Q2 2020 Empire State Realty Trust Inc Earnings Call
Greetings and welcome to the Empire State Realty Trust's second quarter 2020 earnings call.
Hi, all participants are in I'll listen only mode.
Great question answer session will follow the formal presentation.
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My pleasure to introduce your host Mr., Thomas Keltner, Executive Vice President and General Counsel Empire State Realty Trust.
Thank you you maybe got good afternoon. Thank you for joining us today for Empire State Realty Trust second quarter 2020 earnings Conference call.
In addition to the press release distributed yesterday, he quarterly supplemental package, which further detail in our results and our latest investor presentation.
We posted in the Investor section of the company's website at Empire State Realty Trust's Dot com.
On today's call management's prepared remarks answers to your questions may contain forward looking statements.
Decided applicable securities laws.
Putting those related to market conditions property operations.
Expenditures income and expense.
As a reminder.
Forward looking statements represent management's current estimates they are subject to risks and uncertainties, including ongoing developments regarding the cold with 19 pandemic.
Which may cause actual results to differ from those discussed today.
Empire State Realty Trust assumes no obligation to update any forward looking statement in the future.
We encourage listeners to review the more detailed discussions related to these forward looking statements in the company's filings with the FCC.
Certain of our disclosures today, our average specifically in response to the Fccs direction on special additional disclosure due to the changes in our business prompted by the coldest 19 pandemic and our unique to this instruction.
We do not expect to maintain the same level the disclosure when we resumed normal business operations.
Finally during today's call, we will discuss certain non-GAAP financial measures such as if that's all modified and core FFO and NOI cash NOI Aviva door.
We believe are meaningful in evaluating the company's performance.
Definitions and reconciliations of these measures to the most directly comparable GAAP measures are included in the earnings release and supplemental package.
Each available on the company's website.
Now I will turn the call over to Tony Malkin, Chairman, President and Chief Executive Officer.
Thanks, Tom.
Good afternoon, everyone.
It takes a moment to grasp of the magnitude of the dynamic situation. We all have confronted and continue to confront since we last reported result.
That we have adapted to the constant change fluxes had its challenges as a new normal.
That our efforts to respond had been effective.
And that we are prepared to continue this way front indeterminant period of time through the end of pandemic.
Our all Testament to the team that is yes arty.
We have made hard choices that have resulted.
And a great deals change in our organization.
Reduction enforce and costs.
Positioned us on our front feet reserved and create value for our shareholders.
I'd like to take a moment to say thank you to my colleague John Kessler.
I do extend.
And once again.
My best wishes and those of our board and his next endeavors.
Same time.
The public welcome Thanks, and congratulations on a remarkable first three buttons to our new CFO Christiana Chu.
What's worked literally nonstop since her arrival.
I did a tremendous amount of valued at U.S.R.T. a that stakeholders.
We're all better from her contributions.
I will greatly benefit for years to come.
Let me say clearly.
Great deal of confidence in the future of New York City.
And the importance of office buildings to the teams and our current tenants on the tenant to calm.
We will create the value that will lead our economy forward.
And that the legions of young smart motivated individuals that made that Ben and are attracted to this great city will continue to calm and make their marketing yet another reinvention of our American Dream.
Better.
Work and passionate and inclusive American dream.
Yes, our T. is committed to continue to change would be a part of that reinvention for these good of our city its people and the economy.
That makes us the only capital of the World that is neither a capital of the state nor country.
We can and we will.
Yes, our teas.
Leadership, and innovation and redevelopment as our competitive edge.
Our buildings and their unique combination of location.
Value and leadership and sustainability indoor environmental quality have never been more necessary and I've never had a better competitive edge.
Yes, our t. as a company has also undergone tremendous change and there's never been better position for the future.
Here's a brief recap of what we have done where we are well look at where we will go.
Our plan at our IPO was to modernize our properties for the 21st century.
Consolidated spaces.
And redevelop them for new bigger better credit tenants on longer leases.
We're going to lead and energy efficiency indoor environmental quality of sustainability.
We would maintain the strong flexible balance sheet execute our strategy and take advantage of potential opportunities that may arise.
A redevelopment plans is largely completed.
We only have leasing of our remaining redevelop space in a small amount space left to redevelopment.
Oh for your redevelopment of the Observatory was completed in December 2019 to fantastic customer reviews, and produced strong revenue growth in the first two months of Twentytwenty.
We believe this long life investment.
Yield the best results in the future once tourism reserve returns to normal.
We are thrilled amid uncertainty.
Challenges to reopen the observatory as of July Twentyth.
We avoided external growth at market peak pricing.
The only commenced stock repurchases when our stock price drops steeply.
Steered away from co working at other short term fad.
Visible for what they are in this new environment.
We leased to tenants who filled the spaces. They initially at least and then expanded by more than 1.7 million square feet today.
As of the end of quarter.
Well, they hundred $73 million and cash on hand.
We continued to engage and share repurchase activity at these depressed valuation levels.
In the aggregate.
We have purchased $119 million of our common stock at a weighted average price of $8.67 per share through July 2028 2020.
