Q4 2021 Empire State Realty Trust Inc Earnings Call
Okay.
Greetings and welcome to the Empire State Realty Trust fourth quarter 2021 earnings call.
At this time all participants are in a listen only mode.
And 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.
Afternoon. Thank you for joining us today for Empire State Realty Trust fourth 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 later latest investor presentation.
Posted in the investors section of the company's website at E. S. R T REIT 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.
Putting 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 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 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 FCC's direction on special additional disclosure.
Due to the changes in our business prompted by the 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.
On 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 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.
Thanks, Tom and good afternoon to everyone.
2022 is off to a very busy start for everyone here at ESR T.
Do you have an intense focus on the tasks at hand.
Maximize the benefits of our balance sheet and.
And excitement for the next normal as.
As we all continue to adapt to a world where we live with Covid is an endemic and have less and less disruption from COVID-19 as a pandemic.
May I remind everyone on the call, but I have said for nearly more than 18 months that we will see a constructive shift in the dialogue by the end of one Q2 thousand 22.
And we've seen progress towards that end.
There's clear recognition that the world has changed since the onset of Covid nearly two years ago.
Fast towards the next normal is not a straight line.
And the trend is positive.
More and more examples accumulate every day, it's built companies recognition that work.
D matters learning teamwork performance reviews retention promotion.
And fostering a strong culture are incredibly hard if not impossible for most execute entirely remotely.
Said.
This is the next normal to which we will lose out a return to the old normal.
New York city's refocus of its priorities be inclusive of the business community.
The needs of its law abiding citizens.
The leadership.
The elected mayor Eric Adams is refreshingly underway.
Those remain open trains and subways are busier.
Traffic throughout the city.
Hotel occupancy was up 21% year over year through November and hotel bookings for December .
We're up 312% year over year.
At the end of December just prior to the overcrowding spike foot traffic in the garment district rebounded to 86% of pre COVID-19 levels at $3 2 million people traverse the streets and sidewalks around our Manhattan office portfolio.
<unk> T is in pole position to capitalize from the recovery and the competitive positioning of our portfolio is a beneficiary of the flight to quality is obvious.
As Tom Dwells will discuss we had a strong leasing quarter. We continued to see the return of activity on long term leases as tenants contemplate their future needs post COVID-19 .
Unlike past variance discussions with tenants and leases underway for their long term office needs.
Our continued.
With deals underway do you have the seeds for the growth in our leased occupancy.
We continue to attract great companies, who see us as.
Long term partners and their real estate needs, who want to grow with us market commentators debate about the long term outlook of class, a and class B office buildings and their ability to attract tenants it's been eroding as the oversimplified.
Our redevelopment work is placed our portfolio are firmly in the sights of companies needs to implement their long term return to office plans.
Best in class office space, and well amount of ties healthy indoor quality energy efficient buildings centrally located near mass transit in which employees feel safe is critical in all price ranges.
We offer office space for these important attributes at rents that are accessible to the broadest population of tenants not just those who can afford or want to pay triple digits for brand new buildings.
Our properties benefit from the oxide flight to quality trend in the market.
And we see it in leasing activity concluded and underway.
Shifting to our observatory operations.
U S reopened its border.
Fully vaccinated international tourists on November 8th which contributed to the accelerated recapture rate that we achieved in November .
In December before it impacts from the Omicron variant we're self.
Our visits continue to improve along with our revenue per caps and fourth quarter NOI of $10 $7 million is up 67% from the previous quarter.
Two thirds of recent visitation has been driven primarily by domestically sourced retail onsite and website sales with the balance driven by a third party vendor sales to international visitors.
I'm a crown has been a speed bump in our hypothetical recovery rate for the first quarter and the good news about that is that the first quarter to date is our historically slowest period, and we already see post omicron recovery.
We continue to provide our visitors with unique memorable best in class experience.
And we continue to look for ways to enhance that experience that produces better Google on tripadvisor reviews than any of our new competitors on world edge and the latest latest shiny Penny the summit.
Our goal is to provide that visit for our guests and to maximize revenue through our timed ticketing reservation system.
Through which we manage visits in peak periods for our immersive museum quality exhibits.
We are out of the pure volume for volumes sake business.
The Observatory is health and safety enhancements.
The line indoor environmental quality.
Rooting, Merv 13 filters ventilation and active bipolar ionization had been successful for our visitors and our team members.
Fourth quarter attendance that approximately 40% of 2019 comparable period attendance a continued improvement from 2020 in the prior quarter and in line with our hypothetical illustration.
We registered strong November and early December visitation.
Attendance for the fourth quarter, it was slightly impacted by on the crop.
And our latest Investor presentation, we revise the pace of all hypothetical observatory recapture.
Wrap up to account for the impact of Amazon.
To remind everyone that the first quarter is historically the lightest quarter for the observatory.
A quick note on competition.
We believe there's a large enough market for multiple attractions to do well.
We remain the only authentic iconic attraction and have demonstrated repeatedly our ability to compete and other observatories opened we are confident in our continued ability to do so.
Turning to external growth.
We previously announced our business update in early January .
At the end of December we closed on the acquisition of 625.
