(cid:75)(cid:76)(cid:86)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:79)(cid:68)(cid:85)(cid:74)(cid:72)(cid:79)(cid:92)(cid:3)(cid:71)(cid:88)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:69)(cid:82)(cid:89)(cid:72)(cid:229)(cid:68)(cid:89)(cid:72)(cid:85)(cid:68)(cid:74)(cid:72)(cid:3)(cid:79)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:72)(cid:91)(cid:83)(cid:76)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)
(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:79)(cid:68)(cid:85)(cid:74)(cid:72)(cid:229)(cid:69)(cid:79)(cid:82)(cid:70)(cid:78)(cid:3)(cid:78)(cid:81)(cid:82)(cid:90)(cid:81)(cid:3)(cid:80)(cid:82)(cid:89)(cid:72)(cid:229)(cid:82)(cid:88)(cid:87)(cid:86)(cid:3)(cid:71)(cid:88)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:17)(cid:3)(cid:58)(cid:75)(cid:76)(cid:79)(cid:72)(cid:3)(cid:90)(cid:72)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:81)(cid:82)(cid:87)(cid:3)(cid:87)(cid:75)(cid:85)(cid:76)(cid:79)(cid:79)(cid:72)(cid:71)(cid:3)
(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:86)(cid:68)(cid:80)(cid:72)(cid:3)(cid:86)(cid:87)(cid:82)(cid:85)(cid:72)(cid:3)(cid:83)(cid:82)(cid:85)(cid:87)(cid:73)(cid:82)(cid:79)(cid:76)(cid:82)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:28)(cid:21)(cid:17)(cid:21)(cid:8)(cid:3)(cid:79)(cid:72)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:68)(cid:87)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:229)(cid:72)(cid:81)(cid:71)(cid:15)(cid:3)(cid:76)(cid:87)(cid:3)(cid:71)(cid:82)(cid:72)(cid:86)(cid:3)(cid:75)(cid:76)(cid:74)(cid:75)(cid:79)(cid:76)(cid:74)(cid:75)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)
(cid:86)(cid:76)(cid:74)(cid:81)(cid:76)(cid:262)(cid:70)(cid:68)(cid:81)(cid:87)(cid:3)(cid:72)(cid:80)(cid:69)(cid:72)(cid:71)(cid:71)(cid:72)(cid:71)(cid:3)(cid:74)(cid:85)(cid:82)(cid:90)(cid:87)(cid:75)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:79)(cid:76)(cid:72)(cid:86)(cid:3)(cid:68)(cid:75)(cid:72)(cid:68)(cid:71)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:80)(cid:68)(cid:78)(cid:72)(cid:86)(cid:3)(cid:79)(cid:72)(cid:68)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:234)(cid:87)(cid:75)(cid:72)(cid:235)(cid:3)(cid:73)(cid:82)(cid:70)(cid:88)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)
(cid:82)(cid:88)(cid:85)(cid:3)(cid:72)(cid:81)(cid:87)(cid:76)(cid:85)(cid:72)(cid:3)(cid:87)(cid:72)(cid:68)(cid:80)(cid:17)(cid:3)(cid:55)(cid:75)(cid:76)(cid:86)(cid:15)(cid:3)(cid:70)(cid:82)(cid:88)(cid:83)(cid:79)(cid:72)(cid:71)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:73)(cid:68)(cid:70)(cid:87)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:79)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:72)(cid:91)(cid:83)(cid:76)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:87)(cid:75)(cid:85)(cid:82)(cid:88)(cid:74)(cid:75)(cid:3)(cid:21)(cid:19)(cid:21)(cid:19)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)
(cid:69)(cid:72)(cid:79)(cid:82)(cid:90)(cid:3)(cid:68)(cid:89)(cid:72)(cid:85)(cid:68)(cid:74)(cid:72)(cid:3)(cid:68)(cid:87)(cid:3)(cid:79)(cid:72)(cid:86)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:81)(cid:3)(cid:24)(cid:8)(cid:3)(cid:83)(cid:72)(cid:85)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:15)(cid:3)(cid:74)(cid:76)(cid:89)(cid:72)(cid:86)(cid:3)(cid:88)(cid:86)(cid:3)(cid:87)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:71)(cid:82)(cid:88)(cid:86)(cid:3)(cid:70)(cid:82)(cid:81)(cid:262)(cid:71)(cid:72)(cid:81)(cid:70)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:69)(cid:72)(cid:76)(cid:81)(cid:74)(cid:3)
(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:76)(cid:81)(cid:88)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:79)(cid:72)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:70)(cid:70)(cid:88)(cid:83)(cid:68)(cid:81)(cid:70)(cid:92)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:82)(cid:80)(cid:72)(cid:17)(cid:3)
e
g
a
s
s
e
M
s
’
t
n
e
d
i
s
e
r
P
&
O
E
C
,
n
a
m
r
i
a
h
C
Capital Allocation
(cid:58)(cid:72)(cid:3)(cid:80)(cid:68)(cid:76)(cid:81)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:68)(cid:3)(cid:89)(cid:72)(cid:85)(cid:92)(cid:3)(cid:83)(cid:85)(cid:88)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:83)(cid:83)(cid:85)(cid:82)(cid:68)(cid:70)(cid:75)(cid:3)(cid:87)(cid:82)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:71)(cid:76)(cid:86)(cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:17)(cid:3)(cid:44)(cid:81)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:15)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)
(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:86)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:76)(cid:81)(cid:88)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:85)(cid:76)(cid:72)(cid:81)(cid:70)(cid:72)(cid:3)(cid:68)(cid:3)(cid:86)(cid:87)(cid:85)(cid:82)(cid:81)(cid:74)(cid:3)(cid:76)(cid:81)(cid:263)(cid:82)(cid:90)(cid:3)(cid:82)(cid:73)(cid:3)(cid:74)(cid:79)(cid:82)(cid:69)(cid:68)(cid:79)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:78)(cid:72)(cid:83)(cid:87)(cid:3)(cid:70)(cid:68)(cid:83)(cid:3)
(cid:85)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:79)(cid:82)(cid:90)(cid:17)(cid:3)(cid:58)(cid:75)(cid:76)(cid:79)(cid:72)(cid:3)(cid:90)(cid:72)(cid:3)(cid:71)(cid:82)(cid:81)(cid:232)(cid:87)(cid:3)(cid:89)(cid:76)(cid:72)(cid:90)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:75)(cid:76)(cid:74)(cid:75)(cid:3)(cid:83)(cid:85)(cid:76)(cid:70)(cid:72)(cid:86)(cid:3)(cid:68)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:76)(cid:74)(cid:75)(cid:87)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:68)(cid:79)(cid:79)(cid:82)(cid:70)(cid:68)-
tion strategy, especially given our cost of capital, we remain opportunistic, a trait that
(cid:75)(cid:68)(cid:86)(cid:3)(cid:86)(cid:72)(cid:85)(cid:89)(cid:72)(cid:71)(cid:3)(cid:88)(cid:86)(cid:3)(cid:90)(cid:72)(cid:79)(cid:79)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:75)(cid:76)(cid:86)(cid:87)(cid:82)(cid:85)(cid:92)(cid:17)(cid:3)(cid:44)(cid:81)(cid:3)(cid:79)(cid:68)(cid:87)(cid:72)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:15)(cid:3)(cid:90)(cid:72)(cid:3)(cid:70)(cid:68)(cid:80)(cid:72)(cid:3)(cid:68)(cid:70)(cid:85)(cid:82)(cid:86)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:82)(cid:83)(cid:83)(cid:82)(cid:85)(cid:87)(cid:88)(cid:81)(cid:76)(cid:87)(cid:92)(cid:3)(cid:87)(cid:82)(cid:3)
(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:3)(cid:50)(cid:81)(cid:72)(cid:3)(cid:41)(cid:85)(cid:82)(cid:81)(cid:87)(cid:3)(cid:54)(cid:87)(cid:85)(cid:72)(cid:72)(cid:87)(cid:3)(cid:76)(cid:81)(cid:3)(cid:54)(cid:68)(cid:81)(cid:3)(cid:41)(cid:85)(cid:68)(cid:81)(cid:70)(cid:76)(cid:86)(cid:70)(cid:82)(cid:3)(cid:229)(cid:3)(cid:68)(cid:85)(cid:74)(cid:88)(cid:68)(cid:69)(cid:79)(cid:92)(cid:3)(cid:82)(cid:81)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:87)(cid:85)(cid:82)(cid:81)(cid:74)(cid:72)(cid:86)(cid:87)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:86)(cid:3)
(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:85)(cid:92)(cid:3)(cid:229)(cid:3)(cid:68)(cid:87)(cid:3)(cid:68)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:90)(cid:72)(cid:79)(cid:79)(cid:3)(cid:69)(cid:72)(cid:79)(cid:82)(cid:90)(cid:3)(cid:85)(cid:72)(cid:83)(cid:79)(cid:68)(cid:70)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:90)(cid:72)(cid:3)(cid:77)(cid:88)(cid:80)(cid:83)(cid:72)(cid:71)(cid:3)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)
(cid:82)(cid:83)(cid:83)(cid:82)(cid:85)(cid:87)(cid:88)(cid:81)(cid:76)(cid:87)(cid:92)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:3)(cid:87)(cid:85)(cid:68)(cid:71)(cid:72)(cid:71)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:7)(cid:24)(cid:21)(cid:20)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:82)(cid:85)(cid:3)(cid:68)(cid:69)(cid:82)(cid:88)(cid:87)(cid:3)(cid:7)(cid:27)(cid:19)(cid:19)(cid:3)(cid:83)(cid:72)(cid:85)(cid:3)(cid:86)(cid:84)(cid:88)(cid:68)(cid:85)(cid:72)(cid:3)(cid:73)(cid:82)(cid:82)(cid:87)(cid:15)(cid:3)(cid:74)(cid:76)(cid:89)(cid:72)(cid:81)(cid:3)
(cid:76)(cid:87)(cid:86)(cid:3)(cid:79)(cid:72)(cid:68)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:85)(cid:82)(cid:262)(cid:79)(cid:72)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:81)(cid:72)(cid:91)(cid:87)(cid:3)(cid:262)(cid:89)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:86)(cid:15)(cid:3)(cid:90)(cid:75)(cid:72)(cid:85)(cid:72)(cid:3)(cid:27)(cid:19)(cid:8)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:79)(cid:72)(cid:68)(cid:86)(cid:72)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:86)(cid:72)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:72)(cid:91)(cid:83)(cid:76)(cid:85)(cid:72)(cid:17)(cid:3)
(cid:58)(cid:72)(cid:3)(cid:79)(cid:82)(cid:89)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:68)(cid:81)(cid:3)(cid:41)(cid:85)(cid:68)(cid:81)(cid:70)(cid:76)(cid:86)(cid:70)(cid:82)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:75)(cid:68)(cid:71)(cid:3)(cid:87)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:71)(cid:82)(cid:88)(cid:86)(cid:3)(cid:86)(cid:88)(cid:70)(cid:70)(cid:72)(cid:86)(cid:86)(cid:3)(cid:79)(cid:72)(cid:68)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:88)(cid:83)(cid:3)
(cid:82)(cid:88)(cid:85)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:81)(cid:72)(cid:68)(cid:85)(cid:69)(cid:92)(cid:3)(cid:54)(cid:68)(cid:81)(cid:3)(cid:41)(cid:85)(cid:68)(cid:81)(cid:70)(cid:76)(cid:86)(cid:70)(cid:82)(cid:3)(cid:87)(cid:85)(cid:82)(cid:83)(cid:75)(cid:92)(cid:15)(cid:3)(cid:50)(cid:81)(cid:72)(cid:3)(cid:48)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:51)(cid:79)(cid:68)(cid:93)(cid:68)(cid:3)(cid:11)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:28)(cid:27)(cid:17)(cid:26)(cid:8)(cid:3)(cid:79)(cid:72)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)
(cid:68)(cid:87)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3)(cid:72)(cid:81)(cid:71)(cid:12)(cid:3)(cid:68)(cid:87)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:229)(cid:87)(cid:82)(cid:229)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:74)(cid:85)(cid:72)(cid:68)(cid:87)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:68)(cid:81)(cid:3)(cid:24)(cid:19)(cid:8)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:68)(cid:86)(cid:87)(cid:3)(cid:87)(cid:90)(cid:82)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:86)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)
(cid:79)(cid:72)(cid:68)(cid:86)(cid:72)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:50)(cid:81)(cid:72)(cid:3)(cid:41)(cid:85)(cid:82)(cid:81)(cid:87)(cid:3)(cid:68)(cid:85)(cid:72)(cid:15)(cid:3)(cid:82)(cid:81)(cid:3)(cid:68)(cid:89)(cid:72)(cid:85)(cid:68)(cid:74)(cid:72)(cid:15)(cid:3)(cid:21)(cid:19)(cid:8)(cid:3)(cid:69)(cid:72)(cid:79)(cid:82)(cid:90)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:90)(cid:72)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:70)(cid:82)(cid:81)(cid:262)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:90)(cid:72)(cid:3)(cid:90)(cid:76)(cid:79)(cid:79)(cid:3)
(cid:68)(cid:70)(cid:75)(cid:76)(cid:72)(cid:89)(cid:72)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:82)(cid:85)(cid:3)(cid:69)(cid:72)(cid:87)(cid:87)(cid:72)(cid:85)(cid:17)
(cid:44)(cid:81)(cid:3)(cid:82)(cid:85)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)(cid:82)(cid:3)(cid:73)(cid:88)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:50)(cid:81)(cid:72)(cid:3)(cid:41)(cid:85)(cid:82)(cid:81)(cid:87)(cid:15)(cid:3)(cid:90)(cid:72)(cid:3)(cid:79)(cid:82)(cid:82)(cid:78)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:68)(cid:78)(cid:72)(cid:3)(cid:68)(cid:71)(cid:89)(cid:68)(cid:81)(cid:87)(cid:68)(cid:74)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)
strong asset prices in our markets and sell a property that we didn’t see tremendous
(cid:88)(cid:83)(cid:86)(cid:76)(cid:71)(cid:72)(cid:3)(cid:76)(cid:81)(cid:17)(cid:3)(cid:58)(cid:76)(cid:87)(cid:75)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:76)(cid:81)(cid:3)(cid:80)(cid:76)(cid:81)(cid:71)(cid:15)(cid:3)(cid:90)(cid:72)(cid:3)(cid:72)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:87)(cid:82)(cid:3)(cid:68)(cid:81)(cid:3)(cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:86)(cid:72)(cid:79)(cid:79)(cid:3)(cid:58)(cid:68)(cid:87)(cid:72)(cid:85)(cid:89)(cid:76)(cid:72)(cid:90)(cid:15)(cid:3)(cid:68)(cid:3)
(cid:86)(cid:76)(cid:81)(cid:74)(cid:79)(cid:72)(cid:229)(cid:87)(cid:72)(cid:81)(cid:68)(cid:81)(cid:87)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:3)(cid:76)(cid:81)(cid:3)(cid:53)(cid:82)(cid:86)(cid:86)(cid:79)(cid:92)(cid:81)(cid:15)(cid:3)(cid:57)(cid:76)(cid:85)(cid:74)(cid:76)(cid:81)(cid:76)(cid:68)(cid:3)(cid:68)(cid:87)(cid:3)(cid:68)(cid:3)(cid:85)(cid:72)(cid:70)(cid:82)(cid:85)(cid:71)(cid:3)(cid:83)(cid:85)(cid:76)(cid:70)(cid:72)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:7)(cid:23)(cid:25)(cid:19)(cid:3)(cid:80)(cid:76)(cid:79)-
(cid:79)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:82)(cid:85)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:7)(cid:26)(cid:21)(cid:19)(cid:3)(cid:83)(cid:72)(cid:85)(cid:3)(cid:86)(cid:84)(cid:88)(cid:68)(cid:85)(cid:72)(cid:3)(cid:73)(cid:82)(cid:82)(cid:87)(cid:240)(cid:68)(cid:81)(cid:71)(cid:3)(cid:90)(cid:72)(cid:3)(cid:71)(cid:76)(cid:71)(cid:3)(cid:76)(cid:87)(cid:3)(cid:76)(cid:81)(cid:3)(cid:68)(cid:3)(cid:87)(cid:68)(cid:91)(cid:229)(cid:72)(cid:73)(cid:262)(cid:70)(cid:76)(cid:72)(cid:81)(cid:87)(cid:3)(cid:80)(cid:68)(cid:81)(cid:81)(cid:72)(cid:85)(cid:15)(cid:3)(cid:71)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)
(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:7)(cid:22)(cid:28)(cid:22)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:81)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:74)(cid:68)(cid:76)(cid:81)(cid:86)(cid:17)(cid:3)(cid:44)(cid:81)(cid:3)(cid:72)(cid:86)(cid:86)(cid:72)(cid:81)(cid:70)(cid:72)(cid:15)(cid:3)(cid:90)(cid:72)(cid:3)(cid:85)(cid:72)(cid:70)(cid:92)(cid:70)(cid:79)(cid:72)(cid:71)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:53)(cid:82)(cid:86)(cid:86)(cid:79)(cid:92)(cid:81)(cid:15)(cid:3)(cid:57)(cid:76)(cid:85)-
(cid:74)(cid:76)(cid:81)(cid:76)(cid:68)(cid:3)(cid:87)(cid:82)(cid:3)(cid:54)(cid:68)(cid:81)(cid:3)(cid:41)(cid:85)(cid:68)(cid:81)(cid:70)(cid:76)(cid:86)(cid:70)(cid:82)(cid:232)(cid:86)(cid:3)(cid:38)(cid:37)(cid:39)(cid:15)(cid:3)(cid:76)(cid:81)(cid:87)(cid:82)(cid:3)(cid:50)(cid:81)(cid:72)(cid:3)(cid:41)(cid:85)(cid:82)(cid:81)(cid:87)(cid:15)(cid:3)(cid:68)(cid:81)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:88)(cid:83)(cid:86)(cid:76)(cid:71)(cid:72)(cid:3)(cid:74)(cid:85)(cid:82)(cid:90)(cid:87)(cid:75)(cid:3)(cid:83)(cid:82)(cid:87)(cid:72)(cid:81)(cid:87)(cid:76)(cid:68)(cid:79)(cid:17)(cid:3)
Balance Sheet
We have also been very active managing the liability side of our balance sheet, aggres-
(cid:86)(cid:76)(cid:89)(cid:72)(cid:79)(cid:92)(cid:3)(cid:85)(cid:72)(cid:262)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:81)(cid:74)(cid:3)(cid:71)(cid:72)(cid:69)(cid:87)(cid:3)(cid:68)(cid:75)(cid:72)(cid:68)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:80)(cid:68)(cid:87)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:89)(cid:72)(cid:85)(cid:92)(cid:3)(cid:68)(cid:87)(cid:87)(cid:85)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:87)(cid:72)(cid:85)(cid:80)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:68)(cid:3)(cid:74)(cid:85)(cid:68)(cid:71)(cid:88)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)(cid:85)(cid:76)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)
(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:72)(cid:81)(cid:89)(cid:76)(cid:85)(cid:82)(cid:81)(cid:80)(cid:72)(cid:81)(cid:87)(cid:17)(cid:3)(cid:47)(cid:82)(cid:82)(cid:78)(cid:76)(cid:81)(cid:74)(cid:3)(cid:69)(cid:68)(cid:70)(cid:78)(cid:3)(cid:87)(cid:82)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:21)(cid:19)(cid:20)(cid:24)(cid:15)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:90)(cid:72)(cid:76)(cid:74)(cid:75)(cid:87)(cid:72)(cid:71)(cid:3)(cid:68)(cid:89)(cid:72)(cid:85)(cid:68)(cid:74)(cid:72)(cid:3)
(cid:70)(cid:82)(cid:86)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:71)(cid:72)(cid:69)(cid:87)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:24)(cid:17)(cid:22)(cid:24)(cid:8)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:90)(cid:72)(cid:76)(cid:74)(cid:75)(cid:87)(cid:72)(cid:71)(cid:3)(cid:68)(cid:89)(cid:72)(cid:85)(cid:68)(cid:74)(cid:72)(cid:3)(cid:80)(cid:68)(cid:87)(cid:88)(cid:85)(cid:76)(cid:87)(cid:92)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:77)(cid:88)(cid:86)(cid:87)(cid:3)(cid:68)(cid:69)(cid:82)(cid:88)(cid:87)(cid:3)(cid:87)(cid:90)(cid:82)(cid:3)
(cid:92)(cid:72)(cid:68)(cid:85)(cid:86)(cid:17)(cid:3)(cid:54)(cid:76)(cid:81)(cid:70)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:81)(cid:15)(cid:3)(cid:90)(cid:72)(cid:232)(cid:89)(cid:72)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:79)(cid:72)(cid:87)(cid:72)(cid:71)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:7)(cid:22)(cid:17)(cid:22)(cid:3)(cid:69)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:81)(cid:3)(cid:262)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:81)(cid:74)(cid:86)(cid:15)(cid:3)(cid:79)(cid:82)(cid:90)(cid:72)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)
(cid:71)(cid:72)(cid:69)(cid:87)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:69)(cid:92)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:20)(cid:27)(cid:24)(cid:3)(cid:69)(cid:68)(cid:86)(cid:76)(cid:86)(cid:3)(cid:83)(cid:82)(cid:76)(cid:81)(cid:87)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:22)(cid:17)(cid:24)(cid:8)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:90)(cid:72)(cid:79)(cid:79)(cid:3)(cid:79)(cid:68)(cid:71)(cid:71)(cid:72)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:72)(cid:91)(cid:87)(cid:72)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)
(cid:80)(cid:68)(cid:87)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:24)(cid:17)(cid:25)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:86)(cid:17)
(cid:58)(cid:72)(cid:3)(cid:72)(cid:81)(cid:71)(cid:72)(cid:71)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:7)(cid:26)(cid:25)(cid:19)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:81)(cid:3)(cid:79)(cid:76)(cid:84)(cid:88)(cid:76)(cid:71)(cid:76)(cid:87)(cid:92)(cid:15)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:7)(cid:20)(cid:28)(cid:19)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:81)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)
(cid:7)(cid:24)(cid:26)(cid:19)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:88)(cid:81)(cid:71)(cid:85)(cid:68)(cid:90)(cid:81)(cid:3)(cid:70)(cid:68)(cid:83)(cid:68)(cid:70)(cid:76)(cid:87)(cid:92)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:85)(cid:72)(cid:89)(cid:82)(cid:79)(cid:89)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3)(cid:73)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:17)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:79)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)
our overall approach to portfolio management, we view our balance sheet as a source
(cid:82)(cid:73)(cid:3)(cid:86)(cid:87)(cid:85)(cid:72)(cid:81)(cid:74)(cid:87)(cid:75)(cid:3)(cid:68)(cid:86)(cid:3)(cid:90)(cid:72)(cid:3)(cid:79)(cid:82)(cid:82)(cid:78)(cid:3)(cid:87)(cid:82)(cid:3)(cid:73)(cid:88)(cid:85)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:72)(cid:81)(cid:75)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:86)(cid:3)(cid:68)(cid:75)(cid:72)(cid:68)(cid:71)(cid:17)(cid:3)
e
g
a
s
s
e
M
s
’
t
n
e
d
i
s
e
r
P
&
O
E
C
,
n
a
m
r
i
a
h
C
Sustainability
We remain committed and place tremendous emphasis on sustainability, environ-
(cid:80)(cid:72)(cid:81)(cid:87)(cid:68)(cid:79)(cid:3)(cid:72)(cid:73)(cid:262)(cid:70)(cid:76)(cid:72)(cid:81)(cid:70)(cid:92)(cid:15)(cid:3)(cid:87)(cid:72)(cid:81)(cid:68)(cid:81)(cid:87)(cid:3)(cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:83)(cid:85)(cid:82)(cid:83)(cid:72)(cid:85)(cid:87)(cid:92)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:90)(cid:75)(cid:68)(cid:87)(cid:3)(cid:76)(cid:86)(cid:3)(cid:68)(cid:3)(cid:69)(cid:72)(cid:86)(cid:87)(cid:16)(cid:76)(cid:81)(cid:16)
(cid:70)(cid:79)(cid:68)(cid:86)(cid:86)(cid:3)(cid:68)(cid:83)(cid:83)(cid:85)(cid:82)(cid:68)(cid:70)(cid:75)(cid:17)(cid:3)(cid:58)(cid:72)(cid:3)(cid:81)(cid:82)(cid:90)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:68)(cid:70)(cid:75)(cid:76)(cid:72)(cid:89)(cid:72)(cid:71)(cid:3)(cid:72)(cid:76)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:68)(cid:3)(cid:42)(cid:82)(cid:79)(cid:71)(cid:3)(cid:82)(cid:85)(cid:3)(cid:51)(cid:79)(cid:68)(cid:87)(cid:76)(cid:81)(cid:88)(cid:80)(cid:3)(cid:47)(cid:40)(cid:40)(cid:39)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:76)(cid:262)(cid:70)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)
(cid:82)(cid:81)(cid:3)(cid:72)(cid:68)(cid:70)(cid:75)(cid:3)(cid:69)(cid:88)(cid:76)(cid:79)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:81)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:83)(cid:82)(cid:85)(cid:87)(cid:73)(cid:82)(cid:79)(cid:76)(cid:82)(cid:17)(cid:3)(cid:55)(cid:75)(cid:76)(cid:86)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:68)(cid:3)(cid:70)(cid:82)(cid:79)(cid:79)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:72)(cid:73)(cid:73)(cid:82)(cid:85)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)
(cid:72)(cid:81)(cid:87)(cid:76)(cid:85)(cid:72)(cid:3)(cid:51)(cid:68)(cid:85)(cid:68)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:3)(cid:87)(cid:72)(cid:68)(cid:80)(cid:17)(cid:3)(cid:55)(cid:82)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:78)(cid:81)(cid:82)(cid:90)(cid:79)(cid:72)(cid:71)(cid:74)(cid:72)(cid:15)(cid:3)(cid:90)(cid:72)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:82)(cid:81)(cid:79)(cid:92)(cid:3)(cid:83)(cid:88)(cid:69)(cid:79)(cid:76)(cid:70)(cid:3)(cid:85)(cid:72)(cid:68)(cid:79)(cid:3)(cid:72)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:3)(cid:83)(cid:82)(cid:85)(cid:87)(cid:73)(cid:82)-
(cid:79)(cid:76)(cid:82)(cid:3)(cid:87)(cid:82)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:68)(cid:87)(cid:87)(cid:68)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:71)(cid:76)(cid:86)(cid:87)(cid:76)(cid:81)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:90)(cid:72)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:89)(cid:72)(cid:85)(cid:92)(cid:3)(cid:83)(cid:85)(cid:82)(cid:88)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:70)(cid:75)(cid:76)(cid:72)(cid:89)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:86)(cid:88)(cid:70)(cid:70)(cid:72)(cid:86)(cid:86)(cid:17)(cid:3)
(cid:55)(cid:75)(cid:76)(cid:86)(cid:3)(cid:76)(cid:86)(cid:3)(cid:68)(cid:3)(cid:87)(cid:72)(cid:86)(cid:87)(cid:68)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:84)(cid:88)(cid:68)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:69)(cid:85)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3)(cid:87)(cid:68)(cid:81)(cid:74)(cid:76)(cid:69)(cid:79)(cid:72)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:262)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)
(cid:72)(cid:73)(cid:73)(cid:82)(cid:85)(cid:87)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:68)(cid:87)(cid:87)(cid:85)(cid:68)(cid:70)(cid:87)(cid:3)(cid:75)(cid:76)(cid:74)(cid:75)(cid:229)(cid:84)(cid:88)(cid:68)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:87)(cid:72)(cid:81)(cid:68)(cid:81)(cid:87)(cid:86)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:79)(cid:72)(cid:3)(cid:75)(cid:72)(cid:79)(cid:83)(cid:76)(cid:81)(cid:74)(cid:3)(cid:79)(cid:82)(cid:90)(cid:72)(cid:85)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:86)(cid:17)(cid:3)
The Paramount Team
(cid:36)(cid:86)(cid:3)(cid:86)(cid:87)(cid:72)(cid:90)(cid:68)(cid:85)(cid:71)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:92)(cid:82)(cid:88)(cid:85)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:15)(cid:3)(cid:68)(cid:3)(cid:80)(cid:68)(cid:76)(cid:81)(cid:3)(cid:82)(cid:69)(cid:77)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:51)(cid:68)(cid:85)(cid:68)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:3)(cid:87)(cid:72)(cid:68)(cid:80)(cid:3)(cid:76)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:72)(cid:68)(cid:85)(cid:81)(cid:3)(cid:92)(cid:82)(cid:88)(cid:85)(cid:3)
trust that we are managing your investment with the utmost care each and every
(cid:71)(cid:68)(cid:92)(cid:17)(cid:3)(cid:44)(cid:3)(cid:68)(cid:80)(cid:3)(cid:89)(cid:72)(cid:85)(cid:92)(cid:3)(cid:83)(cid:85)(cid:82)(cid:88)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:90)(cid:75)(cid:68)(cid:87)(cid:3)(cid:90)(cid:72)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:68)(cid:70)(cid:70)(cid:82)(cid:80)(cid:83)(cid:79)(cid:76)(cid:86)(cid:75)(cid:72)(cid:71)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:68)(cid:86)(cid:87)(cid:3)(cid:87)(cid:90)(cid:82)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:86)(cid:3)(cid:68)(cid:86)(cid:3)(cid:68)(cid:3)
(cid:83)(cid:88)(cid:69)(cid:79)(cid:76)(cid:70)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:44)(cid:3)(cid:79)(cid:82)(cid:82)(cid:78)(cid:3)(cid:73)(cid:82)(cid:85)(cid:90)(cid:68)(cid:85)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:87)(cid:68)(cid:86)(cid:78)(cid:3)(cid:68)(cid:87)(cid:3)(cid:75)(cid:68)(cid:81)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:74)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:79)(cid:82)(cid:81)(cid:74)(cid:229)(cid:87)(cid:72)(cid:85)(cid:80)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)
(cid:73)(cid:82)(cid:85)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:17)(cid:3)(cid:44)(cid:3)(cid:90)(cid:82)(cid:88)(cid:79)(cid:71)(cid:3)(cid:79)(cid:76)(cid:78)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:68)(cid:81)(cid:78)(cid:3)(cid:92)(cid:82)(cid:88)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:92)(cid:82)(cid:88)(cid:85)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:76)(cid:81)(cid:88)(cid:72)(cid:71)(cid:3)(cid:86)(cid:88)(cid:83)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)
(cid:70)(cid:82)(cid:81)(cid:262)(cid:71)(cid:72)(cid:81)(cid:70)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:87)(cid:72)(cid:68)(cid:80)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:75)(cid:82)(cid:83)(cid:72)(cid:3)(cid:92)(cid:82)(cid:88)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:72)(cid:81)(cid:87)(cid:75)(cid:88)(cid:86)(cid:76)(cid:68)(cid:86)(cid:80)(cid:3)(cid:68)(cid:86)(cid:3)(cid:90)(cid:72)(cid:3)(cid:79)(cid:82)(cid:82)(cid:78)(cid:3)(cid:87)(cid:82)(cid:3)(cid:72)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:72)(cid:3)(cid:82)(cid:81)(cid:3)
(cid:87)(cid:75)(cid:72)(cid:3)(cid:51)(cid:68)(cid:85)(cid:68)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:3)(cid:74)(cid:85)(cid:82)(cid:90)(cid:87)(cid:75)(cid:3)(cid:86)(cid:87)(cid:82)(cid:85)(cid:92)(cid:17)(cid:3)
(cid:54)(cid:76)(cid:81)(cid:70)(cid:72)(cid:85)(cid:72)(cid:79)(cid:92)(cid:15)
Albert Behler
Chairman, CEO & President
e
g
a
s
s
e
M
s
’
t
n
e
d
i
s
e
r
P
&
O
E
C
,
n
a
m
r
i
a
h
C
Portfolio Details
(cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:54)(cid:84)(cid:88)(cid:68)(cid:85)(cid:72)(cid:3)(cid:41)(cid:82)(cid:82)(cid:87)(cid:68)(cid:74)(cid:72)(cid:3)(cid:3)(cid:3)10.8 Million sq ft
Overall Leased Occupancy 92.7%
Reduced Future Exposure to
Lease Expirations
5.5%5.5%
5.8%
4.9%
4.9%
3.4%
2017
2018
2019
2020
Four
Year
Average
December 2016 Annualized Rent
(cid:39)(cid:76)(cid:89)(cid:72)(cid:85)(cid:86)(cid:76)(cid:262)(cid:72)(cid:71)(cid:3)(cid:55)(cid:72)(cid:81)(cid:68)(cid:81)(cid:87)(cid:86)
14.3%
1.9%
13.2%
14.3%
2.1%
2.7%
3.6%
5.2%
71.4%
12.8%
23.0%
21.2%
New York
Washington, D.C.
San Francisco
14.3%
Legal Services
Financial Services
(Commercial and
Investment Banking)
Technology and Media
Financial Services
(All Others)
Insurance
Retail
Government
Consumer Products
Real Estate
Other
Consolidated Revenues
PGRE’s Share of NOI
Core FFO Per Share
$683,341
$662,408
$386,418
$0.84
$368,661
$0.81
(cid:86)
(cid:87)
(cid:75)
(cid:74)
(cid:76)
(cid:79)
(cid:3)
(cid:76)
(cid:75)
(cid:74)
(cid:43)
(cid:72)
(cid:87)
(cid:68)
(cid:85)
(cid:82)
(cid:83)
(cid:85)
(cid:82)
(cid:38)
2015
2016
2015
2016
2015
2016
New York(cid:3)(cid:11)(cid:26)(cid:17)(cid:19)(cid:80)(cid:80)(cid:3)(cid:86)(cid:84)(cid:3)(cid:73)(cid:87)(cid:12) - 90.7% Leased
Columbuss usus
us
s Parkrkrkas Parrkrararr
(cid:20)(cid:25)(cid:22)(cid:22)(cid:3)(cid:37)(cid:85)(cid:82)(cid:68)(cid:71)(cid:90)(cid:68)(cid:92)
86.3%
Property
Leased %
ockefe
oc
ellere
Ro
ckefe
CC t
ere
C
Cente
Center
B
B
B
B
B
r
r
r
o
o
o
o
o
a
a
a
a
a
a
a
d
d
d
d
d
d
w
w
w
w
w
w
w
w
a
a
a
a
a
a
y
y
Grand Centralral
Cent
Gr
tr
ral
G
randd C
GG
Termm l
minalminal
(cid:20)(cid:22)(cid:19)(cid:20)(cid:3)(cid:36)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:36)(cid:80)(cid:72)(cid:85)(cid:76)(cid:70)(cid:68)(cid:86)
93.7%
(cid:20)(cid:22)(cid:21)(cid:24)(cid:3)(cid:36)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:36)(cid:80)(cid:72)(cid:85)(cid:76)(cid:70)(cid:68)(cid:86)
96.5%
(cid:22)(cid:20)(cid:3)(cid:58)(cid:72)(cid:86)(cid:87)(cid:3)(cid:24)(cid:21)(cid:81)(cid:71)(cid:3)(cid:54)(cid:87)(cid:85)(cid:72)(cid:72)(cid:87)
(cid:28)(cid:19)(cid:19)(cid:3)(cid:55)(cid:75)(cid:76)(cid:85)(cid:71)(cid:3)(cid:36)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)
(cid:26)(cid:20)(cid:21)(cid:3)(cid:41)(cid:76)(cid:73)(cid:87)(cid:75)(cid:3)(cid:36)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)
84.5%
98.0%
97.1%
Washington, D.C. (cid:11)(cid:20)(cid:17)(cid:25)(cid:80)(cid:80)(cid:3)(cid:86)(cid:84)(cid:3)(cid:73)(cid:87)(cid:12) - 95.5% Leased
(cid:24)(cid:24)
(cid:24)
(cid:24)(cid:45)(cid:118)(cid:118)(cid:45)(cid:49)(cid:95)(cid:134)
(cid:118)(cid:118)
(cid:118)(cid:118)(cid:118)(cid:45)(cid:118)(cid:45)(cid:49)
(cid:45)(cid:45)(cid:49)(cid:95)(cid:95)
(cid:45)(cid:49)
(cid:95)(cid:49)(cid:95)(cid:49)(cid:95)
(cid:95)(cid:134)(cid:118)(cid:59)(cid:130)
(cid:95)(cid:134)(cid:118)(cid:59)(cid:130)(cid:130)
(cid:59)(cid:130)(cid:59)(cid:130)
(cid:59)(cid:130)(cid:118)(cid:3)(cid:3)
(cid:130)(cid:118)(cid:130)(cid:118)(cid:130)
(cid:130)(cid:118)(cid:130)(cid:118)(cid:3)(cid:136)
(cid:118)(cid:2)
(cid:118)(cid:2)(cid:3)(cid:136)(cid:59)(cid:2)(cid:25)
(cid:3)(cid:136)
(cid:3)(cid:136)
(cid:25)
(cid:41)(cid:41)
(cid:41)(cid:41)(cid:41)
(cid:41)(cid:41)
(cid:41)(cid:41)
owDoww t
Downtwnt
owow
ttownn
wntownnn
oo
gyygy
Fogggogog ygggygo
Foggy
(cid:6)(cid:111)(cid:130)(cid:111)(cid:108)(cid:111)(cid:130) (cid:108)(cid:108)(cid:108)
(cid:6)(cid:111)(cid:130)(cid:111)(cid:108)
(cid:30)(cid:30)
(cid:59)(cid:30)(cid:59)
(cid:30)(cid:59) (cid:109)
(cid:59)(cid:109)(cid:109)(cid:118)
(cid:118)(cid:109)(cid:118)
(cid:118)(cid:139)(cid:1140)(cid:136)
(cid:136)(cid:45)
(cid:136)(cid:45)(cid:136)(cid:45) (cid:98)(cid:45)(cid:109)(cid:98)(cid:45)
(cid:30)(cid:59)(cid:109)(cid:109)(cid:118)(cid:139)(cid:1140)(cid:136)(cid:45)(cid:109)(cid:98)(cid:45)(cid:2)(cid:3)(cid:136)(cid:59)(cid:2)(cid:25)(cid:41)(cid:41)(cid:41)
(cid:98)(cid:45)(cid:45)(cid:2)(cid:3)(cid:136)(cid:59)
(cid:136)
(cid:59)(cid:2)(cid:25)
(cid:41)(cid:25)(cid:41)
(cid:41)(cid:41)
Property
Waterview
(cid:23)(cid:21)(cid:24)(cid:3)(cid:40)(cid:92)(cid:72)(cid:3)(cid:54)(cid:87)(cid:85)(cid:72)(cid:72)(cid:87)
Leased %
98.7%
97.7%
(cid:21)(cid:19)(cid:28)(cid:28)(cid:3)(cid:51)(cid:72)(cid:81)(cid:81)(cid:86)(cid:92)(cid:79)(cid:89)(cid:68)(cid:81)(cid:76)(cid:68)(cid:3)(cid:36)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)
82.3%
Arlington
(cid:111)
(cid:111)
(cid:95)(cid:98)(cid:95)
(cid:98)
(cid:124)
(cid:41)(cid:45)(cid:118)(cid:95)(cid:98)(cid:109)(cid:93)(cid:124)(cid:111)(cid:109)(cid:311)(cid:2)(cid:9)(cid:314)(cid:7)(cid:314)(cid:7)
(cid:95)(cid:98)
(cid:9) (cid:7)(cid:7)
(cid:111)(cid:93)(cid:95)(cid:98)
(cid:111)(cid:109)(cid:311)(cid:2)(cid:9)(cid:314)(cid:7)(cid:314)
(cid:314)(cid:7)
(cid:95)
(cid:20)(cid:27)(cid:28)(cid:28)(cid:3)(cid:51)(cid:72)(cid:81)(cid:81)(cid:86)(cid:92)(cid:79)(cid:89)(cid:68)(cid:81)(cid:76)(cid:68)(cid:3)(cid:36)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)
100.0%
Liberty Place
89.9%
San Francisco (cid:11)(cid:21)(cid:17)(cid:21)(cid:80)(cid:80)(cid:3)(cid:86)(cid:84)(cid:3)(cid:73)(cid:87)(cid:12) - 99.0% Leased
NorthrN tNN
BeachaBeaaBBBB
F nF ancnaFinn
annc
Financialalacia
DistrictictisD striDisisD ri
SannnS naSSaSana
FranFFF
Francisnciscoooooiscsccocciscsciiin iisicicinnc
M ark et Stre etet
ee ee ete
tre e
e e
ett St
et S
k et
ark
ar
M ar
SOMAMAOMSS MAA
Property
Leased %
(cid:50)(cid:81)(cid:72)(cid:3)(cid:48)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:51)(cid:79)(cid:68)(cid:93)(cid:68)
(cid:50)(cid:81)(cid:72)(cid:3)(cid:41)(cid:85)(cid:82)(cid:81)(cid:87)(cid:3)(cid:54)(cid:87)(cid:85)(cid:72)(cid:72)(cid:87)
98.7%
99.4%
(cid:86)
(cid:87)
(cid:75)
(cid:74)
(cid:76)
(cid:79)
(cid:3)
(cid:76)
(cid:75)
(cid:74)
(cid:43)
(cid:72)
(cid:87)
(cid:68)
(cid:85)
(cid:82)
(cid:83)
(cid:85)
(cid:82)
(cid:38)
(cid:47)(cid:40)(cid:40)(cid:39)(cid:3)(cid:38)(cid:72)(cid:85)(cid:87)(cid:76)(cid:262)(cid:70)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)
100% of portfolio
has achieved either
(cid:42)(cid:82)(cid:79)(cid:71)(cid:3)(cid:82)(cid:85)(cid:3)(cid:51)(cid:79)(cid:68)(cid:87)(cid:76)(cid:81)(cid:88)(cid:80)(cid:3)
(cid:47)(cid:40)(cid:40)(cid:39)(cid:3)(cid:38)(cid:72)(cid:85)(cid:87)(cid:76)(cid:262)(cid:70)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)
BOMA Awards
Grand Pinnacle Award
The Outstanding Building
The Outstanding Building
(cid:28)(cid:19)(cid:19)(cid:3)(cid:55)(cid:75)(cid:76)(cid:85)(cid:71)(cid:3)(cid:36)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)
Pinnacle Award
(cid:26)(cid:20)(cid:21)(cid:3)(cid:24)(cid:87)(cid:75)(cid:3)(cid:36)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)
Energy Star Ratings
87
85
79
(cid:86)
(cid:87)
(cid:75)
(cid:74)
(cid:76)
(cid:79)
of the Year
(cid:50)(cid:81)(cid:72)(cid:3)(cid:48)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:51)(cid:79)(cid:68)(cid:93)(cid:68)
of the Year
(cid:28)(cid:19)(cid:19)(cid:3)(cid:55)(cid:75)(cid:76)(cid:85)(cid:71)(cid:3)(cid:36)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)
98
97
95
88
90
77
76
67
75
(cid:76)
(cid:75)
(cid:74)
(cid:43)
(cid:92)
(cid:87)
(cid:76)
(cid:79)
(cid:76)
(cid:3)
(cid:76)
(cid:69)
(cid:68)
(cid:81)
(cid:68)
(cid:87)
(cid:86)
(cid:88)
(cid:54)
1325
AofA
900
Third Ave
31 West
52nd
712
Fifth Ave
1633
Broadway
1301
AofA
425
Eye Street
Waterview
2099
Penn. Ave
1899
Penn. Ave
One
Front
Street
One
Market
Plaza
Avg. Energy Star Score Current (84)
Avg. Energy Star Score at Initial Benchmarking (71)
,
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
⌧ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 2016
OR
(cid:2) 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
(State or other jurisdiction of
incorporation or organization)
1633 Broadway, Suite 1801, New York, NY
(Address of principal executive offices)
32-0439307
(IRS Employer
Identification No.)
10019
(Zip Code)
Registrant’s telephone number, including area code: (212) 237-3100
Securities registered pursuant to section 12(b) of the Act:
Title of each class
Common Stock, $0.01 par value per share
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act:
Title of each class
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. YES ⌧ NO (cid:4)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. YES (cid:4) NO ⌧
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 (cid:4)
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 (cid:4)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is
not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ⌧
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Large Accelerated Filer
Non-Accelerated Filer
⌧
(cid:4) (Do not check if smaller reporting company)
Accelerated Filer
Smaller Reporting Company
(cid:2)
(cid:2)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES (cid:4) NO ⌧
As of January 27, 2017, there were 230,668,694 shares of the registrant’s common stock outstanding.
As of June 30, 2016, the aggregate market value of the 185,936,093 shares of common stock held by non-affiliates of the Registrant
was $2,963,821,000 based on the June 30, 2016 closing share price of our common stock of $15.94 per share on the New York Stock
Exchange.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Stockholders’ Meeting (which is scheduled to be held on May 18, 2017) to be filed
within 120 days after the end of the registrant’s fiscal year are incorporated by reference in Part III of this Annual Report on Form 10-
K.
This Annual Report on Form 10-K includes financial statements required under Rule 3-09 of Regulation S-X, for 712 Fifth Avenue,
L.P. and Paramount Group Real Estate Fund VII, LP.
Table of Contents
Page Number
6
12
34
35
40
40
41
44
47
81
83
132
132
134
134
134
134
134
134
135
135
Item
Part I.
Financial Information
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Part II.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance (1)
Executive Compensation (1)
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters (1)
Certain Relationships and Related Transactions, and Director Independence (1)
Principal Accounting Fees and Services (1)
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Part III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Part IV.
Item 15.
Item 16.
Exhibits, Financial Statements Schedules
Form 10-K Summary
(1)
These items are omitted in whole or in part because the registrant will file a definitive Proxy Statement pursuant to Regulation 14A under the
Securities Exchange Act of 1934 with the Securities and Exchange Commission no later than 120 days after December 31, 2016, portions of
which are incorporated by reference herein.
3
Forward-Looking Statements
We make statements in this Annual Report on Form 10-K 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;
fluctuations in interest rates and increased costs to refinance or issue new debt;
risks associated with variable rate debt, derivatives or hedging activity;
4
•
•
•
•
•
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 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 Annual Report on Form 10-K, including those set forth under the heading “Risk
Factors.”
