Q3 2021 Empire State Realty Trust Inc Earnings Call
Greetings and welcome to Empire State Realty Trust third quarter 2021 earnings call. At this time, all participants are in a listen only mode.
And then answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce Tom Keltner Executive Vice President and General Counsel. Thank you you may begin.
Good afternoon. Thank you for joining us today for Empire State Realty Trust's third quarter 2021 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 was posted in the investors section of the company's website at ESR T REIT dotcom.
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 expense and proposed transactions and events.
As a reminder, forward looking statements represent managements current estimates that 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 in the future. We encourage listeners to review the more detailed discussions related to these forward looking statements in the company's filings with the 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 that COVID-19 pandemic and are unique to this instruction, we do not expect to maintain the same level of disclosure when we resume normal business operations.
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During today's call, we will discuss certain non-GAAP financial measures such as <unk> modified and core F. F O N O Y cash NOI and EBITDA, which we believe are meaningful when 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.
Finally, as a special note.
Last night, we filed an 8-K to announce our conditional agreements for the purchase of two multifamily assets in Manhattan.
625 residential units for a total purchase price of $307 million.
We consider it worthy of an 8-K because this is the first acquisition by E. S. R T. Since our option properties in 2014.
It is a new asset class within New York City.
And our external growth has been a significant focus within the investment community.
Our 8-K disclose the key elements of asset type.
So location and price.
Additional detail is not currently permitted under the sellers confidentiality requirements.
After the acquisitions close we will provide more detail.
For now we want to be clear that this is a voluntary filing for the reasons mentioned.
And in the future, we would not expect to announce acquisitions absent special circumstances involving asset class geography or size.
Now I will turn the call over to Tony Malkin, Chairman, President and Chief Executive Officer.
Thanks, Tom and good afternoon to everyone.
This is a super busy time for ESR team I have a lot to discuss so please bear with me.
New York city's recovery is slowly and steadily underway schools reopened trains and subways more crowded and there was traffic apartment occupancies have increased and rents are back to and beyond in many instances 2019 levels.
Restaurants, and entertainment attractions are open and busy.
Try to get a reservation on the Wednesday through Saturday night or for Sunday, brunch and be prepared for disappointment.
Harold Square Times square Soho, all busy again.
Even the New York times, which is for more than a year practice and apparent editorial policy Abashed, New York City at every opportunity.
And the article on Sunday titled Quote to get ahead at work lawyers find it actually helps to actually be at work.
The article goes on to say and I quote.
Amid the ranks of 20 and 30, some things is a large and growing group of employees, who for reasons part careerist in part emotional increasingly crave the office as well.
Nearly two thirds of millennials expressed concern about a lack of connection with colleagues more than any other age group closed quotes.
Building utilization had a delta variant depth.
And now has continued to pick up to around 30% for our Manhattan office portfolio and 51% for our Greater New York office portfolio of comparable.
2019 numbers to be clear, our pandemic law was below 3%.
People have begun to recognize that work community matters learning teamwork performance reviews promotion are incredibly hard if not impossible for most execute remotely.
Socialization matters and the absence of it.
The comp the concepts of quote hybrid unquote and quote flexibility unquote will carry different meaning for different companies. It is not one size fits all I still believe the office industry in New York City will not move fully to our front foot.
And the storyline in the press will not change until after the first quarter of 2022.
Tom to rails will discuss we see the return of activity on long term leases as tenants contemplate their future space needs post COVID-19, a sizable amount of our current activity is related to expansion of current tenants excellent tenants. We continue to attract great companies, who see us as long term partners and their real estate needs and with rare exception.
We want to grow with us.
Our properties continue to benefit from the flight to quality trend spoken up broadly in the market and we see it and leasing activity underway and our results.
ESR T is well positioned our assets are excellently located for commutation modernized for the 21st century.
Industry leaders in energy efficiency and indoor environmental quality.
And available at prices, which range from the high Fifty's to the mid Seventy's per square foot based on current asking rents, we make modernized buildings I E U and energy efficiency accessible to the thousands of tenants to whom these are driving factors and decisions and whose class.
Hey options and class B options, largely fall short and therefore do not match, our comprehensive suite of monitored and verified base building and tenant standards for energy efficiency healthy buildings and sustainability.
Even if they can afford or want to pay triple digit rents for brand new buildings.
Our I E Q certified prebuilt with full indoor environmental quality suite of Merv 13 filters fresh ventilation and active bipolar ionization leased very well.
We also can accommodate full and multiple floor requirements.
This price accessibility to energy efficient healthy sustainable spaces for a wide range of businesses not just those that pay.
Ripple digit rents as part of the flight to quality movement importantly, we attract and sign leases with tenants who are attracted to these qualities.
We are happy to share ESR Tees, just announced results in our second year of grasp.
Submission and scoring ESR T achieved the highest possible grasp five star rating for the second consecutive year.
Perhaps most importantly, our actual score was 94 six point increase from our first year of participation in 2020 and that is the second highest score within our peer group nationally.
Additionally, we received a score of 96 and an a rating and the public disclosure assessment, which measures ESG disclosure activities for the second year in a row.
Our industry leadership in energy efficiency sustainability, and I E. You continue to set the industry standard while we show annual improvement we look forward to our second annual sustainability report publication in spring 2000.
'twenty two.
Shifting to our observatory operations as announced on October 15th the U S will reopen its border to fully vaccinated international tourists effective November 8th early indications from our tour and travel partners, who serve this market indicate an uptick in sales post. This announcement, we are very happy that.
We have reached this point and look forward to a restoration of international visitors to the E. S. P Observatory.
Our visits continue to improve along with our revenue per caps.
Observatory NOI was $6 $4 million for the third quarter 2021, which is the second consecutive quarter of positive NOI since the onset of the COVID-19, pandemic and more than double the second quarter 2021 earnings contribution the growth in NOI illustrates.