Multifamily units across two class a multifamily assets in Manhattan.
This is a great transaction for our shareholders.
Very happy with the execution from everyone involved across our company and with our new partner.
Our investment team continues actively to underwrite new office retail and multifamily acquisition opportunities, where we think we can get an edge with our local knowledge ability to spot special opportunities and ability to solve other problems with our flexible balance sheet.
We continue to look at share buybacks and the <unk>.
Cheap a meaningful level during the fourth quarter at an attractive share price.
Turning to sustainability, we are happy to share that E. S. R. T was selected to receive a 5 million dollar competitive grant and the first funding round. The Empire building challenge a 50 million dollar State initiative spearheaded by the New York State Energy Research and development.
Ready to reduce greenhouse gas emissions by 85% by 2050.
Additionally, the SRT was selected for the 2020 to Bloomberg gender equity index, an index that aims to track the performance of public companies committed to transparency in gender data reporting.
Our leadership in energy efficiency.
Stay in the ability of the buildings and I E. Q continues to set the industry standard, while we show annual improvement and differentiate our attractiveness to expanding and new tenants.
Thanks to our S. P P and director of energy sustainability, and ESG Dana Robbins Schneider.
We look forward to our second annual sustainability report publication in spring 2022.
<unk> has a well honed operational skill set and flexible balance sheet disciplined track record of capital allocation and ESG leadership position.
Deliver long term shareholder value.
Team works, well and hard as we press forward.
Now I will turn it over to Tom to rails.
Thanks, Tony and good afternoon, everyone.
In the fourth quarter, we signed 34, new and renewal leases totaling approximately 375000 square feet.
That included 294000 square feet in our Manhattan office properties.
75000 square feet in our Greater New York Metropolitan Office properties, and 6000 square feet in our retail portfolio.
The weighted average lease term of 11.2 years. This past quarter reflects the success of our modernized healthy transit oriented portfolio and our tenants long term commitments.
Major leases signed this quarter include a 168000 square foot expansion lease with signature bank at 1400 Broadway.
This is the second expansion by signature Bank, who now leases 280000 square feet across 10 full floors at a long term lease signatures expansion includes 159000 square feet of space that was leased to other tenants of which 131000 square feet was terminated during the first quarter.
As part of these partial terminations.
We received at least termination fees totaling approximately $12 million, which will be recognized as rental revenue over the remaining term of the respective leases, which spans multiple years. The other 28000 square feet will be relocated within our portfolio.
A 17000 square foot expansion lease with the high capital network at one Grand Central place. This is the third expansion by our capital who know these 82000 total square feet.
A 51000 square foot, new direct lease with United rentals, the worlds largest equipment rental company for space that are previously sub leased at first Stamford place in Connecticut and.
And a 15000 square foot new lease with Clarins multinational cosmetic company at 1400 Broadway.
We also signed leases for 17 Prebuilt office spaces in Manhattan in the fourth quarter.
Subsequent to the fourth quarter, we signed a 24000 square foot full floor lease with Crown Castle at 13 59 Broadway.
During the fourth quarter rental rates on new leases signed at our Manhattan office properties increased by three 9% on a cash basis compared to the prior escalator rents.
Positive lease spreads on our four retail leases were seven 3%.
And new and renewal leases across our entire portfolio increased by one 9%.
Our total portfolio occupancy was 82, 4% down 110 basis points from the prior quarter and leased percentage was 85, 7%.
Looking ahead into 2022 for Manhattan Office, we anticipate our leased percentage will increase starting in first quarter 2022.
We remain focused on driving our leased percentage and tenant retention to increase occupancy.
Based on the timing of our partial termination of existing tenant leases to accommodate the signature expansion, we expect occupancy to decline slightly in the first quarter of 2022 and reach mid eighties by year end.
Our office portfolio is fully modernized for the 20, <unk> century and benefits from the recent flight to quality.
More than ever companies are focused on their employees health well being and productivity. We were first in energy efficiency indoor environmental quality and amortization, which are front of mind for most tenants who must consider other spaces. They occupy factor into their ESG and CSR goals.
Our industry leadership in these areas is widely recognized by the brokerage community.
No more than a decade of our 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. We offer newly built modern office space at accessible rents in central locations with convenient access to mass transit we are at the forefront.
<unk>.
Feature proved accessible offices in Manhattan.
Building utilization experienced a dip amidst omicron, followed by a sharp increase in the past two weeks.
Currently stands at 30% for our Manhattan office portfolio, and 52% for our Greater New York Metropolitan Office portfolio.
You stay that passes we see more and more companies announced the return to office date, and anticipate a steady increase in utilization heading into spring.
Property operating expenses in the fourth quarter were $35 million of $3 $5 million increase from the fourth quarter 2020, due to increased building utilization and gradual return to normal operation.
Our property management team has done a fantastic job to reduce operating expenses with approximately $48 million saved in 2021 compared to 2019.
Looking ahead to 2022 when building utilization increases.
We will see steady return to normalized operating expenses.
However, we expect 2022 operating expenses will remain below our annual 2019 operating expenses.
Since announced what since we announced our multifamily acquisition in October we've seen improvement in our fundamentals and mark to market increases compared to current in place rents.