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 financial statements and the
notes thereto, as well as Item 1A entitled “Risk Factors” in this report.
5
ITEM 1.
BUSINESS
General
PART I
Paramount Group, Inc. (“Paramount”) is 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. We conduct our business through, and substantially all our interests in properties
and investments 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 87.0% of, the Operating Partnership as of December 31,
2016. As of December 31, 2016, our portfolio consisted of 13 Class A office properties aggregating approximately 10.8 million square
feet that was 93.3% leased and 90.9% occupied. All references to “we,” “us,” “our,” the “Company” and “Paramount” refer to
Paramount Group, Inc. and its consolidated subsidiaries, including the Operating Partnership.
We were incorporated in Maryland as a corporation on April 14, 2014 to continue the business of our Predecessor, as defined in
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Predecessor, and did not
have any meaningful operations until the acquisition of substantially all of the assets of our Predecessor and assets of the real estate
funds that it controlled, as well as the interests of unaffiliated third parties in certain properties. Our properties were acquired through
a series of Formation Transactions (the “Formation Transactions”) concurrently with our initial public offering of 150,650,000
common shares at a public offering price of $17.50 per share on November 24, 2014 (the “Offering”).
Our Competitive Strengths
We believe that we distinguish ourselves from other owners and operators of office properties through the following competitive
strengths:
•
•
•
•
Premier Portfolio of High-Quality Office Properties in the Most Desirable Submarkets. We have assembled a
premier portfolio of Class A office properties located exclusively in carefully selected submarkets of New York City,
Washington, D.C. and San Francisco. Our submarkets are among the strongest commercial real estate submarkets in the
United States for office properties due to a combination of their high barriers to entry, constrained supply, strong
economic characteristics and a deep pool of prospective tenants in various industries that have demonstrated a strong
demand for high-quality office space. Our markets are international business centers, characterized by a broad tenant base
with a highly educated workforce, a mature and functional transportation infrastructure and an overall amenity rich
environment. These markets are home to a diverse range of large and growing enterprises in a variety of industries,
including financial services, media and entertainment, consulting, legal and other professional services, technology, as
well as federal government agencies. As a result of the above factors, the submarkets in which we are invested have
generally outperformed the broader markets in which they are located.
Strong Internal Growth Prospects. We have substantial embedded rent growth within our portfolio as a result of the
strong historical and projected future rental rate growth within our submarkets, contractual fixed rental rate increases
included in our leases and incremental rent from the lease-up of our portfolio. Our portfolio occupancy was 90.9% as of
December 31, 2016; we believe this presents us with a meaningful growth opportunity as we lease-up our portfolio given
the strong office market fundamentals in the markets in which we operate.
Demonstrated Acquisition and Operational Expertise. Over the past 20 years, we have developed and refined our
highly successful real estate investment strategy. We have a proven reputation as a value-enhancing, hands-on operator of
Class A office properties. We target opportunities with a value-add component, where we can leverage our operating
expertise, deep tenant relationships, and proactive approach to asset and property management. In certain instances, we
may acquire properties with existing or expected future vacancy or with significant value embedded in existing below-
market leases, which we will be able to mark-to-market over time. Even fully leased properties from time to time present
us with value-enhancing opportunities which we have been able to capitalize on in the past.
Deep Relationships with Diverse, High Credit-Quality Tenant Base. We have long-standing relationships with high-
quality tenants, including Allianz Global Investors, LP, Barclays Capital, Inc., Clifford Chance LLP, Morgan Stanley,
Credit Agricole Corporate & Investment Bank, Chadbourne & Parke, LLP, Showtime Networks Inc., TD Bank, N.A.,
Warner Music Group, Google Inc. and the U.S. Federal Government.
6
•
•
•
•
Value-Add Renovation and Repositioning and Development Capabilities. We have expertise in renovating,
repositioning and developing office properties. We have historically acquired well-located assets that have either suffered
from a need for physical improvement to upgrade the property to Class A space, have been underperforming due to a lack
of a coherent leasing and branding strategy or have been under-managed and could be immediately enhanced by our
hands-on approach. We are experienced in upgrading, renovating and modernizing building lobbies, corridors, bathrooms,
elevator cabs and base building systems and updating antiquated spaces to include new ceilings, lighting and other
amenities. We have also successfully aggregated and are continuing to combine smaller spaces to offer larger blocks of
space, including multiple floors, which are attractive to larger, high credit-quality tenants. We believe that the post-
renovation quality of our buildings and our hands-on asset and property management approach attract high credit-
quality tenants and allow us to increase our cash flow.
Seasoned and Committed Management Team with Proven Track Record. Our senior management team, led by
Albert Behler, our Chairman, Chief Executive Officer and President, has been in the commercial real estate industry for
an average of 28 years, and has worked at our company for over 17 years. Our senior management team is highly regarded
in the real estate community and has extensive relationships with a broad range of brokers, owners, tenants and lenders.
We have developed relationships that enable us to secure high credit-quality tenants on attractive terms and provide us
with potential off-market acquisition opportunities. We believe that our proven acquisition and operating expertise enables
us to gain advantages over our competitors through superior acquisition sourcing, focused leasing programs, active asset
and property management and first-class tenant service.
Conservative Balance Sheet. Over the past several decades, we have built strong relationships with numerous lenders,
investors and other capital providers. Our financing track record and depth of relationships provide us with significant
financial flexibility and capacity to fund future growth in both good and bad economic environments. We have a strong
capital structure that supports this flexibility and growth. As of December 31, 2016, our share of net debt to enterprise
value was 42.5% and we had $163.0 million of cash and cash equivalents and a $1.0 billion revolving credit facility, with
$230.0 million drawn as of December 31, 2016.
Proven Investment Management Business. We have a successful investment management business, where we serve as
the general partner and property manager of certain private equity real estate funds for institutional investors and high-net-
worth individuals. We have also entered into a number of joint ventures with institutional investors, high-net-worth
individuals and other sophisticated real estate investors through which we and our funds have invested in real estate
properties. We expect our investment management business to be a complementary part of our overall real estate
investment business.
Objectives and Strategy
Our primary business objective is to enhance shareholder value by increasing cash flow from operations. The strategies we
intend to execute to achieve this objective include:
•
•
•
•
Leasing vacant and expiring space at market rents;
Maintaining a disciplined acquisition strategy focused on owning and operating Class A office properties in select central
business district submarkets of New York City, Washington, D.C. and San Francisco;
Redeveloping and repositioning properties to increase returns; and
Proactively managing our portfolio to increase occupancy and rental rates.
Significant Tenants
None of our tenants accounted for more than 10% of total revenues in the years ended December 31, 2016, 2015 and 2014.
7
Segments
Our determination of segments is primarily based on our method of internal reporting. On January 1, 2016, as a result of certain
organizational and operational changes, we redefined our reportable segments to be 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. Accordingly, our reportable segments were separated by region based on the three regions
in which we conduct our business: New York, Washington, D.C. and San Francisco. In connection therewith, we have reclassified the
prior period segment financial data to conform to the current period presentation.
Our Predecessor historically operated an integrated business that consisted of three reportable segments, (i) Owned Properties,
(ii) Managed Funds and (iii) a Management Company. The Owned Properties segment consisted of properties in which our
Predecessor had a direct or indirect ownership interest, other than properties that it owned through its private equity real estate funds.
The Managed Funds segment consisted of the private equity real estate funds. In addition, our Predecessor included a Management
Company that performed property management and asset management services and certain general and administrative level functions,
including legal and accounting, as a separate reportable segment. See Note 26, Segments Disclosure, to our combined consolidated
financial statements in this Annual Report on Form 10-K for further information on our and our Predecessor’s reportable segments.
Employees
As of December 31, 2016, we had 334 employees, including 93 corporate employees and 241 on-site building and property
management personnel. Certain of our employees are covered by collective bargaining agreements.
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 of
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.
Competition
The leasing of real estate is highly competitive in markets in which we operate. We compete with numerous acquirers,
developers, owners and operators of commercial real estate, many of which own or may seek to acquire or develop properties similar
to ours in the same markets in which our properties are located. The principal means of competition are rent charged, location,
services provided and the nature and condition of the facility to be leased. In addition, we face competition from other real estate
companies including other REITs, private real estate funds, domestic and foreign financial institutions, life insurance companies,
pension trusts, partnerships, individual investors and others that may have greater financial resources or access to capital than we do or
that are willing to acquire properties in transactions which are more highly leveraged or are less attractive from a financial viewpoint
than we are willing to pursue. If our competitors offer space at rental rates below current market rates, below the rental rates we
currently charge our tenants, in better locations within our markets or in higher quality facilities, we may lose potential tenants and we
may be pressured to reduce our rental rates below those we currently charge in order to retain tenants when our tenants’ leases expire.
8
Environmental and Related Matters
Under various federal, state and/or local laws, ordinances and regulations, as a current or former owner or operator of real
property, we may be liable for costs and damages resulting from the presence or release of hazardous substances, waste, or petroleum
products at, on, in, under or from such property, including costs for investigation or remediation, natural resource damages, or third-
party liability for personal injury or property damage. These laws often impose liability without regard to whether the owner or
operator knew of, or was responsible for, the presence or release of such materials, and the liability may be joint and several. Some of
our properties have been or may be impacted by contamination arising from current or prior uses of the property or adjacent properties
for commercial, industrial or other purposes. Such contamination may arise from spills of petroleum or hazardous substances or
releases from tanks used to store such materials. We also may be liable for the costs of remediating contamination at off-site disposal
or treatment facilities when we arrange for disposal or treatment of hazardous substances at such facilities, without regard to whether
we comply with environmental laws in doing so. The presence of contamination or the failure to remediate contamination on our
properties may adversely affect our ability to attract and/or retain tenants, and our ability to develop or sell or borrow against those
properties. In addition to potential liability for cleanup costs, private plaintiffs may bring claims for personal injury, property damage
or for similar reasons. Environmental laws also may create liens on contaminated sites in favor of the government for damages and
costs it incurs to address such contamination. Moreover, if contamination is discovered on our properties, environmental laws may
impose restrictions on the manner in which that property may be used or how businesses may be operated on that property.
Some of our properties may be adjacent to or near other properties used for industrial or commercial purposes or that have
contained or currently contain underground storage tanks used to store petroleum products or other hazardous or toxic substances.
Releases from these properties could impact our properties. While certain properties contain or contained uses that could have or have
impacted our properties, we are not aware of any liabilities related to environmental contamination that we believe will have a
material adverse effect on our operations.
In addition, our properties are subject to various federal, state and local environmental and health and safety laws and
regulations. Noncompliance with these environmental and health and safety laws and regulations could subject us or our tenants to
liability. These liabilities could affect a tenant’s ability to make rental payments to us. Moreover, changes in laws could increase the
potential costs of compliance with such laws and regulations or increase liability for noncompliance. This may result in significant
unanticipated expenditures or may otherwise materially and adversely affect our operations, or those of our tenants, which could in
turn have a material adverse effect on us. We sometimes require our tenants to comply with environmental and health and safety laws
and regulations and to indemnify us for any related liabilities in our leases with them. But in the event of the bankruptcy or inability of
any of our tenants to satisfy such obligations, we may be required to satisfy such obligations. We are not presently aware of any
instances of material noncompliance with environmental or health and safety laws or regulations at our properties, and we believe that
we and/or our tenants have all material permits and approvals necessary under current laws and regulations to operate our properties.
As the owner or operator of real property, we may also incur liability based on various building conditions. For example,
buildings and other structures on properties that we currently own or operate or those we acquire or operate in the future contain, may
contain, or may have contained, asbestos-containing material (“ACM”). Environmental and health and safety laws require that ACM
be properly managed and maintained and may impose fines or penalties on owners, operators or employers for noncompliance with
those requirements. These requirements include special precautions, such as removal, abatement or air monitoring, if ACM would be
disturbed during maintenance, renovation or demolition of a building, potentially resulting in substantial costs. In addition, we may be
subject to liability for personal injury or property damage sustained as a result of releases of ACM into the environment. We are not
presently aware of any material liabilities related to building conditions, including any instances of material noncompliance with
asbestos requirements or any material liabilities related to asbestos. In addition, our properties may contain or develop harmful mold
or suffer from other indoor air quality issues, which could lead to liability for adverse health effects or property damage or costs for
remediation. When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the
moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or
irritants. Indoor air quality issues can also stem from inadequate ventilation, chemical contamination from indoor or outdoor sources,
and other biological contaminants such as pollen, viruses and bacteria. Indoor exposure to airborne toxins or irritants above certain
levels can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the
presence of significant mold or other airborne contaminants at any of our properties could require us to undertake a costly remediation
program to contain or remove the mold or other airborne contaminants from the affected property or increase indoor ventilation. In
addition, the presence of significant mold or other airborne contaminants could expose us to liability from our tenants, employees of
our tenants or others if property damage or personal injury occurs. We are not presently aware of any material adverse indoor air
quality issues at our properties.
9
Americans with Disabilities Act (“ADA”)
Our properties must comply with Title III of the ADA to the extent that such properties are “public accommodations” as defined
by the ADA. The ADA may require removal of structural barriers to access by persons with disabilities in certain public areas of our
properties where such removal is readily achievable. We believe the existing properties are in substantial compliance with the ADA
and that we will not be required to make substantial capital expenditures to address the requirements of the ADA. However,
noncompliance with the ADA could result in imposition of fines or an award of damages to private litigants. The obligation to make
readily achievable accommodations is an ongoing one, and we will continue to assess our properties and make alterations as
appropriate in this respect.
Executive Office
Our principal executive offices are located at 1633 Broadway, Suite 1801, New York, NY 10019; telephone (212) 237-3100.
Available Information
Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to
these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, are available free of charge on our website
(www.paramount-group.com) as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities
and Exchange Commission (“SEC”). You may also obtain our reports by accessing the EDGAR database at the SEC’s website at
http://www.sec.gov or copies of these documents are also available directly from us, free of charge upon written request to Investor
Relations, 1633 Broadway, Suite 1801, New York, NY 10019; telephone (212) 237-3100. Also available on our website are copies of
our (i) Nominating and Corporate Governance Committee Charter, (ii) Corporate Governance Guidelines, (iii) Compensation
Committee Charter, (iv) Code of Business Conduct and Ethics, (v) Audit Committee Charter and (vi) Stockholder Communication
Policy. In the event of any changes to these items, revised copies will be made available on our website.
10
Supplemental Tax Disclosures – Updates to REIT Rules
The “Protecting Americans from Tax Hikes Act of 2015” (the “PATH Act”) was enacted on December 18, 2015 and contains
several provisions pertaining to REIT qualification and taxation, which are briefly summarized below:
•
•
•
•
•
•
•
•
•
•
For taxable years beginning after December 31, 2015, the PATH Act expanded the exclusion of certain hedging income
from the REIT gross income tests to include income from hedges or previously acquired hedges that a REIT entered into
to manage risk associated with liabilities or property that have been extinguished or disposed.
For taxable years beginning before January 1, 2018, no more than 25% of the value of our assets may consist of stock or
securities of one or more taxable REIT subsidiaries. For taxable years beginning after December 31, 2017, the PATH Act
reduced this limit to 20%. As of December 31, 2015, the securities we own in our taxable REIT subsidiaries do not, in the
aggregate, exceed 20% of the total value of our assets.
For taxable years beginning after December 31, 2015, for purposes of the REIT asset tests, the PATH Act provides that
debt instruments issued by publicly traded REITs will constitute “real estate assets.” However, unless such a debt
instrument is secured by a mortgage or otherwise would have qualified as a real estate asset under prior law, (i) interest
income and gain from such a debt instrument is not qualifying income for purposes of the 75% gross income test and (ii)
all such debt instruments may represent no more than 25% of the value of our total assets.
For taxable years beginning after December 31, 2015, certain obligations secured by a mortgage on both real property and
personal property will be treated as a qualifying real estate asset and give rise to qualifying income for purposes of the 75%
gross income test if the fair market value of such personal property does not exceed 15% of the total fair market value of
all such property.
A 100% excise tax is imposed on “redetermined TRS service income,” which is income of a taxable REIT subsidiary
attributable to services provided to, or on behalf of, its associated REIT and which would otherwise be increased on
distribution, apportionment, or allocation under Section 482 of the Code.
For distributions made in taxable years beginning after December 31, 2014, the preferential dividend rules no longer apply
to us.
Additional exceptions to the rules under the Foreign Investment in Real Property Tax Act (“FIRPTA”) were introduced
for non-U.S. persons that constitute “qualified shareholders” (within the meaning of Section 897(k)(3) of the Code) or
“qualified foreign pension funds” (within the meaning of Section 897(l)(2) of the Code).
After February 16, 2016, the FIRPTA withholding rate under Section 1445 of the Code for dispositions of U.S. real
property interests is increased from 10% to 15%.
The PATH Act increased from 5% to 10% the maximum stock ownership of the REIT that a non-U.S. shareholder may
have held to avail itself of the FIRPTA exception for shares regularly traded on an established securities market.
For assets we acquired from a C corporation in a carry-over basis transaction, the PATH Act, as confirmed by recently-
issued Treasury Regulations, permanently reduced the recognition period during which we could be subject to corporate
tax on any built-in gains recognized on the sale of such assets from 10 years to 5 years.
11
ITEM 1A. RISK FACTORS
Set forth below are the risks that we believe are material to our investors. This section contains forward-looking statements. You
should refer to the explanation of the qualifications and limitations on forward-looking statements beginning on page 4.
Risks Related to Real Estate
Unfavorable market and economic conditions in the United States and globally and in the specific markets or submarkets
where our properties are located could adversely affect occupancy levels, rental rates, rent collections, operating expenses, and the
overall market value of our assets, impair our ability to sell, recapitalize or refinance our assets and have an adverse effect on our
results of operations, financial condition and our ability to make distributions to our stockholders.
Unfavorable market conditions in the areas in which we operate and unfavorable economic conditions in the United States and
globally may significantly affect our occupancy levels, rental rates, rent collections, operating expenses, the market value of our assets
and our ability to strategically acquire, dispose, recapitalize or refinance our properties on economically favorable terms or at all. Our
ability to lease our properties at favorable rates may be adversely affected by increases in supply of office space in our markets and is
dependent upon overall economic conditions, which are adversely affected by, among other things, job losses and unemployment
levels, recession, stock market volatility and uncertainty about the future. Some of our major expenses, including mortgage payments
and real estate taxes, generally do not decline when related rents decline. We expect that any declines in our occupancy levels, rental
revenues and/or the values of our buildings would cause us to have less cash available to pay our indebtedness, fund necessary capital
expenditures and to make distributions to our stockholders, which could negatively affect our financial condition and the market value
of our securities. Our business may be affected by the volatility and illiquidity in the financial and credit markets, a general global
economic recession and other market or economic challenges experienced by the real estate industry or the U.S. economy as a whole.
Our business may also be adversely affected by local economic conditions, as all of our revenues are derived from properties located
in New York City, Washington, D.C. and San Francisco. Factors that may affect our occupancy levels, our rental revenues, our net
operating income, or NOI, our funds from operations and/or the value of our properties include the following, among others:
•
•
•
•
•
•
•
•
downturns in global, national, regional and local economic conditions;
declines in the financial condition of our tenants, many of which are financial, legal and other professional firms, which
may result in tenant defaults under leases due to bankruptcy, lack of liquidity, operational failures or other reasons;
the inability or unwillingness of our tenants to pay rent increases;
significant job losses in the financial and professional services industries, which may decrease demand for our office space,
causing market rental rates and property values to be impacted negatively;
an oversupply of, or a reduced demand for, Class A office space;
changes in market rental rates in our markets;
changes in space utilization by our tenants due to technology, economic conditions and business culture; and
economic conditions that could cause an increase in our operating expenses, such as increases in property taxes (particularly
as a result of increased local, state and national government budget deficits and debt and potentially reduced federal aid to
state and local governments), utilities, insurance, compensation of on-site associates and routine maintenance.
All of our properties are located in New York City, Washington, D.C. and San Francisco, and adverse economic or
regulatory developments in these areas could negatively affect our results of operations, financial condition and ability to make
distributions to our stockholders.
All of our properties are located in New York City, in particular midtown Manhattan, as well as Washington, D.C. and San
Francisco. As a result, our business is dependent on the condition of the economy in those cities, which may expose us to greater
economic risks than if we owned a more geographically diverse portfolio. We are susceptible to adverse developments in the New
York City, Washington, D.C. and San Francisco economic and regulatory environments (such as business layoffs or downsizing,
industry slowdowns, relocations of businesses, increases in real estate and other taxes, costs of complying with governmental
regulations or increased regulation). Such adverse developments could materially reduce the value of our real estate portfolio and our
rental revenues, and thus adversely affect our ability to service current debt and to pay dividends to stockholders.
12
We are subject to risks inherent in ownership of real estate.
Real estate cash flows and values are affected by a number of factors, including competition from other available properties and
our ability to provide adequate property maintenance and insurance and to control operating costs. Real estate cash flows and values
are also affected by such factors as government regulations (including zoning, usage and tax laws), interest rate levels, the availability
of financing, property tax rates, utility expenses, potential liability under environmental and other laws and changes in environmental
and other laws.
A significant portion of our revenue is generated from three properties.
As of December 31, 2016, approximately 59% of our total consolidated revenue was generated from three of our
properties − 1633 Broadway, 1301 Avenue of the Americas and One Market Plaza. Our results of operations and cash available for
distribution to our stockholders would be adversely affected if any of these properties were materially damaged or destroyed.
Additionally, our results of operations and cash available for distribution to our stockholders would be adversely affected if a
significant number of our tenants at these properties experienced a downturn in their business, which may weaken their financial
condition and result in their failure to make timely rental payments, defaulting under their leases or filing for bankruptcy.
We may be unable to renew leases, lease currently vacant space or vacating space on favorable terms or at all as leases
expire, which could adversely affect our financial condition, results of operations and cash flow.
As of December 31, 2016, the vacancy rate of our portfolio was 6.7%. In addition, 5.3% of the square footage of the properties
in our portfolio will expire by the end of 2017. We cannot guarantee you that the expiring leases will be renewed or that our properties
will be re-leased at rental rates equal to or above current rental rates. If the rental rates of our properties decrease, our existing tenants
do not renew their leases or we do not re-lease a significant portion of our available and soon-to-be-available space, our financial
condition, results of operations, cash flow, market value of common stock and our ability to satisfy our principal and interest
obligations and to make distributions to our stockholders would be adversely affected.
We are exposed to risks associated with property redevelopment and repositioning that could adversely affect us, including
our financial condition and results of operations.
To the extent that we continue to engage in redevelopment and repositioning activities with respect to our properties, we will be
subject to certain risks, which could adversely affect us, including our financial condition and results of operations. These risks
include, without limitation, (i) the availability and pricing of financing on favorable terms or at all; (ii) the availability and timely
receipt of zoning and other regulatory approvals; (iii) the potential for the fluctuation of occupancy rates and rents at redeveloped
properties, which may result in our investment not being profitable; (iv) start up, repositioning and redevelopment costs may be higher
than anticipated; and (v) cost overruns and untimely completion of construction (including risks beyond our control, such as weather
or labor conditions, or material shortages). These risks could result in substantial unanticipated delays or expenses and could prevent
the initiation or the completion of redevelopment activities, any of which could have an adverse effect on our financial condition,
results of operations, cash flow, the market value of our common stock and ability to satisfy our principal and interest obligations and
to make distributions to our stockholders.
We may be required to make rent or other concessions and/or significant capital expenditures to improve our properties in
order to retain and attract tenants, which could adversely affect us, including our financial condition, results of operations and
cash flow.
In the event that there are adverse economic conditions in the real estate market and demand for office space decreases, with
respect to our current vacant space and upon expiration of leases at our properties, we may be required to increase tenant improvement
allowances or concessions to tenants, accommodate increased requests for renovations, build-to-suit remodeling and other
improvements or provide additional services to our tenants, all of which could negatively affect our cash flow. In addition, a few of
our existing properties are pre-war office properties, which may require frequent and costly maintenance in order to retain existing
tenants or attract new tenants in sufficient numbers. If the necessary capital is unavailable, we may be unable to make these significant
capital expenditures. This could result in non-renewals by tenants upon expiration of their leases and our vacant space remaining
untenanted, which could adversely affect our financial condition, results of operations, cash flow and market value of our common
stock.
13
We depend on significant tenants in our office portfolio, which could cause an adverse effect on us, including our results of
operations and cash flow, if any of our significant tenants were adversely affected by a material business downturn or were to
become bankrupt or insolvent.
Our rental revenue depends on entering into leases with and collecting rents from tenants. While no single tenant accounts for
more than 10% of our rental revenue, our six largest tenants in the aggregate account for approximately 28% of our share of rental
revenue. General and regional economic conditions may adversely affect our major tenants and potential tenants in our markets. Our
major tenants may experience a material business downturn, which could potentially result in a failure to make timely rental payments
and/or a default under their leases. In many cases, through tenant improvement allowances and other concessions, we have made
substantial up front investments in the applicable leases that we may not be able to recover. In the event of a tenant default, we may
experience delays in enforcing our rights and may also incur substantial costs to protect our investments.
The bankruptcy or insolvency of a major tenant or lease guarantor may adversely affect the income produced by our properties
and may delay our efforts to collect past due balances under the relevant leases and could ultimately preclude collection of these sums
altogether. If a lease is rejected by a tenant in bankruptcy, we would have only a general unsecured claim for damages that is limited
in amount and which may only be paid to the extent that funds are available and in the same percentage as is paid to all other holders
of unsecured claims.
If any of our significant tenants were to become bankrupt or insolvent, suffer a downturn in their business, default under their
leases, fail to renew their leases or renew on terms less favorable to us than their current terms, our results of operations and cash flow
could be adversely affected.
Real estate investments are relatively illiquid and may limit our flexibility.
Equity real estate investments are relatively illiquid, which may tend to limit our ability to react promptly to changes in
economic or other market conditions. Our ability to dispose of assets in the future will depend on prevailing economic and market
conditions. Our inability to sell our properties on favorable terms or at all could have an adverse effect on our sources of working
capital and our ability to satisfy our debt obligations. In addition, real estate can at times be difficult to sell quickly at prices we find
acceptable. The Internal Revenue Code of 1986, as amended the (“Code”), also imposes restrictions on REITs, which are not
applicable to other types of real estate companies, on the disposal of properties. Furthermore, we will be subject to U.S. federal
income tax at the highest regular corporate rate, which is currently 35%, on certain built-in gains recognized in connection with a
taxable disposition of a number of our properties acquired in the Formation Transactions for a period of up to 5 years following the
completion of the Formation Transactions, which may make an otherwise attractive disposition opportunity less attractive or even
impractical. These potential difficulties in selling real estate in our markets may limit our ability to change or reduce the office
buildings in our portfolio promptly in response to changes in economic or other conditions.
Competition could limit our ability to acquire attractive investment opportunities and increase the costs of those
opportunities, which may adversely affect us, including our profitability and impede our growth.
We compete with numerous commercial developers, real estate companies and other owners of real estate for office buildings
for acquisition and pursuing buyers for dispositions. We expect that other real estate investors, including insurance companies, private
equity funds, sovereign wealth funds, pension funds, other REITs and other well-capitalized investors will compete with us to acquire
existing properties and to develop new properties. Our markets are each generally characterized by high barriers-to-entry to
construction and limited land on which to build new office space, which contributes to the competition we face to acquire existing
properties and to develop new properties in these markets. This competition could increase prices for properties of the type we may
pursue and adversely affect our profitability and impede our growth.
14
We are subject to losses that are either uninsurable, not economically insurable or that are in excess of our insurance
coverage.
Our San Francisco properties are located in the general vicinity of active earthquake faults. Our New York City and
Washington, D.C. properties are located in areas that could be subject to windstorm losses. Insurance coverage for earthquakes and
windstorms can be costly because of limited industry capacity. As a result, we may experience shortages in desired coverage levels if
market conditions are such that insurance is not available or the cost of insurance makes it, in our belief, economically impractical to
maintain such coverage. In addition, our New York City, Washington, D.C. and other properties may be subject to a heightened risk of
terrorist attacks. We carry commercial general liability insurance, property insurance and both domestic and foreign terrorism
insurance with respect to our properties with limits and on terms we consider commercially reasonable. We cannot assure you,
however, that our insurance coverage will be sufficient or that any uninsured loss or liability will not have an adverse effect on our
business and our financial condition and results of operations in the event of a catastrophic loss event. See “Business – Insurance.”
We carry both domestic and foreign terrorism insurance as an inclusion in our property policies for which our carriers may rely, in part
for foreign acts of terrorism, on support from the federal government’s Terrorism Risk Insurance Program Reauthorization Act of 2015
(“TRIPRA”). TRIPRA expires on December 31, 2020 and we can provide no assurance that it will be extended further or the impact of
modifications or nonrenewal will have on our terrorism insurance coverage and rates.
We are subject to risks from natural disasters such as earthquakes and severe weather.
Natural disasters and severe weather such as earthquakes, tornadoes, hurricanes or floods may result in significant damage to
our properties. The extent of our casualty losses and loss in operating income in connection with such events is a function of the
severity of the event and the total amount of exposure in the affected area. When we have geographic concentration of exposures, a
single catastrophe (such as an earthquake, especially in the San Francisco Bay Area) or destructive weather event (such as a hurricane,
especially in New York City or Washington, D.C. area) affecting a region may have a significant negative effect on our financial
condition and results of operations. As a result, our operating and financial results may vary significantly from one period to the next.
Our financial results may be adversely affected by our exposure to losses arising from natural disasters or severe weather. We also are
exposed to risks associated with inclement winter weather, particularly in the Northeast states in which many of our properties are
located, including increased need for maintenance and repair of our buildings.
Climate change may adversely affect our business.
To the extent that climate change does occur, we may experience extreme weather and changes in precipitation and temperature,
all of which may result in physical damage or a decrease in demand for our properties located in the areas affected by these conditions.
Should the impact of climate change be material in nature or occur for lengthy periods of time, our financial condition or results of
operations would be adversely affected. In addition, changes in federal and state legislation and regulation on climate change could
result in increased capital expenditures to improve the energy efficiency of our existing properties in order to comply with such
regulations.
Actual or threatened terrorist attacks may adversely affect our ability to generate revenues and the value of our properties.
We have significant investments in large metropolitan markets that have been or may be in the future the targets of actual or
threatened terrorism attacks, including New York City, Washington, D.C. and San Francisco. As a result, some tenants in these
markets may choose to relocate their businesses to other markets or to lower-profile office buildings within these markets that may be
perceived to be less likely targets of future terrorist activity. This could result in an overall decrease in the demand for office space in
these markets generally or in our properties in particular, which could increase vacancies in our properties or necessitate that we lease
our properties on less favorable terms or both. In addition, future terrorist attacks in these markets could directly or indirectly damage
our properties, both physically and financially, or cause losses that materially exceed our insurance coverage. As a result of the
foregoing, our ability to generate revenues and the value of our properties could decline materially. See also “We are subject to losses
that are either uninsurable, not economically insurable or that are in excess of our insurance coverage.”
15
We face risks associated with our tenants being designated “Prohibited Persons” by the Office of Foreign Assets Control and
similar requirements.
Pursuant to Executive Order 13224 and other laws, the Office of Foreign Assets Control of the United States Department of the
Treasury (“OFAC”) maintains a list of persons designated as terrorists or who are otherwise blocked or banned (“Prohibited Persons”)
from conducting business or engaging in transactions in the United States and thereby restricts our doing business with such persons.
We are required to comply with OFAC and related requirements and may be required to terminate or otherwise amend our leases,
loans and other agreements. If a tenant or other party with whom we conduct business is placed on the OFAC list or is otherwise a
party with which we are prohibited from doing business, we may be required to terminate the lease or other agreement. Any such
termination could result in a loss of revenue or otherwise negatively affect our financial results and cash flows.
We may become subject to liability relating to environmental and health and safety matters, which could have an adverse
effect on us, including our financial condition and results of operations.
Under various federal, state and/or local laws, ordinances and regulations, as a current or former owner or operator of real
property, we may be liable for costs and damages resulting from the presence or release of hazardous substances, waste, or petroleum
products at, on, in, under or from such property, including costs for investigation or remediation, natural resource damages, or third-
party liability for personal injury or property damage. These laws often impose liability without regard to whether the owner or
operator knew of, or was responsible for, the presence or release of such materials, and the liability may be joint and several. Some of
our properties have been or may be impacted by contamination arising from current or prior uses of the property or from adjacent
properties used for commercial, industrial or other purposes. Such contamination may arise from spills of petroleum or hazardous
substances or releases from tanks used to store such materials. We also may be liable for the costs of remediating contamination at off-
site disposal or treatment facilities when we arrange for disposal or treatment of hazardous substances at such facilities, without regard
to whether we comply with environmental laws in doing so. The presence of contamination or the failure to remediate contamination
on our properties may adversely affect our ability to attract and/or retain tenants and our ability to develop or sell or borrow against
those properties. In addition to potential liability for cleanup costs, private plaintiffs may bring claims for personal injury, property
damage or for similar reasons. Environmental laws also may create liens on contaminated sites in favor of the government for
damages and costs it incurs to address such contamination. Moreover, if contamination is discovered on our properties, environmental
laws may impose restrictions on the manner in which that property may be used or how businesses may be operated on that property.
See “Business – Environmental and Related Matters.”
In addition, our properties are subject to various federal, state and local environmental and health and safety laws and
regulations. Noncompliance with these environmental and health and safety laws and regulations could subject us or our tenants to
liability. These liabilities could affect a tenant’s ability to make rental payments to us. Moreover, changes in laws could increase the
potential costs of compliance with such laws and regulations or increase liability for noncompliance. This may result in significant
unanticipated expenditures or may otherwise adversely affect our operations, or those of our tenants, which could in turn have an
adverse effect on us.
As the owner or operator of real property, we may also incur liability based on various building conditions. For example,
buildings and other structures on properties that we currently own or operate or those we acquire or operate in the future contain, may
contain, or may have contained Asbestos-Containing Material (“ACM”). Environmental and health and safety laws require that ACM
be properly managed and maintained and may impose fines or penalties on owners, operators or employers for non-compliance with
those requirements. These requirements include special precautions, such as removal, abatement or air monitoring, if ACM would be
disturbed during maintenance, renovation or demolition of a building, potentially resulting in substantial costs. In addition, we may be
subject to liability for personal injury or property damage sustained as a result of exposure to ACM or releases of ACM into the
environment.
In addition, our properties may contain or develop harmful mold or suffer from other indoor air quality issues. Indoor air quality
issues also can stem from inadequate ventilation, chemical contamination from indoor or outdoor sources, and other biological
contaminants such as pollen, viruses and bacteria. Indoor exposure to airborne toxins or irritants can be alleged to cause a variety of
adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold or other
airborne contaminants at any of our properties could require us to undertake a costly remediation program to contain or remove the
mold or other airborne contaminants or to increase ventilation. In addition, the presence of significant mold or other airborne
contaminants could expose us to liability from our tenants or others if property damage or personal injury occurs.
We cannot assure you that costs or liabilities incurred as a result of environmental issues will not affect our ability to make
distributions to our stockholders or that such costs, liabilities, or other remedial measures will not have an adverse effect on our
financial condition and results of operations.
16
We may incur significant costs complying with the Americans with Disabilities Act of 1990, (the “ADA”), and similar laws,
which could adversely affect us, including our future results of operations and cash flow.
Under the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. We
have not conducted a recent audit or investigation of all of our properties to determine our compliance with the ADA. If one or more
of our properties were not in compliance with the ADA, then we could be required to incur additional costs to bring the property into
compliance. Additional federal, state and local laws also may require modifications to our properties, or restrict our ability to renovate
our properties. We cannot predict the ultimate amount of the cost of compliance with the ADA or similar laws. Substantial costs
incurred to comply with the ADA and any other legislation could adversely affect us, including our future results of operations and
cash flow.
We may be unable to identify and successfully complete acquisitions and, even if acquisitions are identified and completed,
we may fail to successfully operate acquired properties, which could adversely affect us and impede our growth.
Our ability to identify and acquire properties on favorable terms and successfully operate or redevelop them may be exposed to
significant risks. Agreements for the acquisition of properties are subject to customary conditions to closing, including completion of
due diligence investigations and other conditions that are not within our control, which may not be satisfied. In this event, we may be
unable to complete an acquisition after incurring certain acquisition-related costs. In addition, if mortgage debt is unavailable at
reasonable rates, we may be unable to finance the acquisition on favorable terms in the time period we desire, or at all. We may spend
more than budgeted to make necessary improvements or renovations to acquired properties and may not be able to obtain adequate
insurance coverage for new properties. Further, acquired properties may be located in new markets where we may face risks
associated with a lack of market knowledge or understanding of the local economy, lack of business relationships in the area and
unfamiliarity with local governmental and permitting procedures. We may also be unable to integrate new acquisitions into our
existing operations quickly and efficiently, and as a result, our results of operations and financial condition could be adversely
affected. Further, we may incur significant costs and divert management attention in connection with evaluating and negotiating
potential acquisitions, including ones that we are subsequently unable to complete. Any delay or failure on our part to identify,
negotiate, finance and consummate such acquisitions in a timely manner and on favorable terms, or operate acquired properties to
meet our financial expectations, could impede our growth and have an adverse effect on us, including our financial condition, results
of operations, cash flow and the market value of our securities.
Should we decide at some point in the future to expand into new markets, we may not be successful, which could adversely
affect our financial condition, results of operations, cash flow and market value of our securities.
If opportunities arise, we may explore acquisitions of properties in new markets. Each of the risks applicable to our ability to
acquire and integrate successfully and operate properties in our current markets is also applicable in new markets. In addition, we will
not possess the same level of familiarity with the dynamics and market conditions of the new markets we may enter, which could
adversely affect the results of our expansion into those markets, and we may be unable to build a significant market share or achieve
our desired return on our investments in new markets. If we are unsuccessful in expanding into new markets, it could adversely affect
our financial condition, results of operations, cash flow, the market value of our securities and ability to satisfy our principal and
interest obligations and to make distributions to our stockholders.
17
We are subject to risks involved in real estate activity through joint ventures and private equity real estate funds.
We have in the past, are currently and may in the future acquire and own properties in joint ventures and private equity real
estate funds with other persons or entities when we believe circumstances warrant the use of such structures. Joint venture and fund
investments involve risks, including: the possibility that our partners might refuse to make capital contributions when due; that we
may be responsible to our partners for indemnifiable losses; that our partners might at any time have business or economic goals that
are inconsistent with ours; and that our partners may be in a position to take action or withhold consent contrary to our
recommendations, instructions or requests. We and our respective joint venture partners may each have the right to trigger a buy-sell
or forced sale arrangement, which could cause us to sell our interest, or acquire our partner’s interest, or to sell the underlying asset, at
a time when we otherwise would not have initiated such a transaction, without our consent or on unfavorable terms. In some instances,
joint venture and fund partners may have competing interests in our markets that could create conflicts of interest. These conflicts may
include compliance with the REIT requirements, and our REIT status could be jeopardized if any of our joint ventures or funds does
not operate in compliance with the REIT requirements. Further, our joint venture and fund partners may fail to meet their obligations
to the joint venture or fund as a result of financial distress or otherwise, and we may be forced to make contributions to maintain the
value of the property. We will review the qualifications and previous experience of any co-venturers or partners, although we do not
expect to obtain financial information from, or to undertake independent investigations with respect to, prospective co-venturers or
partners. To the extent our partners do not meet their obligations to us or our joint ventures or funds or they take action inconsistent
with the interests of the joint venture or fund, we may be adversely affected.
Our joint venture partners in 712 Fifth Avenue and One Market Plaza have forced sale rights as a result of which we may be
forced to sell these assets to third parties at times or prices that may not be favorable to us.
Our partners in the joint ventures that own 712 Fifth Avenue and One Market Plaza have forced sale rights pursuant to which,
after a specified period, each may require us either to purchase the property or attempt to sell the property to a third party. With
respect to 712 Fifth Avenue, any time on or after November 24, 2020, our joint venture partner may exercise a forced sale right by
delivering a written notice to us designating the sales price and other material terms and conditions upon which our joint venture
partner desires to cause a sale of the property. Upon receipt of such sales notice, we will have the obligation either to attempt to sell
the property to a third party for not less than 95.0% of the designated sales price or to elect to purchase the interest of our joint venture
partner for cash at a price equal to the amount our joint venture partner would have received if the property had been sold for the
designated sales price (and the joint venture paid any applicable financing breakage costs, transfer taxes, brokerage fees and marketing
costs, prepaid all liquidated liabilities of the joint venture and distributed the balance). With respect to One Market Plaza, at any time
on or after March 31, 2021, our joint venture partner may exercise a forced sale right. Upon exercise of this right, we and our joint
venture partner have 60 days to negotiate a mutually agreeable transaction regarding the property. If we cannot mutually agree upon a
transaction, then we will work together in good faith to market the property in a commercially reasonable manner and neither we nor
our joint venture partner will be allowed to bid on the property. If our joint venture partner, after consultation with us and a qualified
broker, finds a third-party bid for the property acceptable, then the joint venture will cause the property to be sold. As a result of these
forced sale rights, our joint venture partners could require us either to purchase their interests at an agreed upon price or to sell the
properties held by our joint ventures to third parties. In the case of One Market Plaza, our joint venture partner could force us to sell
this property to a third party on terms it deems acceptable. The exercise of these rights could adversely impact our company by
requiring us to sell one or more of these properties to third parties at times or prices that may not be favorable to us.
18
Contractual commitments with existing private equity real estate funds may limit our ability to acquire properties directly in
the near term.
Paramount Group Real Estate Fund VII, L.P. and its parallel fund (“Fund VII”), is our private equity real estate fund and is
actively engaged in acquisition activities. In connection with the formation of Fund VII, we agreed that we would make all
investments that meet its stated investment objectives through Fund VII (provided that Fund VII is able to participate in the
investment and subject to our ability to co-invest), until July 18, 2017, unless we, as the general partner of Fund VII, choose to extend
it until July 18, 2018. Because of the exclusivity requirements of Fund VII, we may be required to acquire properties through this fund
that we otherwise would have acquired through our operating partnership, which may prevent our operating partnership from
acquiring attractive investment opportunities and adversely affect our growth prospects. Alternatively, we may choose to co-invest
with Fund VII as a joint venture partner to the extent it is determined that it is in the best interest of Fund VII. In connection with any
property that we co-invest in with Fund VII, Fund VII will have the authority, subject to our consent in limited circumstances, to make
most of the decisions in connection with such property. Such authority in connection with a co-investment could subject us to the
applicable risks described above.
Paramount Group Real Estate Fund VIII, L.P. (“Fund VIII”), is one of our private equity real estate funds that completed its
final closing in April 2016, with $775,200,000 in capital commitments. Fund VIII is actively engaged in pursuing a diversified
portfolio of real estate and real estate-related assets and companies primarily consisting of acquiring and/or issuing loans to real estate
and real estate-related companies or investing in their preferred equity. We expect that, subject to certain prior rights granted to other
of our private equity real estate funds, we would make all investments that meet Fund VIII’s stated investment objectives through
Fund VIII (provided that Fund VIII is able to participate in the investment and subject to our right to co-invest), until the end of the
fund’s investment period, which will end three years after the fund’s final closing or April 28, 2019, unless we, as the general partner
of Fund VIII, choose to extend it an additional year. However, we have the option (but not the obligation) of participating in each of
Fund VIII’s investments in debt and preferred equity for up to 25% of the total investment and in each of Fund VIII’s equity
investments for up to 50% of the total investment, and may, where it is attractive to us and determined to be in the best interest of
Fund VIII, acquire greater percentages of a given investment opportunity. Because of the limited exclusivity requirements of Fund
VIII, we may be required to acquire assets partially through this fund that we otherwise would have acquired solely through our
operating partnership, which may prevent our operating partnership from acquiring attractive investment opportunities and adversely
affect our growth prospects. In connection with certain assets that we co-invest in with Fund VIII, specifically those where Fund VIII
owns a majority of the joint venture it is expected that Fund VIII will have the authority, subject to our consent in limited
circumstances, to make most of the decisions in connection with such asset. Such authority in connection with a co-investment could
subject us to the applicable risks described above. As of December 31, 2016, Fund VIII had an aggregate of $775,200,000 of
committed capital, of which $365,700,000 has been called and substantially invested.
We share control of some of our properties with other investors and may have conflicts of interest with those investors.
While we make all operating decisions for certain of our joint ventures and private equity real estate funds, we are required to
make other decisions jointly with other investors who have interests in the relevant property or properties. For example, the approval
of certain of the other investors may be required with respect to operating budgets, including leasing decisions and refinancing,
encumbering, expanding or selling any of these properties, as well as bankruptcy decisions. We might not have the same interests as
the other investors in relation to these decisions or transactions. Accordingly, we might not be able to favorably resolve any of these
issues, or we might have to provide financial or other inducements to the other investors to obtain a favorable resolution.
In addition, various restrictive provisions and third-party rights provisions, such as consent rights to certain transactions, apply
to sales or transfers of interests in our properties owned in joint ventures. Consequently, decisions to buy or sell interests in properties
relating to our joint ventures may be subject to the prior consent of other investors. These restrictive provisions and third-party rights
may preclude us from achieving full value of these properties because of our inability to obtain the necessary consents to sell or
transfer these interests.
19
Risks Related to Our Business and Operations
Capital and credit market conditions may adversely affect our access to various sources of capital or financing and/or the
cost of capital, which could impact our business activities, dividends, earnings and common stock price, among other things.