The progression from the closure period in.
<unk> 2020.
Through the steady ramp up over the past year.
Visitation has been primarily driven by domestically sourced travel.
At this retail onsite and the website sales.
Customer satisfaction is at high levels, driven by our time ticketing reservation system that enables us to manage volume in peak periods, our immersive museum quality exhibits at our focus on safety with top of the line indoor environmental quality, including Merv 13 filters that are <unk>.
Asian and active bipolar ionization.
Visitors to New York City, both domestic and international want to visit this iconic and authentic destination and are willing to pay for the distinctive experience we offer.
Third quarter attendance was that approximately 24% of 2019 comparable attendance of continued improvement.
From 2020 on the prior quarter.
We registered strong July and early August visitation attendance for the second half.
Half of the third quarter was impacted by a resurgence delta variant and sustained U S border closure to international tourists, we have no new hypothetical admissions forecast.
Our last was in our September 21st Investor presentation update.
Month to date through October 26th attendance was up 24% of 2019 comparable period attendance above our revised hypothetical October admissions forecast of 20%.
Alright medical admissions forecast suggests that we can reached 60% of 2019 attendance levels by the end of 2021 and returned to 100% by the end of 2022.
Remember two points for your modeling one.
We believe we can maintain our current observatory operating cost structure up to approximately 60% of our 2019 attendance.
We will continue.
To manage tightly expenses, given the gradual pace of ramp up.
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How we have tweaked, our operating hours and staffing accordingly.
Second point.
With more international inbound tourists, we should see lower revenue caps.
Growth from our lower margin passes an online travel agent tourists visitors.
A quick note on competition.
The pass program data. We have received indicate we are the number one redeemed observatory by an increased margin over number to.
Cannibalization of the second visit market is underway.
And we will increase with the summit's opening this past this past week.
We believe there is a large enough market for multiple attractions to do well.
We remain the only authentic iconic attraction.
Amongst all the observatories in New York City.
We have demonstrated repeatedly over time, our ability to compete with other observatories, including top of the rock one World Trade Center and the edge opened.
We remain the only office building in the World to which you can address a letter from anywhere in the world with only Empire state building and be certain of its delivery.
We continue to operate competitively and nurture and invest in our iconic brand to command our leading position.
We are confident in our continued ability to do so.
We can't finish these discussions without a word on the recently announced purchase of the edge by KKR.
While we are not in a position to share insight information on this transaction what we can share from publicly available information is very positive for E. S. R T and our Juul E S B Observatory.
A smart sophisticated institutional buyer stepped up and bought ahead of the full recovery of tourism.
<unk> economic interest subject to our management agreement.
There was debt in place on the edge at the time of the acquisition.
The projections the summit shared and materials that had been disseminated broadly enough for us to see them.
<unk>, a lower visitor volume at lower per caps that E. S. B as historic attendance and current pricing.
As to the edge or analysis based on the number of elevators loading time and elevator speed indicate we have an hourly capacity roughly 50% greater.
Our takeaway on this is that this sale coupled with a very strong level of financing proceeds attained by one Vanderbilt also during the lull in tourist visits showed.
Show these are valuable assets.
Which attract institutional interest and that these are price discovery transactions.
Not fully priced.
We feel very encouraged that our higher capacity and our newly Redeveloped authentic iconic New York City with record per cap revenues since we reopened by reservation only should be valued at a significant premium to all these alternative transactions.
We also feel very confident that our brand and our position remains unparalleled and stronger than it has ever been.
Turning to external growth as Tom Keltner noted, we filed an 8-K regarding potential acquisitions.
Additional detail is not currently permitted under the sellers confidentiality requirements.
After the acquisitions close we will provide more detail.
The transaction is consistent with our previously stated focus on New York City office retail and multifamily assets.
We like the multifamily asset class and have a long institutional history of experience in multifamily assets by our predecessor entities.
And via Malkin Holdings.
There is remaining work to do before we close and at that time, we will be prepared to provide more comment in the interim our investment team continues actively to underwrite new office retail and multifamily acquisition opportunities and we remain well positioned with our flexible balance sheet as we continue to seek ways to deploy our capital through.
Disciplined external growth opportunities.
Yes, our T as a well honed operational skill set.
<unk> balance sheet disciplined track record of capital allocation and.
And ESG leadership position all to deliver long term shareholder value.
The team works, well and hard as we press forward.
Now I will turn it over to Tom <unk>.
Hey, Thanks, Tony and good afternoon, everyone in.
In the third quarter, we signed 34, new and renewal leases totaling approximately 268000 square feet that included 212000 square feet in our Manhattan Office properties 52000 square feet in our Greater New York Metropolitan Office properties, and 4000 square feet in our retail portfolio.
Major leases signed this quarter include a 29000 square foot expansion lease with I capital network.
One Grand Central place. This is the second expansion by capital, who now occupies 665000 total square feet.
30000 square foot new lease with Argo group insurance at 501 seventh Avenue, and a 29000 square foot new lease with place fly sports, a leading sports marketing and media company at 13 33 Broadway.
We also signed leases for 15 pre built office spaces in Manhattan This quarter.
Our fully modernized for the 21st century portfolio benefits from the flight to quality of which so many speak and right today.
We were first in energy efficiency and monetization, we have been leaders in healthy buildings and indoor environmental quality. The first portfolio in the Americas to be certified by the well health and safety standard.
These are the qualities, which remain front of mind for most tenants who have to look at how the space that they occupy factors into their ESG and CSR goals.
Tenants are focused on their employees return to the office.
Our industry leadership in these areas is widely recognized by the brokerage community and are more than a decade of work in indoor environmental quality and sustainability positions us to provide real estate solutions to a wide range of prospective tenants, who seek a healthy workplace environment.
