Q3 2020 Empire State Realty Trust Inc Earnings Call
Greetings and welcome to the Empire State Realty Trust third quarter 2020 earnings call.
At this time all participants are in a listen only mode.
Question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Mr., Anthony Malkin, Chairman and CEO.
Go ahead Sir.
Good afternoon. Thank you for joining us today for our State Realty Trust third quarter 2020 earnings Conference call.
In addition to the press release distributed yesterday quarterly supplemental package with further detail on our results.
Latest investor presentation.
Oh posted in the investors section of the company's website at Empire State Realty Trust Dot com.
On today's call management's prepared remarks answers to your questions may contain forward looking statements justified and applicable securities laws, including those related to market conditions property operations capital expenditures and access.
As a reminder.
Forward looking statements represent management's current estimates they are subject.
Terrific uncertainties, including ongoing developments regarding the COVID-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 statements in the future.
Encourage listeners to review the more detailed discussions related to these forward looking statements in the company's filings are they actually Shane.
Certain of our scores, which today are added specifically in response to the Fccs Directionally special additional disclosure.
The changes in our business prompted by the COVID-19 pandemic.
Our unique to this instruction.
We do not expect to maintain the same level of disclosure when we resumed normal business operations.
Finally during today's call, we will discuss certain non-GAAP financial measures such as I phone modified and core FFO and NOI cash NOI and EBITDA.
Which we believe are meaningful and 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.
President and Chief Executive Officer.
Thanks, Tom and good afternoon, everyone yes.
Yes, our team continues to adjust on a daily basis, the smooth tenant reentry collect rats manage observatory visits.
Assistance survival of our local retail tenants.
Sure, Yes, Archie employee safety.
Our tenant presence in our buildings in our greater New York Metro area.
Has grown materially to 45% and our Westchester properties, and 55% and our Connecticut properties.
Our New York City buildings continue to see slow growth off a low base.
Yes utilization by our largest tenants.
The result in occupancy below 15%.
[music].
Oh lowered in New York City, physical occupancy impacts our retail tax.
That is where we have targeted our proactive.
Work.
Temporary shift.
Percentage rents in order to help these small businesses survive.
Visits to the Empire State building and continue to grow off a very low base.
Roughly two thirds of our typical visitor traffic from overseas.
Actual attendance is limited by reductions in capacity.
To maintain our stringent COVID-19 protocols and also by border controls I guess inter state and international tourist travel.
Yeah Empire State building Observatory 86 for DECT reopened on July Twentyth, and the 102nd floor reopened on August 24.
Despite the travel restrictions.
We've seen steady weekly increases in visitors.
Through October 25th attendance was up nearly 6% of 2019 comparable period attendance.
And the improvement, but below the 10% projection.
Hypothetically set forth earlier by us for traffic in October.
We are fortunate to be well positioned to manage the challenges.
That we face with our flexible balance sheet.
Jamie its success with collections.
Successfully implemented cost reduction measures and.
A new management team members.
All this works to our advantage as we look to utilize our balance sheet flexibility.
No current requirement to pay a dividend and.
Look at ways to deploy our capital to buyback our stock and pursue external growth.
Our more than a decade its industry, leading focus on indoor environmental quality has positioned our buildings for our tenants to return safely to their offices and to compete for new tenants.
Yes, Archie has the first U.S. commercial portfolio to achieve a well health safety rating.
Evidence based third party verified readying for all facility types focused on operational policies maintenance protocols emergency plan and.
Stakeholder education to address post COVID-19 environment now.
Bought her health and safety related issues in the future.
Its rating validates our work to provide tenants with healthy and safe environments.
Additionally, our foresight and planning around energy efficiency means the company has no funds in 2024.
Under New York city's local law 97 to reduce greenhouse gases.
Well the macro environment remains challenged and the outlook is uncertain I feel confident that work done to position, yes, Archie for the long term to thrive and deliver shareholder value leaves us in an enviable position compared to others to summarize.
We have spent over $1 billion as part of our redevelopment work to modernize our properties for the 21st century, where they focus on energy efficiency indoor environmental quality.
We have consolidated.
Previously devised smaller spaces.
And redevelop them for new.
American better credit tenants on longer leases.
We leave it in the areas.
Energy efficiency indoor environmental quality and sustainability.
I will cover in more detail shortly.
We maintain a flexible balance sheet to execute our strategy and take advantage of potential opportunities that may arise.
