Paramount Group, Inc.
Q4 2020 Earnings Call Transcript

Published: 11 Feb 2021

[Operator:]

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Paramount Group Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note that this conference call is being recorded today February 11th, 2021. I will now turn the call over to Rob Simone, Director of Business Development and Investor Relations.

[Rob Simone:]

Thank you, operator and good morning. By now everyone should have access to our fourth quarter 2020 earnings release and the supplemental information. Both can be found under the heading Financial Information, Quarterly Results in the Investors section of the Paramount website at www.paramount-group.com.

[Albert Behler:]

Thank you, Rob and thank you everyone for joining this morning. We hope that everyone is staying safe and healthy. I am very proud of how the Paramount team has performed during these unprecedented times. Yesterday, we reported core FFO for the fourth quarter of $0.24 per share, resulting in core FFO of $0.96 per share for the full year. These results reflect the strengths of our assets and tenant base. Today, we are initiating 2021 core FFO per share guidance between $0.82 to $0.88 per share. Wilbur will review our financial results and our 2021 guidance in greater detail. Looking back at 2020 as a whole, no one could have predicted the crisis that quickly unfolded and shocked the global economy. The world seemed to collectively hit the pause button. The U.S. office market both public and private was no different. The robust leasing environment of the previous year effectively froze as companies waited to see what would happen before making any major decisions.

[Peter Brindley:]

Thanks Albert and good morning everyone. During the fourth quarter, we leased more than 87,000 square feet at a weighted average starting rent of $90.81 per square foot. The majority of our fourth quarter leasing activity was once again renewal based and served to further reduce lease roll in 2021 and beyond. At quarter end, we were 95.2% leased, down 40 basis points quarter-over-quarter, and 70 basis points year-over-year.

[Wilbur Paes:]

Thanks Peter. Yesterday we reported core FFO of $0.24 per share, which was $0.01 ahead of consensus bringing full year 2020 core FFO to $0.96 per share. The current quarter's core FFO once again included some non-cash write-offs of straight line rent balances, aggregating $0.03 per share. Excluding this write-off, core FFO would have been $0.27 per share. Same-store cash NOI was positive 2.2% in the quarter, bringing full year same-store cash NOI growth to positive 0.2%. Our portfolio-wide collections continued to be strong at 96.7% during the fourth quarter, with office collections at 98% and collections from non-office tenants improving to over 60%. As a reminder, our collection figures have always been based on pre-COVID rental obligations as we believe this is a better and more factual depiction of the status of our business. During the fourth quarter, we executed 10 leases covering 87,283 square feet of space at a weighted average starting rent of $90.81 per square foot resulting in mark-to-markets of 2.3% on a GAAP basis and negative 1.3% on a cash basis. Full year leasing activity amounted to 699,159 square feet at a weighted average starting rent of $89.85 per square foot, resulting in mark-to-markets of 19.8% on a GAAP basis and 18.5% on a cash basis. Yesterday, we initiated guidance for the full year of 2021. Let me spend a few minutes discussing the assumptions used in our guidance. We expect 2021 core FFO to range between $0.82 and $0.88 per share, or $0.85 per share at the midpoint. We expect same-store results to be negative this year, driven by the two large known move outs of Barclays and TD Bank aggregating about 629,000 square feet, which account for a majority of our lease explorations in 2021. Our goal is to lease between 600,000 and 900,000 square feet this year, including 50% of the Barclays space. And we expect to end the year with the same-store lease occupancy rate between 88% and 90%. As I highlighted earlier, we provided 2021 core FFO guidance with a range between $0.82 and $0.88 per share, or $0.85 per share the midpoint. While the midpoint of our core FFO guidance is ahead of consensus by $0.02 per share, it is below 2020 core FFO by $0.11 per share. The decrease of $0.11 per share is comprised of the following; a $0.05 reduction due to the sale of 1899 Pennsylvania Avenue in December 2020, and the sale of a 10% interest in 1633 Broadway in May 2020; a $0.17 reduction from the loss in earnings due to the Barclays and TD Bank lease explorations; $0.09 reduction from lower straight line rent adjustments, which is more than offset by a $0.16 benefit from contractual rent steps and the burn-off for free rent; a $0.02 benefit from low interest expense; and $0.02 benefit from lower G&A expenses. Turning to our balance sheet, we ended the quarter with $1.46 billion in liquidity comprised of $460 million of cash and restricted cash and the $4 billion of capacity under our revolving credit facility. Our outstanding debt at quarter end was $3.6 billion and has a weighted average interest rate of 3.2% and a weighted average maturity of 4.9 years. This, of course, includes the debt of -- the depth at 1301 that is set to mature in November of this year. Excluding the 1301 debt, the weighted average interest rate on the remaining debt is 3.4% and the weighted average maturity is 6.2 years. As we have previously discussed, it was our plan all along to approach the 1301 refinancing in early 2021. We are currently in the process of doing just that. The debt markets have improved significantly from the onset of the pandemic and that bodes well for this high quality assets, notwithstanding the existing vacancy. We will provide an update on the status of this refinancing on our next call. Lastly, we have updated our invested deck, which among other things, lays out the building blocks to our 2021 guidance and free rent burn-off schedule. This can be found on our website at www.paramount-group.com. With that, operator, please open the lines for questions.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Steve Sakwa with Evercore ISI. Please proceed with your question.

