Q1 2022 Empire State Realty Trust Inc Earnings Call
Greetings and welcome to the Empire State Realty Trust's first quarter 2022 earnings call. At this time, all participants are in a listen only mode.
Question and answer session will follow the formal presentation.
As a reminder, this conference is being recorded it is now.
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 first quarter 2022 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.
Posted in the investors section of the company's website at.
At ESR 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, including those related to market conditions property operations capital expenditures income expense financial results 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 SEC's direction on special additional disclosure due to the changes in our business prompted by the COVID-19 pandemic and are unique to this instruction, we do not expect to maintain the same level of disclosure when we resume normal business operations.
During today's call, we will discuss certain non-GAAP financial measures, such as <unk> modified and core <unk> NOI cash NOI and EBITDA.
Which we believe are meaningful 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.
We are pleased to report a strong first quarter to start the year and we have many reasons to be confident about the recovery that is underway, both in New York City and within ESR team's portfolio today.
At the start of Covid, We said, we were both realistic and confident about New York City, and we still are today.
The New York City market shows many signs that has passed its bottom and forward on a new upward trend.
The residential market is strongly rebounded as people have returned to enjoy the city overall hotel demand in the city is up 80% year over year through March 30, <unk>, primarily driven by tourism and green shoots of business travel.
Rates surpassed 2019 levels in February .
Foot traffic is near pre pandemic levels in many of the neighborhoods that surround our portfolio.
And office tenants plan their future space needs on the basis of where they see the importance and benefit in person collaboration.
These positive trends translate into improvements in office leasing activity excellent performance from our multifamily assets.
And steady first quarter growth in our observatory deck visitation.
We believe that ESR T is well positioned to benefit from the recovery that is underway in New York City.
We are pleased introduced inaugural earnings guidance to help the street better understand our outlook.
Kristina will cover the details in her remarks.
Our team is focused on the identification of attractive external investment opportunities, which will continue ESR teased next legs of growth there.
The valuation of our company presents a compelling opportunity to purchase our shares and benefit from our multiple sources of New York City upside, which include tourism residential retail and office demand as New York City continues to recover.
Tom to rails will cover our healthy leasing this quarter.
Tennant's consider their long term space needs their work cultures.
And our quality buildings with amenities in place or underway.
Healthy building attributes indoor environmental quality, and energy efficiency and commit to new and expansion leases within our portfolio.
We continue to build back our leased percentage and that will drive higher occupancy in the future.
We have attracted great companies, who see us as long term partners for their needs of high quality real estate and want to grow with us.
The evidence is in the recent expansions from signature bank and I capital network.
Just a couple of recent leases announced in recent months.
The debate about the long term outlook of class, a and class B office buildings and their ability to attract tenants has been overly simplified.
Tenants today, prioritize well a monetized healthy energy efficient buildings, which are essentially located near mass transit at all price points.
We are a destination for the flight to quality trend at a more accessible rental price point for the broadest population of tenants not just those which can afford to pay triple digit rents for brand new buildings.
We're encouraged to see this in our leasing activity completed and underway.
First quarter visitation to the Empire State building Observatory was 45% of 2019 levels.
And that exceeds our hypothetical forecast of 40%.
Well the first quarter is historically, our lightest quarter for the observatory.
We are encouraged with the start of the year, we discussed in our last earnings call that omicron was somewhat of a speed bump earlier in the first quarter.
We saw improvement towards the end of the first quarter with the recapture rate in March to 51%.
Momentum has continued through April with visitation of 62% month to date.
Recent performance was dominated by domestic travel with green shoots of growth from some of our international markets.
With more visitors, we see the percentage of our visitors from our pass program and tour and travel partners steadily grow.
That said our revenue per capita remains stronger than prior periods with the same direct versus third party sources of traffic.
Big win for the Observatory and the ESR T.
It is good to have had a few days with more than 10000 visitors and at the same time with our new reservations only system to provide our visitors with a unique.
Memorable best in class experience to our very well received exhibits.
And 102nd floor with high revenue per cap.