We have undertaken a series of broad based and proactive cost cuts to address the current macro environment.
And we continue to evaluate further.
Further actions.
It's hard to use that leadership and redevelopment and our focus on energy efficiency and indoor environment quality comprise our competitive edge.
Leadership and sustainability indoor environmental quality could never have been more necessary.
[laughter] postcode World, where health and safety are Paramount.
That's our focused.
On the provision to their employees have a clear pathway to return to the office.
And demonstrate our leadership position, we applied and were awarded the wealth health safety rating.
Most stringent third party standard in the world to verify it safe and healthy workplace.
Yes, our team is the first and only commercial portfolio in the United States to achieve this rating.
This third party rating is a validation of the work.
But we have done for more than a decade.
Steps that we have implemented to improve indoor environmental quality in our portfolio.
$165 million redevelopment completed in December 2019 at the Empire State building Observatory mistakes direct.
Indirect and aerosol transmission.
I've COVID-19, and other viruses through Murph third gene filtration increased fresh air ventilation and bipolar Ization air purification.
Similar measures have been made to upgrade health safety and indoor environmental quality protocols throughout yes Archie.
Tired portfolio.
Our well rating is just one representation of the work we are doing yes G under the leadership of Dan or Bob and Schneider.
Our senior Vice President of energy and sustainability and director of U.S.G.
Earlier this year, we announced our intent to participate in the granite real estate assessment.
Based on initial feedback we feel quite confident that when the final results are available later in November our accomplishments will be clear.
With more than a decade of work in this area Davids leadership and the cooperation of our entire team, yes, Archie colleagues I'm confident that our decision to measure ourselves through several widely accepted metrics on sustainability well be rewarded with good result.
Our focus is not just.
On our leadership and preservation of the environment.
He also had a major focus on the social aspect.
Yes, our chief participation and our larger community.
And then I would refer you to our new slide 25.
30 in our Investor presentation.
It's Walter Gretzky advice to sudden Wayne our focus is to quote.
Skate to where the puck is going not where it has been unquote.
Our investors should expect in the future to see increased communication apart, yes gene leadership actions and commitments.
This is all part of U.S., our excuse continued efforts to adapt to the evolving environment with the ability to flex and Kevin all the while with a focus on our goal to deliver long term shareholder value.
We continue to try to gauge and share repurchase activity.
At our stocks significantly disc.
Just kind of public market pricing.
In aggregate.
We purchased $133 million.
Of our common stock at a weighted average price of $8.33 through October 27 2020.
At quarter end, we held three.
$373 million in cash, which provides us with an operating runway amidst an uncertain macro environment.
We also have our 1.1 billion dollar line that was undrawn at this time.
We continue to evaluate opportunities to deploy capital for external growth focused on opportunities in which our balance sheet strength and our redevelopment expertise can be brought to bear.
To date, we have not seen widespread distress as lenders have generally been accommodated to borrowers and there have been few investment transaction data points.
Our new investment team led by Iron Rasner makes progress every day on our efforts to find value opportunities for our investors.
That said we are in a marathon.
Not a sprint.
We will deploy capital when an opportunity presents itself that will lead our growth in the next cycle.
Switching gears here is an update on the observatory now that we have been opened for just over three months.
Our focus on indoor environmental quality in which we've been leaders from more than a decade.
Yielded air filtration for emerging filters aggressive response to viruses with active bipolar ionization.
And a massive capacity so badly the observatory Oh, it's part of our redevelopment.
When combined with comprehensive protocols and employee training. This allowed us permission to reopen on July 20th that's the other attractions in New York City.
Observatory revenue for the third quarter 2020 was $4.4 million.
That included the following components.
$2 million of deferred revenue.
From unused tickets.
That we were able to recognize.
And earned income from tour and travel partners.
As well as.
$1.2 million of fixed license fee for the gift shop.
Observatory expenses were $5.9 million in the third quarter of 2020.
This represents a reduction.
From a $35 million annualized expense run rate pre pandemic.
<unk> current $25 million annualized run rate for 2020, driven by reduced hours of operations and staffing.
Month to date through October 25th attendance visit nearly 6% 2019 comparable period attendance.
Gradual improvement, but below the 10% projection for traffic in October.
This is a slow very bill at a strong next to other comparable attractions.
This is taking this primarily retail and web site <unk>.
Which bolsters revenue per cap to its highest level in our history.