[Steve Sakwa:]

Thanks. Good morning. Maybe Albert or Peter, could you guys just talk a little bit more about the goal of 600,000 to 900,000? And maybe talk a little bit about the pipeline today and how you maybe see the leasing unfolding? I guess Albert is, as you talked about, employees really aren't coming back to the office till probably the second half of the year. So, just how are the discussions with companies going? How's the pipeline stack up? And how do you sort of think the leasing volume unfolds over the course of the year?

[Albert Behler:]

Yes, Steve, morning. It's a very good question. I think I would like to summarize it and then Peter will go into more details. The activity -- we will be very focused on who to talk to and I think currently, you see tenants in the market who really need space and some of them are more long-term focused and are looking at the next 12 months. They want to make sure that their business model works long-term and those are the kind of tenants we are going to talk to and in communication with. And that that kind of communication has started stronger by the end of last year and we think that most probably we will have more real signed inked leases by the second half than the first half of this year. But it's hard at this point to summarize and predict because we went through so many different changes of the pandemic over the -- and the impact on the -- coming back to work scenario, that that prediction is a little difficult. But we are cautiously, -- as you could see, I think from our earnings call, cautiously optimistic.

[Peter Brindley:]

Yes. Steve is no question. As we have said before that getting people back into the office directly correlates to general leasing velocity in the market, which we all recognize is in 2020 very challenged. But I will tell you that we have a lot of conviction in our offering, we are having meaningful conversations with tech and with financial service-based companies varying in sizes, call it from one floor to the majority of the space that we're marketing at 1301 and also 31 West. So, we are actively touring. In fact, we had a 300,000 foot tour just yesterday. We are also giving virtual tours. I think in every instance, we're putting our best foot forward and communicating the various attributes of this offering that we have a lot of conviction in. And so we continue to do all the right things as we have in the past as we've leased up large blocks of space before. We are communicating with tenants, I think, in many cases that are looking to upgrade their current office and participate in this flight to quality trend that we're now realizing. And in many cases, we're talking about long-term deals here where tenants are committed to improving space and doing the long-term deal with us. So, look, I think things are moving slower than any of us would like, but we've been here every day, the team is energized. We like who we're communicating with now in terms of credit and the opportunity, tenants are latching on to the private entrance, among other things that we're communicating as part of our offering. And that's what the current state of 1301 and 31 West are at the moment.

