2018
ANNUAL REPORT
96.4%
TOTAL LEASED OCCUPANCY
PAR AMOUNT GROUP, INC . // ANNUAL REPORT 2018
01
11.9MM
TOTAL SQUARE FOOTAGE
02
PAR AMOUNT GROUP, INC . // ANNUAL REPORT 2018
TO OUR
SHAREHOLDERS
Once again, with great pride, I can report that
Paramount continues to meet or exceed our
goals in executing on our business plan. Those
that have followed us over the past four years
know that within our markets, we always look to
create a portfolio that includes the most sought
after addresses in the business community and
during 2018, we saw the benefits of that discipline
throughout our business.
We completed the multi-year leasing effort of our
large-block vacancies in New York and ended the
year with the entire portfolio 96.4% leased and
the New York portfolio 96.0% leased—effectively
full by most measures. In Washington, D.C., we
sold two fully stabilized buildings at pricing that
reflects our efforts over four years to convert
large blocks of vacancy into high quality tenancy.
In San Francisco, we made great strides in
executing our investment strategy at One Front
Street and 50 Beale Street. Given the successes
with those two assets, late in the year we
announced the addition of 111 Sutter Street to
the San Francisco portfolio.
Our confidence in the strategy and its execution
remains high, as our results continue to reflect
strong underlying performance across our
portfolio. 2018 was another breakthrough year
as we produced record Core FFO earnings and
Cash NOI.1 Our Core FFO earnings grew just
about 8.0% in 2018 to $0.96 per share, driven by
sector-leading same store Cash NOI growth of
10.3%, the second consecutive year of double-
digit NOI growth. We expect to continue
delivering superior results to our shareholders in
the future.
CORE FFO ($MM) & CORE FFO PER SHARE
$0.89
$210.1
$0.84
$183.6
$0.79
$167.1
$0.96
$229.9
2015
2016
2017
2018
LEASING
Leasing and a hands-on approach to managing
our assets remains one of Paramount’s greatest
strengths and key differentiators. 2018 was
another in a series of successful years for our
leasing team since we came public. We signed
leases on just over one million square feet of
space, well ahead of our original guidance of
between 500,000 to 700,000 square feet we
expected at the beginning of the year. All that
leased
increased our same store
leasing
occupancy by 310 basis points to 96.4%. To top it
off, we did all that leasing at robust cash mark-to-
markets of positive 13.3%. We take great pride in
the consistent pace at which we can lease our
space to high quality tenants. On average, we
have leased approximately one million square feet
per year since we have been a public company.
In New York, fundamentals are strong and getting
stronger. Trends in the marketplace such as lower
unemployment and continued job growth, the
stabilization of concessions, and the fact that
leasing velocity is outpacing the delivery of new
supply all bode well for the market outlook. 2018
was a record year for leasing in the Midtown office
market and the second consecutive year that the
market had positive net absorption in excess of
one million square feet. With the leasing strength,
availability has decreased to its lowest level since
2008. With our high-quality, centrally-located
properties, we were able to capitalize and capture
a significant portion of the activity in Midtown. We
executed leases for approximately 576,000
square feet, completing the last of the large
blocks of space we had available and increasing
our leased occupancy to 96.0% at year end.
In San Francisco, we have continued to execute
ahead of expectations, leasing approximately
412,000 square feet in 2018 at exceptional cash
mark-to-markets of 29.0%. With several early
renewals included in our leasing, same store
leased occupancy increased 160 bps to end the
year at 98.0%. These results highlight the
strength and resiliency of the market, as well as
the quality of our portfolio.
At One Market Plaza, which is our largest asset
in San Francisco at 1.6 million square feet, we
executed on all the full floor vacancies that we
previously had in the building. This increased
leased occupancy to 99.0% which
is an
exceptional result for a building of that size. One
Market Plaza remains one of the best performing
assets in the San Francisco CBD.
While at separate stages in their lease-up from
when we acquired the properties, both One Front
Street and 50 Beale Street continue to exceed our
growth expectations. At One Front Street, for
example, the average annualized rent per square
foot has increased by $12.07, or 21.3%, since its
acquisition in late 2016. At 50 Beale Street, we
have already begun to make significant leasing
progress, increasing leased occupancy to 99.7%
from 82.6% a year ago. We see a great opportunity
for further growth through the lease-up of an
upcoming 262,000 square foot block of space
expiring at the end of 2019 at rents well below
market. The demand for large blocks of space
continues to be robust and availability is scarce,
so we are confident in our position in the market.
The significant outperformance in San Francisco
and more specifically the success we have had at
One Front Street and 50 Beale Street were key
factors that led us to increase our exposure in
San Francisco with the acquisition of 111 Sutter
Street. More on that shortly.
We ended the year in Washington, D.C. at 98.0%
leased. Parts of the market may be challenged,
but our strategy to concentrate on Class A
assets in certain key locations within the CBD
has proven to be the right approach and has
created significant value for shareholders. The
portfolio remains well positioned in the market
with not much available space and no meaningful
expirations over the next three years.
ACQUISITIONS & DISPOSITIONS
In addition to our leasing efforts, a core strength
in being able to create long-term value for our
shareholders is our ability to be disciplined fiscal
stewards of your capital. Over nearly 30 years of
operating, first in the private markets and now in
the public markets, we have seen time and time
again that a prudent and oppor tunistic
acquisition at a reasonable cost basis creates
long term opportunities for value creation.
Conversely, and just as important, is maintaining
the discipline of harvesting value over cycles
when we have done all we can to create value
within the Paramount platform.
During 2018, as in 2017, we continued to see
sizeable gaps in our markets between seller and
buyer expectations. The result, once again, was
transaction volumes below long-term averages.
Interest rates were a touch higher than they were
a year ago, but even so, many would-be sellers
chose to refinance and realize net proceeds in a
tax-efficient manner. Given the persistence of
these market dynamics, our views didn’t change
much during the year. We remained disciplined
and elected to recycle capital and use our equity
capital carefully. During 2018, we executed on
the following:
• 2099 Pennsylvania Avenue: We sold 2099
Pennsylvania, a stabilized core property
located in the heart of Washington’s CBD, for
$220.0 million, or just over $1,050 per square
foot. At the time of disposition, the property
was 98.5% leased, up from 31.6% at the time
we went public. The leases had average
annualized rents north of $80 per square foot
on a gross basis. Over a four-year period, our
leasing team converted large blocks of
vacancy into tenancy, creating one of the best
Class A properties in the market.
located
• 425 Eye Street: We sold 425 Eye Street, a
proper ty
in an up-and-coming
submarket of D.C., for $157.0 million. The
property was 98.7% leased at the time of sale.
The U.S. Government, whose lease was
scheduled to expire in 2021, is the largest
tenant, occupying roughly 90.0% of the building.
(1) For a reconciliation of these measures to their most directly comparable GAAP measures and the reasons we view
these measures to be useful, see pages 70–75 of our Annual Report on Form 10-K for the year ended December 31, 2018.
In both cases we monetized stabilized assets
and realized values much higher than what
was implied by our share price at the time,
and higher than those valuations assumed
in Wall Street analyst’s NAV models. Both
transactions highlight a dynamic whereby
valuations in the private markets for stabilized
assets exceed what is being ascribed to the
same assets in the public markets. More on
this divergence and how we responded to the
circumstances in a bit.
• 111 Sutter Street: During 2018, we recycled a
portion of the capital received from the
Washington, D.C. asset sales and agreed to
purchase 111 Sutter Street for $227.0 million,
or approximately $775 per square foot,
through a 49.0% joint venture structure.
There are many things we like about this
acquisition. First, the asset is currently only
70.0% leased and existing leases offer mark-
to-market opportunities. Second, whereas
others are paying well over $1,000 per square
foot for stabilized product, we feel very good
about acquiring a value-add opportunity at an
attractive basis where we can bring our
strengths to bear. Third, the joint venture
structure greatly enhances potential future
returns to Paramount shareholders through
fees and a smaller equity check. Lastly, it
leaves us with “dry powder” to deploy on
similar opportunities as we find them, which
enhances our long-term growth profile. Taken
together, we essentially traded fully-stabilized,
lower-growth assets in D.C. for an asset in our
highest-growth market with signif icant
lease-up potential!
We have executed on this strategy in the past.
Recall a few years ago we sold Waterview, a
stabilized asset in Rosslyn, Virginia at record
pricing and acquired One Front Street for just
$800 per square foot; and in July 2017, we
increased our ownership in 50 Beale at $780
per square foot. Similar to 111 Sutter Street,
both One Front and 50 Beale were under-
rented. In addition, One Front had significant
near-term roll and 50 Beale was only 78.0%
leased. We have outperformed our own
expectations with both these acquisitions
and are very excited at the opportunity to do
the same with 111 Sutter Street!
Our efforts in recycling capital are very consistent
with how we see our markets. Today capital flows
in our markets remain strong, especially for well-
leased assets with little-to-no execution risk.
With our current cost of capital and asset values
elevated in our markets, we will continue to
maintain our disciplined and opportunistic
approach with an eye towards obtaining the
highest risk-adjusted return for our shareholders.
CAPITAL MARKETS
Over the years since going public, we have
remained balanced and consistent
in our
approach to capital allocation. At the same time,
office REIT stock prices have disconnected from
private market valuations. This disconnect has
been evident to us for several years, and in August
of 2017 our Board of Directors authorized the
repurchase of up to $200.0 million of our common
stock as a way to take advantage of this gap.
Yet, our preference has been to allocate and/or
recycle capital in a disciplined manner to
prudently grow our business over the long term.
Whether by leasing our large block availabilities
in New York, or by recycling the capital realized
by selling stabilized assets into acquisition
opportunities like One Front or 50 Beale, the
path we have chosen since we went public has
been to capitalize on our operating strengths to
create additional value for our shareholders.
However, during the fourth quarter of 2018, we
saw levels of disconnect in our stock price that
were, for lack of a better word, completely
irrational. During this period, at a time of
significant market volatility, we had just sold the
two assets in Washington, D.C. and we had
liquidity to take advantage of the dislocation on
a leverage-neutral basis for our shareholders.
We did just that and recycled a portion of the
capital from the Washington, D.C. asset sales by
opportunistically and aggressively repurchasing
as many shares as we could. We bought back
approximately 7.6 million shares at a weighted
average price of $13.95 per share, a level that is
significantly below Wall Street estimates of our
net asset value (NAV).
Investors should not interpret the share buyback
as a change in our strategy or priorities. Quite
the opposite. As we have done in the past, we will
continue to deploy capital prudently to increase
long-term value. Our approach has been and
will remain consistent and balanced! We will
continue to deliberate extensively on what we
do with your capital. We do not consider any of
our options, be it acquisitions or share buybacks,
to be mutually exclusive.
We ended 2018 with approximately $1.4 billion
in liquidity, comprised of $339.6 million of cash,
$25.8 million of restricted cash, and $1.0 billion
of availability under our revolving credit facility,
putting us in a great position to continue to grow
the Company in a disciplined and shareholder-
friendly manner. Looking forward, investors
should expect our capital allocation decisions
to be based on long-term views and an
appropriate balance between returning capital
to shareholders with prudently investing for
future growth.
SUSTAINABILITY
Sustainability, environmental efficiency, tenant
service and property management are central
to our operating principles at Paramount. We
are an industry leader in ongoing sustainability
initiatives and are extremely proud of our
continued recognition as an environmentally
conscious and socially responsible leader in the
market. As in past years, central to these
efforts is our continuing commitment to partner
with the U.S. Green Building Council (USGBC)
and the Environmental Protection Agency
(EPA) to promote sustainability and green
building certifications.
The USGBC’s mission is to transform the way
buildings are designed, built and operated, to
enable environmentally and socially responsible
environments that are prosperous, healthy and
improve the quality of life. We are proud to work
with the USGBC and even more proud that, once
PAR AMOUNT GROUP, INC . // ANNUAL REPORT 2018
03
again, at the end of 2018, our entire portfolio
earned LEED-certified Gold or Platinum status,
including all three of our San Francisco assets at
the time achieving Platinum. We believe this is
an achievement that is unmatched by any of our
public peers, and with the acquisition of 111
Sutter Street we are hard at work once again to
improve efficiency and sustainability.
We are part of the EPA’s voluntary Energy Star
program that certifies the most energy-efficient
buildings across the country. At benchmarking in
2008, our average Energy Star Score was 73;
today it stands at 85, a 16.4% increase. We are
one of only a handful of U.S. commercial
property companies designated as an “Energy
Star Leader” with our portfolio registered and
energy usage monitored online in real-time.
We were early adopters of sustainability practices
and did so for one simple reason—it was the
right thing to do. Over time, the benefits of these
efforts have become evident. Tenants now
demand sustainability practices as prerequisites
for their office space. We remain committed to
our sustainability practices which are imperative
in attracting and retaining the best tenants and
helping us manage operating costs, which
ultimately enhances portfolio values.
THE PARAMOUNT TEAM & STAKEHOLDERS
As we look forward, we recognize that we must
earn the confidence and trust of our shareholders,
employees and tenants every year, every month
and every day. We are committed to continuing
to earn that support and are very excited about
the opportunities for future growth and success
for Paramount.
The team is energized to keep executing and
achieving our strategic goals. We remain focused
on continuing to unlock the significant embedded
growth in the portfolio as well as executing on our
investment strategies at our recent addition.
I cannot emphasize enough how honored I am to
work daily with the team we have in place. Each day,
I observe the extraordinary capabilities, character,
values, know-how, creativity and winning spirit of
the entire team. I have great partners in Executive
Management in Wilbur, Peter, and David, and
collectively within each discipline, there is an
exceptional and deep team working on behalf of
shareholders. I want to personally express my
gratitude to the entire team.
Lastly, we all thank you, our investors and
stakeholders, for your continued support and
confidence. Rest assured, we will work tirelessly
on your behalf and continue to earn that support
and confidence.
Sincerely,
ALBERT BEHLER
Chairman, CEO & President
04
PAR AMOUNT GROUP, INC . // ANNUAL REPORT 2018
CORPORATE HIGHLIGHTS
CONSOALIDATED RE VENUE S ($ IN THOUSANDS)
$758,961
$718,967
$683,341
$662,408
2015
2016
2017
2018
PGRE’S SHARE OF CASH NOI ($ IN THOUSANDS)
$355,913
$308,341
$309,148
$331,985
2015
2016
2017
2018
DIVERSIFIED TENANTS
*Commercial & Investment Banking **All Others ***Figures based on PGRE's share of annualized rent
LEGAL SERVICES
FINANCIAL SERVICES*
TECHNOLOGY AND MEDIA
FINANCIAL SERVICES**
INSURANCE
RETAIL
CONSUMER PRODUCTS
TRAVEL & LEISURE
REAL ESTATE
OTHER
23.0%
22.3%
17.7%
13.1%
7.1%
3.1%
2.4%
2.2%
2.0%
7.1%
DECEMBER 2018 ANNUALIZED RENT *
*All figures exclude the impact of the acquisition of 111 Sutter Street which is completed February 2019.
NEW YORK
SAN FRANCISCO
WASHINGTON, D.C.
77.2%
18.1%
4.7%
PAR AMOUNT GROUP, INC . // ANNUAL REPORT 2018
05
PROPERT Y
LE ASED %
1633 BROADWAY
1301 AVENUE OF THE AMERICAS
1325 AVENUE OF THE AMERICAS
31 WEST 52ND STREET
900 THIRD AVENUE
712 FIFTH AVENUE
95.4%
97.9%
96.7%
97.5%
92.6%
88.4%
60 WALL STREET
100%
ONE MARKET PLAZA
ONE FRONT STREET
50 BEALE STREET
99.0%
96.3%
99.7%
1899 PENNSYLVANIA AVENUE
100%
LIBERTY PLACE
95.8%
96.0%
LEASED IN
NEW YORK
[8.6MM SQUARE FEET]
98.0%
LEASED IN
SAN FRANCISCO*
[2.9MM SQUARE FEET]
98.0%
LEASED IN
WASHINGTON, D.C.
[365K SQUARE FEET]
*All figures exclude the impact
of the acquisition of 111 Sutter Street
which is completed February 2019.
06
PAR AMOUNT GROUP, INC . // ANNUAL REPORT 2018
SUSTAINABILITY
HIGHLIGHTS
“LIVING WALL” - ONE MARKET PLAZA, SF
100%
OF PORTFOLIO HAS
ACHIEVED EITHER
GOLD OR PLATINUM
LEED CERTIFICATION.
Paramount is an industry leader in on-going sustainability initiatives
that have helped us to manage operating costs, attract and retain
premium tenants, and ultimately enhance portfolio value. We are
proud to have partnered with the EPA and U.S. Green Building Council
(USGBC) to promote sustainability and green building certifications.
LEED CERTIFICATION
• We are a member of the USGBC and we have certified millions
of square feet of LEED buildings.
• Our entire portfolio of REIT-owned properties (11.9 million sq. ft)(1)
has earned LEED EB Gold or Platinum.
* All figures exclude the impact of the acquisition of 111 Sutter Street which is completed February 2019.
ENERGY STAR RATINGS
• ENERGY STAR for Buildings is an EPA voluntary program that certifies
the most energy-efficient buildings across the country.
• As an early ENERGY STAR Leader, our entire portfolio has earned ENERGY
STAR Certifications and energy usage is monitored online in real-time.
,
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, 2018
OR
(cid:4) 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:5)
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:5) 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:5)
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted
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 such files). YES ⌧ NO (cid:5)
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, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
⌧
Large Accelerated Filer
(cid:5)
Non-Accelerated Filer
Emerging Growth Company (cid:5)
Accelerated Filer
Smaller Reporting Company
(cid:4)
(cid:4)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:4)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES (cid:5) NO ⌧
As of January 31, 2019, there were 233,214,341 shares of the registrant’s common stock outstanding.
As of June 30, 2018, the aggregate market value of the 206,672,016 shares of common stock held by non-affiliates of the Registrant
was $3,182,749,000 based on the June 29, 2018 closing share price of our common stock of $15.40 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 16, 2019) 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
Item
Part I.
Financial Information
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
Part II.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Part III.
Item 10.
Directors, Executive Officers and Corporate Governance (1)
Item 11.
Executive Compensation (1)
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters (1)
Item 13.
Certain Relationships and Related Transactions, and Director Independence (1)
Item 14.
Principal Accounting Fees and Services (1)
Part IV.
Item 15.
Exhibits, Financial Statements Schedules
Item 16.
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, 2018, portions of
which are incorporated by reference herein.
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6
12
34
35
39
39
40
43
46
76
78
118
118
120
120
120
120
120
120
121
121
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:
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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;
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risks associated with the market for our common stock;
regulatory changes, including changes to tax laws and regulations;
failure to qualify as a real estate investment trust (“REIT”);
compliance with REIT requirements, which may cause us to forgo otherwise attractive opportunities or liquidate certain of
our investments; or
any of the other risks included in this 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. A reader should review carefully, our consolidated financial
statements and the notes thereto, as well as Item 1A entitled “Risk Factors” in this report.
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ITEM 1.
BUSINESS
General
PART I
Paramount Group, Inc. is a fully-integrated REIT focused on owning, operating, managing, acquiring and redeveloping high-
quality, Class A office properties in select central business district submarkets of New York City, Washington, D.C. and San
Francisco. 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 conduct our business through, and substantially all our interests in properties and investments are
held by, the Operating Partnership. We are the sole general partner of, and owned approximately 90.3% of the Operating Partnership
as of December 31, 2018. As of December 31, 2018, our portfolio consisted of 12 Class A office properties aggregating approximately
11.9 million square feet that was 97.0% leased and 95.1% occupied.
Our Competitive Strengths
We believe that we distinguish ourselves from other owners and operators of office properties through the following competitive
strengths:
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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.
(cid:129) Demonstrated Acquisition and Operational Expertise. Over the past 21 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.
(cid:129) 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.
(cid:129) 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, Norton Rose Fulbright, Showtime Networks Inc., TD Bank, N.A., Warner Music
Group, Google Inc. and First Republic Bank.
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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 vacant and expiring leases in our portfolio.
(cid:129) 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, 2018, our share of net debt to enterprise value
was 46.2% and we had $339.7 million of cash and cash equivalents and a $1.0 billion revolving credit facility.
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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.
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 22 years, and has worked at our company for an average of 12 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.
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:
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Leasing vacant and expiring space, at market rents;
(cid:129) 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;
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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, 2018, 2017 and 2016.
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Employees
As of December 31, 2018, we had 321 employees, including 95 corporate employees and 226 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 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.
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.
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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.
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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.
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Supplemental U.S. Federal Income Tax Considerations
The following discussion supplements and updates the disclosures under “Certain United States Federal Income Tax
Considerations” in the prospectus dated May 3, 2018 contained in our Registration Statement on Form S-3 filed with the SEC on
May 3, 2018.
Consolidated Appropriations Act
The Consolidated Appropriations Act amended various provisions of the Code and implicates certain tax-related disclosures
contained in the prospectus. The discussion contained in the two paragraphs under “Certain United States Federal Income Tax
Considerations–Taxation of Non-U.S. Stockholders–Special FIRPTA Rules” is replaced with the following two paragraphs:
For periods on or after December 18, 2015, to the extent our stock is held directly (or indirectly through one or more partnerships)
by a “qualified shareholder,” it will not be treated as a U.S. real property interest (“USRPI”). Further, to the extent such treatment
applies, any distribution to such shareholder will not be treated as gain recognized from the sale or exchange of a USRPI. For these
purposes, a qualified shareholder is generally a non-U.S. stockholder that (i)(A) is eligible for treaty benefits under an income tax
treaty with the United States that includes an exchange of information program, and the principal class of interests of which is listed
and regularly traded on one or more stock exchanges as defined by the treaty, or (B) is a foreign limited partnership organized in a
jurisdiction with an exchange of information agreement with the United States and that has a class of regularly traded limited
partnership units (having a value greater than 50% of the value of all partnership units) on the New York Stock Exchange or Nasdaq,
(ii) is a “qualified collective investment vehicle” (within the meaning of Section 897(k)(3)(B) of the Code) and (iii) maintains records
of persons holding 5% or more of the class of interests described in clauses (i)(A) or (i)(B) above. However, in the case of a qualified
shareholder having one or more “applicable investors,” the exception described in the first sentence of this paragraph will not apply to
the applicable percentage of the qualified shareholder’s stock (with “applicable percentage” generally meaning the percentage of the
value of the interests in the qualified shareholder held by applicable investors after applying certain constructive ownership rules). The
applicable percentage of the amount realized by a qualified shareholder on the disposition of our stock or with respect to a distribution
from us attributable to gain from the sale or exchange of a USRPI will be treated as amounts realized from the disposition of USRPIs.
Such treatment shall also apply to applicable investors in respect of distributions treated as a sale or exchange of stock with respect to
a qualified shareholder. For these purposes, an “applicable investor” is a person who generally holds an interest in the qualified
shareholder and holds more than 10% of our stock applying certain constructive ownership rules.
For periods on or after December 18, 2015, for FIRPTA purposes neither a “qualified foreign pension fund” nor any entity all of
the interests of which are held by a qualified foreign pension fund is treated as a non-U.S. stockholder. A “qualified foreign pension
fund” is an organization or arrangement (i) created or organized in a foreign country, (ii) established by a foreign country (or one or
more political subdivisions thereof) or one or more employers to provide retirement or pension benefits to current or former
employees (including self-employed individuals) or their designees as a result of, or in consideration for, services rendered, (iii) which
does not have a single participant or beneficiary that has a right to more than 5% of its assets or income, (iv) which is subject to
government regulation and with respect to which annual information about its beneficiaries is provided, or is otherwise available, to
relevant local tax authorities and (v) with respect to which, under its local laws, (A) contributions that would otherwise be subject to
tax are deductible or excluded from its gross income or taxed at a reduced rate, or (B) taxation of its investment income is deferred, or
such income is excluded from its gross income or taxed at a reduced rate.
Recent FATCA Proposed Treasury Regulations
On December 18, 2018, the Internal Revenue Service promulgated proposed regulations under Sections 1471-1474 of the Code
(commonly referred to as FATCA), which proposed regulations eliminate FATCA withholding on gross proceeds and thus implicate
certain tax-related disclosures contained in the prospectus. While these regulations have not yet been finalized, taxpayers are generally
entitled to rely on the proposed regulations (subject to certain limited exceptions). As a result, the discussion in the final sentence of
the discussion under “Certain United States Federal Income Tax Considerations–Taxation of Non-U.S. Stockholders–FATCA
Withholding on Certain Foreign Accounts and Entities” is deleted and replaced with the following:
While withholding under FATCA would have applied to the gross proceeds from a disposition of property that can produce U.S.
source interest or dividends after December 31, 2018, recently proposed Treasury Regulations eliminate FATCA withholding on
payments of gross proceeds entirely. Taxpayers generally may rely on these proposed Treasury Regulations until final Treasury
Regulations are issued. Withholding under FATCA currently applies with respect to other withholding payments, including, e.g., U.S.
source interest and dividends.