The vast majority of that site ticket sales are domestic and concentrated amongst the tri state market.
This is consistent with our anticipation that initially we will have a higher local visitor mix followed by a ramp up of regionally and nationally sourced to travel.
And then followed by a restoration of our typical visitor mix that is approximately two thirds international.
That will not be achieved until our anticipation of a broad resumption of international air travel sometime in 2022.
No attraction in any city.
The higher brand value on international recognition, then the Empire State building Observatory.
Fantastic and I caught it.
Moly plant its second annual bucket list just raised at the Empire State building the number one of traction in New York City.
We believe that when the pandemic passes we will emerge stronger than ever as the enduring Brendan I caught up in New York City at its resilience.
As I communicated previously there are certain fixed staffing it operational costs, regardless of volume levels.
Yeah, we continue to look for ways to optimize our cost base.
We believe that we have ample bandwidth and our current cost structure.
To handle our anticipated wrap up an admission volume.
Through 60% of 2019 volumes.
Finally, I would like to reinforce our optimism in the us and our New York City.
It's possible book would be a realist about where we are and to be confident in our future.
The passage through COVID-19 has four phases law.
Locked down.
Number two pre vaccine therapy treatment number three post vaccine therapy treatment and number four clean up and the restart this phase four is important.
The day after Woodstock mystery, guys gerken, not simply gum PIVENS fields in fact crops.
He had to clean up the stage speaker tower expenses cable bottles cans sleeping bags and other human debris.
Similarly, there will be work at investment required to restart our economy.
I've said for some time now, but I think we will know our bottom in Q1 2022 and the growth we commence is from that point.
Yes, our GE has the runway.
And continues to work to make the most of the environment in which we find ourselves.
From a balance sheet Todd.
Capital allocation.
Expats Capex.
An organizational perspective.
With that I would.
I'd like to turn the call over to Tom Durels.
Thank you Tom.
Thanks, Tony and good afternoon, everyone.
In the third quarter, we signed an 18, new and renewal leases totaling approximately 247000 square feet.
This included approximately 137000 square feet in our Manhattan office properties.
105000 square feet in our Greater New York Metropolitan Office properties, and 5000 square feet in our retail portfolio.
The most significant leases signed in the quarter were a 103500 square foot New office lease with Williams falling at the Empire State building.
We have been replaced an existing global brand groups lease for the identical space with no change in rent tenant concessions or at least term.
And a 63200 square foot New office lease Berkley insurance at Metro Center, which back filled the toxin borders move out from the second quarter.
Subsequent to quarter end, we signed a 212000 square foot new office leases with separate brands at the Empire State building for space, which centric previously subleased from global brands group.
This transaction is a triple win.
We retained the 212000 square foot tenant who rejected their sublease in bankruptcy and was close to signing a lease at 237 Park Avenue.
Reduce the burden on global brands group, who would have had to pay rent on space for which it had no need and all with minimal leasing costs.
Well the leasing spread was negative 15% based on the initial base rent.
This transaction was approximately neutral on a cash flow basis inclusive of all related transaction costs and related lease termination fee.
Excluding the lien fun and center leases, new leasing activity in our Manhattan office portfolio. During the third quarter was reduced due to the impact of COVID-19, pandemic and we expect reduced leasing volumes in the fourth quarter.
During the third quarter rental rates on new leases signed at our Manhattan office properties increased by 6.9% on a cash basis.
Paired to the prior escalated rents.
The linfen transaction, which replaces an existing GBG reset identical terms. It included a new lease with a reported leasing spreads.
New and renewal office leases across our entire portfolio were down 5.1% driven largely by leasing spreads in our greater most metropolitan New York portfolio and the offer much linfen transaction.
Our total portfolio leased percentage is 89.7% an increase of 10 basis points from the prior quarter.
Occupancy of 85.9% sequentially increased by 30 basis points during the third quarter.
As a reminder, we have 459400 square feet of signed leases not commenced as shown on page six of our supplemental.
As Tony mentioned in his remarks tenants are focused on providing their employees with a safe environment for return to the office and to this end, we implemented a new health and safety protocols earlier this year on which we have received very favorable feedback from our tenants.
We have more than a decade focused on indoor environmental quality.
Merck 13 filters were standard throughout our portfolio prior to covert and would begin using bipolar ionization pre <unk> and.
Yes, yes, Archie is the first.
