Q4 2020 Empire State Realty Trust Inc Earnings Call
[music].
Yeah.
Greetings and welcome to the Empire State Realty Trust fourth quarter, and full year, 'twenty and 'twenty earnings call.
This time, all participants are in a listen only mode.
Question and answer session will follow the formal presentation.
And he what should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
Now my pleasure to introduce Tom Keltner General counsel. Thank you.
You may begin.
Good afternoon. Thank you for joining us today for Empire State Realty Trust fourth quarter, 'twenty and 'twenty earnings Conference call.
In addition to the press release distributed yesterday, a quarterly supplemental package with further detail on our results and our latest investor presentation were posted on the investors section of the company's website at Empire State Realty Trust Dot com.
On today's call management's prepared remarks and answers to your questions may contain forward looking statements as defined in applicable securities laws.
And those related and market conditions property operations capital expenditures income and expense.
As a reminder forward looking statements represent management's current estimates are subject to risks and uncertainties.
The 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 statement and the future.
We encourage listeners to review the more detailed discussions related to these forward looking statements and the company's filings with the SEC.
Certain of our disclosures today are added specifically in response to the SEC seems direction on special additional disclosure.
Due to the changes and our business prompted by the COVID-19 pandemic and our.
Our unique to this instruction.
We do not expect the maintained the same level of disclosure when we resume normal business operations.
Finally during today's call, we will discuss certain non-GAAP financial measures, such as <unk> modified and core <unk> NOI cash NOI and EBITDA.
Which we believe are meaningful and evaluating the company's performance.
The definitions and reconciliations of these measures to the most.
This 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, Our chairman President and Chief Executive Officer.
Thanks, Tom and good afternoon to everyone and we continue on 2021, the flex and pivot to facilitate employee and tenant reentry to our buildings with the confidence and our indoor on prime it'll quality measures.
We collect rents manage expenses promote Empire state building observatory visits and support our smaller retail tenants.
Our tenant presence remains relatively unchanged.
And many tenants plan their return to the office around the widespread rollout of vaccinations.
We reached just under 15% building utilization and our New York City properties and just under 40 per cent building utilization and our greater New York Metropolitan area of properties prior to the presently of bathing virus Serge.
We are now at approximately 12% and 31% respectively.
Visit to the Empire State building of Observatory continue to grow off of very low base.
That said, our visitation is higher than any other observatory with no discount offered and fantastic visitor feedback from our largely local visitor ship to our attraction. The features Merv 13 filters that elation and active bipolar ionization.
We are very fortunate to be well positioned to manage these changes with our flexible balance sheet stabilized the collection levels and.
That's fully implement the cost reduction measures.
We had $527 million of cash on hand, and no drawdown on the $1.1 billion line as of 12 31 'twenty.
All of this works to our advantage as we look to utilize our balance sheet flexibility and seek ways to deploy our capital through the repurchase of our stock and we review external growth opportunities.
And for Q2 thousand 20, we further refreshed our board of directors with the addition of grass Hill that expands our board of directors and nine directors. The additions of three new board members and Patricia on page HUD and Grant Hill over the last two years has brought expertise and digital commerce real estate investment.
And branding to our board.
While the macroeconomic environment remains challenged and the near term, we believe and the long term prospects for New York City on the office sector.
Since the last quarterly earnings call. There had been several vaccines approved the distribution has begun.
We have signed new leases and tenants with whom we speak including our largest tenants with whom I speak personally have expressed the desire to return to the office. Once there is widespread backs need this vaccine distribution.
Work from home, it's maintenance not growth and competition and we believe firmly that when people are and the room, where it happens.
And Miss the conversations and hallway validation when they click off the video conference people will want to be and the office.
The executive teams will encourage employees returned to the office to nurture their corporate culture of stimulate collaboration and teamwork and provide mentor and development opportunities the junior staff and onboard new talent.
We know that firsthand the.
And the office since July and we have accomplished an incredible amounts of that time I believe that ESR T is well positioned to thrive and deliver long term shareholder value.
As I noted on our last earnings call, we were poised to announce the results of our first time ever participation and grasp and real estate.
And we're quite pleased with the results.
And the five star rating and.
And the Green Star recognition.
The score of 88, which places us on the top 20 per cent of all responded.
And then a rating on public disclosure.
The third party outcome validates our decade, plus of commitment and work and energy efficiency sustainability and indoor environmental quality.
Yes, Archie research further recognition shortly afterwards with fit well certification across $6 7 billion square feet of 83 per cent of our Manhattan portfolio.
We were awarded fit well, one and two star ratings on fixed assets and named and fit well champion.
Combined with our well health and safety rating for the entire portfolio. The first portfolio. So rated and all of the Americas, we demonstrate that our buildings offer a unique combination of location value and leadership and sustainability and indoor environmental quality we.
We believe this offers us the competitive edge and the tenant driven marketplace and increasingly focuses on E. S. P.
We are pleased to announce that our portfolio is not 100% powered by renewable wind energy.
This action and builds upon our earlier success with the Empire State building, which has been 100% renewable powered for a decade.
We will continue to communicate in the future about our ESG leadership actions and commitments and look forward to publishing our first sustainability report this spring.
