Executive Summary / Key Takeaways

• Strategic Acquisition Underway: Paramount Group is set to be acquired by Rithm Capital Corp. for approximately $1.6 billion in cash, or $6.60 per share, underscoring the perceived value of its Class A office portfolio in a challenging market.
• Flight-to-Quality Driving New York Performance: The company's New York portfolio continues to benefit from a strong "flight-to-quality" trend, with robust leasing activity, rising occupancy, and increasing pricing power for premium spaces, notably bolstered by its differentiated amenity offerings.
• San Francisco Showing Green Shoots: While San Francisco faces near-term headwinds from significant lease expirations, management observes encouraging signs of stabilization and renewed tenant interest, particularly from AI and professional services firms, positioning the market for a gradual recovery.
• Disciplined Capital Management: Paramount Group maintains a strong liquidity position, actively manages its debt profile through strategic refinancings and dispositions, and has suspended its dividend to enhance financial flexibility, all aimed at preserving balance sheet strength.
• Operational Excellence and Amenity-Driven Differentiation: The company's focus on high-quality, amenity-rich properties, exemplified by the "Paramount Club" in New York, serves as a crucial competitive differentiator, attracting and retaining high-credit tenants in competitive urban landscapes.

A REIT's Resilience: Paramount Group's Enduring Strategy in Dynamic Urban Cores

Paramount Group, Inc. (PGRE) operates as a fully-integrated real estate investment trust, specializing in the ownership, operation, management, acquisition, and redevelopment of high-quality, Class A office properties. With a history spanning over four decades, Paramount has strategically concentrated its portfolio in the central business district submarkets of New York City and San Francisco, conducting its core business through Paramount Group Operating Partnership LP, in which it holds a significant 93.20% interest as of September 30, 2025. This focused approach, coupled with an investment management business catering to institutional and high net-worth investors, defines its foundational market presence.

The broader U.S. office sector has experienced significant shifts, with transaction volumes declining by 18% in the first quarter of 2025. Despite positive net absorption of 7.7 million square feet, the sector grapples with an elevated vacancy rate of 13.9% and a high CMBS delinquency rate of 12.7%. U.S. office REITs are projected to see a 21% decline in FFO in 2025, primarily due to dividend suspensions and cuts. Against this backdrop, Paramount Group's strategy emphasizes maximizing portfolio value through operational excellence, disciplined capital allocation, and a keen understanding of evolving tenant demands, particularly the "flight-to-quality" trend.

The Paramount Club: A Differentiated Tenant Experience

In an increasingly competitive office market, Paramount Group distinguishes itself not through proprietary hardware or software, but through its strategic investment in creating superior tenant experiences, most notably exemplified by the "Paramount Club." This bespoke amenity, first unveiled at 1301 Avenue of the Americas, is a cornerstone of the company's operational differentiation. It offers a hospitality-caliber experience within a commercial setting, designed to attract new tenants and foster a vibrant workplace community that enhances satisfaction and retention.

The strategic intent behind the Paramount Club is to meet the evolving demands of high-quality tenants who prioritize well-located, highly amenitized buildings that support in-office strategies and reinforce corporate brand and culture. While specific quantifiable performance metrics for the Club itself are not publicly detailed, management consistently highlights its "transformative" impact and its role as a "major reason why our buildings remain top of mind for tenants seeking best-in-class space." The company plans to leverage this successful model, with "exceptional amenities" planned for One Market Plaza and One Front Street in San Francisco, indicating a replicable strategy for enhancing property appeal and driving long-term value. This amenity-driven approach, implicitly supported by modern building infrastructure and management, forms a crucial part of Paramount Group's competitive moat, contributing to higher occupancy rates and sustained rental revenue.

Financial Performance and Operational Momentum

Paramount Group's financial performance in the nine months ended September 30, 2025, reflects both market challenges and strategic responses. The company reported a net loss attributable to common stockholders of $58.76 million, a significant increase from $7.64 million in the prior year. This was primarily influenced by $9.61 million in transaction-related costs associated with the proposed merger and $7.54 million in expenses from accelerated equity awards and severance payments. Core Funds from Operations (FFO) also saw a decrease, falling to $106.33 million ($0.48 per diluted share) for the nine months ended September 30, 2025, compared to $131.89 million ($0.61 per diluted share) in the same period of 2024.

Rental revenue declined to $511.74 million from $543.64 million, largely due to lower average occupancy at 900 Third Avenue and the scheduled expiration of Google's (GOOGL) lease at One Market Plaza. Operating expenses increased to $232.33 million from $226.25 million, driven by higher utilities, repairs, maintenance, and real estate taxes in New York. Interest and debt expense rose to $129.90 million from $124.08 million, impacted by $4.01 million in write-offs of deferred financing costs related to the refinancing of 1301 Avenue of the Americas and the termination of the revolving credit facility.

Despite these headwinds, operational performance showed resilience. The company executed 1.24 million square feet of leases year-to-date through September 30, 2025, with 547,812 square feet leased in the third quarter alone, marking its highest quarterly total since 2019. This activity, partially offset by lease expirations, boosted same-store leased occupancy by 430 basis points to 89.7% at September 30, 2025, from 85.4% at June 30, 2025. Notably, New York's same-store leased occupancy surged by 570 basis points to 93.8%, while San Francisco experienced a 70 basis point decrease to 74.4% due to Google's departure. Rental rates for second-generation space increased by 13.9% on a GAAP basis and 6.4% on a cash basis overall for the three months ended September 30, 2025, indicating a strengthening pricing environment in key segments.

