Q1 2021 Empire State Realty Trust Inc Earnings Call
[music].
Greetings and welcome to the Empire State Realty Trust fourth quarter and full year 2020 earnings call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
My pleasure to introduce Tom Keltner Executive Vice President and General Counsel. Thank you you may begin.
Afternoon. Thank you for joining us today for Empire State Realty Trust first quarter 2021 earnings Conference call.
In addition to the press release distributed yesterday, a quarterly supplemental package with further detail on our results on our latest investor presentation were 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 and answers to your questions may contain forward looking statements as defined in applicable securities laws, including those related to market conditions property operations capital expenditures income and expense as a reminder, forward looking statements represent management's current estimates.
They are subject to risks and uncertainties, including ongoing developments regarding the 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 on the future we.
We encourage listeners to review the more detailed discussions related to these forward looking statements on the company's filings with the SEC.
Certain of our disclosures today are added specifically in response to the SEC's direction on special additional disclosure due to the changes in our business prompted by the COVID-19 pandemic and are unique to this construction, we do not expect to maintain the same level of disclosure when we resume normal.
S operations.
Finally during today's call, we will discuss certain non-GAAP financial measures such as <unk> modified and core F. F O NOI cash NOI and EBITDA, which we believe are meaningful in evaluating the company's performance the 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, Our chairman President and Chief Executive Officer.
Yeah.
Thanks, Tom and good afternoon to everyone.
We remain confident in the recovery of New York City realistic with regard to where we are.
And through what we will have to go to get to that recovery.
And well positioned with a balance sheet that gives us a long runway on the ability to take advantage of growth opportunities.
The U S vaccination rollout stimulus spending.
And reduction in New York State pandemic linked restrictions all speak to a much better spring than any period, we have had since lockdown in March of 2020.
Daily there are new announcements from Arts cultural hotel hospitality and entertainment venues, which all serve the remarkable on growing demand from new Yorkers to get out and enjoy their city.
On apartment occupancy is up and apartment sales have increased schools are back in session.
Airlines have announced rehiring and increased domestic flights even if the much discussed 100% of 2019 domestic schedules by summer does not occur Directionally. This is good news.
Our number one international tourists source for the Empire State building Observatory, United Kingdom is well advanced and they're inoculation program.
As dark as people would like to paint the picture the near term future is brighter than it has been for more than a year.
As I've said for several quarters I still believe that it will be the end of Q1 2022 before we see predominantly positive overall, new stories on New York City office utilization retail sales tourist visits and quality of life issues.
We are well positioned to bring back employees and tenants with confidence to our buildings operate efficiently and encourage Empire state building Observatory visits.
New York State has just announced the return and May have up to 75% of office capacity.
Our tenant presence has grown slightly since last quarter and are building utilization stands now at approximately 13% and our New York City portfolio and 32% in our greater New York portfolio.
Many tenants plan their return to the office around the widespread rollout of vaccinations with major tenants announcements are returned to office beginning around July four and labor day.
Importantly evenly.
Evenly incredibly negatively biased reporting around the quote death of the office Unquote has now shifted to an acknowledgment of the challenges in equities and worries about divided workplaces between home at office work and the impossibilities posed by the thought on Onboarding new employees.
The future of businesses without an office there.
Awareness of the selective discriminatory impacts on minorities women youth.
And the service jobs of COVID-19, Lockdown school and child care shutdowns on the absence from the office paint the roadmap to solutions driven by the reopening of our great City.
All of this is good news to SRT.
And we have shifted our focus from successfully implemented cost reduction measures to a rethink of our processes and practices around new ways to reduce our costs permanently on.
All of this works to our advantage as we look to utilize our balance sheet flexibility and seek ways to deploy our capital through external growth opportunities.
We have done more work on that external growth in the last quarter than our entire prior period as a public company.
Visitors to the Empire State building Observatory continue to grow off a very low base with no discounts offered in fantastic visitor feedback from our largely local visitor ship tour attraction that features top of the line indoor and from a quality, including Merv 13 filters ventilation and active bipolar ionization.
Driven in part by our timed reservation ticketing local and regional visits and limited utilization by our visitors are past programs and online travel agents.
Our per cap revenues have never been higher people are prepared to pay for quality and welcome the opportunity to enjoy our destination attraction with confidence.
First quarter attendance was up nearly 9% of 2019 comparable attendance.