Switching gears to capital allocation and our balance sheet.
Our balance sheet flexibility provides us with and operating runway of amidst an uncertain macro environment as well as the ability to engage and share buybacks at attractive discounted valuation and the value of valuate opportunities to deploy capital for external growth focused on opportunities in which on balance sheet strength.
And redevelopment expertise can be brought to bear.
To date on.
Investment team continues actively to underwrite value opportunities and we are open minded and the types of deals. We will consider that said we're in a marathon not a sprint and we will prudently deploy capital when and opportunity presents itself.
Moving on and here's an update on the observatory.
The observatory revenue for the fourth quarter 2020 was $5 million that included $1 $3 million of deferred revenue from the unused tickets and the earned income from tour and travel partners as well as the 1.5 million dollar fixed license fees of the gift shop.
Observatory expenses were $5 $6 million and the fourth quarter 2020, and we expect run rate expenses to be approximately $6 $6 million to $7 million per quarter.
Depending upon the pace of visitor of ramp up.
We also revised our hypothetical observatory admissions shown on page 15 of the Investor presentation.
We have modeled a slower ramp up and admissions from 2021 and in the near term and flex the high Covid case count.
Ongoing travel restrictions.
And slow vaccination progress to date.
That said, we believe the greater number of approved vaccines and improved distribution rates will lead to increased travel demand in 2021.
We still expect to reach 60% of 2019 attendance levels by the end of 2021 and returned a 100% by the end of 2022.
With roughly two thirds of our typical visitor traffic from overseas potential. The attendance is limited by travel restrictions for inter state and international tourist travel.
Despite these impediments, we have seen steady weekly increases and visitors year to date through February 14 attendance is the nearly 9% of 2019 comparable attendance a gradual improvement.
Lightly above the 8% projection per traffic in February.
This slow rebuild is better than other comparable attractions visitation is primarily retail and website, driven which bolsters revenue per cap.
And also.
Pricing actions, we've taken including increases during peak sunset hours and on the 102nd floor observation deck tickets have improved mix and revenue per cap.
Visitors remain focus on health and safety and area, where we are well positioned with our focus on indoor environmental quality.
Our redevelopment program led to the installation of Merv 13 filters bipolar ionization with Atmos air on the.
The ability to ventilate, the observatory, which provides visitors with peace of mind when they visit.
The vast majority of ticket sales are domestic and concentrated amongst the tri state market with some sales from other large populations of states, such as Florida, Texas and California.
And the online reviews speak for themselves are primarily hometown and New York City visitors love it.
This is consistent with our anticipation that initially we will have a higher local visitor mix followed by a wrap up of regionally and nationally sourced the travel.
And then followed by a restoration of our typical visitor mix that is approximately two thirds of international that will not be achieved until of broad resumption of international travel.
We anticipate will occur sometime in 2022.
I have said.
That I think we all know our bottom and Q1 2022 and that growth recommence is from that point.
<unk> T has the runway.
And continues to work to make the most of the environment and which we find ourselves from a balance sheet capital allocation expense.
Expense management, ESG and organization perspective.
One more comment before I hand, the call over to Tom to Ralph I.
I have been incredibly fortunate to be surrounded by E. B piece F b piece the piece.
Other non union colleagues and the Union team members, who run to the fire not away from it.
We have risen to every challenge.
We have improved and rework and improved again with more improvement underway as I speak.
I have to get the special call out to two relative newcomers Dana Robbins Schneider, our S E T and director of energy sustainability and ESG.
And Kristina Chu, our EVP and CFO.
These two professionals of quickly earned my respect gratitude and appreciation that typically takes years if ever to be earned from me.
And your E. S. R T colleagues of longer tenure enjoy and benefit from our work with you.
As for the rest of the E. S. R. T. We have had babies caught COVID-19.
And our buildings from riots and looting.
Leased and pivoted and flex so many times that literally not one single day and it's the same as the one before.
Our board has been supportive and questioning every step of the way with more direct outreach to our large investors than ever before and genuine concern for our wellbeing and support for our mission.
And it's been a great reward to work with fantastic people on behalf of our stakeholders and I look forward to it for years to come.
And now ladies and gentlemen.
Tom to Ralph.
Thanks, Tony and good afternoon, everyone.
And the fourth quarter, we signed 33, new and renewal leases totaling approximately 413000 square feet.
That included approximately 358000 square feet and our Manhattan office properties.
37000 square feet, and our greater New York Metropolitan Office properties and.
The 18000 square feet and our retail portfolio.
Significant leases signed in the quarter were the previously disclosed 212000 square foot New office lease with centric brands for space at the Empire State building, which centric had previously sub leased from global brands group.
A 39100 square foot New office lease with clearer view health care partners at one of 11 West 33rd Street.
For the space that we recaptured from another tenants from early lease termination, which involved the payment of a termination fee.
That will largely offset the leasing cost for the clear view transaction.
Third you previously occupied of recently built 10005 hundred square foot tower floor that is ready to be leased two of new tenant.
A 32005 hundred square foot, New office lease with transit wireless at 1400 Broadway.
Wireless relocated from 13, 50 Broadway, where it had previously occupied of approximately 24500 square feet.