Our focus on quantitative measures for energy efficiency sustainability, and indoor environmental quality really sets us apart.
Another quantity quantitative measure in which we distinguish ourselves as our pricing.
A range of rents for our great locations with convenient access to mass transit.
Really stands out because to get the benefits of what we offer tennis alternatives are basically all at much higher prices.
We are at the forefront of future proof affordable offices in Manhattan and in this we truly stand out.
Tour volume in the third quarter of 2021 for our Manhattan office portfolio increased by approximately 64% compared to third quarter 2020.
We have seen an improvement in retention rates for our prebuilt relative to 2020 levels and are close to 2019 levels.
Fortunately, we have 289000 square feet of pre built suites, and our Manhattan portfolio that are built and ready for immediate lease up.
We are also in active discussions with high quality tenants and finance health care, Tammy and professional services.
Surfaces for full floor, new renewal and expansion leases.
During the third quarter rental rates on new and renewal leases signed at our Manhattan office properties increased by 1% on a cash basis compared to the prior escalator rents and new and renewal leases across our entire office portfolio were flat.
As previously communicated G. B G filed for chapter 11 bankruptcy protection for its North American operations on July 29, 2021.
Subsequently <unk> filed to reject their leases at 13 33 Broadway for 162000 square feet and at the Empire State building for 191000 square feet and both lease rejections were approved by the bankruptcy court during the third quarter 2021.
Kristina will cover the financial implications shortly but I wanted to share some leasing perspective.
We have automatic or exercised or intermit rights on three sub tenants at least a 133000 square feet at 13, 33 Broadway and.
And we are actively marketing the 220000 square foot balance of <unk> former space most of which is located at the Empire State building.
The large floor plates previously occupied by G. B G. At the Empire State building, we were highly desirable pre COVID-19 remains so today and we feel confident in our ability to release the space.
Our total portfolio leased percentage was 86, 5% down 170 basis points from last quarter and occupancy of 83, 5% was down 170 basis points from the prior quarter, primarily driven by the G. BG lease rejection, partially offset by recent lease commencements.
For the balance of 2021, we anticipate tenant move outs of 122000 square feet, which will be offset by signed the leases that we anticipate will commence before year end of 61000 square feet.
Overall, we have over 355000 square feet of signed leases not yet commenced most of which is due to commence by the end of 2023.
Please refer to the tables on pages, six and 10 in our supplemental.
In summary, we had a solid leasing quarter with 268000 square feet total leases signed.
Our centrally located portfolio with convenient access to mass transit is well positioned fully modernized and has built tenant spaces ready for lease up.
And our industry leadership and experience, an indoor environment to quality and sustainability enhances our ability to attract and retain quality tenants.
Now I'll turn the call over to Kristina Kristina.
Thanks, Tom for the third quarter, we reported core <unk> of $55 million or 20 cents per diluted share.
Same store property operations, if you exclude onetime lease termination fees and observatory results from the respective period yielded a 5.7% cash NOI decreased from the third quarter of 2020.
This decrease was primarily driven by a reduction in revenue due to decreased occupancy three Q 'twenty one revenue from global brands group treated partially as rental revenue and partially at lease termination income and write offs taken over the one year period.
Our rent collections totaled 95% of third quarter 'twenty, one toil belling consistent with recent quarters.
Switching to observatory resolve observatory revenue for the third quarter 2021 was $12 $8 million Observatory expenses were $6 $4 million in the third quarter 2021 and we continue to expect run rate expenses to be approximately $6 million to $7 million for the fourth quarter of 'twenty one.
Depending upon the pace of visitor ramp up.
As Tom noted TPG rejected both leases at 13, 33 Broadway and at the Empire State building, which had the following impact on our result of one $6 million noncash write off and three cube of the straight line rent receivable balance related to G. B chiefly at 13 33 Broadway.
As we had previously announced on last quarter's call.
We drew down in for the balance of GBP $17 million or whatever credit which was applied as follows.
$5 $2 million with applied against <unk> straight line rent receivable balance related to their lease at the Empire State building.
And $1 $7 million was recognized as GAAP rental revenue for the partial period and three Q when the lease remained in place.
And $10 $1 million was recognized as lease termination income.
Turning to our balance sheet as of September 30th 2021 the company had $1 $4 billion of liquidity, which is comprised of $582 million of cash and $850 million of undrawn capacity on our revolving credit facility.
The company had total debt outstanding of approximately $2 $2 billion on a gross basis and $1 $6 billion on a net basis as of September 30th 2021.
Company's total debt has a weighted average interest rate of three 9% and a weighted average term to maturity of seven four years.
We have a well lettered maturity schedule with no outstanding debt maturity until November 2024.
Our net debt to total market capitalization was 34, 7% and net debt to adjusted EBITDA was five six times.
In the third quarter and through October 26, 2021, the company repurchased six $5 million of its common stock at a weighted average price of $10 41 per share.
This brings the cumulative total to date since the stock repurchase program began on March 5th 2000, $20 million to $153.8 million at a weighted average price of $8.41 per share.
Our balance sheet flexibility provides us with the ability to evaluate opportunities to deploy capital for external growth as well as engage and the repurchase of our shares our investment team continues to actively underwrite investment opportunities against the backdrop of record levels of private equity capital light availability of low cost financing.
Ensing and lack of distressed asset pricing.
As we have emphasized we will continue to exercise prudent in our capital allocation and focus on the creation of long term shareholder value.
I will now turn the call back to the operator for a Q&A session.
Operator.
Yeah, if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue and for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Our first question is from Steve <unk> Evercore ISI. Please proceed.
Thanks, Good afternoon, a couple of questions.
Tony I guess I know you cant speak specifically about the.
Two apartment acquisitions that you announced in the 8-K, but can you maybe talk philosophically about the apartment business and you know how you plan to grow it how you plan to manage it over time and you know what percentage investors should maybe expect this to be of the overall portfolio.