Session packages have been reduced and tour volume continues to be strong.
Occupancy has increased to 96, 4%.
We have initiated our plans for upgraded community spaces and common areas.
And attempt to enhance further property performance and replicate our comprehensive approach to sustainability.
In summary, we had a solid leasing quarter with 375000 square feet of total leases signed or.
Our sexually located healthy future proof portfolio with convenient access to mass transit is well positioned.
Fully modernized and has built tenant spaces ready for lease up.
We see strong fundamentals that are multifamily properties.
Our industry leadership and experience in indoor environmental quality and sustainability.
Hence our ability to attract and retain office and multifamily tenants.
Now I'd like to turn the call over to Kristina Kristina.
Thanks, Tom for the fourth quarter, we reported core S. F. L. A 49 $8 million or <unk> 18 cents per diluted share.
Same store property cash NOI, if you exclude onetime lease termination fees and observatory results from their respective period with all four 9% from the fourth quarter of 2020.
This change was primarily due to a reduction in revenues, but the termination of a lease with global brands group and <unk> 2021 and decreased occupancy.
Switching to the observatory ever thought observatory NOI with $10 $7 million for the fourth quarter of 2021, 67% increase from the third quarter of 2021.
<unk> revenue for the fourth quarter increased to $17 $7 million from $12 $8 million in the third quarter of 2021 as visitation continue to ramp up.
Observatory expenses were $6 $9 million in the fourth quarter of 2021 compared to $6 $4 million in the third quarter of 2021, we continue to expect run rate expenses to be approximately $6 million to $7 million per quarter until we reach 60% recapture rate and $8 million to $9 million.
Quarter thereafter.
Turning to our balance sheet as of December 31st 2021, the company had $1 $3 billion of liquidity, which is comprised of $424 million of cash and $850 million of undrawn capacity on our revolving credit facility.
Inclusive of our share of assumed debt from our recently announced acquisition. The company had net debt of $1 $9 billion with a weighted average interest rate of three 9% and a weighted average term to maturity of seven five years.
We have a while ladder maturity schedule with no outstanding debt maturity until November 2024.
Our pro rata net debt to total market capitalization was 42, 2% and net debt to adjusted EBITDA was six and a half times, which includes the assumed debt from our multifamily acquisition before we receive credit for full year EBITDA from the asset.
In the fourth quarter and through February 14, 2022, the company repurchased 41 $7 million of its common stock at a weighted average price of $9.46 per share.
This brings the cumulative total to $195 5 million at a weighted average price of $8 61 per share which represents approximately.
Approximately seven 6% of total shares outstanding as of March 2020, the date, our share buyback program began.
Our balance sheet flexibility provides us with the ability to engage in the repurchase of our shares as well as evaluate opportunities to deploy capital for external growth.
The recently announced multifamily transaction is immediately accretive to S. F O with an initial yield on cost of approximately 4% and expected to reach a mid 5% stabilized cap rate by 2025.
This acquisition expands our New York City opportunity set for a recovery and future growth beyond our existing well positioned office and retail portfolio and iconic Empire State building Observatory business to include multifamily, which benefited from very favorable current market trends.
Our investment team continues actively to pursue and underwrite investment opportunities in New York City office retail and multifamily against the backdrop of record levels of private equity capital wide availability of low cost financing and lack of distressed asset pricing as.
As we have emphasized we will continue to exercise prudence in our capital allocation and focus on the creation of long term shareholder value.
The company has under consideration capital recycling and allocation initiative and in this we take a hard look at all of our assets.
As part of this review during the quarter the company incurred an $8 million noncash impairment charge on our property at 383 main Avenue in Norwalk, Connecticut.
We stopped that service on our $30 million mortgage as of November <unk> 2021, and are in discussions to transfer property ownership back to the lender. We believe this action is in the best interest of our shareholders and allows us to avoid significant capex cost to lease up the property, which was 46% occupied as of.
December 31, 2021, a reflection of the challenging weak fundamentals of the Norwalk sub market.
We would note that this action is specific to this property and the sub market, where yes, Archie does not own any other asset and has no bearing on the balance of yes, Archie with Greater New York Metropolitan area portfolio.
As we look ahead, we enter 2022 with a well positioned and flexible balance sheet and focus on disciplined capital allocation and continued commitment to ESG.
We also look forward to benefiting from companies return to office and recovery of New York City toward them.
With that I will now turn the call back to the operator for a Q&A session operator.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad that's.
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 for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment. Please while we poll for your questions.
Okay.
Our first question is coming from the line of Steve <unk> with Evercore. Please proceed with your question.
Thanks, Hey, good afternoon, I guess, maybe first one for Tom on the leasing I was intrigued by your comment I think you said you're going to get to the mid eighties on an occupancy level by the end of 2022 and I was just hoping you could go to.
Talk a little bit more about you know the.
Lease not commenced offset by the rollovers and and the known Vacates that you have and I guess, how much sort of speculative leasing do you need to do in order to kind of hit that am I thinking about that right that you know 85 is the target up from 82 four.
Well certainly Steve first of all we're focused on our leased percentage right and retention of existing tenants, which will drive our future occupancy where we are.