Important to note that the Empire State building Observatory is $165 million redevelopment has the capacity for thousands more visitors each day without lines or sacrifice and visitor experience.
Our online research and in person polling confirms that the Empire State building Observatory.
Centric New York experience.
Turning to acquisitions, we look to build on our successful fourth quarter multifamily investment, we see a clear advantages and value creation potential for our stakeholders from our unique portfolio positioning that enables us to benefit from the continued recovery of New York City in multiple ways.
Including increased tourism and residential retail and office demand.
As such our investment team continues actively to underwrite new office retail and multifamily acquisition opportunities, which are complementary to our New York City focused portfolio, where risk adjusted returns can be compelling and where we think we have an edge with our local knowledge ability.
The spark unique opportunities and ability to be nimble with our flexible balance sheet.
We continue to measure the potential of these options against the purchase of our own stock.
As we focus on shareholder value creation, we also look at potential capital recycling.
And all of this we actively review our portfolio and seek opportunities to monetize assets in which we have added value and reinvest the proceeds to fund buybacks and accretive acquisitions.
We are proud to report additional sustainability milestones achieved during the quarter.
ESR T was among the first to achieve recertification of well health safety rating for our entire commercial portfolio.
We were the first commercial portfolio in North America to achieve this distinction.
Additionally, last week, President Bill Clinton Governor Kathy vocal and there Eric Adams, where at the Empire State building to reveal the Empire building playbook, a guide to low carbon retrofits.
Which was co developed by Empire State Realty Trust and the New York State Energy Research Development Authority and.
And supported by other than New York City based landlords and the Clinton Global initiative.
We now have playbooks fully planned for more than half of our New York City portfolio.
On the property front during the quarter, we announced a large community solar project at 500, Mamaroneck that will generate supply more than double the buildings energy needs.
And requires zero capital investment.
We will look to highlight more of these projects specific achievements going forward.
Finally, we just published our second annual sustainability report, where you can learn more about our leadership in ESG.
Now I will turn it over to Tom to rails.
Thanks, Tony and good afternoon, everyone.
The office leasing environment in New York City has improved significantly from a year ago. The 15 year average of quarterly leasing volume in New York City of $6 4 million square feet first quarter 2022, so at $7 2 million square feet of new leases in the second consecutive quarter with over 7 million square feet.
Of new leases.
In the first quarter, we benefited from the ongoing flight to quality and signed 44, new and renewal leases totaling approximately 319000 square feet.
Which includes 256000 square feet in our Manhattan office properties.
62000 square feet in our Greater New York Metropolitan Office properties, and 1000 square feet of retail.
The weighted average lease term of eight seven years. This past quarter reflects our tenants long term commitments to our modernized healthy transit oriented portfolio.
Notable leases signed this quarter include.
71000 square foot, new direct lease with progeny for three full floors at 13 59 Broadway.
A 33000 square foot expansion lease with signature bank at 1400 Broadway, where signature now leases 313000 square feet for a term of 17.4 years 1400 Broadway is now 100% leased and we signed leases for 18 Prebuilt office spaces.
In Manhattan.
Lease spreads for new and renewal leases signed at our Manhattan office properties in the first quarter improved to a positive three 5% on a cash basis compared to the prior escalated rents.
Leasing costs were 10 of installations and free rents in our Manhattan office properties were relatively flat this quarter compared to our fourth quarter of 2021 results.
Consistent with our expectation, which we communicated during our last earnings call.
The total commercial portfolio leased percentage improved in the first quarter and was up 130 basis points quarter over quarter to 87%, while our Manhattan office portfolio leased percentage increased by 160 basis points to 88, 6%.
We remain laser focused on lease up of our vacant space and tenant retention to drive occupancy.
As stated in our 2022 guidance.
On which Kristina will provide details we expect occupancy in our entire commercial portfolio to reach between 84% to 86% by year end.
Tennis remained focused on quality at all price points and ESR T delivers modernized buildings with energy efficiency low emissions indoor environmental quality healthy buildings features convenience to mass transit and amenities.
All at an accessible price point.