In periods when the capital and credit markets experience significant volatility, the amounts, sources and cost of capital
available to us may be adversely affected. We primarily use third-party financing to fund acquisitions and to refinance indebtedness as
it matures. As of December 31, 2016, including debt of our unconsolidated joint ventures, we had $3.9 billion of total debt, of which
our share is $3.3 billion, substantially all of which was secured debt, and we have $770 million of available borrowing capacity under
our unsecured revolving credit facility. If sufficient sources of external financing are not available to us on cost effective terms, we
could be forced to limit our acquisition, development and redevelopment activity and/or take other actions to fund our business
activities and repayment of debt, such as selling assets, reducing our cash dividend or paying out less than 100% of our taxable
income. To the extent that we are able and/or choose to access capital at a higher cost than we have experienced in recent years
(reflected in higher interest rates for debt financing or a lower stock price for equity financing) our earnings per share and cash flow
could be adversely affected. In addition, the price of our common stock may fluctuate significantly and/or decline in a high interest
rate or volatile economic environment. If economic conditions deteriorate, the ability of lenders to fulfill their obligations under
working capital or other credit facilities that we may have in the future may be adversely impacted.
We may from time to time be subject to litigation, including litigation arising from the Formation Transactions, which could
have an adverse effect on our financial condition, results of operations, cash flow and trading price of our common stock.
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, 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.
We may be subject to unknown or contingent liabilities related to properties or businesses that we acquire for which we may
have limited or no recourse against the sellers.
Assets and entities that we have acquired or may acquire in the future may be subject to unknown or contingent liabilities for
which we may have limited or no recourse against the sellers. Unknown or contingent liabilities might include liabilities for clean-up
or remediation of environmental conditions, claims of customers, vendors or other persons dealing with the acquired entities, tax
liabilities and other liabilities whether incurred in the ordinary course of business or otherwise. In the future we may enter into
transactions with limited representations and warranties or with representations and warranties that do not survive the closing of the
transactions, in which event we would have no or limited recourse against the sellers of such properties. While we usually require the
sellers to indemnify us with respect to breaches of representations and warranties that survive, such indemnification is often limited
and subject to various materiality thresholds, a significant deductible or an aggregate cap on losses.
As a result, there is no guarantee that we will recover any amounts with respect to losses due to breaches by the sellers of their
representations and warranties. In addition, the total amount of costs and expenses that we may incur with respect to liabilities
associated with acquired properties and entities may exceed our expectations, which may adversely affect our business, financial
condition and results of operations. Finally, indemnification agreements between us and the sellers typically provide that the sellers
will retain certain specified liabilities relating to the assets and entities acquired by us. While the sellers are generally contractually
obligated to pay all losses and other expenses relating to such retained liabilities, there can be no guarantee that such arrangements
will not require us to incur losses or other expenses as well.
20
We depend on key personnel, including Albert Behler, our Chairman, Chief Executive Officer and President, and the loss of
services of one or more members of our senior management team, or our inability to attract and retain highly qualified personnel,
could adversely affect our business.
There is substantial competition for qualified personnel in the real estate industry and the loss of our key personnel could have
an adverse effect on us. Our continued success and our ability to manage anticipated future growth depend, in large part, upon the
efforts of key personnel, particularly Albert Behler, our Chairman, Chief Executive Officer and President, who has extensive market
knowledge and relationships and exercises substantial influence over our acquisition, redevelopment, financing, operational and
disposition activity. Among the reasons that Albert Behler is important to our success is that he has a national, regional and local
industry reputation that attracts business and investment opportunities and assists us in negotiations with financing sources and
industry personnel. If we lose his services, our business and investment opportunities and our relationships with such financing
sources and industry personnel could diminish.
Many of our other senior executives also have extensive experience and strong reputations in the real estate industry, which aid
us in identifying or attracting investment opportunities and negotiating with sellers of properties. The loss of services of one or more
members of our senior management team, or our inability to attract and retain highly qualified personnel, could adversely affect our
business, diminish our investment opportunities and weaken our relationships with lenders, business partners and industry participants,
which could negatively affect our financial condition, results of operations and cash flow.
We face risks associated with security breaches through cyber attacks, cyber intrusions or otherwise, as well as other
significant disruptions of our information technology (IT) networks and related systems.
We face risks associated with security breaches, whether through cyber attacks or cyber intrusions over the Internet, malware,
computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization,
and other significant disruptions of our IT networks and related systems. The risk of a security breach or disruption, particularly
through cyber attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally
increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Our IT
networks and related systems are essential to the operation of our business and our ability to perform day-to-day operations (including
managing our building systems) and, in some cases, may be critical to the operations of certain of our tenants. Although we make
efforts to maintain the security and integrity of these types of IT networks and related systems, and we have implemented various
measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be
effective or that attempted security breaches or disruptions would not be successful or damaging. Even the most well protected
information, networks, systems and facilities remain potentially vulnerable because the techniques used in such attempted security
breaches evolve and generally are not recognized until launched against a target, and in some cases are designed not to be detected
and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security
barriers or other preventative measures, and thus it is impossible for us to entirely mitigate this risk.
A security breach or other significant disruption involving our IT networks and related systems could:
•
•
•
•
•
•
•
•
•
disrupt the proper functioning of our networks and systems and therefore our operations and/or those of certain of our
tenants;
result in misstated financial reports, violations of loan covenants, missed reporting deadlines and/or missed permitting
deadlines;
result in our inability to properly monitor our compliance with the rules and regulations regarding our qualification as a
REIT;
result in the loss, theft or misappropriation of our property;
result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of, proprietary, confidential,
sensitive or otherwise valuable information of ours or others, which others could use to compete against us or which could
expose us to damage claims by third-parties for disruptive, destructive or otherwise harmful purposes and outcomes;
result in our inability to maintain the building systems relied upon by our tenants for the efficient use of their leased space;
require significant management attention and resources to remedy any damages that result;
subject us to claims for breach of contract, damages, credits, penalties or termination of leases or other agreements; or
damage our reputation among our tenants and investors generally.
Any or all of the foregoing could have a material adverse effect on our results of operations, financial condition and cash flows.
21
Changes in accounting pronouncements could adversely affect our operating results, in addition to the reported financial
performance of our tenants.
Uncertainties posed by various initiatives of accounting standard-setting by the Financial Accounting Standards Board and the
Securities and Exchange Commission, which create and interpret applicable accounting standards for U.S. companies, may change the
financial accounting and reporting standards or their interpretation and application of these standards that govern the preparation of
our financial statements. Changes include, but are not limited to, changes in lease accounting and the proposed adoption of accounting
standards likely to require the increased use of “fair-value” measures.
These changes could have a material impact on our reported financial condition and results of operations. In some cases, we
could be required to apply a new or revised standard retroactively, resulting in potentially material restatements of prior period
financial statements. Similarly, these changes could have a material impact on our tenants’ reported financial condition or results of
operations or could affect our tenants’ preferences regarding leasing real estate.
Extensive regulation of our investment management businesses affects our activities and creates the potential for significant
liabilities and penalties, and increased regulatory focus could result in additional burdens on this business.
Our investment management business is subject to extensive regulation, including periodic examinations and investigations, by
governmental agencies in the jurisdictions in which we operate or raise capital. These authorities have regulatory powers dealing with
many aspects of our investment management business, including the authority to grant, and in specific circumstances to cancel,
permissions to carry on particular activities. These regulations are extensive, complex and require substantial management time and
attention. In particular, two of our subsidiaries, Paramount Group Real Estate Advisor LLC and Paramount Group Real Estate
Advisor II, LP, are registered with the U.S. Securities and Exchange Commission (“SEC”) as investment advisers under the U.S.
Investment Advisers Act of 1940 (the “Advisers Act”), and may in the future be registered as managers of alternative investment
funds under the Alternative Investment Fund Managers Directive, 2011/61/EU, and various local European laws implementing this
directive (collectively, the “AIFMD”). Such registration results in certain aspects of our investment management business being
supervised by the SEC and, in the future, subject to notification of sales activities for one or more of our managed funds in Germany
or other countries, the Bundesanstalt fuer Finanzdiensleistungsaufsicht, Germany’s Federal Financial Supervisory Authority (“BaFin”),
or other foreign regulators. The Advisers Act, in particular, requires registered investment advisers to comply with numerous
obligations, including compliance, record-keeping, operating and marketing requirements, disclosure obligations and limitations on
certain activities. Investment advisers also owe fiduciary duties to their clients. These regulatory and fiduciary obligations may result
in increased costs or administrative burdens or otherwise adversely impact our business, including by preventing us from
recommending investment opportunities that otherwise meet the respective investment criteria of us or our funds.
Many of these regulators, including U.S. and foreign government agencies, as well as state securities commissions, are also
empowered to conduct investigations and administrative proceedings that can result in fines, compensatory payments, suspensions of
personnel, changes in policies, procedures or disclosure or other sanctions, including censure, the issuance of cease-and-desist orders,
the suspension or expulsion of an investment adviser from registration or memberships or the commencement of a civil or criminal
lawsuit against us or our personnel. Moreover, the financial services industry generally is presently the subject of heightened scrutiny,
and the SEC has specifically focused on private equity fund managers. In that regard, the SEC’s list of examination priorities includes,
among other things, collection of fees and allocation of expenses, marketing and valuation practices, allocation of investment
opportunities, and appropriate management of other conflicts of interest such as related party sales, loans or coinvestments, by these
fund managers. We may, from time to time, be subject to requests for information or informal or formal investigations by the SEC and
other regulatory authorities, and, in the current environment, even historical practices that have been previously examined are being
revisited. Even if an investigation or proceeding does not result in a sanction or the sanction imposed against us or our personnel by a
regulator is small in monetary amount, the adverse publicity relating to the investigation, proceeding or imposition of these sanctions
could harm our reputation and cause us to lose existing clients or fail to gain new investors.
22
Risks Related to Our Organization and Structure
The ability of stockholders to control our policies and effect a change of control of our company is limited by certain
provisions of our charter and bylaws and by Maryland law.
There are provisions in our charter and bylaws that may discourage a third party from making a proposal to acquire us, even if
some of our stockholders might consider the proposal to be in their best interests. These provisions include the following:
Our charter authorizes our board of directors, without stockholder approval, to amend our charter to increase or decrease the
aggregate number of authorized shares of stock, to authorize us to issue additional shares of our common stock or preferred stock and
to classify or reclassify unissued shares of our common stock or preferred stock and thereafter to authorize us to issue such classified
or reclassified shares of stock. We believe these charter provisions provide us with increased flexibility in structuring possible future
financings and acquisitions and in meeting other needs that might arise. The additional classes or series, as well as the additional
authorized shares of our common stock, are available for issuance without further action by our stockholders, unless such action is
required by applicable law or the rules of any stock exchange or automated quotation system on which our securities are listed or
traded. Although our board of directors does not currently intend to do so, it could authorize us to issue a class or series of stock that
could, depending upon the terms of the particular class or series, delay, defer or prevent a transaction or a change of control of our
company that might involve a premium price for holders of our common stock or that our common stockholders otherwise believe to
be in their best interests.
In order to qualify as a REIT, not more than 50% in value of our outstanding stock may be owned, directly or indirectly, by five
or fewer individuals (as defined in the Code to include certain entities such as private foundations) at any time during the last half of
any taxable year. In order to help us qualify as a REIT, our charter generally prohibits any person or entity from actually owning or
being deemed to own by virtue of the applicable constructive ownership provisions, (i) more than 6.50% (in value or in number of
shares, whichever is more restrictive) of the outstanding shares of our common stock or (ii) more than 6.50% in value of the aggregate
of the outstanding shares of all classes and series of our stock, in each case, excluding any shares of our stock not treated as
outstanding for U.S. federal income tax purposes. We refer to these restrictions as the “ownership limits.” These ownership limits may
prevent or delay a change in control and, as a result, could adversely affect our stockholders’ ability to realize a premium for their
shares of our common stock. In connection with the Formation Transactions and the concurrent private placement to certain members
of the Otto family and their affiliates, our board of directors granted waivers to the lineal descendants of Professor Dr. h.c. Werner
Otto, their spouses and controlled entities to own up to 22.0% of our outstanding common stock in the aggregate (which can be
automatically increased to an amount greater than 22.0% to the extent that their aggregate ownership exceeds such percentage solely
as a result of a repurchase by the company of its common stock). The term the “Otto family” refers to the lineal descendants and the
surviving former spouse of the late Professor Dr. h.c. Werner Otto.
In addition, certain provisions of the Maryland General Corporation Law (“MGCL”), may have the effect of inhibiting a third
party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide the
holders of shares of our common stock with the opportunity to realize a premium over the then-prevailing market price of such shares,
including the Maryland business combination and control share provisions.
As permitted by the MGCL, our board of directors adopted a resolution exempting any business combinations between us and
any other person or entity from the business combination provisions of the MGCL. Our bylaws provide that this resolution or any
other resolution of our board of directors exempting any business combination from the business combination provisions of the
MGCL may only be revoked, altered or amended, and our board of directors may only adopt any resolution inconsistent with any such
resolution (including an amendment to that bylaw provision), which we refer to as an opt in to the business combination provisions,
with the affirmative vote of a majority of the votes cast on the matter by holders of outstanding shares of our common stock. In
addition, as permitted by the MGCL, our bylaws contain a provision exempting from the control share acquisition provisions of the
MGCL any and all acquisitions by any person of shares of our stock. This bylaw provision may be amended, which we refer to as an
opt in to the control share acquisition provisions, only with the affirmative vote of a majority of the votes cast on such an amendment
by holders of outstanding shares of our common stock.
Title 3, Subtitle 8 of the MGCL permits our board of directors, without stockholder approval and regardless of what is currently
provided in our charter or bylaws, to implement certain takeover defenses, including adopting a classified board or increasing the vote
required to remove a director. Such takeover defenses may have the effect of inhibiting a third party from making an acquisition
proposal for us or of delaying, deferring or preventing a change in control of us under the circumstances that otherwise could provide
our common stockholders with the opportunity to realize a premium over the then current market price.
23
In addition, the provisions of our charter on the removal of directors and the advance notice provisions of our bylaws, among
others, could delay, defer or prevent a transaction or a change of control of our company that might involve a premium price for
holders of our common stock or otherwise be in their best interest.
Each item discussed above may delay, deter or prevent a change in control of our company, even if a proposed transaction is at a
premium over the then-current market price for our common stock. Further, these provisions may apply in instances where some
stockholders consider a transaction beneficial to them. As a result, our stock price may be negatively affected by these provisions.
Our board of directors may change our policies without stockholder approval.
Our policies, including any policies with respect to investments, leverage, financing, growth, debt and capitalization, are
determined by our board of directors or those committees or officers to whom our board of directors may delegate such authority. Our
board of directors also establishes the amount of any dividends or other distributions that we pay to our stockholders. Our board of
directors or the committees or officers to which such decisions are delegated have the ability to amend or revise these and our other
policies at any time without stockholder vote. Accordingly, our stockholders are not entitled to approve changes in our policies, and,
while not intending to do so, we may adopt policies that may have an adverse effect on our financial condition and results of
operations.
Conflicts of interest may exist or could arise in the future between the interests of our stockholders and the interests of
holders of common units, which may impede business decisions that could benefit our stockholders.
Conflicts of interest may exist or could arise in the future as a result of the relationships between us and our affiliates, on the one
hand, and our operating partnership or any of its partners, on the other. Our directors and officers have duties to our company under
Maryland law in connection with their management of our company. At the same time, we have duties and obligations to our
operating partnership and its limited partners under Delaware law as modified by the partnership agreement of our operating
partnership in connection with the management of our operating partnership as the sole general partner. The limited partners of our
operating partnership expressly acknowledge that the general partner of our operating partnership acts for the benefit of our operating
partnership, the limited partners and our stockholders collectively. When deciding whether to cause our operating partnership to take
or decline to take any actions, the general partner will be under no obligation to give priority to the separate interests of (i) the limited
partners of our operating partnership (including, without limitation, the tax interests of our limited partners, except as provided in a
separate written agreement) or (ii) our stockholders. Nevertheless, the duties and obligations of the general partner of our operating
partnership may come into conflict with the duties of our directors and officers to our company and our stockholders.
If there are deficiencies in our disclosure controls and procedures or internal control over financial reporting, we may be
unable to accurately present our financial statements, which could materially and adversely affect us, including our business,
reputation, results of operations, financial condition or liquidity.
As a publicly-traded company, we are required to report our financial statements on a consolidated basis. Effective internal
controls are necessary for us to accurately report our financial results. Section 404 of the Sarbanes-Oxley Act of 2002 requires us to
evaluate and report on our internal control over financial reporting and have our independent registered public accounting firm issue
an opinion with respect to the effectiveness of our internal control over financial reporting. There can be no guarantee that our internal
control over financial reporting will be effective in accomplishing all control objectives all of the time. Furthermore, as we grow our
business, our internal controls will become more complex, and we may require significantly more resources to ensure our internal
controls remain effective. Deficiencies, including any material weakness, in our internal control over financial reporting which may
occur in the future could result in misstatements of our results of operations that could require a restatement, failing to meet our public
company reporting obligations and causing investors to lose confidence in our reported financial information. These events could
materially and adversely affect us, including our business, reputation, results of operations, financial condition or liquidity.
24
We may have assumed unknown liabilities in connection with the Formation Transactions, which, if significant, could
adversely affect our business.
As part of the Formation Transactions, we (through corporate acquisitions and contributions to our operating partnership)
acquired the properties and assets of our Predecessor and certain other assets, subject to existing liabilities, some of which may be
unknown. Unknown liabilities might include liabilities for cleanup or remediation of undisclosed environmental conditions, claims of
tenants, vendors or other persons dealing with such entities prior to the Offering (that had not been asserted or threatened prior to the
Offering), tax liabilities, and accrued but unpaid liabilities incurred in the ordinary course of business. Any unknown or unquantifiable
liabilities that we assumed in connection with the Formation Transactions for which we have no or limited recourse could adversely
affect us. See “We may become subject to liability relating to environmental and health and safety matters, which could have an
adverse effect on us, including our financial condition and results of operations” as to the possibility of undisclosed environmental
conditions potentially affecting the value of the properties in our portfolio.
Risks Related to Our Indebtedness and Financing
We have a substantial amount of indebtedness that may limit our financial and operating activities and may adversely affect
our ability to incur additional debt to fund future needs.
We have a substantial amount of indebtedness. Payments of principal and interest on borrowings may leave us with insufficient
cash resources to operate our properties, fully implement our capital expenditure, acquisition and redevelopment activities, or meet the
REIT distribution requirements imposed by the Code. Our level of debt and the limitations imposed on us by our debt agreements
could have significant adverse consequences, including the following:
(cid:2)
require us to dedicate a substantial portion of cash flow from operations to the payment of principal, and interest on,
indebtedness, thereby reducing the funds available for other purposes;
(cid:2) make it more difficult for us to borrow additional funds as needed or on favorable terms, which could, among other things,
adversely affect our ability to meet operational needs;
(cid:2)
(cid:2)
force us to dispose of one or more of our properties, possibly on unfavorable terms (including the possible application of the
100% tax on income from prohibited transactions, discussed below in “We may be subject to a 100% penalty tax on any
prohibited transactions that we enter into, or may be required to forego certain otherwise beneficial opportunities in order
to avoid the penalty tax on prohibited transactions” or in violation of certain covenants to which we may be subject;
subject us to increased sensitivity to interest rate increases;
(cid:2) make us more vulnerable to economic downturns, adverse industry conditions or catastrophic external events;
(cid:2)
limit our ability to withstand competitive pressures;
(cid:2)
(cid:2)
(cid:2)
limit our ability to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of
our original indebtedness;
reduce our flexibility in planning for or responding to changing business, industry and economic conditions; and/or
place us at a competitive disadvantage to competitors that have relatively less debt than we have.
If any one of these events were to occur, our financial condition, results of operations, cash flow and trading price of our
common stock could be adversely affected. Furthermore, foreclosures could create taxable income without accompanying cash
proceeds, which could hinder our ability to meet the REIT distribution requirements imposed by the Code.
25
We may not have sufficient cash flow to meet the required payments of principal and interest on our debt or to pay
distributions on our shares at expected levels.
In the future, our cash flow could be insufficient to meet required payments of principal and interest or to pay distributions on
our shares at expected levels. In this regard, we note that in order for us to continue to qualify as a REIT, we are required to make
annual distributions generally equal to at least 90% of our taxable income, computed without regard to the dividends paid deduction
and excluding net capital gain. In addition, as a REIT, we are subject to U.S. federal income tax to the extent that we distribute less
than 100% of our taxable income (including capital gains) and are subject to a 4% nondeductible excise tax on the amount by which
our distributions in any calendar year are less than a minimum amount specified by the Code. These requirements and considerations
may limit the amount of our cash flow available to meet required principal and interest payments.
If we are unable to make required payments on indebtedness that is secured by a mortgage on our property, the asset may be
transferred to the lender with a consequent loss of income and value to us, including adverse tax consequences related to such a
transfer.
Our debt agreements include restrictive covenants, requirements to maintain financial ratios and default provisions which
could limit our flexibility, our ability to make distributions and require us to repay the indebtedness prior to its maturity.
The mortgages on our properties contain customary negative covenants that, among other things, limit our ability, without the
prior consent of the lender, to further mortgage the property and to reduce or change insurance coverage. Additionally, our debt
agreements contain customary covenants that, among other things, restrict our ability to incur additional indebtedness and, in certain
instances, restrict our ability to engage in material asset sales, mergers, consolidations and acquisitions, and restrict our ability to make
capital expenditures. These debt agreements, in some cases, also subject us to guarantor and liquidity covenants and our revolving
credit facility will, and other future debt may, require us to maintain various financial ratios. Some of our debt agreements contain
certain cash flow sweep requirements and mandatory escrows, and our property mortgages generally require certain mandatory
prepayments upon disposition of underlying collateral. Early repayment of certain mortgages may be subject to prepayment penalties.
Variable rate debt is subject to interest rate risk that could increase our interest expense, increase the cost to refinance and
increase the cost of issuing new debt.
As of December 31, 2016, $606.0 million of our outstanding consolidated debt was subject to instruments which bear interest at
variable rates, and we may also borrow additional money at variable interest rates in the future. Unless we have made arrangements
that hedge against the risk of rising interest rates, increases in interest rates would increase our interest expense under these
instruments, increase the cost of refinancing these instruments or issuing new debt, and adversely affect cash flow and our ability to
service our indebtedness and make distributions to our stockholders, which could adversely affect the market price of our common
stock.
We may, in a manner consistent with our qualification as a REIT, seek to manage our exposure to interest rate volatility by
using interest rate hedging arrangements that involve risk, such as the risk that counterparties may fail to honor their obligations under
these arrangements, and that these arrangements may not be effective in reducing our exposure to interest rate changes. Moreover,
there can be no assurance that our hedging arrangements will qualify for hedge accounting or that our hedging activities will have the
desired beneficial impact on our results of operations. Should we desire to terminate a hedging agreement, there could be significant
costs and cash and other collateral requirements involved to fulfill our obligation under the hedging agreement. Failure to hedge
effectively against interest rate changes may adversely affect our results of operations.
Mortgage debt obligations expose us to the possibility of foreclosure, which could result in the loss of our investment in a
property or group of properties subject to mortgage debt.
Incurring mortgage and other secured debt obligations increases our risk of property losses because defaults on indebtedness
secured by properties may result in foreclosure actions initiated by lenders and ultimately our loss of the property securing any loans
for which we are in default. Any foreclosure on a mortgaged property or group of properties could adversely affect the overall value of
our portfolio of properties. For tax purposes, a foreclosure of any of our properties that is subject to a nonrecourse mortgage loan
would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If
the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income
on foreclosure, but would not receive any cash proceeds, which could hinder our ability to meet the distribution requirements
applicable to REITs under the Code.
26
Risks Related to Our Common Stock
The market price and trading volume of our common stock may be volatile.
The trading price of our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate and
cause significant price variations to occur. Some of the factors that could negatively affect our share price or result in fluctuations in
the price or trading volume of our common stock include:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
actual or anticipated variations in our quarterly operating results or dividends;
changes in our funds from operations, NOI or income estimates;
publication of research reports about us or the real estate industry;
increases in market interest rates that lead purchasers of our shares to demand a higher yield;
changes in market valuations of similar companies;
adverse market reaction to any additional debt we incur in the future;
additions or departures of key management personnel;
actions by institutional stockholders;
speculation in the press or investment community;
the realization of any of the other risk factors presented in this Form 10-K;
the extent of investor interest in our securities;
the general reputation of REITs and the attractiveness of our equity securities in comparison to other equity securities,
including securities issued by other real estate-based companies;
our underlying asset value;
investor confidence in the stock and bond markets, generally;
changes in tax laws;
future equity issuances;
failure to meet income estimates;
failure to meet and maintain REIT qualifications; and
general market and economic conditions.
In the past, securities class-action litigation has often been instituted against companies following periods of volatility in the
price of their common stock. This type of litigation could result in substantial costs and divert our management’s attention and
resources, which could have an adverse effect on our financial condition, results of operations, cash flow and trading price of our
common stock.
The market value of our common stock may decline due to the large number of our shares eligible for future sale.
The market value of our common stock could decline as a result of sales of a large number of shares of our common stock in the
market or upon exchange of common units, or the perception that such sales could occur. These sales, or the possibility that these sales
may occur, also might make it more difficult for us to sell shares of our common stock in the future at a time and at a price that we
deem appropriate.
27
As of December 31, 2016, a significant number of our outstanding shares of our common stock are held by our continuing
investors and their affiliates who acquired shares in the Formation Transactions and the concurrent private placements. These shares
of common stock are “restricted securities” within the meaning of Rule 144 under the Securities Act and may not be sold in the
absence of registration under the Securities Act unless an exemption from registration is available, including the exemptions contained
in Rule 144. All of these shares of our common stock are eligible for future sale and certain of such shares held by our continuing
investors have registration rights pursuant to registration rights agreements that we have entered into with those investors. In addition,
limited partners of our operating partnership, other than us, have the right to require our operating partnership to redeem part or all of
their 28,869,955 common units for cash, based upon the value of an equivalent number of shares of our common stock at the time of
the election to redeem, or, at our election, shares of our common stock on a one-for-one basis. The related shares of common stock or
securities convertible into, exchangeable for, exercisable for, or repayable with common stock will be available for sale or resale, as
the case may be, and such sales or resales, or the perception of such sales or resales, could depress the market price for our common
stock.
Pursuant to the registration rights agreement we entered into with members of the Otto family and certain affiliated entities
receiving shares of our common stock in the Formation Transactions and concurrent private placements, the parties to this agreement
have the right to demand that we register the resale and/or facilitate an underwritten offering of their shares; provided that the demand
relates to shares having a market value of at least $40.0 million and that such parties may not make more than two such demands in
any consecutive 12-month period.
In addition, upon the request of one or more such parties owning at least 1.0% of our total outstanding common stock, we have
agreed to file a shelf registration statement registering the offering and sale of such parties’ registrable securities on a delayed or
continuous basis, or a resale shelf registration statement, and maintain the effectiveness of the resale shelf registration statement for as
long as the securities registered thereunder continue to qualify as registrable securities.
In connection with the registration rights agreement we entered into with the continuing investors who received common units
in the Formation Transactions, on December 14, 2015, we filed a shelf registration statement with the SEC to register the primary
issuance of the shares of our common stock that they may receive in exchange for their common units. We are required to maintain the
effectiveness of this shelf registration statement for as long as the securities registered thereunder continue to qualify as registrable
securities.
Future issuances of debt securities and equity securities may negatively affect the market price of shares of our common
stock and, in the case of equity securities, may be dilutive to existing stockholders.
Our charter provides that we may issue up to 900,000,000 shares of our common stock, $0.01 par value per share, and up to
100,000,000 shares of preferred stock, $0.01 par value per share. Moreover, under Maryland law and our charter, our board of
directors has the power to increase the aggregate number of shares of stock or the number of shares of stock of any class or series that
we are authorized to issue without stockholder approval. Similarly, the partnership agreement of our operating partnership authorizes
us to issue an unlimited number of additional common units, which may be exchangeable for shares of our common stock. In addition,
share equivalents are available for future issuance under the 2014 Equity Incentive Plan (with full value awards counting as one share
equivalent and options counting as one-half of a share equivalent).
In the future, we may issue debt or equity securities or incur other financial obligations, including stock dividends and shares
that may be issued in exchange for common units and equity plan shares/units. Upon liquidation, holders of our debt securities and
other loans and preferred stock will receive a distribution of our available assets before common stockholders. We are not required to
offer any such additional debt or equity securities to existing stockholders on a preemptive basis. Therefore, additional common stock
issuances, directly or through convertible or exchangeable securities (including common units and convertible preferred units),
warrants or options, will dilute the holdings of our existing common stockholders and such issuances or the perception of such
issuances may reduce the market price of shares of our common stock. Any convertible preferred units would have, and any series or
class of our preferred stock would likely have a preference on distribution payments, periodically or upon liquidation, which could
eliminate or otherwise limit our ability to make distributions to common stockholders.
28
Risks Related to Our Status as a REIT
Failure to qualify or to maintain our qualification as a REIT would have significant adverse consequences to the value of
our common stock.
We elected to be treated as a REIT commencing with our taxable year ended December 31, 2014. The Code generally requires
that a REIT distribute at least 90% of its taxable income (without regard to the dividends paid deduction and excluding net capital
gains) to stockholders annually, and a REIT must pay tax at regular corporate rates to the extent that it distributes less than 100% of its
taxable income (including capital gains) in a given year. In addition, a REIT is required to pay a 4% nondeductible excise tax on the
amount, if any, by which the distributions it makes in a calendar year are less than the sum of 85% of its ordinary income, 95% of its
capital gain net income and 100% of its undistributed income from prior years. To avoid entity-level U.S. federal income and excise
taxes, we anticipate distributing at least 100% of our taxable income annually.
We believe that we have been and are organized, and have operated and will continue to operate, in a manner that will allow us
to qualify as a REIT commencing with our taxable year ended December 31, 2014. However, we cannot assure you that we have been
and are organized and have operated or will continue to operate as such. This is because qualification as a REIT involves the
application of highly technical and complex provisions of the Code as to which there may only be limited judicial and administrative
interpretations and involves the determination of facts and circumstances not entirely within our control. We have not requested and
do not intend to request a ruling from the Internal Revenue Service, or the IRS, that we qualify as a REIT. The complexity of the Code
provisions and of the applicable Treasury Regulations is greater in the case of a REIT that, like us, acquired assets from taxable C
corporations in tax-deferred transactions and holds its assets through one or more partnerships. Moreover, in order to qualify as a
REIT, we must meet, on an ongoing basis, various tests regarding the nature and diversification of our assets and our income, the
ownership of our outstanding stock, the absence of inherited retained earnings from non-REIT periods and the amount of our
distributions. Our ability to satisfy the asset tests depends upon our analysis of the characterization and fair market values of our
assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our
compliance with the REIT gross income and quarterly asset requirements also depends upon our ability to manage successfully the
composition of our gross income and assets on an ongoing basis. Future legislation, new regulations, administrative interpretations or
court decisions may significantly change the tax laws or the application of the tax laws with respect to qualification as a REIT for U.S.
federal income tax purposes or the U.S. federal income tax consequences of such qualification. Accordingly, it is possible that we may
not meet the requirements for qualification as a REIT.
If, with respect to any taxable year, we fail to maintain our qualification as a REIT, we would not be allowed to deduct
distributions to stockholders in computing our taxable income. If we were not entitled to relief under the relevant statutory provisions,
we would also be disqualified from treatment as a REIT for the four subsequent taxable years. If we fail to qualify as a REIT, we
would be subject to entity-level income tax, including any applicable alternative minimum tax, on our taxable income at regular
corporate tax rates. As a result, the amount available for distribution to holders of our common stock would be reduced for the year or
years involved, and we would no longer be required to make distributions to our stockholders. In addition, our failure to qualify as a
REIT could impair our ability to expand our business and raise capital, and adversely affect the value of our common stock.
We may owe certain taxes notwithstanding our qualification as a REIT.
Even if we qualify as a REIT, we will be subject to certain U.S. federal, state and local taxes on our income and property, on
taxable income that we do not distribute to our stockholders, on net income from certain “prohibited transactions,” and on income
from certain activities conducted as a result of foreclosure. We may, in certain circumstances, be required to pay an excise or penalty
tax (which could be significant in amount) in order to utilize one or more relief provisions under the Code to maintain our
qualification as a REIT. In addition, we expect to provide certain services that are not customarily provided by a landlord, hold
properties for sale and engage in other activities (such as a portion of our management business) through one or more taxable REIT
subsidiaries (“TRSs”), and the income of those subsidiaries will be subject to U.S. federal income tax at regular corporate rates.
Furthermore, to the extent that we conduct operations outside of the United States, our operations would subject us to applicable non-
U.S. taxes, regardless of our status as a REIT for U.S. tax purposes.
29
In the case of assets we acquired on a tax-deferred basis from certain corporations controlled by the Otto family and Wilhelm
von Finck (which we collectively refer to as the “family corporations”) as part of the Formation Transactions, we are subject to U.S.
federal income tax, sometimes called the “sting tax,” at the highest regular corporate tax rate, which is currently 35%, on all or a
portion of the gain recognized from a taxable disposition of any such assets occurring within the 5-year period following the
acquisition date, to the extent of the asset’s built-in gain based on the fair market value of the asset on the acquisition date in excess of
our initial tax basis in the asset. Additionally, depending upon the location of the asset acquired on a tax deferred basis there may be
additional “sting tax” imposed on a state and local level. Gain from a sale of such an asset occurring after the 5-year period ends will
not be subject to this sting tax. We currently do not expect to dispose of any asset if the disposition would result in the imposition of a
material sting tax liability under the above rules. We cannot, however, assure you that we will not change our plans in this regard.
As part of the Formation Transactions, we also acquired assets of the family corporations through mergers, stock acquisition and
similar transactions. As a result of those acquisitions, we inherited any liability for the unpaid taxes of the family corporations for
periods prior to the acquisitions. In each case, our acquisition of assets was intended to qualify as a tax-deferred acquisition for the
family corporation so that none of the corporations recognized gain or loss for U.S. federal income tax purposes in the Formation
Transactions. If for any reason our acquisition of a family corporation’s assets failed to qualify for tax-deferred treatment, the
corporation generally would recognize gain for U.S. federal income tax purposes to the extent that the fair market value of our stock
(and any cash) issued in exchange for the stock of the family corporation or the corporation’s assets, plus debt assumed, exceeded the
corporation’s adjusted tax basis in its assets. We would inherit the resulting tax liability of the family corporation. In several of the
Formation Transactions, the acquired family corporation would have recognized gain for U.S. federal income tax purposes unless the
acquisition qualified as a tax-deferred “reorganization” within the meaning of Section 368(a) of the Code. The requirements of tax-
deferred reorganizations are complex, and it is possible that the IRS could interpret the applicable law differently and assert that one or
more of the acquisitions failed to qualify as a reorganization under Section 368(a) of the Code. Moreover, under the “investment
company” rules under Section 368 of the Code, certain of the acquisitions could be taxable if the acquired corporation was an
“investment company” under such rules. If any such acquisition failed to qualify for tax-free reorganization treatment we would incur
significant U.S. federal income tax liability.
Our Operating Partnership has, and various Predecessor partnerships whose assets were acquired in the Formation Transactions,
have, limited partners that are non-U.S. persons. Such non-U.S. persons are subject to a variety of U.S. withholding taxes, including
with respect to certain aspects of the Formation Transactions, withholding taxes that the relevant partnership must remit to the U.S.
Treasury. A partnership that fails to remit the full amount of withholding taxes is liable for the amount of the under withholding, as
well as interest and potential penalties. As a successor to certain of the private equity real estate funds controlled by our Predecessor,
our operating partnership could be responsible if the private equity real estate funds failed to properly withhold for prior periods.
Although we believe that we and our Predecessor partnerships have complied and will comply with the applicable withholding
requirements, the determination of the amounts to be withheld is a complex legal determination, depends on provisions of the Code
and the applicable Treasury Regulations that have little guidance and the treatment of certain aspects of the Formation Transactions
under the withholding rules may be uncertain. Accordingly, we may interpret the applicable law differently from the IRS and the IRS
may seek to recover additional withholding taxes from us.
Our property taxes could increase due to property tax rate changes or reassessment, which could impact our cash flow.
Even if we qualify as a REIT for U.S. federal income tax purposes, we are required to pay state and local property taxes on our
properties. The property taxes on our properties may increase as property tax rates change or as our properties are assessed or
reassessed by taxing authorities. Therefore, the amount of property taxes we pay in the future may increase substantially from what we
have paid in the past and such increases may not be covered by tenants pursuant to our lease agreements. If the property taxes we pay
increase, our financial condition, results of operations, cash flow, per share trading price of our common stock and our ability to
satisfy our principal and interest obligations and to make distributions to our stockholders could be adversely affected.
30
If our operating partnership is treated as a corporation for U.S. federal income tax purposes, we will cease to qualify as a
REIT.
We believe our operating partnership qualifies and will continue to qualify as a partnership for U.S. federal income tax
purposes. Assuming that it qualifies as a partnership for U.S. federal income tax purposes, our operating partnership will not be
subject to U.S. federal income tax on its income. Instead, its partners, including us, generally are required to pay tax on their
respective allocable share of our operating partnership’s income. No assurance can be provided, however, that the IRS will not
challenge our operating partnership’s status as a partnership for U.S. federal income tax purposes, or that a court would not sustain
such a challenge. For example, our operating partnership would be treated as a corporation for U.S. federal income tax purposes if it
were deemed to be a “publicly traded partnership” and less than 90% of its income consisted of “qualified income” under the Code. If
the IRS were successful in treating our operating partnership as a corporation for U.S. federal income tax purposes, we would fail to
meet the gross income tests and certain of the asset tests applicable to REITs and, therefore, cease to qualify as a REIT, and our
operating partnership would become subject to U.S. federal, state and local income tax. The payment by our operating partnership of
income tax would reduce significantly the amount of cash available to our operating partnership to satisfy obligations to make
principal and interest payments on its debt and to make distribution to its partners, including us.
There are uncertainties relating to our distribution of non-REIT earnings and profits.
To qualify as a REIT, we must not have any non-REIT accumulated earnings and profits, as measured for U.S. federal income
tax purposes, at the end of any REIT taxable year. Such non-REIT earnings and profits generally would have included any
accumulated earnings and profits of the corporations acquired by us (or whose assets we acquired) in the Formation Transactions. We
believe that we have operated, and intend to continue to operate, so that we have not had and will not have any earnings and profits
accumulated in a non-REIT year at the end of any taxable year. However, the determination of the amounts of any such non-REIT
earnings and profits is a complex factual and legal determination, especially in the case of corporations, such as the corporations
acquired in the Formation Transactions that have been in operation for many years. In addition, certain aspects of the computational
rules are not completely clear. Thus, we cannot guarantee that the IRS will not assert that we had accumulated non-REIT earnings as
of the end of 2014 or a subsequent taxable year. If it is subsequently determined that we had any accumulated non-REIT earnings and
profits as of the end of our first taxable year as a REIT or at the end of any subsequent taxable year, we could fail to qualify as a REIT
beginning with the applicable taxable year. Pursuant to Treasury Regulations, however, so long as our failure to comply with the
prohibition on non-REIT earnings and profits was not due to fraud with intent to evade tax, we could cure such failure by paying an
interest charge on 50% of the amount of accumulated non-REIT earnings and profits and by making a special distribution of
accumulated non-REIT earnings and profits. We intend to utilize such cure provisions if ever required to do so. The amount of any
such interest charge could be substantial.
Dividends payable by REITs generally do not qualify for reduced tax rates applicable to non-corporate taxpayers.
The maximum U.S. federal income tax rate for certain qualified dividends payable to U.S. stockholders that are individuals,
trusts and estates generally is 20%. Dividends payable by REITs, however, are generally not eligible for the reduced rates and
therefore may be subject to a 39.6% maximum U.S. federal income tax rate on ordinary income when paid to such stockholders.
Although the reduced U.S. federal income tax rate applicable to dividend income from regular corporate dividends does not adversely
affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate dividends could
cause investors who are individuals, trusts and estates or are otherwise sensitive to these lower rates to perceive investments in REITs
to be relatively less attractive than investments in the stock of non-REIT corporations that pay dividends, which could adversely affect
the value of the shares of REITs, including our common stock.
Complying with the REIT requirements may cause us to forego otherwise attractive opportunities or liquidate certain of our
investments.
To qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, among other things, the
sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of
our stock. We may be required to make distributions to our stockholders at disadvantageous times or when we do not have funds
readily available for distribution. Thus, compliance with the REIT requirements may, for instance, hinder our ability to make certain
otherwise attractive investments or undertake other activities that might otherwise be beneficial to us and our stockholders, or may
require us to borrow or liquidate investments in unfavorable market conditions and, therefore, may hinder our investment
performance.
31
As a REIT, at the end of each calendar quarter, at least 75% of the value of our assets must consist of cash, cash items,
government securities and qualified real estate assets. The remainder of our investments in securities (other than cash, cash items,
government securities, securities issued by a TRS and qualified real estate assets) generally cannot include more than 10% of the
outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In
addition, in general, no more than 5% of the value of our total assets (other than cash, cash items, government securities, securities
issued by a TRS and qualified real estate assets) can consist of the securities of any one issuer, no more than 25% (for taxable years
beginning before January 1, 2018) or 20% (for taxable years beginning on or after January 1, 2018) of the value of our total assets can
be represented by securities of one or more TRSs. Further, even though for taxable years beginning after December 31, 2015, debt
instruments issued by a publicly traded REIT that are not secured by a mortgage on real property are qualifying real estate assets, no
more than 25% of the value of our total assets can be represented by such assets. After meeting these requirements at the close of a
calendar quarter, if we fail to comply with these requirements at the end of any subsequent calendar quarter, we must correct the
failure within 30 days after the end of the calendar quarter or qualify for certain other statutory relief provisions to avoid losing our
REIT qualification. As a result, we may be required to liquidate from our portfolio otherwise attractive investments. These actions
could have the effect of reducing our income and amounts available for distribution to our stockholders.
We may be subject to a 100% penalty tax on any prohibited transactions that we enter into, or may be required to forego
certain otherwise beneficial opportunities in order to avoid the penalty tax on prohibited transactions.
If we are found to have held, acquired or developed property primarily for sale to customers in the ordinary course of business,
we may be subject to a 100% “prohibited transactions” tax under U.S. federal tax laws on the gain from disposition of the property
unless the disposition qualifies for one or more safe harbor exceptions for properties that have been held by us for at least two years
and satisfy certain additional requirements (or the disposition is made through a TRS and, therefore, is subject to corporate U.S.
federal income tax).
Under existing law, whether property is held primarily for sale to customers in the ordinary course of a trade or business is a
question of fact that depends on all the facts and circumstances. We intend to hold, and, to the extent within our control, to have any
joint venture to which our operating partnership is a partner hold, properties for investment with a view to long-term appreciation, to
engage in the business of acquiring, owning, operating and developing the properties, and to make sales of our properties and other
properties acquired subsequent to the date hereof as are consistent with our investment objectives (and to hold investments that do not
meet these criteria through a TRS). Based upon our investment objectives, we believe that overall, our properties (other than certain
interests we intend to hold through a TRS) should not be considered property held primarily for sale to customers in the ordinary
course of business. However, it may not always be practical for us to comply with one of the safe harbors, and, therefore, we may be
subject to the 100% penalty tax on the gain from dispositions of property if we otherwise are deemed to have held the property
primarily for sale to customers in the ordinary course of business.
The potential application of the prohibited transactions tax could cause us to forego potential dispositions of property or to
forego other opportunities that might otherwise be attractive to us, or to hold investments or undertake such dispositions or other
opportunities through a TRS, which would generally result in corporate income taxes being incurred.
REIT distribution requirements could adversely affect our liquidity and adversely affect our ability to execute our business
plan.
In order to maintain our qualification as a REIT and to meet the REIT distribution requirements, we may need to modify our
business plans. Our cash flow from operations may be insufficient to fund required distributions, for example, as a result of
differences in timing between our cash flow, the receipt of income for accounting principles generally accepted in the United States of
America (“GAAP”) purposes and the recognition of income for U.S. federal income tax purposes, the effect of non-deductible capital
expenditures, the creation of reserves, payment of required debt service or amortization payments, or the need to make additional
investments in qualifying real estate assets. The insufficiency of our cash flow to cover our distribution requirements could require us
to (i) sell assets in adverse market conditions, (ii) borrow on unfavorable terms, (iii) distribute amounts that would otherwise be
invested in future acquisitions or capital expenditures or used for the repayment of debt, (iv) pay dividends in the form of “taxable
stock dividends” or (v) use cash reserves, in order to comply with the REIT distribution requirements. As a result, compliance with the
REIT distribution requirements could adversely affect the market value of our common stock. The inability of our cash flow to cover
our distribution requirements could have an adverse impact on our ability to raise short- and long-term debt or sell equity securities. In
addition, if we are compelled to liquidate our assets to repay obligations to our lenders or make distributions to our stockholders, we
may be subject to a 100% tax on any resultant gain if we sell assets that are treated as property held primarily for sale to customers in
the ordinary course of business, and, in the case of some of our properties, we may be subject to an entity-level sting tax.
32
The ability of our board of directors to revoke our REIT qualification without stockholder approval may cause adverse
consequences to our stockholders.
Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of
our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to be a REIT, we
will not be allowed a deduction for dividends paid to stockholders in computing our taxable income and will be subject to U.S. federal
income tax at regular corporate rates and state and local taxes, which may have adverse consequences on our total return to our
stockholders.
Our ability to provide certain services to our tenants may be limited by the REIT rules, or may have to be provided through a
TRS.
As a REIT, we generally cannot provide services to our tenants other than those that are customarily provided by landlords, nor
can we derive income from a third party that provides such services. If we forego providing such services to our tenants, we may be at
a disadvantage to competitors who are not subject to the same restrictions. However, we can provide such non-customary services to
tenants or share in the revenue from such services if we do so through a TRS, though income earned through the TRS will be subject
to corporate income taxes.
Although our use of TRSs may partially mitigate the impact of meeting certain requirements necessary to maintain our
qualification as a REIT, there are limits on our ability to own and enter into transactions with TRSs, and a failure to comply with
the limits would jeopardize our REIT qualification and may result in the application of a 100% excise tax.