And the 19004 hundred square foot, New office lease with Dime community Bank and one Grand Central place.
And we're dime had previously occupied approximately 3006 hundred square feet.
Excluding the centric lease new and renewal leasing of activity in our Manhattan office portfolio. During the fourth quarter was approximately 146000 square feet and reflects the solid quarter. Despite the COVID-19 pandemic.
The new and expansion leases I mentioned with tenants and health care technology, and finance have made commitments to increase their employee count and expand their offices here in New York City.
During the third quarter rental rates on new leases signed out of Manhattan office properties decreased decreased by six 4% on the cash basis compared to the prior escalator rents.
This includes the centric transaction, which had a leasing spread of negative 15% based on initial face rent.
Approximately neutral on a cash flow basis inclusive of all related transaction costs and lease termination fee.
New and renewal office leases across our entire portfolio were down five 4% driven largely by leasing spreads from the centric transaction.
Retail spreads across our entire portfolio on the 18000 square feet of leasing were down 43, 3% on face rents.
However, most of the leases that drove the mark down and rents were restructured leases with small retailers that contain on percentage rent component that was excluded from the calculation of the widespread.
We worked hard with our small retail channel to do not have and online option or national or international presence and substantial balance sheet to see them true and these negative spreads are the result of that effort.
We estimate net effect of rents and our portfolio of today versus the pre COVID-19 levels have declined 10% to 15% on a comparable space basis, due mostly to increase of free rent and Ti and a modest reduction in base rents.
It is important to remember that every deal is unique and depends on the space condition location tenant credit and other factors.
One such example is the clarity of transaction and.
Which we recapture space from a prior tenant from whom we received the payment of a lease termination fee.
Our total portfolio of leased percentage of 88, 7%.
<unk> of 100 basis points from the prior quarter occupancy of 85, 9% was unchanged from the third quarter.
Looking ahead into the first quarter of 2021, and we recently announced a 30000 square foot 600 square foot lease with a law firm at one Grand Central place and we are of good pipeline of discussions and activity from new and existing tenants and how.
The care Industrials professional services and consumer products.
We have 393006 hundred square feet of of signed leases not commenced.
As shown on page six of our supplemental on page 10 provides an update on lease explorations through 2022.
We believe the tenants will increase their focus on and true strong landlords that can help them fulfill their own company mandates for healthy buildings with the energy efficiency and ESG.
Our leadership in this area has been and will continue to be important to our success and <unk>.
Tracking and retaining quality tenants as Tony mentioned in his remarks, we are of the industry leader and ESG performance as measured by Greg U S you'd be see fit well well and the EPA.
According to the Morgan Stanley reported of February 2020, we have the lowest greenhouse gas per square foot of any publicly traded REIT with office buildings, and New York City.
We were a leader in indoor environmental quality prior to Covid and today, we continue the use of Merv 13 filters bipolar ionization and increased ventilation.
You start to use the first commercial portfolio and the Americas.
To achieve the well health and safety rating.
We were awarded a growth five star rating and Green Star recognition, our Grad score of 88 places us in the top 20 of 20% of respondents.
Yes, there is a third world champion and we achieved the all certification on <unk> 83 per cent of our Manhattan office properties.
And 100% of <unk> more than $10 1 million square foot portfolio and.
And now powered by renewable wind energy.
We have maintained our rent collection is shown on the table on page 10 of our Investor presentation.
We collected 95% of fourth quarter 2020, total build on billings with 96% per office tenants and 87% from retail tenants.
These collection rates start before application of any security deposits and without any adjustment for deferral agreements.
We reduced our property operating expenses and 2020, it's router portfolio, achieving a reduction of $13 million and the fourth quarter 2020 compared to the prior year period.
And third 9 million dollar reduction year to date.
We achieve these cost savings without reduction of services to our tenants and after the cost of it the matching new health and safety protocols.
While most of these cost reductions were driven by low kind of populations of property management team has made certain permanent reductions in labor cleaning security and maintenance contracts.
Keep in mind that a portion of of the reduction in operating expenses will be offset by a reduction and tenant expense recoveries.
Looking ahead to 2021, we anticipate the first half of 2021 property operating expenses will approximate our current run rate based on current reduced building population.
With a greater increase and vaccination distribution and a return to the office, we would expect the utilization rate to increase and the second half of 2021.
In summary, we have a good leasing corp. We had a good leasing quarter that included expansions of existing tenants who are growing within our portfolio.
Our and our industry leadership and experience and the indoor environment of quality and sustainability will enhance our ability to attract and retain quality tenants.
We've reduced our 2020 property operating expenses by $39 million compared to the prior quarter.
And of rent collections have stabilized.
Now I'll turn the call over to Kristina Kristina.
Thanks, Tom.
And the fourth quarter, we reported core S. S aisle of $47 million or 17 cents per diluted share. This is inclusive of one cents per share of expense from a write off of 10 net receivable and a noncash reduction and straight line rent on.
Other items, which impacted results include a net and impact from lease termination income and day, one impact from tax benefits.
Same store property operations, if you exclude onetime lease termination fees and observatory results from their respective period yielded a 1.5% cash NOI increase from the fourth quarter of 2019.