We have new and exciting amenities underway with a basketball court lounge, a townhall assembly space at the Empire State building and Additionally, we will open an outdoor rooftop tenant lounge at 13, 33 Broadway and town Hall Assembly space at 1400 Broadway to be shared with tenants in our Broadway portfolio.
These amenities will be added to our portfolio's current robust offering of state of the art fitness centers tenant lounges, copper centers and more than 60 usable outdoor terraces and twenty-three curated food and beverage providers and our ground floor spaces that are surrounded by robust neighborhood amenities.
Building utilization experienced an increase in February that continued throughout the first quarter and Tuesday through Thursday comparisons to 2019 is currently in the mid 40% range for our Manhattan office portfolio and high 60% range for greater Europe much upon office portfolio.
Same store cash operating expenses and real estate taxes in the first quarter were $65 $3 million, a three and a half million dollar increase from the fourth quarter 2021 due to increased building utilization.
We project same store operating expenses in 2022 to run about 7% below pre pandemic levels due to a combination of earlier permanent cost saving measures and gradual return to office through the year.
Our multifamily occupancy has increased 120 basis points since last quarter.
And up to 260 basis points since our initial underwriting and now stands at 97, 6% with strong mark to market increases.
And reduce concessions and broker commissions.
In summary, we had a solid solid leasing quarter with 319000 square foot of total office and retail leases signed are essentially located office portfolio with convenient access to mass transit is fully modernized and <unk> and has built healthy tenant spaces ready for lease our industry leadership in <unk>.
Curious in indoor environmental quality and sustainability enhances our ability to attract and retain office tenants.
And we continue to see strong fundamentals that are multifamily properties now.
Now I'll turn the call over to Kristina Kristina.
Thanks, Tom for the first quarter of 2022, we've appointed Court F. F. L. A $49 million or 18 cents per diluted share, which compares to core F. F. L. A $41 million or 15 cents per diluted share for the first quarter of 2020 one as observatory results continued to increase.
Same store property cash NOI, excluding lease termination fees was up 90 basis points year over year.
This is driven by a number of cash revenue items in the quarter that aggregate approximately $3.3 million that were generally one time in nature, including a lease modification payments received largely offset by higher operating expenses as compared to the prior year quarter.
Observatory NOI was 7 million for the first quarter of 'twenty came up from negative 2 million in the prior year quarter. This is seasonally our lightest Claire visitation in the quarter exceeded our hypothetical forecast.
Turning to our balance sheet as of March 31st 2022, the company had liquidity totaling $1 $3 billion, which is comprised of $430 million of cash and $850 million of undrawn capacity on our revolving credit facility.
<unk> of our share of assumed debt from our multifamily acquisition that closed in late December 2021, 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 7.2 years, notably we are well positioned in a rising rate environment with 95.
5% fixed rate debt.
We have a well ladder maturity schedule with no outstanding debt maturities until November 2024.
Our pro rata net debt to total market capitalization was 39, 8% and net debt to adjusted EBITDA was $6 three times.
Pro forma for a full year contribution from the multifamily acquisition net debt to adjusted EBITDA would be six one times.
In the first quarter and through April 20, <unk> 2022 the company repurchased $23 $3 million of its common stock at a weighted average price of $9.34 per share.
This brings the cumulative amount purchased 215 million at a weighted average price of $8 67 per share, which represents approximately 8.5% of total shares outstanding as of March 5th 2020. The date our share buyback program began.
Our well positioned balance sheet affords us flexibility to engage in activities that align with our objective to generate shareholder value. This includes the repurchase of our shares are currently significantly discounted share prices. The pursuit of investment opportunities that are additive to our New York City focused portfolio and potential capital recycling.
On acquisition, our investment team continues actively to pursue and underwrite investment opportunities in New York City across the office retail and multifamily sectors that said, we will remain disciplined in our underwriting against the backdrop of record levels of private equity capital now coupled with the recent spike in interest.
Rates and spread.
On capital recycling, we take a hard look at each and every asset within our portfolio and we'll seek opportunities to monetize assets in which we have added value and to reinvest the proceeds to fund share buybacks and accretive acquisition.