You have commercial portfolio to achieve the well how safety rating, which validates our work to provide tonnage with healthy and safe environments.
We maintained our improved monthly run collection are shown in the table on page 10 of our Investor presentation.
We collect 94% of third quarter 2020, total borrowings with 96% for office tenants and 84% for retail tenants.
These collection rates are before application of any security deposits and without any adjustment for the for all agreements.
We have a greatly reduced aggressively reduced our property operating expenses throughout our portfolio, achieving a reduction of $14 million in the third quarter of 2020 compared to the prior year period and $26 million reduction year to date.
We achieved these cost savings without production out of service for China's not through the cost of the body, New health and safety protocols.
Keep in mind that a portion of the reduction in operating expenses will be offset by a reduction in some of the expense recoveries.
In summary, we signed a significant leases that stabilized and of course, our rent roll.
Our industry leadership and experience in indoor environment quality combined with <unk> health and safety protocols allows our tenants to return to the office with confidence that their employees will be safe.
We reduced property operating expenses by $26 million year to date.
And we have seen meaningful overall improvement in our my collections.
Now I'll turn the call over to Kristina Kristina.
Thanks, Tom for the third quarter, we reported core a $35 million or 12 cents per diluted share. This.
This is not a two cents per share.
I remember circumstance tenant receivables and non cash reduction in straight line balance is an absolute $3.2 million in one time charges and expenses, which I will address later.
Im sorry property operation if you exclude one time lease termination fees added territory results from there, but I didn't hear it.
9.3% cash NOI increased from the third quarter of 2019.
This increase was primarily driven by lower property operating expenses and free rent burn off partially offset by lower back.
More detail on the breakout of our collection can be found on page 10 of the investor.
During the Blair, we recorded a number of unique onetime item or at that well [laughter].
Typically we recorded a $1.3 million impairment charge net reimbursement related to the write off of prior capitalized I'm, sorry, I didn't get on it.
An $800000 onetime severance charge due to the elimination of position.
And a $1.2 million at one time.
Due to an estimated liability I think IPO related arbitration.
We also recorded a $5.8 million reduction in rental revenue or acute and I felt impact in the third quarter comprised of a $4.4 million or tenant receivables and $1.4 million and straight line rent out.
The annualized impact of the reserve again tenant receivables equates to approximately 3.2% of our annualized rental revenue number 30 and we.
We reached this determination after her view of each kinda premiers data security deposit balance and management's assessment of the path towards the resolution and liability.
Turning to our balance sheet as of September Thirtyth 2020, the company had $1.5 million of <unk>, which is comprised of 373 million in cash and 1.1 billion of Undrawn capacity on our line.
The company had total debt outstanding of approximately $2 billion, but eight and $1.2 billion I'm about me.
Company total debt has a weighted average interest rate of 4% and a weighted average term to maturity of 8.3 years.
Our net debt to total market cap, 46.3% and that's actually adjusted EBITDA was five point.
We have a well laddered maturity well no debt maturities until.
November 2024.
Our revolving credit facility expires in August 2021, and two month engine option.
Amid uncertainty about the credit market March 2020 onset of COVID-19, <unk> M. We drew down $550 million on our revolving credit facility.
Given increased confidence in the banking system's ability to fine lines right now on September 1st we decided to fully repaid or bother me.
This result in annualized savings.
Eating out.
Kelly I'm in a half million at current interest rate.
Concurrently, we announced our decision to suspend the third and fourth quarter 2022.
We expect to have no taxable income in 2020, and there are no required to pay any yeah.
The management team and the board believe that came out of it and it's currently not the highest and best use of our balance sheet. Given continued uncertainty in the macro environment benefits is maximizing our operating like away and the significant it's kind of valuation of our stock.
During the third quarter and through October 27, the company repurchased 18.4 million of its common stock at a weighted average price of $6.36 per share.
On a year to date basis, the company repurchased a total of 132.9 million of common stock at a weighted average price of $8.33 per share.
As we noted last quarter, we undertook a series of proactive steps to reduce costs across the company. This includes our g. any expenses property operating and capital expenditures and cost of operating our territory.
We continue to anticipate 2020, DNA accident, a $50 million, excluding one times coverage target, which were flat at $8 million reduction year to date as.
As mentioned last quarter 2021 named executive officers, our annual equity compensation will be reduced by $3.9 million. We currently expect 2021, GSK will total approximately $58 million.
We continue to operate.