This increase was primarily driven by lower property operating expenses, partially offset by lower revenue from the prior year period, driven by previously communicated large now and move out.
More detail on the breakdown of our collections can be found on page 10 of the investor presentation.
Turning to our balance sheet as of December 31st 2020, The company had $1 6 billion of liquidity, which is comprised of 527 million of cash and $1 1 billion of Undrawn capacity on our line of credit.
We bolstered our liquidity and balance sheet flexibility with the 180 million dollar of mortgage loan on 250, West 57th Street, and we closed on during the fourth quarter.
The 10 year interest only loans has a fixed rate of 2.83%.
The company had total debt outstanding of approximately $2.2 billion on a gross basis and one.
One $6 billion on a net basis.
The company and total debt had the weighted average interest rate of three 9% and a weighted average term to the charity of eight two years on.
Net debt to total market capitalization was 37, 2% and net debt to adjusted EBITDA was six three times.
We have the well lettered maturity schedule with no outstanding debt maturity until November 2024.
Our revolving credit facility expires in August of 'twenty, 'twenty, one and has two six month extension option.
During the fourth quarter, we also announced our continued suspension of our dividend for the first and second quarters of 2021.
Currently we also announced a new 500 million dollar repurchase authorization for the period of January one two and at December 31st of 'twenty and 'twenty one.
This replaces the 500 million dollar of repurchase authorization that ran through the calendar year 'twenty and 'twenty.
And your the 'twenty and 'twenty authorization, the company repurchased approximately $144 million of the common stock at a weighted average price of $8.32.
And the fourth quarter and through February of 'twenty, 'twenty, one the company repurchased $25 $3 million of its common stock and a weighted average price of $7.32 per share.
Sure.
This brings the cumulative total since the stock repurchase program began on March 3rd 2022, and February 16, 2021, instead of $147 $2 million at a weighted average price of $8.34 per share.
We continue to manage tightly expenses across the company, we achieved our 'twenty and 'twenty goal to reduce G&A expense of $60 million, excluding one time severance charges, which reflected an $8 million reduction from the prior run rate.
We pre announced that 'twenty and 'twenty, one anyhow annual equity compensation will be reduced by at least $3 $9 million expense of awareness and control is a major focus of mine and I had benefited from cooperative work with my colleagues choices that.
And as Tom mentioned earlier, we reduced property operating expenses of $39 million and 'twenty and 'twenty, driven primarily by reduced building utilization.
The company expects the property operating expenses and the first half of 'twenty and 'twenty, one will approximate our current line rate based on continued low building utilization relative to 2019 level.
We believe these proactive measures are aligned with the stakeholders and reflect our efforts to operate efficiently and maximize balance sheet flexibility and operating runway and uncertain time.
We will continue to seek efficiencies and cost reduction opportunities and operating our business.
Now for question as always the kindly ask that each part of it and limit him or herself from one primary question and one follow up and rejoin the queue. If there are additional questions. We will stay on the call as long as we have question.
Later.
Thank you we will now be conducting a question and answer session.
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Our first questions come from the line of Steve <unk> with Evercore ISI. Please proceed with your questions.
Thanks, Good afternoon, I don't know of Tony or Christina and wants to take this on kind of buyback against maybe new investment opportunities and you know first what are you seeing and the market. Today you know what does the pipeline look like of possible deals and you know when you are evaluating purchases of of buildings. How are you sort of weighing that against share.
Our of buybacks is it simply kind of the yield differential is that IRR driven can you give us a little bit of sense of how youre thinking about those two investment opportunities.
Sure.
Thanks, Steve.
We weighted the deployment of our capital against all alternatives and we want to generate shareholder value and maintain the balance sheet to provide us with flexibility and the operating runway.
That's as as far as actual focus of our acquisition and that's on New York City office retail and multifamily.
And we think that.
Outside of prices on assets with long term credit leases to which investors and search of alternative yield are attracted.
Prices are very unsettled and trending down and we believer and the early stages of the type of potential reset on more opportunities will arise.
And we balance all of this along with runway.
Yeah, we clearly feel that Q1 'twenty two is the bottom.
That said, we go up from there it doesn't mean, it's a suddenly things or are all of our back to normal. So are our view is early stages.
And ratner, our CIO and his fully staffed team had begun to uncover more interesting situations and.
And we continue the way the deployment of our capital for new acquisitions against all of the the options and this marathon that we are in non of Sprint's marathon, so with that in mind I would say that we've definitely done deep underwriting on.
Phew.
Fewer than a handful of assets.
We have tremendous catalog of opportunities out there, which we pursue right now either directly.
And and and or through brokers and I'd like to say, we're really encouraged by the fact that we have begun to see.
Information come out from brokers not in the form of polished books, but in the form of short one pagers to pagers.
And that to me indicates something we've seen from periods before and as I've said before when the books from the selling brokers get bad it means that the information flow is not effective there cutbacks and the sales brokerage side, because frankly their business model doesn't support the staffing and that indicates opportunity.
Is is has arisen and and.
That's what we see.
Great. Thanks, and I guess Theres, a follow up I didn't know if maybe Tom could talk a little bit about.
And what you're seeing from the tenants I know you've done a bunch of new deals in the fourth quarter and I guess, what I'm really try and new to you know piece through here is as.