Thanks, Steve for your question the transaction is consistent with our previously stated focus on New York City office retail and multifamily. Please.
Please remember we have a long history of experience in multifamily assets with our predecessor entities and with our mouth.
<unk> holdings, where we have a few thousand apartments outside of our.
Right.
Outside of the New York area.
Yeah.
We really think we have an opportunity to add value.
Through another asset class, we like the prospects for our capital and these two transactions.
I think for the asset allocation piece I'd like to hand, it over to Christina before I do I would just add.
And we do think that.
With our true desire to grow the <unk>.
Portfolio right now.
And with the fact that.
Office performance is where it is has the costs that it does this is something which is more attractive to us at this time and Christine maybe you could go into that in a little bit.
Sure Steve.
As we've discussed in the past, we view everything and borrowing I think you know a key question industrial cleaning my habit is what about share buyback.
Implied cap rate at which we trade and so on that when we say we recognize that our share price at discount, it's a very attractive opportunity to buy back our portfolio and for that reason buybacks are on the table as we communicated on our demonstrated through some of the buyback activity that we've had in the quarter that being said that's only one pago athlete.
Right Theres also acquisitions that can help drive long term shareholder value cash flow growth and contribute to the portfolio.
Strategic mine are calling forward and of course, we also balance that with operating runway and balance sheet flexibility. So we can see as the market evolves, where he can happen to you more opportunity.
I'll just add that.
We look forward to when we have the opportunity to share further details here and we think that people understand how it fits with our local sharpshooter.
Really as I've said, so many times.
Worked through very complicated transactions to create value. It is very consistent with all of that.
Yeah, Tony I can appreciate that but I think look with the investment community wants to understand is are you planning to build out like an internal platform and you know that I know the press release said that the person you were buying these from will continue to manage the assets and keep a 10% stake so they've got some skin in the game, but how do you add value to something that you are not.
Managing day, one and does that imply that youre going to keep it third party managed or that Youll build.
Apartment platform inside of a S. R a T.
Thanks sure look we feel.
Yeah.
As disclosed people understand this is a proven performer, who has done very well with working with institutional and others meaningful investors and we appreciate the relationship that we can build with this particular party.
Fits in very well with our goal. So I would say that we look at this as an opportunity to expand number one and number two we like the resi business on a relative basis and on an actual basis, we think that with the specter of inflation.
It also fits very nicely, but the spectrum of inflation does not what drove US here. It's the unique attributes of this transaction the partnership into which we will enter the fact that we do like this is a use of our capital we think it provides.
We will disclose.
It will it will compare favorably to alternatives, let's just put it that way we liked the opportunity relative to what else we might do.
Well I wouldn't put it past us at some point to have an internal platform.
Would say that the partner we have here is an excellent proven partner and that will become obvious.
We are able to disclose and we may even have an opportunity to build within that relationship as well.
Okay. Thanks, I guess, just maybe moving on to leasing.
The <unk> situation was kind of fluid in the third quarter and probably didn't exactly play out the way you had hoped but you know when you kind of look at where your occupancy sits today at.
83, and a half I know your higher leased.
The portfolio has lost about 600 basis points of occupancy since kind of the end of the third quarter of 2019. So in about two years can you maybe just talk about the steps to rebuild that occupancy you know when do you see it bottoming and and how quickly can you get it back to kind of the high Eighty's.
Sure. Steve. This is Tom look we had a really solid leasing quarter and we've got a healthy pipeline of activity going into the fourth quarter. We were today, we benefit from a flight to quality as tenants are focused on all the things that our portfolio provides including modernized buildings for the 21st century, new energy efficient tenant spaces healthy buildings and <unk>.
<unk> environmental quality and of course convenient access to mass transit for commutation, which is so important to tenants today and in <unk>, both in building and neighborhood amenities and of course, our value proposition in our at our range of wrench, our portfolio really stands out because to get the benefits of what we offer tenants alternatives are basically.
All at much higher prices, so again solid leasing quarter, good activity going into the fourth quarter I expect also improved mark to market rents compared to third quarter.
For the fourth quarter.
We have interest from full floor tenants and prebuilt from mix of tenants financial services Tech.
Health care professional services.
Both new and renewal and we've got a healthy pipeline of activity from significant expansion deals from existing tenants within our portfolio. Our tour activity is up as I commented earlier up 64% compared to third quarter of 2020 and on occupancy and lease percentages look I expect higher year end at least <unk>.
<unk> based upon our current healthy pipeline, we have a total of 355000 square feet of signed leases not yet commenced we expect 61000 square feet of that will commence by year end and looked at the 170 basis point decline in occupancy and leased percentage that we experienced this quarter was primarily driven by.
The termination of the <unk> lease and the good news is that we collected $17 million in security deposit that will go towards the cost to released their former space at the base of the Empire State building, which where they occupy large full floors. In fact, the largest floor plates in our portfolio that have always leased.
Really well.
Empire State building of course, it's fully modernized for the 21st century, we offer a full suite of amenities that are so much in demand by tenants today. So we actively manage the <unk> situation, we reduced our exposure to 220000 square feet through a number of actions and we're going to lose start way out with the benefit of our offering of energy efficiency.
Q healthy buildings.
Market candidly, that's hungry for these qualities at accessible price.
One thing in there Tony here, Steve, which is that don't forget that.
A lot of that vacancy that was created after Q4 of 2019 was intentional by us.
In order to fulfill obligations for tenants, who for whom we already have signed leases. So it does show up right now however.
We had to take back space to prep it and got it in order for tenants, who are signed leases to move in so I realize that the the stats are what they are and we appreciate that.
It was part of what's necessary in order for us to bring new tenants into the portfolio at much higher rates.
Okay, great I'll yield the floor. Thanks.
Yeah.