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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 (“NOI”), our funds from operations (“FFO”) and/or the value of our properties include the following, among others:
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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.
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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, 2018, 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, 2018, the vacancy rate of our portfolio was 3.0%. In addition, 4.7% of the square footage of the properties in
our portfolio will expire by the end of 2019. 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; (v) cost overruns and untimely completion of construction (including risks beyond our control, such as weather or
labor conditions, or material shortages); (vi) the potential that we may fail to recover expenses already incurred if we abandon
development or redevelopment opportunities after we begin to explore them; (vii) the potential that we may expend funds on and
devote management time to projects which we do not complete; (viii) the inability to complete construction and leasing of a property
on schedule, resulting in increased debt service expense and construction or redevelopment costs; and (ix) the possibility that
properties will be leased at below expected rental rates. 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.
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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.
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 25% 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.
We may be adversely affected by trends in the office real estate industry.
Telecommuting, flexible work schedules, open workplaces and teleconferencing are becoming more common. These practices
enable businesses to reduce their space requirements. There is also an increasing trend among some businesses to utilize shared office
spaces and co-working spaces. A continuation of the movement towards these practices could over time erode the overall demand for
office space and, in turn, place downward pressure on occupancy, rental rates and property valuations.
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, under the Tax Cuts and Jobs Act (the “TCJA”), was reduced from 35% to 21%, 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.
14
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.
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.
15
Terrorist attacks and/or shooting incidents may adversely affect our ability to generate revenues and the value of our
properties.
We have significant investments in large metropolitan markets, including New York City, Washington D.C. and San Francisco,
that have been or may be in the future the targets of actual or threatened terrorism attacks and/or shooting incidents. 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.”
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.
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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.
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.
17
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.
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,
put right 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, One Market Plaza and 50 Beale 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, One Market Plaza and 50 Beale have forced sale rights pursuant to
which, after a specified period, each may require us to sell the property to a third party. At any time on or after (i) November 24, 2020,
with respect to 712 Fifth Avenue, (ii) March 31, 2021, with respect to One Market Plaza, and (iii) August 12, 2024, with respect to 50
Beale, our joint venture partners 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. In the case of 712
Fifth Avenue and 50 Beale, 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). In the case of One Market Plaza, upon exercise of forced sale
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 to sell these properties to third
parties at times or prices that may not be favorable to us, which could adversely impact us.
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Contractual commitments with existing private equity real estate funds and our investment club may limit our ability to
acquire properties, issue loans or invest in preferred equity directly in the near term.
Because of the limited exclusivity requirements of our private equity real estate funds, we may be required to acquire or issue
loans, or invest in preferred equity partially through these funds that we otherwise would have acquired solely through our operating
partnership, which may prevent our operating partnership from acquiring or issuing loans, or investing in preferred equity and
adversely affect our growth prospects. In connection with certain assets that we co-invest in with our private equity real estate funds,
specifically those where such funds owns a majority of the joint venture it is expected that such funds 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.
In addition, because of the exclusivity requirements of our strategic real estate co-investment platform (our investment club)
focused on acquiring real estate assets and/or real estate-related equity investments, we may be required to acquire properties through
this platform 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 up to 51.0% of the equity required for any property alongside the third-party investors in this platform to the extent we
determine it is in our best interest. In connection with any property in which we co-invest, we will have the authority, subject to major
decision rights in favor of our joint venture partners, to make a majority of the decisions in connection with such property.
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.
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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, 2018, including debt of our unconsolidated joint ventures, we had $4.5 billion of total debt, of which our
share is $3.1 billion, substantially all of which was secured debt, and we have $1.0 billion 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.
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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 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.
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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 generally accepted accounting principles could adversely affect the operating results and the reported financial
performance of us and our tenants.
Accounting policies and methods are fundamental to how we record and report our financial condition and results of operations.
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. 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 SEC as investment advisers under the U.S. Investment Advisers Act of 1940 (the “Advisers
Act”), and may be registered as non-EU alternative investment fund managers of Non-EU 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 subject to regulation or reporting requirements by the regulatory bodies of the countries where our subsidiaries are or
may be registered in pursuant to the AIFMD. Our investment management business may also, in the future, become 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 has been 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.
We cannot predict the impact future actions by regulators or government bodies, including the U.S. Federal Reserve, will have
on real estate debt markets or on our business, and any such actions may negatively impact us.
Regulators and U.S. government bodies have a major impact on our business. The U.S. Federal Reserve is a major participant in,
and its actions significantly impact, the commercial real estate debt markets. For example, quantitative easing, a program implemented
by the U.S. Federal Reserve to keep long-term interest rates low and stimulate the U.S. economy, had the effect of reducing the
difference between short-term and long-term interest rates. However, the U.S. Federal Reserve ended the latest round of quantitative
easing and has raised interest rates. Rising interest rates increase the cost of borrowing, which could limit our flexibility. This may
result in future acquisitions by us generating lower overall economic returns and increasing the costs associated with refinancing
current debt, which could potentially reduce future cash flow available for distribution. We cannot predict or control the impact future
actions by regulators or government bodies, such as the U.S. Federal Reserve, will have on our business.
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:3)
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:3) 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:3)
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;
(cid:3)
subject us to increased sensitivity to interest rate increases;
(cid:3) make us more vulnerable to economic downturns, adverse industry conditions or catastrophic external events;
(cid:3)
(cid:3)
(cid:3)
(cid:3)
limit our ability to withstand competitive pressures;
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, 2018, $396.8 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:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
actual or anticipated variations in our quarterly operating results or dividends;
changes in our FFO, 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.
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”).
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, 2018, 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 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 May 3, 2018, 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. In addition, share repurchases under our share
repurchase program could also increase the volatility of the price of our common stock and could diminish our cash reserves.
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.
The existence of our share repurchase program could cause our stock price to be higher than it would be in the absence of such a
program and could potentially reduce the market liquidity for our stock. Additionally, our share repurchase program could diminish
our cash reserves, which may impact our ability to finance future growth and to pursue possible future strategic opportunities and
acquisitions. Although our share repurchase program is intended to enhance long-term stockholder value, there is no assurance that it
will do so and short-term stock price fluctuations could reduce the program’s effectiveness.
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 (which, for corporations, was repealed
for tax years beginning after December 31, 2017 under the TCJA), 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 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 21%, effective January 1, 2018,
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 generally 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 are
taxable as ordinary income when paid to such stockholders. However, the TCJA provides a deduction of up to 20% of a non-corporate
taxpayer’s ordinary REIT dividends with such deduction scheduled to expire for taxable years beginning after December 31, 2025.
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, debt instruments issued by a publicly traded REIT and qualified real estate assets. The REIT asset tests further
require that with respect to our assets that are not qualifying assets for purposes of this 75% asset test and that are not securities issued
by a TRS, we generally cannot hold at the close of any calendar quarter (i) securities representing 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 or (ii) securities
of any one issuer that represent more than 5% of the value of our total assets. In addition, securities (other than qualified real estate
assets) issued by our TRSs cannot represent 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 at the close of any calendar quarter. 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 assets for purposes of the 75% asset test, no more than 25% of the value of our total assets
can be represented by such unsecured debt instruments. After meeting these asset test 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 effect of limitations on interest and net operating loss deductibility, 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. 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 (and believe we have conducted our affairs) so that such
securities will represent (or have represented) 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.
The partnership audit rules 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 the case of an audit of a partnership for a taxable year beginning after December 31, 2017, 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. Thus, for example, an audit assessment attributable to former partners of the operating partnership could
be shifted to the partners in the year of adjustment. The partnership audit rules also include an elective alternative method under
which the additional taxes resulting from the adjustment are assessed from the affected partners (often referred to as a “push-out
election”), subject to a higher rate of interest than otherwise would apply. When a push-out election causes a partner that is itself a
partnership to be assessed with its share of such additional taxes from the adjustment, such partnership may cause such additional
taxes to be pushed out to its own partners. In addition, Treasury Regulations provide that a partner that is a REIT may be able to use
deficiency dividend procedures with respect to such adjustments. Many questions remain as to how the partnership audit rules will
apply, and it is not clear at this time what effect these rules will have on us. However, it is possible that 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
Tax legislation or regulatory action could adversely affect us or our investors.
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.
On December 22, 2017, President Trump signed into law the TCJA. The TCJA makes major changes to the Code, including a
number of provisions of the Code that affect the taxation of REITs and their stockholders. The effect of the significant changes made
by the TCJA remains uncertain, and administrative and/or regulatory guidance will be required in order to fully evaluate the effect of
many of the provisions contained therein. The effect of any technical corrections with respect to the TCJA could have an adverse
effect on us or our stockholders.
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, 2018, our portfolio consisted of 12 Class A office properties aggregating approximately 11.9 million square
feet that was 97.0% leased and 95.1% occupied. The following table presents an overview of our portfolio as of December 31, 2018.
(Amounts in thousands, except square feet and per square foot amounts)
Annualized Rent (3)
Property
Submarket
Paramount
Ownership
Square
Feet
%
Leased (1)
%
Occupied (2)
Amount
Per Square
Foot (4)
New York:
1633 Broadway
1301 Avenue of the Americas
1325 Avenue of the Americas
31 West 52nd Street
900 Third Avenue
712 Fifth Avenue
60 Wall Street
Subtotal / Weighted Average
Paramount's Ownership Interest
Washington, D.C.:
1899 Pennsylvania Avenue
Liberty Place
Subtotal / Weighted Average
Paramount's Ownership Interest
San Francisco:
One Market Plaza
One Front Street
50 Beale Street
Subtotal / Weighted Average
Paramount's Ownership Interest
Total / 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
Downtown
100.0% 2,518,597
100.0% 1,781,571
811,439
100.0%
763,140
100.0%
599,317
100.0%
50.0%
543,411
5.0% 1,625,483
8,642,958
6,827,207
CBD
East End
100.0%
100.0%
190,955
174,090
365,045
365,045
South Financial District
North Financial District
South Financial District
49.0% 1,583,336
646,538
100.0%
666,495
31.1%
2,896,369
1,629,653
11,904,372
8,821,905
95.4%
97.9%
96.7%
97.5%
92.6%
88.4%
100.0%
96.5%
96.0%
100.0%
95.8%
98.0%
98.0%
99.0%
96.3%
99.7%
98.5%
98.0%
97.0%
96.4%
$
95.4% $
97.9%
81.2%
95.8%
91.6%
85.5%
100.0%
94.6%
93.7%
174,341
134,544
43,331
65,950
39,025
51,971
73,600
582,762
486,864
74.20
77.80
68.38
87.93
71.56
112.48
45.28
71.94
77.14
100.0%
94.9%
97.5%
97.5%
15,722
14,338
30,060
30,060
97.6%
96.3%
93.5%
96.4%
96.6%
120,288
43,136
38,156
201,580
113,944
83.03
86.49
84.62
84.62
77.09
68.80
61.68
71.84
71.94
95.1% $
814,402
94.4% $
630,868
$
$
72.32
76.45
(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) Except for 60 Wall Street, which is presented on a “triple-net” basis, amounts in this column represent 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.
35
Tenant Diversification
As of December 31, 2018, our properties were leased to a diverse base of tenants. Our tenants represent a broad array of
industries, including financial services, legal services, technology and media, insurance and other professional services. The following
table sets forth information regarding the ten largest tenants in our portfolio based on annualized rent as of December 31, 2018.
(Amounts in thousands, except square feet and per square feet amounts)
Our Share of
Tenant
Barclays Capital, Inc.
Allianz Global Investors, LP
Credit Agricole Corporate &
Investment Bank
Clifford Chance LLP
Norton Rose Fulbright
Morgan Stanley & Company
WMG Acquisition Corporation
(Warner Music Group)
First Republic Bank
Showtime Networks, Inc.
Kasowitz Benson Torres &
Friedman, LLP
Lease
Expiration
Total
Square Feet
Occupied
Total
Square Feet
Occupied
% of
Total
Square Feet
Annualized Rent (1)
Amount
Per Square
Foot
% of
Annualized
Rent
Dec-2020
Jan-2031
497,418
320,911
497,418
320,911
5.6% $
3.6%
32,505 $
28,726
Feb-2023
Jun-2024
Sep-2034 (2)
Mar-2032
Jul-2029
Jun-2025
Jan-2026
312,679
328,992
320,325 (2)
260,829
312,679
328,992
320,325 (2)
260,829
293,888
232,479
238,880
293,888
232,479
238,880
3.5%
3.7%
3.6%
3.0%
3.3%
2.6%
2.7%
26,794
26,538
25,537
19,532
17,423
15,647
14,852
65.35
89.51
85.69
80.66
79.72
74.88
59.28
67.31
62.17
Mar-2037
203,394
203,394
2.3%
14,680
72.18
5.2%
4.6%
4.2%
4.2%
4.0%
3.1%
2.8%
2.5%
2.4%
2.3%
(1) Represents the end of the period monthly base rent plus escalations in accordance with the lease terms, multiplied by 12.
(2)
116,462 of the square feet leased expires on March 31, 2032.
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, 2018.
(Amounts in thousands, except square feet)
Square Feet
Our Share of
% of
Occupied
Annualized
% of
Annualized
Industry
Occupied
Square Feet
Rent (1)
Rent
Legal Services
Financial Services - Commercial and Investment Banking
Technology and Media
Financial Services, all others
Insurance
Retail
Consumer Products
Travel & Leisure
Real Estate
Other
1,864,548
1,909,853
1,618,203
951,219
554,680
190,010
192,620
203,575
171,683
642,339
22.5% $
23.0%
19.5%
11.5%
6.7%
2.3%
2.3%
2.5%
2.1%
7.6%
145,232
140,420
111,540
82,802
44,984
19,383
14,876
13,780
12,754
45,097
23.0%
22.3%
17.7%
13.1%
7.1%
3.1%
2.4%
2.2%
2.0%
7.1%
(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, 2018 for each of the
ten calendar years beginning with the year ending December 31, 2019. The information set forth in the table assumes that tenants
exercise no renewal options and no early termination rights.
(Amounts in thousands, except square feet)
Total
Year of
Lease Expiration (2)
Square Feet of
Expiring Leases
Square Feet of
Expiring Leases
Month to Month
10,459
8,362
Our Share of
Annualized Rent (1)
Amount
$ 500
Per Square Foot (3)
$ 50.83
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
Thereafter
548,310
724,829
1,239,764
2,288,355
769,530
715,125
1,034,174
895,433
169,260
216,489
2,906,375
459,482
446,356
1,063,359
528,018
704,152
658,689
693,699
720,441
131,905
193,575
2,872,731
37,692
32,577
71,954
37,405
56,525
51,667
52,621
55,166
10,716
15,157
220,824
81.93
72.62
68.83
79.96
83.76
78.64
75.88
73.12
81.26
78.91
76.63
% of
Annualized Rent
0.1%
6.0%
5.1%
11.2%
5.8%
8.8%
8.0%
8.2%
8.6%
1.7%
2.4%
34.1%
(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 a new 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, 2018, the vacancy rate of our portfolio was 3.0%. In addition, 558,769 square feet (including month-to-
month tenants), or 4.7% of the square footage of our portfolio is scheduled to expire during the year ending December 31, 2019, which
represents approximately 6.1% 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 the Property Funds and 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 are the general partner and investment manager of Paramount Group Real Estate Fund VII, L.P. (“Fund VII”) and its parallel
fund, Paramount Group Real Estate Fund VII-H, L.P. (“Fund VII-H”), our Property Funds. Fund VII and Fund VII-H’s sole asset,
which they collectively owned 100% of, was 0 Bond Street, a 64,532 square foot creative office building in the NoHo submarket of
Manhattan. As of December 31, 2018, our combined ownership interest in Fund VII and Fund VII-H was approximately 7.2%. On
January 25, 2019, Fund VII and Fund VII-H sold 0 Bond Street for $130,500,000.
Alternative Investment Funds
We are also the general partner and investment manager of Paramount Group Real Estate Fund VIII L.P. (“Fund VIII”) and
Paramount Group Real Estate Fund X L.P. (“Fund X”), our Alternative Investment Funds, which invest in mortgage and mezzanine
loans and preferred equity investments.
Fund VIII completed its final closing in April 2016 with $775,200,000 in capital commitments, of which $614,450,000 has been
called and substantially invested as of December 31, 2018 and an additional $74,391,000 is reserved for funding future draws on
existing mezzanine loans and preferred equity investments. These investments have various stated interest rates ranging from 5.50% to
9.61% and maturities ranging from October 2019 to December 2027. Fund VIII’s investment period is scheduled to end in April 2019,
unless extended by us until April 2020. As of December 31, 2018, our ownership interest in Fund VIII was approximately 1.3%.
Fund X completed an initial closing in December 2018, with $167,000,000 in capital commitments, including $10,000,000 from
us. As of December 31, 2018, none of the capital has been called.
Residential Development Fund
We also serve as the general partner of the Residential Development Fund (“RDF”). The purpose of RDF is to construct a for sale
residential project in San Francisco. We own 7.4% interest in RDF that owns a 25.0% interest in One Steuart Lane (formerly 75
Howard Street), a fully-entitled residential condominium land parcel.
Preferred Equity Investments
As of December 31, 2018, we own a 24.4% interest in PGRESS Equity Holdings L.P. (“PGRESS”). PGRESS owns a
$36,042,000 preferred equity investment in a partnership that owns 470 Vanderbilt Avenue, a 686,000 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. The investment matures in February 2019.
38
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 535,357 square foot art deco style building located on the corner of 5th
Avenue and 58th Street, in New York.
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 joint venture partner in 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 then 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 with the actual purchase occurring no earlier than
12 months after written notice is provided. If the put right is exercised and the 712 Fifth Avenue joint venture acquires the 50.0%
tenancy-in-common interest in the property held by our joint venture partner, we will own a 25.0% interest in 718 Fifth Avenue based
on the current ownership interests.
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.
39
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.
As of December 31, 2018, there were approximately 287 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 14, 2018, we declared a regular quarterly cash dividend of $0.10 per share of common stock for the fourth quarter
ended December 31, 2018, which was paid on January 15, 2019 to stockholders of record as of the close of business on December 31,
2018.
40
Performance Graph
The following graph is a comparison of the cumulative return of our common stock, 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 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 Returns
$150
$125
$100
$75
$50
November 19,
2014
December 31,
2014
December 31,
2015
December 31,
2016
December 31,
2017
December 31,
2018
Paramount Group, Inc.
SNL Office REIT Index
All Equity Index
Paramount
SNL Office REIT Index
All Equity Index
$
November 19, 2014
100.00
100.00
100.00
2014
2015
December 31,
2016
2017
2018
$
$
102.26
104.09
104.09
101.95 $
105.01
107.03
92.23
117.18
116.26
$
93.62 $
120.34
126.35
76.30
98.98
121.24
41
Recent Sales of Unregistered Securities
None.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes certain information about our equity compensation plans as of December 31, 2018.
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
Weighted-average
exercise price of
outstanding options,
warrants and rights
12,182,037 (1) $
17.08 (2)
-
12,182,037 $
-
17.08
Number of securities remaining
available for future issuance
under equity compensation plans
(excluding securities reflected in
the first column of this table)(3)
9,643,663
-
9,643,663
(1)
(2)
Includes an aggregate of (i) 2,131,943 shares of common stock issuable upon the exercise of outstanding options granted pursuant to our 2014
Equity Incentive Plan (the "Plan"), (ii) 6,192,284 shares of common stock issuable in exchange for common units issued or which may, upon the
satisfaction of certain conditions, be issuable pursuant to LTIP units of our Operating Partnership (“LTIP units”) that were previously granted
pursuant to the Plan and (iii) 3,857,810 shares of common stock issuable in exchange for common units issued, pursuant to LTIP units that were
previously granted outside of the Plan in connection with our initial public offering. The 6,192,284 LTIP units include 3,373,570 LTIP units that
remain subject to the achievement of the requisite performance-based vesting criteria.
The outstanding LTIP units and the common units into which they were converted or are convertible into do not have an exercise price.
Accordingly, these awards are not included in the weighted-average exercise price calculation.
(3) Based on awards being granted as "Full Value Awards," as defined in the Plan, including awards such as restricted stock and LTIP units that do
not require the payment of an exercise price. If we were to grant awards other than "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 19,287,326.
Recent Purchases of Equity Securities
Stock Repurchase Program
On August 1, 2017, we received authorization from our Board of Directors to repurchase up to $200,000,000 of our common
stock from time to time, in the open market or in privately negotiated transactions. During the three months ended December 31, 2018,
we repurchased the following shares under the stock repurchase program.
Period
October 2018
November 2018
December 2018
Total Number
of Shares
Purchased
3,206,379 $
988,910
3,123,638
Average Price
Paid per Share
14.50
14.16
13.22
Total Number of Shares
Purchased as Part of Publicly
Announced Plan
3,443,053
4,431,963
7,555,601
Maximum Approximate Dollar
Value Available for Future
Purchase
149,928,000
135,926,000
94,617,000
$
We currently have $94,617,000 available for future repurchases. The amount and timing of future repurchases, if any, will depend
on a number of factors, including, the price and availability of our shares, trading volume and general market conditions. The stock
repurchase program may be suspended or discontinued at any time.
42
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, 2018, 2017, 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 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.
43
The Company
For the Year Ended December 31,
2018
2017
2016
2015
Period from
November 24, 2014
to December 31, 2014
$
$
667,360
56,950
34,651
758,961
$
628,883
52,418
37,666
718,967
$
590,161
44,943
48,237
683,341
(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
Real estate impairment loss
Total expenses
Operating income
Income from unconsolidated joint ventures
Loss from unconsolidated real estate funds
Income from real estate fund investments
Interest and other income (loss), net
Interest and debt expense
Loss on early extinguishment of debt
Gain on sale of real estate
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 joint ventures
Consolidated real estate funds
Operating Partnership
Net income (loss) attributable to
common stockholders
Per Share Data:
Income (loss) per common share - basic
Income (loss) per common share - diluted
Dividends per common share
Balance Sheet Data (as of end of period):
Total assets
Real estate, at cost
Accumulated depreciation and amortization
Debt, net
Total equity
$
586,530
50,885
24,993
662,408
244,754
294,624
42,056
10,355
-
591,789
70,619
6,850
-
37,975
871
(168,366)
-
-
75,760
-
-
23,709
(2,566)
21,143
266,136
266,037
61,577
2,027
-
595,777
123,190
20,185
(6,143)
-
(9,031)
(143,762)
(7,877)
133,989
1,802
-
-
112,353
(5,177)
107,176
250,040
269,450
53,510
2,404
-
575,404
107,937
7,413
(498)
-
6,934
(153,138)
(4,608)
-
39,814
-
-
3,854
(1,785)
2,069
274,078
258,225
57,563
1,471
46,000
637,337
121,624
3,468
(269)
-
8,117
(147,653)
-
36,845
-
-
-
22,132
(3,139)
18,993
(8,182)
(720)
(944)
10,365
(19,797)
(11,363)
(15,423)
1,316
2,104
(5,459)
(21,173)
1,070
$
$
$
$
9,147
$
86,381
$
(9,934)
$
(4,419)
$
0.04
0.04
0.400
$
$
$
0.37
0.37
0.380
$
$
$
(0.05)
(0.05)
0.380
$
$
$
(0.02)
(0.02)
$
$
0.419 (1) $
$ 8,755,978
8,101,651
(644,639)
3,566,917
4,891,664
$ 8,917,661
8,329,475
(487,945)
3,541,300
5,022,084
$ 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
$
Other Data:
Funds from operations attributable to common
stockholders ("FFO") (2)
Core funds from operations attributable to common
stockholders ("Core FFO") (2)
$
224,465
$
205,558
$
195,140
$
209,349
$
229,900
210,072
183,579
167,091
(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 74.
44
57,465
5,865
2,805
66,135
26,011
34,481
2,207
-
-
62,699
3,436
938
-
1,412
(179)
(43,743)
-
-
15,084
(143,437)
239,716
73,227
(505)
72,722
(1,353)
(135)
(13,926)
57,308
0.27
0.27
-
9,021,605
7,530,239
(81,050)
2,843,451
5,554,953
82,425
16,100
The following table sets forth selected financial and operating data 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
45
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, including the related notes included therein.
Overview
We are a fully-integrated REIT focused on owning, operating, managing, acquiring and redeveloping high-quality, Class A office
properties in select central business district submarkets of New York City, Washington, D.C. and San Francisco. We conduct our
business through, and substantially all of our interests in properties and investments are held by, our Operating Partnership. We are the
sole general partner of, and owned approximately 90.3% of the Operating Partnership as of December 31, 2018.
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:
(cid:129)
Leasing vacant and expiring space, at market rents;
(cid:129) 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;
(cid:129)
(cid:129)
Redeveloping and repositioning properties to increase returns; and
Proactively managing our portfolio to increase occupancy and rental rates.