Last quarter, we mentioned that as part of this review we engaged in discussion to transfer property ownership of 383 main Avenue in Norwalk, Connecticut, which has a $30 million mortgage backed to the lender. We concluded that such transfer isn't the best interest of our shareholders given that property sub market fundamentals and the project.
<unk> capex requirements that would be needed to lease up the property.
We worked in close cooperation with the lender and the transfer was successfully concluded on April 20th 2022 as a consensual foreclosure or to a boy transfer CAC and we then completed a reverse 10 31 exchange that we structured as part of our multifamily transaction in December 2021 to defer recognition of non.
Cash taxable income that stems from that cancellation.
We expect to recognize an approximate 27 million noncash gain in connection with this transfer which will be reflected in second quarter 2022 results, but will have no impact on F. F L.
We would note again that this action is specific to this property and sub market, where yes, Archie does not own any other asset and has no bearing on the balance of ESR team's greater New York Metropolitan area portfolio.
Turning to guidance, we expect 2022 core <unk> to range between 73, and 78 cents per fully diluted share inclusive of the impact of our recent multifamily acquisition, which contributes roughly <unk> <unk> per share for the year and the completed transfer of 383 main Avenue, let me.
You spend a moment to discuss the assumption used in our guidance in.
In 2022, we expect same store cash net operating income excluding lease termination income to decline, 10% to 12% from 2021 levels.
This change is primarily driven by the normalization of operating expenses as building utilization increases this year as well as the annualized impact of a large occupancy lot of global brands group in late 2021, we.
We expect roughly 10% year over year increase in same store operating expenses this year.
As a reminder, our team actively manage expenses amid COVID-19 and significantly reduced operating expenses in 2020 in 2021 compared to 2019.
Well, we have realized some permanent savings we expect operating expenses will normalize in 2022 to roughly 7% below 2019 level as building utilization increases.
We expect same store occupancy to be between 84% and 86% by year end up from 82.4% at year end 2021.
Turning to the Observatory, we expect 2022 net operating income to be approximately $74 million to $77 million with the base case, reflecting the hypothetical observatory ramp up that we provide in our latest investor presentation, which assumes 60% of 2019 visitation in second quarter 2022.
70% in the third quarter and 80% in the fourth quarter.
This NOI reflects observatory expenses of $6 $2 million in the first quarter, increasing to $8 million to $9 million per quarter thereafter, depending on the pace of ramp up.
The low end of our guidance range reflects the potential for a slower than expected observatory ramp up due to uncontrollable factors such as another COVID-19 variant worn Ukraine or any other shutdown of border that adversely impacts travel.
The high end of our guidance reflects a slightly better than expected observatory ramp up and pace of tenant returned to office, partially offset by higher building utilization and operating expenses.
Please note that the guidance estimates and assumptions just described do not include the impact from any potential future property acquisitions dispositions or capital markets activity beyond April 'twenty, one 2022 .
As we look ahead, we advanced through 2022, with a well positioned and flexible balance sheet, a 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 Tourism.
With that I will now turn the call back to the operator for 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.
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One moment, please while we poll for your questions.
Our first questions come from the line of Steve <unk> with Evercore. Please proceed with your questions.
Yeah. Thanks, good afternoon, everyone.
Maybe I was hoping that Tom could you just talk a little bit more about the leasing pipeline. I know you don't have a lot of known unknown vacates kind of the rest of this year.
But the figure is still a little bit high for 'twenty, three and I'm. Just wondering as you start working into the summer and talking to tenants next year. You know how is that discussion unfolding our tenants willing to kind of come back to the table now after kind of sitting on the sidelines for two years and maybe just give us a sense for how the pipeline stands today versus say a three to six months ago.
Yes, Steve Thanks for that question.
Certainly lease up our vacant space and tenant retention is our number one priority I would say that we have a very good pipeline of activity going into the second quarter with the prospects in a variety of industries that includes financial services professional services tuck in and others.