Our next question is from Craig Mailman with Keybanc capital markets. Please proceed.
Everyone.
Just to follow up on the acquisition and then again I know you cant talk too much but maybe.
You know higher level or just.
Academically you know given where your stock is trading.
At a discount to NAV.
And traditionally where multifamily is kind of traded could you just give us a sense of the type of returns you're targeting kind of the upside you can see in these assets that justify.
Putting the capital to work today.
As you pointed out rents are already kind of rebounded to pre COVID-19 levels in certain parts of the city. So just kind of walk us through maybe just higher level. How you think about returns for this asset class vis vis your cost of capital.
Sure. Thanks, Craig I'll take a crack at this and then Kristina may add a comment.
No.
We actively review and underwrite a wide variety of marketed off market and family sourced deals.
At.
All times.
Okay. So we've been we have a whole crew and this is meaningful the team that brought us to contract signing.
It is a mix of veterans. However, many new players and they are energized discipline and forward looking they found a lot of different activities, which we can pursue on the acquisition analysis and underwriting side.
We absolutely positively and are confident that this particular transaction is better than any other alternative we have seen over the last 12 months.
And that May reflect our view of the future.
It may not be immediately apparent we think that when we are able to share and again I feel really frustrated that we had to put off throughout this 8-K.
Which was advised for the reasons, which Tom Keltner reference for us to do I would much rather have been able to.
As to speak very specifically and very clearly and succinctly.
I can only say that this we were motivated by the party with whom we get to do business.
We are motivated by our view of the alternatives out there and we're motivated by our desire to grow the company while at the same time.
We did in fact.
Buy back stock.
Which we think is that a value we reached a point, where perhaps we had too much information that we could continue to buyback our stock at some point over the past quarter and with this disclosure we're no longer in that position.
So.
So long story short.
I'll throw it over to Kristina and anybody who has any further questions. Please feel free to ask Christine anything you want to add yeah, I would just add Tony mentioned right. We do believe in buybacks, we'd emphasize that so that is on the table and just to point out the obvious theres no distress in the market, even though if we were to stick.
Within the office.
Asset class office is not trading at the implied cap rate.
The stocks are at so we look to drive value overtime and some of the aspects that we look for and deal are upside to that going on right now.
How it adds strategic value to ESR T right, Yeah, sorry, he is already.
Steady local sharp chair with diversified.
Wade can drive value that includes our value price point with an office there.
A very attractive feature our everyday retail our observatory that benefit from tourism and now we can add multifamily to that which does have a different capex profile has different drivers for tenant demand.
And some inflation linkage that that first so we look at all of these factors and rest assured what we see is to drive value over time, and we look to contribute to shareholder value.
Right I guess, what I'm trying to get is actual numbers I mean, you guys passed on.
The acquisition.
Two years ago, and why our T was selling because you said the return was sort of a 5% yield and that was unacceptable.
What kind of yield are you guys underwriting to on.
On potential apartment acquisitions with the stock trading you know on my numbers North of an eight cap I'm just trying to get a sense of.
Where you guys are actually underwriting to that gives you comfort and and optimism that this is the right time to put capital out.
Look I think we've probably said all we can I would I'd just reiterate one thing Greg I know, we've said all we can with regard to the specific transaction that's absolute.
And with regard to things in general I'd say, we're conscious of where the stock trades and we're conscious of the numbers with you.
<unk> said and we think this compares over time in a way that is logical for our goal to grow the company externally and produce a great result for shareholders.
Of which I expect to benefit significantly myself so.
Our extensive holdings. So the only thing I can say is it really look forward to the opportunity to be more specific and for us to do anything further here.
It really goes well beyond what we're allowed to do what.
Whats the timeframe you think when you guys can close us and tell us more.
Well, we certainly hope its done in the fourth quarter.
Okay.
Great. Thank you.
Yeah.
Our next question is from Jamie Feldman with Bank of America. Please proceed.
Thank you I appreciate the color on the edge and your thoughts on that transaction can you talk about any efforts that you may have to either sell or monetize a piece of that of your observatory.
Sure. Thank you so much for that question, because it's something I think we'd really like to communicate when we when we think about the Empire state building we thought.
As people are students of history Mike.
Remember, a very long multi decade battle to unite the fee and.
And collapsed the master and operating leases. So we have one asset.
For a very long and hard battle to get rid of <unk>.
And attraction, which had been leased in the Empire State building during the time of its management by Helmsley spear long before anybody I think in this call likely most of you paid any attention to it it did tremendous detriment to the value of the asset to have somebody else inside.
That said, there's probably a way in which that could be done better over time.
And our view is that what we want to do is recognize if when ESB is sold we want the market to be able to determine the highest price and whether or not to break it up. So if we were ever to sell a part of the Empire State building. Our view is to be clear, Jamie we'd sell a slice of the Napoleon not a layer. So we would look we'd look carefully.
Should we ever want to raise capital from ESB.
A partial sale of the total gym and not split it up into different pieces, which proved over time in the past.
To create opportunities for litigation.
Diminution of brand and frankly was in our view a great <unk> to put it all together and we're not interested during our ownership period to break up the pieces.
Okay.
So I guess just to be clear so are you considering a sale.
But potentially play a part of the entire building.
Not just the observatory.
Or would you can say that I think yes, I think over time.
Well, let's be very clear we have no active.
Program underway right now to market any component of any part of our current portfolio can be very clear about that so there's no confusion number one number two.
The focus on the observatory, it's a great business, it's a high margin business with cash flow is not dependent on continuous capex and has immediate inflation linkage, we get to adjust the rents every day with no commissions and free rent tenant installation of base building work, particularly in light of our recent redevelopment.
So all incremental dollars flow to the bottom line, that's what I'm talking about the observatory in months is what I did say is that we would not.
Take from this experience that is out there any indication.