[Steve Sakwa:]

Okay. Peter, if I can just ask the follow-up for the for the new tenants that you're talking to, I realize it's still early in their thought process, but how are they sort of thinking about densities and space usage? And that 300,000 foot tenant, are they in a similar size footprint today? Or are they bigger, smaller, I just trying to get a sense for how tenants are really thinking about densities, work-from-home, and overall space needs since we haven't seen much new leasing activity?

[Peter Brindley:]

Yes, I think, Steve, I think it's yet to be decided. Quite frankly, it's entirely fluid. We're talking to tenants, we're talking to architects. I don't see at this point a lot of change on the other side of this pandemic by way of configuration in terms of how tenants are improving their space. I think it'll be somewhat similar to what we had experienced pre-COVID. However, I don't think we'll be nearly as dense -- the densification trend that we've been contending with for more than a decade, I think it will ease because that was already in motion pre-COVID. So, I think what you'll see is, perhaps slightly more rentable square footage attributable to each employee, but I do think companies are going to look for innovative ways to get people back in creative ways that that foster collaboration, because certainly that is of critical importance to these companies remaining productive. So, in speaking with architects and tenants, they're trying to figure out how they create these sort of communal spaces that encourage collaboration. But in terms of overall configuration, I think it's really hard to point to any trend that that's different from what we what we've experienced, historically, other than perhaps a little bit more space per employee.

[Steve Sakwa:]

Okay. Maybe, Albert, just one question for you on transactions. I mean you sort of mentioned that there hadn't been a lot of distress in the marketplace, maybe for obvious reasons with rates being as low as they are. But sounds like you've got some funds and you've got partners. I mean how are you sort of thinking about transaction activity given where your stock price sort of trades, it sounds like you do most of these in joint ventures, but what are you -- are you looking for lease up opportunities? Are you just looking for high quality deals at discounts that don't have a lot of leasing risk? I mean how are you sort of thinking about what to put in the portfolio, whether it's wholly-owned or JV?

[Albert Behler:]

As I mentioned, we -- it's a little early to come up with -- or to find opportunities. I think there's no stress in the market yet because of a lot of liquidity. But the opportunities we look at and we do this, in general, also for our mezzanine business, and we get kind of the first indication of where the market is trending. We are focusing more on value add in the future. But we think that's too early at this point to really go into specific markets. We don't see an opportunity and we want to be staying very, very careful with investing PGRE's equity in those kind of investments and mainly focus on joint ventures opportunities where we can enhance our returns on property management and other fees. So we are looking at value creation, so opportunistic and not long-term, leased opportunities. That's not our kind of business model.

[Steve Sakwa:]

Okay. Thank you. That's it for me.

[Albert Behler:]

Sure. Thank you.

[Operator:]

Our next question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.

[Blaine Heck:]

Great. Thanks. Good morning. Just following up on Steve's earlier questions, and probably for Peter, can you just talk about what you've been seeing on the concession side of things in New York? And what you think it's going to going to take on both a TI per square foot and free rent per year of term to get these deals done at Barclay's space and TD space? And do you think there's going to be any major differences in the concession packages between the two spaces?

[Peter Brindley:]

Hi, Blaine. I think -- I think concessions are slightly elevated relative to where they were pre-COVID, I think on a free rent basis, if you're negotiating with a credit tenant, you're going to be slightly more than a month per year of term call it and I think TI’s have elevated slightly, I think you're generally on a on a long-term deal in the 130-ish neighborhood, and generally, I think direct rents have generally held up, I think that effective rents have been impacted largely as a result of the slight increase in concessions that that owners are having to give in order to transact right now, and during this during this window of time.

[Blaine Heck:]

That makes sense. And any difference in the concessions between the two spaces, or do you think it'll be pretty similar?

[Peter Brindley:]

I think you can assume that they'll be similar.