Liquidity and Capital Allocation Discipline

Paramount Group maintains a robust liquidity position, with $654.36 million in cash and restricted cash as of September 30, 2025. This liquidity is deemed sufficient to cover anticipated needs for the next 12 months, including debt service, capital improvements, and leasing costs. Long-term capital requirements are expected to be met through operating cash flow, joint venture capital, and strategic financings.

The company has actively managed its capital structure. In August 2025, a $900.00 million refinancing of 1301 Avenue of the Americas was completed, securing a new five-year fixed-rate loan at 6.39% and generating $26.00 million in net proceeds. This followed the termination of its revolving credit facility in May 2025 after the partial sale of One Front Street. Total consolidated debt stood at $3.73 billion as of September 30, 2025. To further fortify its balance sheet and enhance financial flexibility, the Board of Directors suspended the regular quarterly dividend in September 2024, retaining over $30 million in cash annually.

This disciplined approach to capital allocation is critical as the company navigates upcoming debt maturities, including loans at 31 West 52nd Street ($500.00 million in June 2026) and 300 Mission Street ($232.05 million in October 2026), for which refinancing options are actively being explored.

Competitive Positioning and Market Dynamics

Paramount Group operates in a highly competitive landscape dominated by other Class A office REITs such as SL Green Realty Corp. (SLG), Vornado Realty Trust (VNO), Boston Properties (BXP), and Empire State Realty Trust (ESRT). While these competitors also focus on prime urban office markets, Paramount Group differentiates itself through its integrated property management capabilities and a concentrated, high-quality portfolio in New York and San Francisco.

In New York, the "flight-to-quality" trend is a significant tailwind. Midtown's leasing activity has consistently outpaced the five-year quarterly average, leading to a scarcity of high-quality availability, particularly for upper-floor spaces. Paramount Group is capitalizing on this, exercising pricing power and pushing rents in its Midtown portfolio. The Paramount Club is a key competitive advantage, enhancing tenant satisfaction and retention. Against New York-centric peers like SLG and ESRT, Paramount's operational execution in tenant experience and its ability to secure long-term leases with high-credit tenants provide a strong competitive edge.

San Francisco, while still in recalibration, shows encouraging signs. Sublease space is being absorbed, and demand from AI, legal, and professional services is increasing. Paramount's buildings in the financial district, including One Market Plaza, 300 Mission Street, and One Front Street, remain highly competitive due to their location, infrastructure, and flexibility. The company's portfolio continues to outperform in this market, with year-to-date leasing on pace for the highest annual total since 2019. While the market requires higher return expectations for institutional investments and faces challenges in debt financing, Paramount's strategic focus on backfilling major expirations like Google's at One Market Plaza, coupled with planned amenity enhancements, positions it for a gradual recovery. The company's geographic diversification across New York and San Francisco also offers a degree of resilience that purely single-market focused REITs may lack.

Outlook, Guidance, and Risks

Paramount Group's outlook for 2025 reflects cautious optimism, particularly in New York. The company has raised its full-year core FFO guidance to a range of $0.55 to $0.59 per share (midpoint $0.57), an increase of $0.03 per share from prior guidance. Full-year leasing guidance has been significantly increased to 1.2 million to 1.4 million square feet (midpoint 1.3 million), a 30% increase. Year-end same-store leased occupancy guidance is also up by 250 basis points to a midpoint of 87.9%. These revisions are driven by robust leasing momentum and operational discipline. Management anticipates New York occupancy to continue its upward trajectory, while San Francisco is expected to experience near-term softness before a long-term recovery. The leasing pipeline remains strong, with over 275,000 square feet in active negotiation, primarily for vacant spaces.

However, the investment thesis is not without risks. The most significant recent development is the proposed acquisition by Rithm Capital Corp. for $6.60 per share. This merger, expected to close by March 17, 2026, introduces risks related to obtaining stockholder approval, satisfying closing conditions, and potential disruptions to business operations or relationships with tenants and employees. The company is also subject to a termination payment of up to $59.70 million if the merger agreement is not fulfilled under certain circumstances. Furthermore, an ongoing SEC investigation into executive compensation, related party transactions, and internal controls presents an unquantifiable risk, though management does not expect it to significantly impact the strategic review. Restrictions on business activities under the merger agreement could also limit strategic flexibility.

Conclusion

Paramount Group, Inc. stands at a pivotal juncture, with a definitive agreement to be acquired by Rithm Capital Corp. (RITM) shaping its immediate future. This proposed merger, at $6.60 per share, offers a clear valuation benchmark for shareholders amidst a dynamic office real estate market. The company's core investment thesis is firmly rooted in its high-quality, Class A office portfolio in prime New York City and San Francisco submarkets, which continues to benefit from the "flight-to-quality" trend. Operational excellence, particularly through differentiated amenities like the Paramount Club, has been crucial in driving leasing momentum and maintaining competitive positioning.

While facing near-term challenges from significant lease expirations in San Francisco and broader macroeconomic headwinds impacting the office sector, Paramount Group's disciplined capital management, strategic refinancings, and proactive approach to asset management underscore its resilience. The upward revision of its 2025 guidance for core FFO, leasing volume, and occupancy reflects management's confidence in its operational strategy and the underlying strength of its key markets. Investors should weigh the certainty of the proposed acquisition against the inherent risks of a complex merger and the ongoing SEC inquiry, while recognizing the company's sustained efforts to maximize value through its differentiated portfolio and operational prowess.