Gradual improvement from 2020 levels and consistent with our hypothetical admissions forecast.
Visitation is primarily domestic retail and website, driven which bolsters revenue per cap.
Visitors remain very pleased with our focus on health and safety, an area, where we excel with more than half a decade old focus on healthy buildings and indoor environmental quality.
We have no change to our hypothetical observatory admissions shown on page 13 of the Investor presentation.
We have said in preceding quarters that we expect to hire local visitor mix followed by a wrap up of regionally than nationally sourced travel.
And then followed by a restoration of our typical visitor mix that is approximately two thirds international that will not be achieved until a broad resumption of international air travel that we anticipate will occur sometime in 2022.
Again, our number one international tourist source from the Empire State building Observatory, United Kingdom is well advanced and they're inoculation program compared to any other international nation.
Our hypothetical suggests that we can reach 60% of 2019 attendance levels by the end of 2021 and returned to 100% by the end of 2022.
Please remember these points for your modeling.
We believe we can essentially maintained our current.
Observatory operating cost structure.
And achieve up to 60% of our 2019 attendance.
With more distant and international inbound tourists, we will see growth from lower margin passes an online travel agent tourists in the future.
As inbound tourism mixes with our current local and regional customers and that will lower our per caps.
Our ESG leadership continues.
I encourage all stakeholders to read our first ever annual sustainability report that highlights our leadership accomplishments and certifications in this area.
And that also can give you a clear understanding that we are well positioned for where the puck will be in the future on issues of energy efficiency healthy buildings and indoor environmental quality.
Our sustainability report can be found at Empire State Realty Trust Dotcom.
Again.
The full first annual sustainability report can be found at Empire State Realty Trust Dot com.
In January we announced that our portfolio is now 100% powered by renewable wind energy.
This action builds on our earlier success with the Empire State building, which has been 100% renewable powered for a decade.
In April we were awarded the energy Star partner of the year designation.
In recognition of our contributions and leadership in the fight against climate change.
I am pleased to say that we are currently 76%.
Energy Star certified by the number of square feet in our portfolio.
That said our first annual sustainability report covers many more issues, many more certifications and many more facts and.
And I hope that you will view it online.
New developments as of just last week we.
We joined New York State and the New York State Energy Research Development Authority and a commitment to the Empire building challenge, a 50 million dollar state initiatives to accelerate progress towards a reduction of 85% of greenhouse gas emissions state wide by 2050.
Our prior work at the Empire State building, which we have extended throughout our entire portfolio over the past decade provided us with knowledge of what is possible in a skill set on how to execute we believe these commitments to a carbon free future will offer us a competitive edge in a tenant driven marketplace that increasingly focuses on.
On ESG and how they're occupied spaces can help them achieve their corporate goals.
As I have said I am confident and I am a realist.
We are still in a time of uncertainty.
I have said and still believe we will not hit the bottom of the market until the end of the first quarter of 2022.
Through the noise, we hear the sound of real companies that now approach real space needs with clarity and vision of how they want to use offices for their teams to work and grow together.
We will have uncertainty in the press about return to the workplace large amounts of sublease space on the market and.
And challenges with leasing and the reestablishment of New York City is a great World capital. It is.
I believe ESR T is well positioned in 2021, with our well priced and competitive product opt.
Operational prowess.
Flexible balance sheet.
Focus on prudent capital allocation and leadership in ESG.
I believe that ESR T is well positioned to thrive and deliver long term shareholder value.
And now folks Tom <unk>.
Thanks, Tony and good afternoon, everyone.
In the first quarter, we signed 26, new and renewal leases totaling approximately 172000 square feet.
On included approximately 44 143000 square feet in our Manhattan office properties too.
28000 square feet in our Greater New York Metropolitan Office properties, and 1000 square feet on a retail portfolio.
Significant leases signed in the quarter were a 33100 square foot expansion on office lease with Burlington stores at 1400 Broadway will now occupy approximately 68300 square feet.
A 31400 square foot, new office lease with us and tell US pharmaceuticals at 13 to 15 on Broadway that walked by space to be vacated by Li <unk> Fung later this year.
And a 30600 square foot new office lease with a law firm at one Grand Central place.
Our mark to market results are always driven by the escalated rents of leases that have expired and.
In todays market, we will focus on retention of tenants and that May result in reduction of rents on a mark to market basis on renewals that said.