You know state utilization, how tenants are planning space for tenants that moved within your portfolio or even new tenants and you know how are they space planning today and how did that maybe compare the space they were coming out of.
Yes, Steve.
The biggest focus that we have seen has been and will continue to be on healthy workplace healthy buildings and indoor environmental quality. The this is the most asked about topic by existing tenants and prospects and as a reminder.
We provide tenants with the energy efficient space and fully modernized healthy buildings, and which we're the industry leader and the R. E true and as you know 95 per cent of our Manhattan spaces has been redeveloped and compliance with our high performance.
Energy efficiency and IQ standards regarding space designed specifically theres, an awful lot of discussion on the topic about which every landlord is the asked however, this is a tenant driven phenomenon and it and most tenants are focused on a post vaccine world we've seen some slight less dense furniture.
Layouts, but we've really not seen heavily dense bench seating and though we did not see this pre COVID-19 as many of our tenants were focused on employee productivity, except and.
And in our prebuilt spaces tenants of the ones, who decide on how spaces will be configured and their furniture layoffs, but we haven't seen any radical changes sought by either our existing tenants by new tenants to whom we've leased or by the tenants with whom we're in negotiation with now.
Okay. Thank you.
Mhm.
Thank you. Our next question will come from the line of Manny Korchman with Citi. Please proceed with your question.
Hey, everyone.
Maybe sticking on buybacks for a second Christina or Tony how do you think about buybacks of from the perspective of increasing our leverage and now you did a sort of a cash out refi and the quarter and then you've done more buybacks since then.
Obviously, the leverage goes up and those types of transactions and and I think you've been hesitant to sell assets and so how do we put that altogether.
I'll take a first track that the money and and let the Christina and in <unk>.
I think over time, our track record on the management of our balance sheet suggest that we are prudent and our decision, making if you recall, we issued shares and an opportune time.
Exercise discipline on our acquisition of Underwritings and avoided asset purchases at the end of the bull market and we borrowed well and.
And we endured a lot of criticism, while we waited of repurchase our stock on.
The actual decision on how we deploy capital is in active discussion with our board.
To maintain our focus on value generation for shareholders. We believe we really need a flexible balance sheet to provide us with the operating runway. So we look at the the lengths of what we think we will go through in this downturn and we.
We feel very comfortable that we are well.
And well positioned there and we look at how the business develops we have to pay careful attention to the observatory.
And we really look at what will be the most accretive benefit to the shareholders not just from a cash perspective.
But also over the longer term.
We.
Distribute our G&A.
And how we look at different trends that we can tap into.
The runway is the single most important thing however, and we put all of these things into the mix and we'll we lever up if we see an opportunity that as we think accretive and delivers value overtime, absolutely. We're prepared to do that we have low leverage and of course, as we do better and our stock does better on our our leverage goes down as our observatory kicks back.
And.
Our our our coverage of our debt that we do have has improved Christie and I don't know if there's anything you'd like to add to that.
Just wanted additional point, Andy which is I think we've discussed and the path, it's really about the company's ability to replenish liquidity as they move along with the various capital allocation decisions. It's not a specific target. So you'd mentioned, our recent financing and that didn't come out of a need of came out of that being opportunistic and we thought to planting per cent.
10 years interest only without adding a ton of debt to the portfolio without weakening our unencumbered asset pool of that supports our unencumbered debt and we think that that's really compelling. So it really tied to the Tony's comments on maximizing operating runway, having balance sheet flexibility and.
And the dividend suspension distances and ties into that we have the cash, but we are thinking about all state called area, what is and their best interest and an uncertain environment and when the company has a unique option where it does not need to pay a dividend and we saw that as a channel to make a prudent capital allocation decisions and we'll continue to debt.
Constraint that and you know as we make these decisions and hopefully drive the point home.
And thanks for that and and Tony and the past and conversations like these you you've talked about your relationships and your family's relationships and finding a potential.
And he is from.
No.
Generational owners of New York City of real estate have their views on maybe the city generally here or there at appetite or attitude towards sales and change more recently.
Of.
And that's a great question and and it's funny because what we advocated early on was that the opportunity advocated to the family's early on was that the opportunity to work with us would prepare them for.
Disruptions like this you.
You see a bunch of people who are very disrupted.
At this point there are a lot of assets.
Which are challenged and families has begun to recognize that they've got capital needs and.
And distributions or even capital calls of required so.
I think the the answer to that question is.
But as from from I know the answer of that question as far as we can see is.
The family meetings are taking place right now and at the moment. It's the lot of the conversation is Wow. This.
And this is a difficult world and which we live we will make it through and on the other hand, some of the conversations on certain assets some of the ones, which were looking specifically are.
Are we all really going to fund of 150 200 million dollar of capital call.
And on and the answer to that by the way there's no [laughter]. So yeah, we think that this people who talk to us earlier.
Could have been smarter, if they'd acted and right now and we look at them and the tail of opportunity along with all of the other ones just weighing them against everything else.
We still just so we're clear if we issue stock and we our units and we may.
Do that we would do it on the basis that we have to value our portfolio.
And the target portfolio equally and we would issue units for shares.
And relative value.
Not the people could look for us and get our discounted currency the.