As we move forward I'd say keep an eye on our leased percentage that will drive occupancy as we as those leases that we signed two months later in the year and you might want to refer to the leased percentage a page for each building on page nine we're at 1400 Broadway one Grand Central 111% at June 30, threes are all over 90% leased fortunate abroad.
What is now post quarter of course, the end of the quarter is now a 100% leased and we're we have space to lease we have a good activity with six leases out in negotiation on six full floors and well over a dozen prebuilt at one graphs are about $30 50 on Broadway and Empire State building.
As you know, we we update page 10 to give as good of an early look as we can in terms of expectations on tenants are who who are making their decision to renew or relocate or not within our portfolio and that gets updated regularly and we'll update that in the quarter ahead.
But you know many of our spaces are.
Our smaller on the prebuilt Sade.
Prebuilt and the most tenants often oh, I would say hold out to their decision.
Closer to when their lease expires.
I'm excited about the amenities that we're rolling out a new rooftop lounge at 13 33 Broadway.
The town Hall Assembly space at 1400 Broadway and at the Empire State building, which is probably the most highly of monetized building in the city, we're adding to the robust amenities there with the new basketball Court Downhole Assembly space tenant lounge golf simulator.
Adding to the state of the art Fitness center that we have an executive Jimmy copper center as well as the onsite food and beverage.
Operator, So you know I think we're well positioned and I'm optimistic for the year ahead.
Great I guess, maybe for Tony or Aaron just on on acquisitions, you know your timing of the apartments. I guess, you know negotiating that middle of last year was good the market's obviously, but covered very quickly in multifamily and rents in New York are now kind of well above pre COVID-19 . So I'm just wondering the.
Entity set that's out there is that kind of bigger or smaller than it was six to 12 months ago, how has pricing changed and just how are your expectations changing on pricing given what you're seeing in the bond market today.
Well, thanks very much Steve.
First of all we remained very active the acquisition team remains very active.
Looking at a variety of investment opportunities and we are very fortunate to have a significant.
Significant balance sheet flexibility that our strong liquidity position.
I also would like to say that.
Look we have a very interesting world on the transaction side with regard to the economic uncertainty war in Ukraine.
An increase in interest rates.
<unk>.
That has caused I think what will probably be more complicated opportunities to come about we get to look at those with great relish because we're good at complicated things the recapitalization in which we were involved in December .
And in December is complicated so.
So we feel pretty good I think that it's unavoidable with increased interest rates, you're going to see a reduced financial buyers are people, who use high leverage that will be less competitive or abuse type leverage would be less competitive and there's always the opportunity for us to selectively recycle capital out of assets, we have created value.
And.
These proceeds to fund a portion for our future external growth investment. So overall, we feel good.
We are.
Right now involved in lots of different activities.
Both how we look at are we might recycle our capital and how we might invest capital.
Okay and then just one last question on the dispositions you know it's not something you guys have really done my job and so I'm just curious how do you think about the size of that or how should we think about the size of that any kind of timing is that something you think is a 2022 event or this is very early and and you know.
Unlikely for anything to actually get to the finish line this year.
I think that you should consider the fact that we mentioned the prospect of the recycling of our existing assets. Some time ago is an indication that that is when we began to think about it.
Yeah.
Oh.
Thank you. Our next question does come from the line of Manny Korchman with Citi. Please proceed with your question.
It's Mike.
Michael Bilerman here with Manny.
Tony Congratulations on last week's event in coming out with the playbook in the blueprint from an energy perspective, clearly something that's.
That's very important for our world.
I was wondering if you can unpack a little bit on just transaction activity in.
In the sense of and I recognize you want to always be nimble in the sense of looking at potential acquisitions evaluating dispositions and then looking at your stock.
Yes.
How does anything ever key.
He'd buying back your stock, which is you know.
Basically you know 50% of your Navy right to how what assets, even if you can find complicated or structured investments or other things could ever derive the value relative to buying your shares which.
Rents are up well off of the lows from 2020, but still meaningfully below.
Where he had been trading five years ago.