We continue to optimize our operating expenses across the company in a variety of areas.
Year to date through September 30, yet the company reduced property operating expenses, I 26 million compared to the prior year period, driven Iraqis tenant utilization and the company's cost reduction initiatives.
The company also spent $4 million of permanent cost reduction on an annualized basis I'm 2021 onward.
We anticipate that 2020 capital expenditures for building improvements compared to 2018 will be approximately 24 million lower as we focus on mandatory spending and worked previously commence.
Service, where expenses are expected at an annualized run rate of $25 million down 10 million from a pre coded annualized run rate of 35.
We believe the proactive measures are aligned with stakeholders and reflect our effort to preserve cash operate efficiently and maximize our bottom line in uncertain we.
We will continue to see efficiencies and cost reduction opportunities in operating our business.
Before I open the call for your question I would like to say that I know in my six month, Yeah I.
I'm excited to be a part yes, our team I want to thank my colleagues at our board for their assistance in isolation as well as your cooperation as I begin my plans for the future. Additionally, I, thank our investors and lenders for their candor I comment on which I learn each day now.
Now for questions.
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Your first question comes from line of.
Craig.
Melman with Keybanc capital markets. Please proceed with your question.
Hey, everyone.
Just kind of curious here you know traditionally your portfolio has been sort of the value product in your markets you know price below kind of traditional Midtown office, and then not really competitive with wouldn't.
With new supply, but clearly sublease availability is rising and core Midtown markets and your rents are expected to fall here can you guys just give a sense of how you're thinking about <unk> kind of how your product is positioned today in that environment your ability to kind of hold rensselaer and whether you've seen any.
Changes in tenant profile that are in kind of the leasing pipeline.
Hi, Craig This is Tom I'll first I would remind you of the attractive value proposition that we make were probably have always traditionally been priced below class I and deliver a better product than Clos the world incredibly well located.
Centrally located near mass transit and I'd remind you that weve invested over a billion dollars within our portfolio and to modernize our entire portfolio and haven't redevelop 94% of all of our space. So we're delivering modernize profit great location and at a price point that is still.
Hi, incredibly affordable.
As far as trends, it's really too.
Early to say, there's there's there's a limited amount of leasing activity certainly work already on lower volumes than this time last year and so I'd be hesitant to say that that's where it where the trend is exactly as we had probably to give them more on concessions that discount.
On space right, but if you looked at our average net effective rent.
Hi decreased by about only 3% compared to the second quarter and that's I think reflective of relatively low leasing cost where we are seeing tenants preserve capital. We're trying to preserve capital of course, we have space that's been redevelop it and that helps and then any sense in that regard.
As far as the sublease market look theres been an increase in sublease availability in the overall in the overall market. We saw some increase with their own our own portfolio this quarter, but much of that wasn't anticipated and some of that already appeared on space, we expect to get back.
In 2021 reflected on page nine so it really wasn't a surprise or result of co but oh.
Precisely.
Okay. That's helpful. Then just quickly on the observatory Tony when it was helpful for you to run through the buckets of where the income came from just as we move into fourth quarter and next year, how much of those kinda deferred ticket sales do you guys kind of have to come through and give a boost relative to you know if if actual tendency.
Please.
At these kind of trough levels here.
Yeah. So I'm used tickets are always hard as it is and then they're always in the number in some fashion when do you need that period is the build out because beginning yeah. Okay.
And then during the period, where this close expecting that to get you know have potential Bu and the 2 million representing a higher than usual number. We say you can expect you know couple of hundred thousand a quarter odd in the next several players keeping in mind tickets have a one year exploration period. So by the time, we let you know.
Second quarter next year that number when complete.
And I wanted to sell point now also most of the time thinking late second expires on the spot. So we don't have the technical issue.
Gotcha. Thank you.
Your next question comes from the line of Manny Korchman with Citi. Please proceed with your question.
Hey, everyone. Good afternoon, Tony or Kristina, if we can just talk about the buybacks for for a moment, how do you sort of figure out that the pace and the timing of those you've done 133 million to date, but.
A lower volume here in this quarter when the stock was under pressure so just.
As you look at other opportunities how do you look at your own liquidity, how do you think about how much you should be buying huge each quarter.
Thanks, Manny as bad as.
As I mentioned, we believe have a long path ahead going through the different phases.
In consultation with our board.
We continue to exercise patience is prudent as we evaluate all of our options.