Critical Accounting Policies
Real Estate
Real estate is carried at cost less accumulated depreciation and amortization. Betterments, major renovations and certain costs
directly related to the improvement of real estate 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”.
46
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. Impairment analyses are based on our current
plans, intended holding periods and available market information at the time the analyses are prepared. 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. Estimates
of fair value are determined using discounted cash flow models, which consider, among other things, anticipated holding periods,
current market conditions and utilize unobservable quantitative inputs, including appropriate capitalization and discount rates. 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.
Real estate 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. Real estate 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 real estate and related intangibles classified as assets held for sale.
Variable Interest Entities (“VIEs”) and Investments in Unconsolidated Joint Ventures and Funds
We consolidate VIEs in which we are considered to be the primary beneficiary. Entities are considered to be the primary
beneficiary if they have 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. We consolidate entities that are not VIEs where we have significant decision making control over
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, which consists of investments in unconsolidated
joint ventures and funds are initially recorded at cost and subsequently adjusted for our share of net income or loss and cash
contributions and distributions each period. To the extent that our cost basis is different than our share of the equity method
investment, the basis difference allocated to depreciable assets is amortized into “income from unconsolidated joint ventures” over the
estimated useful life of the related asset. The agreements that govern our equity method investments may designate different
percentage allocations among investors for profits and losses; however, our recognition of income or loss generally follows the
investment’s distribution priorities, which may change upon the achievement of certain investment return thresholds. We account for
cash distributions in excess of our basis in the equity method investments as income when we have neither the requirement, nor the
intent to provide financial support to the joint venture. 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.
47
Derivative Instruments and Hedging Activities
We record all derivatives on our consolidated balance sheets at fair value in accordance with ASC Topic 815, Derivatives and
Hedging. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and whether we
have designated a derivative as a hedge and whether the hedging relationship has satisfied the criteria necessary to apply hedge
accounting. We use derivative financial instruments in the normal course of business to selectively manage or hedge a portion of the
risk associated with our indebtedness and interest payments. Our objectives in using interest rate derivatives are to add stability to
interest expense and to manage our exposure to interest rate movements. To accomplish these objectives, we primarily use interest rate
swaps. Interest rate swaps that are designated as hedges are so designated at the inception of the contract. We require that hedging
derivative instruments be highly effective in reducing the risk exposure that they are designated to hedge. The changes in the fair value
of interest rate swaps that are designated as hedges are recognized in “other comprehensive income (loss)” (outside of earnings) and
subsequently reclassified to earnings over the term that the hedged transaction affects earnings.
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 revenues 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 income includes (i) property management fees, (ii) asset management fees and (iii) fees related to acquisitions, dispositions
and leasing services and (iv) other fee income earned pursuant to contractual agreements. Fee income is recognized as and when we
satisfy our performance obligations pursuant to contractual agreements. Property management and asset management services are
provided continuously over time and revenue is recognized over that time. Fee income relating to acquisitions, dispositions and
leasing services is recognized upon completion of the acquisition, disposition or leasing services as required in the contractual
agreements. The amount of fee income to be recognized is stated in the contract as a fixed price or as a stated percentage of revenues,
contributed capital or transaction price.
Other income includes lease termination income, income from tenant requested services, including overtime heating and cooling
and parking income. Lease termination income could result from a lessee terminating a lease prior to the stated terms in their
agreements. To the extent a lease term is modified, any incremental fees or increased lease payments received as a result of the
modification are recognized over the remaining lease term based on the relevant facts and circumstances.
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.
48
Business Overview
Dispositions
On August 9, 2018, we completed the sale of 2099 Pennsylvania Avenue, a 208,776 square foot, Class A office building in
Washington, D.C. for $219,900,000 and recognized a gain of $35,836,000.
On September 27, 2018, we completed the sale of 425 Eye Street, a 372,552 square foot, Class A office building in Washington,
D.C. for $157,000,000 and recognized a gain of $1,009,000.
Acquisitions
On February 7, 2019, we completed the acquisition of 111 Sutter Street, a 293,000 square foot office building in San Francisco,
California. Simultaneously with closing, we brought in a joint venture partner to acquire 51.0% of the equity interest. We will retain
the remaining 49.0% equity interest and manage and lease the asset. The purchase price was $227,000,000. In connection with the
acquisition, the joint venture completed a $138,200,000 financing of the property. The four-year loan is interest only at LIBOR plus
215 basis points and has three one-year extension options.
Financings
On January 10, 2018, we amended and restated the credit agreement governing our revolving credit facility. The maturity date of
the revolving credit facility was extended from November 2018 to January 2022, with two six-month extension options, and the
capacity was increased to $1,000,000,000 from $800,000,000. The interest rate on the extended facility, at current leverage levels, was
lowered by 10 basis points from LIBOR plus 125 basis points to LIBOR plus 115 basis points, and the facility fee was reduced by 5
basis points from 25 basis points to 20 basis points.
Stock Repurchase Program
On August 1, 2017, we received authorization from our Board of Directors to repurchase up to $200,000,000 of our common
stock from time to time, in the open market or in privately negotiated transactions. As of December 31, 2018, we have repurchased an
aggregate of 7,555,601 shares, or $105,383,000 of our common stock, at a weighted average price of $13.95 per share. We currently
have $94,617,000 available for future repurchases.
49
Leasing Results – Year Ended December 31, 2018
In the year ended December 31, 2018, we leased 1,014,101 square feet, of which our share was 766,509 square feet that was
leased at a weighted average initial rent of $84.44 per square foot. This leasing activity, partially offset by lease expirations during the
year, increased our leased occupancy by 290 basis points to 96.4% at December 31, 2018 from 93.5% at December 31, 2017 and
increased same store leased occupancy (properties owned by us during both reporting periods) by 310 basis points to 96.4% at
December 31, 2018 from 93.3% at December 31, 2017. Of the 1,014,101 square feet leased in the year, 469,463 square feet
represented our share of second generation space (space that had been vacant for less than twelve months) for which we achieved
rental rate increases of 13.2% on a GAAP basis and 13.3% on a cash basis. The weighted average lease term for leases signed during
the year was 9.1 years and weighted average tenant improvements and leasing commissions on these leases were $9.77 per square foot
per annum, or 11.6% of initial rent.
New York
In the year ended December 31, 2018, we leased 576,037 square feet in our New York portfolio, of which our share was 555,969
square feet that was leased at a weighted average initial rent of $84.01 per square foot. This leasing activity, partially offset by lease
expirations during the year, increased our leased occupancy and same store leased occupancy by 360 basis points to 96.0% at
December 31, 2018 from 92.4% at December 31, 2017. Of the 576,037 square feet leased in the year, 325,646 square feet represented
our share of second generation space for which we achieved rental rates increases of 6.9% on a GAAP basis and 7.4% on a cash basis.
The weighted average lease term for leases signed during the year was 10.0 years and weighted average tenant improvements and
leasing commissions on these leases were $9.49 per square foot per annum, or 11.3% of initial rent.
Washington, D.C.
In the year ended December 31, 2018, we leased 26,381 square feet in our Washington, D.C. portfolio, at a weighted average
initial rent of $76.15 per square foot. This leasing activity increased our leased occupancy by 190 basis points in the year to 98.0% at
December 31, 2018 from 96.1% at December 31, 2017. Same store leased occupancy, which excludes 2099 Pennsylvania Avenue and
425 Eye Street that were sold in August 2018 and September 2018, respectively, increased by 50 basis points to 98.0% at December
31, 2018 from 97.5% at December 31, 2017. The weighted average lease term for leases signed during the year was 11.1 years and
weighted average tenant improvements and leasing commissions on these leases were $11.69 per square foot per annum, or 15.3% of
initial rent.
San Francisco
In the year ended December 31, 2018, we leased 411,683 square feet in our San Francisco portfolio, of which our share was
184,159 square feet that was leased at a weighted average initial rent of $86.65 per square foot. This leasing activity, partially offset
by lease expirations during the year, increased our leased occupancy and same store occupancy by 160 basis points to 98.0% at
December 31, 2018 from 96.4% at December 31, 2017. Of the 411,683 square feet leased in the year, 136,741 square feet represented
our share of second generation space for which we achieved rental rate increases of 29.3% on GAAP basis and 29.0% on a cash basis.
The weighted average lease term for leases signed during the year was 6.2 years and weighted average tenant improvements and
leasing commissions on these leases were $10.72 per square foot per annum, or 12.4% of initial rent.
50
The following table presents additional details on the leases signed during the year ended December 31, 2018. It is not intended to
coincide with the commencement of rental revenue in accordance with GAAP. The leasing statistics, except for square feet leased,
represent office space only.
Year Ended December 31, 2018
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:
Average free rent period (in months)
Average free rent period per annum (in months)
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 (3)
Percentage increase
$
$
$
$
$
$
$
Total
1,014,101
766,509
84.44
9.1
New York
576,037
555,969
84.01
10.0
$
Washington, D.C. San Francisco
411,683
184,159
86.65
6.2
26,381
26,381
76.15
11.1
$
$
$
88.95
9.77
$
11.6%
$
95.13
9.49
$
11.3%
$
129.56
11.69
$
15.3%
66.44
10.72
12.4%
7.3
0.8
8.9
0.9
10.1
0.9
2.3
0.4
469,463
325,646
7,076
136,741
86.25
$
$
76.19
13.2%
$
87.45
$
77.20
13.3%
84.68
79.21
$
$
6.9%
87.29
81.29
$
$
7.4%
$
$
$
$
-
-
-
-
-
-
89.77
69.46
29.3%
87.81
68.08
29.0%
(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) Represents the weighted average cash basis rents (including reimbursements) per square foot at expiration.
51
Financial Results – Year Ended December 31, 2018 and 2017
Net Income, FFO and Core FFO
Net income attributable to common stockholders was $9,147,000, or $0.04 per diluted share, for the year ended December 31,
2018, compared to $86,381,000, or $0.37 per diluted share, for the year ended December 31, 2017. Net income attributable to
common stockholders for the year ended December 31, 2018 includes $32,222,000, or $0.13 per diluted share, of gain on sale of real
estate, net of “sting” taxes and $41,618,000, or $0.17 per diluted share, of real estate impairment loss. Net income attributable to
common stockholders for the year ended December 31, 2017 includes $98,107,000, or $0.42 per diluted share, of gain on sale of real
estate.
FFO attributable to common stockholders was $224,465,000, or $0.94 per diluted share, for year ended December 31, 2018,
compared to $205,558,000, or $0.87 per diluted share, for the year ended December 31, 2017. FFO attributable to common
stockholders for the years ended December 31, 2018 and 2017 includes the impact of non-core items, which are listed in the table on
page 74. The aggregate of these items, net of amounts attributable to noncontrolling interests, decreased FFO attributable to common
stockholders for the years ended December 31, 2018 and 2017 by $5,435,000 and $4,514,000, respectively, or $0.02 per diluted share.
Core FFO attributable to common stockholders, which excludes the impact of the non-core items listed on page 74, was
$229,900,000 or $0.96 per diluted share, for the year ended December 31, 2018, compared to $210,072,000, or $0.89 per diluted share,
for the year ended December 31, 2017.
Same Store NOI
The table below summarizes the percentage increase in our share of Same Store NOI and Same Store Cash NOI, by segment, for
year ended December 31, 2018 versus December 31, 2017
Same Store NOI
Same Store Cash NOI
9.1%
10.3%
10.8%
10.1%
5.2%
4.8%
5.2%
13.6%
Total
New York
Washington, D.C.
San Francisco
See pages 70-75 “Non-GAAP Financial Measures” for a reconciliation of these measures to the most directly comparable GAAP
measure and the reasons why we believe these non-GAAP measures are useful.
52
Results of Operations – Year Ended December 31, 2018 Compared to December 31, 2017
The following pages summarize our consolidated results of operations for the years ended December 31, 2018 and 2017.
(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
Real estate impairment loss
$
Total expenses
Operating income
Income from unconsolidated joint ventures
Loss from unconsolidated real estate funds
Interest and other income (loss), net
Interest and debt expense
Loss on early extinguishment of debt
Gain on sale of real estate
Unrealized gain on interest rate swaps
Net income before income taxes
Income tax expense
Net income
Less net (income) loss attributable to noncontrolling interests in:
Consolidated joint ventures
Consolidated real estate fund
Operating Partnership
Net income attributable to common stockholders
$
For the Year Ended December 31,
2018
2017
Change
667,360 $
56,950
34,651
758,961
274,078
258,225
57,563
1,471
46,000
637,337
121,624
3,468
(269)
8,117
(147,653)
-
36,845
-
22,132
(3,139)
18,993
(8,182)
(720)
(944)
9,147 $
$
628,883
52,418
37,666
718,967
266,136
266,037
61,577
2,027
-
595,777
123,190
20,185
(6,143)
(9,031)
(143,762)
(7,877)
133,989
1,802
112,353
(5,177)
107,176
10,365
(19,797)
(11,363)
86,381
$
38,477
4,532
(3,015)
39,994
7,942
(7,812)
(4,014)
(556)
46,000
41,560
(1,566)
(16,717)
5,874
17,148
(3,891)
7,877
(97,144)
(1,802)
(90,221)
2,038
(88,183)
(18,547)
19,077
10,419
(77,234)
53
Revenues
Our revenues, which consist primarily of rental income, tenant reimbursement income, and fee and other income, were
$758,961,000 for the year ended December 31, 2018, compared to $718,967,000 for the year ended December 31, 2017, an increase of
$39,994,000. Below are the details of the increase (decrease) by segment.
(Amounts in thousands)
Rental income
Acquisitions (1)
Dispositions (2)
Same store operations
Other, net
$
Increase (decrease) in rental income $
Total
New York
Washington, D.C.
San Francisco
Other
19,202 $
(19,618)
39,858
(965)
38,477 $
- $
-
(3)
34,240
184
34,424 $
- $
(19,618)
(232)
-
(19,850) $
19,202 $
-
7,225 (4)
(1,149)
25,278 $
-
-
(1,375)
-
(1,375)
Tenant reimbursement income
Acquisitions (1)
Dispositions (2)
Same store operations
Increase (decrease) in tenant
reimbursement income
Fee and other income
Property management
Asset management
Acquisition and disposition
Other
Decrease in fee income
Acquisitions (1)
Dispositions (2)
Lease termination income
Other income
$
965 $
(2,618)
6,185
- $
-
3,476
- $
(2,618)
1,623
965 $
-
1,086
$
4,532 $
3,476 $
(995) $
2,051 $
$
(173) $
(669)
(4,610)
(131)
(5,583)
347
(119)
796
1,544
2,568
- $
-
-
-
-
-
-
(143)
(292)
(435)
- $
-
-
-
-
-
(119)
-
111
(8)
- $
-
-
-
-
347
-
939
1,779
3,065
-
-
-
-
(173)
(669)
(4,610) (5)
(131)
(5,583)
-
-
-
(54)
(54)
Increase (decrease) in other income
(Decrease) increase in fee
and other income
$
(3,015) $
(435) $
(8) $
3,065 $
(5,637)
Total increase (decrease) in revenues $
39,994 $
37,465 $
(20,853) $
30,394 $
(7,012)
(1) Represents revenues attributable to 50 Beale Street in San Francisco (acquired in July 2017) for the months in which it was not owned by us in
both reporting periods.
(2) Represents revenues attributable to Waterview, 2099 Pennsylvania Avenue and 425 Eye Street in Washington, D.C. (sold in May 2017, August
2018 and September 2018, respectively) for the months in which they were not owned by us in both reporting periods.
Primarily due to an increase in occupancy at 1633 Broadway, 1301 Avenue of the Americas and 31 West 52nd Street.
Primarily due to an increase in occupancy at One Front Street.
Primarily due to $5,320 of fees relating to the sale of 60 Wall Street in January 2017.
(3)
(4)
(5)
54
Expenses
Our expenses, which consist primarily of operating, depreciation and amortization, general and administrative, transaction related
costs and real estate impairment loss, were $637,337,000 for year ended December 31, 2018, compared to $595,777,000 for the year
ended December 31, 2017, an increase of $41,560,000. Below are the details of the increase (decrease) by segment.
Total
New York
Washington, D.C.
San Francisco
Other
$
$
$
6,797
(7,875)
8,819
201
7,942
11,154
(3,796)
(15,170)
$
$
$
-
-
6,887
266
7,153
-
-
1,483
$
$
$
-
(7,875)
(86)
-
(7,961)
-
(3,796)
(331)
6,797
-
2,405
(65)
9,137
11,154
-
$
$
$
(16,896) (3)
(7,812)
$
1,483
$
(4,127)
$
(5,742)
$
-
-
(387)
-
(387)
-
-
574
574
4,854
$
-
$
-
$
-
$
4,854 (4)
(Amounts in thousands)
Operating
Acquisitions (1)
Dispositions (2)
Same store operations
Bad debt expense
Increase (decrease) in operating
Depreciation and amortization
Acquisitions (1)
Dispositions (2)
Operations
(Decrease) increase in depreciation
and amortization
General and administrative
Stock-based compensation
Mark-to-market of investments
$
$
$
$
$
in our deferred compensation plan
Severance costs
Operations
Decrease in general
and administrative
(6,036)
(2,626)
(206)
$
(4,014)
-
-
-
-
-
-
8,636
$
$
$
$
$
$
$
$
-
-
-
-
-
46,000
33,912
$
$
$
$
-
-
-
-
-
-
3,395
$
$
$
$
(6,036) (5)
(2,626)
(206)
(4,014)
(556)
-
(4,383)
Decrease in transaction related costs $
(556)
Real estate impairment loss in 2018
$
46,000
Total increase (decrease) in expenses $
41,560
(1) Represents expenses attributable to 50 Beale Street in San Francisco (acquired in July 2017) for the months in which it was not owned by us in
both reporting periods.
(2) Represents expenses attributable to Waterview, 2099 Pennsylvania Avenue and 425 Eye Street in Washington, D.C. (sold in May 2017, August
(3)
2018 and September 2018, respectively) for the months in which they were not owned by us in both reporting periods.
Primarily due to accelerated amortization of acquired in-place lease assets in connection with certain tenants’ lease modifications.
Primarily due to additional expense from stock awards granted in 2018.
(4)
(5) Represents the change in the mark-to-market of investments in our deferred compensation plan liabilities. This change is entirely offset by the
change in plan assets which is included in “interest and other income (loss), net”.
55
Income from Unconsolidated Joint Ventures
Income from unconsolidated joint ventures was $3,468,000 for the year ended December 31, 2018, compared to $20,185,000 for
the year ended December 31, 2017, a decrease of $16,717,000. This decrease resulted from:
(Amounts in thousands)
712 Fifth Avenue ($3,901 in 2018, compared to $20,072 in 2017) (1)
Other
Total decrease
$
$
(16,171)
(546)
(16,717)
(1) As of December 31, 2018, our basis in the partnership that owns 712 Fifth Avenue, was negative $17,611 resulting from
distributions made to us in excess of our share of earnings recognized. Accordingly, we no longer recognize our
proportionate share of earnings from the venture because we have no further obligation to fund additional capital to the
venture. Instead, we only recognize earnings to the extent we receive cash distributions from the venture.
Loss from Unconsolidated Real Estate Funds
Loss from unconsolidated real estate funds was $269,000 for the year ended December 31, 2018, compared to $6,143,000 for the
year ended December 31, 2017, a decrease in loss of $5,874,000. This decrease was primarily due to a reversal of carried interest in
the year ended December 31, 2017 of $5,590,000.
Interest and Other Income (Loss), net
Interest and other income was $8,117,000 for the year ended December 31, 2018, compared to a loss of $9,031,000 for the year
ended December 31, 2017, an increase in income of $17,148,000. This increase resulted from:
(Amounts in thousands)
Valuation allowance on preferred equity investment in 2017 (1)
Decrease in the value of investments in our deferred compensation plan (which
is offset by a decrease in “general and administrative”)
Decrease in preferred equity investment income ($3,655 in 2018, compared
to $4,187 in 2017) (2)
Other, net (primarily higher interest income)
Total increase
$
$
19,588
(6,036)
(532)
4,128
17,148
(1) Represents the valuation allowance on 2 Herald Square, our preferred equity investment in PGRESS Equity Holdings
L.P., of which our 24.4% share was $4,780, and $14,808 was attributable to noncontrolling interests. In May 2018, the
senior lender foreclosed out our interest and accordingly, we wrote off our preferred equity investment.
(2) Represents income from our preferred equity investments in PGRESS Equity Holdings L.P., of which our 24.4% share is
$890 and $1,029 for the years ended December 31, 2018 and 2017, respectively.
56
Interest and Debt Expense
Interest and debt expense was $147,653,000 for the year ended December 31, 2018, compared to $143,762,000 for the year ended
December 31, 2017, an increase in expense of $3,891,000. This increase resulted from:
(Amounts in thousands)
Assumption of $228 million of existing debt at 50 Beale Street upon acquisition
in July 2017
Higher interest on variable rate debt at 1301 Avenue of the Americas and
1633 Broadway
$171 million of debt repayments at 1899 Pennsylvania Avenue and
Liberty Place in May 2017
Lower amounts outstanding under our revolving credit facility
$975 million refinancing of One Market Plaza in January 2017
Other, net
Total increase
$
$
4,519
3,982
(2,724)
(973)
(767)
(146)
3,891
Loss on Early Extinguishment of Debt
Loss on early extinguishment of debt was $7,877,000 for the year ended December 31, 2017 and represents costs related to (i) the
early repayment of One Market Plaza’s debt in January 2017, in connection with its refinancing and (ii) the early repayment of debt at
1899 Pennsylvania Avenue and Liberty Place in May 2017.
Gain on Sale of Real Estate
In the year ended December 31, 2018, we recognized a $36,845,000 gain on sale of real estate, comprised of (i) a $35,836,000
gain on sale of 2099 Pennsylvania Avenue, which was sold for $219,900,000 in August 2018 and (ii) a $1,009,000 gain on sale of 425
Eye Street, which was sold for $157,000,000 in September 2018. In the year ended December 31, 2017, we recognized a
$133,989,000 gain on sale of real estate, comprised of (i) an $110,583,000 gain on sale of Waterview, which was sold for
$460,000,000 in May 2017 and (ii) a $23,406,000 gain on sale of an 80.0% equity interest in One Steuart Lane in May 2017.
Unrealized Gain on Interest Rate Swaps
Unrealized gain on interest rate swaps was $1,802,000 for the year ended December 31, 2017 and represents gains relating to
swaps aggregating $840,000,000 on One Market Plaza that were settled upon the refinancing in January 2017.
Income Tax Expense
Income tax expense was $3,139,000 for the year ended December 31, 2018, compared to $5,177,000 for the year ended December
31, 2017, a decrease of $2,038,000. This decrease was primarily due to (i) higher taxable income on our taxable REIT subsidiaries in
the prior year and (ii) $1,838,000 of tax on the gain on sale of an 80.0% equity interest in One Steuart Lane in the year ended
December 31, 2017, partially offset by (iii) $1,248,000 of “sting” taxes in connection with the sale of real estate in the year ended
December 31, 2018.
57
Net Income (Loss) Attributable to Noncontrolling Interests in Consolidated Joint Ventures
Net income attributable to noncontrolling interest in consolidated joint ventures was $8,182,000 for the year ended December 31,
2018, compared to net loss of $10,365,000 for the year ended December 31, 2017, an increase in income allocated to noncontrolling
interests in consolidated joint ventures of $18,547,000. This increase resulted from:
(Amounts in thousands)
Valuation allowance on preferred equity investment in 2017
Higher income attributable to One Market Plaza
($6,854 in 2018, compared to $3,389 in 2017)(1)
Decrease in loss attributable to 50 Beale Street ($1,437 in 2018,
compared to $2,104 in 2017)
Lower preferred equity investment income ($2,765 in 2018,
compared to $3,158 in 2017)
Total increase
$
14,808
3,465
667
(393)
18,547
$
(1)
Primarily due to lower interest expense in 2018 and costs related to early repayment of
One Market Plaza’s debt in connection with its refinancing in 2017.
Net Income Attributable to Noncontrolling Interests in Consolidated Real Estate Fund
Net income attributable to noncontrolling interests in consolidated real estate fund was $720,000 for the year ended December 31,
2018, compared to $19,797,000 for the year ended December 31, 2017, a decrease in income attributable to the noncontrolling
interests of $19,077,000. This decrease was primarily due to noncontrolling interests’ share of the gain on the sale of an 80.0% equity
interest in One Steuart Lane in May 2017.
Net Income Attributable to Noncontrolling Interests in Operating Partnership
Net income attributable to noncontrolling interests in Operating Partnership was $944,000 for the year ended December 31, 2018,
compared to $11,363,000 for the year ended December 31, 2017, a decrease in income attributable to noncontrolling interests of
$10,419,000. This decrease resulted from a lower net income subject to allocation to the unitholders of the Operating Partnership for
the year ended December 31, 2018.