A REIT may own up to 100% of the stock of one or more TRSs. A TRS may hold assets and earn income that would not be
qualifying assets or income if held or earned directly by a REIT. Both the subsidiary and the REIT must jointly elect to treat the
subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the
stock will automatically be treated as a TRS. Overall, no more than 25% (for taxable periods beginning before January 1, 2018) or
20% (for taxable years beginning on or after January 1, 2018) of the value of a REIT’s assets may consist of securities of one or more
TRSs. In addition, rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject
to an appropriate level of corporate taxation. Rules also impose a 100% excise tax on certain transactions between a TRS and its
parent REIT that are treated as not being conducted on an arm’s-length basis.
Any company treated as our TRS under the Code for U.S. federal income tax purposes and any other TRSs that we form will
pay U.S. federal, state and local income tax on their taxable income, and their after-tax net income will be available for distribution to
us but is not required to be distributed to us unless necessary to maintain our REIT qualification. Although we will monitor the
aggregate value of the securities of such TRSs and intend to conduct our affairs so that such securities will represent less than 25%
(for taxable periods beginning before January 1, 2018) or 20% (for taxable years beginning on or after January 1, 2018) of the value of
our total assets, there can be no assurance that we will be able to comply with the TRS limitation in all market conditions.
Legislation enacted in 2015 may alter who bears the liability in the event any subsidiary partnership (such as our operating
partnership) is audited and an adjustment is assessed.
In 2015 Congress revised the rules applicable to federal income tax audits of partnerships (such as our operating partnership)
and the collection of any tax resulting from any such audits or other tax proceedings, generally for taxable years beginning after
December 31, 2017. Under the new rules, the partnership itself may be liable for a hypothetical increase in partner-level taxes
(including interest and penalties) resulting from an adjustment of partnership tax items on audit, regardless of changes in the
composition of the partners (or their relative ownership) between the year under audit and the year of the adjustment. The new rules
also include an elective alternative method under which the additional taxes resulting from the adjustment are assessed from the
affected partners, subject to a higher rate of interest than otherwise would apply. Many questions remain as to how the new rules will
apply, especially with respect to partners that are REITs, and it is not clear at this time what effect this legislation will have on us.
However, these changes could increase the federal income tax, interest, and/or penalties otherwise borne by us in the event of a federal
income tax audit of a subsidiary partnership (such as our operating partnership).
33
Possible legislative, regulatory or other actions could adversely affect our stockholders and us.
The rules dealing with U.S. federal, state and local income taxation are constantly under review by persons involved in the
legislative process and by the IRS and the U.S. Treasury Department. Changes to tax laws (which changes may have retroactive
application) could adversely affect our stockholders or us. In recent years, many such changes have been made and changes are likely
to continue to occur in the future. We cannot predict whether, when, in what form, or with what effective dates, tax laws, regulations
and rulings may be enacted, promulgated or decided, which could result in an increase in our, or our stockholders’, tax liability or
require changes in the manner in which we operate in order to minimize increases in our tax liability. A shortfall in tax revenues for
states and municipalities in which we operate may lead to an increase in the frequency and size of such changes. If such changes
occur, we may be required to pay additional taxes on our assets or income and/or be subject to additional restrictions. These increased
tax costs could, among other things, adversely affect our financial condition, the results of operations and the amount of cash available
for the payment of dividends. Stockholders are urged to consult with their own tax advisors with respect to the impact that recent
legislation may have on their investment and the status of legislative, regulatory or administrative developments and proposals and
their potential effect on their investment in our shares.
In addition, according to publicly released statements, a top legislative priority of the Trump administration and the current
Congress may be significant reform of the Code, including significant changes to taxation of business entities and the deductibility of
interest expense. There is a substantial lack of clarity around the likelihood, timing and details of any such tax reform and the impact
of any potential tax reform on our business and the price of our common stock.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
There are no unresolved comments from the staff of the Securities and Exchange Commission as of the date of this Annual Report
on Form 10-K.
34
ITEM 2.
PROPERTIES
Our Portfolio Summary
As of December 31, 2016, our portfolio consisted of 13 Class A office properties aggregating approximately 10.8 million square
feet that was 93.3% leased and 90.9% occupied. The following table presents an overview of our portfolio as of December 31, 2016.
Property
Submarket
Paramount
Ownership
Square
Feet
%
Leased (1)
%
Occupied (2)
Amount
Per Square
Foot (4)
Annualized Rent (3)
New York:
1633 Broadway
1301 Avenue of the Americas
1325 Avenue of the Americas
31 West 52nd Street
900 Third Avenue
712 Fifth Avenue
Subtotal / Weighted Average
New York
Paramount's Ownership Interest
Washington, D.C.:
Waterview (5)
425 Eye Street
2099 Pennsylvania Avenue
1899 Pennsylvania Avenue
Liberty Place
Subtotal / Weighted Average
Washington, D.C.
Paramount's Ownership Interest
San Francisco:
One Market Plaza
One Front Street
Subtotal / Weighted Average
San Francisco
Paramount's Ownership Interest
Total Portfolio / Weighted
Average
Paramount's Ownership Interest
West Side
Sixth Avenue/Rock Center
Sixth Avenue/Rock Center
Sixth Avenue/Rock Center
East Side
Madison/Fifth Avenue
100.0% 2,523,429
100.0% 1,780,472
805,258
100.0%
761,787
100.0%
597,402
100.0%
543,386
50.0%
86.3%
93.7%
96.5%
84.5%
98.0%
97.1%
$
85.7% $ 148,415,000
86.5% 115,091,000
96.5% 50,660,000
84.5% 53,738,000
96.8% 42,021,000
94.1% 56,787,000
7,011,734
6,740,041
91.0%
90.7%
88.6% 466,712,000
88.4% 438,319,000
Rosslyn, VA
East End
CBD
CBD
East End
100.0%
100.0%
100.0%
100.0%
100.0%
636,768
372,555
210,792
190,955
174,449
98.7%
97.7%
82.3%
100.0%
89.9%
98.7% 34,600,000
97.7% 16,398,000
62.3% 10,147,000
98.0% 14,769,000
89.9% 12,031,000
1,585,519
1,585,519
95.5%
95.5%
92.6% 87,945,000
92.6% 87,945,000
South Financial District
South Financial District
49.0% 1,580,078
643,745
100.0%
98.7%
99.4%
95.9% 104,513,000
99.4% 36,707,000
2,223,823
1,417,983
98.9%
99.0%
96.9% 141,220,000
97.5% 87,918,000
71.71
75.53
65.69
80.69
73.28
111.62
76.43
74.86
52.46
45.18
77.82
78.97
75.95
58.72
58.72
68.08
56.73
64.76
62.89
10,821,076
9,743,543
93.3%
92.7%
90.9% $ 695,877,000
90.4% $ 614,182,000
$
$
71.14
70.20
(1) Represents the percentage of square feet that is leased, including signed leases not yet commenced.
(2) Represents the percentage of space for which we have commenced rental revenue in accordance with GAAP.
(3) Represents the end of the period monthly base rent plus escalations in accordance with the lease terms, multiplied by 12.
(4) Represents office and retail space only.
(5) On January 12, 2017, we entered into an agreement to sell Waterview for $460,000,000. The sale, which is subject to customary closing
conditions, is expected to close in the second quarter of 2017.
35
Tenant Diversification
As of December 31, 2016, our properties were leased to a diverse base of tenants. Our tenants represent a broad array of
industries, including financial services, media and entertainment, consulting, legal and other professional services, technology and
federal government agencies. The following table sets forth information regarding the ten largest tenants in our portfolio based on
annualized rent as of December 31, 2016.
Lease
Expiration
Dec-2020 (2)
Total
Square Feet
Occupied
Total
Square Feet
Occupied
% of
Total
Square Feet
Amount
Per Square
Foot
% of
Annualized
Rent
538,518 (2) 538,518 (2)
5.5% $35,471,000 $
65.87
Our Share of
Annualized Rent (1)
Tenant
Barclays Capital, Inc.
The Corporate Executive
Board Company
Allianz Global Investors, LP
Clifford Chance LLP
Credit Agricole Corporate &
Investment Bank
Morgan Stanley & Company
WMG Acquisition Corporation
(Warner Music Group)
Chadbourne & Parke, LLP
Showtime Networks, Inc.
U.S. General Services
Administration
Jan-2028
Jan-2031
Jun-2024
625,062
326,457
328,992
625,062
323,629
328,992
32,761,000
6.4%
3.3% 28,121,000
3.4% 26,029,000
52.41
86.89
79.12
Feb-2023
Mar-2032 (3)
311,291
312,885 (3) 312,885 (3)
311,291
25,051,000
3.2%
3.2% 22,122,000
80.47
70.70
Jul-2029
Sep-2024
Jan-2026
293,487
203,863
238,880
293,487
203,863
238,880
16,753,000
3.0%
2.1% 16,129,000
2.5% 14,179,000
57.08
79.12
59.36
Jun-2021
310,450
310,450
3.2%
14,152,000
45.59
5.8%
5.3%
4.6%
4.2%
4.1%
3.6%
2.7%
2.6%
2.3%
2.3%
(1) Represents the end of the period monthly base rent plus escalations in accordance with the lease terms, multiplied by 12.
(2)
41,100 of the square feet leased expired on December 31, 2016.
52,056 of the square feet leased expires on June 30, 2017.
(3)
Industry Diversification
The following table sets forth information relating to tenant diversification by industry in our portfolio based on annualized rent
as of December 31, 2016.
Industry
Legal Services
Financial Services - Commercial and Investment
Banking
Technology and Media
Financial Services, all others
Insurance
Retail
Government
Consumer Products
Real Estate
Other
Our Share of
Square Feet
Occupied
% of Occupied
Square Feet
1,878,029
21.5% $
Annualized
Rent (1)
141,281,000
1,861,907
1,365,164
942,767
392,507
266,644
345,278
174,082
171,521
1,339,474
21.3%
15.6%
10.8%
4.5%
3.1%
4.0%
2.0%
2.0%
15.3%
130,231,000
87,760,000
78,539,000
32,010,000
21,975,000
16,550,000
12,970,000
11,459,000
81,407,000
% of
Annualized Rent
23.0%
21.2%
14.3%
12.8%
5.2%
3.6%
2.7%
2.1%
1.9%
13.2%
(1) Represents the end of the period monthly base rent plus escalations in accordance with the lease terms, multiplied by 12.
36
Lease Expirations
The following table sets forth a summary schedule of lease expirations for leases in place as of December 31, 2016 for each of
the ten calendar years beginning with the year ending December 31, 2016, at the properties in our portfolio. The information set forth
in the table assumes that tenants exercise no renewal options and no early termination rights.
Year of
Lease Expiration (2)
Month to Month
Total
Square Feet of
Expiring Leases
Square Feet of
Expiring Leases
6,148
4,373
Our Share of
Annualized Rent (1)
Amount
$ 269,000
Per Square Foot (3)
$ -
1Q 2017
2Q 2017
3Q 2017
4Q 2017
Total 2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
Thereafter
275,974
74,487
108,889
109,983
569,333
404,058
693,561
562,320
1,562,513
565,436
730,488
673,679
512,137
730,413
3,812,562
261,279
65,001
107,105
101,008
534,393
329,894
569,612
473,610
1,340,696
421,593
690,945
649,006
314,491
652,769
3,748,095
16,801,000
3,781,000
7,430,000
6,650,000
34,662,000
23,858,000
41,098,000
34,130,000
82,661,000
28,581,000
52,895,000
49,868,000
23,812,000
47,533,000
266,903,000
64.59
57.96
69.37
66.70
65.14
81.78
71.14
72.09
62.52
78.46
77.04
77.04
75.81
69.70
77.34
% of
Annualized Rent
0.0%
2.4%
0.6%
1.1%
1.0%
5.1%
3.5%
6.0%
5.0%
12.0%
4.2%
7.7%
7.3%
3.5%
6.9%
38.8%
(1)
(2)
(3)
Represents the end of the period monthly base rent plus escalations in accordance with the lease terms, multiplied by 12.
Leases that expire on the last day of any given period are treated as occupied and are reflected as expiring space in the following period.
Represents office and retail space only.
Our portfolio contains a number of large buildings in select central business district submarkets, which often involve large users
occupying multiple floors for relatively long terms. Accordingly, the renewal of one or more large leases may have a material positive
or negative impact on average base rent, tenant improvement and leasing commission costs in a given period. Tenant improvement
costs include expenditures for general improvements related to installing a tenant. Leasing commission costs are similarly subject to
significant fluctuations depending upon the anticipated revenue to be received under the leases and the length of leases being signed.
Our ability to re-lease space subject to expiring leases will impact our results of operations and is affected by economic and
competitive conditions in our markets and by the desirability of our individual properties.
As of December 31, 2016, the vacancy rate of our portfolio was 6.7%. In addition, 575,481 square feet (including month-to-
month tenants), or 5.3% of the square footage of our portfolio is scheduled to expire during the year ending December 31, 2017, which
represents approximately 5.1% of our annualized rent.
37
Real Estate Fund Investments
We have an investment management business, where we serve as the general partner of real estate funds for institutional
investors and high net-worth individuals. Real estate fund investments are comprised of Property Funds and the Alternative
Investment Fund. The following is a summary of our ownership in these funds and the funds’ ownership in the underlying
investments.
Property 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”). The purpose of the Property Funds is to invest in office buildings and related facilities
primarily in New York City and San Francisco. The following is a summary of the Property Funds, our ownership interests in these
funds and the funds’ ownership interest in the underlying properties, as of December 31, 2016.
Paramount
Ownership
10.0%
3.1%
7.2%
Fund II
Fund III
Fund VII/VII-H
Total Property Funds
Other Investors
Total
60 Wall
Street (1)
One Market
As of December 31, 2016
50 Beale
Street
Plaza
46.3%
16.0%
-
62.3%
37.7%
100.0%
-
2.0%
-
2.0%
98.0% (3)
100.0%
-
-
42.8%
42.8%
57.2%
100.0%
0 Bond
Street (2)
-
-
100.0%
100.0%
-
100.0%
(1) On January 24, 2017, Fund II, Fund III and the other investors sold their interests in 60 Wall Street to a newly
formed joint venture in which we have a 5.2% ownership interest.
Formerly called 670 Broadway.
Includes a 49.0% direct ownership interest held by us.
(2)
(3)
Alternative Investment Fund
We manage Paramount Group Real Estate Fund VIII L.P. (“Fund VIII”), our Alternative Investment Fund. The purpose of the
Alternative Investment Fund is to invest primarily in real estate related debt and preferred equity investments. The following is a
summary of our ownership interest in the Alternative Investment Fund and the fund’s underlying investments, as of December 31,
2016.
As of December 31, 2016
Investments
26 Broadway
1440 Broadway
700 Eighth
Avenue
1285 Avenue of
the Americas
Other
Paramount Interest
Ownership Rate
1.3% 8.25% Jan-2022 $ 50,000,000 $ 645,000 $ 50,379,000 $ 650,000
522,000
1.3% 6.65% Oct-2019
40,000,000
40,480,000
Face Amount
Our Share
Our Share
516,000
Maturity
Fair Value
Total
Total
Investment Type
Mezzanine Loan
Mezzanine Loan
Mortgage/
Mezzanine Loan 1.3% 6.65% Jan-2019
80,000,000
1,032,000
80,000,000 1,032,000
Mezzanine Loan
Mezzanine Loan/
Preferred
Equity
1.3% 6.75% Jun-2023
55,000,000
710,000
55,834,000
720,000
1.3%
7.00%-
9.61%
Oct-2018
to
Nov-2026
134,237,000
135,589,000 1,749,000
$359,237,000 $4,635,000 $362,282,000 $4,673,000
1,732,000
Residential Development Fund
We also serve as the general partner of the Residential Development Fund (“Residential Fund”), the purpose of which is to
construct a multifamily residential project in San Francisco. As of December 31, 2016, the Residential Fund had an aggregate of
$135,600,000 of committed capital, of which $78,100,000 has been called and substantially invested.
38
Preferred Equity Investments
As of December 31, 2016, we own a 24.4% interest in PGRESS Equity Holdings L.P., a consolidated entity that owns certain
preferred equity investments. The following is a summary of the preferred equity investments.
(Amounts in thousands, except square feet)
Preferred Equity Investment
470 Vanderbilt Avenue (1)
2 Herald Square (2)
Total preferred equity investments
Paramount
Ownership
Dividend Rate
Initial Maturity
2016
2015
As of December 31,
24.4%
24.4%
10.3%
10.3%
Feb-2019 $
Apr-2017
$
$
35,613
19,438
55,051 $
35,305
18,636
53,941
(1) Represents a $33,750 preferred equity investment in a partnership that owns 470 Vanderbilt Avenue, a 650,000 square foot office
building located 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 and 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.
Other
Oder-Center, Germany
We own a 9.5% interest in a joint venture that owns Oder-Center, a shopping center located in Brandenburg, Germany.
745 Fifth Avenue
We own a 1.0% interest in 745 Fifth Avenue, a 35 Story art deco style building located on the corner of 5th Avenue and 58th
Street, in New York.
60 Wall Street - Option Agreement
In connection with the Formation Transactions, we entered into an option agreement with each of Fund II and Fund III
(collectively, the “Funds”) pursuant to which we had the right to acquire their joint venture interests (aggregating 62.3%) in 60 Wall
Street, a 47-story, 1.6 million square foot office building, located in the heart of New York’s financial district, at any time before
November 24, 2016. The remaining 37.7% interest in the property was held by a third party joint venture partner who had a “tag-
along” right in the event we exercised the option to acquire the property. On November 9, 2016, we received the consent from the
Funds’ investor advisory committees to amend the option agreement to extend the option exercise date to February 28, 2017 pursuant
to which we had the right to acquire the Funds’ interests at a purchase price equal to $1.04 billion. On January 17, 2017, the third
party joint venture partner agreed to “tag-along” at the agreed upon purchase price, if we were to exercise the option. On January 24,
2017, we assigned the option agreement to a subsidiary of a newly formed joint venture in which we have a 5.2% ownership interest,
and exercised the option.
39
718 Fifth Avenue - Put Right
We manage 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. Prior to the Formation Transactions, an affiliate of our Predecessor
owned a 25.0% interest in 718 Fifth Avenue (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.
ITEM 3.
LEGAL PROCEEDINGS
From time to time, we are a party to various claims and routine litigation arising in the ordinary course of business. 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 4. MINE SAFETY DISCLOSURES
Not applicable.
40
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol PGRE. The table below sets forth
the high and low sales prices of our common stock and dividends for the years ended December 31, 2016 and 2015:
Quarter Ended
March 31
June 30
September 30
December 31
$
High
17.97 $
17.40
18.28
16.74
2016
Low
14.23
15.26
15.36
14.58
Dividends
$
0.095
0.095
0.095
0.095
$
High
$
20.21
19.73
18.35
18.56
2015
Low
17.66
16.97
15.65
16.50
Dividends
$
0.134 (1)
0.095
0.095
0.095
(1)
Includes the $0.039 cash dividend for the 38 day period following the completion of our initial public offering and the related Formation
Transactions and ending on December 31, 2014.
As of December 31, 2016, there were approximately 320 registered holders of record of our common stock. This figure does
not reflect the beneficial ownership of shares of our common stock held in nominee or “street” name.
Dividends
In order to maintain our qualification as a REIT under the Internal Revenue Code, we must distribute at least 90% of our taxable
income to shareholders. We intend to pay dividends on a quarterly basis to holders of our common stock. Any dividend distributions
we pay in the future will depend upon our actual results of operations, economic conditions and other factors that could differ
materially from our current expectations. Our actual results of operations will be affected by a number of factors; including the
revenue we receive from our properties, our operating expenses, interest expense, the ability of our tenants to meet their obligations
and unanticipated expenditures. Distributions declared by us will be authorized by our board of directors in its sole discretion out of
funds legally available and will be dependent upon a number of factors, including restrictions under applicable law, the capital
requirements of our company and the distribution requirements necessary to maintain our qualification as a REIT. See Item 1A, "Risk
Factors," and Item 7, "Management's Discussion and Analysis of Financial Conditions and Results of Operations," of this Annual
Report on Form 10-K, for information regarding the sources of funds used for dividends and for a discussion of factors, if any, which
may adversely affect our ability to make distributions to our shareholders.
On December 15, 2016, we declared a regular quarterly cash dividend of $0.095 per share of common stock for the fourth quarter
ended December 31, 2016, which was paid on January 13, 2017 to stockholders of record as of the close of business on December 30,
2016.
41
Performance Graph
The following graph is a comparison of the cumulative return of our common stock, the Standard & Poor’s 500 Index (the “S&P
500 Index”), the SNL Financials (“SNL”) Office REIT Index (the “SNL Office REIT Index”) and the National Association of Real
Estate Investment Trusts (“NAREIT”) All Equity Index (the “All Equity Index”). The graph assumes that $100 was invested on
November 19, 2014 (the first trading day of our common stock) in our common stock, the S&P 500 Index, the SNL Office REIT
Index and the All Equity Index and that all dividends were reinvested without the payment of any commissions. There can be no
assurance that the performance of our stock will continue in line with the same or similar trends depicted in the graph below.
Comparison of Cumulative Return
$120
$110
$100
$90
$80
November 19, 2014 December 31, 2014 December 31, 2015 December 31, 2016
Paramount Group, Inc.
S&P 500 Index
SNL Office REIT Index
All Equity Index
Paramount
S&P 500 Index
SNL Office REIT Index
All Equity Index
November 19, 2014
$
December 31, 2014 December 31, 2015 December 31, 2016
92.23
114.33
117.18
116.26
101.95 $
102.12
105.01
107.03
102.26 $
100.72
104.09
104.09
100.00 $
100.00
100.00
100.00
42
Recent Sales of Unregistered Securities
For the three months ended December 31, 2016, we issued an aggregate of 10,405,614 shares of common stock in exchange for
10,405,614 common units of our Operating Partnership held by certain limited partners. Of these shares, 77,214 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.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes certain information about our equity compensation plans as of December 31, 2016.
Plan Category
Equity compensation plans approved by stockholders
Equity compensation plans not approved by
stockholders
Total
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
9,710,107 (1) $
Weighted-average
exercise price of
outstanding options,
warrants and rights
17.34
-
9,710,107 $
-
17.34
Number of securities remaining
available for future issuance
under equity compensation plans
(excluding securities reflected in
the first column of this table)(2)
12,228,883
-
12,228,883
(1)
Includes an aggregate of 1,844,121 options, 1,661,330 long-term incentive plan units in our Operating Partnership ("LTIP units") and 2,224,727
Performance Units that were granted pursuant to our 2014 Equity Incentive Plan (the "Plan") and 3,979,929 units that were granted as one-time
Founders Grants that were granted outside of the Plan. The LTIP units, Performance Units and the Founders Grant Units do not have an exercise
price.
(2) Based on awards being granted as "Full Value Awards," as defined in the Plan, including awards such as restricted stock, LTIP units or
performance units that do not require the payment of an exercise price. If we were to grant "Not Full Value Awards," as defined in the Plan,
including stock options or stock appreciation rights, the number of securities remaining available for future issuance would be 24,457,766.
Recent Purchases of Equity Securities
None.
43
ITEM 6.
SELECTED FINANCIAL DATA
Upon completion of the Offering and the Formation Transactions, we acquired substantially all of the assets of our Predecessor
and the assets of the real estate funds that it controlled. In addition, as part of the Formation Transactions, we also acquired the
interests of certain unaffiliated third parties in 1633 Broadway, 31 West 52nd Street and 1301 Avenue of the Americas. These
transactions were accounted for as transactions among entities under common control. However, as a result of our acquisition of these
assets from the real estate funds in the Formation Transactions, we account for these assets following the Formation Transactions
using historical cost accounting whereas, prior to the Formation Transactions, the Predecessor had accounted for these assets using the
specialized accounting applicable to investment companies because, prior to the Formation Transactions, they had been held by the
real estate funds, which qualified for investment company accounting. As a result, our consolidated financial statements following the
Formation Transactions differ significantly from, and are not comparable with, the historical financial position and results of
operations of our Predecessor. The following table sets forth selected financial and operating data for the years ended December 31,
2016 and 2015 and for the period from November 24, 2014 to December 31, 2014 and as of the end of such years and period. This
data should be read in conjunction with the combined consolidated financial statements and notes thereto included in “Item 8.
Financial Statements and Supplementary Data” and “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in this Annual Report on Form 10-K. This data may not be comparable to, or indicative of, future operating
results.
(Amounts in thousands, except per share amounts)
REVENUES:
Rental income
Tenant reimbursement income
Fee and other income
Total revenues
EXPENSES:
Operating
Depreciation and amortization
General and administrative
Transaction related costs
Total expenses
Operating income
Income from real estate fund investments
Loss from unconsolidated real estate funds
Income from unconsolidated joint ventures
Interest and other income (loss), net
Interest and debt expense
Unrealized gain on interest rate swaps
Formation related costs
Gain on consolidation of an unconsolidated joint venture
Net income before income taxes
Income tax expense
Net income
Less net (income) loss attributable to noncontrolling interests:
Consolidated real estate funds
Consolidated joint ventures
Operating Partnership
Net (loss) income attributable to common
stockholders
Per Share Data:
(Loss) income per common share - basic
(Loss) income per common share - diluted
Dividends per common share
The Company
For the Year Ended December 31,
2016
2015
Period from
November 24, 2014
to December 31, 2014
$
590,161
44,943
48,237
683,341
250,040
269,450
53,510
2,404
575,404
107,937
-
(498)
7,413
6,934
(157,746)
39,814
-
-
3,854
(1,785)
2,069
1,316
(15,423)
2,104
$
586,530
50,885
24,993
662,408
244,754
294,624
42,056
10,355
591,789
70,619
37,975
-
6,850
871
(168,366)
75,760
-
-
23,709
(2,566)
21,143
(21,173)
(5,459)
1,070
57,465
5,865
2,805
66,135
26,011
34,481
2,207
-
62,699
3,436
1,412
-
938
(179)
(43,743)
15,084
(143,437)
239,716
73,227
(505)
72,722
(135)
(1,353)
(13,926)
(9,934)
$
(4,419)
$
57,308
(0.05)
(0.05)
0.380
$
$
$
(0.02)
(0.02)
$
$
0.419 (1) $
0.27
0.27
-
$
$
$
$
$
44
(Amounts in thousands)
Balance Sheet Data (as of end of period):
Total assets
Rental property, at cost
Accumulated depreciation and amortization
Debt, net
Total equity
Other Data:
Funds from operations attributable to common
stockholders ("FFO") (2)
Core funds from operations attributable to common
stockholders ("Core FFO") (2)
The Company
For the Year Ended December 31,
2016
2015
Period from
November 24, 2014
to December 31, 2014
$
$
8,867,168
7,849,093
(318,161)
3,594,898
4,885,947
$
8,775,229
7,652,117
(243,089)
2,942,610
5,310,550
9,021,605
7,530,239
(81,050)
2,843,451
5,554,953
$
195,140
$
209,349
$
82,425
183,116
172,796
16,100
(1)
(2)
Includes the $0.039 cash dividend for the 38 day period following the completion of our initial public offering and the related Formation
Transactions and ending on December 31, 2014.
For a reconciliation of net income to FFO and CORE FFO and why we view these measures to be useful supplemental performance measures,
see page 79.
45
The following table sets forth selected financial and operating data of our Predecessor for the period from January 1, 2014 to
November 23, 2014 and for the years ended December 31, 2013 and 2012 and as of the end of such period and years.
(Amounts in thousands)
REVENUES:
Rental income
Tenant reimbursement income
Distributions from real estate fund investments
Realized and unrealized gains, net
Fee and other income
Total revenues
EXPENSES:
Operating
Depreciation and amortization
General and administrative
Profit sharing compensation
Other
Total expenses
Operating income
Income from unconsolidated joint ventures
Unrealized (loss) gain on interest rate swaps
Interest and other income, net
Interest and debt expense
Net income before income taxes
Income tax expense
Net income
Net income attributable to noncontrolling interests
Net income attributable to the Predecessor
(Amounts in thousands)
Balance Sheet Data:
Total assets
Rental property, at cost
Accumulated depreciation and amortization
Debt, net
Total equity
The Predecessor
Period from
January 1, 2014
to November 23, 2014
For the Year Ended December 31,
2013
2012
30,208
1,646
17,083
129,354
49,098
227,389
15,862
10,203
30,912
12,041
7,974
76,992
150,397
4,241
(673)
2,479
(28,585)
127,859
(18,461)
109,398
(87,888)
21,510
$
$
$
30,406
1,821
29,184
332,053
26,426
419,890
16,195
10,582
33,504
23,385
4,633
88,299
331,591
1,062
1,615
9,407
(29,807)
313,868
(11,029)
302,839
(286,325)
16,514
$
$
29,773
1,543
31,326
161,199
22,974
246,815
15,402
10,104
28,374
17,554
6,569
78,003
168,812
3,852
6,969
4,431
(37,342)
146,722
(6,984)
139,738
(137,443)
2,295
The Predecessor
As of December 31,
2013
2012
$
2,990,814
414,998
(57,689)
497,982
2,025,444
2,610,016
414,855
(48,425)
515,783
1,738,226
$
$
46
ITEM 7. 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 and the combined consolidated financial statements of our Predecessor, including the related notes included
therein.
Overview
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. 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 87.0% of the Operating Partnership as of December 31, 2016.
We were incorporated in Maryland as a corporation on April 14, 2014 to continue the business of our Predecessor, as defined,
and did not have any meaningful operations until the acquisition of substantially all of the assets of our Predecessor and assets of the
real estate funds that it controlled, as well as the interests of unaffiliated third parties in certain properties. Our properties were
acquired through a series of Formation Transactions (the “Formation Transactions”) concurrently with our initial public offering of
150,650,000 common shares at a public offering price of $17.50 per share on November 24, 2014 (the “Offering”).
Our Predecessor
Our Predecessor was not a legal entity but a combination of entities under common control as they were entities controlled by
members of the Otto Family that held various assets, including interests in (i) 15 private equity real estate funds controlled by our
Predecessor (which included nine primary funds and six parallel funds) that owned interests in 12 properties, (ii) a wholly-owned
property, Waterview, in Rosslyn, Virginia and (iii) three partially owned properties in New York.
Objectives and Strategy
Our primary business objective is to enhance stockholder value by increasing cash flow from operations. The strategies we
intend to execute to achieve this objective include:
•
Leasing vacant and expiring space at market rents;
• Maintaining a disciplined acquisition strategy focused on owning and operating Class A office properties in select central
business district submarkets of New York City, Washington, D.C. and San Francisco;
•
•
Redeveloping and repositioning properties to increase returns; and
Proactively managing our portfolio to increase occupancy and rental rates.
47
Acquisitions
On December 1, 2016, we completed the acquisition of One Front Street, a 643,745 square foot Class A office building, in San
Francisco, California for $521,000,000.
On January 24, 2017, a joint venture in which we have a 5.2% interest acquired 60 Wall Street, a 1.6 million square foot Class A
office building in New York, for $1.04 billion. In connection with the acquisition, the joint venture completed a $575,000,000
financing of the property.
Dispositions
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. The sale, which is subject to customary closing conditions, is expected to close in the second quarter of
2017 and will result in a financial statement gain of approximately $110,000,000.
Financings
On May 3, 2016, we completed a $500,000,000 refinancing of 31 West 52nd Street, a 786,647 square foot Class A office
building in New York. The new 10-year loan is interest-only at a fixed rate of 3.80%. We realized net proceeds of $64,538,000 after
the repayment of the existing loan, including swap breakage and closing costs.
On October 6, 2016, we completed an $850,000,000 financing of 1301 Avenue of the Americas, a 1.8 million square foot Class
A office building in New York. The five-year interest-only loan matures in October 2021, has two one-year extension options and has
an initial weighted average interest rate of 2.77%, based on a $500,000,000 tranche at a fixed rate of 3.05% and a $350,000,000
tranche at a floating rate of LIBOR plus 180 basis points (2.36% at closing). We retained net proceeds of $330,387,000 after closing
costs and the repayment of the existing debt at 900 Third Avenue and the defeasance of the existing debt at Waterview, including
swap breakage and defeasance costs. The remaining proceeds were used to fund a portion of the acquisition of One Front Street.
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 January 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.
48
Leasing Activity
Year Ended December 31, 2016
In the year ended December 31, 2016, we leased 734,238 square feet at a weighted average initial rent of $74.12 per square foot.
The current year’s leasing activity, offset by lease expirations during the year, decreased portfolio wide leased occupancy by 210 basis
points to 92.7% at December 31, 2016 from 94.8% at December 31, 2015. The decrease in leased occupancy was driven by lease
expirations in our New York portfolio, partially offset by an increase in leased occupancy in our Washington, D.C. and San Francisco
portfolios. Of the 734,238 square feet leased during the year, 485,809 square feet represents second generation space (space that has
been vacant for less than twelve months) for which we achieved rental rate increases of 10.3% on a GAAP basis and 3.6% on a cash
basis. The weighted average lease term for leases signed during the year was 8.0 years and weighted average tenant improvements and
leasing commissions on these leases were $7.93 per square foot per annum, or 10.7% of initial rent. The rental rate increases for the
year ended December 31, 2016 were impacted by two above-market leases in our New York portfolio aggregating 89,135 square feet
that were terminated and subsequently released at market rates. Excluding the impact of these leases, we achieved rental rate increases
of 10.4% and 10.3% on a GAAP basis and cash basis, respectively.
New York:
In the year ended December 31, 2016, we leased 566,854 square feet in our New York portfolio at a weighted average initial
rent of $73.66 per square foot. The current year’s leasing activity, offset by lease expirations during the year, decreased leased
occupancy by 480 basis points to 90.7% at December 31, 2016 from 95.5% at December 31, 2015. Of the 566,854 square feet leased
during the year, 446,766 square feet represents second generation space for which we achieved rental rate increases of 8.6% on a
GAAP basis and 1.1% on a cash basis. The weighted average lease term for leases signed during the year was 8.0 years and weighted
average tenant improvements and leasing commissions on these leases were $7.25 per square foot per annum, or 9.8% of initial rent.
The rental rate increases for the year ended December 31, 2016 were impacted by the aforementioned above-market leases
aggregating 89,135 square feet that were terminated and subsequently released at market rates. Excluding the impact of these leases,
we achieved rental rate increases of 8.2% and 7.5% on a GAAP basis and cash basis, respectively.
Washington, D.C.:
In the year ended December 31, 2016, we leased 90,183 square feet in our Washington, D.C. portfolio, at a weighted average
initial rent of $69.81 per square foot. The current year’s leasing activity increased leased occupancy by 530 basis points to 95.5% at
December 31, 2016 from 90.2% at December 31, 2015. The weighted average lease term for leases signed during the year was 8.7
years and weighted average tenant improvements and leasing commissions on these leases were $12.17 per square foot per annum, or
17.4% of initial rent.
San Francisco:
In the year ended December 31, 2016, we leased 77,201 square feet in our San Francisco portfolio at a weighted average initial
rent of $92.50 per square foot. Our San Francisco portfolio continues to remain very strongly leased at 99.0% as of December 31,
2016, an increase of 70 basis points from 98.3% at December 31, 2015. The leased occupancy for December 31, 2016 includes One
Front Street, which was acquired on December 1, 2016 and is 99.4% leased. Of the 77,201 square feet leased during the year, 35,110
square feet represents second generation space for which we achieved rental rate increases of 31.8% on a GAAP basis and 40.7% on a
cash basis. The weighted average lease term for leases signed during the year was 5.6 years and weighted average tenant
improvements and leasing commissions on these leases were $5.27 per square foot per annum, or 5.7% of initial rent.
49
The following table presents additional details on the leases signed during year ended December 31, 2016 and is not intended to
coincide with the commencement of rental revenue in accordance with GAAP.
29.31
5.27
5.7%
0.9
0.2
Year Ended December 31, 2016
Total square feet leased
Pro rata share of square feet leased:
Initial rent (1)
Weighted average lease term (in years)
Tenant improvements and leasing commissions:
Per square foot
Per square foot per annum
Percentage of initial rent
Rent concessions:
$
$
$
Total
734,238
662,935
74.12
8.0
New York
566,854
534,924
73.66
8.0
$
Washington, D.C.
90,183
90,183
69.81
8.7
$
San Francisco
77,201
37,828
92.50
5.6
$
63.05
$
$
7.93
10.7%
57.86
$
$
7.25
9.8%
105.79
$
$
12.17
17.4%
Average free rent period (in months)
Average free rent period per annum (in months)
6.5
0.8
7.0
0.9
6.1
0.7
Second generation space(2):
Square feet
GAAP basis:
Straight-line rent
Prior straight-line rent
Percentage increase
Cash basis:
Initial rent (1)
Prior escalated rent (5)
Percentage increase
485,809
446,766
3,933
35,110
$
$
$
$
$
72.98
66.15
$
10.3% (3)
76.05
73.38
(4)$
$
3.6% (3)
71.27
65.62
$
$
8.6% (3)
74.73
73.92
(4)$
$
1.1% (3)
80.13
80.10
$
$
0.0%
79.82
78.95
$
$
1.1%
93.97
71.28
31.8%
92.50
65.72
40.7%
(1) Represents the weighted average cash basis starting rent per square foot and does not include free rent or periodic step-ups in rent.
(2) Represents space leased that has been vacant for less than twelve months.
(3)
Includes the effect of two above market leases aggregating 89,135 square feet that were terminated and subsequently released at market rates.
Excluding the impact of these leases, the percentage increase in GAAP basis and Cash basis rents was 8.2% and 7.5%, respectively, for our New
York portfolio and 10.4% and 10.3%, respectively, for the total portfolio.
Includes the effect of a lease for the parking garage at 1633 Broadway. Excluding the effect of this lease, the initial rent for our second
generation space was $80.72 for our New York portfolio and $79.70 for the total portfolio.
(4)
(5) Represents the weighted average cash basis rents (including reimbursements) per square foot at expiration.
50
Financial Results
For the Year Ended December 31, 2016
Net loss attributable to common stockholders was $9,934,000, or $0.05 per diluted share, for the year ended December 31, 2016,
compared to $4,419,000, or $0.02 per diluted share, for the year ended December 31, 2015. Funds from Operations (“FFO”)
attributable to common stockholders was $195,140,000, or $0.89 per diluted share, for the year ended December 31, 2016, compared
to $209,349,000, or $0.99 per diluted share, for the year ended December 31, 2015. FFO attributable to common stockholders for the
years ended December 31, 2016 and 2015 includes the impact of non-core items, which are listed in the table on page 79. The
aggregate of these items, net of amounts attributable to noncontrolling interests, increased FFO attributable to common stockholders
for the years ended December 31, 2016 and 2015 by $12,024,000 and $36,553,000, or $0.05 and $0.18 per diluted share, respectively.
Core Funds from Operations (“Core FFO”) attributable to common stockholders, which excludes the impact of the non-core items
listed on page 79, was $183,116,000, or $0.84 per diluted share, for the year ended December 31, 2016, compared to $172,796,000, or
$0.81 per diluted share, for the year ended December 31, 2015.
See page 79 “Non-GAAP Financial Measures – Funds from Operations (“FFO”) and Core Funds From Operations (“Core
FFO”)” for a reconciliation of net income to FFO attributable to common stockholders and Core FFO attributable to common
stockholders and the reasons why we believe these non-GAAP measures are useful.
Critical Accounting Policies
Rental Property
Rental property is carried at cost less accumulated depreciation and amortization. Betterments, major renovations and certain
costs directly related to the improvement of rental properties are capitalized. Maintenance and repair expenses are charged to expense
as incurred. Depreciation is recognized on a straight-line basis over estimated useful lives of the assets, which range from 5 to 40
years. Tenant improvements are amortized on a straight-line basis over the lives of the related leases, which approximate the useful
lives of the assets.
Upon the acquisition of real estate, we assess the fair value of acquired assets (including land, buildings and improvements,
identified intangibles, such as acquired above-market leases and acquired in-place leases) and acquired liabilities (such as acquired
below-market leases) and allocate the purchase price based on these assessments. We assess fair value based on estimated cash flow
projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows
are based on a number of factors including historical operating results, known trends, and market/economic conditions. We record
acquired intangible assets (including acquired above-market leases and acquired in-place leases) and acquired intangible liabilities
(including below-market leases) at their estimated fair value. We amortize acquired above-market and below-market leases as a
decrease or increase to rental income, respectively, over the lives of the respective leases. Amortization of acquired in-place leases is
included as a component of “depreciation and amortization”.
Our properties, including any related intangible assets, are individually reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment exists when the carrying amount
of an asset exceeds the aggregate projected future cash flows over the anticipated holding period on an undiscounted basis. An
impairment loss is measured based on the excess of the property’s carrying amount over its estimated fair value. Impairment analyses
are based on our current plans, intended holding periods and available market information at the time the analyses are prepared. If our
estimates of the projected future cash flows, anticipated holding periods, or market conditions change, our evaluation of impairment
losses may be different and such differences could be material to our consolidated financial statements. The evaluation of anticipated
cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that
could differ materially from actual results. Plans to hold properties over longer periods decrease the likelihood of recording
impairment losses.
Rental property and related intangibles are classified as held for sale when all the necessary criteria are met. The criteria include
(i) management, having the authority to approve action, commits to a plan to sell the property in its present condition, (ii) the sale of
the property is at a price reasonable in relation to its current fair value and (iii) the sale is probable and expected to be completed
within one year. Rental property and the related intangibles held for sale are carried at the lower of carrying amounts or estimated fair
value less disposal costs. Depreciation and amortization is not recognized on rental property classified as assets held for sale.
51
Variable Interest Entities and Investments in Unconsolidated Joint Ventures and Funds
We consolidate variable interest entities (“VIEs”) in which we are considered to be the primary beneficiary. The primary
beneficiary is defined by the entity having both of the following characteristics: (i) the power to direct the activities that, when taken
together, most significantly impact the VIE’s performance, and (ii) the obligation to absorb losses and right to receive the returns from
the VIE that would be significant to the VIE. For joint ventures that are not VIEs, we consolidate entities for which we have
significant decision making control over the joint ventures’ operations. Our judgment with respect to our level of influence or control
of an entity involves the consideration of various factors including the form of our ownership interest, our representation in the
entity’s governance, the size of our investment, estimates of future cash flows, our ability to participate in policy making decisions and
the rights of the other investors to participate in the decision making process and to replace us as manager and/or liquidate the joint
venture, if applicable.
We account for investments under the equity method when the requirements for consolidation are not met, and we have
significant influence over the operations of the investee. Equity method investments are initially recorded at cost and subsequently
adjusted for our share of net income or loss and cash contributions and distributions each period. Investments accounted for under the
equity method are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the
investment may not be recoverable. An impairment loss is measured based on the excess of the carrying amount of an investment over
its estimated fair value. Impairment analyses are based on current plans, intended holding periods and available information at the
time the analyses are prepared.
Investments that do not qualify for consolidation or equity method accounting are accounted for under the cost method.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required
payments under the lease agreements. We also maintain an allowance for deferred rent receivable. This receivable arises from
earnings recognized in excess of amounts currently due under the lease agreements. Management exercises judgment in establishing
these allowances and considers payment history and current credit status in developing these estimates.
Income Taxes
We operate and have been organized in conformity with the requirements for qualification and taxation as a REIT for U.S.
federal income tax purposes. So long as we qualify as a REIT, we generally will not be subject to U.S. federal income tax on our net
income that we distribute currently to our stockholders. In order to maintain our qualification as a REIT, we are required under the
Internal Revenue Code of 1986, as amended, to distribute at least 90% of our taxable income (without regard to the deduction for
dividends paid and excluding net capital gains) to our stockholders and meet certain other requirements. If, with respect to any taxable
year, we fail to maintain our qualification as a REIT, and we are not entitled to relief under the relevant statutory provisions, we would
be subject to income tax at regular tax rates. Even if we qualify as a REIT, we may also be subject to certain state, local and franchise
taxes. Under certain circumstances, U.S. federal income tax may be due on our undistributed taxable income.
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
Accounting Standards Codification (“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. Changes
in the fair value of interest rate swaps that are not designated as hedges are recognized in earnings. 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).
52
Revenue Recognition
Rental Income
Rental income includes base rents that each tenant pays in accordance with the terms of its respective lease and is reported on a
straight-line basis over the non-cancellable term of the lease, which includes the effects of rent steps and rent abatements under the
leases. We commence rental revenue recognition when the tenant takes possession of the leased space or controls the physical use of
the leased space and the leased space is substantially ready for its intended use. Differences between rental income recognized and
amounts due under the respective lease agreements are recorded as an increase or decrease to “deferred rent receivable.” Rental
income also includes the amortization of acquired above and below-market leases, net.
Tenant Reimbursement Income
Tenant reimbursement income includes revenue arising from tenant leases which provide for the recovery of all or a portion of
the operating expenses and real estate taxes of the property. This revenue is accrued in the same period as the expenses are incurred.
Fee and Other Income
Fee and other income includes management fees earned pursuant to contractual agreements. This revenue is recognized as the
related services are performed. Fee and other income also includes lease termination fees and income from tenant requested services,
including overtime heating and cooling.
Segment Reporting
Our determination of segments is primarily based on our method of internal reporting. On January 1, 2016, as a result of certain
organizational and operational changes, we redefined our reportable segments to be 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. Accordingly, our reportable segments were separated by region based on the three regions
in which we conduct our business: New York, Washington, D.C. and San Francisco. In connection therewith, we have reclassified the
prior period segment financial data to conform to the current period presentation.
Our Predecessor historically operated an integrated business that consisted of three reportable segments, (i) Owned Properties,
(ii) Managed Funds and (iii) a Management Company. The Owned Properties segment consisted of properties in which our
Predecessor had a direct or indirect ownership interest, other than properties that it owned through its private equity real estate funds.
The Managed Funds segment consisted of the private equity real estate funds. In addition, our Predecessor included a Management
Company that performed property management and asset management services and certain general and administrative level functions,
including legal and accounting, as a separate reportable segment.
Recently Issued Accounting Literature
A summary of 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
Annual Report on Form 10-K.
53
Results of Operations
The following pages summarize our consolidated results of operations for the years ended December 31, 2016 and 2015, and for
the period from November 24, 2014 to December 31, 2014 and the combined consolidated historical results of operations of our
Predecessor for the period from January 1, 2014 to November 23, 2014.