Through a combination of open window purchases.
And then place Tenbfive one program.
We believe current shareholders will benefit long term from our purchases.
We finalized the series a management changes during the quarter is weak and close consultation with our board.
Rolled out possible plans for U.S.R.T. version 2.0.
We laid out our plans to the board in late 2018.
As we can see it was time for us to move from our plans at IPO and the logical new areas of focus for yes hearty.
With both new personnel and perspective.
Let me briefly review some of the key new hires that appointment.
He made over this period.
Fresh rangarajan as our new senior Vice President and Chief Technology Officer.
In a Robyn Snyder, our new senior Vice President and director of energy and sustainability.
Christine that you as executive Vice President and Chief Financial Officer.
And Radnor as senior Vice President and Chief Investment Officer.
I had an internal appointment of that.
A director of E.S.G.
Importantly, Aaron its hard to of the three additional team members, we agreed during our discussions with him.
Position us to generate and evaluate opportunities and deployed capital for external growth focused on opportunities in which our balance sheet strength.
By the whole philosophy redevelopment expertise can be brought to bear.
We are in a marathon not a threat.
Like capital when an opportunity.
That will lead our growth in the next cycle presents itself.
Anticipate opportunities will arise during the next three to four years, which we as I've never us opportunity for US will focus are essential to expand to create long term shareholder value.
Our team has risen to all the challenges that have arisen from the cobot 19 pandemic.
As we pivot and flex our way through.
We have gone from a shelter in place environment.
To a return to the office in our Connecticut properties first.
Then to a phased implementation process in New York with the gradual return of our office and retail tenant.
Our assets are well positioned for changing tenant demands on indoor environmental quality.
With the work we have done it's part of our redevelopment efforts.
We have met and we'll meet each challenge with our best organized plan.
As successful execution born out of our experience with many different cycles.
Strong balance sheet in hand, we have also undertaken a rigorous review of our cost structure.
Hi experiences six crises and that's business.
Has let us to move prudently and swiftly to reduce operating costs DNA capex and headcount.
As disclosed in our earnings release and on page 14 at the Investor presentation, and our first round of rationalization, we have undertaken cuts to reduce our 2020.
General and administrative expenses by 12% to $60 million.
Property operating expenses and building improvement capital expenditures have also been reduced and Tom Durels like received that you will go into more detail, let me provide some highlights.
We have implemented broad based corporate and property level base salary reductions.
True.
Yep.
Yearend effective August 1st.
Starting at the top with my 33% reduction followed by Tom Durels, and 25% reduction of scaling down from there.
This is in addition to the salary reduction to one dollar that I talked in the second quarter.
Furthermore, we announced the upcoming 2021 any annual equity compensation will be reduced by $3.9 million.
Which consists of $2.7 million for me and $1.2 million for Tom Durels.
We have made permanent head count reductions as well as instituted departmental budget cuts.
This is in addition to covert 19 related cost savings.
We reduced property operating expenses by $10 million in the second quarter.
We expect.
Further to reduce expenses by 12 million in the second half of 2020.
We expect additional savings from a combination of staffing reductions in operational improvements.
Furthermore, we reduced building a prudent capital expenditures plan for 2020 by $24 million relative to 2019 levels.
These broad based cost cuts.
Our start of our efforts to address the current environment.
The balance sheet.
In a position he SRT and the long term to thrive and deliver shareholder value.
I'd say start.
As we are not done.
We'll take additional measures to reduce costs further after we digest, what we have put in place so far.
We will see the bright shiny penny of work from home taught us further in the post coated environment.
We share the belief with the vast majority of businesses that work from home diminishes productivity team building and culture.
Companies that show up and build personal relationships and develop new products and services will always win.
That said.
We see the pandemic business environment for phases.
First locked down.
Second post lockdown free vaccine or cure.
Third.
Post vaccine.
For cure.
The fourth.
Cleanup and situation assessment.
We're not naive about the current environment.
There's no doubt that we will see economic challenges from higher unemployment levels and business failures.
We expect the current environment to continue to evolve.
But we feel well prepared and ready to flex and pivot to handle whatever challenge lies ahead.
That said New York City is the greatest global economic and cultural capital.
And one two which people will return for work.
The living and to visit.
New York City has come back time, and time again from shocks recessions and tough environment.
Stronger each time.
You have an opportunity that touch on these themes more acuity.
And for now I'd like turn the call over to my colleague and friend of three decades, Tom Durels.
Oh.
Thanks, Tony and good afternoon, everyone.
Today I'll comment on the following.
Second quarter. This result.
Oh paid on rent collections and rent or what.
Actions taken to reduce operating expenses, Oh grooming call.
And our in place health and safety protocols.
In the second quarter, we signed the 90, new and renewal leases totaling approximately 113000 square feet.
Approximately 32000 square feet in our Manhattan office properties.
47000 square feet in our Greater New York Metropolitan Office properties at 14000 square feet in our retail portfolio.
The two most significant leases signed in the quarter, where a $36 per square foot office renewal lease with John but first ever place.
Turning now to 700 square for retail renewable diesel troll swap at one Grand Central place.