58
Results of Operations – Year Ended December 31, 2017 Compared to December 31, 2016
The following pages summarize our consolidated results of operations for the years ended December 31, 2017 and 2016.
For the Year Ended December 31,
2017
2016
Change
$
$
628,883
52,418
37,666
718,967
$
590,161
44,943
48,237
683,341
38,722
7,475
(10,571)
35,626
16,096
(3,413)
8,067
(377)
20,373
15,253
12,772
(5,645)
(15,965)
9,376
(3,269)
133,989
(38,012)
108,499
(3,392)
105,107
25,788
(21,113)
(13,467)
96,315
266,136
266,037
61,577
2,027
595,777
123,190
20,185
(6,143)
(9,031)
(143,762)
(7,877)
133,989
1,802
112,353
(5,177)
107,176
250,040
269,450
53,510
2,404
575,404
107,937
7,413
(498)
6,934
(153,138)
(4,608)
-
39,814
3,854
(1,785)
2,069
10,365
(19,797)
(11,363)
86,381
$
(15,423)
1,316
2,104
(9,934)
$
(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 unconsolidated joint ventures
Loss from unconsolidated real estate funds
Interest and other (loss) income, net
Interest and debt expense
Loss on early extinguishment of debt
Gain on sale of real estate
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 joint ventures
Consolidated real estate fund
Operating Partnership
Net income (loss) attributable to common stockholders
$
59
Revenues
Our revenues, which consist primarily of rental income, tenant reimbursement income, and fee and other income, were
$718,967,000 for the year ended December 31, 2017, compared to $683,341,000 for the year ended December 31, 2016, an increase of
$35,626,000. Below are the details of the increase (decrease) by segment.
(Amounts in thousands)
Rental income
Acquisitions (1)
Dispositions (2)
Other, net
Same store operations
$
Increase (decrease) in rental income $
Total
New York
Washington, D.C.
San Francisco
Other
52,020 $
(22,021)
4,607
4,116
38,722 $
- $
-
3,878
(3,423) (3)
455 $
- $
(22,021)
22
5,107
(4)
(16,892) $
52,020 $
-
707
4,501
57,228 $
-
-
-
(2,069)
(2,069)
Tenant reimbursement income
Acquisitions (1)
Dispositions (2)
Same store operations
Increase (decrease) in tenant
reimbursement income
Fee and other income
Property management
Asset management
Acquisition and disposition (5)
Other
Increase in fee income
Acquisitions (1)
Dispositions (2)
Lease termination income
Other income
$
5,871 $
(1,629)
3,233
- $
-
(620)
- $
(1,629)
3,730
(4)
5,871 $
-
123
$
7,475 $
(620) $
2,101 $
5,994 $
$
$
388 $
827
5,744
322
7,281 $
704
(204)
(14,821)
(3,531)
(17,852)
- $
-
-
-
- $
-
-
(16,013)
(3,068)
(19,081)
- $
-
-
-
- $
-
(204)
-
749
545
- $
-
-
-
- $
704
-
1,192
(1,254)
642
-
-
-
-
388
827
5,744
322
7,281
-
-
-
42
42
(Decrease) increase in other income
(Decrease) increase in fee
and other income
$
(10,571) $
(19,081) $
545 $
642 $
7,323
Total increase (decrease) in revenues $
35,626 $
(19,246) $
(14,246) $
63,864 $
5,254
(1) Represents revenues attributable to One Front Street and 50 Beale Street in San Francisco (acquired in December 2016 and July 2017,
respectively) for the months in which they were not owned by us in both reporting periods.
(2) Represents revenues attributable to Waterview in Washington, D.C. (sold in May 2017) for the months in which it was not owned by us in both
reporting periods.
Primarily due to a decrease in occupancy at 31 West 52nd Street and 1325 Avenue of the Americas.
Primarily due to an increase in occupancy at 2099 Pennsylvania Avenue and Liberty Place.
Primarily due to $5,320 of fees relating to the sale of 60 Wall Street in January 2017.
(3)
(4)
(5)
60
Expenses
Our expenses, which consist primarily of operating, depreciation and amortization, general and administrative, and transaction
related costs, were $595,777,000 for the year ended December 31, 2017, compared to $575,404,000 for the year ended December 31,
2016, an increase of $20,373,000. Below are the details of the increase (decrease) by segment.
(Amounts in thousands)
Operating
Acquisitions (1)
Dispositions (2)
Bad debt expense
Same store operations
$
Increase (decrease) in operating
$
18,589
(7,231)
(192)
4,930
16,096
Depreciation and amortization
Acquisitions (1)
Dispositions (2)
Operations
(Decrease) increase in depreciation
$
39,928
(6,897)
(36,444)
Total
New York Washington, D.C.
San Francisco
Other
$
$
$
-
-
(261)
4,671
4,410
-
-
$
$
$
(29,979) (3)
-
(7,231)
(4)
1,856
(5,379)
$
$
18,589
-
73
1,355
20,017
$
$
-
-
-
(2,952)
(2,952)
$
-
(6,897)
(2,687) (3)
$
39,928
-
(3,949) (3)
-
-
171
and amortization
$
(3,413)
$
(29,979)
$
(9,584)
$
35,979
$
171
General and administrative
Stock-based compensation
Mark-to-market of investments
$
5,369
$
-
$
-
$
-
$
5,369 (4)
in our deferred compensation plan
Severance costs
Operations
Increase in general
and administrative
4,670
(248)
(1,724)
$
8,067
$
Decrease in transaction related costs $
(377)
$
-
-
-
-
$
-
$
-
-
-
-
$
-
$
-
-
-
4,670 (5)
(248)
(1,724)
-
$
8,067
-
$
(377)
Total increase (decrease) in expenses $
20,373
$
(25,569)
$
(14,963)
$
55,996
$
4,909
(1) Represents expenses attributable to One Front Street and 50 Beale Street in San Francisco (acquired in December 2016 and July 2017,
respectively) for the months in which they were not owned by us in both reporting periods.
(2) Represents expenses attributable Waterview in Washington, D.C. (sold in May 2017) for the months in which it was not owned by us in both
reporting periods.
Primarily due to additional expense from stock awards granted in 2017.
(3) Decrease primarily due to lower amortization of in-place lease assets due to the expiration of such leases.
(4)
(5) Represents the change in the mark-to-market of investments in our deferred compensation plan liabilities. This change is entirely offset by the
change in plan assets which is included as a component of “interest and other (loss) income, net” on our consolidated statements of income.
61
Income from Unconsolidated Joint Ventures
Income from unconsolidated joint ventures was $20,185,000 for the year ended December 31, 2017, compared to $7,413,000 for
the year ended December 31, 2016, an increase of $12,772,000. This increase resulted from:
(Amounts in thousands)
712 Fifth Avenue ($20,072 in 2017, compared to $7,335 in 2016)
60 Wall Street (acquired in January 2017)
One Steuart Lane (acquired in May 2017)
Oder-Center, Germany ($83 in 2017, compared to $78 in 2016)
Total increase
$
$
(1)
(2)
12,737
(152)
182
5
12,772
(1)
Prior to June 30, 2017, our basis in the partnership that owns 712 Fifth Avenue, was $4,928. On June 30, 2017, we
received a $20,000 distribution for our 50.0% share of net proceeds from refinancing the property. Because the
distributions resulted in our basis becoming negative and because we have no further obligation to fund additional
capital to the venture, we can no longer recognize our proportionate share of earnings from the venture until our
basis is above zero. Accordingly, we are only recognizing income to the extent we receive cash distributions from
the venture.
(2) Represents our residential fund’s 20% share of income from the property, of which our 7.4% share is $14.
Loss from Unconsolidated Real Estate Funds
Loss from unconsolidated real estate funds was $6,143,000 for the year ended December 31, 2017, compared to $498,000 for the
year ended December 31, 2016, an increase in loss of $5,645,000. This increase resulted primarily from a decrease in carried interest
of $7,122,000, partially offset by a decrease in unrealized losses of $1,043,000.
Interest and Other (Loss) Income, net
Interest and other loss was $9,031,000 for the year ended December 31, 2017, compared to income of $6,934,000 for the year
ended December 31, 2016, a decrease in income of $15,965,000. This decrease resulted from:
(Amounts in thousands)
Valuation allowance on preferred equity investment in 2017 (1)
Decrease in preferred equity investment income ($4,187 in 2017, compared
to $5,716 in 2016) (2)
Increase in the value of investments in our deferred compensation plan (which
is offset by an increase in “general and administrative”)
Other, net
Total decrease
$
(19,588)
(1,529)
4,670
482
(15,965)
$
(1) Represents the valuation allowance on 2 Herald Square, our preferred equity investment in PGRESS Equity
Holdings L.P., of which our 24.4% share is $4,780.
(2) Represents income from our preferred equity investments in PGRESS Equity Holdings L.P., of which our 24.4%
share is $1,029 and $1,393 for the years ended December 31, 2017 and 2016, respectively.
62
Interest and Debt Expense
Interest and debt expense was $143,762,000 for the year ended December 31, 2017, compared to $153,138,000 for the year ended
December 31, 2016, a decrease of $9,376,000. This decrease resulted from:
(Amounts in thousands)
$445 million of debt repayments ($274 million at 900 Third Avenue in
October 2016 and $171 million at 1899 Pennsylvania Avenue and
Liberty Place in May 2017)
$975 million refinancing of One Market Plaza in January 2017
$210 million defeasance of Waterview in October 2016
$850 million financing of 1301 Avenue of the Americas in October 2016
$228 million assumption of existing debt at 50 Beale upon acquisition in July 2017
Amortization of deferred financing costs
Other, net
Total decrease
$
$
(14,359)
(15,202)
(9,442)
20,225
3,803
4,384
1,215
(9,376)
Loss on Early Extinguishment of Debt
Loss on early extinguishment of debt was $7,877,000 for the year ended December 31, 2017, compared to $4,608,000 for the year
ended December 31, 2016, an increase in loss of $3,269,000. The loss for the year ended December 31, 2017 represents costs related
to (i) the early repayment of One Market Plaza’s debt in January 2017, in connection with its refinancing and (ii) the early repayment
of debt at 1899 Pennsylvania Avenue and Liberty Place in May 2017. The loss for the year ended December 31, 2016 represents costs
in connection with the defeasance of debt at Waterview.
Gain on Sale of Real Estate
In the year ended December 31, 2017, we recognized $133,989,000 of gains on sale of real estate, comprised of an $110,583,000
net gain on sale of Waterview in May 2017 and a $23,406,000 net gain on sale of an 80.0% equity interest in One Steuart Lane in May
2017.
Unrealized Gain on Interest Rate Swaps
Unrealized gain on interest rate swaps was $1,802,000 for the year ended December 31, 2017, compared to an unrealized gain of
$39,814,000 for the year ended December 31, 2016, a decrease of $38,012,000. This decrease was primarily due to (i) $32,376,000 of
lower unrealized gains in 2017 relating to swaps aggregating $840,000,000 on One Market Plaza that were settled upon the
refinancing in January 2017, (ii) $4,016,000 of unrealized gains in 2016 relating to swaps aggregating $162,000,000 on 900 Third
Avenue that were settled upon the repayment in October 2016 and (iii) $1,620,000 of unrealized gains in 2016 relating to swaps
aggregating $237,600,000 on 31 West 52nd Street that were settled upon the refinancing in May 2016.
Income Tax Expense
Income tax expense was $5,177,000 for the year ended December 31, 2017, compared to $1,785,000 for the year ended December
31, 2016, an increase in expense of $3,392,000. This increase in expense was primarily due to higher fee income on our taxable REIT
subsidiaries for the year ended December 31, 2017 and $1,838,000 of tax on the gain on sale of an 80.0% equity interest in One
Steuart Lane in May 2017.
63
Net (Loss) Income Attributable to Noncontrolling Interests in Consolidated Joint Ventures
Net loss attributable to noncontrolling interest in consolidated joint ventures was $10,365,000 for the year ended December 31,
2017, compared to income of $15,423,000 for the year ended December 31, 2016, a decrease in income attributable to noncontrolling
interests in consolidated joint ventures of $25,788,000. This decrease resulted from:
(Amounts in thousands)
Valuation allowance on preferred equity investment in 2017
Lower preferred equity investment income ($3,158 in 2017,
compared to income of $4,323 in 2016)
Lower income attributable to One Market Plaza
($3,389 in 2017, compared to $11,100 in 2016) (1)
Loss attributable to 50 Beale (acquired in July 2017)
Total decrease
$
(14,808)
(1,165)
(7,711)
(2,104)
(25,788)
$
(1) The decrease in income is primarily due to lower unrealized gains in 2017 relating
to interest rate swaps that were settled in connection with the refinancing of
property level debt in January 2017, partially offset by lower interest expense
resulting from such refinancing.
Net Income (Loss) Attributable to Noncontrolling Interests in Consolidated Real Estate Fund
Net income attributable to noncontrolling interests in consolidated real estate fund was $19,797,000 for the year ended December
31, 2017, compared to a loss of $1,316,000 for the year ended December 31, 2016, an increase in income attributable to the
noncontrolling interests of $21,113,000. This increase was primarily due to the noncontrolling interests’ $20,288,000 share of the gain
on the sale of an 80.0% equity interest in One Steuart Lane in May 2017.
Net Income (Loss) Attributable to Noncontrolling Interests in Operating Partnership
Net income attributable to noncontrolling interests in Operating Partnership was $11,363,000 for the year ended December 31,
2017, compared to a loss of $2,104,000 for the year ended December 31, 2016, an increase in income attributable to noncontrolling
interests of $13,467,000. This increase resulted from higher income subject to allocation to the unitholders of the Operating
Partnership for the year ended December 31, 2017.
64
Liquidity and Capital Resources
Liquidity
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 and cash on hand.
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.
As of December 31, 2018, we had $1.365 billion of liquidity comprised of $339,653,000 of cash and cash equivalents,
$25,756,000 of restricted cash and $1.0 billion of borrowing capacity under our revolving credit facility. As of December 31, 2018,
our outstanding consolidated debt aggregated $3.6 billion. We had no amounts outstanding under our revolving credit facility as of
December 31, 2018 and none of our debt matures until 2021.
On February 7, 2019, we completed the acquisition of 111 Sutter Street, a 293,000 square foot office building in San Francisco,
California. Simultaneously with closing, we brought in a joint venture partner to acquire 51.0% of the equity interest. We will retain
the remaining 49.0% equity interest and manage and lease the asset. The purchase price was $227,000,000. In connection with the
acquisition, the joint venture completed a $138,200,000 financing of the property. The four-year loan is interest only at LIBOR plus
215 basis points and has three one-year extension options. Accordingly, our share of equity funded was approximately $45,000,000, of
which $10,000,000 was funded as a deposit in December 2018.
We may refinance 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.
Revolving Credit Facility
On January 10, 2018, we amended and restated the credit agreement governing our revolving credit facility. The maturity date of
the revolving credit facility was extended from November 2018 to January 2022, with two six-month extension options, and the
capacity was increased to $1.0 billion from $800,000,000. The interest rate on the extended facility, at current leverage levels, was
lowered by 10 basis points from LIBOR plus 125 basis points to LIBOR plus 115 basis points, and the facility fee was reduced by 5
basis points from 25 basis points to 20 basis points. We also have an option, subject to customary conditions and incremental lender
commitments, to increase the capacity under the facility to $1.5 billion at any time prior to the maturity date of the facility.
The facility contains certain restrictions and covenants that require us to maintain, on an ongoing basis, (i) a leverage ratio not to
exceed 60%, however, the leverage ratio may be increased to 65% for any fiscal quarter in which an acquisition of real estate is
completed and for up to the next three subsequent consecutive fiscal quarters, (ii) a secured leverage ratio not to exceed 50%, (iii) a
fixed charge coverage ratio of at least 1.50, (iv) an unsecured leverage ratio not to exceed 60%, however, the unsecured leverage ratio
may be increased to 65% for any fiscal quarter in which an acquisition of real estate is completed and for up to the next three
subsequent consecutive fiscal quarters and (v) an unencumbered interest coverage ratio of at least 1.75. The facility also contains
customary representations and warranties, limitations on permitted investments and other covenants.
Dividend Policy
On December 14, 2018, we declared a regular quarterly cash dividend of $0.10 per share of common stock for the fourth quarter
ending December 31, 2018, which was paid on January 15, 2019 to stockholders of record as of the close of business on December 31,
2018. During 2018, we paid an aggregate of $105,055,000 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 2019, we would pay out approximately $104,000,000 to common stockholders and unitholders during 2019.
65
Contractual Obligations
The following table provides a summary of our contractual obligations and commitments as of December 31, 2018.
(Amounts in thousands)
Our share of:
Consolidated debt (including interest expense) (1)
Unconsolidated debt (including interest expense) (1)
Tenant obligations
Leasing commissions
Total (2)
Less than
1 year
Payments due by period
1-3
years
3-5
years
Total
Thereafter
$ 3,427,940
230,327
78,957
4,301
$ 3,741,525
$ 109,816
7,421
65,166
4,301
$ 186,704
$ 1,134,323
13,384
13,546
-
$ 1,161,253
$ 1,159,105
41,385
245
-
$ 1,200,735
$ 1,024,696
168,137
-
-
$ 1,192,833
(1)
Interest expense is calculated using contractual rates for fixed rate debt and the rates in effect as of December 31, 2018 for variable rate debt.
(2) The total above does not include various standing or renewal service contracts with vendors in connection with the operations of our properties.
Off Balance Sheet Arrangements
As of December 31, 2018, our unconsolidated joint ventures had $896,803,000 of outstanding indebtedness, of which our share
was $180,879,000. We do not guarantee the indebtedness of our 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.
Stock Repurchase Program
On August 1, 2017, we received authorization from our Board of Directors to repurchase up to $200,000,000 of our common
stock from time to time, in the open market or in privately negotiated transactions. As of December 31, 2018, we have repurchased an
aggregate of 7,555,601 shares, or $105,383,000 of our common stock, at a weighted average price of $13.95 per share. We currently
have $94,617,000 available for future repurchases. The amount and timing of future repurchases, if any, will depend on a number of
factors, including, the price and availability of our shares, trading volume and general market conditions. The stock repurchase
program may be suspended or discontinued at any time.
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.
66
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, 2018, we believe we are in
compliance with all of our covenants.
Transfer Tax Assessments
During 2017, the New York City Department of Finance issued Notices of Determination (“Notices”) assessing additional
transfer taxes (including interest and penalties) in connection with the transfer of interests in certain properties during our 2014 initial
public offering. Prior to February 16, 2018, we believed that the likelihood of a loss related to these assessments was remote. On
February 16, 2018, the New York City Tax Appeals Tribunal issued a decision against a publicly traded REIT in a case interpreting
the same provisions of the transfer tax statute, on similar but distinguishable facts. As a result, after consultation with legal counsel,
we now believe the likelihood of loss is reasonably possible, and while it is not possible to predict the outcome of these Notices, we
estimate the range of loss could be between $0 and $39,800,000. Since no amount in this range is a better estimate than any other
amount within the range, we have not accrued any liability arising from potential losses relating to these Notices in our consolidated
financial statements.
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.
67
Cash Flows
Cash and cash equivalents and restricted cash were $365,409,000, $250,425,000, $192,339,000 and $185,707,000 as of December
31, 2018, 2017, 2016 and 2015, respectively. Cash and cash equivalents and restricted cash increased by $114,984,000 and
$58,086,000 for the years ended December 31, 2018 and 2017, respectively. Our December 31, 2015 cash and cash equivalents and
restricted cash 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 and restricted cash increased by $14,619,000 for the
year ended December 31, 2016. 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
For the Year Ended December 31,
2017
2018
2016
$
$
156,523
156,610
(198,149)
$
190,111
295,731
(427,756)
148,283
(652,658)
518,994
Operating Activities
Year Ended December 31, 2018 – We generated $156,523,000 of cash from operating activities for the year ended December 31,
2018, primarily from (i) $240,615,000 of net income (before $212,467,000 of noncash adjustments, $46,000,000 of real estate
impairment loss and $36,845,000 of gain on sale of real estate) and (ii) $6,537,000 of distributions from unconsolidated joint ventures
and real estate funds, partially offset by (iii) $90,629,000 of net changes in operating assets and liabilities. Noncash adjustments of
$212,467,000 were primarily comprised of depreciation and amortization, straight-lining of rental income, amortization of above and
below market leases and amortization of stock-based compensation. The changes in operating assets and liabilities were primarily due
to prepaid real estate taxes of $57,905,000 and additions to deferred charges of $31,861,000.
Year Ended December 31, 2017 – We generated $190,111,000 of cash from operating activities for the year ended December 31,
2017, primarily from (i) $198,845,000 of net income (before $225,658,000 of noncash adjustments and $133,989,000 of gain on sale
of real estate) and (ii) $6,042,000 of distributions from unconsolidated joint ventures and real estate funds, partially offset by (iii)
$14,776,000 of net changes in operating assets and liabilities. Noncash adjustments of $225,658,000 were primarily comprised of
depreciation and amortization, income from unconsolidated joint ventures, straight-lining of rental income, amortization of above and
below market leases, impairment loss on preferred equity investment and amortization of stock based compensation.
Year Ended December 31, 2016 – We generated $148,283,000 of cash from operating activities for the year ended December 31,
2016, primarily from (i) $155,848,000 of net income (before $153,779,000 of noncash adjustments) and (ii) $8,513,000 of
distributions from unconsolidated joint ventures and real estate funds, partially offset by (iii) $16,078,000 of net changes in operating
assets and liabilities. Noncash adjustments of $153,779,000 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.
68
Investing Activities
Year Ended December 31, 2018 –We generated $156,610,000 of cash from investing activities for the year ended December 31,
2018, primarily from (i) $349,013,000 of proceeds from the sales of real estate and (ii) $4,775,000 from the net sales of marketable
securities (which are held in our deferred compensation plan), partially offset by (iii) $137,915,000 for additions to real estate, which
were comprised of spending for tenant improvements and other building improvements, (iv) $29,883,000 for investments in and
contributions to unconsolidated joint ventures, (v) $15,680,000 for escrow deposits and loans receivable for RDF, (vi) $10,000,000 for
deposit in connection with the acquisition of 111 Sutter Street and (vii) $3,700,000 for net contributions to our unconsolidated real
estate funds.
Year Ended December 31, 2017 – We generated $295,731,000 of cash from investing activities for the year ended December 31,
2017, primarily from (i) $540,333,000 of proceeds from the sales of real estate and (ii) $34,584,000 of distributions from
unconsolidated joint ventures and real estate funds, partially offset by (iii) $161,184,000 for acquisition of real estate; (iv) $86,434,000
for additions to real estate, which were comprised of spending for tenant improvements and other building improvements (v)
$28,791,000 for the investments in and contributions to unconsolidated joint ventures, and (vi) $1,987,000 for net purchases of
marketable securities (which are held in our deferred compensation plan).
Year Ended December 31, 2016 – We used $652,658,000 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 real estate, which were
comprised of spending for tenant improvements and other building improvements, (iii) $1,780,000 for contributions to our
unconsolidated real estate funds and (iv) $369,000 for the net purchases of marketable securities (which are held in our deferred
compensation plan).
Financing Activities
Year Ended December 31, 2018 – We used $198,149,000 of cash for financing activities for the year ended December 31, 2018,
primarily due to (i) $105,055,000 for dividends and distributions paid to common stockholders and unitholders, (ii) $102,863,000 for
the repurchases of common shares, (iii) $27,299,000 for repayment of loans to affiliates, (iv) $18,184,000 for distributions to
noncontrolling interests and (v) $6,564,000 for the payment of debt issuance costs and other, partially offset by (vi) $45,116,000 of
contributions from noncontrolling interests and (vii) $16,700,000 of proceeds from notes and mortgages payable.
Year Ended December 31, 2017 – We used $427,756,000 of cash for financing activities for the year ended December 31, 2017,
primarily due to (i) $1,044,821,000 for repayments of notes and mortgages payable and $7,877,000 for loss on early extinguishment of
debt, primarily for the early repayments of One Market Plaza, 1899 Pennsylvania Avenue and Liberty Place loans, (ii) $290,000,000
for repayments of the amounts borrowed under the revolving credit facility, (iii) $119,251,000 for distributions to noncontrolling
interests, (iv) $100,780,000 for dividends and distributions paid to common stockholders and unitholders, (v) $19,425,000 for the
settlement of swap liabilities, and (vi) $7,490,000 for the payment of debt issuance costs and other, partially offset by (vii)
$991,556,000 of proceeds from notes and mortgages payable, primarily from the refinancing of One Market Plaza, (viii) $100,777,000
of contributions from noncontrolling interests, primarily from the acquisition of 50 Beale, (ix) $60,000,000 of borrowings under the
revolving credit facility and (x) $9,555,000 from the refund of transfer taxes.
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) $210,000,000 for the purchase of
marketable securities and $4,608,000 for loss on early extinguishment of debt, 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.