Upon completion of the Offering and the Formation Transactions, we acquired substantially all of the assets of our Predecessor
and the assets of the real estate funds that it controlled. These transactions were accounted for as transactions among entities under
common control. However, as a result of our acquisition of these assets from the real estate funds in the Formation Transactions, we
account for these assets following the Formation Transactions using historical cost accounting whereas, prior to the Formation
Transactions, the Predecessor had accounted for these assets using the specialized accounting applicable to investment companies
because, prior to the Formation Transactions, they had been held by the real estate funds, which qualified for investment company
accounting.
Results of Operations – The Company – Year Ended December 31, 2016 Compared to December 31, 2015
For the Year Ended December 31,
The Company
2016
2015
Change
$
$
590,161
44,943
48,237
683,341
$
586,530
50,885
24,993
662,408
3,631
(5,942)
23,244
20,933
5,286
(25,174)
11,454
(7,951)
(16,385)
37,318
(37,975)
(498)
563
6,063
10,620
(35,946)
(19,855)
781
(19,074)
22,489
(9,964)
1,034
(5,515)
250,040
269,450
53,510
2,404
575,404
107,937
-
(498)
7,413
6,934
(157,746)
39,814
3,854
(1,785)
2,069
244,754
294,624
42,056
10,355
591,789
70,619
37,975
-
6,850
871
(168,366)
75,760
23,709
(2,566)
21,143
1,316
(15,423)
2,104
(9,934)
$
(21,173)
(5,459)
1,070
(4,419)
$
(Amounts in thousands)
REVENUES:
Rental income
Tenant reimbursement income
Fee and other income
Total revenues
EXPENSES:
Operating
Depreciation and amortization
General and administrative
Transaction related costs
Total expenses
Operating income
Income from real estate fund investments
Loss from unconsolidated real estate funds
Income from unconsolidated joint ventures
Interest and other income (loss), net
Interest and debt expense
Unrealized gain on interest rate swaps
Net income before income taxes
Income tax expense
Net income
Less net (income) loss attributable to noncontrolling interests:
Consolidated real estate funds
Consolidated joint ventures
Operating Partnership
Net loss attributable to common stockholders
$
54
Revenues
Our revenues, which consist primarily of rental income, tenant reimbursement income, and fee and other income, were
$683,341,000 for the year ended December 31, 2016, compared to $662,408,000 for the year ended December 31, 2015, an increase of
$20,933,000. Below are the details of the increase (decrease) by segment.
(Amounts in thousands)
Rental income
Acquisitions (1)
Same store operations
Other, net
Increase (decrease) in rental income
Tenant reimbursement income
Acquisitions (1)
Same store operations
(Decrease) increase in tenant
reimbursement income
Fee and other income
Property management
Asset management
Acquisition and leasing
Other
Increase in fee income
Lease termination income
Other income
Increase (decrease) in other
income
Increase (decrease) in fee
and other income
Total
New York
Washington, D.C.
San Francisco
Other
The Company
$
$
3,347
8,198
(7,914)
3,631
$
-
(2,537)
(7,807) (3)
(10,344)
$
-
3,348
(22)
3,326
3,347
$
7,452 (2)
(85)
10,714
373
(6,315)
-
(8,489) (4)
(5,942)
(8,489)
185
7,754
(1,690)
434
6,683
16,139
422
-
-
-
-
-
15,770 (6)
15
16,561
15,785
23,244
15,785
-
885
885
-
-
-
-
-
-
(188)
(188)
(188)
373
1,289
1,662
-
-
-
-
-
369
596
965
965
-
(65)
-
(65)
-
-
-
(5)
185
7,754
(1,690)
434
6,683
-
(1)
(1)
6,682
Total increase (decrease) in revenues $
20,933
$
(3,048)
$
4,023
$
13,341
$
6,617
(1) Represents One Front Street, which was acquired in December 2016.
(2)
(3)
Primarily due to an increase in weighted average occupancy.
Includes $12,406 of non-cash write-offs in the year ended December 31, 2016, primarily related to the termination of a tenant’s above-market
lease at 1633 Broadway, partially offset by $6,400 of higher non-cash income in the year ended December 31, 2016 from the accelerated
amortization of a below-market lease liability in connection with a tenant’s lease modification.
Primarily due to leases with tenants that have new base years as well as a decrease in occupancy.
(4)
(5) Represents asset management fees earned from our unconsolidated real estate funds for the year ended December 31, 2016. The asset
management fees for the year ended December 31, 2015 were included as a reduction of noncontrolling interests due to our real estate funds
being consolidated in the prior period.
Includes $10,861 of income in the year ended December 31, 2016, in connection with a tenant’s lease termination at 1633 Broadway.
(6)
55
Expenses
Our expenses, which consist primarily of operating, depreciation and amortization, general and administrative, and transaction
related costs, were $575,404,000 for the year ended December 31, 2016, compared to $591,789,000 for the year ended December 31,
2015, a decrease of $16,385,000. Below are the details of the (decrease) increase by segment.
Total
New York
Washington, D.C.
San Francisco
Other
The Company
(Amounts in thousands)
Operating
Acquisitions (1)
Same store operations
Bad debt expense
Increase in operating
Depreciation and amortization
Acquisitions (1)
Operations
Other, net
(Decrease) increase in depreciation
and amortization
General and administrative
Operations
Mark-to-market of investments
in our deferred compensation plan
Severance costs
Increase in general
and administrative
$
$
1,220
3,839
227
5,286
$
-
1,831
341
2,172
2,331
(40,751)
13,246
-
(39,335) (2)
12,054 (3)
(25,174)
(27,281)
11,648
247
(441)
11,454
-
-
-
-
-
-
235
4
239
-
980
-
980
-
-
-
-
-
$
$
1,220
510
(118)
1,612
2,331
(3,162)
1,192
361
-
-
-
-
-
-
1,263
-
1,263
-
766
-
766
11,648 (4)
247 (5)
(441)
11,454
(7,951) (6)
Decrease in transaction related costs
(7,951)
Total (decrease) increase in expenses
$
(16,385)
$
(25,109)
$
1,219
$
1,973
$
5,532
(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.
(3) Represents acceleration in the amortization of tenant improvements and in-place lease assets in connection with a tenant’s lease modification
and other lease terminations.
Increase primarily due to non-cash stock-based compensation expense and higher professional fees.
(4)
(5) Represents the change in 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 (loss), net”.
(6) Decrease primarily due to $5,872 of transfer taxes incurred in connection with the sale of shares by a former joint venture partner in the year
ended December 31, 2015 and lower transaction related costs in the year ended December 31, 2016.
56
Income from Real Estate Fund Investments
Prior to January 1, 2016, our real estate funds were consolidated into our consolidated financial statements and accordingly 100%
of the income or loss from our real estate funds was reported as “income from real estate fund investments” and the noncontrolling
share of such income or loss was reflected as “net (income) loss attributable to noncontrolling interests in consolidated real estate
funds”. On January 1, 2016, we adopted ASU 2015-02 using the modified retrospective method, which required us to deconsolidate
all of our real estate funds that were previously accounted for at fair value, except for our Residential Fund, which is accounted for at
historical cost and will continue to be consolidated into our consolidated financial statements. The following table sets forth the
details of income from these funds, including our share thereof.
(Amounts in thousands)
Net investment income
Net realized gains
Previously recorded unrealized gains on exited investments
Net unrealized gains
Income from real estate fund investments (1)
Less: noncontrolling interests in consolidated
real estate funds (2)
Income from real estate fund investments attributable
to Paramount Group, Inc.
$
$
The Company
For the Year Ended
December 31, 2015
12,274
13,884
(6,584)
18,401
37,975
(24,896)
13,079
(1) Represents income from our real estate funds that were consolidated during 2015, including Fund II,
Fund III, Fund VII, Fund VII-H, Fund VIII, Paramount Group Real Estate Special Situations Fund
L.P. (“PGRESS”) and Paramount Group Real Estate Special Situations Fund-H L.P. (“PGRESS-H”).
Includes $5,481 of asset management fee income that was reflected as a reduction of the amounts
attributable to noncontrolling interests for the year ended December 31, 2015.
(2)
Loss from Unconsolidated Real Estate Funds
The following table sets forth the details of (loss) income from unconsolidated real estate funds.
(Amounts in thousands)
Our Share of Net (Loss) Income:
Net investment (loss) income
Net unrealized (loss) income
Carried interest
(Loss) income from unconsolidated real estate funds (1)
The Company
For the Year Ended December 31, 2016
Total
Property Funds
Alternative
Investment Fund
$
$
(324) $
(1,706)
1,532
(498) $
(460) $
(1,710)
1,532
(638) $
136
4
-
140
(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 for the year ended December 31, 2016.
57
Income from Unconsolidated Joint Ventures
Income from unconsolidated joint ventures was $7,413,000 for the year ended December 31, 2016, compared to $6,850,000 for
the year ended December 31, 2015, an increase of $563,000. This increase resulted from:
(Amounts in thousands)
712 Fifth Avenue ($7,335 in 2016, compared to $6,734 in 2015)
Oder-Center, Germany ($78 in 2016, compared to $116 in 2015)
Total increase
The Company
$
$
(1)
(2)
601
(38)
563
(1)
(2)
Primarily due to lower interest expense resulting from the expiration of interest rate swaps on $90,000 of debt in
March 2015 and higher income from tenant requested work.
Primarily due to a decrease in operating income of the property.
Interest and Other Income (Loss), net
Interest and other income was $6,934,000 for the year ended December 31, 2016, compared to $871,000 for the year ended
December 31, 2015, an increase of $6,063,000. This increase resulted from:
(Amounts in thousands)
Preferred equity investment income in 2016 (1)
Increase in interest income
Increase in the value of investments in
our deferred compensation plan (which is offset by
an increase in "general and administrative")
Total increase
The Company
5,716
100
247
6,063
$
$
(1) Represents 100% of the income from our preferred equity investments in PGRESS Equity Holdings
L.P., which was acquired in December 2015, of which our 24.4% share is $1,393.
Interest and Debt Expense
Interest and debt expense was $157,746,000 for the year ended December 31, 2016, compared to $168,366,000 for the year
ended December 31, 2015, a decrease of $10,620,000. This decrease resulted from:
(Amounts in thousands)
$1.5 billion of refinancings (1633 Broadway in December 2015 and
31 West 52nd Street in May 2016)
$850 million financing of 1301 Avenue of the Americas in October 2016
$484 million of repayment and defeasance (900 Third Avenue and
Waterview in October 2016)
Defeasance costs in connection with the repayment of the Waterview debt
Amortization of deferred financing costs
Other, net (primarily related to the deconsolidation of our real estate
fund investments)
Total decrease
$
$
The Company
(15,104)
5,480
(7,784)
4,608
4,239
(2,059)
(10,620)
58
Unrealized Gain on Interest Rate Swaps
Unrealized gain on interest rate swaps represents 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 $39,814,000 for the year ended December 31, 2016,
compared to $75,760,000 for the year ended December 31, 2015, a decrease of $35,946,000. The decrease was primarily due to (i)
$26,450,000 of unrealized gains in 2015 relating to swaps aggregating $772,100,000 that were terminated in connection with the
refinancing of 1633 Broadway in December 2015 (ii) $9,468,000 of lower unrealized gains relating to swaps aggregating
$237,600,000 that were terminated in connection with the refinancing of 31 West 52nd Street in May 2016 and (iii) $3,512,000 of
lower unrealized gains relating to swaps aggregating $162,000,000 that were terminated in connection with the repayment of our debt
on 900 Third Avenue, partially offset by (iv) $3,484,000 of higher unrealized gains in 2016 relating to swaps aggregating
$840,000,000 on One Market Plaza due to increase in LIBOR rates.
Income Tax Expense
Income tax expense was $1,785,000 for the year ended December 31, 2016, compared to $2,566,000 for the year ended
December 31, 2015, a decrease of $781,000. This decrease is primarily due to a benefit recognized for the year ended December 31,
2016 as result of a change in position for filing the unincorporated business tax returns for our Washington, D.C. properties and lower
taxable income attributable to our taxable REIT subsidiaries.
Net Loss (Income) Attributable to Noncontrolling Interests in Consolidated Real Estate Funds
Net loss attributable to noncontrolling interests in consolidated real estate funds was $1,316,000 for the year ended December 31,
2016, compared to income attributable to noncontrolling interests of $21,173,000 for the year ended December 31, 2015, a decrease in
income attributable to the noncontrolling interests of $22,489,000. This decrease resulted primarily from the deconsolidation of our
real estate funds that were accounted for at fair value pursuant to our adoption of ASU 2015-02 on January 1, 2016 using the modified
retrospective method. Below are the components of this decrease:
(Amounts in thousands)
Decrease in net loss attributable to the Residential Fund ($1,316 in 2016,
compared to $3,723 in 2015)
Income attributable to consolidated real estate funds in 2015
Total decrease
The Company
$
$
2,407
(24,896)
(22,489)
Net Income Attributable to Noncontrolling Interests in Consolidated Joint Ventures
Net income attributable to noncontrolling interests in consolidated joint ventures was $15,423,000 of income for the year ended
December 31, 2016, compared to $5,459,000 for the year ended December 31, 2015, an increase of $9,964,000. This increase resulted
from:
(Amounts in thousands)
One Market Plaza ($11,100 in 2016, compared to $4,131 in 2015)
Preferred equity investment income in 2016
31 West 52nd Street in 2015
Total increase
The Company
6,969
4,323
(1,328)
9,964
$
$
Net Loss Attributable to Noncontrolling Interests in Operating Partnership
Net loss attributable to noncontrolling interests in Operating Partnership was $2,104,000 for the year ended December 31, 2016,
compared to $1,070,000 for the year ended December 31, 2015, an increase of $1,034,000. This increase resulted from greater losses
subject to allocation to the unitholders of the Operating Partnership.
59
Results of Operations – The Company – Year Ended December 31, 2015 Compared to the Period from November 24, 2014 to
December 31, 2014
For the
Year Ended
December 31, 2015
The Company
Period from
November 24, 2014
to December 31, 2014
Change
$
$
586,530
50,885
24,993
662,408
$
57,465
5,865
2,805
66,135
529,065
45,020
22,188
596,273
218,743
260,143
39,849
10,355
529,090
67,183
36,563
5,912
1,050
(124,623)
60,676
143,437
(239,716)
(49,518)
(2,061)
(51,579)
(21,038)
(4,106)
14,996
(61,727)
244,754
294,624
42,056
10,355
591,789
70,619
37,975
6,850
871
(168,366)
75,760
-
-
23,709
(2,566)
21,143
26,011
34,481
2,207
-
62,699
3,436
1,412
938
(179)
(43,743)
15,084
(143,437)
239,716
73,227
(505)
72,722
(21,173)
(5,459)
1,070
(4,419)
$
(135)
(1,353)
(13,926)
57,308
$
(Amounts in thousands)
REVENUES:
Rental income
Tenant reimbursement income
Fee and other income
Total revenues
EXPENSES:
Operating
Depreciation and amortization
General and administrative
Transaction related costs
Total expenses
Operating income
Income from real estate fund investments
Income from unconsolidated joint ventures
Interest and other income (loss), net
Interest and debt expense
Unrealized gain on interest rate swaps
Formation related costs
Gain on consolidation of an unconsolidated joint venture
Net income before income taxes
Income tax expense
Net income
Less net (income) loss attributable to noncontrolling interests:
Consolidated real estate funds
Consolidated joint ventures
Operating Partnership
Net (loss) income attributable to common stockholders
$
60
Rental Income
Rental income for the year ended December 31, 2015 and for the period from November 24, 2014 to December 31, 2014
represents rental income from the 11 properties that we consolidate using historical cost accounting subsequent to the completion of
the Offering and the Formation Transactions. Rental income was $586,530,000 for the year ended December 31, 2015, compared to
$57,465,000 for the period from November 24, 2014 to December 31, 2014, an increase of $529,065,000. This increase was primarily
due to a full year’s results of operations in 2015, compared to a partial year in 2014.
Tenant Reimbursement Income
Tenant reimbursement income represents reimbursement income from tenants at the 11 properties that we consolidate using
historical cost accounting subsequent to the completion of the Offering and the Formation Transactions. Tenant reimbursement
income was $50,885,000 for the year ended December 31, 2015, compared to $5,865,000 for the period from November 24, 2014 to
December 31, 2014, an increase of $45,020,000. This increase was primarily due to a full year’s results of operations in 2015,
compared to a partial year in 2014.
Fee and Other Income
Fee and other income was $24,993,000 for the year ended December 31, 2015 and $2,805,000 for the period from November 24,
2014 to December 31, 2014, an increase of $22,188,000. This increase was primarily due to a full year’s results of operations in 2015,
compared to a partial year in 2014. The following table sets forth the details of fee and other income.
(Amounts in thousands)
Fee income
Property management
Acquisition, leasing and disposition
Other
Total fee income
Lease termination income
Other income (1)
Total fee and other income
The Company
For the
Year Ended
December 31, 2015
Period from
November 24, 2014
to December 31, 2014
$
$
5,763
3,916
569
10,248
871
13,874
24,993
$
$
587
510
79
1,176
465
1,164
2,805
(1)
Primarily comprised of income from tenant requested services, including overtime heating and cooling.
Operating Expenses
Operating expenses for the year ended December 31, 2015 and for the period from November 24, 2014 to December 31, 2014
represent the operating expenses of the 11 properties that we consolidate using historical cost accounting subsequent to the completion
of the Offering and the Formation Transactions. Operating expenses were $244,754,000 for the year ended December 31, 2015,
compared to $26,011,000 for the period from November 24, 2014 to December 31, 2014, an increase of $218,743,000. This increase
was primarily due to a full year’s results of operations in 2015, compared to a partial year in 2014.
Depreciation and Amortization
Depreciation and amortization for the year ended December 31, 2015 and for the period from November 24, 2014 to December
31, 2014 represents depreciation and amortization on the 11 properties that we consolidate using historical cost accounting subsequent
to the completion of the Offering and the Formation Transactions. Depreciation and amortization was $294,624,000 for the year ended
December 31, 2015, compared to $34,481,000 for the period from November 24, 2014 to December 31, 2014, an increase of
$260,143,000. This increase was primarily due to a full year’s results of operations in 2015, compared to a partial year in 2014 and the
timing of the amortization of certain in-place leases.
61
General and Administrative Expenses
General and administrative expenses were $42,056,000 for the year ended December 31, 2015, compared to $2,207,000 for the
period from November 24, 2014 to December 31, 2014, an increase of $39,849,000. This increase was primarily due to a full year’s
results of operations in 2015, compared to a partial year in 2014. The following table sets forth the details of general and
administrative expenses.
The Company
(Amounts in thousands)
General and administrative expenses
Mark-to-market of investments in our
deferred compensation plan (2)
Total general and administrative expenses
$
$
For the
Year Ended
December 31, 2015
Period from
November 24, 2014
to December 31, 2014
2,528
41,859 (1) $
197
42,056
$
(321)
2,207
Includes $7,000 of amortization of stock-based compensation expense and $3,315 of severance costs.
(1)
(2) Represents the mark-to-market of investments in our deferred compensation plan liabilities, which is entirely
offset by the mark-to-market of deferred compensation plan assets, which is included in “interest and other
income, net”.
Transaction Related Costs
Transaction related costs were $10,355,000 for the year ended December 31, 2015 and are primarily comprised of legal and
professional fees related to transactions, including dead deal costs and capital raising costs in connection with real estate fund
investments. Transaction related costs for the year ended December 31, 2015 also includes $5,872,000 of transfer taxes incurred in
connection with the sale of shares by a former joint venture partner.
Income from Real Estate Fund Investments
Income from real estate fund investments for the year ended December 31, 2015 and for the period from November 24, 2014 to
December 31, 2014, represents income from the remaining private equity real estate funds that we consolidate. Income from real
estate fund investments was $37,975,000 for the year ended December 31, 2015, compared to $1,412,000 for the period from
November 24, 2014 to December 31, 2014, an increase of $36,563,000. This increase was primarily due to a full year’s results of
operations in 2015, compared to a partial year in 2014. In addition, the year ended December 31, 2015 includes $13,884,000 of
realized gains from the sale of certain fund investments and $18,401,000 of unrealized gains from the appreciation in value of certain
fund investments. The following table sets forth the details of income from real estate fund investments.
The Company
$
(Amounts in thousands)
Net investment income
Net realized gains
Previously recorded unrealized gains on exited
investments
Net unrealized gains (losses)
Income from real estate fund investments (1)
Less: interest expense
Less: noncontrolling interests in consolidated
real estate funds (2)
Income from real estate fund investments attributable
to Paramount Group, Inc.
$
For the
Year Ended
December 31, 2015
Period from
November 24, 2014
to December 31, 2014
2,769
50
12,274 $
13,884
(6,584)
18,401
37,975
-
(24,896)
13,079 $
-
(1,407)
1,412
(325)
(485)
602
(1) Represents income from our real estate funds that were consolidated during 2015, including Fund II, Fund III,
(2)
Fund VII, Fund VII-H, Fund VIII, PGRESS and PGRESS-H
Includes $5,481 and $521 of asset management fee income that was reflected as a reduction of the amounts
attributable to noncontrolling interests for the year ended December 31, 2015 and for the period from November
24, 2014 to December 31, 2014, respectively.
62
Income from Unconsolidated Joint Ventures
Income from unconsolidated joint ventures was $6,850,000 for the year ended December 31, 2015, compared to $938,000 for
the period from November 24, 2014 to December 31, 2014, an increase of $5,912,000. This increase was primarily due to a full year’s
results of operations in 2015, compared to a partial year in 2014. The following table sets forth the details of income from
unconsolidated joint ventures.
(Amounts in thousands)
Our share of Net Income:
712 Fifth Avenue
Oder-Center, Germany (1)
Total income from unconsolidated
joint ventures
Paramount
Ownership at
December 31, 2015
For the
Year Ended
Period from
November 24, 2014
December 31, 2015 to December 31, 2014
The Company
50.0% $
9.5%
6,734 $
116
$
6,850 $
938
-
938
(1) We account for our interest in Oder-Center, Germany on a one-quarter lag basis.
Interest and Other Income (Loss), net
Interest and other income (loss), net was income of $871,000 for the year ended December 31, 2015, compared to a loss of
$179,000 for the period from November 24, 2014 to December 31, 2014, an increase in income of $1,050,000. This increase was
primarily due to a full year’s results of operations in 2015, compared to a partial year in 2014. The following table sets forth the details
of interest and other income.
(Amounts in thousands)
Mark-to-market of investments in
our deferred compensation plan (1)
Interest and other income
Total interest and other income (loss)
The Company
For the
Year Ended
December 31, 2015
Period from
November 24, 2014
to December 31, 2014
$
$
197 $
674
871 $
(321)
142
(179)
(1) Represents the mark-to-market of investments in our deferred compensation plan, which is entirely offset by
the mark-to-market of deferred compensation plan liabilities, which is included in “general and
administrative” expenses.
Interest and Debt Expense
Interest and debt expense for the year ended December 31, 2015 and for the period from November 24, 2014 to December 31,
2014, represents interest cost on the properties that we consolidate using historical cost accounting subsequent to the completion of the
Offering and the Formation Transactions. Interest and debt expense was $168,366,000 for the year ended December 31, 2015,
compared to $43,743,000 for the period from November 24, 2014 to December 31, 2014, an increase of $124,623,000. This increase
was primarily due to a full year’s results of operations in 2015, compared to a partial year in 2014. Interest and debt expense also
includes $2,565,000 and $240,000 of amortization of deferred financing costs for the year ended December 31, 2015 and for the
period from November 24, 2014 to December 31, 2014, respectively. In addition, the period from November 24, 2014 to December
31, 2014 includes $25,717,000 of defeasance and debt breakage costs related to the Formation Transactions.
63
Unrealized Gain on Interest Rate Swaps
Unrealized gain on interest rate swaps was $75,760,000 for the year ended December 31, 2015, compared to $15,084,000 for the
period from November 24, 2014 to December 31, 2014, an increase of $60,676,000, and represents the change in fair value of the
interest rate swap derivative instruments.
Formation Related Costs
Formation related costs were $143,437,000 for the period from November 24, 2014 to December 31, 2014 and includes (i)
$71,000,000 of stock-based compensation expense in connection with the one-time founders’ grants to executive officers and certain
other employees, (ii) $51,306,000 of transfer taxes and (iii) $21,131,000 of accounting, legal and other professional fees incurred in
connection with the Formation Transactions.
Gain on Consolidation of an Unconsolidated Joint Venture
Prior to the completion of the Offering and the Formation Transactions, our Predecessor owned a 50.0% interest in a joint
venture that owned 1325 Avenue of the Americas, which was accounted for under the equity method. The remaining 50.0% interest
was held by a third-party joint venture partner. As part of the Formation Transactions, we acquired the 50.0% interest held by our
joint venture partner for $130,381,000 payable in shares of our common stock. The purchase price took into account certain tax
benefits to our joint venture partner. The transaction was accounted for as a step acquisition in which we were required to re-measure
our existing 50.0% ownership interest at fair value. As a result of the acquisition, we own 100.0% of the property and began
consolidating the accounts of the property into our consolidated financial statements from the date of acquisition. In connection
therewith, we recognized a $239,716,000 gain in the period from November 24, 2014 to December 31, 2014, comprised of (i)
$175,917,000 representing the excess of the fair value of the property over the carrying amount of our investment in the property and
(ii) $63,799,000 representing a purchase gain.
Income Tax Expense
Income tax expense was $2,566,000 for the year ended December 31, 2015, compared to $505,000 for the period from
November 24, 2014 to December 31, 2014, an increase of $2,061,000. This increase was primarily due to a full year’s results of
operations in 2015, compared to a partial year in 2014.
Net Income Attributable to Noncontrolling Interests in Consolidated Real Estate Funds
Net income attributable to noncontrolling interest in consolidated real estate funds was $21,173,000 for the year ended
December 31, 2015 compared to $135,000 for the period from November 24, 2014 to December 31, 2014, an increase of $21,038,000.
This increase is primarily due to a full year’s results of operations in 2015, compared to a partial year in 2014.
Net Income Attributable to Noncontrolling Interests in Consolidated Joint Ventures
Net income attributable to noncontrolling interest in consolidated joint ventures was $5,459,000 for the year ended December 31,
2015 compared to $1,353,000 for the period from November 24, 2014 to December 31, 2014, an increase of $4,106,000. This increase
is primarily due to a full year’s results of operations in 2015, compared to a partial year in 2014.
Net (Income) Loss Attributable to Noncontrolling Interests in Operating Partnership
Net (income) loss attributable to noncontrolling interest in Operating Partnership represents net (income) or loss attributable to
the unitholders of the Operating Partnership. For the year ended December 31, 2015, we allocated a loss of $1,070,000 and for the
period from November 24, 2014 to December 31, 2014, we allocated income of $13,926,000 to the unitholders of the Operating
Partnership.
64
Results of Operations – The Predecessor - Period from January 1, 2014 to November 23, 2014
The following table summarizes the combined consolidated results of operations of our Predecessor for the period from January
1, 2014 to November 23, 2014.
(Amounts in thousands)
REVENUES:
Rental income
Tenant reimbursement income
Distributions from real estate fund investments
Realized and unrealized gains, net
Fee and other income
Total revenues
EXPENSES:
Operating
Depreciation and amortization
General and administrative
Profit sharing compensation
Other
Total expenses
Operating income
Income from unconsolidated joint ventures
Unrealized loss on interest rate swaps
Interest and other income, net
Interest and debt expense
Net income before income taxes
Income tax expense
Net income
Net income attributable to noncontrolling interests
Net income attributable to the Predecessor
The Predecessor
Period from
January 1, 2014
to November 23, 2014
30,208
1,646
17,083
129,354
49,098
227,389
15,862
10,203
30,912
12,041
7,974
76,992
150,397
4,241
(673)
2,479
(28,585)
127,859
(18,461)
109,398
(87,888)
21,510
$
$
Rental Income
Rental income was $30,208,000 for the period from January 1, 2014 to November 23, 2014 and represented rental income from
Waterview, the sole property for which direct property operations were reflected in the historical combined consolidated financial
statements of our Predecessor.
Tenant Reimbursement Income
Tenant reimbursement income was $1,646,000 for the period from January 1, 2014 to November 23, 2014 and represented
reimbursement income from tenants at Waterview, the sole property for which direct property operations were reflected in the
historical combined consolidated financial statements of our Predecessor.
Distributions from Real Estate Fund Investments
Distributions from real estate fund investments were $17,083,000 for the period from January 1, 2014 to November 23, 2014
and represented distributions received by our private equity real estate funds from its underlying investments.
65
Realized and Unrealized Gains, Net
Realized and unrealized gains, net were $129,354,000 for the period from January 1, 2014 to November 23, 2014 and were
comprised of $92,468,000 of unrealized gains, primarily due to an increase in the value of our real estate fund investments, and
$36,886,000 of realized gains from the sale of fund investments.
Fee and Other Income
Fee and other income was $49,098,000 for the period from January 1, 2014 to November 23, 2014. The following table sets
forth the details of fee and other income.
(Amounts in thousands)
Fee and other income
Property management
Acquisition, leasing and disposition
Other
Total fee and other income
Operating Expenses
The Predecessor
Period from
January 1, 2014
to November 23, 2014
$
$
15,599
27,038
6,461
49,098
Operating expenses were $15,862,000 for the period from January 1, 2014 to November 23, 2014 and represented the operating
expenses of Waterview, the sole property for which direct property operations were reflected in the historical combined consolidated
financial statements of our Predecessor, and the cost of operating and managing the portfolio of properties owned by our Predecessor
as well as the private real estate funds that it controlled.
Depreciation and Amortization
Depreciation and amortization was $10,203,000 for the period from January 1, 2014 to November 23, 2014 and represented
depreciation and amortization on Waterview, the sole property for which direct property operations were reflected in the historical
combined consolidated financial statements of our Predecessor.
General and Administrative
General and administrative expenses were $30,912,000 for the period from January 1, 2014 to November 23, 2014. The
following table sets forth the details of general and administrative expenses.
(Amounts in thousands)
General and administrative expenses
Mark-to-market of investments in our
deferred compensation plans (1)
Total general and administrative expenses
The Predecessor
Period from
January 1, 2014
to November 23, 2014
$
$
29,206
1,706
30,912
(1) Represented the mark-to-market of investments in our deferred compensation plan liabilities, which was entirely
offset by the mark-to-market of deferred compensation plan assets, which was included in “interest and other
income, net”.
66
Profit Sharing Compensation
Profit sharing compensation was $12,041,000 for the period from January 1, 2014 to November 23, 2014 and represented a
portion of fee income and real estate appreciation attributable to our Predecessor’s private equity real estate fund business, which was
payable to certain management employees through profit sharing arrangements. These arrangements ceased upon completion of the
Offering and the Formation Transactions.
Other Expenses
Other expenses were $7,974,000 for the period from January 1, 2014 to November 23, 2014 and represented capital raising and
formation costs for our Predecessor’s private equity real estate fund business.
Income from Unconsolidated Joint Ventures
Income from unconsolidated joint ventures was $4,241,000 for the period from January 1, 2014 to November 23, 2014. The
following table sets forth the details of income from unconsolidated joint ventures.
(Amounts in thousands)
Our share of Net Income:
712 Fifth Avenue
1325 Avenue of the Americas (1)
900 Third Avenue (1)
Total income from unconsolidated joint ventures
Paramount
Ownership at
November 23, 2014
The Predecessor
Period from
January 1, 2014
to November 23, 2014
50.0% $
50.0%
11.8%
$
4,141
100
-
4,241
(1) As part of the Formation Transactions we acquired 100% ownership of these properties.
Unrealized Loss on Interest Rate Swaps
Unrealized loss on interest rate swaps was $673,000 for the period from January 1, 2014 to November 23, 2014. These interest
rate swaps related to the debt of certain private equity real estate funds that were controlled by our Predecessor.
67
Interest and Other Income, net
Interest and other income, net was $2,479,000 for the period from January 1, 2014 to November 23, 2014. The following table
sets forth the details of interest and other income, net.
(Amounts in thousands)
Mark-to-market of investments in our deferred compensation plans (1)
Interest and other income
Total interest and other income
$
$
The Predecessor
Period from
January 1, 2014
to November 23, 2014
1,706
773
2,479
(1) Represented the mark-to-market of investments in our deferred compensation plan, which was entirely offset by
the mark-to-market of deferred compensation plan liabilities, which was included in “general and administrative”
expenses.
Interest and Debt Expense
Interest expense was $28,585,000 for the period from January 1, 2014 to November 23, 2014 and related to interest incurred on
the Waterview mortgage loan, the fund-level debt of the private equity real estate funds and preferred equity in the joint venture
holding 1633 Broadway.
Income Tax Expense
Income tax expense was $18,461,000 for the period from January 1, 2014 to November 23, 2014 and represented federal, state
and local corporate income tax of our Predecessor for their share of income from the funds’ underlying investments.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests was $87,888,000 for the period from January 1, 2014 to November 23, 2014
and represented net income attributable to the noncontrolling interest of the private equity real estate funds.
68
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 December 31, 2016, we had $162,965,000 of cash and cash equivalents, $29,374,000 of restricted cash and $570,000,000
of borrowing capacity under our revolving credit facility. As of December 31, 2016, our outstanding consolidated debt (including
amounts outstanding under our revolving credit facility) aggregated $3.638 billion. None of our debt matures in 2017 and
$314,000,000 of our debt matures in 2018.
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 January 2024 and has a fixed rate
of 4.03%. The proceeds from the refinancing were used to repay the existing $872,960,000 loan that had an interest rate of 6.12% and
was scheduled to mature in December 2019. 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 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. The sale, which is subject to customary closing conditions, is expected to close in the second quarter of
2017. We expect to retain net proceeds of approximately $457,000,000 from the sale, which is expected to be used to repay the
amounts outstanding under our revolving credit facility and the indebtedness on 1899 Pennsylvania Avenue and 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 December 15, 2016, we declared a regular quarterly cash dividend of $0.095 per share of common stock for the fourth
quarter ending December 31, 2016, which was paid on January 13, 2017 to stockholders of record as of the close of business on
December 30, 2016. During 2016, we paid an aggregate of $100,517,000 in dividends and distributions to our common stockholders
and common unitholders. These dividends were paid utilizing the cash flow from operations. If we were to continue our current
dividend policy for all of 2017, we would have to pay out approximately $101,000,000 to common stockholders and unitholders
during 2017.
69
Contractual Obligations
Below is a summary of our contractual obligations and commitments as of December 31, 2016.
(Amounts in thousands)
Notes and mortgages payable:
Interest expense (1)
Principal repayment
Revolving credit facility (including interest expense) (1)
Due to affiliates (including interest expense)(1)
Tenant obligations
Leasing commissions
Our share of debt relating to unconsolidated joint
ventures (including interest expense)
Total (3)
Less than
1 year
Payments due by period
1-3
years
3-5
years
Total
$ 607,976
3,408,179
238,216
27,404
76,628
6,626
$ 125,379
1,513
4,327
27,404
75,596
5,361
$ 207,166
960,216 (2)
233,889
-
-
1,265
$ 158,697
932,906
-
-
787
-
Thereafter
$ 116,734
1,513,544
-
-
245
-
130,029
$ 4,495,058
5,423
$ 245,003
124,606
$ 1,527,142
-
$ 1,092,390
-
$ 1,630,523
(1)
(2)
Interest expense is calculated using contractual rates for fixed rate debt and the rates in effect as of December 31, 2016 for variable rate debt.
Includes the $872,960 mortgage loan on One Market Plaza, which was refinanced in January 2017 with a new $975,000 mortgage loan that
matures in January 2024.
(3) The total above does not include various standing or renewal service contracts with vendors in connection with the operations of our property.
Off Balance Sheet Arrangements
As of December 31, 2016, our unconsolidated joint ventures had $269,573,000 of outstanding indebtedness, of which our share
was $125,442,000. We do not guarantee the indebtedness of unconsolidated joint ventures other than providing customary
environmental indemnities and guarantees of specified non-recourse carve outs 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.
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 of
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.
70
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 requires 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 December 31, 2016, 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.
71
Cash Flows
The Company
Cash and cash equivalents were $162,965,000, $143,884,000, and $438,599,000, as of December 31, 2016, 2015 and 2014,
respectively. Our December 31, 2015 cash and cash equivalents included $7,987,000 relating to our real estate funds, which were
deconsolidated as of January 1, 2016. Excluding the impact of deconsolidation of these real estate funds, cash and cash equivalents
increased by $27,068,000 for the year ended December 31, 2016. Cash and cash equivalents decreased by $294,715,000 for the year
ended December 31, 2015 and increased by $386,513,000 for the period from November 24, 2014 to December 31, 2014. The
following table sets forth the changes in cash flow.
(Amount in thousands)
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Operating Activities
For the Year Ended December 31,
2015
2016
Period from
November 24, 2014 to
December 31, 2014
$
$
145,040
(636,966)
518,994
$
(16,969)
(95,416)
(182,330)
(80,572)
204,913
262,172
Year Ended December 31, 2016 – We generated $145,040,000 of cash from operating activities for the year ended December
31, 2016, primarily from (i) $157,510,000 of net income (after $155,441,000 of noncash adjustments) and (ii) $8,270,000 of
distributions from unconsolidated joint ventures and real estate funds, partially offset by (iii) $20,740,000 of net changes in operating
assets and liabilities. Noncash adjustments of $155,441,000 were primarily comprised of depreciation and amortization, straight-lining
of rental income and unrealized gain on interest rate swaps. The changes in operating assets and liabilities were primarily due to
additions to deferred charges of $15,701,000.
Year Ended December 31, 2015 – We used $16,969,000 of cash for operating activities for the year ended December 31, 2015,
primarily due to (i) $170,269,000 of net changes in operating assets and liabilities, partially offset by (ii) $148,334,000 of net income
(after $127,191,000 of noncash adjustments) and (iii) $4,966,000 of distributions from unconsolidated joint ventures. Noncash
adjustments of $127,191,000 were primarily comprised of depreciation and amortization, unrealized gain on interest rate swaps,
straight-lining of rental income and realized and net unrealized gains on real estate fund investments. The changes in operating assets
and liabilities were primarily due to net acquisition of real estate fund investments of $127,743,000 and additions to deferred charges
of $40,510,000.
Period from November 24, 2014 to December 31, 2014 – We used $80,572,000 of cash for operating activities for the period
from November 24, 2014 to December 31, 2014, primarily due to (i) $51,362,000 of net acquisitions of real estate fund investments
and (ii) $13,181,000 of deferred leasing costs.
72
Investing Activities
Year Ended December 31, 2016 – We used $636,966,000 of cash for investing activities for the year ended December 31, 2016,
primarily due to (i) $517,823,000 for the acquisition of One Front Street, (ii) $132,686,000 of additions to rental properties, which was
comprised of spending for tenant improvements and other building improvements, partially offset by (iii) $15,080,000 decrease in
restricted cash.
Year Ended December 31, 2015 – We used $95,416,000 of cash for investing activities for the year ended December 31, 2015,
primarily due to (i) $107,859,000 of additions to rental properties, which was comprised of spending for tenant improvements and
other building improvements, partially offset by (ii) $12,424,000 decrease in restricted cash.
Period from November 24, 2014 to December 31, 2014 – We generated $204,913,000 of cash from investing activities for the
period from November 24, 2014 to December 31, 2014, primarily from cash received from properties in connection with the
Formation Transactions.
Financing Activities
Year Ended December 31, 2016 – We generated $518,994,000 of cash from financing activities for the year ended December
31, 2016, primarily from (i) $1,362,414,000 of proceeds from notes and mortgages payable, primarily from the refinancings of 1301
Avenue of the Americas and 31 West 52nd Street, (ii) $340,000,000 of borrowings under the revolving credit facility and (iii)
$7,651,000 of contributions from noncontrolling interests, partially offset by (iv) $689,269,000 of repayments of notes and mortgages
payable, primarily for the repayments of the 31 West 52nd Street and 900 Third Avenue, (v) $214,608,000 for the purchase of
marketable securities in connections with the defeasance of Waterview’s mortgage loan, (vi) $130,000,000 of repayments of the
amounts borrowed under the revolving credit facility, (vii) $100,517,000 of dividends and distributions paid to common stockholders
and unitholders, (viii) $29,387,000 for the payment of debt issuance costs, (ix) $23,654,000 for the settlement of swap liabilities and
(x) $3,636,000 for distributions to noncontrolling interests.
Year Ended December 31, 2015 – We used $182,330,000 of cash for financing activities for the year ended December 31, 2015,
primarily due to (i) $927,633,000 of repayments of notes and mortgages payable, primarily for the repayment of 1633 Broadway loan,
(ii) $261,464,000 for the acquisition of noncontrolling interest in consolidated joint ventures, (iii) $85,458,000 of dividends and
distributions paid to common stockholders and unitholders, (iv) $56,636,000 for distributions to noncontrolling interests, (v)
$33,741,000 for the settlement of interest rate swap liabilities and (vi) $18,871,000 for the payment of debt issuance costs, partially
offset by (vii) $1,013,544,000 of proceeds from notes and mortgages payable, primarily from the refinancing of 1633 Broadway, (viii)
$167,929,000 of contributions from noncontrolling interests and (ix) $20,000,000 of borrowing under the revolving credit facility.
Period from November 24, 2014 to December 31, 2014 – We generated $262,172,000 of cash from financing activities for the
period from November 24, 2014 to December 31, 2014. Cash generated from financing activities during the period was primarily due
to the issuance and sale of common stock in connection with the Offering, substantially all of the proceeds of which were used toward
the repayment of debt assumed in the Formation Transactions and the defeasance of notes and mortgages payable.
73
The Predecessor
Cash and cash equivalents were $52,086,000 and $307,161,000 at November 23, 2014 and December 31, 2013, respectively, a
decrease of $255,075,000. The following table sets forth the changes in cash flow.
(Amount in thousands)
Net cash used in:
Operating activities
Investing activities
Financing activities
Operating Activities
Period from
January 1, 2014 to
November 23, 2014
$
(84,495)
(64,330)
(106,250)
Period from January 1, 2014 to November 23, 2014 – Our Predecessor used $84,495,000 of cash for operating activities for the
period January 1, 2014 to November 23, 2014, due to $80,195,000 of net changes in operating assets and liabilities, which included
$31,061,000 of net real estate fund investments from the purchase of a new asset and additional investments in existing assets.
Investing Activities
Period from January 1, 2014 to November 23, 2014 – Our Predecessor used $64,330,000 of cash for investing activities for the
period January 1, 2014 to November 23, 2014, primarily due to $64,650,000 for the acquisition by the Residential Fund, which utilizes
historical cost accounting rather than investment company accounting.
Financing Activities
Period from January 1, 2014 to November 23, 2014 – Our Predecessor used $106,250,000 of cash for financing activities for the
period January 1, 2014 to November 23, 2014, primarily due to (i) $266,028,000 of distributions to noncontrolling interests, (ii)
$149,135,000 of distributions to Predecessor shareholders and (iii) $23,744,000 of offering costs, partially offset by (iv) $272,721,000
of contributions from noncontrolling interests, (v) $39,075,000 of proceeds from loans payable to noncontrolling interests and (vi)
$23,688,000 of contributions from Predecessor shareholders.
74
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.
Net Operating Income (“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 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 our net income to NOI and Cash NOI for the years ended December 31, 2016 and 2015
and for the period from November 24, 2014 to December 31, 2014.