During the second quarter rental rates on new and renewal office leases across our entire portfolio were up 2.8% on cash basis.
Parents of the part cash escalator rise.
And that our Manhattan office properties, we signed new leases out of positive cash French fries <unk>, 8.7%.
Our total portfolio leased percentage.
1.6%, a decrease of 150 basis points from prior quarter.
Occupancy sequentially declined by 310 basis points during the second quarter, mostly due to anticipated move out to large tenants that we previously announced.
On page nine of the so nothing from prior quarters.
Further the Empire State building a 100.
250 square foot space.
Well the tactfully vacated by Oh in connection with the previously announced expansion lease with Wednesday, which will commence over three years are detailed in our signed leases not commence schedule on page six oh the supplemental.
And talks Warner <unk> 49009, <unk> fourth for Metro Center.
It on page nine opens up not only in prior quarters.
New leasing activity was impact during the second quarter by the pandemic shelter on place rules that were starting for much of the Puria.
During this time period, we instituted a number of online measures to maintain our relationships with brokers and exposure availabilities to the market.
Well physical tours resumed on June 22nd.
Coincided with phase two reopening.
We expect lower leasing volumes for the third and fourth quarter is based upon current.
Kind of demand.
Moving to erect collections, we have made study monthly improvements in Iran collections as shown on.
The table on page 10 of our Investor presentation.
We collected 84% of second quarter 2024 buildings.
86% for office tenants and 75% for reach all times.
Sure July 24 weeks like 90%.
Oh July total billings.
93% for office tenants and 75% will reach all John.
These collection rates are before application of any security deposits and without any adjustment or defer or agreements.
Deferral rates today have generally been for no more than three months of on the rents more replenishment of security deposit.
For most of our local retail China's we're going to hit particularly hard.
We will convert from May 2020, fixed rates 20 percentage rent structure.
Hey back of the difference between fixed and percentage right over a defined period.
As shown on page six up or supplemental there was $42 million revenue upside by free rent burn off and signed leases not matched.
We resumed honest central construction on June eight and updated the timing of lease commencements.
Typically the GAAP revenue component on page six of the supplemental.
Principally disclosed we scaled back certain noting operations, which will reduce cost and troubling for re population.
These actions reduced property operating expenses by approximately $10 million during the second quarter from the prior year period.
And we'll reduce operating expenses for the second half 2020 by approximately $12 million.
The majority of these cost savings are covered related and are expected to decline as physical occupancy increases you combine that a portion of the reduction in operating expenses will be offset by a reduction in China expense recoveries.
We've also have come back and permanent cost savings actions of approximately $4 million and <unk> on an annualized basis from staffing and other reductions.
Our buildings are fully open and we are committed to follow on health and safety protocols as detailed on page 12 of our investor presentation.
Including temperature Chuck.
I'll now hand, sanitizer has required prior to putting actually.
Mandatory mass in common areas.
Footprint, Dekalb signage and lobbies, Oh, the better banks and other vendors to encourage social distancing.
And sanitizing dispensers played in common areas.
<unk> increased cleaning of high touch points and common areas.
Furthermore, we have a comprehensive indoor environments quality program that is in line with kind of request.
Something done we consistently doing for years as part of our ongoing development work.
This program includes Burps 13 filters and all air conditioning, followed by us.
Meet or exceed ASHRAE 62.1 standard.
Increased speculation in which typical offices.
Or outside aired in take provided at least one air change per hour.
Regular air and water quality tough.
There are all cleaning and disinfecting air and water systems.
<unk> Air purification, it's like space.
I've mentioned previously by Tony you're taking action to reduce capital expenditures.
Your completion of our redevelopment work.
We now anticipate that you don't 20 capital expenditures were building improvements compared to 2009, she will be approximately $24 billion lower.
As we booked on mandatory spending and were previously mentioned.
Now I'll turn the call Oaktree Christina.
Thanks, Tom.
I'd like to begin by saying I'm sorry.
Yes, Archie immediately yeah.
I've worked closely with the various departments to make sure that transition to settle into this fall and that many of our investors and analysts virtually every engine and look forward to meeting more you over the coming.
Now, let me start with our part of the right now.
The second Claire we've reported core.
The $9 million or 14.
Yeah.
I have three cents per share.
Our reserve accounts receivable and non cash production straight line right now.
At least $3 million severance costs, and a $4 million carrying charge ultimately I only time there.
Same store property operation, if you exclude one high lease termination fee and territory here all I'm never satisfied hearing it you will need an 18% cash NOI increase on the where 2000 names.
This increase is primarily driven by lower hobby offering.
Partially offset by Advertiser began.
We hold it really didn't match up from our leading seems to our copycat highlighting 9.9 [laughter] clarity on that.
More detail on writer for all at the breakout arc flash and can be found on piece in that region.
During the quarter, we recorded a number of unique items that are largely non cash asset.
Yeah.
Basically we recorded 4.1 million dollar noncash impairment charge related to the write off.
Hi uninsured.
Hi, heat power generation projects are evolving and major economically on people used to New York City local lightning.
