Q2 2022 Empire State Realty Trust Inc Earnings Call
Greetings and welcome to the Empire State Realty Trust second quarter 2022 earnings call. At this time, all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation, depending what should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded it is now.
My pleasure to introduce Tom Keltner Executive Vice President and General Counsel. Thank you you may begin.
Good afternoon. Thank you for joining us today for Empire State Realty Trust second quarter 2022 earnings Conference call.
In addition, the press release distributed yesterday, a quarterly supplemental package with further detail on our results and our latest investor presentation are posted in the investors section of the company's website at <unk> REIT Dot com.
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 remain 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 same store 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 our strong second quarter and first half of the year.
<unk> top priorities are to lease space sell tickets to the observatory.
And achieve our sustainability goals.
Through all of that we will enhance our shareholder value through active portfolio management and capital allocation.
<unk> is well positioned with a modernized portfolio that takes advantage of the flight to quality.
Signed leases that will contribute to earnings.
And a strong and flexible balance sheet that allows us to take advantage of investment opportunities.
We are a great way to play in New York city's upside with our revenue streams from office tourism residential and retail and.
And there is no doubt about it New York City is busy again.
International tourists have returned on their numbers are growing.
Seats on planes to New York City in the second quarter reached 87% of second quarter 2019 levels and hotel demand is up.
Traffic nearest pre pandemic levels in many of the neighborhoods that surround our portfolio.
We are well positioned with modernized buildings close to mass transit with great amenities and more to come.
Our industry leadership, and energy efficiency and indoor environmental quality, and we have a very attractive set of buildings with a tremendous pricing advantage.
If you want to see some great independent validation of how the market values of our portfolio.
I encourage you to view the new video by our largest tenant Linkedin on slide six.
Our updated investor presentation.
In fact, there are several new videos, you can view and that new presentation.
The Empire State building Observatory.
Rated by Tripadvisor as the number one attraction in the United States.
And number three in the World is strong.
We have already passed 1 million visitors.
Year to date.
We're on target for our hypothetical recovery.
More on this in a moment.
Our stock has presented a very compelling opportunity and we accelerated buyback activity during the second quarter.
That said, we continue our focus on the identification of accretive external growth with an eye to how we can recycle our portfolio for better performance and give <unk>. Its next legs of growth.
We have a history of success in unstable markets and we see opportunity ahead.
Tom <unk> will cover our healthy leasing this quarter.
<unk> is the beneficiary of the flight to quality trend.
Tenants focus on buildings with tenant amenities, including.
Healthy building features energy efficiency lower emissions.
Indoor environmental quality.
Convenient access to mass transit.
And are attracted to our modernized buildings and they're compelling price points, we continue to see robust expansion activity from our existing tenants, who know and love our product, including recent expansions with high capital and Burlington, which followed the signature bank expansion signed last <unk>.
<unk>.
Linked in our largest office tenant has expanded many times within ESR Ts portfolio and recently created a great video.
It showcases how their office space at the Empire State building is an asset that helps them attract and retain talent.
Again their video can be found on slide six and our updated investor presentation, which also includes several other great videos to watch.
We continue to build our leased percentage and that will drive higher occupancy and earnings in the future two years. After we reopened from the Covid shutdown our entire team is over the moon that the Empire State building was declared the Tripadvisor number one top attraction in.
In the United States and number three in the World and the 2022 travellers choice best of the best rankings.
Our newly re imagined and iconic observation deck continues to lead an unmatched brand recognition and historic covenants.
<unk> must due for a visit to New York City.
Our new timed ticketing and reservation system implemented post COVID-19 delivers our visitors fantastic experiences with outlines.
And even with our higher prices.
People love it.
We have already passed 1 million visitors to our observation deck year to date.
Second quarter visitation to the Empire State building was in line with our expectations of approximately 60% recapture relative to 2019 levels.
Visitation recapture rates in July continue in line with our hypothetical recovery.
As visitor number increase the percentage of <unk> from our pass program and tour and travel partners.
Steadily grow.
Our revenue per capita remains at record levels relative to prior periods with a comparable direct versus third party traffic mix.
Big win for the Observatory and <unk> shareholders.
As a result, while second quarter traffic was 59% of 2019 levels.
NOI recapture was 80%.
That is the pricing power we have achieved from this best in class experience that we provide to visitors.