Hi, Thanks, very much Michael and thank you very much it was great to see you at the event with President Clinton and Governor Cocoa and mayor atoms and yes, I think that the important thing that takeaway about that event for US is we are a flight to quality. We really are at the lead in and we really are where the.
The most important and highest credit tenants want to be just at a different price point from the new Triple a brand new asset. So thank you for your attendance there.
Our priorities include share buybacks, new acquisitions capital recycling.
We look at those and in those three different baskets in the following way and I'll, let Kristina add to my comment when I'm done if you don't mind.
The first is for our actual cash.
So long as we can procure value for our investors. We are very interested in and continue to acquire our stock.
Courseware and it can be five one period now if if if if if we are buying back stock. So that's not under our control.
That said with regard to.
Why we might look at acquisitions, even that the value of our stock and we want to be very mindful. If you take a look at how we handle that merit view hand back to you.
The lender.
We'll differed avoided current payment recognition of a lot of gain and if you look at our disclosures there was also.
Protection on that asset.
So for certain of the original contributors of value to the REIT on a consolidation. So we do look at our existing assets as an opportunity to recycle into higher growth prospect for the future at the same time as we look at the cash that we can generate without tax effect to repurchase our stock.
<unk>.
And and Christina I don't know if you'd like to add to that.
I would just reiterate your message our attorney which is thanks.
Thanks for the question Michael I think that's such an important question for all companies and state very clearly our priority is to engage in activities that align with our objective to drive shareholder value. So that absolutely includes the repurchase of our stock at very significantly discounted share prices, but that's not the only thing we located we will look for interesting.
<unk> M. We have various sources of capital coming from balance sheet cash on hand.
Flexibility to increase leverage if we choose to capital recycle them to the extent, we can effectively recycle sell assets and redeploy okay, new acquisition and a lot of our balance sheet capital can be utilized towards share buyback without adding a lot of us as a company. So those are the objectives.
Have in mind, we don't feel we have to choose between one or the other interesting opportunities come along we will pursue them.
They are accretive and we're buying back our shares.
And can drive further accretion.
That's helpful. I was wondering maybe you can unpack a little bit on the capital recycling front and I understand the Norwalk transaction.
Sounds like you have the stuff up in Westport on main street for sale as well do you have anything else on the market either as a full 100% sale or where youre looking to raise joint venture capital against your existing assets I'm, just trying to get a sense of what is taking priority right. Now is it is it really.
<unk> on the acquisition front of retail office and multifamily or is there more time being spent at looking at every one of the assets and seeing what the best opportunity to monetize at today's valuations.
I Love the question, Mike that's incredibly helpful and and I'll I'll take a crack at this and then ask perhaps if Tom to rails or Christiana has further comment on it number.
Number one are we at.
Absolutely positively have looked at every single asset.
And we do have a plan for what we wish to do.
<unk>.
We do have.
Right now and you may not have seen it yet, but it went out on the market earlier. This week 10 Bank Street out in the market for.
For sale, that's been listed and number three we do look at our.
Situations like that.
Merit view and just to give you some insight as to how we analyzed and determined that we looked at mirror view and said you know that could consume.
Eight figure number of cash over 10 years, and not producing effect that might have enough F O effect, but it wouldn't have a positive cash effect.
Our view is that we actually made money for investors.
In order for us to have cash facilitated us to have cash to allow us.
To deploy into growth rather than into stagnant C and so I'll I'll just say that that's a hyperbolic example of what we're what we've concluded we want to do and and with that in mind, Tom I don't know if tomorrow Kristina if there's anything he wished how do you think that's covered enough.
I think you've covered it.
Just to emphasize we do look at our we look at every one of our assets on a regular basis and I think the Westport retail and 10.
Bank Street or a good case studies, where we've executed on for redevelopment and lease up and we've we see an opportunity to extract that value through a sale and redeploy the capital and we'll continue to look at our assets on an ongoing basis from that perspective.
Yeah, I was just trying to get at Tony If there was a more urgent.
Sort of a perspective of really trying to narrow the gap on your stock by more aggressively looking at capital recycling and share buybacks versus growing the base through additional I I was just trying to get a sense of where the.