Other than institutional investment is literally focused on except the value and as committed capital too.
Two.
Observatory attractions in New York City with no history of operation.
Strong and regular period, and we think this should drive value consideration by our buyer side and sell side friends mud.
Much higher than people have given value to the observatory for in recent periods.
Okay.
And then I guess just shifting gears to.
The prebuilt business you know, we work is a public and out there again with a better balance sheet.
I'm just curious like are you seeing any change in the types of leases that youre signing whether it's in if it's rent or if its duration or if it breaks or anything in the prebuilt business. The shorter lease duration business based on some of the whats changed in the flexible office business, our flexible office competitive.
Gabe.
Sure. Jamie This is Tom I'd point out that we find 15 prebuilt during the quarter and it's always been an active part of our program.
As you know our prebuilt program goes back.
Right a few years, what is relatively new and maybe you've picked us up on prior calls cause is that we offer you start chief suites, which is our full turnkey suites and gives them the option to have us provide fully furnished fully wired and actually even provide moved coordination so that.
All of the tenant has to do is when they pick up from the current location and plug in their laptop, but there are other new location can be up and running so we have seen quite a bit of uptake on that maybe is maybe as much as a third of the pre.
Pre booth prebuilt have been.
Taken us up on the on those turnkey suites, and then of course, our I E Chu suites, which are you know.
<unk> filters active bipolar ionization increased fresh air low VLCC <unk>.
Products for healthy healthier is also part of our prebuilt offering and that's attracting a lot of tenants. So that is that is one change in it we view it as another part of our overall offering and not all tenants upward, but it gives us another alternative to give to our prospective tenants.
Lease term was very clear we are signing lease terms.
Pretty much the same as we have signed it at length of leases we've had before right.
That's out there on <unk>.
Prebuilt generally five year term it can range anywhere from three to seven when we go less than five are going to look at okay is this a tenant prospect for growth growth, we'd like to get the tenant in the portfolio, but but generally on average we're doing five year term deals on pre built and full floors multi floors.
On full floors are generally can vary anywhere from seven to 15 years, but on average 10 year terms. So we really haven't seen any.
A significant change in the length of term of course, we are in negotiation right now with several expansion China's debt would what the existing tenants that would also lengthen the term of their existing lease. So these are good solid positive signs in terms of tenants make long term commitments to their office.
Occupancy in New York City.
Okay are you seeing a pickup in demand from some smaller tenants at all or no. It's pretty much the same as it's been.
Well, we should have a larger.
Yes, yes.
So last quarter, the bulk of our activity by the way of showings tours and lease activity, where we are in the smaller suites. This quarter, we actually had a good mix of full floors.
And prebuilt tonnage I'd say the majority of our tours bought by showing numbers is with the smaller suites, but we are we have seen also that pickup in full floor activity. So I think the small tenants, where the kind of the first to be able to go home. They were quite nimble during COVID-19, but they were also the first two.
To return to the market and then I think that we'll see this followed up by the you know the.
The multi floor tenants.
Okay and did I hear you correct that you said your IQ suites have kind of the upgraded filters.
And then does that imply the other suite don't I'm just it you basically have a suite package that has the full upgrade and one that doesn't.
Yes.
As a full offering that includes active bipolar ionization that we offer on all of our new leasing as well as our within our <unk> suites, there our entire portfolio pre Covid had merv 13 filters and continues to have that today.
But in answer to your question.
Releasing today, we leased with IQ.
Does it just specific to your question Jamie.
That is not an alternative it's what we do okay.
Okay that makes more sense.
And then just last.
Can you just discuss the credit watch list as it stands today there are no G B G.
A special circumstance, but how would you characterize that.
The risk of any other similar tenant risk.
Jamie we have no no comment on others as we've discussed Jimmy Dean, we proactively manage overtime and nothing to speak of for any other thing.
Meaning no nothing on the watch list or you just prefer not to comment.
I prefer not to comment, but since you're asking everyone else's rental and we have nothing more to say on their businesses Gvg with public company. They did their own filings so far more tracking and they were able to monitor their financial health, but we don't want to speak further on the kind of businesses.
Okay alright, thank you.
Our next question is from Manny.
<unk> with Citi. Please proceed.
Okay.
Good morning, Good afternoon, it's Michael Bilerman here with Manny.
Maybe we can start just on the observatory and obviously you referenced the KKR deal at the edge and talking about the financing that evergreen was able to get on one Vanderbilt.
Going back in history.
The team had sort of guided the street without a lot of Comparables, just sort of gated entertainment.
Typos.
Businesses as a multiple for Tao.
If you've ever had sold an interest in the observatory or sold it how it should be valued I guess can you give us a little bit more color today now that you've seen how the debt markets are pricing a building with an observatory KKR stepped into the edge, how we should sort of put some goalposts.
Around the value of the observatory.
I Love that question. Thank you for asking it.
We did in the past, but we still have in our Investor presentation was we tried to grab at what.
Could be used don't forget the most of the revenue that comes through the observatory is rent to somebody else were to operate the observatory as an outside party. They would pay us rent we disclose what the margins are it's clearly a tremendously profitable it's an intra inter company rent right I mean, obviously, the operator thats going to buy is it going to negotiate a new lease with you to.
The profitability on the business right, obviously, right day, youre, losing money because of Covid, So I'm not all that well.
We're not losing any money because of Covid. The observatory has been profitable for two quarters in a row of increased profitability in the most recent quarter number one number two the point that I would make is it's what's the value of the piece above the rent and what we believe has occurred Michael is that the market has shown no. We don't need to go to that higher multiple.
So certainly that's the that in fact people are looking at these things as much more stable businesses and we believe that if you.
You want to look at that point of profitability as you as you call it that.
Probably deserves a higher multiple than we put on it in the past.
That's our view.