And a $3 million onetime charge in GMI [laughter] related to the departure from our former CLL only $2.7 million noncash elevated backing up happening.
We also have a $49.1 million reduction in rental revenue in it and were comprised of a $1.9 million retirement accounts receivable at $7.2 million straight line right now.
This equates to 1.6% of our annualized rental revenue as of June or yet yeah.
And if we sat down.
We leased that determination after our view at each and every year and security deposit down and managements assessment on the path right the resolution and viability.
Turning to our balance sheet as of June Thirtyth 2020, the company had total debt outstanding approximately two and a half a million dollars Randy.
And $1.8 billion 90.
The company total that has a weighted average interest rate, we point part, 1% and a weighted average charge and the Cherokee <unk> 0.9 years.
Our consolidated net debt to total market capitalization was 43.7 for that.
All I need a net debt to EBITDA I.
We have no near term that surety and well laddered maturity.
Our revolving credit facility expires in audience, yet 2021 and had huge six month action on our next maturity isn't until November 2000.
As you look ahead, the second half the year here a few items to keep in mind. We noted earlier that we undertook a series of proactive steps to reduce our Jamie is property operating and capital batch.
Tom already covered property operating expenses.
Well I will focus on gene.
We now anticipate 2020, <unk> is $60 million, excluding one time severance charge.
This is approximately 12% lessened the previously disclosed she any run rate of $68 million and we provided on our for Q2 thousand 19 Arnie.
As detailed on page 14 of the MSRP.
The reduction fall into category named Executive officer compensation and other corporate overhead.
Named Executive Officer compensation production include 40000 from the reduction in you won't be alley for Tony Malkin.
Now through December 31st.
1.2 million from the changing requirements from 60 to 65, any accounting basking carrier for time be happy holidays.
And 2.7 million from the departure of our former yeah.
Other corporate overhead reduction include one anyhow areas that eating some reduction in corporate staff.
Hi reductions.
Sorry pardon.
Partially offset by the addition of investment personnel and the balances from Department budget, <unk>, and lower anticipated spending beauty and home at night.
As mentioned by Tony earlier 2021 anyhow.
Equity compensation will be reviewed by $3.9 million. Currently in fact, 2021 Ginnie run rate of approximately $58 million and we will continue to seek efficiencies and cost reduction opportunity in operating aren't.
We believe these proactive measure, particularly on DNA that are aligned with our stakeholders and reflect our effort to preserve cash and operate efficiently I'm uncertain time, we will continue to eat right now and as market conditions.
Now I'll turn the call over to Tony to provide some thought on our territory Tony.
Thanks Kristina.
Before we go to queue at a here's an update on the observatory now that we have reopened and the expense picture.
Go forward basis.
We started the year on a strong basis following the completion of our observatory redevelopment program in the fourth quarter 2019.
Revenue for the first two months was up 13.2% year over year, excluding the impact from the hundred and second floor Observatory.
This revenue growth occurred despite the absence of Chinese new year activity in January.
Pull back and visitor traffic in March from European countries, where cobot 19 was.
Rapid.
We followed the mandate of government authorities and close the observatory in March 16th.
And the observatory remain close for the entire second quarter.
The 86th floor Observatory reopened on July 20.
With new protocols and processes.
Other New York State.
Phase four guidelines.
We still have weight permission.
To reopen the 102nd floor.
We have updated our hypothetical admissions ramp up on page 18, the bar investor presentation.
It assumes 2019 monthly levels as the baseline visitation comparison reference point then uses our reopening date of July 20th with a gradual ramp up towards normalized levels by 2022.
We have been open for just under two weeks now and slowly rebuild the beach that is our business one grain of sand at a time.
Our focus on indoor environmental quality in which we have been leaders for more than decade.
Yielded air filtration through Mirth 13 filters.
That aggressive response to viruses with Atlas Air.
And a massive capacity the ventilate the observatory as part of our redevelopment.
Combined with comprehensive protocols and employee training.
This is made it possible to reopen.
Our expectations for more gradual ramp up aligned with our channel checks with other observatory operations around the world.
It's have seen to date, a gradual volume build up as they reopen in their respective countries to a 20% to 25% level of prior years operations.
We are confirmed in our anticipation initially that we will have a higher local visitor mix followed by a ramp up of regionally then actually source to travel.
And then followed by a restoration of our typical visitor mix that is approximately two thirds international.
We do not think we'll achieve normalization until the broad resumption of international Air travel.
And we presently peg that for sometime in 2022.
Well the observatory was closed we remain relevant and active in the promotion of our brand through numerous initiatives from our pandemic cyren lighting over the Skylanders New York City.
Well partnership on the fourth of July with Macy's fireworks finale.
Fireworks shut off the top of the Empire State building.
If you missed it take a moment and look at our you tube channel.
You will be impressed and entertained.
With our July Twentyth reopening, we posted a detailed presentation to educate the general public.
That we're open for business and rated welcome visitors in a safe an enjoyable environment.
Since launch a social media push.
So attraction in any city has a higher brand value and international recognition that the Empire State building observatory authentic and iconic.