The intense focus is right now whether it's on external versus you know shrinking the base and trying to get to that value to improve your cost of capital. That's what that's where I was going with that.
I'll give you our four points of focus if I may number one lease space number to sell tickets number three attract investors number for <unk>.
Instantly in the background where.
Where do we have better opportunity for growth and what we have or what we might acquire.
And when we can.
Remove something from a balance sheet and the tax effective fashion.
And go into <unk> with.
With it with those same dollars into something that that we feel serves us better as far as our focus on what we wanted to accomplish we will do that.
And our focus is intense on those four things are it is it is an everyday conversation. That's how we grew up in our business right now.
Great. Thanks for all the time.
Thank you.
Thank you. Our next question is coming from the line of Daniel Ismail with Green Street. Please proceed with your questions.
Great. Thank you, maybe just along those lines of the capital allocation playbook.
A question on dispositions I assume any disposition in Manhattan would have a large capital gain associated with that.
Am I correct in that understanding.
So, let's just say that Oh every situation is different.
We have lots of different tax considerations.
As stated in our public disclosures, we have certain assets with tax protection.
If you look at how are we actually handled the transaction with Merit view.
The the the interesting structure that we were able to deploy there.
It was actually to take an acquisition.
The form of a tenancy in common.
Coordinate that with the handing back of merit due to the lender.
Swap in that transaction.
That transfer.
Into.
At into the tenancy with tenancy in common one of the tenants we created for the recapitalization on the.
The assets, we have and.
In which we invested on the residential.
For tax.
Yep.
Let's just say that we've a draw attention to the fact that people that we've had an acquisition team in place now for just over approaching two years.
And as we do that work, but things are on 10, 30 ones, which we've done before effectively certainly.
<unk>, Tom Keltner, and I have on our watch we wanted to get the team. It's a different sort of transaction process. It's a different way of doing business that has different focal points in pressure points I want to get the team all working well together Aaron and the team under him.
Work Iron Ratner that is as our CIO.
Folks are working incredibly hard they're they're they're learning very well and they also know with us approach a new cycle.
A lot of folks who are in their thirties had never seen before.
That said we've.
We've seen it we've lived through it and so that's our experience and wisdom comes into play there as well so I hope that that's that's helpful. For you when you talk about that capital gain.
So long as 10, 31, like kind exchanges or available there's a way to deferred tax.
Got it that's helpful. Tony and then maybe just last one for me on the ESG playbook whatever your your city office peers mentioned.
Publicly that maybe only half of the New York City office stock qualifies for the workplace of the future where sustainability is obviously a critical factor there I'm curious to get your sense of how much of the New York City office off can be decarbonize there'd be on the path of Decarbonization and you really need a lot of these.
But all of these factors that you guys have implemented in your own portfolio.
I'm I'm I'm I'm. So glad you brought that up but first I'd like to point out that we are very proud of our six point improvement and achievement of the second highest score in our peer group with 94 in our in our grasp filings.
We're very happy with the fact that we.
We have the lowest carbon footprint.
Of any publicly traded New York City office REIT as actually cited by Green Street.
We are and older.
Portfolio of assets, we accomplished this with our office assets of age because we have a balance sheet that has allowed us to invest and modernize these assets.
Along with the investment in modernization, we have made them energy efficient.
Along with the energy efficiency, we have created.
The highest standards for indoor environmental quality and health buildings.
We are a green lease leader.
Platinum with.
Our friends at the Environmental Protection Agency. So we are actually.
What we call a flight to quality for a very broad based opportunity set of tenants in the market not just those who can pay a 150 to $300 a square foot for what they are they are prepared to pay for their office space I think that theres a tremendous opportunity.
The Redeveloped what is existing.
You need to have the balance sheet and you need to have the knowhow.
Our senior Vice President of sustainability energy in E. S. G. Dana Schneider, who spearheaded our playbook activities with our partners in development of the New York State Energy Research Development Authority.
And by the way of course. This work is now all publicly available we would encourage people to look at it it's available and it's noted on an online.