We think these are these early transactions and a world overflowing with capital Theyre moving capital in this area because they think there is a value. We don't think these are the values. We think this is pricing discovery.
Right I'm, just trying to you had put out pretty lofty valuations of the observatory grossing over 1 billion and a half so I'm just trying to.
Understand whether these transactions support that value or to your point the price discovery, therefore, it would be lower.
And my comment is that we tried to link this to you with some thoughts we put in with regard to our capacity and of course, our per caps and our onto our authenticity and our brand.
Well, we thought out the redo and we just think that.
We believe that we can do a lot more business and at higher income per caps and we deserved to as I said the best multiple.
And then shifting to multifamily.
We go back to the IPO.
2013 sitting in the old boardroom.
Multifamily at that point, obviously wasn't discussed but it was part of the predecessor and obviously your private.
Holdings, and Balkan Holdings can you give us a little bit more color as to what it was.
The remaining in the entity that had what did you have as multifamily and the predecessor, how long ago was that and then also <unk>.
Within the company.
Is it just you on molten holdings that is sort of has insights to the multifamily thousands of multifamily units. You said you are.
I'm just trying to understand the relationships.
Okay.
Yeah.
It's publicly disclosed that we have.
Service agreements for supervised properties.
Which includes those multifamily units. So we provide asset management services Tom to rails was deeply involved in this we have people on our property maintenance side insurance legal everybody has been involved in this are experienced in the past ranges from the construction of the Corinthian and the Alexandria.
The redevelopment of.
The Grand Palais into the into the Mondrian at 54.
Second the facts of the matters that the Alexandria ended up growing rental.
And we went through a lot of different workouts on that so it's thousands of units in New York City, with which we had over 1000 units excuse me.
Close to two in New York City, with which we had experience.
As well as outside and it's throughout the portfolio, we have an asset management function for multifamily existing SRT.
Okay, and then are you I guess just in terms of scope of the future in terms of what youre willing to look at it on the multifamily side is it purely Manhattan centric or are you willing to go sort of Tri State go into Jersey City go up.
And to some of the northern suburbs I guess, how should we think about what you look at.
I'd say, our focus is New York City, and within that New York City, probably down to two boroughs.
So tomorrow so in Manhattan.
Okay.
Just with regard to <unk>.
Well long island Theres, not a borough of Manhattan, LASA, Jack, but I think I had mentioned.
Norway to Brooklyn.
Queens, I think that but no Manhattan is our focus right now.
And that's why we said it throughout all our acquisition efforts focused on New York City office retail and multifamily assets.
Okay and then in terms of was there any.
Transaction doesn't involve any sort of.
Related parties is it is it completely arm's length third party or is there some related party to either yourself the family or someone within the company.
There are multiple parties involved and none of them is related.
Okay, and then how should we think about going forward given the fact that.
You have.
Multifamily outside of the company.
Those potential now acquisition targets I know at the time of the IPO the option properties were only.
The office assets.
So how should we think about that going forward.
Yes, none of our other assets.
Assets that Werent included in the IPO on the residential side, where specific because theyre not within Manhattan, The Greater New York Metro area. They still are not within Manhattan, The Greater New York Metro area, and I would not expect to see anything with which.
The Malkin family is involved in residential part of <unk>.
Okay last one on multifamily.
I assume you are looking at how the stock has reacted how investors are reacting.
Due to this move and I recognize you've talked about potentially doing this for.
Some time and it's hard to judge right how much of it is just a lack of details I E. You're.
Are you buying these things that $500000 of pop, but what are they where are they what's the in place rents whats the cap rate youre going with that.
All of the variety of things versus how much is just Oh my God. They just took $300 million likely at which pricing when their stock is trading at a meaningful discount.
And I recognize you are active in buying but $11 million is not putting $310 million to work. So I'm just trying to.
Your your internal reaction to how the market is reacting.
I think the market is just absorbing the information and I think that we've got a week before we can take any action on buying our stock.
Okay.
But I guess do you want to put out at least some guidepost like look most of the apartment Reits have been exiting the coasts given the regulatory concerns and then investing in the sunbelt.
The vessel Greenland Vornado that went into multifamily over the last decade, but really couldnt make much of it and we're never getting values for it so.
I'm just trying to piece all this together with your stock down 5%, whether you want to sort of give a little bit more clarity.
Around sort of the return profile, the going in yield and things like that to get at least a little bit more.
How you went about it and what the real value is relative to not doing it and just sitting on the cash and continuing to buy back your stock like evergreen does.
As Ive commented our goal is to grow the business and as I've commented, we can't provide any more detail at this time I wish I could and I wish we could have done it when we made the 8-K and at the same time, we did not cannot and there we go.
Okay, Alright, Tony I appreciate all the time as always.
Thanks, so much.
Our next question is from John Kim with BMO capital markets. Please proceed.
Thank you.
Notwithstanding today's share price reaction, how much multifamily exposure do you need for its impact and Penn state valuation.
These two assets or about 6% of enterprise value, so it's not that meaningful yet.
Yeah, Hey, John.
Well look at deals on a deal by deal basis right. They have to make sense. It cant be driven by strictly what percentage of the Pie chart. We wanted to be and obviously, we hope for this not to be acquired for lost that on contribute strategically for the region.
And that I mentioned and just to touch on your comment as well as the previous question the share price reaction.
Last night, we have not given a lot of information right, we're simply trying to be transparent as much as possible and something that we felt we should put out there, but recognize there could be some frustration I understand the comment on the cap rate differential in Israel. We have mentioned that they are definitely on the table. If we can buy back at a discounted valuation our own portfolio that we know the risk.
We will do that and then the last comment I would say is it's not new news that the market generally has criticised diversified component of REIT portfolios right, it's not as well understood people prefer a pure play but the point that we would make is we're already diversified and we think that this provides.