69
Non-GAAP Financial Measures
We use and present NOI, Same Store 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. Other real estate
companies may use different methodologies for calculating these measures, and accordingly, our presentation of these measures may not be
comparable to other real estate companies. These non-GAAP measures should not be considered a substitute for, and should only be
considered together with and as a supplement to, financial information presented in accordance with GAAP.
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, lease termination 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, net, 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
NOI and Cash NOI 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.
The following tables present reconciliations of our net income (loss) to NOI and Cash NOI for the years ended December 31, 2018, 2017
and 2016.
(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
Income from unconsolidated joint ventures
Loss from unconsolidated real estate funds
Fee income
Interest and other income, net
Real estate impairment loss
Gain on sale of real estate
NOI
Less NOI attributable to noncontrolling interests in:
Consolidated joint ventures
Consolidated real estate fund
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 (including our share of unconsolidated
joint ventures)
Cash NOI
Less Cash NOI attributable to noncontrolling
interests in:
Consolidated joint ventures
Consolidated real estate fund
Paramount's share of Cash NOI
For the Year Ended December 31, 2018
Total
New York Washington, D.C. San Francisco Other
$ 18,993 $
35,209 $
5,578 $
30,223 $ (52,017)
258,225
57,563
147,653
1,471
3,139
20,730
(3,468)
269
(18,629)
(8,117)
46,000
(36,845)
486,984
154,820
-
93,359
-
-
20,395
(3,383)
-
-
-
-
-
300,400
17,357
-
-
-
-
-
-
-
-
(181)
46,000
(36,845)
31,909
83,346
-
49,207
-
9
-
-
-
-
(757)
-
-
162,028
2,702
57,563
5,087
1,471
3,130
335
(85)
269
(18,629)
(7,179)
-
-
(7,353)
(69,017)
11
$ 417,978 $
-
-
300,400 $
-
-
31,909 $
(69,017)
-
93,011 $
-
11
(7,342)
$ 486,984 $
300,400 $
31,909 $
162,028 $
(7,353)
(59,122)
(41,151)
(1,712)
(16,252)
(7)
(15,408)
412,454
2,154
261,403
(1,407)
28,790
(16,155)
129,621
-
(7,360)
(56,552)
11
$ 355,913 $
-
-
261,403 $
-
-
28,790 $
(56,552)
-
73,069 $
-
11
(7,349)
70
(Amounts in thousands)
Reconciliation of net income (loss) to NOI and Cash NOI:
For the Year Ended December 31, 2017
Total
New York Washington, D.C. San Francisco Other
Net income (loss)
Add (subtract) adjustments to arrive at NOI and Cash NOI:
$ 107,176
$
27,031
$
126,054
$
5,727
$ (51,636)
Depreciation and amortization
General and administrative
Interest and debt expense
Loss on early extinguishment of debt
Transaction related costs
Income tax expense
NOI from unconsolidated joint ventures
Income from unconsolidated joint ventures
Loss from unconsolidated real estate funds
Fee income
Interest and other loss (income), net
Gain on sale of real estate
Unrealized gain on interest rate swaps
Consolidated joint ventures
Consolidated real estate fund
Paramount's share of NOI
NOI
Less:
266,037
61,577
143,762
7,877
2,027
5,177
19,643
(20,185)
6,143
(24,212)
9,031
(133,989)
(1,802)
153,337
-
89,358
-
-
-
19,143
(19,920)
-
-
(113)
-
-
268,836
(55,464)
(154)
$ 392,644
$ 268,836
-
-
$
21,484
-
2,724
5,162
-
-
-
-
-
-
(40)
(110,583)
-
44,801
-
-
$
44,801
89,088
-
45,366
2,715
-
2
-
-
-
-
(325)
-
(1,802)
2,128
61,577
6,314
-
2,027
5,175
500
(265)
6,143
(24,212)
9,509
(23,406)
-
(6,146)
140,771
(55,464)
-
85,307
-
(154)
$ (6,300)
$ 448,262
$ 268,836
$
44,801
$
140,771
$ (6,146)
NOI
Less NOI attributable to noncontrolling interests in:
448,262
Straight-line rent adjustments (including our share
of unconsolidated joint ventures)
(54,886)
(38,293)
(979)
(15,592)
(22)
Amortization of above and below-market leases,
net (including our share of unconsolidated
joint ventures)
Cash NOI
Less Cash NOI attributable to noncontrolling interests in:
374,464
(18,912)
4,737
235,280
(2,193)
41,629
(21,456)
103,723
-
(6,168)
Consolidated joint ventures
Consolidated real estate fund
Paramount's share of Cash NOI
(42,325)
-
61,398
-
(154)
$ (6,322)
(42,325)
(154)
-
-
$ 235,280
-
-
41,629
$
$
$ 331,985
71
(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
Loss on early extinguishment of debt
Transaction related costs
Income tax expense
NOI from unconsolidated joint ventures
Income from unconsolidated joint ventures
Loss from unconsolidated real estate funds
Fee income
Interest and other income, net
Unrealized gain on interest rate swaps
NOI
Less NOI attributable to noncontrolling interests in:
Consolidated joint ventures
Consolidated real estate fund
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:
For the Year Ended December 31, 2016
Total
New York Washington, D.C. San Francisco Other
$
2,069 $
29,478 $
247 $
22,167 $ (49,823)
269,450
53,510
153,138
4,608
2,404
1,785
17,195
(7,413)
498
(16,931)
(6,934)
(39,814)
433,565
183,316
-
73,729
-
-
-
16,874
(7,335)
-
-
(203)
(5,636)
290,223
31,068
-
17,798
4,608
-
-
-
-
-
-
(53)
-
53,668
53,109
-
55,817
-
-
37
-
-
-
-
(28)
(34,178)
96,924
1,957
53,510
5,794
-
2,404
1,748
321
(78)
498
(16,931)
(6,650)
-
(7,250)
(47,561)
414
$ 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
(24)
-
(7,274)
Consolidated joint ventures
Consolidated real estate fund
Paramount's share of Cash NOI
(32,571)
414
$ 309,148 $
-
-
235,088 $
-
-
46,692 $
(32,571)
-
34,228 $
-
414
(6,860)
72
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, 2018 and 2017. 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 NOI also excludes lease termination income, bad debt expense, and certain other items that vary from period to
period. 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, 2018 (1)
Acquisitions (2)
Dispositions
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, 2018
(Amounts in thousands)
Paramount's share of NOI for the year ended
December 31, 2017 (1)
Acquisitions
Dispositions (3)
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, 2017
Total
New York
For the Year Ended December 31, 2018
Washington, D.C.
San Francisco
Other
$
$
417,978
(5,254)
-
$
300,400
(173)
-
$
31,909
-
-
$
93,011
(5,081)
-
(7,342)
-
-
(4,303)
320
(3,526)
316
-
-
(777)
4
-
-
$
408,741
$
297,017
$
31,909
$
87,157
$
(7,342)
Total
New York
For the Year Ended December 31, 2017
Washington, D.C.
San Francisco
Other
$
$
392,644
-
(14,480)
$
268,836
-
-
$
44,801
-
(14,480)
(2,381)
(1,053)
(1,097)
234
-
-
$
85,307
-
-
(1,284)
(1,164)
(6,300)
-
-
-
(123)
$
374,730
$
267,973
$
30,321
$
82,859
$
(6,423)
Increase (decrease) in Same Store NOI
$
34,011
$
29,044
$
1,588
$
4,298
$
(919)
% Increase
9.1%
10.8%
5.2%
5.2%
(1)
See page 70 “Non-GAAP Financial Measures – NOI” for a reconciliation to net income in accordance with GAAP and the reasons why we
believe these non-GAAP measures are useful.
(2) Represents our share of NOI attributable to acquired properties (60 Wall Street in New York and 50 Beale Street in San Francisco) for the
months they were not owned by us in both reporting periods.
(3) Represents our share of NOI attributable to sold properties (Waterview, 2099 Pennsylvania Avenue and 425 Eye Street in Washington, D.C.) for
the months they were not owned by us in both reporting periods.
73
(Amounts in thousands)
Paramount's share of Cash NOI for the year ended
December 31, 2018 (1)
$
Acquisitions (2)
Dispositions
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, 2018
(Amounts in thousands)
Paramount's share of Cash NOI for the year ended
December 31, 2017 (1)
$
Acquisitions
Dispositions (3)
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, 2017
Total
For the Year Ended December 31, 2018
Washington, D.C.
New York
San Francisco
Other
$
355,913
(4,188)
-
$
261,403
(215)
-
$
28,790
-
-
$
73,069
(3,973)
-
(7,349)
-
-
(4,303)
320
(3,526)
316
-
-
(777)
4
-
-
$
347,742
$
257,978
$
28,790
$
68,323
$
(7,349)
Total
For the Year Ended December 31, 2017
Washington, D.C.
New York
San Francisco
Other
$
331,985
-
(14,160)
$
235,280
-
-
$
41,629
-
(14,160)
(2,381)
(50)
(1,097)
50
-
-
$
61,398
-
-
(1,284)
23
(6,322)
-
-
-
(123)
$
315,394
$
234,233
$
27,469
$
60,137
$
(6,445)
Increase (decrease) in Same Store Cash NOI
$
32,348
$
23,745
$
1,321
$
8,186
$
(904)
% Increase
10.3%
10.1%
4.8%
13.6%
(1)
See page 70 “Non-GAAP Financial Measures – NOI” for a reconciliation to net income in accordance with GAAP and the reasons why we
believe these non-GAAP measures are useful.
(2) Represents our share of Cash NOI attributable to acquired properties (60 Wall Street in New York and 50 Beale Street in San Francisco) for the
months they were not owned by us in both reporting periods.
(3) Represents our share of Cash NOI attributable to sold properties (Waterview, 2099 Pennsylvania Avenue and 425 Eye Street in Washington,
D.C.) for the months they were not owned by us in both reporting periods.
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 our share of such adjustments of unconsolidated joint ventures. FFO is commonly used in the real
estate industry to assist investors and analysts in comparing results of real estate companies because it excludes the effect of real estate
depreciation and amortization and net gains on sales, which are based on historical costs and implicitly assume that the value of real
estate diminishes predictably over time, rather than fluctuating based on existing market conditions. In addition, we present Core FFO
as an alternative measure of our operating performance, which adjusts FFO for certain other items that we believe enhance the
comparability of our FFO across periods. Core FFO, when applicable, excludes the impact of certain items, including, transaction
related costs, realized and unrealized gains or losses on real estate fund investments, unrealized gains or losses on interest rate swaps,
severance costs and gains or losses on early extinguishment of debt, 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.
74
FFO and Core FFO are presented as supplemental financial measures and do not fully represent our operating performance.
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 share 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)
Real estate impairment loss
Gain on sale of depreciable real estate
FFO
Less FFO attributable to noncontrolling interests in:
Consolidated joint ventures
Consolidated real estate fund
Operating Partnership
FFO attributable to common stockholders
Per diluted share
FFO
Non-core items:
Our share of earnings from 712 Fifth Avenue in excess of
distributions received and (distributions in excess of earnings)
Transaction related costs
"Sting" taxes in connection with the sale of real estate
Realized and unrealized loss from unconsolidated real estate funds
After-tax net gain on sale of residential condominium land parcel
Valuation allowance on preferred equity investment
Loss on early extinguishment of debt
Unrealized gain on interest rate swaps (including
our share of unconsolidated joint ventures)
Severance costs
Core FFO
Less Core FFO attributable to noncontrolling interests in:
Consolidated joint ventures
Consolidated real estate fund
Operating Partnership
Core FFO attributable to common stockholders
Per diluted share
For the Year Ended December 31,
2017
2016
2018
$
18,993 $
107,176 $
2,069
266,236
46,000
(36,845)
294,384
(45,622)
(720)
(23,577)
224,465 $
0.94 $
273,938
-
(110,583)
270,531
(19,748)
(20,132)
(25,093)
205,558 $
0.87 $
275,653
-
-
277,722
(41,320)
419
(41,681)
195,140
0.89
294,384 $
270,531 $
277,722
2,727
1,471
1,248
560
-
-
-
-
-
300,390
(45,622)
(720)
(24,148)
229,900 $
0.96 $
(14,205)
2,027
-
6,380
(21,568)
19,588
7,877
(2,750)
2,626
270,506
(35,022)
156
(25,568)
210,072 $
0.89 $
-
2,404
-
607
-
-
4,608
(41,869)
2,874
246,346
(23,890)
419
(39,296)
183,579
0.84
$
$
$
$
$
Reconciliation of weighted average shares outstanding:
Weighted average shares outstanding
Effect of dilutive securities
Denominator for FFO per diluted share
239,526,694
28,942
239,555,636
236,372,801
28,747
236,401,548
218,053,062
15,869
218,068,931
75
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,
2018.
Rate
Property
(Amounts in thousands)
Fixed Rate Debt:
1633 Broadway (1)
1301 Avenue of the Americas 3.05%
3.80%
31 West 52nd Street
4.03%
One Market Plaza
3.65%
50 Beale Street
3.66% $
Total Fixed Rate Debt
3.54% $
Variable Rate Debt:
1633 Broadway
1301 Avenue of the Americas 4.18%
n/a
Revolving Credit Facility
4.17% $
Total Variable Rate Debt
4.10% $
2019
2020
2021
2022
2023
Thereafter
Total
Fair Value
- $
-
-
-
-
- $
- $
-
-
- $
- $
-
-
-
-
- $
- $
-
-
- $
- $ 1,000,000 $
500,000
-
-
228,000
728,000 $ 1,000,000 $
-
-
-
-
- $ 1,000,000 $ 1,019,734
- $
489,633
-
-
490,328
500,000
-
987,828
975,000
-
-
226,986
-
- $ 1,475,000 $ 3,203,000 $ 3,214,509
500,000
500,000
975,000
228,000
- $
46,800 $
350,000
-
-
-
350,000 $
46,800 $
- $
-
-
- $
- $
-
-
- $
46,800 $
350,000
-
47,724
355,728
-
396,800 $ 403,452
Total Consolidated Debt
3.72% $
- $
- $ 1,078,000 $ 1,046,800 $
- $ 1,475,000 $ 3,599,800 $ 3,617,961
(1) All or a portion of this debt has been swapped from floating rate debt to fixed rate debt. See table below.
In addition to the above, our unconsolidated joint ventures had $896,803,000 of outstanding indebtedness as of December 31,
2018, of which our share was $180,879,000.
The following table summarizes our fixed rate debt that has been swapped from floating rate to fixed as of December 31, 2018.
Property
Notional
Amount
Effective Date
Maturity Date
Strike
Rate
Fair Value as of
December 31, 2018
(Amounts in thousands)
1633 Broadway (1)
Dec-2022
1633 Broadway (1)
Dec-2021
1633 Broadway (1)
Dec-2020
Total interest rate swap assets designated as cash flow hedges (included in “other assets”)
300,000
300,000
400,000
Dec-2015
Dec-2015
Dec-2015
$
1633 Broadway (1)
Total interest rate swap liabilities designated as cash flow hedges (included in “other liabilities”)
400,000
Dec-2021
Dec-2020
1.95% $
1.82%
1.65%
$
2.35% $
$
5,294
5,254
6,311
16,859
48
48
(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).
76
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:
Balance
December 31, 2018
Weighted
Average
Interest
Rate
Effect of
1%
Increase in
Base Rates
December 31, 2017
Weighted
Average
Interest
Rate
Balance
Variable rate
Fixed rate (1)
$
396,800
2,548,658
$ 2,945,458
4.17% $
3.59%
3.67% $
3,968 $
-
380,100
2,548,658
3,968 $ 2,928,758
3.17%
3.59%
3.54%
Paramount’s share of debt of non-consolidated entities
(non-recourse):
Variable rate
Fixed rate (1)
$
$
28,808
152,071
180,879
4.91% $
3.41%
3.65% $
288 $
-
288 $
28,808
152,182
180,990
3.93%
3.41%
3.49%
Noncontrolling interests’ share of above
Total change in annual net income
Per diluted share
$
$
$
(408)
3,848
0.02
(1) Our fixed rate debt includes floating rate debt that has been swapped to fixed. See table on page 76.
77
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Income for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Changes in Equity for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
Page Number
79
80
81
82
83
85
87
78
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Paramount Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Paramount Group, Inc. and subsidiaries (the “Company”) as of
December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, changes in equity and cash flows
for each of the three years in the period ended December 31, 2018, and the related notes and the schedules listed in the Index at Item
15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects,
the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United
States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal
Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated February 13, 2019, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to
be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or
fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due
to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
New York, NY
February 13, 2019
We have served as the Company's auditor since 2014.
79
PARAMOUNT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share, unit and per share amounts)
ASSETS
December 31, 2018 December 31, 2017
Real estate, at cost
Land
Buildings and improvements
Accumulated depreciation and amortization
Real estate, net
Cash and cash equivalents
Restricted cash
Investments in unconsolidated joint ventures
Investments in unconsolidated real estate funds
Preferred equity investments, net of allowance of $0 and $19,588
Marketable securities
Accounts and other receivables, net of allowance of $593 and $277
Deferred rent receivable
Deferred charges, net of accumulated amortization of $30,129 and $19,412
Intangible assets, net of accumulated amortization of $245,444 and $200,857
Other assets
Total assets (1)
LIABILITIES AND EQUITY
Notes and mortgages payable, net of deferred financing costs of $32,883 and $41,800
Revolving credit facility
Due to affiliates
Accounts payable and accrued expenses
Dividends and distributions payable
Intangible liabilities, net of accumulated amortization of $89,200 and $75,073
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 233,135,704 and 240,427,022 shares in 2018 and 2017, respectively
Additional paid-in-capital
Earnings less than distributions
Accumulated other comprehensive income
Paramount Group, Inc. equity
Noncontrolling interests in:
Consolidated joint ventures
Consolidated real estate fund
Operating Partnership (25,127,003 and 24,620,279 units outstanding)
Total equity
Total liabilities and equity
$
$
$
$
2,065,206 $
6,036,445
8,101,651
(644,639)
7,457,012
339,653
25,756
78,863
10,352
36,042
22,660
20,076
267,456
117,858
270,445
109,805
8,755,978 $
3,566,917 $
-
-
124,334
25,902
95,991
51,170
3,864,314
2,329
4,201,756
(219,906)
16,621
4,000,800
394,995
66,887
428,982
4,891,664
8,755,978 $
2,209,506
6,119,969
8,329,475
(487,945)
7,841,530
219,381
31,044
44,762
7,253
35,817
29,039
17,082
220,826
98,645
352,206
20,076
8,917,661
3,541,300
-
27,299
117,630
25,211
130,028
54,109
3,895,577
2,403
4,297,948
(133,693)
10,083
4,176,741
404,997
14,549
425,797
5,022,084
8,917,661
(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 90.3% as of December 31, 2018. The assets and liabilities of the Operating Partnership, as of December 31, 2018, include
$1,982,679 and $1,253,414 of assets and liabilities, respectively, of certain VIEs that are consolidated by the Operating Partnership. See Note
14, Variable Interest Entities (“VIEs”).
See notes to consolidated financial statements.
80
PARAMOUNT GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except share and per share amounts)
REVENUES:
For the Year Ended December 31,
2017
2016
2018
Rental income
Tenant reimbursement income
Fee and other income
Total revenues
EXPENSES:
Operating
Depreciation and amortization
General and administrative
Transaction related costs
Real estate impairment loss
Total expenses
Operating income
Income from unconsolidated joint ventures
Loss from unconsolidated real estate funds
Interest and other income (loss), net
Interest and debt expense
Loss on early extinguishment of debt
Gain on sale of real estate
Unrealized gain on interest rate swaps
Net income before income taxes
Income tax expense
Net income
Less net (income) loss attributable to noncontrolling interests in:
Consolidated joint ventures
Consolidated real estate fund
Operating Partnership
Net income (loss) attributable to common stockholders
INCOME (LOSS) PER COMMON SHARE - BASIC:
Income (loss) per common share
Weighted average shares outstanding
INCOME (LOSS) PER COMMON SHARE - DILUTED:
Income (loss) per common share
Weighted average shares outstanding
$
$
$
$
667,360 $
56,950
34,651
758,961
628,883 $
52,418
37,666
718,967
274,078
258,225
57,563
1,471
46,000
637,337
121,624
3,468
(269)
8,117
(147,653)
-
36,845
-
22,132
(3,139)
18,993
266,136
266,037
61,577
2,027
-
595,777
123,190
20,185
(6,143)
(9,031)
(143,762)
(7,877)
133,989
1,802
112,353
(5,177)
107,176
(8,182)
(720)
(944)
9,147 $
10,365
(19,797)
(11,363)
86,381 $
590,161
44,943
48,237
683,341
250,040
269,450
53,510
2,404
-
575,404
107,937
7,413
(498)
6,934
(153,138)
(4,608)
-
39,814
3,854
(1,785)
2,069
(15,423)
1,316
2,104
(9,934)
0.04 $
0.37 $
239,526,694
236,372,801
(0.05)
218,053,062
0.04 $
0.37 $
239,555,636
236,401,548
(0.05)
218,053,062
See notes to consolidated financial statements.
81
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 (loss) income of
unconsolidated joint ventures
Comprehensive income
Less comprehensive (income) loss attributable to noncontrolling
interests in:
Consolidated joint ventures
Consolidated real estate fund
Operating Partnership
For the Year Ended December 31,
2017
2016
2018
$
18,993 $
107,176 $
7,273
(129)
26,137
(8,182)
(665)
(1,605)
10,618
160
117,954
10,365
(19,797)
(12,430)
2,069
8,161
17
10,247
(15,423)
1,316
2,141
Comprehensive income (loss) attributable to common
stockholders
$
15,685 $
96,092 $
(1,719)
See notes to consolidated financial statements.
82
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4
8
PARAMOUNT GROUP, INC.
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
operating activities:
Depreciation and amortization
Straight-lining of rental income
Real estate impairment loss
Gain on sale of real estate
Amortization of stock-based compensation expense
Amortization of above and below-market leases, net
Amortization of deferred financing costs
Distributions of earnings from unconsolidated joint ventures
Income from unconsolidated joint ventures
Realized and unrealized losses (gains) on marketable securities
Distributions of earnings from unconsolidated real estate funds
Loss from unconsolidated real estate funds
Valuation allowance on preferred equity investment
Loss on early extinguishment of debt
Unrealized gain on interest rate swaps
Other non-cash adjustments
Changes in operating assets and liabilities:
Accounts and other receivables
Deferred charges
Other assets
Accounts payable and accrued expenses
Other liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of real estate
Additions to real estate
Investment in and contributions of capital to unconsolidated joint ventures
Sales of marketable securities
Purchases of marketable securities
Escrow deposits and loans receivable for Residential Development Fund
Deposit on real estate
Contributions of capital to unconsolidated real estate funds
Distributions of capital from unconsolidated real estate funds
Acquisitions of real estate
Distributions of capital from unconsolidated joint ventures
Net cash provided by (used in) by investing activities
For the Year Ended December 31,
2017
2016
2018
$
18,993 $
107,176 $
2,069
258,225
(59,061)
46,000
(36,845)
19,646
(16,059)
11,023
6,207
(3,468)
1,604
330
269
-
-
-
288
(2,994)
(31,861)
(57,216)
4,200
(2,758)
156,523
349,013
(137,915)
(29,883)
24,794
(20,019)
(15,680)
(10,000)
(3,779)
79
-
-
156,610
266,037
(54,453)
-
(133,989)
15,922
(19,523)
11,188
5,700
(20,185)
(4,664)
342
6,143
19,588
7,877
(1,802)
(470)
(1,000)
(33,295)
10,243
6,305
2,971
190,111
540,333
(86,434)
(28,791)
27,261
(29,248)
-
-
(790)
14,584
(161,184)
20,000
295,731
269,450
(82,568)
-
-
11,278
(9,536)
6,804
8,121
(7,413)
(494)
392
498
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4,608
(39,814)
966
(4,521)
(15,701)
(12,037)
11,479
4,702
148,283
-
(132,686)
-
2,353
(2,722)
-
-
(1,780)
-
(517,823)
-
(652,658)
See notes to consolidated financial statements.