Right now our Manhattan office is 87% leased.
And we do expect a higher leased percentage in the first quarter, but of course, the occupancy as I said, we expect a decline slightly just because of the timing of the move outs to accommodate the signature.
Deal, but those are that signature at least we would expect to commence by year on year, and so that will help drive our occupancy.
Look I'd say that we've got a good pipeline.
Overall activity leading into the first quarter, we just signed a new full floor lease with Crown Castle at 13 59 Broadway.
But in a in Manhattan.
The our lease percentage the oxy was certainly results from the 270 basis point decline for the Manhattan office portfolio by the GPT a move out we have 545000 square feet of signed leases not yet commenced about 500000 square feet. We expect will commence by year end of 'twenty, two but about 330.
Square feet represent positive absorption in other words, those signed leases not yet commenced that 330000 square feet will go against our currently vacant space and then we have modest rollover in 2022 with only about 576000 square feet for which you know if you look at page 10 of our supplement.
Much has been covered by by expected renewals and such so that hopefully gives you a good good ideas of where we're headed but we expect steady improvement at least percentage occupancy may be bumpy. The first second quarter and then improve over the second half of 2022.
Okay. Thanks, and just I guess one question on the investment activity Kristine I understand you guys are you know kind of casting a wide net but maybe could you just talk about sort of what is sort of out there today and I guess you know how I guess, how confident do you think you can scale the raise he part of the.
Platform over the next couple of years, given sort of how low cap rates are and how quickly the Manhattan market has recovered.
Sure Yeah. So we continue to actively underwrite healed.
That container is hard at work and our focus areas, New York City office retail and multifamily them consistent with what we have messaged in the past and we are pleased with this transaction and hopefully with this demonstrates is we are looking for opportunities, where we can add value, where we are utilizing our balance sheet to help solve an issue.
And that can involve some deal complexity it could involve a recapitalization for 'twenty one a state planning tax issue. So a number of factors. What we said on multifamily and scale is the intention is not for me to be orphan assets 625 unit. It's a good start.
Like to do more if the fundamentals are great. However, we won't force anything we will look for the right opportunities to come along where it makes sense.
And I said Theres a lot of capital that is interested in the sector, but it will be driven by our ability to generate shareholder value overtime.
Great.
Might add Steve Tony here that the.
The fact is.
We look for creative ways, where we can apply our capital solve people's problems sellers to existing owners.
And we really need to shy away from actively marketed properties given the capital markets today.
Yeah.
Great. Thanks.
Thank you. Our next question is come from the line of Jamie Feldman with Bank of America. Please proceed with your question.
Great. Thank you good afternoon.
Just going back to the percent leased comment so it looks like I'm looking at page four of the supplemental it looks like you are at 85, 7% to end the year and then you're saying it'll dip and then get back to the mid eighties and my hope is that the right number to compare that to I think this is total portfolio.
Or did I just wanted to.
Make sure I'm following Arden.
Yes.
I think Jamie you're referring to our leased percentage as opposed to occupancy percentage and at our current portfolio is 85, 7% leased.
And our occupancy is 82, 4% that's the delta between those two figures represent leases that upside, but not yet commenced so my comment about occupancy.
In my prepared remarks has to do with we expect occupancy to hit the mid <unk> by the end of the year, but as I said before look we our number one focus here is to lease up vacant space and tenant retention, that's going to drive our occupancy going forward, we expect improved leased percentage in the first quarter of 2022.
As I mentioned earlier, a slight decline in occupancy simply to reflect the move out of space to allow for the signature a lease that will commence by year end that will also help drive our occupancy.
By year end.
And I'd add.
Jamie just just keep in mind, we are maybe a little different we aggressively when we see tenants.
Not utilize their space.
We aggressively move to lease that space and get buyout money from those tenants.
So.
There are other transactions on which we work and other transactions, we've done where we will move to create.
Create space for tenants and that May involve momentary pops in our vacancy well, we increased our leased percentage or maintain against future potential vacancy.
Okay. That's helpful sorry for my confusion.
So $12 million termination fee.
How will that flow through earnings over the next several quarters.
So as Tom mentioned, because these are partial lease termination the way it'll be recognized to eventual revenue over the span of the remaining term of the tunnel.
Which is about four or five years. So it will come through same store cash NOI, but in our platform.
Oh, so four to five years okay.
Yeah. So it won't be anything chunky, we were just trying to be transparent on the deal economics.
Okay. That's helpful.
Say, we get cash right away, it's just when we recognize it.
Right Okay.
And then one of the stats you provided in the press release was that I think 17 of your 'twenty for Manhattan leases were prebuilt and.
And I was just hoping to get some more color on that part of you know I know that's an active part of your business, but maybe talk more about the types of tenants that are going into those are or is there any read through in terms of what that saying about you know tenant interest in terms of term rents the kind of space, they're looking for.
We come out of the pandemic.
Yes, well, we've seen the most activity on our prebuilt as at one Grand Central place two doors its proximity to our grants central we're seeing interest from a variety of tenants really in all sectors.
<unk> care.
Finance professional services legal.