The same as they could get cash from somebody else because we wouldn't do that doesn't make any sense.
Thanks for the agriculture.
Thank you. Our next question that's come from the line of Jamie Feldman with Bank of America. Please proceed with your question.
Thank you.
Tony You said a couple of times that you expect to know the bottom and.
<unk> 22, I'm just curious what does that look like is that office occupancy is that net effective rents. It sounds like the observatory would actually be better by then.
Just trying to understand what you're what you're implying.
And so the bottom for me Jamie is when the distribution of vaccines and vaccinations.
Our broad wide and and and and place and we've already seen in Israel, and and and the United Kingdom, where there the way out ahead on their vaccination.
You've seen the numbers really dropped tremendously as far as infections, and and and that bottom. Therefore to me is based on when people feel.
We now know that.
The maybe endemic maybe we would get and annual shot.
However, we can now plan going forward. So to me, it's the time when people stop on the pivot and flex every single day and say Alright. This day it looks a little bit like the day before the day before that and we can anticipate tomorrow is the same.
And what decisions do we want to make.
And I think of big component of that Jamie is the degree of it from the leasing market, but we have done long term leases. There are a lot of folks who have focused on users who are focused on short term renewals, while they reevaluate what goes on.
And I think that we've seen that behavior and 2021.
And we will see it in 2021, we definitely saw it in 2020 I think that will also taper off.
By Q1, 'twenty, two I think people will begin to plan.
Longer term, which means by the way that the normal rules, which you'll see in 'twenty two 'twenty three 'twenty four people, who have roles coming in 'twenty, two and of kick the can down the road. They will already have done that by Q1 of 'twenty. Two so people and now begin to plan for 'twenty three 'twenty four 'twenty five 'twenty six along with all the other short term renewals and that to me will set the <unk>.
Page four.
For the resumption of leasing that probably with the vigor real vigor, but I think in 'twenty three 'twenty four 'twenty five and.
And then the last thing I would say is that with the bottom do too.
The the.
The wide distribution and the uptake of the vaccine.
Not only will.
And what will people returned the offices, but when they returned offices those commercial districts, which have had retail so badly impacted the retail will know where it is and have a certainty and and and the ability to open good news about the U K from of tourism perspective, as the U K at least and the Empire state buildings on number one source.
And of overseas visitors, so as the U K U K vaccination gets way out ahead of everybody else.
I think with vaccinations, you'll see more normalization of travel.
So the New York has the Hospitality Center, and New York City as the Hospitality Center again Q1, 'twenty two I think those are our positive certainly from an internal United States travel perspective, and we'll begin to see glimpses from international.
I would say across the water.
That's the that's what I think about it and when I say Q1 'twenty to bottom.
Okay, and that's really helpful.
I guess just to add to that I mean, do you think as you look at your lease expirations for the year I mean I think.
And for scent lease declined about 100 basis points and the quarter.
Do you think that's what kind of continues until then or when you look at the the exploration schedule today.
It's actually.
The conversations are picking up maybe you're seeing some better renewal percentage, how do we think about just where per cent leased or occupancy could go.
Yeah, Jamie This is Tom let me jump in here if I could as you know were about just under 89% leased in two.
2021.
And as you see on the supplemental we have about 311000 square feet of known tenant Vacates and then only about 78000 square feet of tenants that remain.
And on decided now we do have 393000 square feet of signed leases not yet commenced that equals about three 9% of our total portfolio square footage of again as shown on page six of the supplemental.
And approximately 278000 square feet of those leases should legally commenced a year and GAAP commencement will follow again as shown on page six and the supplemental if I look out in 2022, only five 5% of our portfolio of leases expire and then 2023, it's about.
7%, So I've commented on.
The earlier that we have a pipeline of new expansion and extension and renewal activity to the extent that we can sign those this year that will add.
Add to our leased percentage and then the good news is as a reminder, 95% of our Manhattan spaces, Redeveloped and and we have 258000 square feet of pre built space ready per lease up and for immediate tenant move in and so that's how we think about our occupancy trend in the in the next year.
So I guess, if you add it all up you're saying, it's still bleeds, a little bit and that the right way to think about it.
Well if you again, if you do if you do the math of 311000 square feet of unknown and Vacates against 278000 square feet of leases that should commence by by year end and what it is.
Not a lot of leasing to achieve.
Achieve positive leased percentage by year end.
Okay.
Great Thanks for walking through that.
Mhm.
Thank you. Our next question is come from the line of Blaine Heck with Wells Fargo. Please proceed with your questions.
Great. Thanks, good after noon and maybe for Kristina and I just wanted to ask about the observatory performance and its relation to the dividend and is there a level of attendance of revenue maybe relative to 2019 levels that would necessitate a dividend reinstatement for you guys or is there a better way.
We should think about the kind of the trigger point for that dividend coming back.
Yeah. So the dividend decision was tied to taxable income and I mentioned, a one driver and you are correct to note is the observatory business.
And when it's performing the way it had it generated of intercompany ran and each of the REIT and that triggers taxable income and Howie.
Or there are other sources that also play into the taxable income such as net operating losses repairs deductions that we get to take the call. We spent over $1 billion on the portfolio since the IPO, we've had depreciation what type of repairs deduction. So all of that comes into play and in terms of what you can stop the against cash.