(Amounts in thousands)
Reconciliation of net income (loss) to NOI and Cash NOI:
Net income (loss)
$
Add (subtract) adjustments to arrive at NOI and Cash NOI:
Depreciation and amortization
General and administrative
Interest and debt expense
Transaction related costs
Income tax expense
NOI from unconsolidated joint ventures
Loss from unconsolidated real estate funds
Income from unconsolidated joint ventures
Fee income
Interest and other income, net
Unrealized gain on interest rate swaps
NOI
Less NOI attributable to noncontrolling interests in:
Consolidated real estate funds
Consolidated joint ventures
Paramount's share of NOI
NOI
Less:
Straight-line rent adjustments (including our share
of unconsolidated joint ventures)
Amortization of above and below-market leases, net
Cash NOI
Less Cash NOI attributable to noncontrolling interests in:
Consolidated real estate funds
Consolidated joint ventures
Paramount's share of Cash NOI
$
$
$
The Company
For the Year Ended December 31, 2016
New York Washington, D.C. San Francisco
Total
Other
2,069 $
29,478 $
247 $
22,167 $
(49,823)
269,450
53,510
157,746
2,404
1,785
17,195
498
(7,413)
(16,931)
(6,934)
(39,814)
433,565
183,316
-
73,729
-
-
16,874
-
(7,335)
-
(203)
(5,636)
290,223
31,068
-
22,406
-
-
-
-
-
-
(53)
-
53,668
53,109
-
55,817
-
37
-
-
-
-
(28)
(34,178)
96,924
1,957
53,510
5,794
2,404
1,748
321
498
(78)
(16,931)
(6,650)
-
(7,250)
414
(47,561)
386,418 $
-
-
290,223 $
-
-
53,668 $
-
(47,561)
49,363 $
414
-
(6,836)
433,565 $
290,223 $
53,668 $
96,924 $
(7,250)
(82,724)
(9,536)
341,305
(64,056)
8,921
235,088
(4,772)
(2,204)
46,692
(13,872)
(16,253)
66,799
414
(32,571)
309,148 $
-
-
235,088 $
-
-
46,692 $
-
(32,571)
34,228 $
(24)
-
(7,274)
414
-
(6,860)
75
(Amounts in thousands)
Reconciliation of net income (loss) to NOI and Cash NOI:
Net income (loss)
$
Add (subtract) adjustments to arrive at NOI and Cash NOI:
Depreciation and amortization
General and administrative
Interest and debt expense
Transaction related costs
Transfer taxes due in connection with sale of shares
by a former joint venture partner
Income tax expense (benefit)
NOI from unconsolidated joint ventures
Income from real estate fund investments
Income from unconsolidated joint ventures
Fee income
Interest and other income, net
Unrealized gain on interest rate swaps
NOI
Less NOI attributable to noncontrolling interests in:
Consolidated real estate funds
Consolidated joint ventures
Paramount's share of NOI
NOI
Less:
Straight-line rent adjustments (including our share
of unconsolidated joint ventures)
Amortization of above and below-market leases, net
Cash NOI
Less Cash NOI attributable to noncontrolling interests in:
Consolidated real estate funds
Consolidated joint ventures
Paramount's share of Cash NOI
$
$
$
The Company
For the Year Ended December 31, 2015
New York Washington, D.C. San Francisco
Total
Other
21,143 $
35,932 $
(462) $
7,858 $
(22,185)
294,624
42,056
168,366
4,483
5,872
2,566
16,580
(37,975)
(6,850)
(10,248)
(871)
(75,760)
423,986
210,597
-
84,164
-
-
-
16,210
-
(6,734)
-
(324)
(45,066)
294,779
30,088
-
20,609
-
-
(321)
-
-
-
-
(30)
-
49,884
52,748
-
55,285
-
-
11
-
-
-
-
(13)
(30,694)
85,195
1,191
42,056
8,308
4,483
5,872
2,876
370
(37,975)
(116)
(10,248)
(504)
-
(5,872)
(668)
(54,657)
368,661 $
-
(11,576)
283,203 $
-
-
49,884 $
-
(43,081)
42,114 $
(668)
-
(6,540)
423,986 $
294,779 $
49,884 $
85,195 $
(5,872)
(69,112)
(9,917)
344,957
(45,847)
8,052
256,984
(6,029)
(2,237)
41,618
(17,205)
(15,732)
52,258
(668)
(35,948)
308,341 $
-
(9,665)
247,319 $
-
-
41,618 $
-
(26,283)
25,975 $
(31)
-
(5,903)
(668)
-
(6,571)
76
(Amounts in thousands)
Reconciliation of net income (loss) to NOI and Cash NOI:
Net income (loss)
$
Add (subtract) adjustments to arrive at NOI and Cash NOI:
Depreciation and amortization
General and administrative
Interest and debt expense
Formation related costs
Income tax expense
NOI from unconsolidated joint ventures
Income from unconsolidated joint ventures
Fee income
Interest and other loss (income), net
Unrealized gain on interest rate swaps
Gain on consolidation of a partially owned entity
NOI
Less NOI attributable to noncontrolling interests in:
Consolidated real estate funds
Consolidated joint ventures
Paramount's share of NOI
NOI
Less:
Straight-line rent adjustments (including our share
of unconsolidated joint ventures)
Amortization of above and below-market leases, net
Cash NOI
Less Cash NOI attributable to noncontrolling interests in:
Consolidated real estate funds
Consolidated joint ventures
Paramount's share of Cash NOI
$
$
$
The Company
Period from November 24, 2014 to December 31, 2014
New York Washington, D.C. San Francisco
Total
Other
72,722 $
(20,962) $
(1,908) $
1,753 $
93,839
34,481
2,207
43,743
143,437
505
1,680
(938)
(1,176)
179
(15,084)
(239,716)
42,040
25,789
61
33,869
-
-
1,680
(938)
-
(26)
(9,012)
-
30,461
3,104
27
2,223
-
475
-
-
-
(3)
-
-
3,918
5,485
3
5,541
-
-
-
-
-
(1)
(6,072)
-
6,709
103
2,116
2,110
143,437
30
-
-
(1,176)
209
-
(239,716)
952
(789)
(4,921)
36,330 $
-
(1,531)
28,930 $
-
-
3,918 $
-
(3,390)
3,319 $
(789)
-
163
42,040 $
30,461 $
3,918 $
6,709 $
952
(5,660)
(467)
35,913
(4,293)
1,222
27,390
(788)
(3,304)
31,821 $
-
(1,259)
26,131 $
(186)
(233)
3,499
-
-
3,499 $
(1,181)
(1,456)
4,072
-
(2,045)
2,027 $
-
-
952
(788)
-
164
77
Same Store NOI
The tables below set forth the reconciliations of our share of NOI to our share of Same Store NOI and Same Store Cash NOI for
the years ended December 31, 2016 and 2015. 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.
(Amounts in thousands)
Paramount's share of NOI for the year
ended December 31, 2016
Acquisitions (1)
Lease termination income (including our
share of unconsolidated joint ventures)
Other, net
Paramount's share of Same Store NOI for
the year ended December 31, 2016
(Amounts in thousands)
Paramount's share of NOI for the year
ended December 31, 2015
Acquisitions
Lease termination income (including our
share of unconsolidated joint ventures)
Other, net
Paramount's share of Same Store NOI for
the year ended December 31, 2015
The Company
For the Year Ended December 31, 2016
Total
New York
Washington, D.C.
San Francisco
Other
$
386,418 $
(13,754)
290,223 $
(11,136)
$
53,668
-
$
49,363
(2,618)
(6,836)
-
(17,040)
4,182
(16,859) (2)
4,373 (3)
-
26
(181)
(217)
-
-
$
359,806 $
266,601 $
53,694
$
46,347
$
(6,836)
Total
New York
Washington, D.C.
San Francisco
Other
For the Year Ended December 31, 2015
$
368,661 $
-
283,203 $
-
$
49,884
-
$
42,114
-
(6,540)
-
(870)
(3,975)
(569)
(3,775) (4)
-
-
(301)
(200)
-
-
$
363,816 $
278,859 $
49,884
$
41,613
$
(6,540)
(Decrease) increase in Same Store NOI
% (Decrease) increase
$
(4,010)
$
(12,258) $
3,810
$
4,734
$
(296)
(1.1%)
(4.4%)
7.6%
11.4%
(1) Represents NOI from the acquisitions of the remaining 35.8% equity interest that we did not previously own in 31 West 52nd Street, which was
(2)
(3)
(4)
acquired in October 2015 and One Front Street, which was acquired in December 2016.
Includes $10,861 from the termination of a tenant’s lease at 1633 Broadway.
Includes an aggregate of $12,406 of non-cash write-offs primarily related to an above-market lease asset from the termination of a tenant’s lease
at 1633 Broadway, partially offset by $10,315 of income from the accelerated amortization of a below-market lease liability in connection with
a tenant’s lease modification.
Includes $3,915 of income from the accelerated amortization of the aforementioned below-market lease liability in connection with a tenant’s
lease modification.
78
(6,571)
-
-
-
(6,571)
(289)
(Amounts in thousands)
Paramount's share of Cash NOI for the year
ended December 31, 2016
Acquisitions (1)
Lease termination income (including our
share of unconsolidated joint ventures)
Other, net
Paramount's share of Same Store Cash NOI
for the year ended December 31, 2016
(Amounts in thousands)
Paramount's share of Cash NOI for the year
ended December 31, 2015
Acquisitions
Lease termination income (including our
share of unconsolidated joint ventures)
Other, net
Paramount's share of Same Store Cash NOI
for the year ended December 31, 2015
The Company
For the Year Ended December 31, 2016
Total
New York
Washington, D.C.
San Francisco
Other
$ 309,148
(11,214)
$
235,088
(9,329)
$
46,692
-
$
34,228
(1,885)
$
(17,040)
315
(16,859) (2)
311
-
4
(181)
-
(6,860)
-
-
-
$ 281,209
$
209,211
$
46,696
$
32,162
$
(6,860)
Total
New York
Washington, D.C.
San Francisco
Other
For the Year Ended December 31, 2015
$ 308,341
-
$
247,319
-
$
41,618
-
$
25,975
-
$
(870)
28
(569)
(30)
-
-
(301)
58
$ 307,499
$
246,720
$
41,618
$
25,732
$
(Decrease) increase in Same Store Cash NOI
% (Decrease) increase
$
(26,290)
$
(37,509)
$
5,078
$
6,430
$
(8.5%)
(15.2%)
12.2%
25.0%
(1) Represents Cash NOI from the acquisitions of the remaining 35.8% equity interest that we did not previously own in 31 West 52nd Street,
which was acquired in October 2015 and One Front Street, which was acquired in December 2016.
Includes $10,861 from the termination of a tenant’s lease at 1633 Broadway.
(2)
Funds from Operations (“FFO”) and Core Funds from Operations (“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 the pro rata 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.
79
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 to FFO and Core FFO.
(Amounts in thousands, except shares and per share amounts)
Reconciliation of net income to FFO and Core FFO:
Net income
Real estate depreciation and amortization (including
our share of unconsolidated joint ventures)
FFO
Less FFO attributable to noncontrolling interests in:
Consolidated real estate funds
Consolidated joint ventures
Operating Partnership
FFO attributable to common stockholders
Per diluted share
FFO
Non-core (income) expense:
Unrealized gain on interest rate swaps (including
our share of unconsolidated joint ventures)
Defeasance and debt breakage costs
Transaction related costs
Severance costs
Transfer taxes due in connection with the sale of shares
by a former joint venture partner
Predecessor income tax true-up
Gain on consolidation of an unconsolidated joint venture
Core FFO
Less Core FFO attributable to noncontrolling interests in:
Consolidated real estate funds
Consolidated joint ventures
Operating Partnership
Core FFO attributable to common stockholders
Per diluted share
Reconciliation of weighted average shares outstanding:
Weighted average shares outstanding
Effect of dilutive securities
Denominator for FFO per diluted share
The Company
For the Year Ended December 31,
2016
2015
Period from
November 24, 2014 to
December 31, 2014
$
2,069 $
21,143 $
275,653
277,722
419
(41,320)
(41,681)
195,140 $
0.89 $
277,722 $
(41,869)
4,608
2,404
2,874
-
-
-
245,739
419
(23,890)
(39,152)
183,116 $
0.84 $
300,645
321,788
(22,096)
(39,383)
(50,960)
209,349 $
0.99 $
321,788 $
(77,872)
-
4,483
3,315
5,872
721
-
258,307
(22,096)
(21,355)
(42,060)
172,796 $
0.81 $
72,722
35,086
107,808
(223)
(5,130)
(20,030)
82,425
0.39
107,808
(15,727)
25,717
143,437
-
-
-
(239,716)
21,519
(153)
(1,353)
(3,913)
16,100
0.08
218,053,062
15,869
218,068,931
212,106,718
4,572
212,111,290
212,106,718
1,190
212,107,908
$
$
$
$
$
80
ITEM 7A.
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 December 31,
2016.
Property
(Amounts in thousands)
Fixed Rate Debt:
1633 Broadway(1)
1301 Avenue of the Americas
31 West 52nd Street
1899 Pennsylvania Avenue
Liberty Place
One Market Plaza(1)(2)
Total Fixed Rate Debt
Variable Rate Debt:
1633 Broadway
1301 Avenue of the Americas
One Market Plaza(2)
Revolving Credit Facility
Total Variable Rate Debt
Rate
2017
2018
2019
2020
2021
Thereafter
Total
Fair Value
3.54% $
3.05%
3.80%
4.88%
4.50%
6.13%
4.30% $
2.37% $
2.43%
4.94%
2.02%
2.32% $
- $
-
-
-
-
-
- $
- $
-
-
-
- $
-
$
-
$
-
$
- $ 1,000,000 $ 1,000,000 $1,001,862
-
-
-
84,000
-
84,000 $
-
-
-
-
860,546
860,546 $
-
-
87,675
-
-
87,675 $
-
500,000
-
-
500,000
-
-
-
-
486,937
482,832
90,269
85,079
845,768
500,000 $ 1,500,000 $ 3,032,221 $2,992,747
500,000
500,000
87,675
84,000
860,546
-
$
-
$
-
-
230,000
230,000 $
-
12,414
-
12,414 $
-
$
-
-
-
- $
- $
350,000
-
-
350,000 $
13,569
13,544 $
13,544 $
350,000
351,648
13,298
12,414
230,000
230,018
13,544 $ 605,958 $ 608,533
-
-
-
Total Consolidated Debt
3.97% $
- $
314,000 $
872,960 $
87,675 $
850,000 $ 1,513,544 $ 3,638,179 $3,601,280
(1) All or a portion of this debt has been swapped from floating rate debt to fixed rate debt. See table below.
(2) We refinanced this loan on January 19, 2017.
In addition to the above, our unconsolidated joint ventures had $269,573,000 of outstanding indebtedness as of December 31,
2016, of which our share was $125,442,000.
The following table summarizes our fixed rate debt that has been swapped from floating rate to fixed as of December 31, 2016.
Property
(Amounts in thousands)
1633 Broadway (1)
Total interest rate swap assets
$
One Market Plaza (2)
1633 Broadway (1)
Total interest rate swap liabilities
$
Notional
Amount
Effective Date
Maturity Date
Strike
Rate
Fair Value as of
December 31, 2016
400,000
Dec-2020
Dec-2021
840,000
1,000,000
Aug-2007 - Aug-2012
Dec-2015
Aug-2017
Dec-2020 - Dec-2022
2.35% $
$
5.02% $
1.79%
$
139
139
21,227
1,219
22,446
(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).
(2) Represents interest rate swaps not designated as hedges. We refinanced this loan on January 19, 2017.
81
The following table summarizes our share of total indebtedness and the effect to interest expense of a 100 basis point increase in
LIBOR.
(Amounts in thousands, except per share amount)
Paramount's share of consolidated debt:
Variable rate
Fixed rate (1)
Paramount's share of debt of non-consolidated entities
(non-recourse):
Variable rate
Fixed rate (1)
December 31, 2016
Weighted
Average
Interest Rate
Effect of 1%
Increase in
Base Rates
December 31, 2015
Weighted
Average
Interest Rate
Balance
Balance
$
599,627
2,593,343
$ 3,192,970
2.29% $
3.99%
3.67% $
5,996 $
321,771
- 2,202,664
5,996 $ 2,524,435
1.75%
4.79%
4.40%
$
$
55,750
69,692
125,442
2.72% $
5.74%
4.40% $
558 $
-
558 $
55,750
69,794
125,544
2.34%
5.74%
4.23%
Noncontrolling interests' share of above
Total change in annual net income
Per diluted share
$
$
$
(1,146)
5,408
0.02
(1) Our fixed rate debt includes floating rate debt that has been swapped to fixed. See table on page 81.
82
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets of the Company as of December 31, 2016 and 2015
Consolidated Statements of Income of the Company for the years ended December 31, 2016 and 2015 and for the
period from November 24, 2014 to December 31, 2014
Combined Consolidated Statement of Income of the Predecessor for the period from January 1, 2014 to November 23,
2014
Consolidated Statements of Comprehensive Income of the Company for the years ended December 31, 2016 and 2015
and for the period from November 24, 2014 to December 31, 2014
Combined Consolidated Statements of Changes in Equity of the Company for the years ended December 31, 2016 and
2015 and for the period from November 24, 2014 to December 31, 2014 and of the Predecessor for the period from
January 1, 2014 to November 23, 2014
Combined Consolidated Statements of Cash Flows of the Company for the years ended December 31, 2016 and 2015
and for the period from November 24, 2014 to December 31, 2014 and of the Predecessor for the period from
January 1, 2014 to November 23, 2014
Notes to Combined Consolidated Financial Statements of the Company and the Predecessor
Page Number
84
85
86
87
88
90
91
94
83
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Paramount Group, Inc.
New York, NY
We have audited the accompanying consolidated balance sheets of Paramount Group, Inc. and subsidiaries (the Company or
Successor) as of December 31, 2016 and 2015, the related consolidated statements of income and comprehensive income for the years
ended December 31, 2016 (Successor) and 2015 (Successor) and for the period from November 24, 2014 to December 31, 2014
(Successor), the related combined consolidated statements of changes in equity and cash flows for the years ended December 31, 2016
(Successor) and 2015 (Successor) and for the period from November 24, 2014 to December 31, 2014 (Successor), and the related
combined consolidated statements of income, changes in equity and cash flows for the period from January 1, 2014 through
November 23, 2014 (Paramount Predecessor). Our audits also included the financial statement schedules listed in the Index at Item 15.
These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Paramount
Group, Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the
two years ended December 31, 2016 (Successor) and 2015 (Successor), for the period from November 24, 2014 through December 31,
2014 (Successor) and for the period from January 1, 2014 through November 23, 2014 (Paramount Predecessor), in conformity with
accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules,
when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the Company's internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control
— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report
dated February 22, 2017 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
New York, NY
February 22, 2017
84
(Amounts in thousands, except share, unit and per share amounts)
ASSETS
The Company
December 31, 2016
December 31, 2015
PARAMOUNT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
Rental property, at cost
Land
Buildings and improvements
Accumulated depreciation and amortization
Rental property, net
Cash and cash equivalents
Restricted cash
Real estate fund investments
Investments in unconsolidated real estate funds
Investments in unconsolidated joint ventures
Preferred equity investments
Marketable securities
Deferred rent receivable
Accounts and other receivables, net of allowance of $202 and $365
Deferred charges, net of accumulated amortization of $9,832 and $14,204
Intangible assets, net of accumulated amortization of $166,841 and $143,987
Assets held for sale
Other assets
Total assets (1)
LIABILITIES AND EQUITY
Notes and mortgages payable, net of deferred financing costs of $43,281 and $18,914
Revolving credit facility
Due to affiliates
Loans payable to noncontrolling interests
Accounts payable and accrued expenses
Dividends and distributions payable
Deferred income taxes
Interest rate swap liabilities
Intangible liabilities, net of accumulated amortization of $55,349 and $41,931
Other liabilities
Total liabilities (1)
Commitments and contingencies
Paramount Group, Inc. equity:
Common stock $0.01 par value per share; authorized 900,000,000 shares;
issued and outstanding 230,015,356 and 212,112,137 shares
in 2016 and 2015, respectively
Additional paid-in-capital
Earnings less than distributions
Accumulated other comprehensive income (loss)
Paramount Group, Inc. equity
Noncontrolling interests in:
Consolidated real estate funds
Consolidated joint ventures
Operating Partnership (34,511,214 and 51,660,088 units outstanding)
Total equity
Total liabilities and equity
$
$
$
$
2,091,535 $
5,757,558
7,849,093
(318,161)
7,530,932
162,965
29,374
-
28,173
6,411
55,051
22,393
163,695
15,251
71,184
412,225
346,685
22,829
8,867,168 $
3,364,898 $
230,000
27,299
-
103,896
25,151
1,467
22,446
153,018
53,046
3,981,221
2,300
4,116,987
(129,654)
372
3,990,005
64,793
253,788
577,361
4,885,947
8,867,168 $
2,042,071
5,610,046
7,652,117
(243,089)
7,409,028
143,884
41,823
416,438
-
7,102
53,941
21,521
77,792
10,844
74,991
511,207
-
6,658
8,775,229
2,922,610
20,000
27,299
45,662
102,730
25,067
2,533
93,936
179,741
45,101
3,464,679
2,122
3,802,858
(36,120)
(7,843)
3,761,017
414,637
236,849
898,047
5,310,550
8,775,229
(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 87.0%. As of December 31, 2016, the assets and liabilities of the Operating Partnership include $1,514,292 and $970,473,
respectively, of certain VIEs that are consolidated by the Operating Partnership. See Note 13, Variable Interest Entities.
See notes to combined consolidated financial statements.
85
PARAMOUNT GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
The Company
For the Year Ended December 31,
2015
2016
Period from
November 24, 2014
to December 31, 2014
$
590,161 $
44,943
48,237
683,341
586,530 $
50,885
24,993
662,408
(Amounts in thousands, except share and per share amounts)
REVENUES:
Rental income
Tenant reimbursement income
Fee and other income
Total revenues
EXPENSES:
Operating
Depreciation and amortization
General and administrative
Transaction related costs
Total expenses
Operating income
Income from real estate fund investments
Loss from unconsolidated real estate funds
Income from unconsolidated joint ventures
Interest and other income (loss), net
Interest and debt expense
Unrealized gain on interest rate swaps
Formation related costs
Gain on consolidation of an unconsolidated joint venture
Net income before income taxes
Income tax expense
Net income
Less net (income) loss attributable to noncontrolling interests:
Consolidated real estate funds
Consolidated joint ventures
Operating Partnership
Net (loss) income attributable to common stockholders
$
250,040
269,450
53,510
2,404
575,404
107,937
-
(498)
7,413
6,934
(157,746)
39,814
-
-
3,854
(1,785)
2,069
244,754
294,624
42,056
10,355
591,789
70,619
37,975
-
6,850
871
(168,366)
75,760
-
-
23,709
(2,566)
21,143
1,316
(15,423)
2,104
(9,934) $
(21,173)
(5,459)
1,070
(4,419) $
57,465
5,865
2,805
66,135
26,011
34,481
2,207
-
62,699
3,436
1,412
-
938
(179)
(43,743)
15,084
(143,437)
239,716
73,227
(505)
72,722
(135)
(1,353)
(13,926)
57,308
(LOSS) INCOME PER COMMON SHARE - BASIC:
(Loss) income per common share
Weighted average shares outstanding
$
(0.05) $
(0.02) $
218,053,062
212,106,718
0.27
212,106,718
(LOSS) INCOME PER COMMON SHARE - DILUTED:
$
(Loss) income per common share
Weighted average shares outstanding
(0.05) $
(0.02) $
218,053,062
212,106,718
0.27
212,107,908
DIVIDENDS PER COMMON SHARE
$
0.380 $
0.419 (1) $
-
(1)
Includes the $0.039 cash dividend for the 38 day period following the completion of our initial public offering and related Formation
Transactions and ending on December 31, 2014.
See notes to combined consolidated financial statements.
86
PARAMOUNT PREDECESSOR
COMBINED CONSOLIDATED STATEMENT OF INCOME
(Amounts in thousands)
REVENUES:
Rental income
Tenant reimbursement income
Distributions from real estate fund investments
Realized and unrealized gains, net
Fee and other income
Total revenues
EXPENSES:
Operating
Depreciation and amortization
General and administrative
Profit sharing compensation
Other
Total expenses
Operating income
Income from unconsolidated joint ventures
Unrealized loss on interest rate swaps
Interest and other income, net
Interest and debt expense
Net income before income taxes
Income tax expense
Net income
Net income attributable to noncontrolling interests
Net income attributable to the Predecessor
The Predecessor
Period from
January 1, 2014
to November 23, 2014
30,208
1,646
17,083
129,354
49,098
227,389
15,862
10,203
30,912
12,041
7,974
76,992
150,397
4,241
(673)
2,479
(28,585)
127,859
(18,461)
109,398
(87,888)
21,510
$
$
See notes to combined consolidated financial statements.
87
PARAMOUNT GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
Net income
Other comprehensive income (loss):
Change in value of interest rate swaps
Pro rata share of other comprehensive income (loss)
of unconsolidated joint ventures
Comprehensive income
Less comprehensive (income) loss attributable to
noncontrolling interests in:
Consolidated real estate funds
Consolidated joint ventures
Operating Partnership
Comprehensive (loss) income attributable to
common stockholders
The Company
For the Year Ended December 31,
2015
2016
$
2,069 $
21,143 $
Period from
November 24, 2014
to December 31, 2014
72,722
8,161
17
10,247
1,316
(15,423)
2,141
(9,241)
(512)
11,390
(21,173)
(5,459)
2,980
$
(1,719) $
(12,262) $
-
-
72,722
(135)
(1,353)
(13,926)
57,308
See notes to combined consolidated financial statements.
88
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
COMBINED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Common Shares
Noncontrolling Interests in
Shares
Amount
Additional
Paid-in-
Capital
Earnings
(Less than)
In Excess of
Distributions
Accumulated
Other
Comprehensive
Income (Loss)
Predecessor
Shareholders'
Equity
Consolidated
Real Estate
Funds
Consolidated
Joint
Ventures
Operating
Partnership
Total
Equity
(Amounts in thousands, except per share
amounts)
The Predecessor
Balance as of December 31, 2013
Net income
Contributions
Distributions
Deemed contributions
Balance as of November 23, 2014
The Company
Net income
Common shares issued:
$
-
-
-
-
-
-
-
$
-
-
-
-
-
-
-
$
-
-
-
-
-
-
-
$
-
-
-
-
-
-
57,308
Initial public offering
Private placement
Acquire property interests
Upon redemption of common units
Under Omnibus share plan
150,650
3,914
11,279
210
6
1,507
39
113
2
1
2,496,693
68,461
209,203
3,890
-
Common units issued:
Founders Grant
Under Omnibus share plan
Allocation of equity resulting from
shares and units issued in connection
with the Formation Transactions
Contributions from noncontrolling
interests
Distributions to noncontrolling interests
Adjustments to noncontrolling interests
Other
Balance as of December 31, 2014
-
-
-
-
-
(13,702)
46,048
460
1,130,868
-
-
-
-
212,107
-
-
-
-
2,122
$
-
-
(43,981)
-
$ 3,851,432
$
-
-
-
-
57,308
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
321,769
21,510
23,688
(176,434)
187,389
377,922
$
$ 1,703,675
87,888
272,721
(266,028)
-
1,798,256
$
-
-
-
-
-
-
-
-
-
-
-
-
$ 2,025,444
109,398
296,409
(442,462)
187,389
2,176,178
-
-
-
-
-
-
-
-
135
1,353
13,926
72,722
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(3,892)
-
2,498,200
68,500
209,316
-
1
71,000
13,702
71,000
-
(377,922) (1,509,417)
347,219
819,177
410,385
-
-
-
-
-
$
57,843
(7,683)
-
(1,064)
338,070
-
(805)
51
347,818
$
$
-
-
43,981
309
958,203
57,843
(8,488)
-
(704)
$ 5,554,953
See notes to combined consolidated financial statements.
89
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
COMBINED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY - CONTINUED
Common Shares
Noncontrolling Interests in
Shares
212,107 $
Amount
2,122
-
-
Additional
Paid-in-
Capital
$ 3,851,432
-
Earnings
(Less than)
In Excess of
Distributions
57,308
(4,419)
$
Accumulated
Other
Comprehensive
Income (Loss)
-
$
-
$
Predecessor
Shareholders'
Equity
Consolidated
Real Estate
Funds
Consolidated
Joint
Ventures
$
338,070 $
21,173
347,818 $
5,459
Operating
Partnership
958,203
(1,070)
Total
Equity
$ 5,554,953
21,143
(2,127)
-
5
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(412)
(Amounts in thousands, except per share
amounts)
Balance as of December 31, 2014
Net income (loss)
Common shares and units issued under
Omnibus share plan
Dividends and distributions
($0.419 per share and unit)
Contributions from noncontrolling interests
Distributions to noncontrolling interests
Change in value of interest rate swaps
Pro rata share of other comprehensive
loss of unconsolidated joint ventures
Acquisition of noncontrolling interests' in
consolidated joint ventures and funds
Adjustments to noncontrolling interests
Amortization of equity awards
Other
Balance as of December 31, 2015
Deconsolidation of real estate fund
investments upon adoption of
ASU 2015-02
Balance as of January 1, 2016
Net income (loss)
Common shares issued upon redemption of
common units
Common shares and units issued under
Omnibus share plan
Dividends and distributions ($0.380
per share and unit)
Contributions from noncontrolling
interests
Distributions to noncontrolling
interests
Change in value of interest rate swaps
Pro rata share of other comprehensive income
of unconsolidated joint ventures
Amortization of equity awards
Other
Balance as of December 31, 2016
-
-
-
-
212,112
-
-
-
-
2,122
(91,417)
43,981
1,459
(470)
3,802,858
-
212,112
-
-
2,122
-
-
3,802,858
-
17,808
178
312,079
-
-
-
-
-
-
-
-
-
-
95
-
-
-
-
-
-
-
230,015 $
(88,874)
-
-
-
-
-
-
(135)
(36,120)
-
(36,120)
(9,934)
-
-
(83,805)
.
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,131
4
-
165,399
(55,905)
-
-
2,530
(731)
-
(21,651)
-
-
(1,810)
(110,525)
167,929
(56,636)
(9,241)
-
-
(100)
(512)
(53,772)
-
-
(328)
414,637
(118,227)
-
-
-
236,849
-
(43,981)
6,325
-
898,047
(263,416)
-
7,784
(933)
5,310,550
(351,035)
63,602
(1,316)
-
236,849
15,423
-
898,047
(2,104)
(351,035)
4,959,515
2,069
-
(312,257)
-
-
-
(16,796)
(100,601)
2,500
5,151
-
7,651
(3,636)
-
-
(42)
(3,636)
8,161
$
64,793
$
253,788
$
5
10,494
14
577,361
17
12,528
243
$ 4,885,947
-
-
-
-
-
-
-
7
-
-
-
-
1
-
-
-
-
(7,431)
-
-
-
-
(7,843)
-
(7,843)
-
-
-
-
-
-
8,203
12
-
-
372
$
-
-
-
2,300
-
2,034
16
$ 4,116,987
$
-
-
205
(129,654)
$
See notes to combined consolidated financial statements.
90
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
$
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization
Unrealized (gain) loss on interest rate swaps
Straight-lining of rental income
Realized and unrealized (gains) losses on real
estate fund investments
Loss from unconsolidated real estate funds
Distributions of cumulative earnings from
unconsolidated real estate funds
Amortization of above and below-market leases, net
Amortization of stock-based compensation expense
Income from unconsolidated joint ventures
Other non-cash adjustments
Distributions of cumulative earnings from
unconsolidated joint ventures
Amortization of deferred financing costs
Realized and unrealized (gains) losses on
marketable securities
Defeasance cost in connection with the repayments
of notes and mortgages payable
Gain on consolidation of an unconsolidated
joint venture
Stock-based compensation expense in connection
with the Founders Grant
Changes in operating assets and liabilities:
Restricted cash
Real estate fund investments
Accounts and other receivables
Deferred charges
Other assets
Accounts payable and accrued expenses
Profit sharing payables
Deferred income taxes
Other liabilities
Net cash provided by (used in) operating activities
The Company
For the Year Ended December 31,
2016
2015
Period from
November 24, 2014
to December 31, 2014 to November 23, 2014
The Predecessor
Period from
January 1, 2014
2,069 $
21,143 $
72,722 $
109,398
269,450
(39,814)
(82,568)
294,624
(75,760)
(69,522)
34,481
(15,084)
(5,653)
-
498
(21,201)
-
189
(9,536)
11,278
(7,413)
2,628
8,081
6,804
-
(9,917)
7,309
(6,850)
5,824
4,966
2,565
(494)
119
4,608
-
-
-
-
(4,521)
(15,701)
(12,037)
11,479
-
(1,662)
1,702
145,040
-
-
-
-
(127,743)
(3,152)
(40,510)
6,465
(6,152)
-
(328)
1,151
(16,969)
1,357
-
-
(467)
-
(938)
1,368
532
240
356
14,990
(239,716)
71,000
6,502
(51,362)
(150)
(13,181)
13,722
14,162
-
-
14,547
(80,572)
10,203
673
161
(129,354)
-
-
-
-
(4,241)
7,303
2,874
389
(1,706)
-
-
-
(8,271)
(31,061)
(35,989)
600
311
(4,605)
156
(2,205)
869
(84,495)
See notes to combined consolidated financial statements.
91
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED
(Amounts in thousands)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of rental property
Additions to rental properties
Changes in restricted cash
Contributions to unconsolidated real estate funds
Distributions of capital from unconsolidated
real estate funds
Distributions of capital from unconsolidated
joint ventures
Cash received from properties in connection with
the Formation Transactions
Proceeds from repayment of loan to management
Investment in unconsolidated joint ventures
Net cash (used in) provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes and mortgages payable
Repayments of notes and mortgages payable
Proceeds from revolving credit facility
Purchase of marketable securities in connection with
the defeasance of notes and mortgages payable
Repayments of revolving credit facility
Dividends paid to common stockholders
Debt issuance costs
Settlement of interest rate swap liabilities
Distributions paid to common unitholders
Contributions from noncontrolling interests
Distributions to noncontrolling interests
Acquisition of noncontrolling interest in
consolidated joint ventures
Cash paid for equity interests in the
Formation Transactions
Proceeds from the issuance of common stock
Contribution from Predecessor shareholders
Distributions to Predecessor shareholders
Proceeds from loans payable to noncontrolling interests
Offering costs
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Decrease in cash due to deconsolidation
of real estate fund investments
Cash and cash equivalents at end of period
The Company
For the Year Ended December 31,
2016
2015
Period from
November 24, 2014
to December 31, 2014 to November 23, 2014
The Predecessor
Period from
January 1, 2014
$
(517,823) $
(132,686)
15,080
(1,780)
- $
(107,859)
12,424
-
203
40
-
-
-
(636,966)
-
19
-
-
-
(95,416)
- $
(6,143)
18,556
-
-
-
192,500
-
-
204,913
1,362,414
(689,269)
340,000
1,013,544
(927,633)
20,000
-
(1,704,330)
-
(214,608)
(130,000)
(82,105)
(29,387)
(23,654)
(18,412)
7,651
(3,636)
-
-
(68,723)
(18,871)
(33,741)
(16,735)
167,929
(56,636)
(435,774)
-
-
(8,599)
(14,130)
-
57,843
(8,488)
(64,650)
(1,266)
584
-
-
2,079
-
3,000
(4,077)
(64,330)
-
(2,827)
-
-
-
-
-
-
-
272,721
(266,028)
-
(261,464)
-
-
-
-
-
-
-
-
518,994
-
-
-
-
-
-
(182,330)
27,068
143,884
(294,715)
438,599
(214,949)
2,590,599
-
-
-
-
262,172
386,513
52,086
-
438,599 $
-
-
23,688
(149,135)
39,075
(23,744)
(106,250)
(255,075)
307,161
-
52,086
(7,987)
162,965 $
-
143,884 $
$
See notes to combined consolidated financial statements.
92
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED
$
$
(Amounts in thousands)
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash payments for interest
Cash payments for income taxes, net of refunds
NON-CASH TRANSACTIONS:
(Decrease) increase due to deconsolidation of
real estate fund investments
Real estate fund investments
Loans payable to noncontrolling interests
Investments in unconsolidated real estate funds
Noncontrolling interests in consolidated
real estate funds
Dividends and distributions declared but not yet paid
Common shares issued upon redemption
of commons units
Transfer of rental property to assets held for sale
Marketable securities transferred in connection with
the defeasance of notes and mortgages payable
Defeasance of notes and mortgages payable
Additions to real estate included in accounts payable
and accrued expenses
Change in value of interest rate swaps
(Purchases) sale of marketable securities
using restricted cash
Write-off of fully amortized and/or depreciated assets
Increase (decrease) in assets, liabilities
and noncontrolling interests from
the Formation Transactions:
Rental property, net
Real estate funds
Investment in unconsolidated joint ventures
Working capital, net of cash
Intangible assets
Notes and mortgages payable
Intangible liabilities
Preferred equity obligation
Profit sharing compensation payable
Interest rate swap liabilities
Reduction of equity for deferred offering costs
Debt assumed from affiliate
The Company
For the Year Ended December 31,
2016
2015
Period from
November 24, 2014
to December 31, 2014 to November 23, 2014
The Predecessor
Period from
January 1, 2014
140,111 $
2,095
159,186 $
2,798
23,728 $
-
19,829
18,998
(416,438) $
(45,662)
27,292
(351,035)
25,151
312,257
(346,685)
214,608
(210,000)
12,104
(8,161)
(369)
11,431
- $
-
-
-
25,067
-
-
-
-
32,009
9,241
(1,481)
1,399
- $
-
-
-
-
-
-
435,774
(420,784)
16,598
-
-
-
-
-
-
-
-
-
-
-
-
146
-
7,110
2,735
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
7,043,651
(2,045,922)
(18,264)
26,784
689,894
4,261,903
222,985
114,147
(57,296)
223,411
31,284
-
-
-
-
-
-
-
-
-
-
-
-
27,299
See notes to combined consolidated financial statements.
93
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization and Business
As used in these combined 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
December 31, 2016, our portfolio consisted of 13 Class A office properties aggregating approximately 10.8 million square feet.
We were incorporated in Maryland as a corporation on April 14, 2014 to continue the business of our Predecessor, as defined, and
did not have any meaningful operations until the acquisition of substantially all of the assets of our Predecessor and the assets of the
funds that it controlled, as well as the interests of unaffiliated third parties in certain properties. Our properties were acquired through
a series of Formation Transactions (the “Formation Transactions”) concurrently with our initial public offering of 150,650,000
common shares at a public offering price of $17.50 per share on November 24, 2014 (the “Offering”).
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 87.0% of, the Operating Partnership as of December 31,
2016.
Our Predecessor
Our Predecessor was not a legal entity but a combination of entities under common control as they were entities controlled by
members of the Otto Family that held various assets, including interests in (i) 15 private equity real estate funds controlled by our
Predecessor (which included nine primary funds and six parallel funds) that owned interests in 12 properties, (ii) a wholly-owned
property, Waterview, in Rosslyn, Virginia and (iii) three partially owned properties in New York (See Note 7, Investments in
Unconsolidated Joint Ventures).
94
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
2.
Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying combined consolidated financial statements include the accounts of Paramount and its consolidated
subsidiaries, including the Operating Partnership. These combined consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America (“GAAP”) which requires us to make 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
these estimates. All significant inter-company amounts have been eliminated.
Our Predecessor’s combined consolidated financial statements included all the accounts of our Predecessor, including its
interests in (i) the 15 private equity real estate funds, (ii) Waterview and (iii) the three partially-owned properties. Our Predecessor
evaluated each of the real estate funds pursuant to the control model of Accounting Standards Codification (“ASC”) 810-20,
Consolidation—Control of Partnerships and Similar Entities and concluded that based on its rights and responsibilities as the sole
managing member of the general partner it should consolidate each of the real estate funds. With the exception of the Residential
Development Fund (“Residential Fund”), which was carried at historical cost, each of the real estate funds qualified as investment
companies pursuant to Financial Services—Investment Companies (“ASC 946”); accordingly, the underlying real estate investments
were carried at fair value, which was retained in consolidation by our Predecessor.
Upon completion of the Offering and the Formation Transactions, we acquired substantially all of the assets of our Predecessor
and the assets of the real estate funds that it controlled, other than their interests in 60 Wall Street, 50 Beale Street, and a residual 2.0%
interest in One Market Plaza. In addition, as part of the Formation Transactions, we also acquired the interests of certain unaffiliated
third parties in 1633 Broadway, 31 West 52nd Street and 1301 Avenue of the Americas. These transactions were accounted for as
transactions among entities under common control. However, as a result of our acquisition of these assets from the real estate funds in
the Formation Transactions, we account for these assets following the Formation Transactions using historical cost accounting
whereas, prior to the Formation Transactions, the Predecessor had accounted for these assets using the specialized accounting
applicable to investment companies because, prior to the Formation Transactions, they had been held by the real estate funds, which
qualified for investment company accounting. As a result, our consolidated financial statements following the Formation Transactions
differ significantly from, and are not comparable with, the historical financial position and results of operations of our Predecessor.
Significant Accounting Policies
Rental Property
Rental property is carried at cost less accumulated depreciation and amortization. Betterments, major renovations and certain
costs directly related to the improvement of rental properties are capitalized. Maintenance and repair expenses are charged to expense
as incurred. Depreciation is recognized on a straight-line basis over estimated useful lives of the assets, which range from 5 to 40
years. Tenant improvements are amortized on a straight-line basis over the lives of the related leases, which approximate the useful
lives of the assets.
Upon the acquisition of real estate, we assess the fair value of acquired assets (including land, buildings and improvements,
identified intangibles, such as acquired above-market leases and acquired in-place leases) and acquired liabilities (such as acquired
below-market leases) and allocate the purchase price based on these assessments. We assess fair value based on estimated cash flow
projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows
are based on a number of factors including historical operating results, known trends, and market/economic conditions. We record
acquired intangible assets (including acquired above-market leases and acquired in-place leases) and acquired intangible liabilities
(including below-market leases) at their estimated fair value. We amortize acquired above-market and below-market leases as a
decrease or increase to rental income, respectively, over the lives of the respective leases. Amortization of acquired in-place leases is
included as a component of “depreciation and amortization”.
95
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
Our properties, including any related intangible assets, are individually reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment exists when the carrying amount
of an asset exceeds the aggregate projected future cash flows over the anticipated holding period on an undiscounted basis. An
impairment loss is measured based on the excess of the property’s carrying amount over its estimated fair value. Impairment analyses
are based on our current plans, intended holding periods and available market information at the time the analyses are prepared. If our
estimates of the projected future cash flows, anticipated holding periods, or market conditions change, our evaluation of impairment
losses may be different and such differences could be material to our consolidated financial statements. The evaluation of anticipated
cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that
could differ materially from actual results. Plans to hold properties over longer periods decrease the likelihood of recording
impairment losses.
Rental property and related intangibles are classified as held for sale when all the necessary criteria are met. The criteria include
(i) management, having the authority to approve action, commits to a plan to sell the property in its present condition, (ii) the sale of
the property is at a price reasonable in relation to its current fair value and (iii) the sale is probable and expected to be completed
within one year. Rental property and the related intangibles held for sale are carried at the lower of carrying amounts or estimated fair
value less disposal costs. Depreciation and amortization is not recognized on rental property and related intangibles classified as assets
held for sale.
Variable Interest Entities and Investments in Unconsolidated Joint Ventures and Funds
We consolidate variable interest entities (“VIEs”) in which we are considered to be the primary beneficiary. The primary
beneficiary is defined by the entity having both of the following characteristics: (i) the power to direct the activities that, when taken
together, most significantly impact the VIE’s performance, and (ii) the obligation to absorb losses and right to receive the returns from
the VIE that would be significant to the VIE. For joint ventures that are not VIEs, we consolidate entities for which we have
significant decision making control over the joint ventures’ operations. Our judgment with respect to our level of influence or control
of an entity involves the consideration of various factors including the form of our ownership interest, our representation in the
entity’s governance, the size of our investment, estimates of future cash flows, our ability to participate in policy making decisions and
the rights of the other investors to participate in the decision making process and to replace us as manager and/or liquidate the joint
venture, if applicable.
We account for investments under the equity method when the requirements for consolidation are not met, and we have
significant influence over the operations of the investee. Equity method investments are initially recorded at cost and subsequently
adjusted for our share of net income or loss and cash contributions and distributions each period. Investments accounted for under the
equity method are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the
investment may not be recoverable. An impairment loss is measured based on the excess of the carrying amount of an investment over
its estimated fair value. Impairment analyses are based on current plans, intended holding periods and available information at the
time the analyses are prepared.
Investments that do not qualify for consolidation or equity method accounting are accounted for under the cost method.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, demand deposits with financial institutions, and short-term highly liquid
investments with original maturities of three months or less. The majority of our cash and cash equivalents are held at major
commercial banks, which may at times exceed the Federal Deposit Insurance Corporation limit. To date, we have not experienced any
losses on our invested cash.
Restricted Cash
Restricted cash consists primarily of security deposits held on behalf of our tenants, cash escrowed under loan agreements for
debt service, real estate taxes, property insurance and capital improvements and cash restricted in connection with our deferred
compensation plan.
96
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required
payments under the lease agreements. We also maintain an allowance for deferred rent receivable. This receivable arises from
earnings recognized in excess of amounts currently due under the lease agreements. Management exercises judgment in establishing
these allowances and considers payment history and current credit status in developing these estimates.
Deferred Charges
Deferred charges include deferred lease costs and deferred financing costs related to our revolving credit facility. Deferred lease
costs consist of fees and direct costs related to successful leasing activities. Such costs are amortized on a straight-line basis over the
lives of the related leases and recognized in our consolidated statements of income as a component of “depreciation and amortization”.
Deferred financing costs consist of fees and direct costs incurred in obtaining our revolving credit facility. Such costs are amortized
over the terms of the revolving credit facility and recognized in our consolidated statements of income as a component of “interest and
debt expense”.
Deferred Financing Costs Related to Notes and Mortgages Payable
Deferred financing costs related to notes and mortgages payable consists of fees and direct costs incurred in obtaining such
financings. These costs are presented as a reduction of our notes and mortgages payable liability and are amortized over the terms of
the related agreements and recognized in our consolidated statements of income as a component of “interest and debt expense”.
Income Taxes
We operate and have been organized in conformity with the requirements for qualification and taxation as a REIT for U.S.
federal income tax purposes. So long as we qualify as a REIT, we generally will not be subject to U.S. federal income tax on our net
income that we distribute currently to our stockholders. In order to maintain our qualification as a REIT, we are required under the
Internal Revenue Code of 1986, as amended, to distribute at least 90% of our taxable income (without regard to the deduction for
dividends paid and excluding net capital gains) to our stockholders and meet certain other requirements. If, with respect to any
taxable year, we fail to maintain our qualification as a REIT, and we are not entitled to relief under the relevant statutory provisions,
we would be subject to income tax at regular tax rates. Even if we qualify as a REIT, we may also be subject to certain state, local and
franchise taxes. Under certain circumstances, U.S. federal income tax may be due on our undistributed taxable income.
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. Changes in the fair value of interest rate swaps that are
not designated as hedges are recognized in earnings. 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).
97
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition
Rental Income
Rental income includes base rents that each tenant pays in accordance with the terms of its respective lease and is reported on a
straight-line basis over the non-cancellable term of the lease, which includes the effects of rent steps and rent abatements under the
leases. We commence rental revenue recognition when the tenant takes possession of the leased space or controls the physical use of
the leased space and the leased space is substantially ready for its intended use. Differences between rental income recognized and
amounts due under the respective lease agreements are recorded as an increase or decrease to “deferred rent receivable” on our
consolidated balance sheets. Rental income also includes the amortization of acquired above-and below-market leases, net.
Tenant Reimbursement Income
Tenant reimbursement income includes revenue arising from tenant leases which provide for the recovery of all or a portion of
the operating expenses and real estate taxes of the property. This revenue is earned in the same period as the expenses are incurred.
Fee and Other Income
Fee and other income includes management fees earned pursuant to contractual agreements. This revenue is recognized as the
related services are performed. Fee and other income also includes lease termination and income from tenant requested services,
including overtime heating and cooling.
Segment Reporting
Our determination of segments is primarily based on our method of internal reporting. On January 1, 2016, as a result of certain
organizational and operational changes, we redefined our reportable segments to be 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. Accordingly, our reportable segments were separated by region based on the three regions
in which we conduct our business: New York, Washington, D.C. and San Francisco. In connection therewith, we have reclassified the
prior period segment financial data to conform to the current period presentation.