[Blaine Heck:]

Okay, helpful. And then maybe a couple for either Wilbur or Albert, just wondering what your appetite is for share buybacks in 2021? Would you need to sell an asset to resume buybacks? Or do you think you guys have the capacity for more well, staying within your kind of targeted leverage range without additional capital?

[Wilbur Paes:]

You know, we've always done buybacks, and we've said that we've done it on a leverage neutral basis. If you look at what we did in 2020, we did that by transacting with at 16.33, and use that capital to buy back. So right now, we're being very, very mindful and focused on the balance sheet and the liquidity on balance sheet. If you saw the shares, we bought back in the fourth quarter was around $11.5 million, which was very opportunistic at a price of 666. So I don't think we have go -- we're going full on in buyback using existing cash on balance sheet. We're going to be losing $45 million or so in cash flow in 2021, given the Barclays vacancy given the TD Bank vacancy, and these are non-movers. So I think we're going to be very, very thoughtful, if we feel there is opportunity in the market to buy back stock, because it's such a continued depressed values, we will we will look to be opportunistic again.

[Blaine Heck:]

Got it. That makes sense. Last one, for me sticking with you, Wilbur again, we appreciate your conservative approach to cash same-store NOI and excluding that cash revenue from deferred rent as you've been granting it to certain tenants. But with respect to cash, same-store NOI guidance, similar to the way that those deferrals hit -- hurt your cash same-store in 2020. Is there a positive tailwind from the repayment of those deferred rents being factored into that flat to negative 2% guidance?

[Wilbur Paes:]

Yes. That's an excellent point, Blaine. There is -- there is some element of that payback, that is factored in, because otherwise, if you were to run math, you could not come to the range we provided. If you had not factored some of that tailwind, you got 40 plus million, as I said, coming out in cash, and that would otherwise lead you to be significantly negative on the same-store basis in 2021. And, we're between negative two and flat. So there is some element of that tailwind that you talked about. There's obviously the burn off of free rent that's factored into that number, largely deals that were last year not paying that come from the blue chip tenant roster that we feel very good about in collecting that rent in 2021. So there's an element of that. And there's an element of organic bumps in our existing leases from that blue chip tenant roster that I just talked about.

[Blaine Heck:]

All right. Great. Thanks, guys.

[Albert Behler:]

Thank you.

[Operator:]

Our next question comes from the line of Rick Skidmore with Goldman Sachs. Please proceed with your question.

[Rick Skidmore:]

Good morning. Thank you. Albert, just a follow-up on the acquisition transaction market, as you look at your portfolio going forward, how do you think the mix changes over time now that you're out of DC? Do you get larger in San Francisco? Or is it too early to tell?

[Albert Behler:]

It's a very good question. We get it quite often. Rick. So we have been quite active over the last couple of years in San Francisco. And, I think that was a -- that was a good we found good opportunities. Because we have the platform there we have our leasing platform, which was -- which was very helpful and creating value. But the long history is that we are opportunistic. So, we look at both markets for the time being, may I say for the time being, we are not considering the third or fourth market. We are looking at both markets and we'll opportunistically approach potential investment. We'd like New York, and we like San Francisco, both of them.

[Rick Skidmore:]

And then maybe a question for Peter -- thank you, Albert. Question for Peter, just in terms of the difference between tenants viewpoints on long-term space needs between New York and San Francisco, it seems like each week we see something in the press around a large tech tenant deciding to work from home or in San Francisco, or what are you hearing on the ground as you from your tenants or prospective tenants, in terms of their long-term space needs? Is there a difference between the two cities or anything that's -- that strikes you between in those conversations that you're having? Thanks?