It really runs runs that runs the gamut and we also have activity, where we have a significant pre built inventory at 13, 50 Broadway and at Empire State building as I said before I think that the smaller tenants were able.
<unk> able to.
Leave the market work from home during Covid and then there were the quickest to return to the market. So we're seeing a steady pace of activity.
On our <unk>. The good news is we have about 270000 square feet of prebuilt inventory. That's been built the money has been previously spent and those units are ready to go and ready for lease up that combined with our four matters for them.
<unk> of our portfolio really hits home with the smaller users they come to our buildings and get access to.
Our portfolio of amenities and move RIDEA and be up and running so I think that that's where we'll continue to see some some steady activity.
Okay. So it sounds like Theres smaller tenants like what's the average tenant size or maybe if you break up your work.
Leasing volume how much of that was pre built in terms of square feet.
Well generally our prebuilt are anywhere from say 3500 square feet to 6000 square feet on average of the total prebuilt that released during this quarter were 17 units representing about 83000 square feet.
Okay do you see this size growing.
I think the more you know just I guess what is it.
You know, we keep hearing about tenants wanting more flexibility.
We have a real more enterprise type leases.
First well, we will always accommodate tenants growth and in fact, our prebuilt program has been a theatre to many of the tenants that have grown with us over time.
Certainly.
Workday is a good example came into us.
On a on a pre built and expanded to a full floor over time and a plan came to us on a pre built at one graphics place eventually took a tower floor at 111. So we will always use look to leased to quality tenants, who have the opportunity and the potential to grow with us.
Over time, but in terms of flexibility although lease term, we really haven't seen any significant changes is as mentioned in my opening remarks, we had an 11.2 year weighted average lease term this quarter and are we're seeing tenants to commit to long term leases.
Prebuilt during the lease term could be.
Around three to five years on average.
Okay, Alright, thank you very much.
Thank you. Our next question is coming from the line of John Kim with BMO. Please proceed with your questions.
Thank you good afternoon.
You guys talked a lot about flight to quality in your portfolio and taking advantage.
Of that trend.
A lot of the trophy buildings in the market are being signed with rents exceeding 2019 levels and I was wondering if you see that potential in your portfolio given your discussions today.
Well, we're definitely seeing a flight to quality today tenants are more focused than ever on modernized buildings and modernized tenant spaces healthy buildings indoor environmental quality, which we were an early leader.
You know well before for Covid.
And what's giving you access to mass transit and full suite of amenities and that's what our portfolio provides so we are benefiting from a flight to quality tenants looking for those attributes that have come through our portfolio and we see that come up in discussions with our tenants.
On a regular basis.
Yeah, and I would just add to Tom's hot in.
The activity on key actually located near mass transit buildings that are fully modernized. These are all really important talent attraction and retention tool, but the vast majority of comparables in liquidity you can't afford a triple digit rent and so we think we're really selling a portion of the market.
Has demand a lot collaboration they want to bring their teams together and they want the price to be very accessible so it fits into their business model. So that's really what our comments were late two which is flight to quality accessible price point, and we think that we're solving business problems.
I would just add when you look at the flight to quality and who goes where signature bank has a phenomenal bread.
It's a phenomenal company.
And they have come to US Crown Castle is a phenomenal credit on a phenomenal company. They have come to US. We can go through any number of different leases we have done.
R R I E Q.
Healthy buildings energy efficiency had been the driver.
Flight to quality does not necessarily mean, the bright shiny penny flight to quality means in your price point at what you want to do what's the options for what you are differentiated in your decision, making we believe we are absolutely in the catcher's position for this.
And the results will be in higher occupancy in your portfolio as you alluded to earlier.
Or at least percentage, which will lead to higher occupancy and we also know that we are renting.
At higher prices.
With better credits on longer lease terms and buildings of similar vintage to ours.
Okay.
Hum.
Kristina I think you mentioned the normal luck write down or impairment was a one off situation.
But your suburban portfolio has been a consistent underperformer versus versus in New York.
I'm looking to occupancy that was at 95% back in 2016 today is probably <unk>.
<unk> excluding Norwalk.
Do you think youll need to make a significant amount of Oh, that's sticking up significant amount of capital in these assets to get it back to what it was before.
Yes, you know they have to make a decision whether or not and when they do that.
Yeah, well I'll make a quick comment and I'll, let Paul speak more on the capital budget.
On a point on cleaning up that trial, we are taking a hard look across all our assets, which is where is the best place to invest our capital whether it's on top of that whether its share buyback or other at time external opportunity.
To me the land, which we love and Norwalk took a turn for the worse after the exit of GE. So that's very specific to the market and Tom on your comment on a little bit on the capital for that Oh, Yeah. We recently completed upgrades of common areas and amenities that all of our properties out there we got a little bit of work left to do at Metro Center, but for the <unk>.
Part of our Capex spend on common area upgrades to it and to have an amenities has done been done.
That includes a refresh of our fitness centers dining coffee Lounge conference centers.
<unk> and some outdoor space. So we're positioned very well remember two of our assets are three of our assets are located right next to mass transit and CBD locations.
So do you see a similar pickup in occupancy.
In your greater New York portfolio as you do in Manhattan.