During the first quarter rental rates on new leases signed out on Manhattan office properties increased by a healthy 14, 7% on a cash basis.
Paired to the prior escalated rents spa.
Spreads on renewal leases at our Manhattan Office properties were down 11, 6% on 32000 square feet and 10 deals new and renewal office leases across our entire portfolio were up six 8%.
We estimate net effective rents in our portfolio today versus pre COVID-19 levels have declined 10% to 15% on a comparable space basis.
Net effective rent is a combination of base rent free rent.
<unk> of lease term and tenant work all of which vary by deal it depends on the space on condition location tenant credit and other factors.
Our total portfolio lease percentage is 88, 7% unchanged from last quarter occupancy of 85% was down 90 basis points from the prior quarter due to anticipated tenant move outs and for the balance of 2021, we anticipate tenant move outs of 300000.
300000 square feet, which will be offset by some leases that we anticipate will commence before year end of 305000 square feet.
Please refer to the tables on pages, six and 10 in our supplemental.
We have seen a noticeable increase in tour volume during the past six weeks in our Manhattan office portfolio to about two thirds of pre COVID-19 levels.
While the recent increase is a positive sign that some tenants are beginning to reengage the lease transactions that come from these tours will likely appear in the second half of the year.
Healthy buildings and indoor environmental quality remains front of mind for all four nearly all tenants and has the most asked about topic before and during space tours.
We reduced property operating expenses by $11 million in the first quarter of 2021 compared to the prior year period, and a cumulative total of $50 million since the pandemic onset.
We achieved these cost savings without reduction of services to our tenants and after the cost of implementing new health and safety protocols.
Previously mentioned most of the cost reductions were primarily driven by low building utilization.
However, we continue to focus on ways in which we can change our processes and reduce expenses beyond savings driven by lower occupancy.
Keep in mind that a portion of the reduction in operating expenses will be offset by a reduction in tenant expense recoveries from existing leases.
And looking ahead to the second half of 2021 with a greater increase in vaccination distribution and a return to the office.
We expect a gradual increase in operating expense levels.
In summary, we had a good leasing quarter that included expansions of existing tenants and the addition of new tenants to the portfolio, our industry leadership and experience in indoor environmental quality and sustainability enhances our ability to attract and retain quality tenants and we continue to manage.
Property operating expenses tightly with a cumulative production of $50 million since the pandemic onset.
Now I'll turn the call over to Kristina Kristina.
Thanks, Tom for the first quarter, we reported core F on a $41 million or 15 cents per diluted share.
Same store property operations, if you exclude onetime lease termination fees and observatory results from their respective period, you'll need a 3% cash NOI increase from the first quarter of 2020.
This increase was primarily driven by lower property operating expenses, partially offset by lower revenue as compared to the prior year period, driven by receivable write off and increased vacancy.
Our rent collections remain stable at 94% of first quarter 2021, total billing with 96% for office tenants and 86% for retail tenants.
The company recorded a noncash reduction of straight line balance of the airplane 6 million and wrote off the airplane 5 million of tenant receivables assessed as uncollectible during the first quarter of 2021.
Switching to Observatory result Observatory revenue for the first quarter of 2021 with $2 6 million and that included <unk> 1 million of deferred revenue from unused ticket and earn income from our tour and travel partners.
<unk> expenses were $4 6 million in the first quarter of 2021, which is our seasonally lightest quarter and we continue to expect run rate expenses to be approximately $6 million to $7 million per quarter for the balance of 2021, depending upon the pace of visitor on.
Turning to our balance sheet as of March 31st 2021, The company had $1 4 billion of liquidity, which is comprised of 567 million of cash on 850 million of Undrawn capacity on our new revolving credit facility entered into at the end of the quarter.
This facility has an initial maturity of March 2025, and has two six month extension option and its sustainability linked green pricing mechanisms that reduces the borrowing spread at certain benchmarks are achieved each year.
The company had total debt outstanding of approximately $2 $2 billion on a gross basis and one 6 billion on a net basis at March 31st 2021, the core.
Company's total debt has a weighted average interest rate of three 9% and a weighted average term to maturity of seven nine years.
A while later maturity schedule on with no outstanding debt maturity until November 2024.
Our net debt to total market capitalization was 32, 6% and net debt to adjusted EBITDA with six and a half time.