85
PARAMOUNT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED
$
(Amounts in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchases of common shares
Dividends paid to common stockholders
Contributions from noncontrolling interests
Repayment of loans to affiliates
Distributions to noncontrolling interests
Proceeds from notes and mortgages payable
Distributions paid to common unitholders
Debt issuance costs and other
Repayments of notes and mortgages payable
Repayment of borrowings under revolving credit facility
Borrowings under revolving credit facility
Settlement of interest rate swap liabilities
Transfer tax refund in connection with the acquisition of noncontrolling interests
Loss on early extinguishment of debt
Purchase of marketable securities in connection with the defeasance
of notes and mortgages payable
Net cash (used in) provided by financing activities
For the Year Ended December 31,
2017
2016
2018
(102,863) $
(94,991)
45,116
(27,299)
(18,184)
16,700
(10,064)
(6,564)
-
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(89,276)
100,777
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(119,251)
991,556
(11,504)
(7,490)
(1,044,821)
(290,000)
60,000
(19,425)
9,555
(7,877)
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(82,105)
7,651
-
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1,362,414
(18,412)
(29,387)
(689,269)
(130,000)
340,000
(23,654)
-
(4,608)
-
(198,149)
-
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(210,000)
518,994
Net increase in cash and cash equivalents and restricted cash
Cash and cash equivalents and restricted cash at beginning of period
Decrease in cash due to deconsolidation of real estate fund investments
Cash and cash equivalents and restricted cash at end of period
114,984
250,425
-
365,409 $
58,086
192,339
-
250,425 $
$
RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH:
Cash and cash equivalents at beginning of period
Restricted cash at beginning of period
Cash and cash equivalents and restricted cash at beginning of period
219,381 $
31,044
250,425 $
$
$
14,619
185,707
(7,987)
192,339
143,884
41,823
185,707
162,965
29,374
192,339
312,257
25,151
11,431
-
12,104
(8,161)
(396,697)
-
(346,685)
162,965 $
29,374
192,339 $
219,381 $
31,044
250,425 $
339,653 $
25,756
365,409 $
136,452 $
4,049
132,361 $
5,048
140,111
2,095
3,461 $
25,902
4,158
172,728 $
25,211
9,684
-
10,413
(10,618)
102,512
228,000
-
7,086
19,872
(7,273)
-
-
-
-
-
-
-
214,608
(210,000)
$
$
$
$
Cash and cash equivalents at end of period
Restricted cash at end of period
Cash and cash equivalents and restricted cash at end of period
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for interest
Cash payments for income taxes, net of refunds
NON-CASH TRANSACTIONS:
Common shares issued upon redemption of commons units
Dividends and distributions declared but not yet paid
Write-off of fully amortized and/or depreciated assets
Basis adjustment to investment in unconsolidated joint ventures upon
adoption of ASU 2017-05
Additions to real estate included in accounts payable and accrued expenses
Change in value of interest rate swaps
Consolidation (deconsolidation) of real estate and real estate fund investments
Assumption of notes and mortgages payable
Transfer of real estate to assets held for sale
Marketable securities transferred in connection with the defeasance of
notes and mortgages payable
Defeasance of notes and mortgages payable
See notes to consolidated financial statements.
86
PARAMOUNT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization and Business
As used in these consolidated financial statements, unless otherwise indicated, all references to “we,” “us,” “our,” the “Company,”
and “Paramount” refer to Paramount Group, Inc., a Maryland corporation, and its consolidated subsidiaries, including Paramount
Group Operating Partnership LP (the “Operating Partnership”), a Delaware limited partnership. We are a fully-integrated real estate
investment trust (“REIT”) focused on owning, operating, managing, acquiring and redeveloping high-quality, Class A office
properties in select central business district submarkets of New York City, Washington, D.C. and San Francisco. As of December 31,
2018, our portfolio consisted of 12 Class A office properties aggregating approximately 11.9 million square feet. We conduct our
business through, and substantially all of our interests in properties and investments are held by, the Operating Partnership. We are the
sole general partner of, and owned approximately 90.3% of, the Operating Partnership as of December 31, 2018.
2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally
accepted in the United States of America (“GAAP”) and with the rules and regulations of the Securities and Exchange Commission
(the “SEC”). These consolidated financial statements include the accounts of Paramount and its consolidated subsidiaries, including
the Operating Partnership. All significant intercompany balances and transactions have been eliminated in consolidation.
Significant Accounting Policies
Real Estate
Real estate is carried at cost less accumulated depreciation and amortization. Betterments, major renovations and certain costs
directly related to the improvement of real estate 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. Impairment analyses are based on our current
plans, intended holding periods and available market information at the time the analyses are prepared. 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. Estimates
of fair value are determined using discounted cash flow models, which consider, among other things, anticipated holding periods,
current market conditions and utilize unobservable quantitative inputs, including appropriate capitalization and discount rates. 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.
87
PARAMOUNT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Real estate 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. Real estate 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 real estate and related intangibles classified as assets held for sale.
Variable Interest Entities (“VIEs”) and Investments in Unconsolidated Joint Ventures and Funds
We consolidate VIEs in which we are considered to be the primary beneficiary. Entities are considered to be the primary
beneficiary if they have 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. We consolidate entities that are not VIEs where we have significant decision making control over
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, which consists of investments in unconsolidated
joint ventures and funds are initially recorded at cost and subsequently adjusted for our share of net income or loss and cash
contributions and distributions each period. To the extent that our cost basis is different than our share of the equity in the equity
method investment, the basis difference allocated to depreciable assets is amortized into “income from unconsolidated joint ventures”
over the estimated useful life of the related asset. The agreements that govern our equity method investments may designate different
percentage allocations among investors for profits and losses; however, our recognition of income or loss generally follows the
investment’s distribution priorities, which may change upon the achievement of certain investment return thresholds. We account for
cash distributions in excess of our basis in the equity method investments as income when we have neither the requirement, nor the
intent to provide financial support to the joint venture. 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 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.
88
PARAMOUNT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Preferred Equity Investments
Preferred equity investments are comprised of investments in certain partnerships that own real estate. We evaluate the
collectibility of preferred equity investments when changes in events or circumstances, including delinquencies, loss experience and
collateral quality, indicate that it is probable we will be unable to collect all amounts due under the contractual terms. If a preferred
equity investment is considered impaired, a valuation allowance is measured and recorded based on the excess of the carrying amount
of the investment over the net realizable value of the collateral.
Marketable Securities
Marketable securities consists of investments in trading securities that are held in our deferred compensation plan for which there
is an offsetting liability. These investments are initially recorded at cost and subsequently measured at fair value at the end of each
reporting period, with gains or losses resulting from changes in fair value recognized in earnings, which are included as a component
of “interest and other income (loss), net” on our consolidated statements of income and the earnings are entirely offset by expenses
from the mark-to-market of plan liabilities, which are included as a component of “general and administrative” expenses on our
consolidated statements of income.
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, as needed. 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 leasing costs and deferred financing costs related to our revolving credit facility. Deferred
leasing 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 term of the revolving credit facility and are recognized as a component of “interest and debt expense” on our
consolidated statements of income.
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
financing and are recorded as a reduction of our notes and mortgages payable. Such costs are amortized over the terms of the related
debt agreements and recognized as a component of “interest and debt expense” on our consolidated statements of income.
Derivative Instruments and Hedging Activities
We record all derivatives on our consolidated balance sheets at fair value in accordance with ASC Topic 815, Derivatives and
Hedging. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and whether we
have designated a derivative as a hedge and whether the hedging relationship has satisfied the criteria necessary to apply hedge
accounting. We use derivative financial instruments in the normal course of business to selectively manage or hedge a portion of the
risk associated with our indebtedness and interest payments. Our objectives in using interest rate derivatives are to add stability to
interest expense and to manage our exposure to interest rate movements. To accomplish these objectives, we primarily use interest rate
swaps. Interest rate swaps that are designated as hedges are so designated at the inception of the contract. We require that hedging
derivative instruments be highly effective in reducing the risk exposure that they are designated to hedge. The changes in the fair value
of interest rate swaps that are designated as hedges are recognized in “other comprehensive income (loss)” (outside of earnings) and
subsequently reclassified to earnings over the term that the hedged transaction affects earnings.
89
PARAMOUNT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Financial Instruments
Accounting Standard Codification (“ASC”) Topic 820, Fair Value Measurement and Disclosures, defines fair value and
establishes a framework for measuring fair value. The objective of fair value is to determine the price that would be received upon the
sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit
price). ASC Topic 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value
into three levels: Level 1 – quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or
liabilities; Level 2 – observable prices that are based on inputs not quoted in active markets, but corroborated by market data; and
Level 3 – unobservable inputs that are used when little or no market data is available. The fair value hierarchy gives the highest
priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, we utilize valuation techniques that
maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, as well as consider
counterparty credit risk in our assessment of fair value. Considerable judgment is necessary to interpret Level 2 and 3 inputs in
determining the fair value of our financial and non-financial assets and liabilities. Accordingly, our fair value estimates, which are
made at the end of each reporting period, may be different than the amounts that may ultimately be realized upon sale or disposition of
these assets or settlement of these liabilities.
We use the following methods and assumptions in estimating fair value for financial instruments that are presented at fair value
on our consolidated balance sheets:
Interest Rate Swaps
Interest rate swaps are valued by a third-party specialist using widely accepted valuation techniques, including discounted
cash flow analysis on the expected cash flows of each swap. This analysis reflects the contractual terms of the interest rate
swaps and uses observable market-based inputs, including interest rate curves and implied volatilities. Interest rate swaps are
classified as Level 2 in the fair value hierarchy.
We use the following methods and assumptions in estimating fair value for financial instruments that are not presented at fair
value on our consolidated balance sheets, but are disclosed in the notes to our consolidated financial statements:
Preferred Equity Investments
Preferred equity investments are valued by a third-party specialist using the standard practice of modeling the contractual
cash flows required under the instrument and discounting them back to their present value. We use significant unobservable
inputs in determining the discount rate used in the fair value measurement of these investments, including a credit spread and
preferred rate of return. Preferred equity investments are classified as Level 3 in the fair value hierarchy.
Notes and Mortgages Payable
Notes and mortgages payable are valued by a third-party specialist using 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. 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. The notes and mortgages payable are classified
as Level 2 in fair value hierarchy.
The carrying value of marketable securities is determined using quoted prices in active markets. The carrying values of all other
financial instruments on our consolidated balance sheets, including cash and cash equivalents, restricted cash, accounts and other
receivable and accounts payable and accrued expenses, approximate their fair values due to the short-term nature of these instruments.
90
PARAMOUNT GROUP, INC.
NOTES TO 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 revenues 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 income includes (i) property management fees, (ii) asset management fees and (iii) fees related to acquisitions, dispositions
and leasing services and (iv) other fee income earned pursuant to contractual agreements. Fee income is recognized as and when we
satisfy our performance obligations pursuant to contractual agreements. Property management and asset management services are
provided continuously over time and revenue is recognized over that time. Fee income relating to acquisitions, dispositions and
leasing services is recognized upon completion of the acquisition, disposition or leasing services as required in the contractual
agreements. The amount of fee income to be recognized is stated in the contract as a fixed price or as a stated percentage of revenues,
contributed capital or transaction price.
Other income includes lease termination income, income from tenant requested services, including overtime heating and cooling
and parking income. Lease termination income could result from a lessee terminating a lease prior to the stated terms in their
agreements. To the extent a lease term is modified, any incremental fees or increased lease payments received as a result of the
modification are recognized over the remaining lease term based on the relevant facts and circumstances.
Gains and Losses on Sale of Real Estate
Gains and losses on the sale of real estate are recognized pursuant to ASC Topic 610-20, Gains and Losses from the
Derecognition of Nonfinancial Assets when (i) we do not have a controlling financial interest in the buyer and (ii) the buyer has
obtained control of the real estate asset. Any gain or loss on sale is measured based on the difference between the amount of
consideration received and the carrying amount of the real estate assets, less costs to sell. For partial sale of real estate resulting in
transfer of control, we measure any noncontrolling interest retained at fair value and recognize a gain or loss on the difference between
fair value and the carrying amount of the real estate assets retained.
Stock-based Compensation
We account for stock-based compensation in accordance with ASC Topic 718, Compensation – Stock Compensation. The fair
value of the award on the date of grant (adjusted for estimated forfeitures) is ratably amortized into expense over the vesting period of
the respective grants. The determination of fair value of these awards involves the use of significant estimates and assumptions,
including expected volatility of our stock, expected dividend yield, expected term, and assumptions of whether these awards achieve
the requisite performance criteria.
91
PARAMOUNT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 (“TRSs”). TRSs 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 TRSs had a combined current income tax expense of
approximately $622,000, $5,758,000 and $780,000 for the years ended December 31, 2018, 2017 and 2016, respectively. In addition,
our TRSs had a combined deferred income tax expense of $87,000 for the year ended December 31, 2018 and deferred income tax
benefits of $922,000 and $479,000 for the years ended December 31, 2017 and 2016, respectively.
The following table reconciles net income (loss) attributable to Paramount Group, Inc. to estimated taxable income for the years
ended December 31, 2018, 2017 and 2016.
(Amounts in thousands)
Net income (loss) attributable to Paramount Group, Inc.
Book to tax differences:
Straight-lining of rents and amortization of above and
below-market leases, net
Depreciation and amortization
Stock-based compensation
Real estate impairment loss
Gain on sale of real estate
Write-off of and valuation allowance on preferred equity
investment
Earnings of unconsolidated joint ventures, including
real estate investments
Swap breakage costs
Unrealized gain on interest rate swaps
Other, net
Estimated taxable income
$
For the Year Ended December 31,
2017
2016
2018
$
9,147 $
86,381 $
(9,934)
(48,604)
92,512
17,847
41,788
(14,381)
(44,083)
96,991
14,441
-
(95,182)
(3,574)
4,327
179
-
-
(8,240)
86,674 $
(8,600)
(1,487)
(860)
1,885
53,813 $
(51,880)
95,489
9,673
-
-
-
(3,513)
(25,367)
(4,651)
13,295
23,112
The following table sets forth the characterization of dividend distributions for federal income tax purposes for the years ended
December 31, 2018, 2017 and 2016
2018
For the Year Ended December 31,
2017
2016
Ordinary income
Long-term capital gain
Return of capital
Total
Amount
$
(1)
(2)
%
Amount
%
Amount
%
72.4%
18.7%
8.9%
100.0%
$
$
0.195
0.034
0.151
0.380 (2)
51.3%
8.9%
39.8%
100.0%
$
$
0.107
-
0.273
0.380 (2)
28.2%
-
71.8%
100.0%
0.286
0.074
0.035
0.395
$
(1) Represents amounts treated as “qualified REIT dividends” for purposes of Internal Revenue Code 199A.
(2) The fourth quarter dividend for the years ended December 31, 2018, 2017 and 2016 of $0.100, $0.095 and $0.095 per share, respectively, were
paid in January of the subsequent years and are allocable to the subsequent years for federal income tax purposes.
92
PARAMOUNT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segments
Our reportable segments are separated by region based on the three regions in which we conduct our business: New York,
Washington, D.C. and San Francisco. Our determination of segments is aligned with our method of internal reporting and the way our
Chief Executive Officer, who is also our Chief Operating Decision Maker, makes key operating decisions, evaluates financial results
and manages our business. See Note 25, Segments.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the
reported amounts in the consolidated financial statements and the notes thereto. Actual results could differ materially from those
estimates.
Reclassification
Certain prior year balances have been reclassified to conform to current year presentation.
Recently Issued Accounting Pronouncements Not Materially Impacting Our Financial Statements
In May 2014, the Financial Accounting Standard’s Board (“FASB”) issued 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 made in applying the guidance. This guidance is effective for fiscal years
beginning after December 15, 2017, and for interim periods within those fiscal years, and can be applied using a full retrospective or
modified retrospective approach. We adopted the provisions of ASU 2014-09 on January 1, 2018, using the modified retrospective
approach. The adoption of ASU 2014-09 did not impact our consolidated financial results but resulted in additional disclosures on our
consolidated financial statements. See Note 16, Revenues.
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. In November 2018, the FASB issued ASU 2018-19, which clarified that receivables arising from operating leases
are not within the scope of ASC Topic 326, and instead, impairment of receivables arising from operating leases (previously recorded
as bad debt expense, a component of “operating expenses”), should be accounted for under the scope of ASC Topic 842, Leases.
Accordingly, pursuant to ASU 2018-19, beginning on January 1, 2019, impairment of receivables arising from operating leases, if any,
will be recorded as a reduction of rental income and no longer reflected as bad debt expense. 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 do not believe the adoption of ASU 2016-13 will have a material impact on our consolidated financial
statements.
93
PARAMOUNT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In May 2017, the FASB issued ASU 2017-09, an update to ASC Topic 718, Compensation – Stock Compensation. ASU 2017- 09
clarifies the types of changes to the terms and conditions of a share-based payment award that requires modification accounting. ASU
2017-09 does not change the accounting for modification of share-based awards, but clarifies that modification accounting should only
be applied if there is a change to the value, vesting condition or award classification and would not be required if the changes are
considered non-substantive. ASU 2017-09 is effective for interim and annual reporting periods in fiscal years that begin after
December 31, 2017, with early adoption permitted. We adopted the provisions of ASU 2017-09 on January 1, 2018 and the adoption
of ASU 2017-09 did not have an impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, an update to ASC Topic 820, Fair Value Measurements. ASU 2018-13 modifies
the disclosure requirements in ASC Topic 820, by (i) removing certain disclosure requirements related to transfers between Level 1
and Level 2 of the fair value hierarchy and the valuation processes for Level 3 fair value measurements, (ii) modifying existing
disclosure requirements related to measurement uncertainty and (iii) adding new disclosure requirements related to changes in
unrealized gains or losses for the periods included in other comprehensive income for recurring Level 3 fair value measurements and
disclosures related to the range and weighted average of significant unobservable inputs used to develop Level 3 fair value
measurements. ASU 2018-13 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2019,
with early adoption permitted. We are evaluating the impact of ASU 2018-13 but do not believe the adoption will have an impact on
our consolidated financial statements.
In October 2018, the FASB issued ASU 2018-16, an update to ASC Topic 815, Derivatives and Hedging. ASU 2018-16 adds the
Overnight Index Swap Rate (“OIS”) based on Secured Overnight Financing Rate (“SOFR”) to the list of permissible benchmark
interest rates for hedge accounting purposes. ASU 2018-16 is effective for interim and annual reporting periods in fiscal years that
begin after December 15, 2018. The FASB permitted early adoption of ASU 2018-16 for entities that had already adopted ASU 2017-
12, an earlier update to ASC Topic 815, Derivatives and Hedging. We adopted the provisions of ASU 2017-12 on December 31, 2017
and have adopted the provisions of ASU 2018-16 on December 31, 2018. These adoptions did not have any impact on our
consolidated financial statements.
Recently Issued Accounting Pronouncements Impacting or Potentially Impacting Our 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 by requiring lessees to, among other things, (i) recognize most leases on their balance sheets, (ii)
classify leases as either financing or operating, and (iii) record a right-of-use asset and a lease liability for all leases with a term greater
than 12 months. ASU 2016-02 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2018,
with early adoption permitted. We will adopt the provisions of ASU 2016-02 on January 1, 2019, using the alternative modified
retrospective method, also known as the transition relief method, permitted under ASU 2018-11. Additionally, we will elect the
package of practical expedients which permits us not to reassess under ASC Topic 842 our prior conclusions about lease identification,
lease classification and initial direct costs. We will record a right-of-use asset and a lease liability upon such adoption for leases in
which we are a lessee. However, we do not believe that any asset and liability recorded in connection with such adoption will have a
material impact to our financial statements.
While accounting for lessors under ASU 2016-02 is substantially similar to existing lease accounting guidance, lessors are
required to separate payments received pursuant to a lease between lease components (rental income) and non-lease components
(revenue related to various services we provide). In July 2018, the FASB issued ASU 2018-11, which provided lessors with a practical
expedient to not separate lease and non-lease components, if certain criteria are met. We believe we meet such criteria and upon the
adoption of ASU 2016-02, we will elect this practical expedient.
Furthermore, ASU 2016-02 also updates the definition of initial direct costs for both lessees and lessors to include only
incremental costs of a lease that would not have been incurred if the lease had not been obtained. As a result, upon adoption of ASU
2016-02 on January 1, 2019, we will no longer be able to capitalize internal leasing costs and will have to expense them instead. We
had capitalized internal leasing costs of $5,653,000, $7,003,000 and $5,027,000 for the years ended December 31, 2018, 2017 and
2016, respectively.
94
PARAMOUNT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 2018, the FASB issued ASU 2018-20, an update to ASC Topic 842, Leases. ASU 2018-20 allows lessors to make an
accounting policy election not to evaluate whether sales taxes and similar taxes imposed by a governmental authority on a specific
lease transaction and collected by the lessor from the lessee are the primary obligation of the lessor. A lessor that makes this election
must exclude from the consideration in the contract and from variable payments not included in the consideration in the contract all
taxes within the scope of the election and make additional disclosures. ASU 2018-20 requires a lessor to exclude lessor costs paid
directly by a lessee to third parties on the lessor’s behalf from variable payments, but lessor costs that are paid by the lessor and
reimbursed by the lessee are required to be included in variable payments. The effective date of ASU 2018-20 is required to coincide
with the effective date of ASU 2016-02. The adoption of the provisions of ASU 2018-20 on January 1, 2019 will not have an impact
on our 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 elected to early adopt ASU 2016-18 retrospectively, on December 31, 2017.
This adoption resulted in (i) additional disclosures to reconcile cash and cash equivalents and restricted cash on our consolidated
balance sheets to our consolidated statements of cash flows, (ii) increased cash provided by operating activities and cash used in
investing activities by $3,000,000 and $15,449,000, respectively, for the year ended December 31, 2016.
In February 2017, the FASB issued ASU 2017-05, an update to ASC Topic 610, Other Income. ASU 2017-05 clarifies the scope
and accounting for derecognition of a nonfinancial asset and eliminates the guidance in ASC 360-20 specific to real estate sales and
partial sales. ASU 2017-05 requires an entity that transfers control of a nonfinancial asset to measure any noncontrolling interest it
retains (or receives) at fair value. ASU 2017-05 is effective for interim and annual reporting periods in fiscal years that begin after
December 15, 2017, with early adoption permitted for entities concurrently early adopting ASU 2014-09. We adopted the provisions
of ASU 2017-05 on January 1, 2018, using the modified retrospective approach. Upon adoption, we recorded a $7,086,000 adjustment
to “investments in unconsolidated joint ventures” relating to the measurement of our consolidated Residential Development Fund’s
(“RDF”) retained interest in One Steuart Lane (formerly 75 Howard Street) at fair value with an offset to equity. See Note 5,
Investments in Unconsolidated Joint Ventures.
In October 2018, the FASB issued ASU 2018-17, an update to ASC Topic 810, Consolidations. ASU 2018-17 requires reporting
entities to consider indirect interests held by related parties under common control on a proportional basis rather than as the equivalent
of a direct interest in its entirety in determining whether a decision-making fee is a variable interest. ASU 2018-17 is effective for
interim and annual reporting periods in fiscal years that begin after December 15, 2019, with early adoption permitted. We are
evaluating the impact of ASU 2018-17 on our consolidated financial statements.
95
PARAMOUNT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Dispositions
2099 Pennsylvania Avenue
On August 9, 2018, we completed the sale of 2099 Pennsylvania Avenue, a 208,776 square foot, Class A office building in
Washington, D.C. for $219,900,000 and recognized a gain of $35,836,000, which is included as a component of “gain on sale of real
estate” on our consolidated statement of income for the year ended December 31, 2018.
425 Eye Street
On September 27, 2018, we completed the sale of 425 Eye Street, a 372,552 square foot, Class A office building in Washington,
D.C. for $157,000,000 and recognized a gain of $1,009,000, which is included as a component of “gain on sale of real estate” on our
consolidated statement of income for the year ended December 31, 2018.
Waterview
On May 3, 2017, we completed the sale of Waterview, a 636,768 square foot, Class A office building in Rosslyn, Virginia for
$460,000,000 and recognized a gain of $110,583,000, which is included as a component of “gain on sale of real estate” on our
consolidated statement of income for the year ended December 31, 2017.
4. Acquisitions
111 Sutter Street
On February 7, 2019, we completed the acquisition of 111 Sutter Street, a 293,000 square foot office building in San Francisco,
California. Simultaneously to closing, we brought in a joint venture partner to acquire 51.0% of the equity interest. We will retain the
remaining 49.0% equity interest and manage and lease the asset. The purchase price was $227,000,000. In connection with the
acquisition, the joint venture completed a $138,200,000 financing of the property. The four-year loan is interest only at LIBOR plus
215 basis points and has three one-year extension options.
50 Beale Street
On July 17, 2017, we and a new joint venture in which we have a 36.6% interest, acquired, through a series of transactions, a
62.2% interest in 50 Beale Street, a 660,625 square foot, Class A office building in San Francisco, California. Subsequent to the
acquisition, we own a direct 13.2% interest in the property and the new joint venture owns the remaining 49.0% interest. Accordingly,
our economic interest in the property is 31.1%. The acquisition valued the property at $517,500,000 and included the assumption of
$228,000,000 of existing debt.
96
PARAMOUNT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5.