Now it is not as strong as Manhattan.
I would think that look we're focused we are focused on leasing our vacant space and tenant retention the United rentals was it a great example of retaining a really call it quality China.
We have some other leases that were.
We're in negotiation on now.
Some significant tenant retentions.
We're seeing good traffic out there.
And it's still too early to call in terms of a strong.
A rebound in that market, but I'm pleased with the with the traffic, we're seeing and the condition in the show of our properties.
Great. Thank you.
Thank you. Our next question will come from the line of Craig Mailman with Keybanc. Please proceed with your questions.
Hey, everyone. Tony maybe just for you you know in the past you've always said you know when you guys do you buy something.
It's gonna have something maybe a little bit of hair on it where you guys can bring is expertise so again today to solve problems.
Other than money what problem did you solve at the apartments and kind of where is the the extra juice that you should get for bringing their expertise.
To this it seemed like a pretty a pretty fair price for our for the assets.
Craig you're absolutely completely wrong on the pricing on the asset as far as residential is concerned.
I'm happy to provide you were happy to provide you with comps in the market.
Number one number two.
We solve the problem.
Of an existing partnership with and individuals who wish to entities, who wished to stay an institution who wish to leave.
And number three it was incredibly complex and involves things that frankly, we were in a unique position to be able to accomplish from a tax perspective the structure perspective.
If you think that the numbers that were quoted as far as.
The result is indicative of what is available and broadly marketed.
Recently concluded transactions in the market, but we can better educate you.
Oh, no yeah, and I would just add sorry, I'd add one more comment on that which is if you look a little bit at the timeline for when this deal close and when we first announced they were going to do it. It wasn't a time in New York City, where the fundamentals were not as clearly strongly improved.
We were able to see long term <unk> and have confidence in New York City, the sub market and we were able to step in at a time to solve the issue whatever the issues are for our salaried, we were able to move quickly and utilize our balance sheet and got very comfortable.
The result, we're able to go wrong in the low four cap rate with stabilization expected in the mid fives and that is nowhere near where comps are trading in the market as Tony mentioned.
Right I guess I guess bigger picture right you guys pass on 14 40 Broadway stabilizing in.
In the fives and you didn't think that was attractive the stabilizes in the fives and your cost of capital is probably two or 300 basis points wider than it was at the time of that potential acquisition. So I'm just trying not to.
To get a sense of reconciling the relative attractiveness of the cost of capital with the going in and stabilize yield.
Greg I think that it would be probably helpful. For your particular line of question for us to follow up with you and educate you better on the difference in the assets.
And the.
Rent rolls and the exposure of 14, 40 had which were very significant.
Two vacancy.
I think that you've got just a lot of mixed information here and we can probably spend some time with you and help you out.
Sure that's fair, maybe what we'll do that after the call and then.
I'll, let clay on cost of capital I know, what you're getting at which is our shares our guest count it and hopefully you and the market can appreciate while we are looking for ways to add value through external growth and in particular, the more unique situation at the same time. We are also engaged in the buyback of our shares.
Yes, which does became attractive discounted valuation, where we bought back over 7.5% of our total shares outstanding so to us it's not exclusive we're not rushing into one or the other or looking for multiple ways to drive value on behalf of our shareholders.
Yeah.
He is not necessary that I guess the point I'm trying to make is you guys sat on cash for about five years, because you said you couldn't find anything with.
With a yield that was appropriate then he ended up buying something at a similar yields what you could have bought several years ago. When he was down on accretion.
Over that time period that that's my only point I really think we should move on to the next question and we can have a little time for a tutorial with you.
And follow up.
Sure.
Can I ask a separate question.
Sure.
I was just going to ask you guys have a couple.
Duane Reade in street retail I'm, just kind of curious with all the headlines.
Store closures because of shoplifting in other <unk>.
Issues of that sort of in house.
All of your particular tenants been weathering. This is there any concerns that you know what I think.
Locations, we've had any of those kind of problems or you guys. Your tenants have been able to kind of sidestep. This issue in your locations.
They're doing quite well you know, we're 91% leased that says something about our portfolio. Our tenants are open theyre doing business. If you walk into Wolfgang that restaurant in the Broadway corridor at 30 59 Broadway on a typical weekday night that restaurant is packed.
As you know, we assisted some of our smaller local retailers, particularly in F&B to get through Covid converting some of their base rent to percentage rent that come out of that nicely. We're glad we did it they provide an important and valuable service and amenity to our office tenants I'm glad we did it and so our tenants are doing really well.
Tenants down here.
At 112, West 34th Street target foot locker Sephora, you walk in the stores that their business is bustling.
Great. Thank you.
Thank you. Our next question is coming from the line of Manny Korchman with Citi. Please proceed with your questions.
Hey, good afternoon, it's Michael Bilerman here with Manny.
Kristina and Tony was helpful just to understand sort of capital allocation.
Using different.
Uses for that capital that you have on the balance sheet, whether it's share buybacks or these acquisitions, but I'm wondering if you can just step back and obviously.
Referencing the fact that the shares are not trading at a level that you like which is why you're buying 75% of your base back.
And I know you have $400 million of cash on the balance sheet.