Year to date through April 27, 2021, the company repurchased three and a half million dollars of common stock at an average price of $9 from 22 cents per share. This brings the cumulative total since the stock repurchase program began on March 5th 2020 from April 27 2021.
On the 147 $2 million at an average price of $8.34 per share.
Our balance sheet flexibility provides us with an operating runway to engage selectively in share buybacks and evaluate opportunities to deploy capital for external growth.
Our investment team continues to underwrite office retail and multifamily opportunities actively as we have emphasized we will prudently deploy capital when an opportunity presents itself.
Looking ahead, there are a few items to touch upon free of modeling from theory, we reduced property operating expenses by roughly $11 million in the first quarter of 2021 on a year over year basis, driven primarily by Ricky.
The company expects operating operating expenses.
Second quarter of 2020, one will approximate our current levels based on continued low building utilization relative to <unk>.
19 level.
Also the company expects annual G&A to be approximately 58 novel.
And now we will turn it over to the operator for Q&A.
Thank you.
At this time I would like to take any questions. You may have as a reminder, if you would like to ask a question over the phone. Please press Star then one on your telephone keypad.
From Asia tolerant Kate your line is on the questions here.
You may price start to if he would like to remove your question from the queue.
The first question comes from Steve Chocolate Evercore ISI.
Thanks, Good afternoon.
Was hoping that maybe Tom could speak a little bit more about the demand and I guess, specifically just sort of thinking about how tenants are looking at density as theyre looking for new space and for the deals that you said you got an increase in activity or those for just kind of reloads are they new deals are they expansions downsizings just a little color.
There would be helpful.
Okay.
On monthly.
On to about two thirds of our pre COVID-19 pace for space tours.
So any of these showings that lease proposals will likely occur in the second half of the year, but it's a really good sign that tenants have re engaged in the market.
<unk> IQ indoor environmental quality on healthy buildings remains the primary focus by most tenants and it's often a gating issue before tours are scheduled and it's certainly the most frequently asked.
Topic during tours and of course, we encourage everybody to look at our inaugural sustainability report on our website.
I'd say about half the proposals on new activity that we see right now are represent tenants that are growing and the other half are our lateral moves, but if you look at.
This quarter, we're pleased with the expansion lease we do with Burlington.
And the new leases was intolerant belkin these represent growth by tenants, who committed to long term leases in the middle of the pandemic.
On space on.
Spaces, we haven't really seen any change or significant change in what tenants are designing this as an awful there's an awful lot of talk or discussion on the topic, but I would say we've seen some slightly less dense furniture layouts, although pre COVID-19. Many of our tenants were focused on employee productivity and really.
Rarely occupied space to their maximum density we've seen some increase in phone rooms breakout rooms. Some additional office is being added but that that that does not mean that there is a conversion to all.
All built offices. So overall, we had a really good quarter 172000 square feet hub.
Leases are done.
And you know I think that.
We're seeing a mix of tenancy in legal Tech financial services government media. So it's a good mix of tenants that we're saying.
Okay. Thanks, I guess second question I guess, Tony in your comments as well as in the press release, you sort of talked about a real step up in your activity levels looking at transactions.
So notice the share buyback.
Volume was was.
Rather de Minimis this quarter I don't know if those two are tied together, but could you maybe speak a little bit more about.
On the types of deals that you're seeing if it's more distress or.
Just the fact that the markets are getting better on the debt markets are open net more product is coming to market.
Sure. Thanks, Steve.
Ms busy that means our new team and our seasoned players like <unk> and US property team and John Hagen is S. P N a team.
And we're looking at are at a broad variety of.
Of situations, our focus remains New York City office retail and multifamily.
We are.
In conversation with families many of whom were.
We're not so interested in talking about transactions four or five years ago, who are more interested now.
We've seen widely marketed transactions, we've seen off market transactions.
M&A, we spend time on at all.
At the same time I want to make sure that we're not distracted by this you know bright shiny penny topic. If you will when we have something we will let you know when we will give a rationale.
As far as the.
On the source and motivation of the transactions that we see I would say quite similar to the leasing things just have begun to move.
There is a little bit less of shall we say the squirrel that hunkered down in the middle of the road not knowing to which way to go.
We're actually in a process in which people have begun to make moves come out of their shells recognize things. They have to do recognize things they would like to do so I think it's all kinds of different.
Motivations and I think we will begin over the next few months to see price discovery.
Come out on.