Kristina will update you on our buybacks.
We continue to underwrite new 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 to spot unique opportunities and ability to be nimble with our flexible and strong balance sheet.
<unk>.
We continue to review our portfolio to monetize assets in which we have added value.
So that we can reinvest the proceeds in accretive acquisitions.
We are happy to report additional sustainability milestones achieved during the quarter.
Notably <unk> was awarded the New 2022 Platinum Green lease leader award by the U S Department of Energy's better buildings Alliance and the Institute for market transformation.
<unk> is one of only nine award is to achieve the highest platinum distinction.
With this award <unk> is recognized for its integration of high performance leasing and sustainability practices into business operations, which deliver energy efficiency cost savings, Eric quality and sustainability for our tenants.
And now I will turn it over to Tom <unk>.
All right, Thanks, Tony and good afternoon, everyone.
We have said for some time that we benefit from flight to quality, which we provide at a great price points with modernized energy efficient and healthy buildings newly built tenant spaces with endured environmental quality.
At convenient locations with excellent access to mass transit and fantastic amenities.
To which we will add.
We had great results in our portfolio this quarter, including over 320000 square feet of total leasing major lease expansions by existing tenants and a 25% increase in net effective rents in our Manhattan office portfolio in the second quarter year over year and 16% increase.
Italy.
Overall leasing volumes were consistent quarter over quarter. This year, marking a significant improvement from the environment. We're in one year ago.
In the second quarter, we signed 37, new and renewal leases totaling approximately 320000 square feet, which includes 260000 square feet in our Manhattan Office properties 57000 square feet in our Greater New York Metropolitan Office properties, and 3000 square feet of retail.
The weighted average lease term increased to 10 years, this past quarter, which reflects our tenants long term commitments to our modernized healthy transit oriented portfolio. Notable leases signed this quarter include a 59000 square foot expansion lease with <unk> capital for two full floors with a term of over 15.
Years at one Grand Central place.
This is <unk> capital's fourth expansion at one grassroots place Hannon now leases a total of 141000 square feet across six full floors and a long term lease.
A 35000 square foot expansion lease with Burlington merchandising company.
Full floor with a 15 year term at 1400 Broadway, where Burlington now leases 103000 square feet.
The expansion space, which formally under leased to Uber, who paid us a termination fee upon their early exit from this space.
We always look to obtain termination payments recapture space and signed direct leases rather than facilitate sub leases when tenants have excess space.
As a reminder, lease termination fees are a regular part of our business and have averaged $13 million annually over the last five years and during the quarter, we signed leases for 18 Prebuilt office spaces in Manhattan.
Following the close of the second quarter, we signed a long term renewal lease with Franklin Templeton for approximately 79000 square feet that will extend their lease term through 2035 at our first Stamford place property.
Blended lease spreads signed at our Manhattan office properties improved in the second quarter to a positive five 3% on a cash basis compared to the prior escalated rents driven by new leases up by eight 2%.
Consistent with our expectations, which we communicated during our last earnings call the.
The total commercial portfolio leased percentage was up 80 basis points quarter over quarter in the second quarter to 87 point.
8% inclusive of the removal of $3 3 million from our portfolio.
Burlington lease is scheduled to commence in the first quarter of 2023, therefore overall portfolio occupancy will be reduced by 35 basis points in the second half of this year due to the timing delay between ubers termination and Burlington commencement.
That said our occupancy guidance for the year is unchanged with other positive offsets from leasing activity we remain.
Focused on the lease up of our vacant space and tenant retention and are on track to reach portfolio occupancy by year end between 84% and 86%.
Recently tour volumes have slowed somewhat this likely reflects the typical summer lower combined with a more stabilized environment. Following the post pandemic catch up and leasing activity that we saw over the past year.
The good news is that the people showing up on tours are ready to make decisions and our tour to lease conversion rates have trended higher.
We have a good pipeline of leasing activity for the third quarter, and we have $53 million of contracted incremental rent from signed leases not yet commenced and free rent burn off.
We believe our portfolio offers a compelling value proposition to tenants, especially amid an inflationary and potentially recessionary environment, where price point will be a significant factor in leasing decisions.
We announced an expansion of our amenities and that announcement has been very positively received by the brokerage in China communities, including at Empire State building, a new 300 person town Hall presentation room basketball and sports Court tenant lounge with bar service and golf simulator lounge.