[music].
What we really do as we look at it.
The opportunity of how to utilize each dollar at a time when there is competition, we didnt do the.
Oh, the dividend because we felt we had an asset on our balance sheet no requirement to pay dividend. So.
So we decided to take care or take advantage of that as a good capital allocation decision. We will similarly look at repurchase opportunity.
As a capital allocation decision each time, we look at our balance sheet capital available and what else we might do.
So the board and management continues to review.
Priorities.
And.
We just don't see a really.
Quick snap back in the economy for New York.
In our business conditions.
That's part of the reason for our pace.
And then just on the observatory rents is there any risk that that gift shop, Brent would get caught for any reason understand its contractual but at the same time, obviously that that's a tenant that's under a lot of <unk> income pressure right now.
We have to talk to all of our tenants all the time about the prospects that they they have for their business weve afforded.
Opportunity for tenants to have a red deferrals abatements changes.
And.
We may have ended up in a discussion with that.
Secular gift shop operator.
Good.
I would not anticipate we end up with a period of no red.
It is possible that the month to month rent could be adjusted.
So that's a $1.2 million from never said that that was as contractual or that was already adjusted.
Pretty adjustment that was that was that was contractual.
No well provide updates as and when they develop.
Thanks Bill.
Your next question comes from line of the Steve Sakwa with Evercore ISI. Please proceed with your question.
Great. Thanks, Christie and I know you guys took a another kind of large round of charges this quarter and I guess relative to the Uncollectibles I think 3% maybe up to 5% is now you know effectively on on effective cash accounting.
I guess, how do you think about sort of the remaining couple of percent that that's not collected are not really dealt with and and what sort of resolution do you think you get in one.
Yeah, we will continue to evaluate you know in some instances as we show on page 10, we do have a security deposit at Catarina now and we will be a continued discussions with the pending could see if we can collapse and so it seems that you know like 3% or 3.2% of the time.
Hi, we've addressed most of it as mentioned Yaki Criterias again, we are staffed it security deposit balance how those discussions are going and whether its a viable business as mentioned in our earlier remarks for those that are food vendor you know I really need some support on in terms of percentage rents you get what I'm hearing it right.
No. They are experiencing low utilization, we will focus our energy on that and get to a win win situation knowing that even if you had a replacement tenant 18 seems situation, we feel pretty good about where we're going to we will continue this discipline of being very transparent and writing on anything and medium class.
Okay, and then maybe just kind of circling back on the buyback and the leverage you know I think ER I don't remember if it was Tony are you Kristine that said your 5.6 times net debt to EBITDA, just remind us kind of what what are your targets or sort of what does the upper bound that you would take.
Take that number two as you think about buybacks and new investments.
Yeah. So you know, we got a little bit differently, it's not a specific target that were trying to avoid or try to limit ourselves to it's really about the availability of capital yes. Its unique sadly no need to replenish liquidity that you put out we might have a different view, what we are seeing today.
Hey, it that the market is definitely moving into a little more has been top notch and Iran. You know capital is available, but it's becoming a little more selective neighboring threaten factor favoring specific profile and building a you know assets that we try to not so were aware of all those factors and it will be.
Extremely prudent and patient in how we deploy capital I think the buyback activity were flat, which is you know when we announced our decision to suspend the dividend for Threeq and Fourq you made it very clear we're acutely aware of how attractive Arctic cat in share price is on the agenda or the opportunity to buy that our portfolio at the.
Chris were flattered by valuation is extremely compelling having said that it is a very uncertain environment I tell you mentioned capital D., then and even after that we need over time and so having operating line way is extremely important we do not want to be in addition, we were forced to sell assets when it doesn't make sense.
So taking all those elements into consideration, we will continue with the buyback activity and we'll be at a prudent and measured eight.
Okay, Great and then last question you guys mentioned the utilization differences between the suburbs than New York City I'm. Just curious if Tom is seeing a real pick up in suburban office demand either from a you know existing New York tenant smell, some sort of a hub and spoke or.
Essentially complete moves out of the city to the suburbs.
Steve we're seeing some new post code activity from tenants coming out of New York City.
Looking to open up a satellite office in a couple of them.
Potential relocations, but it's it's I.
I wouldn't call. It a major trends, we signed three leases with New York City based tenants are today that total just under 10000 square feet returning papers with other tenants that represent so little under 40000 square feet. A couple of those a couple of tennis, we may have to look at from.