[Peter Brindley:]

Sure. Well, look, in San Francisco, we're seeing a lot of San Francisco based companies hire. We're seeing a lot of venture capital money, more in 2020, and in 2019, invested in San Francisco based companies. So -- so we generally feel like when some of the restrictions and shelter in place ordinances are lifted in San Francisco, we will be having more productive conversations and leasing will pick back up. That's our fundamental belief, because we believe that these companies are well capitalized and will lead the way out of the recession. I think the fact that non-essential has been essentially shut down, as it has been for the majority of this year, has led to fewer conversations in that regard. But the anticipation is that those will pick back up as we move forward. New York is a little bit further along because of course, non-essential has been allowed back in the office for a longer period of time. New York has become more interesting than ever before, it's become more diverse than ever before. In fact, tech, lead leasing activity in Midtown in other words, they contributed more toward leasing activity during the year with 27% of the demand. So I think the resiliency of New York, and the diversification of the city's tenant base is oftentimes under appreciated. I think we're having, I think, more constructive conversations with prospective tenants in New York on our availabilities. But I think that that's a good thing, right? Because we have considerably more role in 2021 in New York than we do San Francisco, with only 128,000 square feet expiring at Sheraton, San Francisco, a lot of the leasing we did this year, de risked significantly our 2021 and 2022 roll in San Francisco. So, we look forward to San Francisco being opened up. We feel the same about New York, but at this point, we are having more constructive conversations with prospective tenants in New York across a variety of industry. And that's how I would address your question, Rick.

[Rick Skidmore:]

Thanks Peter. Appreciate it.

[Operator:]

Our next question comes from the line of Tom Catherwood with BTIG. Please proceed with your question.

[Tom Catherwood:]

Thank you, and good morning, everyone.

[Albert Behler:]

Good morning, Tom.

[Tom Catherwood:]

So -- quick question just on the New York City market in general, I guess, this probably applies to San Francisco as well. We hear about office landlords trying to create a “ecosystem” in their building these days, layering in both big block space with a prebuilt program, maybe some self-managed co-working space. But the idea being that they can approach multiple tiers of the leasing market as the city starts to reopen. From what I'm hearing from you guys, the focus in your available space still seems to be larger or full floor or bigger tenants? What's your thought about kind of layering in different types of office offerings within your assets? Or is the physical nature of your buildings not necessitate that?

[Albert Behler:]

You know, Tom, our portfolio is very diversified from the get-go. So we have properties that have 10,000 square feet per floor like 712 Fifth Avenue, and we have been doing pre-built 10 years ago. So this is not new for us. So we are working on multiple disciplines in our leasing approach since years, and we do this also in San Francisco, where for example, in market center you have smaller floor plates in one of the buildings and in the other one, the larger floor plates. So we mix it up and create the best opportunity for us long-term. And there's so we do with the amenity packages. I mean, we started very early on when people didn't even use the word amenity. We started at One Market Plaza to totally renovate the retail section of it, it looked before very stale and not inviting, and we have redone the entire retail space, and then filled it up nicely to really help the office space and it has worked. It has improved the rental rates, and it's something that we have. I think. in our culture to really approach leasing on an asset-by-asset basis and not a general broad brush kind of approach to the entire portfolio.

[Peter Brindley:]

Yes, I would only add to that, Tom, by saying we do have a very nice product mix in terms of our availability. And as a result, we do see a broad range of prospective tenants ranging from called it 3,000 square feet to 600,000 square feet. So I think our portfolio lends itself to the product mix that we're able to offer. The other thing around amenities, we are contemplating some conferencing space at 1301. It's something that the tenants that we're speaking with now as they're referred to previously have asked about as an amenity that would move the needle in their estimation. And that's something I think that we can do and have a real advantage given our scale in and around the building. If you think about where our properties are located, so we can offer it as an exclusive type amenity, if you will to Paramount tenants, which as you can imagine is very well received. So we're always thinking about that in terms of our offering, I mean, amenities also go so far as to include a private welcome center, as we refer to in my remarks that allow for branding and so forth and so on, not to mention exclusivity. So our offerings are diverse in nature. And I think it's largely a function of not only how we think about our real estate, but the buildings that comprise our portfolio.