Different assets as more deals are announced and we will see more folks come to grips with are they on a good position with a good runway or do they need help.
And maybe just as one follow up there Tony does the potential for cap gains tax or the elimination of 10 30 ones kind of accelerate some of that activity or you don't think either of those have a kind of a big driving factor in transaction volume.
Look I think it is.
Highly conjectural at this point.
We don't see anything that really evidence is there I think the only thing about which we feel reasonably confident with regard to the tax situation is that the by the administration on the like taxes to go higher that there is a dialectic and Congress.
And that the Democratic majority in the house is not large and therefore.
In order to get any package passed there is a contingent a growing contingent of members of the happiness house of Representatives.
They will not approve anything without.
The removal of the cap on state and local tax deduction.
And while we think it's hard to predict the outcome of any potential decision any decision that lessens the burden on high income earners.
In our region is very positive.
Great. Thanks, that's it from me.
Thank you. Our next question comes from the line of Manny Korchman with Citi. Please proceed with your questions.
Hey, Tony.
You've spoken about this <unk> 'twenty to date, a couple of times now and.
You call it the bottom, but I guess what is the path to the bottom look like is that can be an increase in vacancy or sublease spaces that can be rent, they're paying us that can be tenants, leaving the market.
You know others have maybe on.
<unk> been sort of more on the type of where we're seeing the bottom because activities offer lease leasing activities up our tours were up but you're saying that we have to wait a year to see sort of.
When the bottom head. So so what is the path to that look like.
I think that what we see right now Manny.
Thanks for the question <unk>.
Uneven.
Starting points of data I wouldn't say that it lays the foundation at this point for a this is where we are but.
What we've seen in prior periods as far more space gets put on the sublet market than has ever sublet.
Far more space as discussed to be shed than has ever shed.
We also see at a time like this where things are not necessarily restarted entirely lot of folks will try to generate business with big incentives big breaks and rent brokers will go out with.
Initial proposals, which are radically low and.
And I think that we don't.
The intervening period upcoming expect to see a lot of what really sets.
The base, we will see some halting commencement will get price discovery will get real demand discovery.
So I think a lot of people don't know what's going on until they come back to the office.
I would say that a big component.
I'm sorry, if this goes off of your question, but I think it's something which needs to be addressed for everybody.
With regard to this whole future of work.
Is that the conversation has really turned the conversation has turned about.
The return to <unk>.
On the basis that the world has started to reopen.
And companies now recognize the difficulties with regard to culture team competition posed not just by work from home, but from the proposed hybrid.
Or does this discussed hybrid future.
It's in the New York Times Wall Street Journal Economist, New York Post the problems caused by this theoretical hybrid future.
So I think that we understand there are a lot of motivations exhaustion disconnections appear to take a day off you want to be in the office.
There are a lot of things, which are occurring which.
Which build back into clarity on what peoples uses will be on I think.
Many of that that will build on that base the foundation as we move forward.
So I think that's where the puck will be and I really don't think we have a clear vision of that where we don't get any more bad news.
Until the end of the first quarter of 'twenty two directionally things are greatly improved and I think we will continue to see them approved I think that.
A lot of reporters will have to learn how to write something which isn't negative.
Great. Thanks, Tony.
And maybe you sort of touched on this a little bit on in speeds.
In response to Steve's question, but when you see your teams are busy as its ever been over the last three months compared to the entire history of the company is that.
Looking under more rocks is that you've had more inbounds are more receptivity to our inquiries or offers you've made is that the net is now just wider.
So what are the levers that you pull to bring in so much more.
Activity or volume or work.
I would say, it's three things the first answer is E. All of the above.
So and every Avenue.
And I go there there are multiple families who have come back to to us to discuss issues that they've got that need resolution. They won't all lead to transactions, but people are assessing their situation more actively people assess their situations proactively.
Number two.
I do believe.
That we have.
<unk> spent a fair amount of very productive time, working with our board and.
And our Finance committee, so that we got a good process in place.
And the final piece is we got a full team now and we're underwriting and analyzing a lot of different situations looking at all the different structures, we can put together to make us competitive.
And we weigh it against our allocation of capital on how we use it. So hopefully that's helpful to you, but it's really coming from all angles and it's the fact that we're getting back into an expansion mode, where candidly we haven't been as a public company and we are quite pleased with that.
Thanks, Tony.