We believe when the pandemic passes we will emerge stronger than ever.
And remain the brand and icon of New York City.
On the expense side.
We wanted to share an update on how to think about expenses as we reopened.
Previously we had communicated that we reduced our typical annualized expense run rate by 60% from 35 million in February 14 million by night.
And the second quarter Observatory expenses totaled $4 million.
Now that we have reopened we calculate our annualized expense run rate to approximately $25.5 million.
There are certain fixed staffing and operational cost regardless of volume levels. For example, we need to maintain staffing to operate the we'll call desk security elevator loading unloading.
And deck attendance, regardless of whether we have one or 1000 visitors at a time.
We believe that we have ample bandwidth to handle our anticipated ramp up and admission volume through 60% of 2019 volume levels with current staffing.
With this completed I'd like to open the call for your questions.
Keep the goal moving as always we ask that each participant limit him or herself to one primary question and one follow up.
Please do feel free to rejoin the queue. If you have additional questions. We will stay on the call as long as we have questions.
Operator.
Thank you we will now be conducting a question and answer session.
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Our first question has come from the line of Craig Mailman Keybanc capital markets. Please proceed with your question.
Hey, good afternoon, Tony I appreciate your comments at the beginning of the call and kinda, though the long term conviction in New York City, but just a question here on you know recently, we've seen some livability issues in quality of life issues.
That hopefully reverse itself, but who knows how long it last I mean at this point did you guys are ramping your investment team and broaden that out I mean is there any thought process on moving beyond just the New York Metro area I'm looking at other markets within the U.S. that could potentially be good.
Sorry to deploy capital.
Thanks very much for the question appreciate it.
We really view ourselves as I'm never saw opportunity wars and at this early point and what I do us a three to four your opportunity I really don't want to limit our options on anything.
That said, we certainly have certain skills in New York City.
I've lived through times of much greater livability challenges than we presently have in New York.
And the fact is every.
Dollar capital that we have.
We have to patiently and prudently evaluate all our options I do look at a focused we generate shareholder value. So.
Well I would like to say that it's very straight forward.
I think there's some things, which obviously would fit in with us clearly and comfortably on their other things candidly, which.
Might be out of the box and we just have to look at it all against Oh, we use our capital.
Anything from buying our own stock to.
Ah buying debt joint venturing different product types different locations.
That's helpful. And then just on the retail portfolio, you know you guys, but 70% of rents coming from that segment. As you guys are looking at the credit worthiness of those tenants and I realize a lot of its sort of amenity based.
You know, what's the viability, even with you know going to percentage rents of you know the majority of those tons here as the pandemic kinda drags on and restaurant Reopenings kind of keep getting kicked down the road.
What I, absolutely think that when it comes to foodservice, but there are specific challenges.
We need the bodies in the buildings in order to justify people and their activities.
And as far as in store dining that's a challenge by the fact that frankly people need to deploy the protocols that we have in our spaces, including our retail mirth 13 filters atmosphere, and <unk> and fresh dental pressure ventilation.
That said I think that we'll see people pivot in flex a we're at quote percentage right Unquoted people aren't open and they're not doing fills that means their rent is zero.
I think overtime.
Our strong credits are strong tenets of those rents are in the bag and those people up long term views. We may see failure was on the smaller amenity based tenants and as people return to the offices, which they will those people are well either restart with new business is oh, well have other folks come and we'll see.
Downward adjustment.
And and rental pricing and I think as far as retail in New York is concerned there are certain very large boxes that had been occupied by tenants that won't be a business anymore that are permanently disabled and need to be redevelop and I think that there are.
There are certain areas.
Geographically, where retailers went for folks open because that's where they could afford it and they will have a lot of business to do there and they'll be able to getting better locations.
More centrally located that better rents due to the free up of space.
Great. Thank you.
Thank you. Our next question is computer line of Michael Bilerman at Citi. Please proceed with your question.
Yeah. Good morning, Tony just staying on an external growth I think the way you sort of frame the sort of three to four your opportunity seems to be a slower cheat and then the excitement that you shared on the last quarter's call.
We've seen yeah coming to a fork in the road and taking it a it seemed a little bit more.
Nearer term in terms of deploying that capital.
That's fair.
So I I think Michael but the big excitement for US is actually the fork in the road.
We look at everything it along pathway I think that decisions and real estate that are successful for long term value creation have to have to last a cycle have to indura cycle.
We are not saying that it's between years three and four that these opportunities will present themselves.
Really saying that I think we'll go into a depth and which pricing inefficiency will that goodwill that first kick off.
And then we'll be able to <unk> to see perhaps better pricing efficiency as more transactions take place.
But then we'll also have to deal with the recovery on the <unk> in the marketplace in general and I think that as we've seen in most cycles that creates a buying opportunity that lasts anywhere from three to four years to recycle.
And that.
You really at the beginning of a downturn through the downturn at the beginning of a new cycle I have a broad a number of months in which to deploy capital that doesn't mean that we are not active and I'd just thrilled with Aaron.
And what he has done a he's already got two of the three hires that he wanted to put in place I selected one it's been working with us for over a month now.