Our Predecessor historically operated an integrated business that consisted of three reportable segments, (i) Owned Properties,
(ii) Managed Funds and (iii) a Management Company. The Owned Properties segment consisted of properties in which our
Predecessor had a direct or indirect ownership interest, other than properties that it owned through its private equity real estate funds.
The Managed Funds segment consisted of the private equity real estate funds. In addition, our Predecessor included a Management
Company that performed property management and asset management services and certain general and administrative level functions,
including legal and accounting, as a separate reportable segment. See Note 26, Segments Disclosure.
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.
98
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
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.
While we believe that the key changes in ASU 2014-09 and ASU 2016-02 relate to the separation 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 these updates will have on our consolidated financial statements.
In June 2014, the FASB issued ASU 2014-12, an update to ASC Topic 718, Compensation – Stock Compensation. ASU 2014-
12 requires an entity to treat performance targets that can be met after the requisite service period of a share-based award has ended, as
a performance condition that affects vesting. ASU 2014-12 is effective for interim and annual reporting periods in fiscal years that
begin after December 15, 2015. We adopted the provisions of ASU 2014-12 on January 1, 2016, using the prospective method. This
adoption did not have an impact on our consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02, an update to ASC Topic 810, Consolidation. ASU 2015-02 modifies the
evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, eliminates the presumption
that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are
involved with VIEs, particularly those that have fee arrangements and related party relationships. ASU 2015-02 is effective for interim
and annual reporting periods in fiscal years that begin after December 15, 2015. We adopted the provisions of ASU 2015-02 on
January 1, 2016, using the modified retrospective method. The adoption of ASU 2015-02 resulted in the deconsolidation of all of our
real estate fund investments that were accounted for at fair value, except for Residential Fund, which is accounted for at historical cost
and will continue to be consolidated into our consolidated financial statements. See Note 5, Real Estate Fund Investments.
In April 2015 and August 2015, the FASB issued ASU 2015-03 and ASU 2015-15, updates to ASC Topic 835, Interest –
Imputation of Interest. These updates require an entity to present debt issuance costs in the balance sheet as a direct deduction from
the related debt liability, rather than as an asset but provides for an exclusion for line-of-credit arrangements to be continued to be
reported as an asset, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. Amortization of
debt issuance costs will continue to be reported as interest expense. We adopted the provisions of these updates on January 1, 2016,
and have retrospectively reclassified $18,914,000 of deferred financing costs that were included in “deferred charges, net” as of
December 31, 2015, to “notes and mortgages payable, net”. The deferred financing costs related to our revolving credit facility
continue to be reported as an asset on our consolidated balance sheets.
In September 2015, the FASB issued ASU 2015-16, an update to ASC Topic 805, Business Combinations. ASU 2015-16
eliminates the requirement to retrospectively account for adjustments made to provisional amounts recognized in a business
combination. ASU 2015-16 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2015.
We adopted the provisions of ASU 2015-16 on January 1, 2016, using the prospective method. This adoption did not have an impact
on our consolidated financial statements.
99
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED 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 are evaluating the impact of ASU 2016-09 but do not believe the adoption will
have a material 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 are evaluating the impact of ASU 2016-15 but do not believe that the adoption will 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 are evaluating the impact of ASU 2016-17 but do not believe that the
adoption will have a material 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 are evaluating the impact of ASU 2016-18 but do not believe that the adoption
will have a material impact on our consolidated financial statements.
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 early adopted the provisions of ASU 2017-01 as of October 1, 2016 and concluded that the
acquisition of our One Front Street property did not meet the definition of a business and was treated as an asset acquisition.
100
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
3.
Acquisitions
One Front Street
On December 1, 2016, we completed the acquisition of One Front Street, a 643,745 square foot Class A office building, in San
Francisco, California, for $521,000,000. The following table summarizes the allocation of purchase price between the assets acquired
and liabilities assumed on the date of acquisition.
(Amounts in thousands)
Land
Building and improvements
In-place lease intangible assets
Above-market lease intangible assets
Below-market lease intangible liabilities
Net assets acquired
$
$
The Company
127,688
376,702
29,092
968
(16,921)
517,529 (1)
(1) Represents the purchase price of $521,000, net of a $3,471 assumed tenant
improvement obligation.
4.
Dispositions
In accordance with provisions of ASC 360, Property, Plant and Equipment, we have 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)
Land
Building and improvements, net
Deferred charges
Deferred rent receivable
Assets held for sale
The Company
As of December 31, 2016
78,300
251,671
14,512
2,202
346,685
$
$
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. The sale, which is subject to customary closing conditions, is expected to close in the second quarter of
2017. See Note 27, Subsequent Events for details.
101
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
5.
Real Estate Fund Investments
The Company
On January 1, 2016, we adopted ASU 2015-02 Amendments to the Consolidation Analysis using the modified retrospective
method. The adoption of ASU 2015-02 resulted in the deconsolidation of all of our real estate fund investments that were accounted
for at fair value, except for the Residential Fund, which is accounted for at historical cost and will continue to be consolidated into our
consolidated financial statements. See Note 2, Basis of Presentation and Significant Accounting Policies – Recently Issued Accounting
Literature.
Unconsolidated Real Estate Funds
As of December 31, 2016, our unconsolidated real estate funds comprised of Property Funds and Alternative Investment Funds.
Property 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”). The following is a summary of the Property Funds, our ownership interests in these funds
and the funds’ ownership interest in the underlying properties.
Fund II
Fund III
Fund VII/VII-H
Total Property Funds
Other Investors
Total
Paramount
Ownership
10.0%
3.1%
7.2%
As of December 31, 2016
60 Wall
Street (1)
One Market
Plaza
50 Beale
Street
0 Bond
Street (2)
46.3%
16.0%
-
62.3%
37.7%
100.0%
-
2.0%
-
2.0%
98.0% (3)
100.0%
-
-
42.8%
42.8%
57.2%
100.0%
-
-
100.0%
100.0%
-
100.0%
(1) On January 24, 2017, Fund II, Fund III and the other investors sold their interests in 60 Wall Street to a newly
formed joint venture in which we have a 5.2% ownership interest. See Note 27, Subsequent Events.
Formerly 670 Broadway.
Includes a 49.0% direct ownership interest held by us.
(2)
(3)
Alternative Investment Fund
We manage Paramount Group Real Estate Fund VIII L.P. (“Fund VIII”), our Alternative Investment Fund, which has
mezzanine loan, mortgage loan and preferred equity investments with a fair value of $362,282,000, of which our 1.3% share is
$4,673,000, as of December 31, 2016. The investments have interest rates ranging from 6.65% to 9.61% and maturities ranging from
January 2019 to November 2026.
102
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarize our investments in Property Funds and an Alternative Investment Fund as of December 31,
2016, and income or loss recognized from these investments for the year ended December 31, 2016.
(Amounts in thousands)
Our Share of Investments:
Property funds
Alternative investment fund
Investments in unconsolidated real estate funds
The Company
As of December 31, 2016
$
$
22,811
5,362
28,173
(Amounts in thousands)
Our Share of Net (Loss) Income:
Net investment (loss) income
Net unrealized (loss) income
Carried interest
(Loss) income from unconsolidated real estate funds (1)
The Company
For the Year Ended December 31, 2016
Total
Property Funds
Investment Fund
Alternative
$
$
(324) $
(1,706)
1,532
(498) $
(460) $
(1,710)
1,532
(638) $
136
4
-
140
(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 statement of income for the year ended December 31, 2016.
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)
Balance Sheets:
Real estate investments
Cash and cash equivalents
Other assets
Total assets
Other liabilities
Total liabilities
Equity
Total liabilities and equity
(Amounts in thousands)
Income Statements:
Investment income
Investment expenses
Net investment income (loss)
Net unrealized (losses) gains
(Loss) income from real estate
fund investments
Fund II
As of December 31, 2016
Fund III
Fund VII
64,989 $
1,297
127
66,413 $
60 $
60
66,353
66,413 $
39,376 $
2,221
-
41,597 $
49 $
49
41,548
41,597 $
165,556
741
-
166,297
1,483
1,483
164,814
166,297
For the Year Ended December 31, 2016
Fund III
Fund II
Fund VII
2,780 $
2,694
86
(1,906)
1,739 $
184
1,555
2,199
1,233
2,000
(767)
13,123
(1,820) $
3,754 $
12,356
$
$
$
$
$
$
103
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Real Estate Funds
Below is a summary of the fair value of our Property Funds and the Alternative Investment Fund that were consolidated on our
balance sheet as of December 31, 2015 and income from fund investments for the year ended December 31, 2015 and for the period
from November 24, 2014 to December 31, 2014.
(Amounts in thousands)
Real estate fund investments (1)
Cash and other assets and liabilities, net
Total real estate fund investments
Less: noncontrolling interests in consolidated
real estate funds
Paramount Group, Inc.'s equity in real estate fund investments
As of December 31, 2015
416,438
7,050
423,488
(396,196)
27,292
$
$
(1) Represents the fair value of investments owned by Fund II, Fund III, Fund VII, Fund VII-H and Fund VIII.
(Amounts in thousands)
Net investment income
Net realized gains
Previously recorded unrealized gains on exited
investments
Net unrealized gains (losses)
Income from real estate fund investments (1)
Less: interest expense
Less: noncontrolling interests in consolidated
real estate funds (2)
Income from real estate fund investments
attributable to Paramount Group, Inc.
$
$
For the
Year Ended
December 31, 2015
Period from
November 24, 2014 to
December 31, 2014
12,274 $
13,884
(6,584)
18,401
37,975
-
(24,896)
13,079 $
2,769
50
-
(1,407)
1,412
(325)
(485)
602
(1) Represents income from our real estate funds that were consolidated during 2015, including Fund II, Fund III,
Fund VII, Fund VII-H, Fund VIII, Paramount Group Real Estate Special Situations Fund L.P. and Paramount
Group Real Estate Special Situations Fund-H L.P.
Includes $5,481 and $521 of asset management fee income that was reflected as a reduction of the amounts
attributable to noncontrolling interests for the year ended December 31, 2015 and for the period from November
24, 2014 to December 31, 2014, respectively.
(2)
104
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
The Predecessor
Below is a summary of realized and unrealized gains from real estate fund investments on our combined consolidated statement
of income.
(Amounts in thousands)
Income Statement:
Net realized gains on real estate fund investments
Previously recorded unrealized gains on exited investments
Net unrealized gains on real estate fund investments
Realized and unrealized gains, net
Period from
January 1, 2014
to November 23, 2014
43,309
(10,405)
96,450
129,354
$
$
Asset Management Fees
Our Predecessor earned asset management fees from the real estate funds it managed. Asset management fees and expenses
related to the real estate funds included in the combined consolidated statement of income are eliminated in combination and
consolidation. The limited partners’ share of such fees are reflected as a reduction of net income attributable to noncontrolling
interests, which results in a corresponding increase in net income attributable to our Predecessor.
Below is a summary of the asset management fees earned by our Predecessor.
(Amounts in thousands)
Income Statement:
Gross asset management fees
Eliminated fees(1)
Net asset management fees
Period from
January 1, 2014
to November 23, 2014
23,701
(1,078)
22,623
$
$
(1)
Eliminated fees reflect a reduction in asset management fees from the general partner’s interest in
each of the real estate funds.
6.
Preferred Equity Investments
As of December 31, 2016, we own a 24.4% interest in PGRESS Equity Holdings L.P., a consolidated entity that owns certain
preferred equity investments. The following is a summary of the preferred equity investments.
(Amounts in thousands, except square feet)
Preferred Equity Investment
470 Vanderbilt Avenue (1)
2 Herald Square (2)
Total preferred equity investments
Paramount
Ownership
24.4%
24.4%
Dividend Rate
10.3%
10.3%
The Company
As of December 31,
Initial Maturity
2016
2015
Feb-2019 $
Apr-2017
$
$
35,613
19,438
55,051 $
35,305
18,636
53,941
(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.
105
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
7.
Investments in Unconsolidated Joint Ventures
The following tables summarize our investments in unconsolidated joint ventures as of December 31, 2016 and 2015 and
income from these investments for the periods set forth below.
(Amounts in thousands)
Our Share of Investments:
712 Fifth Avenue
Oder-Center, Germany (1)
Investments in unconsolidated joint ventures
Paramount
Ownership
50.0%
9.5%
$
$
The Company
As of December 31,
2016
2015
2,912
3,499
6,411
$
$
3,577
3,525
7,102
(Amounts in thousands)
Our Share of Net Income:
712 Fifth Avenue
Oder-Center, Germany (1)
1325 Avenue of the Americas (2)
900 Third Avenue (2)
Income from unconsolidated
joint ventures
Paramount
Ownership
For the Year Ended December 31,
2016
2015
Period from
November 24, 2014
to December 31, 2014
The Company
50.0% $
9.5%
n/a
n/a
7,335 $
78
-
-
6,734 $
116
-
-
The Predecessor
Period from
January 1, 2014
to November 23, 2014
4,141
-
100
-
938 $
-
-
-
$
7,413 $
6,850 $
938 $
4,241
(1) We account for our interest in Oder-Center, Germany on a one-quarter lag basis.
(2) As part of the Formation Transactions, we acquired 100% ownership of these properties.
106
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
712 Fifth Avenue
As of December 31, 2016, 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)
Balance Sheets:
Rental property, net
Other assets
Total assets
Notes and mortgages payable, net
Other liabilities
Total liabilities
Equity (1)
Total liabilities and equity
As of December 31,
2016
2015
$
$
$
$
207,632
40,701
248,333
245,990
8,783
254,773
(6,440)
248,333
$
$
$
$
214,139
41,337
255,476
245,582
15,000
260,582
(5,106)
255,476
(1) The carrying amount of our investment, as of December 31, 2016 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)
Income Statements:
Rental income
Tenant reimbursement income
Fee and other income
Total revenues
Operating
Depreciation and amortization
General and administrative
Total expenses
Operating income
Interest and other income
Interest and debt expense
Unrealized gain on interest rate swaps
Net income
For the Year Ended December 31,
2015
2016
$ 49,382
$ 50,228
4,758
4,495
1,235
1,850
55,375
56,573
22,956
22,826
11,764
12,127
-
-
34,720
34,953
20,655
21,620
15
68
(11,425)
(11,128)
4,223
4,109
$ 13,468
$ 14,669
Period from
November 24, 2014
to December 31, 2014
$ 5,118
607
231
5,956
2,586
1,209
32
3,827
2,129
1
(1,538)
1,285
$ 1,877
Period from
January 1, 2014
to November 23, 2014
$ 41,710
4,282
1,269
47,261
20,826
10,127
182
31,135
16,126
5
(13,098)
5,249
$ 8,282
107
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
Oder-Center
As of December 31, 2016, we own a 9.5% interest in a joint venture that owns Oder-Center, a shopping center located in
Brandenburg, Germany. We account for our interest in Oder-Center on a one-quarter lag basis. The following tables provide
summarized financial information of Oder-Center as of the dates and for the periods set forth below.
(Amounts in thousands)
Balance Sheets:
Rental property, net
Other assets
Total assets
Notes and mortgages payable
Other liabilities
Total liabilities
Equity (1)
Total liabilities and equity
As of September 30,
2016
2015
6,271 $
1,150
7,421 $
23,073 $
323
23,396
(15,975)
7,421 $
6,626
1,228
7,854
24,143
245
24,388
(16,534)
7,854
$
$
$
$
(1) The carrying amount of our investment is greater than our share of the equity by approximately $5,017. This basis
difference resulted primarily from the excess in purchase price over the historical book value of Oder-Center’s net
assets, which was allocated to land and building and improvements. We are amortizing this basis difference
related to building and improvements into earnings as additional depreciation expense.
(Amounts in thousands)
Income Statements:
Rental income
Fee and other income
Total revenues
Operating
Depreciation and amortization
Total expenses
Operating income
Interest and debt expense
Income tax expense
Net income
For the Twelve Months Ended September 30,
2016
2015
$
$
4,192 $
32
4,224
844
382
1,226
2,998
(1,084)
(10)
1,904 $
4,458
60
4,518
625
401
1,026
3,492
(1,186)
(21)
2,285
108
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
8.
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 December 31, 2016 and 2015.
(Amounts in thousands)
Intangible assets:
Gross amount
Accumulated amortization
Intangible liabilities:
Gross amount
Accumulated amortization
The Company
As of December 31,
2016
2015
$
$
$
$
579,066 $
(166,841)
412,225 $
208,367 $
(55,349)
153,018 $
655,194
(143,987)
511,207
221,672
(41,931)
179,741
Amortization of acquired below-market leases, net of acquired above-market leases, resulted in an increase to rental income of
$9,536,000 and $9,917,000 for the years ended December 31, 2016 and 2015, respectively, and $467,000 for the period from
November 24, 2014 to December 31, 2014. The years ended December 31, 2016 and 2015 include $10,315,000 and $3,915,000 of
income, respectively, from the accelerated amortization of a below-market lease liability in connection with a tenant’s lease
modification and $12,183,000 of expense in the year ended December 31, 2016, from the write-off of above-market lease assets in
connection with certain lease terminations. Estimated annual amortization of acquired below-market leases, net of acquired above-
market leases, for each of the five succeeding years commencing January 1, 2017 is as follows.
(Amounts in thousands)
2017
2018
2019
2020
2021
The Company
15,450
$
14,056
12,124
9,672
4,505
Amortization of acquired in-place leases (a component of depreciation and amortization expense) was $94,935,000 and
$128,603,000 for the years ended December 31, 2016 and 2015, respectively, and $17,260,000 for the period from November 24,
2014 to December 31, 2014. Estimated annual amortization of acquired in-place leases for each of the five succeeding years
commencing January 1, 2017 is as follows.
(Amounts in thousands)
2017
2018
2019
2020
2021
9.
Debt
The Company
64,157
$
54,774
48,184
41,073
28,268
On May 3, 2016, we completed a $500,000,000 refinancing of 31 West 52nd Street, a 786,647 square foot Class A office
building in New York. The new 10-year loan is interest-only at a fixed rate of 3.80%. We realized net proceeds of $64,538,000 after
the repayment of the existing $413,490,000 loan and $21,972,000 of costs, primarily for swap breakage.
On October 6, 2016, we completed an $850,000,000 financing of 1301 Avenue of the Americas, a 1.8 million square foot Class
A office building in New York. The five-year interest-only loan matures in October 2021, has two one-year extension options and has
an initial weighted average interest rate of 2.77%, based on a $500,000,000 tranche at a fixed rate of 3.05% and a $350,000,000
tranche at a floating rate of LIBOR plus 180 basis points (2.36% at closing). We retained net proceeds of $827,187,000 after closing
costs.
109
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
On October 6, 2016, we repaid the $274,337,000 mortgage loan on 900 Third Avenue, a 596,270 square foot Class A office
building in New York. In connection with the repayment, we incurred $7,614,000 of swap breakage costs.
On October 7, 2016, we defeased the $210,000,000 mortgage loan on Waterview, a 647,243 square foot office building in
Washington, D.C. In connection with the repayment, we incurred $4,608,000 of defeasance costs, which is included in “interest and
debt expense” on our consolidated statement of income.
The following is a summary of our outstanding debt.
Maturity
Date
Fixed/Variable
Rate
Interest Rate at
December 31, 2016
The Company
As of December 31,
2016
2015
(Amounts in thousands)
Notes and mortgages payable
1633 Broadway
1301 Avenue of the Americas
900 Third Avenue
31 West 52nd Street
Dec-2022 Fixed (1)
Dec-2022 L + 175 bps(2)
Nov-2021 Fixed
Nov-2021 L + 180 bps
n/a
n/a
Fixed
Variable
May-2026 Fixed
n/a
Variable
One Market Plaza (49.0% interest)(3)
Dec-2019 Fixed (1)
Dec-2019 L + 420 bps(4)
Waterview
1899 Pennsylvania Avenue
Liberty Place
n/a
Fixed
Nov-2020 Fixed
June-2018 Fixed
Total notes and mortgages payable
Less: deferred financing costs
Total notes and mortgages payable, net
$1.0 Billion Revolving Credit Facility
($200,000 reserved for
outstanding letters of credit)
3.54% $
2.37%
3.52%
3.05%
2.43%
2.79%
n/a
n/a
n/a
3.80%
n/a
3.80%
6.13%
4.94%
6.12%
n/a
4.88%
4.50%
4.10%
$
1,000,000 $
13,544
1,013,544
1,000,000
13,544
1,013,544
500,000
350,000
850,000
-
-
-
500,000
-
500,000
860,546
12,414
872,960
-
-
-
162,000
112,337
274,337
237,600
175,890
413,490
857,037
-
857,037
-
87,675
84,000
3,408,179
(43,281)
3,364,898 $
210,000
89,116
84,000
2,941,524
(18,914)
2,922,610
Nov-2018 L + 125 bps
2.02% $
230,000 $
20,000
(1) Represents loans with variable interest rates that have been fixed by interest rate swaps. (See Note 10, Derivative Instruments and Hedging
Activities).
(2) Represents amounts outstanding under an option to increase the loan balance up to $250,000, if certain performance hurdles related to the
property are satisfied.
(3) We refinanced this loan on January 19, 2017. See Note 27, Subsequent Events.
(4) Represents amounts outstanding under a $20,136 line of credit. The LIBOR spread includes a liquidity premium of 120 basis points.
110
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2016, principal repayments required for the next five years and thereafter in connection with our notes and
mortgages payable and revolving credit facility are as follows.
(Amounts in thousands)
2017
2018
2019
2020
2021
Thereafter
Notes and
Mortgages Payable
$
1,513 $
85,588
874,628 (1)
82,906
850,000
1,513,544
The Company
Revolving
Credit Facility
- $
230,000
-
-
-
-
Total
1,513
315,588
874,628
82,906
850,000
1,513,544
(1)
Includes the $872,960 mortgage loan on One Market Plaza, which was refinanced in January 2017
with a new $975,000 mortgage loan that matures in January 2024. See Note 27, Subsequent Events.
10. 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 December 31, 2016, the fair value of the derivative obligations with such provisions aggregated $22,255,000.
Interest Rate Swaps – Non-designated Hedges
As of December 31, 2016, we had interest rate swaps with an aggregate notional amount of $840,000,000 that were not
designated as hedges. Changes in the fair value of interest rate swaps that are not designated as hedges are recognized in earnings. For
the years ended December 31, 2016 and 2015 and the period from November 24, 2014 to December 31, 2014, we recognized
unrealized gains of $39,814,000, $75,760,000 and $15,084,000, respectively, from the changes in the fair value of these interest rate
swaps. The table below provides additional details on our interest rate swaps that are not designated as hedges.
Property
Notional
Amount
Effective Date
Maturity Date
Strike
Rate
The Company
Fair Value as of December 31,
2016
2015
(Amounts in thousands)
One Market Plaza (1)
31 W 52nd Street (2)
-
900 Third Avenue (3)
-
Total interest rate swap liabilities related to non-designated hedges
$ 840,000 Aug-2007 to Aug-2012
n/a
n/a
Aug-2017
5.02% $
n/a
n/a
n/a
n/a
$
21,227 $
-
-
21,227 $
55,404
17,661
11,630
84,695
(1)
(2)
(3)
Terminated in connection with the refinancing of One Market Plaza in January 2017. See Note 27, Subsequent Events.
Terminated in connection with the refinancing of 31 West 52nd Street. See Note 9, Debt.
Terminated in connection with the repayment of this loan. See Note 9, Debt.
111
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
Interest Rate Swaps – Designated as Cash Flow Hedges
As of December 31, 2016, we had interest rate swaps with an aggregate notional amount of $1.0 billion that were designated as
cash flow hedges. We also have entered into 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 $8,161,000 and losses of $9,241,000 for the years ended December 31, 2016 and 2015, respectively, from the changes in
the fair value of these interest rate swaps. During the next twelve months, we estimate that $8,227,000 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.
Property
Notional
Amount
Effective Date
Maturity Date
Strike
Rate
The Company
Fair Value as of December 31,
2016
2015
(Amounts in thousands)
1633 Broadway
Total interest rate swap assets designated as cash flow hedges
$ 400,000
Dec-2020
Dec-2021 2.35% $
$
139 $
139 $
$1,000,000
1633 Broadway
1633 Broadway
400,000
Total interest rate swap liabilities designated as cash flow hedges
Dec-2015
Dec-2020
Dec-2020 to Dec-2022 1.79% $
Dec-2021 2.35%
$
1,219 $
-
1,219 $
-
-
9,204
37
9,241
11. Accumulated Other Comprehensive Income (Loss)
The following table sets forth changes in accumulated other comprehensive income (loss), by component for the years ended
December 31, 2016 and 2015.
(Amounts in thousands)
Amount of loss related to the effective portion of cash flow hedges
recognized in other comprehensive income (loss) (1)
Amounts reclassified from accumulated other comprehensive
income (loss) into interest expense (1)
Amount income (loss) related to unconsolidated joint ventures recognized
in other comprehensive income (loss) (1) (2)
Amount of gain (loss) related to the ineffective portion of cash
flow hedges and amount excluded from effectiveness testing
The Company
For the Year Ended December 31,
2015
2016
$
(2,774) $
(8,501)
10,977
12
-
1,070
(412)
-
(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.
112
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
12. Noncontrolling Interests
Consolidated Real Estate Funds
As of December 31, 2015, noncontrolling interest in consolidated real estate funds aggregated $414,637,000 and consisted of
equity interest in the real estate funds that were not wholly owned by us, but were required to be consolidated into our consolidated
financial statements because we were the sole general partner of such funds. On January 1, 2016, we adopted ASU 2015-02 using the
modified retrospective method, which resulted in the deconsolidation of all of our real estate fund investments that were accounted for
at fair value, except for the Residential Fund, which is accounted for at historical cost and will continue to be consolidated into our
consolidated financial statements. See Note 5, Real Estate Fund Investments. As of December 31, 2016, the noncontrolling interest in
consolidated real estate funds aggregated $64,793,000 and represents the noncontrolling interest of the Residential Fund.
Consolidated Joint Ventures
Noncontrolling interests in consolidated joint ventures consists of equity interests held by third parties in properties and
investments that are consolidated into our consolidated financial statements because we exercise control over the entities that own
such properties and investments. As of December 31, 2016 and 2015, noncontrolling interests in consolidated joint ventures on our
consolidated balance sheets aggregated $253,788,000 and $236,849,000, respectively, and was comprised of the equity interests held
by third parties in One Market Plaza and PGRESS Equity Holdings, L.P.
Operating Partnership
Noncontrolling interests in the Operating Partnership represents 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 December 31, 2016
and 2015, noncontrolling interests in the Operating Partnership on our consolidated balance sheets had a carrying amount of
$577,361,000 and $898,047,000, respectively and a redemption value of $551,834,000 and $935,048,000, respectively.
113
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
13. 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 87.0% of, the Operating Partnership as of December 31, 2016. 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 December 31, 2016, the Operating
Partnership held variable interests in the entities owning certain real estate fund investments, preferred equity and a property that were
determined to be VIEs. As of December 31, 2015, the Operating Partnership held variable interests in the entities owning certain
funds 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.
(Amounts in thousands)
Rental property, net
Investments, at fair value
Cash and restricted cash
Preferred equity investments
Deferred rent receivable
Accounts and other receivables
Deferred charges, net
Intangible assets, net
Other assets
Total VIE assets
Notes and mortgages payable, net
Loans payable to noncontrolling interests
Accounts payable and other accrued expenses
Intangible liabilities, net
Interest rate swap liabilities
Other liabilities
Total VIE liabilities
The Company
As of December 31,
2016
2015
$
$
$
$
1,336,810 $
-
17,054
55,051
32,103
695
5,966
52,139
14,474
1,514,292 $
872,960 $
-
21,077
48,654
21,227
6,555
970,473 $
63,511
8,025
497
-
-
-
-
-
-
72,033
-
45,662
-
-
-
195
45,857
Unconsolidated VIEs
The adoption of ASU 2015-02 using the modified retrospective method resulted in the deconsolidation of all of our real estate
funds that were accounted for at fair value, except for the Residential Fund, which is accounted for at historical cost. The table below
summarizes our investments in these unconsolidated real estate funds that are VIEs.
(Amounts in thousands)
Unconsolidated real estate funds
The Company
As of December 31, 2016
Asset Management Fees
Investments
and Other Receivables
Maximum
Risk of Loss
$
28,173 $
1,680 $
29,853
114
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
14. 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.
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), real estate fund investments and interest rate swaps. The table below aggregates the fair values of these financial assets and
liabilities as of December 31, 2016 and 2015, based on their levels in the fair value hierarchy.
(Amounts in thousands)
Marketable securities
Interest rate swap assets (included in "other assets")
Total assets
Interest rate swap liabilities
Total liabilities
(Amounts in thousands)
Real estate fund investments:
Investments in Property Funds
Investments in Alternative Investment Funds
Total real estate fund investments
Marketable securities
Total assets
Interest rate swap liabilities
Total liabilities
The Company
As of December 31, 2016
Total
Level 1
Level 2
Level 3
22,393 $
139
22,532 $
22,446 $
22,446 $
22,393 $
-
$
22,393
- $
139
139
$
- $
$
-
22,446 $
$
22,446
-
-
-
-
-
Total
Level 1
Level 2
Level 3
As of December 31, 2015
248,824 $
167,614
416,438
21,521
437,959 $
93,936 $
93,936 $
- $
-
-
21,521
21,521
$
- $
-
-
-
-
$
- $
$
-
93,936 $
$
93,936
248,824
167,614
416,438
-
416,438
-
-
$
$
$
$
$
$
$
$
115
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
Property Funds
As of December 31, 2015, the Property Funds had four investments. These investments were classified as Level 3. We used a
discounted cash flow valuation technique to estimate the fair value of each of these investments, which was updated quarterly by
personnel responsible for the management of each investment and reviewed by senior management at each reporting period. The
discounted cash flow valuation technique required us to estimate cash flows for each investment over the anticipated holding period,
which ranged from 1.0 to 10.0 years. Cash flows were derived from property rental revenue (base rents plus reimbursements) less
operating expenses, real estate taxes and capital and other costs, plus projected sales proceeds in the year of exit. Property rental
revenue was based on leases currently in place and our estimates for future leasing activity, which were based on market rents for
similar space. Similarly, estimated real estate taxes and operating expenses were based on amounts incurred in the period plus a
projected growth factor for future periods. Anticipated sales proceeds at the end of an investment’s expected holding period were
determined based on the net cash flow of the investment in the year of exit, divided by a terminal capitalization rate, less estimated
selling costs. The fair value of each property was calculated by discounting future cash flows (including anticipated sales proceeds),
using an appropriate discount rate. The fair value of the investment was calculated by subtracting property level debt, if any, from the
fair value of the property.
Significant unobservable inputs used in determining the fair value of each investment included capitalization rates and discount
rates. These rates were based on, among other factors, location and type of property. Significant unobservable quantitative inputs in
the table below were utilized in determining the fair value of the Property Fund investments as of December 31, 2015.
Unobservable Quantitative Input
Discount rates
Terminal capitalization rates
As of December 31, 2015
Range
7.00% - 7.50%
5.00% - 6.00%
Weighted Average (based on fair
value of investments)
7.18%
5.47%
The above inputs were subject to change based on changes in economic and market conditions and/or changes in use or timing
of exit. Changes in discount rates and terminal capitalization rates result in increases, or decreases, in the fair values of these
investments. The discount rates encompass, among other things, uncertainties in the valuation models with respect to terminal
capitalization rates and the amount and timing of cash flows. Therefore, a change in the fair value of these investments resulting from
a change in the terminal capitalization rate may be partially offset by a change in the discount rate. Significant increases (decreases) in
any of these inputs in isolation would have resulted in a significantly lower (higher) fair value, respectively.
Alternative Investment Fund
As of December 31, 2015, the investments in the Alternative Investment Fund were comprised of mezzanine loans and a senior
mortgage loan. These investments were classified as Level 3. Estimates of the fair value of these instruments are determined by the
standard practice of modeling the contractual cash flows required and discounting it back to its present value at the appropriate risk
adjusted interest rate. The balances were updated quarterly by a third party and reviewed by senior management at each reporting
period.
Significant unobservable inputs used in determining the fair value of these investments included preferred returns and credit
spreads. Significant increases (decreases) in any of these inputs in isolation would have resulted in a significantly lower (higher) fair
value, respectively. Significant unobservable quantitative inputs in the table below were utilized in determining the fair value of the
investment in the Alternative Investment Fund as of December 31, 2015.
Unobservable Quantitative Input
Preferred return
Credit spread
As of December 31, 2015
Range
7.32% - 14.02%
2.34%
Weighted Average (based on
fair value of investments)
9.51%
2.34%
116
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
The table below summarizes the changes in the fair value of Real Estate Fund Investments that are classified as Level 3, as of
December 31, 2015.
(Amounts in thousands)
Beginning balance
Purchases / Additions
Sales / Transfer of assets
Net realized gains
Previously recorded unrealized gains on exited investments
Net unrealized gains
Ending balance
Interest Rate Swaps
The Company
Real Estate Fund Investments
for the Year Ended December 31, 2015
323,387
170,218
(98,368)
7,455
(6,584)
20,330
416,438
$
$
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.
Financial Assets and Liabilities Not Measured at Fair Value
Financial assets not measured at fair value on our consolidated balance sheets consists of cash equivalents and would be
classified as Level 1 as their carrying amount approximates their fair value, due to their short-term nature. 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 December 31, 2016 and
2015.
(Amounts in thousands)
Cash equivalents
Total assets
(Amounts in thousands)
Notes and mortgages payable
Revolving credit facility
Total liabilities
The Company
As of December 31, 2016
As of December 31, 2015
Carrying Amount
$
$
107,100 $
107,100 $
Fair Value
Carrying Amount
Fair Value
107,100 $
107,100 $
118,561 $
118,561 $
118,561
118,561
As of December 31, 2016
As of December 31, 2015
Carrying Amount
$
3,408,179 $
230,000
3,638,179 $
$
Fair Value
Carrying Amount
Fair Value
3,371,262 $
230,018
3,601,280 $
2,941,524 $
20,000
2,961,524 $
2,907,242
20,723
2,927,965
117
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
15. Leases
We lease office, retail and storage space to tenants under operating leases. These leases provide for the payment of fixed
minimum rents over the terms of the respective lease and generally require tenants to reimburse us for operating costs and real estate
taxes above their base year costs.
The following is a schedule of future minimum rents under non-cancelable operating leases as of December 31, 2016.
(Amounts in thousands)
2017
2018
2019
2020
2021
Thereafter
Total
The Company
552,573
564,545
551,392
522,219
457,868
2,758,892
5,407,489
$
$
16. Fee and Other Income
The following table sets forth the details of our fee and other income.
(Amounts in thousands)
Fee income
Property management
Asset management (1)
Acquisition, leasing and disposition
Other
Total fee income
Lease termination income
Other income (3)
Total fee and other income
The Company
For the Year Ended December 31,
2016
2015
Period from
November 24, 2014
to December 31, 2014
The Predecessor
Period from
January 1, 2014
to November 23, 2014
$
$
5,948 $
7,754
2,226
1,003
16,931
17,010 (2)
14,296
48,237 $
5,763 $
-
3,916
569
10,248
871
13,874
24,993 $
587 $
-
510
79
1,176
465
1,164
2,805 $
15,599
-
27,038
6,461
49,098
-
-
49,098
(1) As a result of deconsolidating our real estate funds that were accounted for at fair value, on January 1, 2016, asset management fees are now
included in fee income as opposed to a reduction of income attributable to noncontrolling interests in consolidated real estate funds in the prior
periods. See Note 5, Real Estate Fund Investments.
(2) The year ended December 31, 2016 includes $10,861 from the termination of a lease with a tenant at 1633 Broadway.
(3) Primarily comprised of income from tenant requested services, including overtime heating and cooling.
118
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
17.
Interest and Other Income (Loss), net
The following table sets forth the details of interest and other income (loss).
The Company
Period from
(Amounts in thousands)
Preferred equity investment income
Interest and other income
Mark-to-market of investments in our
deferred compensation plans (2)
Total interest and other income (loss), net $
$
For the Year Ended December 31,
2015
2016
5,716 (1) $
774
444
6,934
$
November 24, 2014
to December 31, 2014
$
- $
142
-
674
The Predecessor
Period from
January 1, 2014
to November 23, 2014
-
773
197
871
$
(321)
(179) $
1,706
2,479
(1) Represents income from our preferred equity investments in PGRESS Equity Holdings L.P., which was acquired in December 2015, of which
(2)
our 24.4% share is $1,393. See Note 6, Preferred Equity Investments.
The change resulting from the mark-to-market of the deferred compensation plan assets is entirely offset by the change in deferred
compensation plan liabilities, which is included in “general and administrative” expenses.
18.
Interest and Debt Expense
The following table sets forth the details of interest and debt expense.
(Amounts in thousands)
Interest and debt expense (1)
Amortization of deferred financing costs
Total interest and debt expense
$
$
The Company
For the Year Ended December 31,
2016
2015
Period from
November 24, 2014
to December 31, 2014
150,942 $
6,804
157,746 $
165,801 $
2,565
168,366 $
43,503 $
240
43,743 $
The Predecessor
Period from
January 1, 2014
to November 23, 2014
28,196
389
28,585
(1)
Includes $4,608 and $25,717, of defeasance and debt breakage costs for the year ended December 31, 2016 and for the period from November
24, 2014 to December 31, 2014, respectively, resulting from the repayments of debt.
19. Formation Related Costs
The following table sets forth the details of formation related costs in connection with our initial public offering.
(Amounts in thousands)
Founders Grant
Transfer taxes
Accounting, legal and other professional fees
Total formation related costs
The Company
Period from
November 24, 2014
to December 31, 2014
$
$
71,000
51,306
21,131
143,437
119
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
20.
Incentive Compensation
Stock-Based Compensation
In November 2014, we adopted our 2014 Equity Incentive Plan (the “Plan”), under which we expect to grant future cash and
equity incentive awards to our executive officers, non-employee directors, eligible employees and other key persons in order to attract,
motivate and retain the talent for which we compete. Under the Plan, awards may be granted up to a maximum of 17,142,857 shares,
if all awards granted are “full value awards,” as defined, and up to 34,285,714 shares, if all of the awards granted are “not full value
awards,” as defined. “Full value awards” are awards such as restricted stock or long-term incentive plan (“LTIP”) units that do not
require the payment of an exercise price. “Not full value awards” are awards such as stock options or stock appreciation rights that
require the payment of an exercise price. As of December 31, 2016, we have 12,228,883 shares available for future grants under the
Plan, if all awards granted are full value awards, as defined in the 2014 Equity Incentive Plan.
We account for all stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation. Below are
the components of stock-based compensation expense for the years ended December 31, 2016 and 2015 and for the period from
November 24, 2014 to December 31, 2014.
(Amounts in thousands)
Stock options (1)
LTIP units (2)
Restricted stock
Performance programs
Total
For the Year Ended December 31,
2016
2015
$
$
1,590
5,617
391
3,680
11,278
$
$
Period from
November 24, 2014
to December 31, 2014
79
296
16
-
391
1,241 $
4,507
142
1,110
7,000 $
(1)
(2)
The years ended December 31, 2016 and 2015 include $412 and $294 of expense, respectively, related to the
acceleration of vesting of stock options in connection with certain separation agreements.
The years ended December 31, 2016 and 2015 include $1,443 and $1,567 of expense, respectively, related to the
acceleration of vesting of LTIP units in connection with the aforementioned separation agreements.
Stock Options
We grant certain of our executive officers and other employees stock options which vest over periods ranging from three to five
years and expire 10 years from the date of grant. The stock options granted in the years ended December 31, 2016 and 2015 and in the
period from November 24, 2014 to December 31, 2014 had grant date fair values of $3.40, $4.44 and $3.39 per stock option,
respectively, which are being amortized into expense on a straight-line basis over the vesting period. The fair value of the option is
estimated using an option-pricing model with the following weighted-average assumptions for grants in the years ended December 31,
2016 and 2015 and in the period from November 24, 2014 to December 31, 2014.
Expected volatility
Expected life
Risk free interest rate
Expected dividend yield
For the Year Ended December 31,
2016
29.0%
5.9 years
1.5%
2.3%
2015
27.0%
6.5 years
1.8%
2.0%
Period from
November 24, 2014
to December 31, 2014
23.0%
6.5 years
2.1%
2.3%
120
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2016, there was $3,347,000 of total unrecognized compensation cost related to unvested stock options,
which is expected to be recognized over a weighted-average period of 2.8 years. Below is a summary of our stock option activity for
year ended December 31, 2016.
Weighted-
Average
Exercise Price
17.69
$
Outstanding as of December 31, 2015
14.94
238,971
Granted
-
-
Exercised
17.50
(19,300)
Cancelled or expired
17.34
Outstanding as of December 31, 2016
1,844,121 $
17.04
Options vested and expected to vest as of December 31, 2016 1,012,693 $
17.76
742,000 $
Options exercisable as of December 31, 2016
Shares
1,624,450
Weighted-Average
Remaining
Contractual Term (in years)
Aggregate
Intrinsic
Value
8.1 $
8.2 $
7.9 $
250,920
240,171
-
LTIP Units
We grant our executive officers, non-employee directors and other employees LTIP units which vest over a period of four to
five years and are subject to a taxable book-up event, as defined. The LTIP units granted in the years ended December 31, 2016,
December 31, 2015 and in the period from November 24, 2014 to December 31, 2014 had grant date fair values of $10,106,000,
$2,081,000 and $14,700,000, respectively, which are being amortized into expense on a straight-line basis over the vesting period. As
of December 31, 2016, there was $15,390,000 of total unrecognized compensation cost related to unvested LTIP units, which is
expected to be recognized over a weighted-average period of 3.0 years. Below is a summary of our LTIP unit activity for the year
ended December 31, 2016.
Unvested as of December 31, 2015
Granted
Vested
Cancelled or expired
Unvested as of December 31, 2016
Restricted Stock
Units
Weighted-Average
Grant-Date Fair Value
16.84
15.01
17.00
16.63
15.68
714,959 $
673,237
(281,626)
(13,715)
1,092,855 $
We grant shares of restricted stock to a non-employee director and other employees which vests over four years. The shares of
restricted stock granted in the years ended December 31, 2016 and December 31, 2015 and in the period from November 24, 2014 to
December 31, 2014 had grant date fair values of $1,600,000, $100,000 and $100,000, respectively, which are being amortized into
expense on a straight-line basis over the vesting period. As of December 31, 2016, there was $1,146,000 of total unrecognized
compensation cost related to restricted stock, which is expected to be recognized over a weighted-average period of 3.1 years. Below
is a summary of restricted stock activity for the year ended December 31, 2016.
Shares
Weighted-Average
Grant-Date Fair Value
19.16
15.90
19.16
15.90
15.90
5,219 $
100,673
(5,219)
(5,850)
94,823 $
Unvested as of December 31, 2015
Granted
Vested
Cancelled or expired
Unvested as of December 31, 2016
121
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
2016 Performance Program
In March 2016, our Compensation Committee approved the 2016 Performance Program, a multi-year performance-based equity
compensation program. The purpose of the 2016 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 2016
Performance Program, participants may earn awards in the form of Long LTIP units of our operating partnership based on our total
return to stockholders (“TRS”) over a three-year performance measurement period beginning on March 18, 2016, and continuing
through March 17, 2019, on both an absolute basis and relative basis. 25.0% of the award is earned if we outperform a predetermined
absolute TRS and the remaining 75.0% is earned if we outperform a predetermined relative TRS. Specifically, participants begin to
earn awards under the 2016 Performance Program if our TRS for the performance measurement period equals or exceeds 21.0% on an
absolute basis and is within 250 basis points of the performance of the SNL Office REIT Index on a relative basis, and awards will be
fully earned if our TRS for the performance measurement period equals or exceeds 36.0% on an absolute basis and exceeds the
performance of the SNL Office REIT Index by 400 basis points on a relative basis. Participants will not earn any awards under the
2016 Performance Program if our TRS 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 2016 Performance Program will also be subject
to vesting based on continued employment with us through March 17, 2020, with 50.0% of each award vesting following the
conclusion of the performance measurement period, and the remaining 50.0% vesting on March 17, 2020. The fair value of the
awards granted under the 2016 Performance Program on the date of the grant was $10,914,000 and is being amortized into expense
over the four-year vesting period using a graded vesting attribution method.
Deferred Compensation
In connection with the Formation Transactions, we assumed a deferred compensation plan (the “1993 Plan”) from our
Predecessor. The 1993 Plan permits certain management employees to defer certain percentages of their compensation, as defined.
The assets of the 1993 Plan remain the sole property of the Company and are subject to the claims of its general creditors. The assets
of the 1993 Plan are included in “marketable securities” and “restricted cash,” with an offsetting liability included in “other liabilities”
on our consolidated balance sheets. Income from the mark-to-market of investments in our deferred compensation plan is included in
“interest and other income” and this amount is entirely offset by expense from the mark-to-market of plan liabilities, which is included
as a component of “general and administrative” expenses on our consolidated statements of income. The 1993 Plan had a balance of
$30,743,000 and $28,947,000 as of December 31, 2016 and 2015, respectively.
122
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
21.
Income Taxes
The Company
We operate and have been organized in conformity with the requirements for qualification and taxation as a REIT for U.S.
federal income tax purposes. So long as we qualify as a REIT, we generally will not be subject to U.S. federal income tax on our net
income that we distribute currently to our stockholders. In order to maintain our qualification as a REIT, we are required under the
Internal Revenue Code of 1986, as amended, to distribute at least 90% of our taxable income (without regard to the deduction for
dividends paid and excluding net capital gains) to our stockholders and meet certain other requirements. If, with respect to any
taxable year, we fail to maintain our qualification as a REIT, and we are not entitled to relief under the relevant statutory provisions,
we would be subject to income tax at regular corporate tax rates. Even if we qualify as a REIT, we may also be subject to certain state,
local and franchise taxes. Under certain circumstances, U.S. federal income tax may be due on our undistributed taxable income.