[Tom Catherwood:]

Appreciate that. Thank you both. Peter, maybe sticking on the leasing. You had this comment about New York being more diverse, especially when it came to tenants and tenants in Midtown. When you're doing your showings, has the geographic footprint or the net that these tenants are casting, has that expanded? Or did the same other way? Are you being comped not just against other trophy Midtown buildings and the west side? Are you not being comped against Lower Manhattan, Brooklyn kind of other Midtown South, other sub markets in Manhattan? Or has the search area tightened up?

[Peter Brindley:]

I think it used to be that you could anticipate with some level of confidence what other buildings were being contemplated. I do think tenants are willing to consider other sub markets. But I do think it's actually tightening up a bit, I have to say, most recently, I do think the pendulum has swung from new product, new product, new product to location, location, location in many respects. And I think we went to two very nicely. I think that's part of the reason we've had the level of interest. We have 1301 and 31 West. As I said in my remarks, I do think walkability is something that that matters. I think the idea that you've come into your Central, Grand Central, let's use, an example and then you've got to get on another train for example, to get to your building in Midtown, for example, is less desirable than having the ability to walk there. So, I think there's a renewed focus on location. And when you study our portfolio, you see that we have continually reinvest it in our product and we think that the attributes of our product are entirely cutting edge. And that's how I would address the question.

[Albert Behler:]

The only thing I'd say, just to clarify, when Peter refer to sub markets, he was not talking about Brooklyn.

[Peter Brindley:]

Right.

[Albert Behler:]

We're not seeing somebody looking at our buildings and looking in Brooklyn. That's different sub markets, obviously, I mentioned.

[Tom Catherwood:]

Very, very fair. Thank you. Thank you both. And then just one more quick one for me, Wilbur.

[Peter Brindley:]

Yes, nothing against Brooklyn.

[Tom Catherwood:]

One -- Wilbur, as we're looking at the leasing guidance and then earnings guidance as well and squaring them up. Given that leases obviously take a long time to come to fruition, even though the interest seems to be picking up. Is there a certain amount of leasing that that you have to hit to reach the midpoint of your guidance or these guides pretty much assume none of the leasing that happens in 2021 ends up flowing into earnings?

[Wilbur Paes:]

Well, I think we said in my remarks, I said in my remarks that we are expecting that we lease around 50% of the Barclays space by the end of 2021. And that is -- that's a goal that we will achieve. And that's part of it.

[Peter Brindley:]

Yes. And if I can dimension that a little bit, two parts to that question in terms of one on the leasing side, and one on the earning side. The leasing side of it, as Albert said, we have a goal 600,000 square feet to 900,000 square feet, call it 750 at the midpoint. If you want to do the math, if you look at where we ended the year, Tom, we ended the year with a lease occupancy rate of 95.2%, we have roughly a million square feet expiring, assuming all of those leases expire, and not a single square footage is leased, that would have a 10.4% impact to occupancy. So that would bring you down to 84.8%. In order to get to the midpoint of our same-store occupancy guidance, which is 89%. That would imply 375,000 square feet of newly single occupancy increasing leasing. And so that's about 50% of the total leasing goal at the midpoint of all leasing that we provided. And so the question was asked early on in terms of renewal and lease and new leasing? That's the answer really, it's off the 750, you have baked in 375,000 square feet of occupancy increasing leasing, which will do what Albert said, includes 50% of our estimation of the Barclays Block to get leased up in the year. And the remaining 50% of that leasing goal is renewal based. And we will venture to say, most of the renewal stuff will get done in the first half of the year, and the occupancy increasingly leasing towards the second half of the year. So that's the discussion on the leasing guidance. On the earnings guidance, if you follow that along, we have not factored any benefit from the potential lease up of the Barclay space in 2021 earnings. So that should help answer the risk part of that question Tom is, is if we anticipate that lease gets executed in the second half of the year, there is going to be time before the tenant takes possession and builds up your space before we commence gap revenue recognition. And we have not factored any of that benefit in 2021.