The fact is we.
We've worked together for more than a decade and a half.
In order to get to where we are so I think it's knowhow, it's its balance sheet.
And then you get to the physical realities of the locations.
And the floor plates of the buildings.
1400 Broadway, it's not 100% leased that was mid priced Lady sportswear.
The floor plate was good the location is excellent we modernize the building we produced everything that we did there signature bank in a credit tenant is now over 330000 square feet.
So we are a flight to quality target.
And I think it's when you get down to the bones and a lot of floor plates and locations that just don't match and that's compounded by balance sheets, which are not adequate and its been further compounded by the fact that there are a lot of practitioners, who do not have the capacity the intellectual capacity the technical capacity to execute.
Got it I appreciate the color Tony.
Thanks.
Thank you as a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next questions come from the line of Jamie Feldman with Bank of America. Please proceed with your questions.
Hi, everyone. This is <unk> on for Jamie Thanks for taking my question.
Could you talk about how the pace of leasing activity for your typical price point office spaces compares to the higher end.
And the market.
Yes, I think that a lot has been written about when you say the high end and maybe a lot of the focus has been on on new development, but echoing what Tony had said that there are those that have modernized their buildings.
And made them energy efficient and sustainable.
And we are a leader in in that area, we've been we definitely benefit.
And we see a flight to quality to our buildings as tenants are focused on the things that our portfolio provides right healthy buildings, but a modernized for the 21st century.
Latest technologies and indoor environmental quality.
Newly built modern energy efficient tenant spaces convenient access to mass transit.
Full of monetization such as the ones that I mentioned before and I'm really excited about not only what we have but we're adding to our robust amenities and at an accessible price point. So you put all those things together right and I think that we are maybe unique in our price point that we get an outsized share of activity.
That may not get the same headlines as the latest largest lease in a new development, but certainly there is an abundance of activity within our price point the far majority of tenants pay rent with that are below $100 per square foot.
And and and we provide an important niche to two businesses that want to be at our locations.
With convenient access to mass transit newly built modern office space at an accessible price point so.
Yeah, I think that that are our level of activity is as is very solid in that respect.
Okay, great. Thank you that's really helpful. And then could you just talk about your latest thoughts on how tenants will use their office space going forward like are they starting to get a better picture on the number of days in the office per week.
And what it means for their footprint is there a noticeable trend by tenant size or Manhattan or since your suburban portfolio.
Yeah.
We have in terms of number of days in the office we.
Constantly hear from tenants about the benefits of employees being together.
For collaboration creativity productivity training Mentorship and all of those things I was speaking to the C. O. One of our tenants are yesterday, who has mandated a minimum of three days in the office Tuesday, Thursday, which then reflects there is no reduction in their footprint and there have been expanding with us and.
The tenants are the employees that initially voiced Ah Ah Ah Ah.
Prior to work from home during the Covid or the very first to say they desire to come back to the office for the things that I just mentioned they miss the interaction and the social connectivity and the excitement and the energy that generated from being in the office with more and more of our tenants are definitely focused on if it's a hybrid of work from home. They are definitely focused on at least three days in the office and that speaks to really no reduction.
<unk> and footprint and its the leasing stats show that we've reported on and we have certainly tenants that are expanding their footprint within our portfolio and growing growing there.
Ploy base, and we've not seen any significant or any reduction in space size based upon less use of space for a number of days.
In the office.
I would just add to that look our mid Tuesday through Thursday, our occupancy in our Manhattan office properties.
Is nearly 50% compared to 2019 and and in our Greater New York Metro area.
It's above 60%.
So.
If if if you look at that you'd say right now Tuesday through Thursday, Theres, a good deal of activity and we feel very strongly that as the business becomes more competitive.
And people start.
Having worked handed to them on their their inboxes at home, they're going to come into the office and find out what's going on at the same time, However, Tom's comments, I think about space utilization and not need speak for themselves.
Okay. Thank you that's awesome.
Alright.
Thank you.
Thank you there are no further questions at this time I will now turn the call back over to Anthony Malkin for some closing comments.
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