Investments in Unconsolidated Joint Ventures
Prior to March 14, 2018, RDF, in which we have a 7.4% interest, owned 20.0% of One Steuart Lane (the “Property”). On March
14, 2018, RDF transferred its 20.0% interest to a new joint venture in which it owns a 75.0% interest. Separately on March 14, 2018,
RDF acquired an additional 10.0% interest in the Property from its existing partner. Subsequent to these transactions RDF owns a
25.0% economic interest in the Property, comprised of the newly acquired 10.0% interest and an indirect 15.0% interest it owns
through the joint venture. Accordingly, RDF was required to consolidate its 75.0% interest in the joint venture that owns 20.0% of the
Property, and reflect the 25.0% interest in this venture (5.0% economic interest in the Property) it does not own as noncontrolling
interests. We continue to consolidate our 7.4% interest in RDF and reflect the 92.6% interest we do not own as noncontrolling
interests. As of December 31, 2018, our economic interest in the Property was 1.85%.
The following tables summarize our investments in unconsolidated joint ventures as of the dates thereof and the income or loss
from these investments for the periods set forth below.
(Amounts in thousands)
Our Share of Investments:
712 Fifth Avenue (1)
60 Wall Street (2)
One Steuart Lane (2)
Oder-Center, Germany (2)
Investments in unconsolidated joint ventures
Paramount
Ownership
As of December 31,
2018
2017
50.0% $
5.0%
25.0% (3)
9.5%
$
- $
22,353
52,923 (4)
3,587
78,863 $
-
25,083
16,031
3,648
44,762
(Amounts in thousands)
Our Share of Net Income (Loss):
712 Fifth Avenue (1)
60 Wall Street (2)
One Steuart Lane (2)
Oder-Center, Germany (2)
Income from unconsolidated joint ventures
For the Year Ended December 31,
2017
2016
2018
$
$
3,901 $
(518)
(18)
103
3,468 $
20,072 $
(152)
182
83
20,185 $
7,335
-
-
78
7,413
(1) As of December 31, 2018, our basis in the partnership that owns 712 Fifth Avenue, was negative $17,611 resulting from
distributions made to us in excess of our share of earnings recognized. Accordingly, we no longer recognize our proportionate
share of earnings from the venture because we have no further obligation to fund additional capital to the venture. Instead, we
only recognize earnings to the extent we receive cash distributions from the venture.
(2) As of December 31, 2018, the carrying amount of our investment in 60 Wall Street, One Steuart Lane and Oder Center, Germany
is greater than our share of equity in these investments by $2,772, $692, $5,055, respectively, and primarily represents the
unamortized portion of our capitalized acquisition costs. Basis differences allocated to depreciable assets are being amortized into
“income from unconsolidated joint ventures” over the estimated useful life of the related assets.
(3) Represents RDF’s economic interest in the Property.
(4)
Includes a $7,086 basis adjustment which was recorded upon the adoption of ASU 2017-05 on January 1, 2018.
97
PARAMOUNT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables provide the combined summarized financial information of our unconsolidated joint ventures as of the dates
and for the periods set forth below.
(Amounts in thousands)
Balance Sheets:
Real estate, net
Intangible assets
Other assets
Total assets
Notes and mortgages payable, net
Other liabilities
Total liabilities
Equity
Total liabilities and equity
As of December 31,
2018
2017
$
$
$
$
1,236,989 $
97,658
91,552
1,426,199 $
887,882 $
22,310
910,192
516,007
1,426,199 $
1,196,116
126,422
81,596
1,404,134
886,902
14,196
901,098
503,036
1,404,134
(Amounts in thousands)
Income Statements:
Rental income
Tenant reimbursement income
Fee and other income
Total revenues
Operating
Depreciation and amortization
Total expenses
Operating income
Interest and other income
Interest and debt expense
Unrealized gain on interest rate swaps
Net income before income taxes
Income tax expense
Net income
2018
For the Year Ended December 31,
2017
2016
$
$
113,156 $
27,178
7,146
147,480
53,417
48,452
101,869
45,611
803
(39,406)
-
7,008
(10)
6,998 $
113,643 $
25,161
1,622
140,426
51,390
46,409
97,799
42,627
381
(33,461)
1,896
11,443
(2)
11,441 $
54,420
4,495
1,882
60,797
23,670
12,509
36,179
24,618
68
(12,212)
4,109
16,583
(10)
16,573
98
PARAMOUNT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Investments in Unconsolidated Real Estate Funds
We are the general partner and investment manager of Paramount Group Real Estate Fund VII, L.P. (“Fund VII”) and its parallel
fund, Paramount Group Real Estate Fund VII-H, L.P (“Fund VII-H”), our Property Funds. As of December 31, 2018, Fund VII and
Fund VII-H’s sole asset, which they collectively owned 100% of, was 0 Bond Street, a 64,532 square foot creative office building in
the NoHo submarket of Manhattan. As of December 31, 2018, our combined ownership interest in Fund VII and Fund VII-H was
approximately 7.2%. On January 25, 2019, Fund VII and Fund VII-H sold 0 Bond Street for $130,500,000.
We are also the general partner and investment manager of Paramount Group Real Estate Fund VIII, L.P. (“Fund VIII”), our
Alternative Investment Fund, which invests in mortgage and mezzanine loans and preferred equity investments. Fund VIII completed
its final closing in April 2016 with $775,200,000 in capital commitments, of which $614,450,000 has been called and substantially
invested as of December 31, 2018 and an additional $74,391,000 is reserved for funding future draws on existing mezzanine loans and
preferred equity investments. These investments have various stated interest rates ranging from 5.50% to 9.61% and maturities
ranging from October 2019 to December 2027. Fund VIII’s investment period is scheduled to end in April 2019, unless extended by
us until April 2020. As of December 31, 2018, our ownership interest in Fund VIII was approximately 1.3%.
The following tables summarize our investments in these unconsolidated real estate funds as of the dates thereof and the income
or loss recognized for the periods set forth below.
(Amounts in thousands)
Our Share of Investments:
Property Funds
Alternative Investment Fund
Investments in unconsolidated real estate funds
As of December 31,
2017
2018
$
$
2,340 $
8,012
10,352 $
2,429
4,824
7,253
(Amounts in thousands)
Our Share of Net Loss:
Net investment income (loss)
Net realized loss
Net unrealized loss
Carried interest
Loss from unconsolidated real estate funds
For the Year Ended December 31,
2017
2016
2018
$
$
291 $
-
(560)
-
(269) $
236 $
(126)
(663)
(5,590)
(6,143) $
(324)
-
(1,706)
1,532
(498)
In December 2018, we completed an initial closing of Paramount Group Real Estate Fund X, L.P. (“Fund X”), with $167,000,000
in capital commitments, including $10,000,000 from us. As of December 31, 2018, none of the capital has been called.
99
PARAMOUNT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables provide the summarized financial information of our unconsolidated real estate funds, excluding Fund X, 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
$
$
$
$
As of December 31,
2018
2017
645,013 $
10,791
10
655,814 $
1,483 $
1,483
654,331
655,814 $
405,931
5,076
74
411,081
1,308
1,308
409,773
411,081
(Amounts in thousands)
Income Statements:
Investment income
Investment expenses
Net investment income
Net realized losses
Previously recorded unrealized losses
Net unrealized (losses) gains
Income (loss) from real estate fund
investments
$
For the Year Ended December 31,
2017
2016
2018
$
33,814
10,587
23,227
-
-
(4,656)
29,013 $
7,086
21,927
(72,134)
35,682
(6,266)
20,484
7,466
13,018
-
-
14,275
$
18,571
$
(20,791) $
27,293
7. Preferred Equity Investments
We own a 24.4% interest in PGRESS Equity Holdings L.P., an entity that owns certain preferred equity investments that are
consolidated into our consolidated financial statements.
The following table summarizes our preferred equity investments.
(Amounts in thousands, except square feet)
Preferred Equity Investment
470 Vanderbilt Avenue (1)
2 Herald Square (2)
Less: valuation allowance (2)
Total preferred equity investments, net
Paramount Dividend
Initial
As of December 31,
Ownership
24.4%
n/a
Rate
10.3%
n/a
Maturity
Feb-2019
n/a
2018
2017
$
$
36,042
-
36,042
-
$
36,042 $
35,817
19,588
55,405
(19,588)
35,817
(1) Represents a preferred equity investment in a partnership that owns 470 Vanderbilt Avenue, a 686,000 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 preferred equity investment in a partnership that owned 2 Herald Square, a 369,000 square foot office and retail property in
Manhattan. In April 2017, the borrower defaulted on the obligation to extend the maturity date or redeem the preferred equity investment and
accordingly, we had recorded a valuation allowance of $19,588. In May 2018, the senior lender foreclosed out our interest and accordingly, we
wrote off our preferred equity investment and the related valuation allowance.
100
PARAMOUNT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Intangible Assets and Liabilities
The following table summarizes our intangible assets (acquired above-market leases and acquired in-place leases) and intangible
liabilities (acquired below-market leases) and the related amortization as of the dates and for the periods set forth below.
(Amounts in thousands)
Intangible assets:
Gross amount
Accumulated amortization
Intangible liabilities:
Gross amount
Accumulated amortization
As of December 31,
2018
2017
$
$
$
$
515,889 $
(245,444)
270,445 $
185,191 $
(89,200)
95,991 $
553,063
(200,857)
352,206
205,101
(75,073)
130,028
(Amounts in thousands)
Amortization of above and below-market leases, net (component
of “rental income”)
Amortization of acquired in-place leases (component of “depreciation
and amortization”)
$
$
For the Year Ended December 31,
2017
2018
2016
16,059 $
19,523 $
9,536
58,814 $
76,016 $
94,935
The following table sets forth annual amortization of acquired above and below-market leases, net and amortization of acquired
in-place leases for each of the five succeeding years commencing from January 1, 2019.
(Amounts in thousands)
For the Year Ending December 31,
2019
2020
2021
2022
2023
$
Above and
Below-Market
Leases, Net
11,851 $
6,654
3,361
892
4,407
In-Place Leases
49,378
38,738
28,150
23,598
18,917
101
PARAMOUNT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Debt
On January 10, 2018, we amended and restated the credit agreement governing our revolving credit facility. The maturity date of
the revolving credit facility was extended from November 2018 to January 2022, with two six-month extension options, and the
capacity was increased to $1,000,000,000 from $800,000,000. The interest rate on the revolving credit facility, at current leverage
levels, was lowered by 10 basis points from LIBOR plus 125 basis points to LIBOR plus 115 basis points, and the facility fee was
reduced by 5 basis points from 25 basis points to 20 basis points.
The following table summarizes our outstanding debt.
(Amounts in thousands)
Notes and mortgages payable:
1633 Broadway
Maturity
Date
Fixed/
Interest Rate as of
Variable Rate December 31, 2018
As of December 31,
2017
2018
Dec-2022 Fixed (1)
Dec-2022 L + 175 bps
3.54% $ 1,000,000 $ 1,000,000
46,800 (2)
4.10%
3.56%
1,030,100
1,046,800
30,100 (2)
One Market Plaza (3)
Feb-2024 Fixed
4.03%
975,000
975,000
1301 Avenue of the Americas
Nov-2021 Fixed
Nov-2021 L + 180 bps
3.05%
4.18%
3.51%
500,000
350,000
850,000
500,000
350,000
850,000
31 West 52nd Street
May-2026 Fixed
3.80%
500,000
500,000
50 Beale Street (3)
Oct-2021 Fixed
3.65%
228,000
228,000
Total notes and mortgages payable
Less: deferred financing costs
Total notes and mortgages payable, net
3.72%
3,599,800
(32,883)
3,583,100
(41,800)
$ 3,566,917 $ 3,541,300
$1.0 Billion Revolving Credit Facility
Jan-2022 L + 115 bps
n/a
$
- $
-
(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 borrowed to fund leasing costs at the property. The loan balance can be increased by an additional $200,000 upon the
satisfaction of certain performance hurdles related to the property.
(3) Our ownership interest in One Market Plaza and 50 Beale Street is 49.0% and 31.1%, respectively.
The following table summarizes our principal repayments required for the next five years and thereafter in connection with our
notes and mortgages payable and revolving credit facility as of December 31, 2018.
Notes and
Revolving
$
(Amounts in thousands)
2019
2020
2021
2022
2023
Thereafter
Total
1,052 $
4,304
1,072,644
1,046,800
-
1,475,000
Mortgages Payable Credit Facility
-
1,052 $
-
4,304
-
-
-
-
1,072,644
1,046,800
-
1,475,000
102
PARAMOUNT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Derivative Instruments and Hedging Activities
Interest Rate Swaps – Designated as Cash Flow Hedges
We have interest rate swaps with an aggregate notional amount of $1.0 billion that are designated as cash flow hedges. We also
have entered into 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 $7,273,000,
$10,618,000, and $8,161,000 for the years ended December 31, 2018, 2017 and 2016, respectively, from the changes in fair value of
these interest rate swaps. See Note 12, Accumulated Other Comprehensive Income (Loss). During the next twelve months, we estimate
that $7,489,000 of the amounts recognized in accumulated other comprehensive income will be reclassified as a decrease in interest
expense.
The following table summarizes the fair value of our interest rate swaps that are designated as cash flow hedges.
Interest rate swap assets designated as cash flow hedges (included in “other assets”)
Interest rate swap liabilities designated as cash flow hedges (included in “other liabilities”)
Fair Value as of December 31,
2018
2017
16,859 $
9,855
48 $
317
$
$
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, 2018, we did not have such obligations relating to our swaps.
Interest Rate Swaps – Non-designated Hedges
As of December 31, 2018 and 2017, we did not have interest rate swaps that were not designated as hedges. Prior to December
31, 2017, we had interest rate swaps on One Market Plaza, 900 Third Avenue and 31 West 52nd Street that were not designated as a
hedges. We recognized unrealized gains of $1,802,000 and $39,814,000 for the years ended December 31, 2017 and 2016,
respectively, in connection with these interest rate swaps, which are included as “unrealized gain on interest rate swaps” on our
consolidated statements of income.
11. Equity
Stock Repurchase Program
On August 1, 2017, we received authorization from our Board of Directors to repurchase up to $200,000,000 of our common
stock from time to time, in the open market or in privately negotiated transactions. As of December 31, 2018, we have repurchased an
aggregate of 7,555,601 shares, or $105,383,000 of our common stock, at a weighted average price of $13.95 per share. We currently
have $94,617,000 available for future repurchases. The amount and timing of future repurchases, if any, will depend on a number of
factors, including, the price and availability of our shares, trading volume and general market conditions. The stock repurchase
program may be suspended or discontinued at any time.
103
PARAMOUNT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. 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, 2018, 2017 and 2016, including amounts attributable to noncontrolling interests in the Operating Partnership.
(Amounts in thousands)
Amount of income (loss) related to the effective portion of
cash flow hedges recognized in other comprehensive income (loss)
Amounts reclassified from accumulated other comprehensive
income (decreasing) increasing interest and debt expense
Amount of (loss) income related to unconsolidated joint
ventures recognized in other comprehensive income (loss) (1)
For the Year Ended December 31,
2017
2018
2016
$
9,203 $
3,360 $
(5,150)
(1,930)
7,258
13,311
(129)
160
17
(1) Represents foreign currency translation adjustments. No amounts were reclassified from accumulated other comprehensive income (loss) during
any of the periods set forth above.
13. Noncontrolling Interests
Consolidated Joint Ventures
Noncontrolling interests in consolidated joint ventures consist of equity interests held by third parties in One Market Plaza, 50
Beale Street and PGRESS Equity Holdings L.P. As of December 31, 2018 and 2017, noncontrolling interests in our consolidated joint
ventures aggregated $394,995,000 and $404,997,000, respectively.
Consolidated Real Estate Fund
Noncontrolling interests in our consolidated real estate fund consists of equity interests held by third parties in RDF. As of
December 31, 2018 and 2017, the noncontrolling interest in our consolidated real estate fund aggregated $66,887,000 and $14,549,000,
respectively.
Operating Partnership
Noncontrolling interests in the Operating Partnership represent common units of the Operating Partnership that are held by third
parties, including management, and units issued to management under equity incentive plans. Common units of the Operating
Partnership may be tendered for redemption to the Operating Partnership for cash. We, at our option, may assume that obligation and
pay the holder either cash or common shares on a one-for-one basis. Since the number of common shares outstanding is equal to the
number of common units owned by us, the redemption value of each common unit is equal to the market value of each common share
and distributions paid to each common unitholder is equivalent to dividends paid to common stockholders. As of December 31, 2018
and 2017, noncontrolling interests in the Operating Partnership on our consolidated balance sheets had a carrying amount of
$428,982,000 and $425,797,000, respectively, and a redemption value of $315,595,000 and $390,231,000, respectively.
104
PARAMOUNT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. 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 deemed to be the primary beneficiary.
Consolidated VIEs
We are the sole general partner of, and owned approximately 90.3% of, the Operating Partnership as of December 31, 2018. 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, 2018 and 2017, the Operating
Partnership held interests in consolidated VIEs owning properties, a real estate fund and preferred equity investments that were
determined to be VIEs. 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 following table
summarizes the assets and liabilities of consolidated VIEs of the Operating Partnership.
(Amounts in thousands)
Real estate, net
Cash and restricted cash
Investments in unconsolidated joint ventures
Preferred equity investments, net
Accounts and other receivables, net
Deferred rent receivable
Deferred charges, net
Intangible assets, net
Other assets
Total VIE assets
Notes and mortgages payable, net
Accounts payable and accrued expenses
Intangible liabilities, net
Other liabilities
Total VIE liabilities
$
$
$
$
As of December 31,
2018
2017
1,699,618 $
63,450
52,923
36,042
2,107
51,926
14,160
45,818
16,635
1,982,679 $
1,197,644 $
24,183
31,582
5
1,253,414 $
1,726,800
55,658
16,031
35,817
2,550
44,000
8,123
66,112
929
1,956,020
1,196,607
21,211
46,365
155
1,264,338
Unconsolidated VIEs
As of December 31, 2018, the Operating Partnership held variable interests in entities that own our unconsolidated real estate
funds that were deemed to be VIEs. The following table summarizes our investments in these unconsolidated real estate funds and the
maximum risk of loss from these investments.
(Amounts in thousands)
Investments
Asset management fees and other receivables
Maximum risk of loss
$
$
As of December 31,
2018
2017
10,352 $
722
11,074 $
7,253
597
7,850
105
PARAMOUNT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Fair Value Measurements
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
and interest rate swaps. The following table aggregates the fair values of these financial assets and liabilities as of the dates set forth
below, based on their levels in the fair value hierarchy.
(Amounts in thousands)
Marketable securities
Interest rate swap assets (included in “other assets”)
Total assets
Total
$
$
22,660 $
16,859
39,519 $
As of December 31, 2018
Level 2
Level 1
Level 3
22,660 $
-
22,660
$
- $
16,859
16,859
$
Interest rate swap liabilities (included in “other liabilities”) $
$
Total liabilities
48 $
48 $
- $
$
-
48 $
$
48
(Amounts in thousands)
Marketable securities
Interest rate swap assets (included in “other assets”)
Total assets
Total
$
$
29,039 $
9,855
38,894 $
29,039 $
-
29,039
$
Interest rate swap liabilities (included in “other liabilities”) $
$
Total liabilities
317 $
317 $
- $
$
-
- $
9,855
9,855
$
317 $
$
317
As of December 31, 2017
Level 2
Level 1
Level 3
-
-
-
-
-
-
-
-
-
-
Financial Assets and Liabilities Not Measured at Fair Value
Financial assets and liabilities not measured at fair value on our consolidated balance sheets consists of preferred equity
investments, notes and mortgages payable and the revolving credit facility. The following table summarizes the carrying amounts and
fair value of these financial instruments as of the dates set forth below.
(Amounts in thousands)
Preferred equity investments
Total assets
Notes and mortgages payable
Revolving credit facility
Total liabilities
$
$
$
$
As of December 31, 2018
Fair
Value
Carrying
Amount
As of December 31, 2017
Fair
Value
Carrying
Amount
36,042 $
36,042 $
36,339 $
36,339 $
35,817 $
35,817 $
36,112
36,112
3,599,800 $
3,617,961 $
3,583,100 $
-
-
-
3,599,800 $
3,617,961 $
3,583,100 $
3,596,953
-
3,596,953
106
PARAMOUNT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Revenues
Our revenues consist primarily of rental income, tenant reimbursement income and fee and other income. The following table sets
forth the details of our revenues.
(Amounts in thousands)
Rental income
Tenant reimbursement income
Fee and other income:
Fee income:
Property management
Asset management
Acquisition, disposition and leasing
Other
Total fee income
Lease termination income
Other income (2)
Total fee and other income
Total revenues
$
$
For the Year Ended December 31,
2017
2016
2018
667,360 $
56,950
628,883 $
52,418
590,161
44,943
6,163
7,912
3,160
1,394
18,629
2,985
13,037
34,651
758,961 $
6,336
8,581
7,770
1,525
24,212
2,189
11,265
37,666
718,967 $
5,948
7,754
2,026
1,203
16,931
17,010 (1)
14,296
48,237
683,341
Includes $10,861 from the termination of a lease with a tenant at 1633 Broadway.
(1)
(2) Primarily comprised of (i) tenant requested services, including overtime heating and cooling and (ii) parking income.
Property-related Revenues
Property-related revenue is recognized in accordance with ASC Topic 840, Leases, and consists of (i) rental income, which is
generated from the lease-up of office, retail and storage space to tenants under operating leases and recognized on a straight-line basis
over the non-cancellable term of the lease, (ii) tenant reimbursement income, which is comprised of reimbursement of certain
operating costs and real estate taxes from tenants, (iii) lease termination income and (iv) other income.
The following table is a schedule of future minimum cash rents under non-cancelable operating leases as of December 31, 2018,
for each of the five succeeding years commencing January 1, 2019.
(Amounts in thousands)
2019
2020
2021
2022
2023
Thereafter
Total
$
$
611,301
606,339
553,330
519,559
473,206
2,790,256
5,553,991
107
PARAMOUNT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue from Contracts with Customers
Revenue from contracts with customers, which is primarily comprised of (i) property management fees, (ii) asset management
fees, (iii) fees relating to acquisitions, dispositions and leasing services and (iv) other fee income, is recognized in accordance with
ASC Topic 606, Revenue From Contracts With Customers. Fee income is generated from the various services we provide to our
customers and is disaggregated based on the types of services we provide pursuant to ASC Topic 606.
Fee income is recognized as and when we satisfy our performance obligations pursuant to contractual agreements. Property
management and asset management services are provided continuously over time and revenue is recognized over that time. Fee
income relating to acquisitions, dispositions and leasing services is recognized upon completion of the acquisition, disposition or
leasing services as required in the contractual agreements. The amount of fee income to be recognized is stated in the contract as a
fixed price or as a stated percentage of revenues, contributed capital or transaction price. Fee income is reported in a non-operating
segment, and therefore is shown as a reconciling item to net income in Note 25, Segments.
The following table sets forth the amounts receivable from our customers under our various fee agreements and are included as a
component of “accounts and other receivables” on our consolidated balance sheets.
(Amounts in thousands)
Accounts and other receivables:
Balance as of December 31, 2017 $
Balance as of December 31, 2018
Increase
$
Property
Asset
Total
Management Management
Acquisition,
Disposition
and Leasing
Other
1,558 $
2,075
517 $
290 $
567
277 $
762 $
954
192 $
490 $
490
- $
16
64
48
As of December 31, 2018 and 2017, our consolidated balance sheets included $400,000 and $387,000, respectively, of deferred
revenue in connection with prepayments for services we have not yet provided. These amounts are included as a components of
“accounts payable and accrued expenses” on our consolidated balance sheets and will be recognized as income upon completion of the
required services.
There are no other contract assets or liabilities as of December 31, 2018 and 2017, respectively.
17. Real Estate Impairment Loss
On June 30, 2018, we wrote down the value of certain real estate assets in our Washington, D.C. portfolio. Our estimates of fair
value were determined using discounted cash flow models, which considered, among other things, anticipated holding periods, current
market conditions and utilized unobservable quantitative inputs, including appropriate capitalization and discount rates. Accordingly,
we recorded a $46,000,000 impairment loss based on the excess of the carrying value over the estimated fair value, which is included
as “real estate impairment loss” on our consolidated statement of income for the year ended December 31, 2018.
108
PARAMOUNT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Interest and Other Income (Loss), net
The following table sets forth the details of interest and other income (loss), net.
(Amounts in thousands)
Preferred equity investment income (1)
Interest and other income
Mark-to-market of investments in our deferred
compensation plans (2)
Valuation allowance on preferred equity investment (3)
Total interest and other income (loss), net
$
$
2018
For the Year Ended December 31,
2017
2016
3,655
5,384
(922)
-
8,117
$
$
4,187
1,256
5,114
(19,588)
(9,031)
$
$
5,716
774
444
-
6,934
(1) Represents income from our preferred equity investments in PGRESS Equity Holdings L.P., of which our 24.4% share is $890, $1,029 and
(2)
$1,393 for the years ended December 31, 2018, 2017 and 2016, respectively. See Note 7, 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 as a component of “general and administrative” expenses on our consolidated statements of
income.
