Flight To Quality And San Francisco Recovery Will Support Long Term Office Portfolio Strength

Catalysts

About Paramount Group

Paramount Group owns and operates Class A office properties in prime submarkets of New York City and San Francisco.

What are the underlying business or industry changes driving this perspective?

• Continued flight to high quality, amenity rich office space in core Midtown submarkets supports strong leasing velocity at assets such as 1301 Avenue of the Americas and 900 Third Avenue, which should underpin rental rate growth and higher net effective rents over time.
• Emerging strength in San Francisco, including rising tour volumes and growing demand from AI, legal and financial services tenants, positions the portfolio to gradually backfill large move outs and lift cash NOI as that market normalizes.
• Scarcity of large, contiguous high grade blocks like 1633 Broadway and highly leased towers such as 1301 Avenue of the Americas enhances pricing power as Midtown availability tightens further, supporting future revenue growth and margin resilience.
• Disciplined capital allocation through joint ventures, selective dispositions and targeted amenity investments, including Paramount Club style enhancements in San Francisco, is expected to improve asset productivity, supporting core FFO growth and more efficient capital deployment.
• Strong liquidity with over $500 million in cash, a largely fixed rate debt stack and no core maturities until 2026 provides financial flexibility to refinance 1301 Avenue of the Americas and fund leasing capital, reducing balance sheet risk and stabilizing earnings.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Paramount Group's revenue will decrease by 1.9% annually over the next 3 years.
• Analysts are not forecasting that Paramount Group will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Paramount Group's profit margin will increase from -14.3% to the average US Office REITs industry of 10.5% in 3 years.
• If Paramount Group's profit margin were to converge on the industry average, you could expect earnings to reach $67.4 million (and earnings per share of $0.29) by about December 2028, up from $-97.4 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 29.9x on those 2028 earnings, up from -15.0x today. This future PE is lower than the current PE for the US Office REITs industry at 33.5x.
• Analysts expect the number of shares outstanding to grow by 2.01% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.92%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The accelerating flight to quality in both New York and San Francisco, combined with scarcity of high floor Class A space and consistently rising starting rents above 90 dollars per square foot, could support continued rental rate growth and higher occupancy, driving revenue and earnings above levels consistent with a flat share price.
• San Francisco is showing early signs of a cyclical and potentially structural recovery, with availability starting to decline, AI tenants bringing new demand into the market and a broadening mix of tech, legal and financial services users signing long dated leases, which could meaningfully improve long term cash NOI and net margins.
• Paramount’s long lease terms averaging nearly 13 years and a robust pipeline of deals on both vacant space and upcoming expirations reduce rollover risk and create multi year visibility on cash flows, which could lead investors to rerate the stock higher through expanding earnings multiples and stronger expected core FFO growth.
• Strategic capital allocation, including joint ventures, selective dispositions of noncore assets such as Market Center and reinvestment into high impact amenities such as Paramount Club style offerings in San Francisco, may enhance asset values and portfolio productivity, supporting higher revenue and improving net margins over time.
• The active review of strategic alternatives by the Board, combined with a strong liquidity position of over 500 million dollars in cash and no core debt maturities until 2026, creates optionality for value unlocking transactions such as asset sales, recapitalizations or a takeout that could drive the share price materially above today’s level and disconnect it from a flat price path implied by current financials.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $6.45 for Paramount Group based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $643.7 million, earnings will come to $67.4 million, and it would be trading on a PE ratio of 29.9x, assuming you use a discount rate of 9.9%.
  
• Given the current share price of $6.58, the analyst price target of $6.45 is 2.0% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.