[Tom Catherwood:]

Got it. That's really helpful. Thanks, everyone.

[Peter Brindley:]

Sure.

[Albert Behler:]

Sure. You're welcome.

[Operator:]

Our next question comes from the line of Omotayo Okusanya with Mizuho. Please proceed with your question.

[Omotayo Okusanya:]

Hi, morning. Thanks for the time. Also along the lines of guidance, could you talk a little bit about expectations for non-office income or non-office revenues in 2021, including any potential for additional lease up of the former Bendel space?

[Peter Brindley:]

So I'll talk about the first part and Albert will touch upon the Bendel space. If you saw the collections tie on the non-office side, they increased over 10 percentage points relative to last quarter. So, last quarter, the non-office component which as a reminder, that entire group only accounts for 3.5% of annualized revenue. That was a 50%. We saw a nice uptick in that which went from 50% to 60 plus percent. I think the exact number was 60.3%, if I'm not mistaken. And we are anticipating that that will continue to trend in the right direction. We have obviously moved a lot of that sector on a cash basis. So there's no real write-off of future straight lining or receivables that we anticipate in 2021 relative to that, and we think that quarter-over-quarter, that number should continue to increase.

[Albert Behler:]

We got to the second half of your question Omotayo. We leased significant, but relatively small space, but income wise, a very significant piece of the Henri Bendel space already up last year. That provides us with about 85% of the income that we achieved of the entire space for the last couple of years from Henri Bendel. And the market in addition will be the tenant most probably will be in the same segment, which will be most will be luxury goods is relatively slow for the time being. So we haven't planned for 2021 to get that space occupied. We also want to be selective and that's why we are a little bit capital and cautious to find the right use for that space. It should be fitting the entire corner which is one of the best retail corners in the world.

[Omotayo Okusanya:]

Very helpful. Thank you guys.

[Albert Behler:]

You're welcome.

[Operator:]

Our next question comes from the line of the Vikram Malhotra with Morgan Stanley. Please proceed with your question.

[Vikram Malhotra:]

Thanks for taking the question. And Wilbur if you've touched on this before, but just wanted to check on thoughts on the dividend, you obviously reduced the dividend given sort of your conservative approach, given to you sort of lease up Barclays and TD reach your goals this year, I'm just thinking you just want to be -- can you give us latest thoughts on how you think about the dividend going into next year and beyond?

[Wilbur Paes:]

Sure. And Vikram we were very, very thoughtful here. Going through our dividend policy with the board, we felt it was the right thing to do in terms of right sizing the dividend relative to where we are in the pandemic. And also bearing in mind that we were going to lose $40 million plus of cash flow as a result of these two large non-mover. So what that has enabled us to do is right size a dividend in 2021, offset that diminution in cash flow, call it to the tune of $30 million in savings from that new dividend policy. So it preserves liquidity in the company. And it provides a path for significant dividend growth going forward. Because as you lease up the Barclay space as you lease up the TD Bank space, you will see a really nice uptick in our cash flow and in taxable income, which will translate into increased dividends.

[Vikram Malhotra:]

Okay, that's helpful. And then just going back to a couple of comments Peter made on just both San Francisco and New York. Wanted to get your thoughts on two aspects, just kind of where sublease rates are today in both markets, and what you're hearing kind of from the brokerage community or tenants on kind of where sublease could go. And ultimately, to get transaction activity sort of back to pre-COVID levels, just sort of your current view on where you think sort of effective rents eventually settle down given kind of where sublease rates are. So how much of a decline in in market rents do you think we'll eventually see?