All of which will be added on the concourse level than previously Unutilized space.
At 1400 Broadway, a 140 person town Hall presentation room adjacent to our recently built tenant lounge.
And a 30% 33 Broadway.
A new rooftop tent allowance with private cabanas debt reserve by tenants for special events and social gatherings.
Tenants located in our times square South campus will benefit from shared access to the new rooftop lounge at 13, 33 Broadway and town Hall room at 1400 Broadway.
Along with the new Linkedin testimonial video that Tony highlighted you can preview these new amenities through video links in our updated investor deck on slide five building.
Building utilization as compared to 2019 levels for Tuesday through Thursday has reached 50% for our Manhattan office portfolio, and 70% or Greater New York Metropolitan Office portfolio.
Same store cash property operating expenses and real estate taxes in the second quarter were $64 3 million roughly consistent with first quarter levels, but a $4 $5 million increase from the second quarter of 2021 due to utilities labor and R&M related to increased utilization.
We continue to project same store operating expenses in 2022 to run approximately 7% below pre pandemic levels due to a combination of earlier permanent cost saving measures and gradual return to office through the year.
Turning to our multifamily assets occupancy remains strong at 98, 4% up 80 basis points quarter over quarter, and we continue to see strong mark to market increases and reduced concessions, which validates our earlier investment decision.
In summary.
We had another solid leasing quarter with 320000 square feet of total office and retail leases signed.
We have a good pipeline of leasing activity heading into the third quarter. Despite so much slower summer tour volumes.
And we continue to benefit from flight to quality as tenants seek energy efficient healthy buildings with robust amenities as convenient locations.
And we continue to see strong fundamentals in our multifamily properties.
Now I'll turn the call over to Kristina Kristina.
Thanks, Tom I'm pleased to provide comment on what was a solid quarter that emphasizes the strength of our portfolio comprised of quality office asset the Empire State building Observatory and number one attraction in the United States by strong everyday retail assets with 95% national retail.
Tenancy in our well located wallet monetize multifamily.
And the second quarter of 2020, K, we reported core <unk> of.
$79 million or 29 cents per diluted share, which compares to <unk> of $49 million by.
By <unk> 18 per diluted share for the second quarter of 2021.
Notably class I follow this quarter include seven of lease termination fee income, which was not contemplated in our prior guidance range.
So our property cash NOI, excluding lease termination fee was down seven 1% year over year. This is primarily due to the normalization of operating expenses and a higher building utilization as well as the impact from the occupancy loss of TPG in late 2021 as assumed in our 2020 earnings outlook.
For the second quarter of 2020, Q inventory visitation was inline with our hypothetical forecast of 60% of 2019 level, while observatory NOI at $19 6 million was approximately 80% of 2019 model, reflecting our progress in higher revenues per account.
Second quarter NOI was up significantly from $3 1 million in the second quarter of 2021, we feel confident in the path back to pre pandemic levels at <unk>.
As a reminder, the observatory historically contributed roughly a quarter of the company's NOI and stands at approximately 9% on a trailing 12 month basis during the second quarter, but is steadily building back and based on our 2022 full year guidance, we expect it to reach roughly 20% of NOI.
As we look at are significantly discounted share price today. We believe this upside is not fully appreciated by the market.
Turning to our balance sheet as of June 32020, Q. The company had liquidity totaling $1 $2 billion, which is comprised of $359 million of cash and $850 million of undrawn capacity on our revolving credit facility.
At quarter end the company had net debt at share of $2 3 billion with a weighted average interest rate eight 9% and a weighted average chunky maturity of six nine years.
Notably we are well positioned in a rising rate environment with 95% ex rate that will allow roderick maturity schedule with no outstanding debt maturities until November 2020 for a.
Our ratio of net debt to total market capitalization was 48, 7% and net debt was five eight times, our adjusted EBITDA, notably while below peer averages.
Pro forma for a full year contribution from our December 2021, multifamily acquisition net debt to adjusted EBITDA would be five 6%.
Our well positioned balance sheet appointed flexibility to engage in activities that generate shareholder value. This.
This includes the repurchase of our shares at discounted level. The pursuit of investment opportunities that are additive to our New York City focus portfolio and potential capital recycling.