One of our New York City properties to our one of our Connecticut properties, but I think the square footage sorry, I just did you puts it into context.
Of course, when I went to quite positioned to take advantage of any kind of sit you to relocate.
Oh for half a second office outside New York City, because of our reputation our relationship with the New York City brokers that are great access to mass transit.
Your next question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.
Great. Thanks, Good afternoon, so Tony it was good to see a little bit of an increase in revenue and activity at the observatory this quarter.
But as you point out here you are still running below your original projections I guess I'm I'm wondering if there's enough of a difference there that to change those expectations are forecast at this point or maybe they do you think it's just a little delayed here in the beginning and you still got a chance to kind of catch up to some of those projections in future quarters.
Well you know look first of all I. Appreciate the question. We are confident that travel will return and we are confident in the future of New York City. We also believe that we will not be out of the disruptions from COVID-19 until we see free travel in and out of New York City from States and countries.
Just this week, we have had reinforced the reality that we are we're not there now so.
The way we look at this is.
Number one we do see steady growth, we are basically selling new York to new Yorkers right now.
Our hypothetical growth targets remain naturism represented on page 18 of our updated investor presentation.
We believe that the social media reviews that we have received since we reopened which are five star focus on cleanliness safety and the enjoy ability of it.
That is what is encouraging more and more people to visit.
We were very comfortable with the way we are outperforming its based on our market intelligence any other attraction that is comparable to us that said.
We'll take another look.
As as we as we head into November through December.
And.
Recognize that these are very low periods for us at any at any time of any particular year right. Now. This this or any just any particular here. This time is slow.
And we think we need to take another look at the hypothetical layout that we gave.
We will just want to make sure that you understand that everyone should understand when we gave the original hypothetical outlook. We were really driven by the guidance from the FCC to address the potential impacts of COVID-19 on our business and.
We felt it was really important to provide investors with the the view that we had that the pandemic would be long term impact.
Something we felt that investors did not have the time I think that what we found is that the academic side, an even bigger impact.
Then the larger impact.
That we thought of at the time when we first did this we will try to update this hypothetical from time to time I think the best thing to do is to track flights in and out of New York City. It's a it's places from which people can visit which will drive our business higher.
And and that's good data that's what we look at that's what we track.
Okay. That's helpful.
Yeah, great. That's it that's helpful commentary, let's.
And then second question just on the leap following who use at the Empire State building that replaced some of the global brands space. I believe Lampung is then space at 13, 59 Broadway as well and it looks like that lease expires in phases, starting at about a year. So I guess.
Does this lease at the Empire State building have any implications for for the space that will be coming up an expiring at at 13 59.
Sure sure they are fine.
Finally, I space at 30, 59, that's something about expenses expires in 2021, and then other charters expire out in 2023 and 27, we do anticipate would take some of that space back at 13 59.
In late 2021, what over 65000 square feet and that's captured on page nine of our supplement we've always anticipated that and but overall, it's a net positive for for us and it locks Liam falling into a much longer term lease for approximately eight years.
Irrs at Empire State building or the 103000 square feet they put there.
All right. Thanks, Tom.
Your next question comes from the line of Jamie Feldman with Bank of America Merrill Lynch. Please proceed with your question.
Great. Thank you I guess, Tony appreciate all your comments on the well rating did you have to make any additional investments in the portfolio to hit those numbers or are we already on track to get there.
Hopley actually Jamie we were there already and that's just a you know.
If you've read our stuff in the past I've felt that it was important for us not to.
Cater to other people.
Metrics we've.
We've decided to go ahead and submit ourselves to other People's review and the well rating was just a validation of how far ahead, we work with everybody else when it comes to indoor environmental quality, it's providing safe work spaces for people.
They've been healthy work spaces. So we made no other change.
Okay interesting thank you and.
And then I'm just thinking through the schedule of your largest unknown and tenant vacates through next year.
Can you provide some color on you know that the truth about risk or maybe the size of some of those leases just so we have.
Some idea of where the risk in the occupancy risk might be or maybe lumpy.
Sure I mean, if you're afraid to EM Manhattan on the unknown most of those really all of those leases are below 10000 square feet.
And I know in the Greater New York Metropolitan Office portfolio in 2021, we have to.
Kinda stat or a rough a little over 20000 square feet. Each the rest are relatively small and then the balance that you see on the schedule. There are either already classified as non renewals relocations or or vacate so no no a whole lot of unknown.