But I guess what happens is you spend all this capacity on the next retail or multifamily or office deal or buying back another 100 or $20 million of stock.
And what happens when you chew up all this capacity in your stock still trades at a 10 times, 10% implied cap.
Cost of equity capital.
I mean, how aggressive are you going to want to be the unions. All this capacity when your main sources on the capital raise.
Is your common equity.
Yeah, So I'd say for New York City Office three the main source of capital raise would not be common equity given discounted valuations and from that one it's very helpful to have a flexible balance sheet and your point is well taken a at some point you keep spending.
That's why we mentioned we are actively focused on capital recycling and capital allocation initiatives, taking a hard look at the portfolio and wherever we wanted to play a capital B tool capital requirement for leasing up the asset upkeep, keeping our competitive buying back our share.
Also external opportunity and remember that our asset except for the latest multifamily transaction, we own 100% of our assets and that does afford us the ability to pursue JV should we choose our lower than average levels of leverage allows us to tap into the debt market not to be overly aggressive on led.
Rich, but it is another source of capital as we navigate so we feel we have good optionality and hence our comment on balance sheet flexibility and we will take it for granted and understand your point and you cant just keep going on out in the hedge fund out, but we feel we're navigating patiently and prudently through this market.
Aging them on all those fronts.
I just wanted to step back from it go ahead, Tony I was just shocked that in addition, we have the benefit of.
Perfect balance sheet and on that balance sheet, our assets and we will also have the opportunity to recycle capital through our portfolio.
And we also make decisions if that's what it came down with with Merit doing Norwalk. We said look we'll we have a major multimillion dollar commitment to on this asset going forward in a market that's poor better for us to put that capital elsewhere, and we decided to walk from the property.
As you think about the portfolio and maybe tapping into it either in a joint venture and the sale process.
Over the years, you've been reluctant to sell anything down at the Empire State building, which obviously is a significant amount of your value you'll obviously Tony of your family, It's a tax protection agreements and some of the assets.
North of the city.
You often do you have a number of assets on ground leases and <unk>.
Your assets are different from where the market is clearing today in the sense that you know it's the high trophy.
Asset.
Hi, credit leases that are fine being the most appetite from institutional investors.
So really what do you have that you could.
Open yourself up to liquidate to start narrowing this gap between what you perceive value.
And the stock being in a single digit range.
I think there are three factors here one is to take things that are.
And made tour through our work over time and moved to things, where we see growth over time.
To is 10 30 ones are very useful in this regard and there's all sorts of structuring that we can we can and will do.
That is using that structure, which avoids the issue of tax basis and tax protection.
And three.
Think theres a theres a myopic.
And and and and and problematic view of what's happened and happening in transactions today.
And I think that we'd be happy to share some time with you guys as well as what we will do with Craig just to highlight.
Highlight there are tremendous number of deals that have cleared the market that are not the bri.
Shiny pennies, which get reported in the press and evidently it made that made its way to the analysts community.
The fact that Hudson Commons went well leased brand new of course, the peloton and lift we didn't participate in that we don't believe in peloton as a long term credit we didn't believe in lift as a long term credit. There are many other deals that have occurred in many different property types in Manhattan and in the boroughs, where we would be interested and and.
The market is way more active than you're making it ought to be and.
On every asset quality.
Assets are quality and not quality of every type.
That was my question, Tony was more going to your own portfolio and some of the restrictions over time that you've talked about talking about not wanting to sell anything in the building some of the ground lease assets things like that.
Maybe just stepping back I mean, your stock's trading at a 10 times multiple which is the lowest in the all in the urban office space.
I guess can you communicate a little bit more clearly what the company is going to do to try to lift that stock price I don't think doing a 10 31 and exchanging assets is really what the market is looking for from an active perspective.
And so I think that's where some of these questions are coming from just given where the stock is and how it hasn't reacted to your multifamily purchase if anything it's gone further down.
Most of that and so that's where I'm struggling is really trying to understand management's view of things and where the investors appear to be.
Well first of all I think we can go through the charts and find at least one other REIT that's trading at a worst multiple than ours number one number two I do believe that there is a fundamental reality that we need to build value over time and that the investor community within reach.
Really looks at today, and tomorrow, and and not that far down the road.
We've seen that occur in any number of different situations with other Reits as well and our goal over time is candidly to do.
The work to build value when people are interested in investing in New York City based office Reits, primarily office Reits and in New York City, and that's really our focus point.
And we do believe that a move from stabilized.
Well redeveloped.
We will into growth makes sense and we haven't seen what can happen in assets like ours, because there really aren't other assets like ours fully modernized hi, I E Q energy efficiency, they havent come on the market and if we do put those on the market. We anticipate that we'll get a good reaction to them all of that said we have to.
Before the ability to raise additional capital and we also have the ability.
On our balance sheet to borrow for additional capital so we feel pretty comfortable.
In an uncomfortable time in the market in general.
And what do you have to tap that right I can remember the Q I E, but do I invest it in 'twenty. One I think it was 21 or 'twenty $2. You know that doesn't set up the next personnel must do investment stock if that stat, but you took advantage of the market at that time.