Thank you. Our next question is coming from the line of Blaine Heck with Wells Fargo. Please proceed with your question.
Great. Thanks, Good afternoon, just a follow up on that Tony and I know you don't want to focus too much on transactions until you get something done, but yeah, Kristina both mentioned that Youre looking at office retail and multifamily opportunities.
Number one are there more opportunities in any one property type than another and then number two I guess you know you guys have experienced as a company and in on.
In retail, but multifamily would be a different product I guess, how do you. How do you think about your ability to compete in that space, how do your skills in office and retail translate to acquiring and operating multifamily.
Is it just more of a matter of some of the product you are looking at has a multifamily component or are you actually looking at true multifamily.
So I think I'd, rather just focus on I'll focus on the last part of your question because the first part I think is.
Pretty much straightforward in my prior response on.
The multifamily piece.
We've done a lot of multifamily historically and outside of the REIT.
My family still owns thousands of apartment properties not in the New York area. That's part one they werent included in the rate because they weren't in New York.
State region.
Number one number two.
We developed multifamily for sale in New York City before the Corinthian the Alexandria.
We have turned around assets before.
Who remembers that what was known as the the Grand Palais and became the Mondrian.
The team that made that redo.
Redo of that failed condo, so we've done New York City multifamily before and some.
Members of our team who were involved in that and underwriting on that the property side. The <unk> side. They are still here. So we believe we've got good experience in that area and we.
We find it interesting as potential.
Additional wheel on our on our tricycle.
Okay. That's helpful.
And then just shifting to the balance sheet.
Obviously have an end.
Enviable liquidity position.
But leverage has been creeping up a little bit over the past several quarters. Kristina can you just talk a little bit about where you guys are comfortable on a debt to EBITDA basis. I think you were at six five times now on a net basis.
Are you running into any constraints on the share repurchase or potential investment side or not quite yet.
Yeah, no not feeling constrained, we're happy with our liquidity position alright, that's over $550 million of cash on 850 on our new line, which has been now.
Now has a maturity in 2025, so we feel good about that in addition, we have no debt deal.
Until 2024 in November so we feel very good about the flexibility that we have in terms of net debt to EBITDA I think I've answered this.
This question before which is we don't really look at the exact Max level. It's really about how you are able to access further on liquidity. The company has always had a relatively conservative stance on our balance sheet. We will continue to manage that responsibly, but the increase in net debt to EBITDA is largely driven by observatory revenue is coming down.
On a net quarter, we're now capturing the full impact of COVID-19 right between <unk> and <unk> of 2020.
<unk> seen a ramp up on managing expenses really low so we feel very comfortable at these levels not constrained, but we will continue to manage the balance sheet prudently.
I'd just like to add to Christine's comment the comment we've made before people may forget I know you folks on this call. It a lot of different calls of which to keep track over the over this over today and over the quarters, but we are prepared to take our leverage up.
And we're also prepared.
At the right time.
To issue more equity.
Whereas we're also prepared to recognize that there's a virtuous cycle in which we may find ourselves when we commence growth.
And we're also cognizant of the fact that we have bought a lot of stock back at a price which is below where we currently trade in at some point, we could re issue that stock at a higher price.
And both make a game on behalf of our investors and increase our liquidity. So we really feel that we have all of the arrows in the quiver that we might like to have we feel a very good spot very well positioned at this point. If there were one thought that I think we would want to communicate here is we feel very well positioned right now we feel comfortable.
We're working very very hard it's not the place where we'd like to be we feel very well positioned for the future.
Very helpful. Thank you.
Thank you. Our next question is coming from the line of Craig Mailman with Keybanc capital markets. Please proceed with your question.
Thanks, everyone, maybe I'll circle back to Tom in your commentary on the leasing front, obviously the pickup in tours is a good kind of future indicator here, but I'm just kind of curious.
You guys. Your portfolio is always kind of served as a.
A little bit of a value relative to traditional midtown or newer Midtown office buildings typically in these situations you see a little bit of a trade up.
Of space among tenants I'm, just kind of curious.
Number one has your.
The kind of the demo of the tenants kind of shifted at all at all versus what you've seen in the past and do you think because we are hearing from everyone that tours are increasing.
How much of a.
Overlap do you think you guys are having relative to other portfolios where maybe the.
The net pool of tenants is it necessarily increasing its just youre seeing everyone is seeing the same ones over and over again.