At this point only about 80000 square feet of Manhattan, 62000 square feet.
In the Greater New York Metropolitan portfolio.
I just might add to Tom's comment when we look at but we've got as far as rollover.
On an unknown on the outcomes.
When we look at all of this stuff with the context that we are in as much contact as we possibly can be with our tenants as to their needs. Their uses their returned to office.
I think the belief that we did with centric combined with with global brands group is a huge triple win for us.
The fact that we were able to take that space, where they were aggressively out in the market through their restructuring team had an active lease under way to go to another building, we're able to preserve them at Empire State building on a direct basis deliver that.
To us on a long term lease and also relieve the burden of our direct tenant global brands group of.
The need to cover space that is otherwise would have on its balance sheet obligations with itself sub tenant moved out. So we'll work super hard with all of our expirations, including the ones that the the market throws up at us.
They will be very successful in that.
Okay. Thank you and then what about the category of known move outs, how chunky or those.
Yeah.
[noise] Manhattan.
In 2021, as I mentioned earlier that in response to a place question.
We are getting back went over 65000 square feet from <unk> at the end of 2021, that's really our largest vacate next year.
We've got some tower floors that Empire state building and one branch place having to get those back because they started consolidated and their tireless force. So I anticipate that there will be a good demand.
That's really the largest known Vacates next year.
Okay, great. Thank you.
Your final question comes from the line of Frank Lee with BMO Capital markets. Please proceed with your question [noise].
Hi, good afternoon, everyone and we're.
First question I have on the Observatory have you implemented any new marketing or.
Any changes in pricing strategy that you think will help drive traffic [noise].
[noise] well first of all.
We are currently outperforming all of our comps and we have our highest per caps in our history, we have not adjusted.
Our pricing.
Nor do we intend to except we had we did.
At a rate slightly.
The pricing.
That is a paid during our sunset period, which is our peak period.
For visitors at the building always has been.
So that was always planned for when we reopened and that's not represented any reduction it's not created any reduction in our attendance or from that sums up to it.
As far as what drives people to us.
Oh, no we haven't done any discounting.
We know we are capturing.
The the biggest component of the market as far as people go into destination attraction the edge it.
Theres, giving away free tickets to first responders.
It's been a major source of their traffic.
One world trade is not open yet they're talking about opening on a weekend. It's only a we have good insight as to our performance in comparison to top of the rock.
So we really see no reason the discount we think we will get the visitors who want to come for a clean safe and I'm proud of experienced.
And we really at a bar of our trip advisor common sense. We reopened we've had two negative comments about price and we've had just a slew of incredibly positive comments about quality of the experience thinking cleanliness.
Okay. Thanks, and then on the direct lease with centric are you able to quantify the termination fee associated with the transaction and should we expect this to be recorded in the fourth quarter.
[noise], well simply saying what I'm talking about an hour earlier that the transaction is is neutral to slightly positive over lease term on a cash flow basis, you on that really aren't in a position to share more to more detail on that but as Tony mentioned earlier I think its a.
I forgot to become a fantastic. So Craig was helped by the company and then I have a question on smoking he will be booked over time, I mean fights on only nothing chunky.
Okay, great. Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Mr., Anthony Malkin for closing remarks.
So thank you everybody. Thank you very much for participating in the call today are.
We will continue to include that improve our or disclosures in both financial and he asks can you we continue to make strides in both.
We're happy about that please remember that forward looking statements on plans, rather the observatory and returned the business.
Our for discussion purposes, only and to help you with your models they are not guidance nor the guarantees.
We feel good well positioned with our portfolio of our leadership in energy efficiency sustainability in indoor environmental quality combined with our flexible balance sheet and proactive cost reduction actions really we think represent not only long term planning, but our ability to pivot that inflection meet the challenges these difficult times.
I'd like to just say one thank you to our board has been active in direct conversations with our major investors and also thank our investors for their Frank conversations with our board members.
Feel that open dialogue and communication has great value in general and especially so in today's world. So we look forward to the chance to meet many of you virtual either through road shows or our conferences in the months ahead, we're doing meetings here in our office, which has ventilation vrthirteen filters and active bipolar ization. So it's.
As as Steven and Michael I will tell you, it's a safe place to compensate place it does it and.
And until then we report in a in February.
For the full year stay safe.
The smart and onward and upward.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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