And we're looking at just a tremendous number of different opportunities, including a couple of transactions, where frankly, Oh, we didnt participate.
Or we were at our hero taken off as a as the trucks carrying the money to the closing deal drove by at high speed and we're now able to look at the senior debt and then other <unk> other pieces and say there are opportunities to reenter things we've already underwritten. So hopefully that's that's helpful. If not please just a press further and I'll try to respond more clearly.
Yeah, No. That's helpful color to have an I know you acted on the stock buyback again during the quarter.
How does where the stock is trading affect your decision to deploy capital in anything whether its debt whether it's an asset in New York outside in New York I guess, how does what is the.
Reference that you and the board and the rest of the management team goes through and in terms of because once they've gone. It's gone what she spent that money you don't have it anymore. So how do you how do you sort of manage that side given your stock is severely depressed.
Levels.
So yeah. Great question. Thank you I think there's a there's an important footnote to all of our thinking when it comes to our cash we look at capital allocation very carefully I don't care. If it's when we look at new deals that we might that we working on right now compared to.
How we would use that money and everything from stock buyback dividend to external reinvestment to where we see things panning out in the cycle.
That's part one part to we also do have a fantastic partner and Oh, Qatar investment authority, who has repeatedly reinforced its willingness to participate with us in opportunities, which we think are worthwhile.
And one of the things that I like about the fact that we've brought on Aaron Ratner is his prior experience with joint ventures. His prior experience and in and work with with institutional capital other than just his own at TPG. So we look at our capital as capital that can be levered by other people.
Capital, where we have an opportunity to play not just capital let's use our.
Our own expertise and I think that as we perform a as we continue to differentiate ourselves in in our own unique ways candidly I think the stock price will improve but we always have the opportunity to address things with joint ventures, and we use our money as seed capital for up for bigger bigger moves.
Okay. Thank you.
Q.
Thank you. Our next question is coming from the line of James Feldman Bank of America. Please proceed with your question.
Good afternoon. This is all of us on for Jamie.
Tony and maybe Christina can you talk a little bit about you know sort of the lingering credit risks slash write downs that not only that occurred in the quarter, but could potentially occur in the future.
Should we be thinking about sort of your portfolio versus some of the other write downs that we've seen across the sector.
Well I'll take the first crack at this one hand this off to Christina.
<unk>, we can only write off rents that are actually owed to us and not paid.
And at that point, we'll take a look at that cash component and then also go to the straight line component.
So we have.
A very very actively engaged on our.
Request for deferrals on our tenants who have not paid as you can see we've made really good progress on our red collections.
And I think that it's it's it's this is performing without an that it's a live fire exercise I wouldn't even say, it's an exercise you know we're as I said last quarter. We're at war. This is that the nature of things.
I think that as far as what we look at coming forward I'd throw that over to Kristina just to talk about how she is looked at this and worked with the folks in her area and in leasing and on the real estate side as we assess our collections.
Our.
When we you know and I'd refer you said he had a which we put together, it's our total billing and collection update on and notably we show My mind and they all had that's why I'm afraid I know Jesse.
And I know that to answer your question Andy hedge. This represents the work we do in determining write offs and flexibility and we perform a rigorous side trip valley, each and every year Stan and in Dallas accounts receivable when are we thinking Oh, we're looking for is how much in arrears, what's the pattern what's the.
Security deposit balance efficient cavada down mid West management [laughter] right. The resolution in getting uncollected amount. He wants the viability of the tight on ended the dash and based on that that's how we arrived at a 9.1 million I'm talking about down as wage I'm you know.
Nine represent the uncollected tenant now and we have to watch out for those straight line is the other question and we'll continue to look at we then that track if you take a lot.
You see improvement so in July we've reached 90% interest rate collapsed again, it's completely on the catfish and we have a basket you know that uncollected, but covered by security I thought that and then another basket of uncollected and we are seeing improvement at the theory. It goes on well continue to do you see category.
With that very carefully and certainly looking right now as me either viability of payback.
Okay. Thanks, and then maybe one for Tom Tom You mentioned on the call, having lower expenses, but also hobby.
Lower recoveries.
You know some of the beats had been on lower expenses, but how does that look sort of within the quarter versus future quarters in thinking about you know these lower expenses versus collecting lower recoveries per ton, it's how should we be thinking about that.
Well.
I commented earlier.
In the second half of 2020 compared to second half 2019, we'd expect to reduce operating expenses by $12 million and then on a go forward basis in 2021, we eliminated $4 million and recurring staffing and other expenses. So these are unrelated to cover the needs are permitted.
Oh reductions.
Percentage.
Our <unk> expenses will.
You recovered by operating expense Escalations, but as we reduce those expenses going forward then you'll see some decrease.
Operating expense escalation, we haven't given us a number but it's not.
800 somebody portion of those expense reductions.
Thank you.
Thank you. Our next question has gotten a lot of Lee of BMO capital markets. Please proceed with your question.
Hi, Good afternoon, then just number weekend the inventory Riocan I'm just curious how has that did your topic then so far.
And are you considering any.