We treat certain consolidated subsidiaries, and may in the future elect to treat newly formed subsidiaries, as taxable REIT
subsidiaries. Taxable REIT subsidiaries may participate in non-real estate related activities and/or perform non-customary services for
tenants and are subject to federal and state income tax at regular corporate tax rates. Our taxable REIT subsidiaries had a combined
current income tax expense of approximately $780,000, $2,545,000 and $189,000 for the years ended December 31, 2016 and
December 31, 2015 and for the period from November 24, 2014 to December 31, 2014, respectively, and have immaterial differences
between the financial reporting and tax basis of assets and liabilities.
The following table reconciles net (loss) income attributable to Paramount Group, Inc. to estimated taxable income (loss) for the
years ended December 31, 2016 and 2015 and for the period from November 24, 2014 to December 31, 2014.
(Amounts in thousands)
Net (loss) income attributable to Paramount Group, Inc.
Book to tax differences:
Straight-line and prepaid rents
Depreciation and amortization
Stock-based compensation
Gain on consolidation of unconsolidated joint venture
Swap breakage costs
Unrealized gain on interest rate swaps
Earnings of unconsolidated joint ventures, including real
estate investments
Other, net
Estimated taxable income (loss) (unaudited)
$
For the Year Ended December 31,
2015
2016
$
(9,934) $
(4,419) $
Period from
November 24, 2014
to December 31, 2014
57,308
(29,024)
95,489
9,673
-
(25,367)
(4,651)
(36,131)
104,399
5,794
-
(27,147)
(29,586)
(3,513)
(9,561)
23,112 $
(12,909)
7,356
7,357 $
6,927
11,691
57,740
(192,891)
(11,316)
(6,832)
(5,347)
20,832
(61,888)
Dividends distributed for the year ended December 31, 2016, were characterized for federal income tax purposes as (i) $0.273
per share or 71.8% as return of capital and (ii) $0.107 per share or 28.2% as ordinary dividends. Dividends distributed for the year
ended December 31, 2016 exclude the fourth quarter 2016 dividend of $0.095 per share, which was paid on January 13, 2017 and is
allocable to 2017 for federal income tax purposes.
Dividends distributed for the year ended December 31, 2015, were characterized for federal income tax purposes as (i) $0.289
per share or 89.2% as return of capital and (ii) $0.035 per share or 10.8% as ordinary dividends. Dividends distributed for the year
ended December 31, 2015 exclude fourth quarter 2015 dividend of $0.095 per share, which was paid January 15, 2016 and was
allocable to 2016 for federal income tax purposes.
123
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
The Predecessor
The companies included in our Predecessor’s combined consolidated financial statements operated in the U.S. as partnerships or
corporations for U.S. federal income tax purposes. Our Predecessor, which owned the general partners of the real estate funds and
consolidated them, was a corporate entity that was subject to federal, state, and local corporate income taxes at the entity level for their
share of the profits and losses of the underlying investments. Our Predecessor accounted for income taxes using the asset and liability
method of accounting. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of
differences between the carrying amounts of assets and liabilities and their respective tax basis, using tax rates in effect for the year in
which the differences are expected to reverse. The effect on deferred assets and liabilities of a change in tax rates was recognized in
income in the period when the change was enacted.
The following table summarizes our Predecessor’s tax position.
(Amounts in thousands)
Income before income taxes
Total provision for income taxes
Effective income tax rate
Period from
January 1, 2014
to November 23, 2014
$
127,859
18,461
14.4%
The following table reconciles our Predecessor’s provision for income taxes to the U.S. federal statutory tax rate.
Statutory U.S. federal income tax rate
Income passed through to common unitholders
and noncontrolling interests(1)
State and local income taxes
Other
Effective income tax rate (2)
Period from
January 1, 2014
to November 23, 2014
35.0%
(24.1%)
5.5%
(2.0%)
14.4%
(1)
(2)
Included income that was not taxable to the Predecessor. Such income was directly taxable to the
Predecessor’s unitholders and the noncontrolling interests.
The effective tax rate was calculated on income before income taxes.
124
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
22. Earnings Per Share
The following table provides a summary of net (loss) income and the number of common shares used in the computation of
basic and diluted (loss) income per common share, which includes the weighted average number of common shares outstanding and
the effect of dilutive potential common shares, if any.
(Amounts in thousands, except per share amounts)
Numerator:
Net (loss) income attributable to common stockholders
Earnings allocated to unvested participating securities
Numerator for (loss) income per common share - basic
and diluted
Denominator:
$
$
Denominator for basic (loss) income per common share -
weighted average shares
Effect of dilutive employee stock options and
restricted share awards (1)
Denominator for diluted (loss) income per common
share - weighted average shares
The Company
For the Year Ended December 31,
2015
2016
Period from
November 24, 2014
to December 31, 2014
(9,934) $
(37)
(4,419) $
-
(9,971) $
(4,419) $
57,308
-
57,308
218,053
212,107
212,107
-
-
1
218,053
212,107
212,108
(Loss) income per common share - basic and diluted
$
(0.05) $
(0.02) $
0.27
(1)
The effect of dilutive securities for the years ended December 31, 2016 and December 31, 2015 and for the period from November 24, 2014 to
December 31, 2014 excludes 48,113, 53,281 and 53,043 weighted average share equivalents, respectively, as their effect was anti-dilutive.
23.
Summary of Quarterly Results (unaudited)
The following table provides a summary of our company’s quarterly results of operations for the years ended December 31,
2016 and 2015.
(Amounts in thousands, except per share amounts)
2016
Revenues
Net (loss) income
attributable to the
common stockholders
Income (Loss) Per Common Share
Basic
Diluted
December 31
September 30
June 30
March 31
2015
December 31
September 30
June 30
March 31
$
$
$
$
166,802
171,318
172,303
172,918
170,528
167,726
162,928
161,226
$
$
(6,489)
(139)
3,188
(6,494)
8,905
1,116
(4,709)
(9,731)
(0.03) $
(0.00)
0.01
(0.03)
$
0.04
0.01
(0.02)
(0.05)
(0.03)
(0.00)
0.01
(0.03)
0.04
0.01
(0.02)
(0.05)
125
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
24. Related Party
Due to Affiliates
As of December 31, 2016 and 2015, 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%. For the years ended December 31, 2016 and
2015 and the period from November 24, 2014 to December 31, 2014, we recognized $139,000, $136,000 and $15,000 of interest
expense, respectively, in connection with these notes.
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 $795,000, $776,000 and $45,000 for the years ended December 31, 2016 and 2015, and the period
from November 24, 2014 to December 31, 2014, 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 December 31, 2016, amounts owed to us
under these agreements aggregated $83,000, 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 years ended December 31, 2016 and 2015 and the period from November 24, 2014 to
December 31, 2014, we recognized $9,920,000, $2,308,000 and $212,000, respectively, of fee income in connection with these
agreements. As of December 31, 2016, amounts owed to us under these agreements aggregated $1,966,000, which are included as a
component of “accounts and other receivables, net” on our consolidated balance sheet.
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 years ended December 31, 2016 and December 31, 2015 and the period from November 24, 2014 to
December 31, 2014, we incurred $625,000, $349,000 and $840,000 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 6,790 square feet at 712 Fifth Avenue, our 50.0% owned unconsolidated joint venture. For the year ended December 31,
2016, we recognized $416,000 for our share of rental income from this lease.
126
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
25. 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 December 31, 2016, we believe we are in
compliance with all of our covenants.
127
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
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.
60 Wall Street – Option Agreement
In connection with the Formation Transactions, we entered into an option agreement with each of Fund II and Fund III
(collectively, the “Funds”) pursuant to which we had the right to acquire their joint venture interests (aggregating 62.3%) in 60 Wall
Street, a 47-story, 1.6 million square foot office building, located in the heart of New York’s financial district, at any time before
November 24, 2016. The remaining 37.7% interest in the property was held by a third party joint venture partner who had a “tag-
along” right in the event we exercised the option to acquire the property. On November 9, 2016, we received the consent from the
Funds’ investor advisory committees to amend the option agreement to extend the option exercise date to February 28, 2017 pursuant
to which we had the right to acquire the Funds’ interests at a purchase price equal to $1.04 billion. On January 17, 2017, the third
party joint venture partner agreed to “tag-along” at the agreed upon purchase price, if we were to exercise the option. On January 24,
2017, we assigned the option agreement to a subsidiary of a newly formed joint venture in which we have a 5.2% ownership interest,
and exercised the option. See Note 27, Subsequent Events, for details.
128
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
26.
Segments Disclosure
The Company
Our determination of segments is primarily based on our method of internal reporting. On January 1, 2016, as a result of certain
organizational and operational changes, we redefined our reportable segments to be 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. Accordingly, our reportable segments were separated by region based on the three regions
in which we conduct our business: New York, Washington, D.C. and San Francisco. In connection therewith, we have reclassified the
prior period segment financial data to conform to the current period presentation.
The following tables provide NOI for each reportable segment for years ended December 31, 2016 and 2015 and for the period
from November 24, 2014 to December 31, 2014.
(Amounts in thousands)
Property-related revenues
Property-related operating expenses
NOI from unconsolidated joint ventures
NOI (1)
$
$
Total
666,410 $
(250,040)
17,195
433,565 $
(Amounts in thousands)
Property-related revenues
Property-related operating expenses
NOI from unconsolidated joint ventures
NOI (1)
$
$
Total
652,160 $
(244,754)
16,580
423,986 $
For the Year Ended December 31, 2016
Washington, D.C.
New York
San Francisco
449,794 $
(176,445)
16,874
290,223 $
86,389 $
(32,721)
-
53,668 $
127,813
(30,889)
-
96,924
For the Year Ended December 31, 2015
Washington, D.C.
New York
San Francisco
452,842 $
(174,273)
16,210
294,779 $
82,366 $
(32,482)
-
49,884 $
114,472
(29,277)
-
85,195
(Amounts in thousands)
Property-related revenues
Property-related operating expenses
NOI from unconsolidated joint ventures
NOI (1)
$
$
Total
66,371 $
(26,011)
1,680
42,040 $
Period from November 24, 2014 to December 31, 2014
Washington, D.C.
New York
San Francisco
47,460 $
(18,679)
1,680
30,461 $
7,225 $
(3,307)
-
3,918 $
9,978
(3,269)
-
6,709
Other
2,414
(9,985)
321
(7,250)
Other
2,480
(8,722)
370
(5,872)
Other
1,708
(756)
-
952
$
$
$
$
$
$
(1) Net Operating Income (“NOI”) is used to measure the operating performance of a property. 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.
129
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
The following table provides a reconciliation of NOI to net (loss) income attributable to common stockholders for the years
ended December 31, 2016 and 2015 and for the period from November 24, 2014 to December 31, 2014.
(Amounts in thousands)
NOI
Add (subtract) adjustments to arrive to net (loss) income:
Fee income
Depreciation and amortization expense
General and administrative expenses
Transaction related costs
Formation related costs
Transfer taxes due in connection with the sale of shares
by a former joint venture partner
NOI from unconsolidated joint ventures
Income from unconsolidated joint ventures
Income from real estate fund investments
Loss from unconsolidated real estate funds
Interest and other income (loss), net
Interest and debt expense
Unrealized gain on interest rate swaps
Gain on consolidation of an unconsolidated joint venture
Net income before income taxes
Income tax expense
Net income
Less: net (income) loss attributable to
noncontrolling interests in:
Consolidated real estate funds
Consolidated joint ventures
Operating Partnership
Net (loss) income attributable to common stockholders
$
The Company
For the Year Ended December 31,
2015
2016
$
433,565 $
423,986 $
Period from
November 24, 2014
to December 31, 2014
42,040
16,931
(269,450)
(53,510)
(2,404)
-
-
(17,195)
7,413
-
(498)
6,934
(157,746)
39,814
-
3,854
(1,785)
2,069
10,248
(294,624)
(42,056)
(4,483)
-
(5,872)
(16,580)
6,850
37,975
-
871
(168,366)
75,760
-
23,709
(2,566)
21,143
1,316
(15,423)
2,104
(9,934) $
(21,173)
(5,459)
1,070
(4,419) $
1,176
(34,481)
(2,207)
-
(143,437)
-
(1,680)
938
-
-
(179)
(43,743)
15,084
239,716
73,227
(505)
72,722
(135)
(1,353)
(13,926)
57,308
(Amounts in thousands)
Balance Sheet Data:
Total assets
Total liabilities
Total equity
As of December 31, 2016
$
Total
8,867,168 $
3,981,221
4,885,947
New York
Washington, D.C.
San Francisco
Other
5,617,344 $
2,444,101
3,173,243
1,075,350 $
204,020
871,330
$
1,913,747
980,460
933,287
260,727
352,640
(91,913)
130
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
The Predecessor
Our Predecessor historically operated an integrated business that consisted of three reportable segments, (i) Owned Properties,
(ii) Managed Funds and (iii) a Management Company. The Owned Properties segment consisted of properties in which our
Predecessor had a direct or indirect ownership interest, other than properties that it owned through its private equity real estate funds.
The Managed Funds segment consisted of the private equity real estate funds. In addition, our Predecessor included a Management
Company that performed property management and asset management services and certain general and administrative level functions,
including legal and accounting, as a separate reportable segment.
The following tables provide selected results for each reportable segment for the period from January 1, 2014 to November 23,
2014.
(Amounts in thousands)
Income Statement data:
Revenues
Owned
Properties
Period from January 1, 2014 to November 23, 2014
Management
Company
Managed
Funds
Eliminations
Rental income
Tenant reimbursement income
Distributions from real estate fund investments
Realized and unrealized gains, net
Fee and other income
$
Total revenues
Total expenses
Operating income
Income from unconsolidated joint ventures
Unrealized loss on interest rate swaps
Interest and other income, net
Interest and debt expense
Net income before income taxes
Income tax expense
Net income
Net income attributable to noncontrolling interests
Net income attributable to the Predecessor
$
27,774 $
1,646
-
-
-
29,420
20,553
8,867
4,241
-
2,004
(11,157)
3,955
-
3,955
-
3,955 $
2,434 $
-
17,083
129,354
-
148,871
27,995
120,876
-
(673)
388
(17,323)
103,268
-
103,268
(87,888)
15,380 $
- $
-
-
-
74,686
74,686
54,032
20,654
48,683
-
87
(105)
69,319
(18,461)
50,858
-
- $
-
-
-
(25,588)
(25,588)
(25,588)
-
(48,683)
-
-
-
(48,683)
-
(48,683)
-
50,858 $ (48,683) $
Total
30,208
1,646
17,083
129,354
49,098
227,389
76,992
150,397
4,241
(673)
2,479
(28,585)
127,859
(18,461)
109,398
(87,888)
21,510
27.
Subsequent Events
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. The sale, which is subject to customary closing conditions, is expected to close in the second quarter of
2017 and will result in a financial statement gain of approximately $110,000,000.
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 January 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 January 24, 2017, a joint venture in which we have a 5.2% interest, acquired 60 Wall Street, a 1.6 million square foot Class
A office building in New York for $1,040,000,000. In connection with the acquisition, the joint venture completed a $575,000,000
financing of the property.
131
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as such term is defined in Rule 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 and that such information is
accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate
to allow timely decisions regarding required disclosure. 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.
As of December 31, 2016, the end of the period covered by this Report, 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.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting (as such
term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act). Our internal control over financial reporting is a process
designed under the supervision of our principal executive officer and principal financial officer to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in
accordance with U.S. generally accepted accounting principles.
As of December 31, 2016, management conducted an assessment of the effectiveness of our internal control over financial
reporting based on the framework established in Internal Control—Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that our
internal control over financial reporting as of December 31, 2016 was effective in providing reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally
accepted accounting principles.
Our internal control over financial reporting includes policies and procedures that (i) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect transactions and dispositions of our assets, (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted
accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management
and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on our financial statements.
The effectiveness of our internal control over financial reporting as of December 31, 2016 has been audited by Deloitte &
Touche LLP, an independent registered public accounting firm, as stated in their report appearing on page 133 in this Form 10-K,
which expresses an unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 2016.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2016, that have
materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
132
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Paramount Group, Inc.
New York, NY
We have audited the internal control over financial reporting of Paramount Group, Inc., and subsidiaries (the "Company") as of
December 31, 2016, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the
Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's
principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of
directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's
internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial
statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.
Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to
the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement schedules as of and for the year ended December 31, 2016 of the Company
and our report dated February 22, 2017 expressed an unqualified opinion on those financial statements and financial statement
schedules.
/s/ Deloitte & Touche LLP
New York, NY
February 22, 2017
133
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 will be set forth in our Definitive Proxy Statement for our 2016 Annual Meeting of
Stockholders (which is scheduled to be held on May 18, 2017), to be filed pursuant to Regulation 14A under the Securities and
Exchange Act of 1934, as amended, or our Proxy Statement, and is incorporated herein by reference.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by Item 11 will be set forth in our Proxy Statement and is incorporated herein by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by Item 12 will be set forth in our Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 will be set forth in our Proxy Statement and is incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 will be set forth in our Proxy Statement and is incorporated herein by reference.
134
ITEM 15.
EXHIBITS, FINANCIAL STATEMENTS SCHEDULES
PART IV
(a) The following documents are filed as part of this report
1. The combined consolidated financial statements are set forth in Item 8 of this Annual Report on Form 10-K
2. The following financial statement schedules should be read in conjunction with the financial statements included:
Schedule II – Valuation and Qualifying Accounts for the years ended December 31,
2016, 2015 and 2014
Schedule III – Real Estate and Accumulated Depreciation as of December 31, 2016,
2015 and 2014
Pages in this
Annual Report on
Form 10-K
136
137
(b) The exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index on page 141 of this Annual Report, on Form
10-K, and is incorporated herein by reference.
ITEM 16.
FORM 10-K SUMMARY
None.
135
PARAMOUNT GROUP, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
COLUMN A
COLUMN B
COLUMN C
COLUMN D
COLUMN E
Balance at
Beginning
of Year
Additions
Charged
Against
Operations
Uncollectible
accounts
Written-off
Balance
at End
of Year
$
$
$
365
333
257 (1)
$
$
$
315 $
(478) $
87 $
(55) $
202
365
76 $
- $
333
(Amounts in thousands)
The Company:
For the Year Ended December 31, 2016
Allowance for doubtful accounts
For the Year Ended December 31, 2015
Allowance for doubtful accounts
For the period from November 24, 2014
to December 31, 2014
Allowance for doubtful accounts
The Predecessor:
Period from January 1, 2014
to November 23, 2014
Allowance for doubtful accounts
$
-
$
- $
- $
-
(1) Represents the allowance for doubtful accounts of the properties that were acquired in connection with the Formation Transactions.
136
PARAMOUNT GROUP, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
COLUMN B
COLUMN C
COLUMN D
COLUMN E
COLUMN F
COLUMN G COLUMN H COLUMN I
Initial cost to company
Costs capitalized
subsequent
to acquisition
Building and
Building and
Gross amount at which
carried at close of period
Buildings and
Encumbrances
$
1,013,544
850,000
500,000
-
-
2,363,544
Land
$
502,846
406,039
221,318
174,688
103,741
1,408,632
Improvements
1,398,341
$
1,051,697
604,994
370,553
296,031
3,721,616
Land
-
$
-
-
-
-
-
Improvements
63,900
$
54,765
2,376
17,359
6,835
145,235
Land
$
502,846
406,039
221,318
174,688
103,741
1,408,632
Improvements
1,462,241
$
1,106,462
607,370
387,912
302,866
3,866,851
Total (1)
$ 1,965,087
1,512,501
828,688
562,600
406,607
5,275,483
Accumulated
depreciation
and
amortization
(81,875 )
$
(61,175 )
(35,534 )
(24,343 )
(20,881 )
(223,808 )
-
84,000
87,675
-
171,675
872,960
-
872,960
93,669
46,401
52,568
50,631
243,269
98,088
96,422
94,874
103,992
393,376
288,743
127,765
416,508
(2)
988,014
376,919
1,364,933
(2)
-
-
23,126
-
41,524
-
-
-
-
-
-
-
-
-
-
-
4,866
11,653
4,164
10,926
31,609
49,939
-
49,939
93,669
46,401
52,568
50,631
243,269
288,743
127,765
416,508
102,954
108,075
99,038
114,918
424,985
196,623
154,476
151,606
165,549
668,254
1,037,953
376,919
1,414,872
1,326,696
504,684
1,831,380
(7,832 )
(6,827 )
(6,094 )
(6,990 )
(27,743 )
(62,309 )
(1,130 )
(63,439 )
Life on
which
depreciation
in latest
income
statement
is computed
5 to 40 Years
5 to 40 Years
5 to 40 Years
5 to 40 Years
5 to 40 Years
5 to 40 Years
5 to 40 Years
5 to 40 Years
5 to 40 Years
Date of
Date
construction acquired
11/2014
11/2014
11/2014
11/2014
11/2014
11/2014
11/2014
11/2014
11/2014
1971
1963
1987
1989
1983
1973
1993
1915
2001
1976
1979
11/2014
12/2016
5 to 40 Years
5 to 40 Years
$
$
3,408,179
$ 2,091,535
$
5,521,449
$
-
$
231,280
$ 2,091,535
$
5,757,558
$ 7,849,093
$
(318,161 )
-
$
78,300
$
297,669
$
-
$
36,346
$
78,300
$
334,015
$
412,315
$
(82,344 )
2007
05/2007
5 to 40 Years
4,497
-
23,126
-
52,193
(1,343 )
75,319
(1,343 )
(2,896 )
(275 )
03/2014
11/2014
5 to 40 Years
5 to 40 Years
COLUMN A
(Amounts in thousands)
Description
1633 Broadway
1301 Avenue of the Americas
31 West 52nd Street
1325 Avenue of the Americas
900 Third Avenue
Total New York
425 Eye Street
Liberty Place
1899 Pennsylvania Avenue
2099 Pennsylvania Avenue
Total Washington, D.C.
One Market Plaza
One Front Street
Total San Francisco
Residential Development Fund
("75 Howard")
Other
Total
Assets held for sale:
Waterview
(1)
(2)
The net basis of the Company’s assets and liabilities for tax purposes is approximately $3.1 billion lower than the net amount reported for financial statement purposes.
In accordance with the early adoption of ASU 2017-01, these amounts include the capitalized acquisition costs associated with this transaction.
137
PARAMOUNT GROUP, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
(Amounts in thousands)
Rental Property:
Beginning balance
Acquisitions
Acquisition of properties in connection
with the Formation Transactions
Additions during the year:
Land
Buildings and improvements
Assets held for sale
Assets sold and written-off
Ending balance
Accumulated Depreciation:
Beginning balance
Additions charged to expense
Assets held for sale
Accumulated depreciation related
to assets sold and written-off
Ending balance
2016
For the Year Ended December 31,
2015
2014
7,652,117
504,684
$
7,530,239
$
414,998
64,650
-
-
7,043,650
-
116,038
(412,315)
(11,431)
7,849,093
243,089
168,847
(82,344)
(11,431)
318,161
$
$
$
-
123,277
-
(1,399)
7,652,117
81,050
163,438
-
(1,399)
243,089
$
$
$
-
9,676
-
(2,735)
7,530,239
57,689
26,096
-
(2,735)
81,050
$
$
$
$
138
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Date: February 22, 2017
Paramount Group, Inc.
By:
/s/ Wilbur Paes
Wilbur Paes
Executive Vice President, Chief Financial Officer and
Treasurer (duly authorized officer and principal financial and
accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Chairman, Chief Executive Officer and President
(Principal Executive Officer)
Date
February 22, 2017
By:
By:
By:
By:
By:
By:
By:
By:
By:
By:
/s/ Albert Behler
(Albert Behler)
/s/ Wilbur Paes
(Wilbur Paes)
/s/ Thomas Armbrust
(Thomas Armbrust)
/s/ Martin Bussmann
(Martin Bussmann)
/s/ Dan Emmett
(Dan Emmett)
/s/ Lizanne Galbreath
(Lizanne Galbreath)
/s/ Karin Klein
(Karin Klein)
/s/ Peter Linneman
(Peter Linneman)
/s/ David O’Connor
(David O’Connor)
/s/ Katharina Otto-Bernstein
(Katharina Otto-Bernstein)
Executive Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
February 22, 2017
February 22, 2017
February 22, 2017
February 22, 2017
February 22, 2017
February 22, 2017
February 22, 2017
February 22, 2017
February 22, 2017
Director
Director
Director
Director
Director
Director
Director
Director
139
Exhibit
Number
3.1
3.2
3.3
4.1
10.1
10.2*
10.3
10.4
10.5
10.6†
10.7
10.8
10.9
10.10
10.11
EXHIBIT INDEX
Exhibit Description
Articles of Amendment and Restatement of Paramount Group, Inc., incorporated by reference to Exhibit 3.1 to
Amendment No. 4 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on
November 14, 2014.
Amended and Restated Bylaws of Paramount Group, Inc., incorporated by reference to Exhibit 3.2 to the
Registrant’s Form 10-K filed with the SEC on March 19, 2015.
Resolution to Change Resident Agent, incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K,
filed with the SEC on August 8, 2016.
Specimen Certificate of Common Stock of Paramount Group, Inc., incorporated by reference to Exhibit 4.1 to
Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on
November 12, 2014.
Amended and Restated Limited Partnership Agreement of Paramount Group Operating Partnership LP, dated as
of November 21, 2014, incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8-K filed with the
SEC on November 24, 2014.
First Amendment to Amended and Restated Limited Partnership Agreement of Paramount Group Operating
Partnership LP, dated as of February 23, 2016.
Registration Rights Agreement by and among Paramount Group, Inc. and the holders named therein, dated
November 6, 2014, incorporated by reference to Exhibit 10.2 to Amendment No. 3 to the Registrant’s Form S-11
(Registration No. 333-198392) filed with the SEC on November 12, 2014.
Registration Rights Agreement among Paramount Group, Inc. and the persons named therein, dated November
6, 2014, incorporated by reference to Exhibit 10.3 to Amendment No. 3 to the Registrant’s Form S-11
(Registration No. 333-198392) filed with the SEC on November 12, 2014.
Stockholders Agreement between Paramount Group, Inc. and Maren Otto, Alexander Otto and Katharina Otto-
Bernstein, dated November 6, 2014, incorporated by reference to Exhibit 10.4 to Amendment No. 3 to the
Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on November 12, 2014.
2014 Equity Incentive Plan, incorporated by reference to Exhibit 10.5 to the Registrant’s Form 10-K filed with
the SEC on March 19, 2015.
Form of Indemnification Agreement between Paramount Group, Inc. and each of its Directors and Executive
Officers, incorporated by reference to Exhibit 10.6 to Amendment No. 3 to the Registrant’s Form S-11
(Registration No. 333-198392) filed with the SEC on November 12, 2014.
Contribution Agreement by and among Paramount Group Real Estate Fund I, L.P., Paramount Group Operating
Partnership LP and Paramount Group, Inc., dated as of November 6, 2014, incorporated by reference to Exhibit
10.7 to Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on
November 12, 2014.
Contribution Agreement by and among Paramount Group Real Estate Fund III, L.P., Paramount Group
Operating Partnership LP and Paramount Group, Inc., dated as of November 6, 2014, incorporated by reference
to Exhibit 10.8 to Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the
SEC on November 12, 2014.
Contribution Agreement by and among Paramount Group Real Estate Fund IV, L.P., Paramount Group
Operating Partnership LP and Paramount Group, Inc., dated as of November 6, 2014, incorporated by reference
to Exhibit 10.9 to Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the
SEC on November 12, 2014.
Contribution Agreement by and among PGREF IV Parallel Fund Sub US, LP, Paramount Group Operating
Partnership LP and Paramount Group, Inc., dated as of November 6, 2014, incorporated by reference to Exhibit
10.10 to Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on
November 12, 2014.
140
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
Transfer Agreement by and among Paramount Group Real Estate Fund V (Core), L.P., Paramount Group
Operating Partnership LP and Paramount Group, Inc., dated as of November 6, 2014, incorporated by reference
to Exhibit 10.11 to Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with
the SEC on November 12, 2014.
Contribution Agreement by and among PGREF V (Core) Parallel Fund Sub US, LP, Paramount Group
Operating Partnership LP and Paramount Group, Inc., dated as of November 6, 2014, incorporated by reference
to Exhibit 10.12 to Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with
the SEC on November 12, 2014.
Contribution Agreement by and among Paramount Group Real Estate Fund V (CIP), L.P., Paramount Group
Operating Partnership LP and Paramount Group, Inc., dated as of November 6, 2014, incorporated by reference
to Exhibit 10.13 to Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with
the SEC on November 12, 2014.
Contribution Agreement by and among Arcade Rental Investments, Inc., Paramount Group, Inc. and the
Stockholder of Arcade Rental Investments, Inc., dated as of November 6, 2014, incorporated by reference to
Exhibit 10.14 to Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the
SEC on November 12, 2014.
Contribution Agreement by and among Arcade Rental Investments 2, Inc., Paramount Group, Inc. and the
Stockholder of Arcade Rental Investments 2, Inc., dated as of November 6, 2014, incorporated by reference to
Exhibit 10.15 to Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the
SEC on November 12, 2014.
Contribution Agreement by and among Marathon Rental Investments, Inc., Paramount Group, Inc. and the
Stockholder of Marathon Rental Investments, Inc., dated as of November 6, 2014, incorporated by reference to
Exhibit 10.16 to Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the
SEC on November 12, 2014.
Agreement and Plan of Merger by and among Cosmos Rental Investments, Inc., Paramount Group, Inc. and the
Stockholder of Cosmos Rental Investments, Inc., dated as of November 6, 2014, incorporated by reference to
Exhibit 10.17 to Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the
SEC on November 12, 2014.
Agreement and Plan of Merger by and among Paramount Group, Inc., a Delaware corporation, Paramount
Group, Inc. and the Stockholders of Paramount Group, Inc., a Delaware corporation, dated as of November 6,
2014, incorporated by reference to Exhibit 10.18 to Amendment No. 3 to the Registrant’s Form S-11
(Registration No. 333-198392) filed with the SEC on November 12, 2014.
Stock Purchase Agreement by and between Paramount Group, Inc. and the Stockholder of Forum Rental
Investments, Inc., dated as of November 6, 2014, incorporated by reference to Exhibit 10.19 to Amendment No.
3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on November 12, 2014.
Stock Purchase Agreement by and among Paramount Group, Inc., the Stockholders of Imperial Rental
Investments, Inc., dated as of November 6, 2014, incorporated by reference to Exhibit 10.20 to Amendment No.
3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on November 12, 2014.
Stock Purchase Agreement by and among Paramount Group, Inc., the Stockholders of Milton Rental
Investments, Inc., dated as of November 6, 2014, incorporated by reference to Exhibit 10.21 to Amendment No.
3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on November 12, 2014.
Share Purchase Agreement, dated as of October 31, 2014, between Paramount Group, Inc. and WvF 718, L.P.,
incorporated by reference to Exhibit 10.22 to Amendment No. 3 to the Registrant’s Form S-11 (Registration No.
333-198392) filed with the SEC on November 12, 2014.
Share Purchase Agreement, dated as of November 6, 2014, between Paramount Group, Inc. and the individuals
and entity listed therein, incorporated by reference to Exhibit 10.23 to Amendment No. 3 to the Registrant’s
Form S-11 (Registration No. 333-198392) filed with the SEC on November 12, 2014.
Contribution Agreement by and between Albert Behler, Paramount Group Operating Partnership LP, and
Paramount Group, Inc., dated as of November 6, 2014, incorporated by reference to Exhibit 10.24 to
Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on
November 12, 2014.
141
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
Contribution Agreement by and between Jolanta Bott, Paramount Group Operating Partnership LP, and
Paramount Group, Inc., dated as of November 6, 2014, incorporated by reference to Exhibit 10.25 to
Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on
November 12, 2014.
Contribution Agreement by and between David Spence, Paramount Group Operating Partnership LP, and
Paramount Group, Inc., dated as of November 6, 2014, incorporated by reference to Exhibit 10.26 to
Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on
November 12, 2014.
Contribution Agreement by and between Daniel Lauer, Paramount Group Operating Partnership LP, and
Paramount Group, Inc., dated as of November 6, 2014, incorporated by reference to Exhibit 10.27 to
Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on
November 12, 2014.
Contribution Agreement by and between Vito Messina, Paramount Group Operating Partnership LP, and
Paramount Group, Inc., dated as of November 6, 2014, incorporated by reference to Exhibit 10.28 to
Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on
November 12, 2014.
Contribution Agreement by and between Ralph DiRuggiero, Paramount Group Operating Partnership LP, and
Paramount Group, Inc., dated as of November 6, 2014, incorporated by reference to Exhibit 10.29 to
Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on
November 12, 2014.
Contribution Agreement by and between Gage Johnson, Paramount Group Operating Partnership LP, and
Paramount Group, Inc., dated as of November 6, 2014, incorporated by reference to Exhibit 10.30 to
Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on
November 12, 2014.
Contribution Agreement by and between Theodore Koltis, Paramount Group Operating Partnership LP, and
Paramount Group, Inc., dated as of November 6, 2014, incorporated by reference to Exhibit 10.31 to
Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on
November 12, 2014.
Agreement and Plan of Merger by and among Paramount Group, Inc., WvF 1325, Inc., WvF 1325, L.P., US Real
Estate Holding AG and WvF, L.P., dated as of October 31, 2014, incorporated by reference to Exhibit 10.32 to
Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on
November 12, 2014.
Purchase and Sale Agreement of Ownership Interests in PGREF I Paramount Plaza, L.P., by and between BCSP
1633 Broadway, LLC, as Seller, and Paramount Development and Investment, Inc., as Purchaser, PGREF I
Paramount Plaza GP, LLC and Paramount Group, Inc., a Delaware corporation, dated as of September 4, 2014,
incorporated by reference to Exhibit 10.33 to Amendment No. 3 to the Registrant’s Form S-11 (Registration No.
333-198392) filed with the SEC on November 12, 2014.
Purchase and Sale Agreement of Ownership Interests in PGREF V 1301 Sixth Holding LP, by and between
PGREF V 1301 Sixth Investors I LP, as Seller, Paramount Development and Investment, Inc., as Purchaser, and
PGREF V 1301 Sixth Investors GP LLC, dated as of July 23, 2014, incorporated by reference to Exhibit 10.34 to
Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on
November 12, 2014.
First Amendment to Purchase and Sale Agreement by and among PGREF V 1301 Sixth Investors I LP, as Seller,
Paramount Development and Investment, Inc., as Purchaser, PGREF V 1301 Sixth Investors GP LLC,
Commonwealth Land Title Insurance Company and First American Title Insurance Company, dated as of
September 26, 2014, incorporated by reference to Exhibit 10.35 to Amendment No. 3 to the Registrant’s Form S-
11 (Registration No. 333-198392) filed with the SEC on November 12, 2014.
Purchase Option Agreement for Purchase and Sale of Direct and Indirect Limited Partnership Interests in
PGREF II 60 Wall Street Investors, L.P., by and between Paramount Development and Investment, Inc., and
Paramount Group Real Estate Fund II, L.P. and Paramount Group Real Estate Fund III, L.P., dated as of June 27,
2014, incorporated by reference to Exhibit 10.36 to Amendment No. 3 to the Registrant’s Form S-11
(Registration No. 333-198392) filed with the SEC on November 12, 2014.
142
10.38
10.39
10.40
10.41†
10.42†
10.43†
10.44†
10.45†
10.46
10.47
10.48
10.49
10.50
10.51
Consent and Tag-Along Agreement among Paramount Development and Investment, Inc., SSF III 60 Wall JV
LLC, Paramount Group Real Estate Fund II, L.P., PGREF II 60 Wall Investors GP, LLC and PGREF III Wall
Street Investors, L.P., with respect to PGREF II 60 Wall Street Investors, L.P., dated as of June 27, 2014,
incorporated by reference to Exhibit 10.37 to Amendment No. 3 to the Registrant’s Form S-11 (Registration No.
333-198392) filed with the SEC on November 12, 2014.
Put Option Agreement among WvF 2 W. 56, Inc., WvF, Inc., WvF, L.P. and WvF 718, L.P., collectively, as
optionee, and 712 Fifth Avenue, L.P., as option or, dated as of September 10, 2014, incorporated by reference to
Exhibit 10.38 to Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the
SEC on November 12, 2014.
Credit Agreement among Paramount Group Operating Partnership LP, as the Borrower, and Paramount Group,
Inc. and certain subsidiaries of Paramount Group, Inc. from time to time party thereto, as Guarantors, Bank of
America, N.A., as Administrative Agent and Swing Line Lender, Morgan Stanley Senior Funding, Inc. and
Wells Fargo Bank, National Association, as Co-Syndication Agents, U.S. Bank National Association, as
Documentation Agent, Bank of America, N.A., Morgan Stanley Bank, N.A., and Wells Fargo Bank, National
Association, as L/C Issuers, and the lenders from time to time party thereto, Bank of America Merrill Lynch,
Morgan Stanley Senior Funding, Inc. and Wells Fargo Securities, LLC, as Joint Lead Arrangers And Joint
Bookrunners, dated as of November 24, 2014, incorporated by reference to Exhibit 10.1 to the Registrant’s Form
8-K filed with the SEC on November 24, 2014.
Employment Agreement among Paramount Group Operating Partnership LP, Paramount Group, Inc. and Albert
Behler, dated as of November 18, 2014, incorporated by reference to Exhibit 10.7 to the Registrant’s Form 8-K
filed with the SEC on November 24, 2014.
Employment Agreement among Paramount Group Operating Partnership LP, Paramount Group, Inc. and David
Spence, dated as of November 18, 2014, incorporated by reference to Exhibit 10.8 to the Registrant’s Form 8-K
filed with the SEC on November 24, 2014.
Employment Agreement among Paramount Group Operating Partnership LP, Paramount Group, Inc. and Jolanta
Bott, dated as of November 18, 2014, incorporated by reference to Exhibit 10.9 to the Registrant’s Form 8-K
filed with the SEC on November 24, 2014.
Paramount Group, Inc. Executive Severance Plan, incorporated by reference to Exhibit 10.10 to the Registrant’s
Form 8-K filed with the SEC on November 24, 2014.
The Paramount Group 2005 Nonqualified Deferred Compensation Plan, incorporated by reference to Exhibit
10.44 to Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on
November 12, 2014.
Waiver of Ownership Limits granted to The Otto Family by Paramount Group, Inc., dated as of November 18,
2014, incorporated by reference to Exhibit 10.6 to the Registrant’s Form 8-K filed with the SEC on November
24, 2014.
Property Management Agreement, dated as of August 7, 2013, between CNBB Owner LLC and Paramount
Group, Inc., a Delaware corporation, incorporated by reference to Exhibit 10.46 to Amendment No. 3 to the
Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on November 12, 2014.
Lease, dated as of October 27, 2014, between Paramount Group, Inc., a Delaware corporation, as Agent for
PGREF I 1633 Broadway Tower, L.P. (Landlord), and CNBB-RDF Holdings, LP (Tenant), incorporated by
reference to Exhibit 10.47 to Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392)
filed with the SEC on November 12, 2014.
Agreement and Plan of Merger by and among Arcade Rental Investments LLC, Paramount Group, Inc. and the
stockholder of Arcade Rental Investments LLC, dated as of November 24, 2014, incorporated by reference to
Exhibit 10.3 to the Registrant’s Form 8-K filed with the SEC on November 24, 2014.
Agreement and Plan of Merger by and among Arcade Rental Investments 2 LLC, Paramount Group, Inc. and the
stockholder of Arcade Rental Investments 2 LLC, dated as of November 24, 2014, incorporated by reference to
Exhibit 10.4 to the Registrant’s Form 8-K filed with the SEC on November 24, 2014.
Agreement and Plan of Merger by and among Marathon Rental Investments LLC, Paramount Group, Inc. and
the stockholder of Marathon Rental Investments LLC, dated as of November 24, 2014, incorporated by reference
to Exhibit 10.5 to the Registrant’s Form 8-K filed with the SEC on November 24, 2014.
143
10.52†
10.53†
10.54†
10.55†
10.56†
10.57
21.1*
23.1*
23.2*
23.3*
31.1*
31.2*
32.1**
32.2**
99.1*
99.2*
101.INS*
101.SCH*
101.CAL*
101.DEF*
101.LAB*
101.PRE*
*
**
†
Employment Agreement among Paramount Group, Inc., Paramount Group Operating Partnership, L.P. and
Michael Walsh, dated March 26, 2015, incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K
filed with the SEC on March 26, 2015.
Separation Agreement and Release among Paramount Group, Inc., Paramount Group Operating Partnership, L.P.
and David Spence dated March 25, 2015, incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8-K
filed with the SEC on March 26, 2015.
Form of Paramount Group, Inc. Performance LTIP Unit Award Agreement, incorporated by reference to Exhibit
10.1 to the Registrant’s Form 8-K filed with the SEC on April 1, 2015.
Employment Agreement among Paramount Group, Inc., Paramount Group Operating Partnership, L.P. and
Wilbur Paes, dated March 3, 2016, incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed
with the SEC on March 8, 2016.
Separation Agreement and Release among Paramount Group, Inc., Paramount Group Operating Partnership, L.P.
and Michael Walsh dated March 7, 2016, incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8-K
filed with the SEC on March 8, 2016.
First Amendment to the November 2014 Credit Agreement dated as of April 8, 2016, among Paramount Group
Operating Partnership, L.P. and Paramount Group Inc., and certain subsidiaries of Paramount Group Inc. from
time to time party thereto, as Guarantors, each lender from time to time party thereto, Bank of America, N.A., as
Administrative Agent and Swing Line Lender and Bank of America, N.A., Morgan Stanley Senior Funding, Inc.
and Wells Fargo Bank, National Association, as L/C Issuers, incorporated by reference to Exhibit 10.1 to the
Registrant’s Form 10-Q filed with the SEC on August 4, 2016.
List of Subsidiaries of the Registrant.
Consent of Deloitte & Touche LLP.
Consent of Deloitte & Touche LLP for 712 Fifth Avenue, L.P.
Consent of Deloitte & Touche LLP for Paramount Group Real Estate Fund VII, LP
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.
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.
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.
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.
Financial Statements of 712 Fifth Avenue, L.P.
Financial Statements of Paramount Group Real Estate Fund VII, LP
XBRL Instance Document.
XBRL Taxonomy Extension Schema.
XBRL Taxonomy Extension Calculation Linkbase.
XBRL Taxonomy Extension Definition Linkbase.
XBRL Taxonomy Extension Label Linkbase.
XBRL Taxonomy Extension Presentation Linkbase.
_______________________
Filed herewith.
Furnished herewith.
Indicates management contract or compensatory plan or arrangement required to be filed or incorporated by
reference as an exhibit to this Form 10-K pursuant to Item 15(b) of Form 10-K.
144
EXHIBIT 31.1
I, Albert Behler, certify that:
CERTIFICATION
1.
I have reviewed this Annual Report on Form 10-K of Paramount Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
February 22, 2017
/s/ Albert Behler
Albert Behler
Chairman, Chief Executive Officer and
President
EXHIBIT 31.2
I, Wilbur Paes certify that:
CERTIFICATION
1.
I have reviewed this Annual Report on Form 10-K of Paramount Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
February 22, 2017
/s/ Wilbur Paes
Wilbur Paes
Executive Vice President, Chief Financial Officer and Treasurer
CERTIFICATION
EXHIBIT 32.1
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Paramount Group, Inc. (the “Company”),
hereby certifies, to such officer’s knowledge, that:
(cid:120)
(cid:120)
the Annual Report on Form 10-K for the year ended December 31, 2016 (the “Report”) of the Company fully complies
with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
This certification shall not be deemed “filed” for any purpose, nor shall it be deemed to be incorporated by reference into any
filing under the Securities Act of 1933 or the Securities Exchange Act of 1934 regardless of any general incorporation language in
such filing.
February 22, 2017
/s/ Albert Behler
Name: Albert Behler
Title:
Chairman, Chief Executive Officer and President
CERTIFICATION
EXHIBIT 32.2
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Paramount Group, Inc. (the “Company”),
hereby certifies, to such officer’s knowledge, that:
(cid:120)
(cid:120)
the Annual Report on Form 10-K for the year ended December 31, 2016 (the “Report”) of the Company fully complies
with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
This certification shall not be deemed “filed” for any purpose, nor shall it be deemed to be incorporated by reference into any
filing under the Securities Act of 1933 or the Securities Exchange Act of 1934 regardless of any general incorporation language in
such filing.
February 22, 2017
/s/ Wilbur Paes
Name: Wilbur Paes
Title:
Executive Vice President, Chief Financial Officer
and Treasurer
Corporate Headquarters
1633 Broadway, Suite 1801
New York, New York 10019
(212) 237-3100
www.paramount-group.com
About Our Stock
Our Common Stock is listed on the
New York Stock Exchange under the
symbol PGRE.
Annual Meeting
Thursday, May 18, 2017
Investor Relations Information
ir@paramount-group.com
(212) 492-2298
Registrar & Transfer Agent
Computershare Trust Company, N.A .
http://www.computershare.com/us/
(800) 962-4284
Corporate Counsel
Goodwin Procter LLP
New York, NY
Auditors
Deloitte & Touche LLP
New York, NY
Board of Directors
Albert Behler
Chairman, Chief Executive Officer & President
Thomas Armbrust
Managing Director of CURA Vermögensverwaltung
Martin Bussmann
Trustee of the Mannheim Trust in New York
Dan Emmett
Chairman of the Board, Douglas Emmett
Lizanne Galbreath
Managing Partner, Galbreath & Company
Karin Klein
Partner at Bloomberg Beta
Peter Linneman
Professor Emeritus, The University of Pennsylvania,
Wharton School of Business
David O’Connor
Co-Founder and Senior Managing Partner of
High Rise Capital Management, L.P.
Katharina Otto-Bernstein
President of Film Manufacturers Inc.
Management
Albert Behler
Chairman, Chief Executive Officer & President
Wilbur Paes
Executive Vice President, Chief Financial Officer
and Treasurer
Jolanta Bott
Executive Vice President, Operations and
Human Resources
Theodore Koltis
Executive Vice President, Leasing
Daniel Lauer
Executive Vice President, Chief Investment Officer
a
t
a
D
e
t
a
r
o
p
r
o
C
New York • Washington, D.C. • San Francisco