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Annual Report 96.4% Total Leased Occupancy Paramount Group, Inc

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Annual Report 96.4% Total Leased Occupancy Paramount Group, Inc 2018 ANNUAL REPORT 96.4% TOTAL LEASED OCCUPANCY PARAMOUNT GROUP, INC. // ANNUAL REPORT 2018 01 11.9MM TOTAL SQUARE FOOTAGE 02 PARAMOUNT GROUP, INC. // ANNUAL REPORT 2018 TO OUR LEASING continues to be robust and availability is scarce, Leasing and a hands-on approach to managing so we are confident in our position in the market. SHAREHOLDERS our assets remains one of Paramount’s greatest strengths and key differentiators. 2018 was The significant outperformance in San Francisco another in a series of successful years for our and more specifically the success we have had at leasing team since we came public. We signed One Front Street and 50 Beale Street were key leases on just over one million square feet of factors that led us to increase our exposure in space, well ahead of our original guidance of San Francisco with the acquisition of 111 Sutter between 500,000 to 700,000 square feet we Street. More on that shortly. expected at the beginning of the year. All that We ended the year in Washington, D.C. at 98.0% leasing increased our same store leased leased. Parts of the market may be challenged, Once again, with great pride, I can report that occupancy by 310 basis points to 96.4%. To top it but our strategy to concentrate on Class A Paramount continues to meet or exceed our off, we did all that leasing at robust cash mark-to- assets in certain key locations within the CBD goals in executing on our business plan. Those markets of positive 13.3%. We take great pride in has proven to be the right approach and has that have followed us over the past four years the consistent pace at which we can lease our created significant value for shareholders. The know that within our markets, we always look to space to high quality tenants. On average, we portfolio remains well positioned in the market create a portfolio that includes the most sought have leased approximately one million square feet with not much available space and no meaningful after addresses in the business community and per year since we have been a public company. during 2018, we saw the benefits of that discipline expirations over the next three years. throughout our business. In New York, fundamentals are strong and getting stronger. Trends in the marketplace such as lower ACQUISITIONS & DISPOSITIONS We completed the multi-year leasing effort of our unemployment and continued job growth, the large-block vacancies in New York and ended the stabilization of concessions, and the fact that In addition to our leasing efforts, a core strength year with the entire portfolio 96.4% leased and leasing velocity is outpacing the delivery of new in being able to create long-term value for our the New York portfolio 96.0% leased—effectively supply all bode well for the market outlook. 2018 shareholders is our ability to be disciplined fiscal full by most measures. In Washington, D.C., we was a record year for leasing in the Midtown office stewards of your capital. Over nearly 30 years of sold two fully stabilized buildings at pricing that market and the second consecutive year that the operating, first in the private markets and now in reflects our efforts over four years to convert market had positive net absorption in excess of the public markets, we have seen time and time large blocks of vacancy into high quality tenancy. one million square feet. With the leasing strength, again that a prudent and opportunistic In San Francisco, we made great strides in availability has decreased to its lowest level since acquisition at a reasonable cost basis creates executing our investment strategy at One Front 2008. With our high-quality, centrally-located long term opportunities for value creation. Street and 50 Beale Street. Given the successes properties, we were able to capitalize and capture Conversely, and just as important, is maintaining with those two assets, late in the year we a significant portion of the activity in Midtown. We the discipline of harvesting value over cycles announced the addition of 111 Sutter Street to executed leases for approximately 576,000 when we have done all we can to create value the San Francisco portfolio. square feet, completing the last of the large within the Paramount platform. blocks of space we had available and increasing Our confidence in the strategy and its execution our leased occupancy to 96.0% at year end. During 2018, as in 2017, we continued to see remains high, as our results continue to reflect sizeable gaps in our markets between seller and strong underlying performance across our In San Francisco, we have continued to execute buyer expectations. The result, once again, was portfolio. 2018 was another breakthrough year ahead of expectations, leasing approximately transaction volumes below long-term averages. as we produced record Core FFO earnings and 412,000 square feet in 2018 at exceptional cash Interest rates were a touch higher than they were Cash NOI.1 Our Core FFO earnings grew just mark-to-markets of 29.0%. With several early a year ago, but even so, many would-be sellers about 8.0% in 2018 to $0.96 per share, driven by renewals included in our leasing, same store chose to refinance and realize net proceeds in a sector-leading same store Cash NOI growth of leased occupancy increased 160 bps to end the tax-efficient manner. Given the persistence of 10.3%, the second consecutive year of double- year at 98.0%. These results highlight the these market dynamics, our views didn’t change digit NOI growth. We expect to continue strength and resiliency of the market, as well as much during the year. We remained disciplined delivering superior results to our shareholders in the quality of our portfolio. and elected to recycle capital and use our equity the future. capital carefully. During 2018, we executed on At One Market Plaza, which is our largest asset the following: in San Francisco at 1.6 million square feet, we CORE FFO ($MM) & CORE FFO PER SHARE executed on all the full floor vacancies that we • 2099 Pennsylvania Avenue: We sold 2099 previously had in the building. This increased Pennsylvania, a stabilized core property $0.96 leased occupancy to 99.0% which is an located in the heart of Washington’s CBD, for exceptional result for a building of that size. One $220.0 million, or just over $1,050 per square $0.89 $0.84 Market Plaza remains one of the best performing foot. At the time of disposition, the property $229.9 $0.79 assets in the San Francisco CBD. was 98.5% leased, up from 31.6% at the time $210.1 we went public. The leases had average $183.6 While at separate stages in their lease-up from annualized rents north of $80 per square foot $ 16 7.1 when we acquired the properties, both One Front on a gross basis. Over a four-year period, our Street and 50 Beale Street continue to exceed our leasing team converted large blocks of growth expectations. At One Front Street, for vacancy into tenancy, creating one of the best example, the average annualized rent per square Class A properties in the market. foot has increased by $12.07, or 21.3%, since its acquisition in late 2016. At 50 Beale Street, we • 425 Eye Street: We sold 425 Eye Street, a have already begun to make significant leasing property located in an up-and-coming progress, increasing leased occupancy to 99.7% submarket of D.C., for $157.0 million. The from 82.6% a year ago. We see a great opportunity property was 98.7% leased at the time of sale. for further growth through the lease-up of an The U.S. Government, whose lease was upcoming 262,000 square foot block of space scheduled to expire in 2021, is the largest tenant, occupying roughly 90.0% of the building. 2015 2016 2017 2018 expiring at the end of 2019 at rents well below market. The demand for large blocks of space (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. PARAMOUNT GROUP, INC. // ANNUAL REPORT 2018 03 In both cases we monetized stabilized assets Yet, our preference has been to allocate and/or again, at the end of 2018, our entire portfolio and realized values much higher than what recycle capital in a disciplined manner to earned LEED-certified Gold or Platinum status, was implied by our share price at the time, prudently grow our business over the long term. including all three of our San Francisco assets at and higher than those valuations assumed Whether by leasing our large block availabilities the time achieving Platinum. We believe this is in Wall Street analyst’s NAV models. Both in New York, or by recycling the capital realized an achievement that is unmatched by any of our transactions highlight a dynamic whereby by selling stabilized assets into acquisition public peers, and with the acquisition of 111 valuations in the private markets for stabilized opportunities like One Front or 50 Beale, the Sutter Street we are hard at work once again to assets exceed what is being ascribed to the path we have chosen since we went public has improve efficiency and sustainability. same assets in the public markets. More on been to capitalize on our operating strengths to this divergence and how we responded to the create additional value for our shareholders.
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