What changes in pricing I didn't more premium or Conversely.
Possibly promotions to track more definitive.
Alright. Thanks, Thanks for that question Tony here, but.
We aren't quote we will not disclosing this call any specific numbers, but we're comfortable to say that our visit or.
Numbers aligned with our expectations. They are also consistent with the reopening path that other tower operators around the world with whom we regularly compare notes have experience.
Most of these people are seeing internal or travel.
They're seeing people, who travel by cars largely for day trips. After a few months of operations they have gotten to the 20% to 25% range.
So from from that perspective, you know, it's pretty much in line get up we have not.
Changed our ticket pricing, we don't anticipate the change our ticket pricing.
We have received fantastic results on social from our visitors who come through.
The five star Ah interesting and understandably focused on safety first.
Then the spectacular view and the experience second so I think we will see these reviews and we have seen these reviews encourage others to venture fourth week two is stronger than than a week won our first weekend was stronger than our week a prior so we look forward to the this weekend upcoming and.
We also think that overtime.
Recognize that right now basically almost all of our sales our direct.
From our website, a as ancillary New York City attractions reopened such as music museums like the met or the 911 Museum and there's more of a promotion for New York City as a destination, our past partner and online travel agency partners.
We'll have more products to sell so right now the interesting thing is that our per caps are actually quite high because virtually everybody is bought it has purchased a ticket directly from us online.
Hopefully this is helpful. Let me know if you have any further question.
No that was helpful. And then took a follow up on that in your hypothetical.
Never Tory assumptions, when do you expect or which quarter to increase the 500 capacity level.
So the 500 capacity level was an arbitrary that a number that we set.
Under phase four we have opened under that and as an extra and outside of traction. That's why the 102nd floor is not open at this time on me the 86 floors open at this time.
So so that said.
We can flex.
Up to a bigger number based on demand and we can fluctuate bigger number.
Frankly, when we're comfortable that all of the protocols that we have put in place our are well observed by our visitors and well have forced by our team who went through the team went through three or four to three and four days of training before we reopened.
So we're very conscious that we've been fortunate ER and the extensive review that was given to us.
By both that the Governor's office and the Mayor's office that both of them agreed that we were in a good position to reopen.
We want to demonstrate that we can do exactly what we said we would do.
That we can maintain like the appropriate protocols as we set them out.
And and will work closely and carefully and advise them before we do anything further as far as increasing our capacity.
Okay, great. Thank you.
Thank you. Our next question is how can the line of Daniel is Smile Green Street Advisors. Please proceed with your question.
Great. Thank you.
Tony I was hoping if he can speak to make the type of demand, you're seeing or albeit that the understanding that's a demand is.
Lower now because of the most coveted by underwear and but if you could just speak to the suburbs versus the city and the type of tenants that are looking in both areas going if you notice notice an acceleration out to the birds.
But look I I think the comforting news for US is that we actually I have seen tours.
If we we have active proposals we have some approved deals but for the actual detail as to from where it's at comes and where it's headed but unlike hand this over to Tom Durels for him to make comment.
Sure. Thanks, Tony.
Lease tours have resumed in Manhattan as Tony commented.
On a comparative basis for the month of July.
2020, compared to two that's 2019 through our volumes were up at about 40%.
Bear in mind that were the phase two opening in Manhattan was when June 20 seconds. So we're not too. Many weeks. Following the same is true up running what we are pleased to the tours have resumed and we're running at about 40% pace.
Probably just mentioned we've received some recent proposals both for full floors at one of 11 West 30, Threerd Street, and an Empire state building and prebuilt or we have them at 32 broad why aren't they bought and got an at one Grand Central place and then for what we saw some leases that were in negotiation before the shelter in place orders.
A few of those have been executing that showed up in our second quarter numbers a few more that we still remain in negotiation, we hope to get those close not Oh God.
I would say that we do expect lower leasing volumes for the third quarter, particularly bear in mind were pretty much shut down for tours for your targets I'm curious whether stuff the shelter in place orders I work and it could affect but we're pleased that start towards our upper upper zone.
And I think Paul can you talk about trying to try to Todd you know I can't say that there's one particular kinda we have seen how a good amount of activity in the fire sector. Some healthcare professional services and the like is fairly broad based.
Alright focused on one specific industry.
Great. That's helpful. And then maybe different write off at the Empire State building regarding the capital improvement project the.
I believe make long 97 is passed last year and I was just curious if you can provide any more color on what me about project on economical on it and if there's any anything else that's being done or other properties you guys have.
So that's really only there.
The project on which we had a a.
Actual combined heat power project put together.
It made very good economic sense, we had worked with the Governor's office to get an exemption or for a a pilot program.
To look at the Con Ed standby tariff rates that that previously would have made the they did or an economic we feel very strongly that.
Even from an environmental perspective, it makes a great deal of sense because the.
Efficiency is extraordinarily high in the recapture of waste heat for steam for the Chillers and hot water for the building a bill really a tremendously high efficiency. The issue is and local on 97 and I'm the sole real estate industry representative on the mirrors Advisory board for the implementation of local law 97.