Sure. So I would point to the fact that Zehntel us.
And.
As in Tolleson Burlington were gross right.
And committed to long term leases and so we are seeing growth in the market probably half of our proposals.
On that are active right now represent tenants that are growing both <unk> and belk and the law from the move to one Grand Central place those where trade ups.
They've moved up to our property from what I'd call inferior inferior property and so what did they see they saw.
What we offer which is well located property next to mass transit and fully redeveloped modernized buildings.
With with our tenant spaces that will be built.
In compliance with our state of the art industry, leading standards for healthy buildings are EQ and energy efficiency.
Including active bipolar ionization, Merv 13, and <unk> $62 one standards so the.
That was an example, those are examples of tennis trading up in the market to come to our properties and so we believe we still offer a great value proposition for the reasons I. Just stated we're at an affordable price point, we're well located near mass transit and we're offering we offer fully modernized buildings and newly built tenant spaces and of course, 95% of our.
Portfolio has been redeveloped.
And we have.
270000 square feet of pre built space, that's built and ready to go and what's interesting we have seen healthy pickup in activity and interest both from proposals on tours for our prebuilt suites, which in the fourth quarter.
It was fairly slow in terms of the.
The level of proposals were exchanged and we've seen a big pickup this quarter now I would caution a lot of that activity.
It will translate into activity in the second half of the year.
Great. Thanks for the color and then.
Maybe I'll go with this on for Tom or Christina, but you guys the $11 million reduction in Opex in the first quarter.
A strong and I know you guys a lot from some of that is due to lower utilization, but as we think about going forward how much of that $11 million is kind of permanent and as people come back can you guys can materially improve the NOI margins.
Kind of a stabilized point versus maybe historic levels.
So first I'd say that.
Echoing what Tony Carr.
Comments that he made in his opening remarks that we are.
Actively looking at ways to improve our operational efficiency. So that we can lock in permanent savings.
The reductions made to date represent aggressively managing our.
Our expenses.
Certainly the bulk of it was due to reduced physical occupancy is related to COVID-19, but we have completed our redevelopment work, which allows us to reduce permanently certain expenses and certainly keep a cap on the growth in expenses as we get into next year. So we do expect to lock in a portion of those we haven't given.
On a specific number but I think that was well.
Our best Mark will be 2019, which which are last year, a four building utilization.
I think that we're going to we're going to see some some improvement off of those off of those numbers.
Great. Thanks, guys.
Thank you our next questions come from the line of Jamie Feldman with Bank of America Merrill Lynch. Please proceed with your questions.
Great. Thank you and good afternoon.
I was hoping you could talk a little bit about the smallest tenant leasing activity versus larger.
You were able to keep your percent lease flat, which is impressive it looks like you had a couple of buildings that had occupancy dip a little bit just curious if theres any kind of read throughs for small tenants versus larger tenants based on what youre seeing.
Yeah.
Sure.
So Jamie.
The increase or the increase in Victoria, a decrease in occupancy that you noted from the prior quarter was really due to known tenant move outs, which we had communicated last quarter. The most significant was the termination of a full floor tenant for 40000 square feet, which we have already re leased to two clear view, which we announced last quarter who is.
Lease will commence by the end of this year. The most important thing is that our forecast of 300000 square feet of tenant Vacates in 2021 has not changed significantly from prior forecast and we have 305000 square feet of signed leases that we expect will commence by year end. So I think from an occupancy.
Z standpoint, we're in very good shape on the small tenant activity as I just mentioned we've seen.
A big pickup in activity and level of interest both on tours and proposals being exchanged.
For our smaller suites that are fully built.
Fully built to comply with our standards for <unk> and sustainability, we offer turnkey sweeps that means before price increase will offer the suite fully furnished fully wired and provide move coordination comparing to where we were last quarter I'd say, we're probably about three quarters or 80%.
Our pre COVID-19 level, which represents a big increase from from last quarter.
Okay. Thank you and then you had said you think net effect as youre down about 10% to 15% can you break that out by face rents and concessions and free rent.
Okay.
Well first I would say that.
Our.
We deal is unique and really depends on the space condition the location the tenant credit.
Other factors for example, the Burlington expansion Zen Tolleson Belkin leases were all turnkey deals with leases that range from 11 to 16 years generally theres been more negotiation around concessions, but one of those deals.