(3) Represents the valuation allowance on 2 Herald Square, our preferred equity investment in PGRESS Equity Holdings L.P., of which our 24.4%
share was $4,780, and $14,808 was attributable to noncontrolling interests. In May 2018, the senior lender foreclosed out our interest and
accordingly, we wrote off our preferred equity investment.
19. Interest and Debt Expense
The following table sets forth the details of interest and debt expense.
(Amounts in thousands)
Interest and debt expense
Amortization of deferred financing costs
Total interest and debt expense
2018
For the Year Ended December 31,
2017
2016
$
$
136,630
11,023
147,653
$
$
132,574
11,188
143,762
$
$
146,334
6,804
153,138
109
PARAMOUNT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. Incentive Compensation
Stock-Based Compensation
Our 2014 Equity Incentive Plan (the “Plan”), provides for grants of 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 of our Operating Partnership (“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, 2018, we have 9,643,663 shares available for future grants under the Plan, if all
awards granted are full value awards, as defined in the Plan.
The following table summarizes the components of stock-based compensation expense for the years ended December 31, 2018,
2017 and 2016.
(Amounts in thousands)
LTIP units
Performance-based units
Restricted stock
Stock options
Total stock-based compensation expense
LTIP Units
For the Year Ended December 31,
2017
2016
2018
$
$
9,059 $
7,645
988
1,954
19,646 $
6,572 $
6,421
715
2,214
$
15,922
5,617
3,680
391
1,590
11,278
We grant our executive officers, non-employee directors and other employees LTIP units which vest over a period of three to
five years and are subject to a taxable book-up event, as defined. The LTIP units granted in the years ended December 31, 2018,
2017 and 2016 had grant date fair values of $10,145,000, $7,467,000 and $10,106,000, respectively, which are being amortized
into expense on a straight-line basis over the vesting period. As of December 31, 2018, there was $12,387,000 of total
unrecognized compensation cost related to unvested LTIP units, which is expected to be recognized over a weighted-average
period of 2.0 years. The following table summarizes our LTIP unit activity for the year ended December 31, 2018.
Unvested as of December 31, 2017
Granted
Vested
Cancelled or expired
Unvested as of December 31, 2018
Units
1,090,764
$
754,069
(516,318)
(44,432)
1,284,083 $
Weighted-Average
Grant-Date Fair
Value (per unit)
15.70
13.45
15.66
15.40
14.41
110
PARAMOUNT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Performance-Based Award Programs (“Performance Programs”)
We grant our executive officers and other employees LTIP units under multi-year performance-based long-term equity
compensation programs. The purpose of these Performance Programs 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
Performance Programs, participants may earn LTIP units based on our Total Shareholder Return (“TSR”) over a three-year
performance measurement period on both an absolute basis and relative basis. If the designated performance objectives are
achieved, awards earned under the Performance Programs are subject to vesting over a period of four years and are also subject to
a taxable book-up event, as defined.
The LTIPs unit activity granted under the Performance Programs in the years ended December 31, 2018, 2017 and 2016 had
grant date fair values of $7,009,000, $10,520,000 and $10,914,000, respectively, and are being amortized into expense over the
four-year vesting period using a graded vesting attribution method. As of December 31, 2018, there was $10,537,000 of total
unrecognized compensation cost related to unvested LTIP units granted under the Performance Programs, which is expected to be
recognized over a weighted average period of 2.3 years. The following table summarizes our LTIP unit activity granted under the
Performance Programs for the year ended December 31, 2018.
Unvested as of December 31, 2017
Granted
Cancelled or expired
Unvested as of December 31, 2018
Units
3,253,991 $
1,382,807
(1,263,228)
3,373,570 $
Weighted-Average
Grant-Date Fair
Value (per unit)
8.72
5.07
8.59
7.27
2017 Performance-Based Awards Program (“2017 Performance Program”)
On February 5, 2018, the Compensation Committee of our Board of Directors (the “Compensation Committee”)
approved the 2017 Performance Program. Under the 2017 Performance Program, participants may earn awards in the form of
LTIP units based on our TSR over a three-year performance measurement period beginning on January 1, 2018 and
continuing through December 31, 2020, on both an absolute basis and relative basis. Awards granted to our Chief Executive
Officer, under the 2017 Performance Program include an additional performance feature requiring threshold TSR
performance on both an absolute and a relative basis in order for any awards to be earned. If the designated performance
objectives are achieved, awards earned under the 2017 Performance Program are subject to vesting based on continued
employment with us through December 31, 2021, with 50.0% of each award vesting upon the conclusion of the performance
measurement period, and the remaining 50.0% vesting on December 31, 2021. Furthermore, our Named Executive Officers
are required to hold earned awards for an additional year following vesting. The fair value of the awards granted under the
2017 Performance Program on the date of the grant was $7,009,000 and is being amortized into expense over the four-year
vesting period using a graded vesting attribution method.
2015 Performance-Based Awards Program (“2015 Performance Program”)
On April 3, 2018, the Compensation Committee determined that the performance goals set forth in the 2015 Performance
Program were not satisfied during the performance measurement period, which ended on March 31, 2018. Accordingly, all of
the 779,055 LTIP units that were granted on April 1, 2015, were forfeited, with no awards being earned. As of April 3, 2018,
we had $947,000 of total unrecognized compensation cost related to these awards, which is being recognized over a
weighted-average period of 1.6 years.
111
PARAMOUNT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Stock
We grant shares of restricted stock to a non-employee director and certain other employees which vest over four years. The
shares of restricted stock granted in the years ended December 31, 2018, 2017 and 2016 had grant date fair values of $1,335,000,
$1,309,000 and $1,600,000, respectively, which are being amortized into expense on a straight-line basis over the vesting period.
As of December 31, 2018, there was $1,918,000 of total unrecognized compensation cost related to restricted stock, which is
expected to be recognized over a weighted-average period of 2.3 years. The table below summarizes our restricted stock activity
for the year ended December 31, 2018.
Unvested as of December 31, 2017
Granted
Vested
Cancelled or expired
Unvested as of December 31, 2018
Stock Options
Shares
$
129,005
93,961
(42,325)
(17,660)
162,981 $
Weighted-Average
Grant-Date Fair
Value (per share)
16.33
14.21
16.18
15.24
15.26
We did not grant any stock options in year ended December 31, 2018. Stock options granted in prior years to certain of our
executive officers and other employees 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, 2017 and 2016 had grant date fair values of $4.02 and $3.40 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, 2017 and 2016.
Expected volatility
Expected life
Risk free interest rate
Expected dividend yield
For the Year Ended December 31,
2017
29.0%
5.9 years
2.2%
2.3%
2016
29.0%
5.9 years
1.5%
2.3%
As of December 31, 2018, there was $1,370,000 of total unrecognized compensation cost related to unvested stock options,
which is expected to be recognized over a weighted-average period of 1.0 years. The following table summarizes our stock option
activity for year ended December 31, 2018.
Shares
Outstanding as of December 31, 2017
2,448,743 $
Granted
-
Exercised
-
Cancelled or expired
(316,800)
2,131,943 $
Outstanding as of December 31, 2018
Options vested and expected to vest as of December 31, 2018 2,083,994 $
1,496,664 $
Options exercisable as of December 31, 2018
112
Weighted-
Average
Remaining
Contractual Term
(in years)
Weighted-
Average
Exercise Price
17.20
Aggregate
Intrinsic
Value
-
-
18.00
17.08
17.14
17.20
6.7 $
6.5 $
6.2 $
-
-
-
PARAMOUNT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21. Earnings Per Share
The following table summarizes our net income (loss) and the number of common shares used in the computation of basic and
diluted income (loss) per common share, which includes the weighted average number of common shares outstanding and the effect of
dilutive potential common shares, if any.
(Amounts in thousands, except per share amounts)
Numerator:
Net income (loss) attributable to common stockholders
Earnings allocated to unvested participating securities
Numerator for income (loss) per common share - basic
and diluted
Denominator:
Denominator for basic income (loss) per common share -
weighted average shares
Effect of dilutive employee stock options and
restricted share awards (1)
Denominator for diluted income (loss) per common
share - weighted average shares
For the Year Ended December 31,
2017
2016
2018
$
$
$
9,147
(79)
86,381 $
(98)
9,068
$
86,283 $
(9,934)
(37)
(9,971)
239,527
236,373
218,053
29
29
-
239,556
236,402
218,053
Income (loss) per common share - basic and diluted
$
0.04 $
0.37 $
(0.05)
(1)
The effect of dilutive securities for the years ended December 31, 2018, 2017, and 2016 excludes 27,510, 30,848 and 48,113 weighted average
share equivalents, respectively, as their effect was anti-dilutive.
22. Summary of Quarterly Results (unaudited)
The following table summarizes our quarterly results of operations for the years ended December 31, 2018 and 2017.
(Amounts in thousands, except per share amounts)
2018:
Revenues
Net income (loss)
attributable to the
common stockholders
Income (Loss) Per Common Share
Basic
Diluted
December 31
September 30
June 30
March 31
2017:
December 31
September 30
June 30
March 31
$
$
$
$
190,675
192,596
191,419
184,271
180,257
179,770
177,704
181,236
$
$
5,318
37,531
(34,816)
1,114
(6,793)
(10,214)
103,016
372
$
0.02
0.16
(0.14)
0.00
(0.03) $
(0.04)
0.44
0.00
0.02
0.16
(0.14)
0.00
(0.03)
(0.04)
0.44
0.00
113
PARAMOUNT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
23. Related Parties
Due to Affiliates
On November 13, 2018, we repaid the $27,299,000 of loans that were due to affiliates. These loans 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 bore interest at a fixed
rate of 1.40%. For the years ended December 31, 2018, 2017 and 2016, we recognized $334,000, $197,000 and $139,000 of interest
expense, respectively, in connection with these notes, which is included as a component of “interest and debt expense” on our
consolidated statements of income.
Management Agreements
We provide property management, leasing and other related services to certain properties owned by members of the Otto Family.
We recognized fee income of $838,000, $824,000 and $795,000 for the years ended December 31, 2018, 2017 and 2016, respectively,
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, 2018, we were owed $51,000 under these agreements, which is included as a component of “accounts
and other receivables, net” on our consolidated balance sheet. There were no amount owed to us under these agreements as of
December 31, 2017.
We also provide property management, asset management, leasing and other related services to our unconsolidated joint ventures
and real estate funds. We recognized fee income of $15,231,000, $20,263,000 and $9,920,000, respectively, for the years ended
December 31, 2018, 2017 and 2016, respectively, in connection with these agreements. As of December 31, 2018 and 2017, amounts
owed to us under these agreements aggregated $1,836,000 and $1,627,000, respectively, and are included as a component of “accounts
and other receivables, net” on our consolidated balance sheets.
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. We incurred expense of $240,000, $247,000 and $625,000 for the years ended December 31, 2018, 2017 and
2016, respectively, in connection with these agreements, which is included as a component of “transaction related costs” on our
consolidated statements of income. As of December 31, 2018 and 2017, we owed $40,000 and $51,000, respectively, to HTC under
this agreement, which are included as a component of “accounts payable and accrued expenses” on our consolidated balance sheets.
Mannheim Trust
Dr. Martin Bussmann (a member of our Board of Directors) is also a trustee and a director of Mannheim Trust, a subsidiary of
which leases office space at 712 Fifth Avenue, our 50.0% owned unconsolidated joint venture. The Mannheim Trust, which is for the
benefit of Dr. Bussmann’s children, leases 5,593 square feet, which expires in April 2023. Our share of rental income from this lease
was $366,000, $358,000 and $416,000, for the years ended December 31, 2018, 2017 and 2016, respectively.
114
PARAMOUNT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
24. 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, 2018, we believe we are in
compliance with all of our covenants.
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
joint venture partner in 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
then 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 with the actual purchase occurring no earlier than 12 months after written notice
is provided. If the put right is exercised and the 712 Fifth Avenue joint venture acquires the 50.0% tenancy-in-common interest in the
property by our joint venture partner, we will own a 25.0% interest in 718 Fifth Avenue based on current ownership interests.
115
PARAMOUNT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Transfer Tax Assessments
During 2017, the New York City Department of Finance issued Notices of Determination (“Notices”) assessing additional
transfer taxes (including interest and penalties) in connection with the transfer of interests in certain properties during our 2014 initial
public offering. Prior to February 16, 2018, we believed that the likelihood of a loss related to these assessments was remote. On
February 16, 2018, the New York City Tax Appeals Tribunal issued a decision against a publicly traded REIT in a case interpreting
the same provisions of the transfer tax statute, on similar but distinguishable facts. As a result, after consultation with legal counsel,
we now believe the likelihood of loss is reasonably possible, and while it is not possible to predict the outcome of these Notices, we
estimate the range of loss could be between $0 and $39,800,000. Since no amount in this range is a better estimate than any other
amount within the range, we have not accrued any liability arising from potential losses relating to these Notices in our consolidated
financial statements.
25. Segments
Our reportable segments are separated by region based on the three regions in which we conduct our business: New York,
Washington, D.C. and San Francisco. Our determination of segments is aligned with our method of internal reporting and the way our
Chief Executive Officer, who is also our Chief Operating Decision Maker, makes key operating decisions, evaluates financial results
and manages our business.
The following tables provide Net Operating Income (“NOI”) for each reportable segment for the periods set forth below.
(Amounts in thousands)
Property-related revenues
Property-related operating expenses
NOI from unconsolidated joint ventures
NOI (1)
$
$
Total
New York
Washington, D.C. San Francisco Other
740,332 $
(274,078)
20,730
486,984 $
468,013 $
(188,008)
20,395
300,400 $
51,290 $
(19,381)
-
31,909 $
222,071
$
(60,043)
-
162,028
$
(1,042)
(6,646)
335
(7,353)
For the Year Ended December 31, 2018
(Amounts in thousands)
Property-related revenues
Property-related operating expenses
NOI from unconsolidated joint ventures
NOI (1)
$
$
Total
New York
Washington, D.C. San Francisco Other
694,755 $
(266,136)
19,643
448,262 $
430,548 $
(180,855)
19,143
268,836 $
72,143 $
(27,342)
-
44,801 $
$
191,677
(50,906)
-
140,771
$
387
(7,033)
500
(6,146)
For the Year Ended December 31, 2017
(Amounts in thousands)
Property-related revenues
Property-related operating expenses
NOI from unconsolidated joint ventures
NOI (1)
$
$
Total
New York
Washington, D.C. San Francisco Other
666,410 $
(250,040)
17,195
433,565 $
449,794 $
(176,445)
16,874
290,223 $
86,389 $
(32,721)
-
53,668 $
$
127,813
(30,889)
-
96,924
$
2,414
(9,985)
321
(7,250)
For the Year Ended December 31, 2016
(1) NOI is used to measure the operating performance of our properties. NOI consists of property-related revenue (which includes rental income,
tenant reimbursement income, lease termination 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.
116
PARAMOUNT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides a reconciliation of NOI to net income attributable to common stockholders for the periods set forth
below.
(Amounts in thousands)
NOI
Add (subtract) adjustments to arrive to net income (loss):
For the Year Ended December 31,
2017
2016
2018
$
486,984 $
448,262 $
433,565
Fee income
Depreciation and amortization expense
General and administrative expenses
Transaction related costs
NOI from unconsolidated joint ventures
Income from unconsolidated joint ventures
Loss from unconsolidated real estate funds
Interest and other income (loss), net
Interest and debt expense
Loss on early extinguishment of debt
Real estate impairment loss
Gain on sale of real estate
Unrealized gain on interest rate swaps
Net income before income taxes
Income tax expense
Net income
Less: net (income) loss attributable to noncontrolling interests in:
Consolidated joint ventures
Consolidated real estate fund
Operating Partnership
Net income (loss) attributable to common stockholders
$
18,629
(258,225)
(57,563)
(1,471)
(20,730)
3,468
(269)
8,117
(147,653)
-
(46,000)
36,845
-
22,132
(3,139)
18,993
24,212
(266,037)
(61,577)
(2,027)
(19,643)
20,185
(6,143)
(9,031)
(143,762)
(7,877)
-
133,989
1,802
112,353
(5,177)
107,176
(8,182)
(720)
(944)
9,147 $
10,365
(19,797)
(11,363)
86,381 $
The following table provides the total assets for each of our reportable segments as of the dates set forth below.
(Amounts in thousands)
Total Assets as of:
December 31, 2018
December 31, 2017
December 31, 2016
$
New York
Total
8,755,978 $
8,917,661
8,867,168
5,583,022 $
5,511,061
5,617,344
Washington, D.C. San Francisco
2,388,094
2,421,173
1,913,747
305,980 $
693,408
1,075,350
16,931
(269,450)
(53,510)
(2,404)
(17,195)
7,413
(498)
6,934
(153,138)
(4,608)
-
-
39,814
3,854
(1,785)
2,069
(15,423)
1,316
2,104
(9,934)
Other
$
478,882
292,019
260,727
117
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 Rules 13a-15(e) and 15d-15(e) under the Exchange
Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is processed,
recorded, summarized and reported within the time periods specified in the SEC’s rules and regulations, and that such information is
accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow for 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, 2018, the end of the period covered by this Annual Report on Form 10-K, 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. Based on the foregoing evaluation, as of the end of the period
covered by this Annual Report, our Chief Executive Officer and Chief Financial Officer concluded 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, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
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 Chief Executive Officer and Chief 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. 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 acquisitions, use or disposition of our assets that could have a material effect on our financial statements.
As of December 31, 2018, 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 concluded that our
internal control over financial reporting was effective as of December 31, 2018.
Deloitte & Touche LLP, an independent registered public accounting firm, has audited our financial statements and has issued a
report on the effectiveness of our internal control over financial reporting, which is included herein.
Changes in Internal Control over Financial Reporting
There were no changes to our internal control over financial reporting in connection with the evaluation referenced above that
occurred in the fourth quarter of the fiscal year ended December 31, 2018 that have materially affected, or are reasonably likely to
materially affect our internal control over financial reporting.
118
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Paramount Group, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Paramount Group, Inc. and subsidiaries (the "Company") as of
December 31, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control —
Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated financial statements as of and for the year ended December 31, 2018, of the Company and our report dated
February 13, 2019, expressed an unqualified opinion on those financial statements and financial statement schedules.
Basis for Opinion
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 are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
New York, NY
February 13, 2019
119
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 2018 Annual Meeting of
Stockholders (which is scheduled to be held on May 16, 2019), 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.
120
ITEM 15.
EXHIBITS, FINANCIAL STATEMENTS SCHEDULES
PART IV
(a) The following documents are filed as part of this report
1. The 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, 2018, 2017 and 2016
Schedule III – Real Estate and Accumulated Depreciation as of December 31, 2018, 2017 and 2016
122
123
Pages in this
Annual Report
on Form 10-K
(b) The exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index on page 125 of this Annual Report, on Form
10-K, and is incorporated herein by reference.
ITEM 16.
FORM 10-K SUMMARY
None
121
PARAMOUNT GROUP, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
COLUMN A
COLUMN B
COLUMN D
COLUMN E
COLUMN C
Additions
Charged
Against
Operations
Balance at
Beginning
of Year
Uncollectible
accounts
Written-off
Balance
at End
of Year
(Amounts in thousands)
For the Year Ended December 31, 2018
Allowance for doubtful accounts
Allowance for preferred equity investments
Total valuation allowance
For the Year Ended December 31, 2017
Allowance for doubtful accounts
Allowance for preferred equity investments
Total valuation allowance
For the Year Ended December 31, 2016
$
$
$
$
277 $
19,588
19,865 $
324 $
-
324 $
(8) $
(19,588)
(19,596) $
593
-
593
202 $
-
202 $
123 $
19,588
19,711 $
(48) $
-
(48) $
277
19,588
19,865
Allowance for doubtful accounts
$
365 $
315 $
(478) $
202
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(
PARAMOUNT GROUP, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
(Amounts in thousands)
Real Estate:
Beginning balance
Acquisitions
Additions during the year:
Land
Buildings and improvements
Assets held for sale
Real estate impairment loss
Assets sold and written-off
Ending balance
Accumulated Depreciation:
Beginning balance
Additions charged to expense
Accumulated depreciation related
to assets held for sale
Accumulated depreciation related
to assets sold and written-off
Ending balance
2018
For the Year Ended December 31,
2017
2016
$
$
$
$
8,329,475
-
$
7,849,093
484,916
$
-
146,378
-
(46,000)
(328,202)
8,101,651
487,945
188,871
-
(32,177)
644,639
$
$
$
-
82,862
-
-
(87,396)
8,329,475
318,161
182,732
-
(12,948)
487,945
$
$
$
7,652,117
504,684
-
116,038
(412,315)
-
(11,431)
7,849,093
243,089
168,847
(82,344)
(11,431)
318,161
124
Exhibit
Number
EXHIBIT INDEX
Exhibit Description
3.1
3.2
3.3
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7†
10.8
10.09*†
10.10†
10.11
10.12
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, incorporated by reference to Exhibit 10.2 to the Registrant’s
Form 10-K filed with the SEC on February 22, 2017.
Second Amendment to Amended and Restated Limited Partnership Agreement of Paramount Group Operating
Partnership LP, dated as of February 22, 2017, incorporated by reference to Exhibit 10.1 to the Registrant’s
Form 10-Q filed with the SEC on May 4, 2017.
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.
Paramount Group, Inc. Executive Severance Plan.
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.
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.
125
10.13†
10.14†
10.15†
10.16†
10.17†
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*
*
**
†
Amended and Restated Employment Agreement among Paramount Group Operating Partnership LP, Paramount
Group, Inc. and Albert Behler, dated as of January 1, 2018, incorporated by reference to Exhibit 10.1 to the
Registrant’s Form 8-K filed with the SEC on January 5, 2018.
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.
Amended and Restated Credit Agreement dated as of January 10, 2018, 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 the financial institutions party thereto as L/C Issuers and Swing Line Lenders,
incorporated by reference to Exhibit 10.1 to the Registrant’s 8-K filed with the SEC on January 16, 2018.
Resignation Agreement among Paramount Group, Inc., Paramount Group Management LP, Paramount Group
Operating Partnership LP and Dan Lauer, effective as of June 6, 2018, incorporated by reference to Exhibit 10.1
to the Registrant’s Form 10-Q filed with the SEC on August 8, 2018.
Retirement and Consulting Agreement among Paramount Group, Inc., Paramount Group Management LP,
Paramount Group Operating Partnership LP and Jolanta Bott, effective as of June 30, 2018, incorporated by
reference to Exhibit 10.2 to the Registrant’s Form 10-Q filed with the SEC on August 8, 2018.
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.
126
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 13, 2019
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 13, 2019
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/ Katharina Otto-Bernstein
(Katharina Otto-Bernstein)
/s/ Mark Patterson
(Mark Patterson)
Executive Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
February 13, 2019
February 13, 2019
February 13, 2019
February 13, 2019
February 13, 2019
February 13, 2019
February 13, 2019
February 13, 2019
February 13, 2019
Director
Director
Director
Director
Director
Director
Director
Director
127
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 13, 2019
/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 13, 2019
/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:129)
(cid:129)
the Annual Report on Form 10-K for the year ended December 31, 2018 (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 13, 2019
/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:129)
(cid:129)
the Annual Report on Form 10-K for the year ended December 31, 2018 (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 13, 2019
/s/ Wilbur Paes
Name: Wilbur Paes
Title: Executive Vice President, Chief Financial Officer and Treasurer
[THIS PAGE INTENTIONALLY LEFT BLANK]
CORPORATE DATA
BOARD OF DIREC TORS
MANAGEMENT
CORPOR ATE HE ADQUARTERS
ALBERT BEHLER
Chairman, Chief Executive
Officer & President
ALBERT BEHLER
Chairman, Chief Executive
Officer & President
WILBUR PAES
Executive Vice President,
Chief Financial Officer
& Treasurer
PETER BRINDLEY
Executive Vice President,
Leasing
DAVID ZOBEL
Executive Vice President,
Head of Acquisitions
THOMAS ARMBRUST
Managing Director,
CURA Vermögensverwaltung
MARTIN BUSSMANN
Trustee,
Mannheim Trust
DAN EMMET T
Chairman of the Board,
Douglas Emmett, Inc.
LIZANNE GALBREATH
Managing Partner,
Galbreath & Company
K ARIN KLEIN
Partner,
Bloomberg Beta
PETER LINNEMAN
Professor Emeritus,
The University of Pennsylvania,
Wharton School of Business
K ATHARINA OT TO -BERNSTEIN
President,
Film Manufacturers Inc.
MARK PAT TERSON
President,
MP Realty Advisors, LLC
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 16, 2019
INVESTOR REL ATIONS
INFORMATION
ir@paramount-group.com
(212) 492-2298
REGISTR AR &
TR ANSFER AGENT
Computershare Trust Company, N.A.
http://www.computershare.com/us/
(800) 962-4284
CORPOR ATE COUNSEL
Goodwin Procter LLP
New York, NY
AUDITORS
Deloitte & Touche LLP
New York, NY
NEW YORK
SAN FR ANCISCO
WASHINGTON, D.C .