[Albert Behler:]

Sure, Vikram. So in New York, in my remarks, I pointed out that sublease availability in Midtown is 24% of total availability, which looking back in time, which is important to do, during the.com, bust, it did reach 45% of total availability and then again, and the great financial crisis in Midtown, specifically, it was 33%. So sublease availability is of course lower relative to those two periods of time. There's no question that sublease space does serve as a headwind, but I want to make sure that you understand something which I think is very interesting. I spoke with a tenant who's trying -- who's listed a considerable amount of space in Midtown recently and the commentary was if we lease one or two floors, we will withdraw our space. We're sort of testing the water. We're going to drop the rent. We don't want to deploy much capital in order to secure a sub tenant. And I think that sentiment is somewhat widespread. In fact, we're competing for a space right now one of our buildings or for a deal rather, because of the deal that they had on for a sublease space at another property fell apart when the tenant decided they didn't in fact want to sublet their space. And CPRA has put out a really very nice statistic that I think tells what sort of further reinforces what I'm now describing. And that is in two -- in Manhattan from 2008 to 2009, there was 24 million square feet of sublease space added to the market. And from 2009 to 2010 13.6 million square feet was withdrawn from the market. So I think the truth of the matter is that as people come back to work and utilization discovery takes place as it is now, I think a lot of these tenants will realize that they don't in fact want to sublease the space. And I think that will likely remove some of the inventory that we're having to compete with in the near-term. So I think it's important to be aware of that phenomena. Thankfully, in Midtown, specifically, the figures aren't too elevated. But it's something that we're keeping a close eye on, because it certainly serves as a headwind in the near-term. In San Francisco, I think much of what I just described will apply. Sublease availability in the CBD is elevated in San Francisco. And the general sentiment is that when more people come back, much of that space will be withdrawn as well. But there is no question that in the near-term, sublease space does serve as a headwind. As it relates to net effective rent the second part of your question, I think it's very, very difficult given how few data points there have been. My instinct at this point is that net effective rents largely as a result of elevated concessions probably down in the neighborhood of 10%, I would say during this period of time. But it's really hard to say with a lot of conviction, exactly how that will settle, given the lack of transactions.

[Vikram Malhotra:]

Fair enough. Thanks so much.

[Albert Behler:]

Thank you, Vikram.

[Operator:]

Our next question comes from the line of Daniel Ismail with Green Street. Please proceed with your question.

[Daniel Ismail:]

Great, thank you. So question on the leasing targets for 2021. Is it your sense that lease terms will continue to be fairly short? Or do you think we'll revert to a more normalized level as tenants get back to the office?

[Albert Behler:]

What I would say, Danny is our product is, what we're now marketing is larger blocks of space, we're generally dealing with larger companies that have greater visibility, perhaps into what the future holds. And so as a result, we're dealing with tenants that are contemplating long-term deals, generally 10, 15 years, in some cases even more, where the intention is to invest in the space and be there for a long period of time. So, the conversations that we're having, yes, we've had some -- we've transacted most recently on some short term deals, and there will be some short term transactions because some tenants at this point are more comfortable doing short term transactions and maintaining that flexibility. But I think largely a function of our product has resulted in us having conversations that typically as it relates to 1301, 31 West have been more longer term and in nature.

[Daniel Ismail:]

And then maybe sticking with leasing. You mentioned the 300,000 square foot tour the other day. I'm just curious in the leasing pipeline, is that mostly relocations? Or are there any net expansions in that group?

[Albert Behler:]

Well, when I look at the composition of demand, it primarily relocations in one case, the tenants taking more space and the other case, they're taking roughly the same amount of space. I think it varies every situation is different. Like we could spend some time on each one of these situations if we were to sit down, but I think suffice it to say, these are primarily relocations, and each tenant is sort of viewing it differently. One of them requires more space right now that we're competing for considerably more space.

[Daniel Ismail:]

Great. Thanks Behler.

[Operator:]

There are no further questions in the queue. I'd like to end the call back to Mr. Behler for closing remarks.

[Albert Behler:]

Well, thank you all for joining us today. We look forward to providing an update on our continued progress when we report our first quarter results in May. Goodbye.

[Operator:]

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.