And kind of so observatory is a driver, but it's not the only driver there are other factors and there and we have not communicated any specific linkage to the attendant.
And we'll continue to monitor as per and you know as part of of what we've communicated in terms of hypothetical ramp up and the expense run rate, but that's all I can state right now.
Alright, that's helpful color and then I think this was brought up on last quarter's call, but wanted to see if there was any update or anticipated update to the observatory gift shop lease structure of given the extended kind of time frame for recovery there.
Yeah. So on the observatory gift shop actually we just renegotiated and so they are as disclosed on in the supplemental as they currently pay 6 million a year and we actually restructured the agreement so that they have some rent relief.
During this period, where there is low visitor of volume and basically it's the percentage rent agreement and where we reduced the fixed portion by about half of them and then it ramps up as the attendance comes back so it's pretty much of a win win situation. If you can imagine for a gift shop, operator that relies on the on track.
Action visitor of level.
And and I grew up in front of me also extent, we also extended the lease the license agreement with them at the same time so the.
So we've locked that in for longer.
Okay. Thank you guys.
Thank you. Our next question is coming from the line of John Kim with BMO capital markets. Please proceed with your questions.
Thank you Tony you mentioned on the investment side that you're looking at the multifamily and the just wanted to see if you can elaborate on that.
But he also said that as far as investing capital of this is the marathon and not of sprint.
With all of the sentiment is pretty much out of the all time low but the economy, you're looking to reopen this year do you see this as the tight window, where you can make opportunistic investments.
Yeah.
So the first comment I'll make is that.
As far as multifamily we are primarily focused on situations and which we can get involved and which there are.
Properties, which can go to.
On a book got properties, which are either on 100 per cent or a significant majority of market rate rental that's part one.
Two we do have of focus even with multifamily where the where we can have.
And impact on what occurs there through our our ability to manage them.
Effectively aggressively actively through a downturn and number three I would say that the real focus is on on just to the extent, we can get our hands on and busted condos, either declared effective or not declared effective.
So that's that's the part one we've had success with that and New York City on the past downturns and so we look and we'd look at that again.
And as to your second piece of it.
I think that there isn't there there are a couple of factors, which are interesting here you're of the 10 year is creeping up.
By a big number, but it's up by a percentage of appraisals are.
I don't know what the creeping, but the appraisal values have declined four of certain assets.
The amounts are.
Which lenders are prepared to lend with regard to office our.
I'd say.
Reduced.
So when you look at these different factors. These are factors, which will continue.
I think and and good they're not going to ameliorate just with the bottoming and in Q1 'twenty. Two so we think the window opens actually as people realize that and opens further as people realize them.
And have a problem and hand and has and how they're going to redo their debt they have a problem and hand.
And as to the fundamental performance of their assets.
The the net effective rents the people and get are down and it's very expensive you need a lot of cash right now and over the next 12 to 24 months to lease office space, and New York City as a landlord.
And so I think that these factors and.
And so on a light switch they don't turn off.
I think that they could cause.
Continued challenges, which create the opportunity of.
That we see so I don't think it's a short window I think it's the bigger window and and we actually.
One of the things. We've done is we have taken steps internally to say, okay. What's the the right strategy for us.
We have a certain amount of cash on our balance sheet.
Which is a lot relative to our company size, we have a certain amount of cash available on our line, which is a lot relative to our company size.
That said, even if we deploy all of that.
How many deals can we actually do so.
So we look at this from a perspective of we make.
We're looking at how we actually lever our capital.
Not just with debt, but perhaps at the other People's capital. So that should let you know we think the opportunity.
And it's larger and I'll tell you that you know it's it's it's it's public knowledge. It's been announced you know a couple of rights of reduced.
The folks they have on their their investment side.
And I don't know anyone's eliminated them entirely that we've created a of about four person team.
On that commenced back in the second quarter of the 2020 of that that team building. So we look at it as very much on our front foot and we've got a longer term view on it and the opportunity set.
Okay.
And my second question is on.
On the Observatory, you mentioned more of the local mix, which can make sense.
I'm wondering if there's anything that you have done or can do to attract the local customers whether on the marketing basis, and where from a pricing standpoint, even if it's temporary.
And what we've seen from multifamily landlords and as I can occupancy is picking up people are coming back to the city.
And at reduced rates.
But I think of a lot of people and New York, We're still looking for something to do a lot of and until recently, the restaurants, where and when it opened the door. So.
Is there anything of that you could do to.
Educate and I guess the customers that haven't been to the Empire State building recently and don't know of your recent investments.
Matt It's a it's a viable and viable option.
So it's it's funny earlier today at a meeting with our observatory marketing team.
The team inter.
Internal team and just the you know that group includes PR and marketing branding social digital and we're extremely active and these areas.
We've created.
And and you can look at our Investor updated investor deck, and we've created increased within the United States advertising value equivalency through art, but the actions we have taken a brand is extremely strong.
And it's to a significant degree it's also of word of mouth. So you've seen the steady increase when we when we reopened the observatory.
And we were and the twos and three percentage points of of your prior activity.