Is that there had been some arbitrary.
Values set for greenhouse gas.
Emission coefficient.
And the results of that is.
That we cannot see a clear path way.
Under the current rules.
That the.
Assessment charged for greenhouse gas emissions.
For a combined heat and power plant.
We'll be economical because they add very significant charge, but each.
Each year for operation.
So.
If we can restructure this we will I am a as I mentioned actively involved with the merits of advisory board on the implementation of the law one of the things, which we will attempt to speak to is how actually to measure the.
The greenhouse gas coefficient of combined heating power plant. However, Christina on arrival and then review of this said look you know the way things are presently set and based on the fact that the rules as they are currently set the level says they're currently set.
Are you know they rendered on economic it's it's logical time to expense.
<unk>.
Did that your sense that most building owners or I should say office building owners and New York City might see to offset some of its risk by I'm looking for carbon tax credits.
There's a done.
So if you look at <unk>. This is a much bigger subject Oh I'll, just say that there's a lot of work that needs to be done on this there are limitations as to what you can do on carbon tax credits.
There, but there are there there's a lot to be sorted through this was a.
<unk> <unk> <unk> and ideologically ER positive I think move.
However, it's not a very well thought out bill on many levels.
And to the extent that we can be helpful with the.
The city, which is our goal and the goal with everybody is on the advisory Board.
To improve.
The current situation, we will but we have to be conscious of with what we're dealing.
And and so with that in mind.
We took the the the.
The write down that we did.
Great. Thanks, everyone.
Thank you. Our next question, it's not from the line of Craig Mailman Keybanc capital markets. Please proceed with your question.
Hey, guys just just a follow up here as you think about the Opex savings in kind of just looking at the fiscal <unk> outlook for the city I mean, how much of this could just be eaten up by higher taxes as we head into 21 22.
Property taxes.
Certainly arrest, Craig certainly a risk so no I think that one of the reasons that we need to be careful to Michaels earlier question about how we look at underwriting off our opportunity set it's got to take a look at what happens on the fiscal <unk>.
On the physical seen every city in the United States not just New York City has been tremendously adversely impacted by the the cobot pandemic I think the good news is candidly, there's a lot of fat and the New York City budget.
During the de Blasio administration.
There had been significant increases in a lot of programs creations of new programs, which are our ideologically and and I think directionally a logical however, when it really comes down to what makes a difference to deliver services to allow the city to function.
There's a lot of fat that could be cut I think it's important to note that this mirror and this city Council.
Ah two thirds of the city Council will be gone as of the next election cycle in 2021 everybody's term limited out so to me it very interesting set of developments I think as we go forward.
And it's one where I think we just need to be careful when we look at committing new capital.
And then just something like the Capex savings you guys have for sounds like some deferred on them I mean, how much of that just gonna land in and 21 of those kind of the timing decision. There just because someone that can be passed through the tenants. They want to make sure people are in the space to be able to pass through or.
Some of that you know permanently avoidable.
Tom.
Sure Craig This is Tom as we've commented we're we're nearing the end of our redevelopment program and so we're seeing the benefit of that we wish we had anticipated a decline in our capex and going into two.
2020.
But certainly tournament.
In this environment, we took a look at everything.
We've deferred those things, where we could get more life out of the equipment or systems, and we're focusing on executing and putting the work that we have commenced a pretty cold and we're prioritizing only those things are going to generate income, but the big picture is that we're nearing the end of our redevelopment and so.
Oh, you know we're in good shape I remember, we're I'm pleased with what the reductions were closing out a lot of work at a the Empire state building.
And throughout the portfolio and that's what we're trying to wrap up this year.
Great. Thank you.
There are no further questions at this time I would now like to turn the call back over to Mr. Malcolm for any closing comments.
Okay. Operator, thank you very much like very much everybody else on the call clearly we did this all right. We are socially distance, we did not fit in one conference room, so, but I think hats off to the team we pulled it off.
All that being said I think I'd just like the thank everyone for the time and effort.
Put into.
The the disclosures this quarter more detailed specifically the normal. However, we think it's good and helpful to you folks to be able to analyze and underwrite it.
Please remember that forward looking statements on plans to ramp up the observatory and returned to business are really for a discussion purposes, only they're not guidance that we will have to pivot and flex depending upon what happens.
With travel and with covert pandemic.
Switching gears I want to express on behalf of the board and myself.
Gratitude and appreciation we have for the hard work of all the MSR teas employees. During this time.
Our team has continued to approach the business would come mindsets, we've got a smart work can do experience and resilience that will Oh <unk> will carry us through these times, our balance sheet and proactive cost saving measures will position us well for what lies ahead.
The fact is we've had to say sad good buys to team members, who have been impacted by a reduction enforced to date.
People have had to tolerate some tough news with regard to compensation reduction.
We have another phase as it's been mentioned of but of cost examination then reduction to do after these costs settle in so we look forward to the chance to meet see many of you virtually either through road shows are conferences in the months ahead.
And we look forward to Altoona share our third quarter results in October till then, but please stay safe and Oh burden upward folks.
This does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great that.
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