Just the second topic I want to address with you mentioned, we're out of the volume business I think is what you said.
On the observation back in and I respect the night member.
I did our special tour of all of the unique things that you've been able to develop in that experience, but at the end of the day isn't the goal to get as many bodies.
Profitably through there as possible. So I mean at the gate at admission I would always want to have as many volume as possible. So can you just sort of reconcile that for us a little bit.
I think when you read the transcript of the of the earnings you'll you'll hear from my comments, what I said, we're out of the volume for volume sake business. So we don't drive volume with pricing.
We have a unique asset.
We like the fact that the observatory business in general.
It has been really dubbed <unk>.
I did if you as an institutional asset and we've seen this through the KKR parcel acquisition at the edge and the summit to assist in the high loan proceeds for one Vanderbilt.
We do believe that.
We will continue.
And our highest.
Revenue per visitor that we've had a we will continue to provide a better experience.
Right on Google Tripadvisor much higher than the.
The edge the summit than one world all these new competitors and don't forget we also have the ability to do much higher volume.
Just because the way we built the way we're structured we have much higher volume.
At a much higher quality experience that.
And.
Then those buildings can those observatories can just because the way they were built designed and what the <unk>.
Infrastructure is that is dedicated to them.
That said the key thing for US is we will not just do volume for volume's sake.
And our volume has increased significantly.
Like what we're seeing in the snap back from Omicron, even today.
Even this week.
And we feel good about that business and we feel good about it at a higher pricing.
Most importantly, the whole day to be a beautiful day to be up there today.
Most importantly, what we what we don't want to do.
Is to have people eight deep 70 during Sun set at the Empire State building.
Which drives high volume at that particular time and delivers people a lousy experience.
And bad reviews online.
And the reviews online is what ultimately inform customers and clients and ours are excellent and better than anybody else's up those new competitors.
Thanks for the time Tony.
Yeah.
Thank you. Our next question is coming from the line of Blaine Heck with Wells Fargo. Please proceed with your questions.
Great. Thanks, just one for me here in the interest of time, Tom I know this is looking out into 2023, there's a lot on your plate between now and then but you guys included your expectations for new leases renewals Vacates and unknown for 2023 in the supplemental on page 10.
And it seems like Theres, a larger proportion of leases and that unknown bucket in 2023 than it's been the case in previous years, which is certainly to be expected given the current environment, but just wanted to ask if there are any major leases in that bucket that could swing occupancy progression one way or another in 2023.
Well, Brian as you've seen in the past as time goes on those unknowns move into other categories and that will be the case as we approach 2023, and we'll have clarity on those unknowns and we'd only move into another carrier. We have when we have strong conviction as to exactly what's going to happen that that said we are already in discussion.
With with tenants, whose leases expire between now and the end of 'twenty three the largest tenants.
Tenants, whose leases expire or at 13 33 that represented about 100000 square feet of tenants that were former subtenant of G. B G. They've now gone into direct lease with us and we're already in discussion with them about their future plans.
Great that's helpful. Thanks.
Yeah.
Thank you. Our next question is come from the line of Daniel Ismail with Green Street. Please proceed with your questions.
Great. Thank you.
Maybe just a quick question for Tom you mentioned in the concession packages being produced are able to quantify that changed maybe relative to pre COVID-19 levels.
Yeah.
I would say that our net effective rents have trended positive over the last four quarters, it's still a bit below pre COVID-19 levels that said, our average lease cost per lease year for Ti and commissions. This quarter was $9.25 per square foot, which are really right in line with.
Our lease costs over the past three years and certainly helped by the length of lease term, which represents tenants long term commitment to their space.
And to that.
The New York City, so our concession packages have been training.
Again right in line with our average lease cost per lease year over over the last few years.
Got it. Thank you and then maybe just turning towards sustainability quickly Tony you've been active on the local law 97 implementation board and I'm curious what you're hearing from the new administration on.
Excuse me the new administration thoughts on sustainability related laws in New York City.
Oh look the mayor Adams administrations made a brilliant move to bring Agarwalla back where it was the original director of the Mayor's office to sustainability under Mike Bloomberg.
And number one number two we have had very constructive engagement. Both I've had one on one constructive engagement with mirror Adams.
And with risk prior.
Prior to and after his actually taking office in prior to and after rich.
Our actual appointment.
So and I think that the.
The difficulty is I have a confidentiality agreement signed as of the mirrors Advisory Board I, just I would say that the engagement with the Mers office of numerous office is very constructive.
Understood. Okay I appreciate it.
Thank you there are no further questions at this time I would like to turn the call back over to Anthony Malkin, Chairman, President and CEO for closing remarks.
Thank you very much everybody great work by the team confidence that we continue to focus on moving the least.
Percentage and bringing back visitors to the observatory and reinvesting in a constructive and accretive fashion, we look forward to the chance to meet with many of you at non deal road shows conferences and property tours in the months ahead and to share our fourth quarter results in April .
Actually excuse me.
With our first quarter results.
And until then thank you very much for your interest and onward and upward.
Thank you that does conclude today's teleconference. We appreciate your participation you may disconnect your lines at this time.
Great day.
Yeah.