Another way for us to be even better positioned for a New York City recovery again office value price point offering a lot for attending and we'll traffic in a different price point versus the other public carrier number two the retail is everyday retail we benefit from that high traffic and number three the observatory is low capex.
Margin attractive business that we see smart sophisticated capital <unk>. So we're really pleased with that and if we can have multifamily in the portfolio that has different capex profile demand drivers and can further add to the portfolio. We look forward to the opportunity to do that having said that we need to deal to speak for themselves.
Just to add to the portfolio. So we can generate value.
Post post these two assets, you'll have about $460 million of cash on hand.
And this quarter your leverage improved at least in the net debt to EBITDA basis, what's the observatory.
Earnings coming up.
It continues to improve or are you going to be more proactively using cash or are you going to be funding acquisition through sale of noncore assets, including maybe suburban office.
We've mentioned nothing is off the table in terms of sales, we're really pleased to have this liquidity.
Net debt to EBITDA ratio does improve as operating results.
<unk> to improve as we've mentioned, it's not as we've levered up so well continue to focus on having that balance sheet flexibility and if we can borrow attractively will use that as part of funding, but very question that to also have the cash that also allows us to do buybacks along with that.
We're very fortunate to be able to say exactly what you. Just said is the observatory comes back well, our net debt to enterprise value just drops back to where it was and gives us a much better perspective from which to work.
Tony You mentioned in your prepared remarks, not being able to share information on the edge did you participate in the investment process at all either for informational purposes only.
Areas of investment.
Look it's art.
It's our.
Requirement as the.
The leading destination attraction of its kind in New York City to know what's going on so.
Let it suffice to say that if I had stuff I felt I could share I would I don't.
Therefore, we go back to publicly available information there was information circulated as the edge.
Went out for financing.
There is information we can deduce I mean.
We definitely have people out there who survey in check and follow everything that goes on with everybody else's operations and that can only leave it at that.
And just to double check.
The sale of <unk>.
Investment is a passive investor right that the operations.
We're not.
Considered as part of the sale.
Yes.
We're in no position to make the comments other than what we've made.
Theres disclosure out there by other parties and our own insights.
We were very careful to say, what we can say and we've said what we can say on that.
Got it thank you.
Got it thank you.
And our final question is from Blaine Heck with Wells Fargo. Please proceed.
Great. Thanks for the time, Tony is more of a big picture question on the office side could you give us your thoughts around how you expect that leasing decision process and the timetable to play out for large tenants that they return I guess I'm wondering once tenants physically return to the office to whatever extent they will how long do you think it'll take them to.
Determine how work from home and more flexible work schedules are going to impact what their ultimate space requirements are going to be.
Obviously, they can't act on that typically can act on that until their lease expires in most cases.
More interested in that assessment and planning and decision process and how long do you think that could take.
Hey, Blayne. Thanks first of all thank you so much for for hanging on the line here and thank you. So much for that question, which I think is one that's been missed in this spot on I can tell you from our behaviors, we've seen with our existing portfolio of tenants.
<unk>.
There are those who have acted with absolute clarity and focus.
And there are those who are confused.
And the ones that have acted with the most clarity of focus candidly are the best businesses.
And they've done that.
And they are they do not hesitate they know exactly what they will do we get to see.
The redevelopment plans and the new installation plans of some large tenants for whom we have signed leases.
And some of those leases for which we created vacancy in order to bring people in and what we succeeded in doing in that case was we were able to see Wow look at the reduction in benching the increase in convening areas, they're very common and popular theme here as we will make the office a place which is so attractive people will.
Want to be here and to be more successful convenient number one number two is.
Our first.
Year full year in which we've got people looking at reviews and compensation and performance.
With.
Salaries promotions.
And changing.
Personnel, that's been completely out of the office for a lot of people and the people with whom we speak about and that say they are absolutely lost it is a huge HR nightmare for them. The folks who are in the office doing very well doing very well a lot of confidence a lot of clarity.
And then there are the bigger businesses candidly.
Their growth is so strong.
And their business is so great.
That they will file ahead and have great clarity of what they need and the way they want to get things done they understand what the culture is to understand what they want to create for their culture.
And those people.
There is no hesitation and we've seen a bunch of those people take spaces. The last thing I would say is we are a go to for flight for qualities flight to quality.
Is a huge factor for us.
So when we look at tenants, who signed with US sometimes they will take a second space from what they've got we see big growth within our portfolio.
And it's in our investor deck over 2 million square feet of expansions since we went public in October of 2013.
And we will add to that number handily in the fourth quarter.
So when we said when we look at these things.
All I would say is the areas that have the least clarity.
Our finance.
Legal and accounting and I think thats because they are so.
Overwhelmed and impacted by the comp combined fiscal and monetary stimulus.
That they're they're floating at the Guild wars.
With too much work to do that will change.
This is not that the snake has changed there's a rat and the snake and it's this floating.
Caused by the massive fiscal and monetary stimulus and I think that those people when they realized in order to compete for business they've got to show up they will.
Okay, Great I'll leave it at that thanks for going over and really appreciate the thoughts.
Thank you so much and we've got no other questions. So what I'll do is if I can just say please remember that forward looking statements on plans to ramp up the observatory and returned to business our discussion purposes, only and to help you with your models Theyre not guidance, nor the guarantees many thanks to our great team, who have done do and I have every confidence we will.
Continue to do a great job on behalf of stakeholders and a big Thank you to Greg <unk>, our IR lead as he heads off to his next position out of the real estate industry for all his hard work and contributions. Thank you Greg and thank you to adjacent the graph as you step up and help carry the ball in the interim as we transitioned.
In this space, we look forward to the chance to meet with many of you at non deal Roadshows and property tours in the months ahead and to share our fourth quarter results in February until then stay safe get you. Mr. If you qualify and thank you for your interest of course onward and upward.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
Okay.
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