And now we're close to 9% and the first.
On a two months to date of 2021 and and the fact is that includes a February and which we've had two weeks of.
Impacted severely by blizzards and so we are we.
The the one thing we really don't think we need to do is to do pricing promotion and the edge of.
Gave all first responders through 2020.
Free admission.
And when that expired their numbers just dropped like a stone.
So you know one world trade centers up and two days of week.
Rockefeller Center on our numbers are significantly outperforming theirs. So when we look at this.
This this per.
Performance from our side.
And I can only just tell you that the team on the observatory stent and amazing job and amazing job of cost containment.
Containment and amazing job of flex and pivot on staffing and.
And the visitors.
Love.
The experience so we're using user generated content to push it and we're active on social and digital to get this out and the local community.
And we're doing a lot of brand building to make sure that we when we measure of advertising value equivalency.
And that's about where we get ourselves placed out there says the C. B S. This morning.
Just covered our valentines day weddings.
The many fold increase over prior year coverage on that advertising value equivalency and.
And and and that's an idea of what we're doing on the marketing side.
Got it okay. Thank you.
Thank you and our next question is coming from the line of Daniel Ismail of Green Street. Please proceed with your question.
Great. Thank you.
Tony You mentioned the cost of a return of doing office space and clearly over the past few years and spent a lot of time and capital modernizing your portfolio with the focus on ESG.
Is it your sense that some of these older or lower quality buildings, and New York and potentially.
Potentially facing and pending vacancies and no longer remain office buildings.
I know there's been some chatter of office and residential conversions. So I just wanted to get your sense on that and if that's something Empire state would be interested in.
And then I think I'll, let Tom dwells are take a crack at that if I may.
Yes sure.
In terms of the overall generally conversion of office buildings to residential I think it's it's pretty early we've seen that and certainly in prior cycles, but we haven't seen a lot of lot yet we'd certainly.
We certainly look at that it's a lot would depend on the floor plate and the configuration of that to see if it's appropriate for conversion out of out of price point that makes sense in light of where the where the current market is.
And then as far as what would we look at these from an acquisition and investment perspective.
Absolutely.
However, you got to recognize that and an office owner of it.
It takes the building and converted to residential that is complete abdication and it's it's a write off for that owner.
And unless they have extraordinarily low basis.
This is a major of reinvestment and put in riser shaft from for electric for for waste for Hot and cold water for the all of the new bathrooms and stuff that would be put in.
And a huge investments of those those those properties really need to be of wipe out.
And then is it your sense of that potentially we could be facing and just higher structural vacancy or a higher amount of obsolete office buildings and in Manhattan.
Manhattan as I say tenants focus more on ESG and some of the older buildings, just simply can't compete with the higher quality offerings.
And I certainly think of it yes, absolutely I can say that certainly there'll be facing significant redevelopment cost to bring them up the standards with the what tenants are seeking for indoor environmental quality of sustainability energy efficiency and compliance with local low 97. Unfortunately as I've commented before we redevelop 95 per cent of.
Our space in Manhattan.
No fine from 2024 for local low 97, and you know we're a leader in this area.
And then one more if I may.
Are you able to provide and I know rents are tricky. These days, but are you able to provide a portfolio wide estimates of where in place rents sit relative to market today.
Well for of Manhattan Office portfolio, I think the real question is where where our net effect of ranch and which of the net effect on ramps and our portfolio trades today versus pre COVID-19 levels have declined maybe 10% to 15% on a comparable space basis, due mostly to increased free rent and T I's and.
Some modest reduction and face rents, but it's important.
And to remember that every deal is unique and depends on the space the condition of the location and the tenant credit and a bunch of other factors. For example, the clear view deal that I mentioned earlier is was close to our pre COVID-19 rent for a full turnkey space.
But we gave several months of additional free rent compared to pre COVID-19 levels to encourage the tenant to lease and entire floor rather than on a partial which saved us on corridor and the margin costs and then the deal involved of recapture of of fully built tower floor.
In addition, and of course, we received meaningful termination fee in connection with the Joe from a prior tenant whereas the deal we did the deal with stuff by comparison, and an 8000 square foot lease at Empire State building with Nordic based Swedbank, who has great credit and we gave very little cheat.
The free rent matched our pre COVID-19 level of concession, but the starting rent was maybe 15% below where we would of leased to the tenant pre COVID-19 and so we're seeing a range of overall, we think it's about 10% to 15%.
10% to 15% reduction and net effective rent comparable of pre COVID-19.
Great. That's helpful. Thanks, everyone.
Thank you there are no further questions at this time I would like to turn the call back over to Tony Malkin for any closing comments.
Look thank you all for your attendance, we continue to improve our financial and ESG disclosures and hope you find them useful to take a look at our new Investor report, which is on line. Please remember that forward looking statements on plans to ramp up the observatory and returned the business or for discussion purposes, only and to help you with your models theyre not guidance nor the guarantees.
We look forward to the chance to meet with many of you virtually at the upcoming Citi CEO conference and through Roadshows in the months ahead and to share our first quarter results and April until then.
Stay safe. Thank you for your interest and the onward and upward.
Thank you that does conclude today's conference. We appreciate your participation.
You may disconnect at this time have a great day.