We gave maybe a rent is kind of two to $3 per square foot compared to pre COVID-19 levels combined with three to four months of additional rent and a few dollars more on ti, whereas the others. We held <unk> flat and gave more on concession. So it's really a mixed bag and it depends on the.
The individual deal and the negotiation I would point out that our average lease cost per lease year for this quarter for Ti and commissions was about just under $95 per square foot, which is right in line with our leasing cost for all of 2019 and of course, we got a weighted average lease term this quarter of 10 years.
It compares favorably with the last two to three quarters.
Okay. Thank you.
And then I guess.
I know you've talked a lot about the investment activity, but just to be clear are you would you consider assets outside of New York city or entity level transactions.
If they did have assets outside of New York City.
We are.
Thanks for that Jamie we are.
I'm never a soccer tuna force have used that word before our focus is.
Manhattan, and the Greater New York Metropolitan area.
In order to grow the business, we need to look at all types of transactions I would just say that.
Okay is there it's funny because I was going to use the same words, but I do you want on taken out of your mouth, you've been using it for a long time.
I mean is there a regional limits.
Would you look at national stuff or west of the Mississippi River or not necessarily [laughter] gosh, I mean, I didn't know that the world existed west of the Hudson River. There is there something else out there.
I think well.
<unk> aside.
Okay.
The last thing we want to do is generate speculation I think as prudent.
Fiduciary as to our stakeholders as prudent investors, we really need to look at all things, which are that that could be logical and in how we allocate our capital we look forward to.
Have some day to talk about other than speculation will be much more talkative as and when we do.
Okay. Thanks for that.
And just some thoughts on the suburbs net portfolio it looks like it's been.
Relatively flattish on the on the percent occupied side I think you had a little bit of a dip at 10 Bank Street.
Just any would you say theres been any pick up or it's been pretty flat.
Well, Jamie remember, we have a 63000 square feet with Berkley insurance that will commence later this year and that comes on the heels of a fairly large.
Earlier move out by a tenant at Metro Center, So that will help our occupancy numbers, we have seen a pickup in tours.
Like in Manhattan.
And that pickup since the start of the year.
Brings us to tour volume today at about.
So we thought about pre COVID-19 levels, which I think is a positive sign.
So I think that that's going to translate into activity in the second half of the year. So.
It is a bit bit early on that downtown White plains generally performing good downtown CBD. Stanford is is where we see a good amount of tour activity up in Norwalk, I'd say, it's slower, but we are exchanging proposals with some fairly large China six where you have a large block of.
About 80 to 90000 square feet it on.
Property.
And so so we will see you at that.
Translates into real activity late on this later in the year.
Okay. I mean is there anything in behavior during the pandemic that would make you want to grow transit oriented.
Suburban.
We like our portfolio, we like our portfolio. We think we're very well located next to mass transit we did.
Recently complete upgrade of <unk>.
All of our common areas, including gyms dining coffee lounge Congresses lobbies and outdoor areas, we've got a little bit more work to do at Metro Center, but property share really well.
And I think we're focused on leasing up our vacant space there.
I would I would put it this way I think it's important to note.
You didn't ask is have we seen a big flow of tenants and that tour group.
Out of New York City, and the answer is no we haven't.
A handful.
And some leases done smaller leases under 10000 square feet, but on which we've reported right.
Okay, alright, thanks for all that on the color.
Yes.
Thank you alright, as a reminder.
Sorry, if anyone would like to ask a question. Please press star one on your telephone keypad.
There being no further questions, we're going to flow will finish up here, we have one way of.
We have no further questions. So what we will do is we will go to one last comment and then get your all tier one o'clock.
I do again want to complement our great team without them SRT is nothing.
Number one number two please do review our sustainability report.
We don't do it today, but do it when you've got a moment it really will show you what's more than the 100% of renewable wind energy, what's more than healthy buildings, you got to see where the puck will be when you read our <unk>.
First annual sustainability report.
And finally, we want to make sure that you understand that our forward looking statements on plans to ramp up the observatory on returned to business are for discussion purposes, only and to help you with your models, they're not guidance nor are there guarantees and we look forward to a chance to meet with you. Many at the upcoming NAREIT conference virtual and we look forward to seeing you all returned to office returned to here.
We're healthy were vaccinated and we're in a very very.
Safe place to come and visit so say Hello, we look forward to seeing in person. Thanks much.
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