In the second quarter and through July 21, 2022, the company repurchased $53 $7 million of its common stock at a weighted average price of $7 90 per share a significantly discounted level that presents a compelling opportunity to purchase our shares and benefit from multiple sources of New York City.
Upside and are underway. This brings the cumulative amount we purchased at $256 million at a weighted average price of $8 48 per share, which represents approximately 10, 2% of total shares outstanding as of March five 2020, the date of our share buyback program began.
On acquisition, our investment team continues actively pursuing underwrite investment opportunity 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 higher financing rates and more select.
The lending environment, we are in a period of dislocation in the market with wider than usual bid ask spreads as New York City sellers seek yesterday's prices buyers seek tomorrow.
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 reinvest the proceeds to fund share buybacks and acquisitions.
That said, we want to reiterate that we are not for sellers. Thanks to our flexible balance sheet and liquidity position that we will be patient to act on the right deals at the right prices.
Turning to guidance, we now expect 2022 core <unk> to range between 80, and 85 per fully diluted share.
The increase is driven by the inclusion of <unk>.
Or approximately $19 million lease termination fee income recognized in the second quarter.
Our updated SFO range does not contemplate any other meaningful lease termination fee and the balance of the year.
All other underlying guidance assumptions for the year are unchanged from our prior expectation.
In 2022, we expect same store cash NOI, excluding lease termination income to decline, 10% to 12% in 2021 level again. This change is primarily driven by the normalization of operating expenses at building utilization increases this year as well as the annualized impact of the large occupancy loss of <unk> <unk>.
In late 'twenty one.
We are not providing 2023 guidance at this time, however, we do expect a more normalized growth rate next year.
We expect same store occupancy to be between 84 and 86% by year end.
Unchanged from prior expectations and up from 82, 4% at year end 2021.
Turning to the Observatory, we still expect 2022 NOI 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 70% in the third quarter and 80% in the fourth quarter.
This NOI reflects stronger revenue per caps and observatory expenses, increasing from an average of $7 million per quarter in the first half to $8 million to $9 million per quarter in the second half of the year, depending on the patient sample.
Lastly, as a reminder, on G&A and 2021 reflected certain temporary cost savings in the midst of rising cost environment, we expect G&A to trend upwards in 2022 more comparable to 2020 level.
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, one Ukraine and any other shutdown of waters that adversely and tax travel.
The high end of our guidance reflects a slightly better than expected observatory ramp up in pace of tenant returned to office, partially offset by higher operating expenses from increased building utilization.
Note that the guidance estimates and assumption just described does not include the impact of any meaningful future lease termination fee income or any potential future property acquisitions dispositions or capital markets activity beyond July 21, 2020 as.
As we look ahead, we advanced through the balance of 2022 with a wild position 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'll now turn the.
Back to the operator for Q&A operator.
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While we poll for your questions.
Our first questions come from the line of Steve <unk> with Evercore ISI. Please proceed with your questions.
Good afternoon, Tom I was wondering if you could provide a little bit more color and detail around the leasing pipeline and maybe talk a little bit about the new versus renewals and just where the tenants are coming from the industries.
To the extent that they are new are they looking to expand contract or roughly stay the same.
Sure Steve.
We've got a good pipeline of activity.
Going into the third quarter with the tenant prospects in a variety of industries that ranges from professional services.
Fire sector legal healthcare, some tech and some consumer products similar to what we've seen in the past our portfolio of trucks a wide.
First range of tenant types and various industries you may have seen we just signed a 30000 square foot lease for an expansion of a tenant move out at one Grand Central place it into a 501 seventh Avenue for full floor.
30000 square feet, we have about roughly about 160000 square feet of new and renewal activity. The four leases in negotiation. So this is aside from proposal for which we're exchanging paper, but these are actual leases in negotiation and includes about a dozen or so prebuilt, that's a mix of new.
And renewal tenants in.
It also includes a sizable renewal of a multi floor tenants in our times square south portfolio.
A couple of expansion deals.
At Empire State building, one of about 15000 square feet.
No the new deal with a credit tenant of about 15000 square feet to 30 to 59 Broadway. So we've got a mix of good activity of course all of this follows on the heels of a really solid quarter of over 320000 square feet of total leasing activity, which is a really solid performance by our leasing team did an outstanding job and achieved a weighted average lease term of 10 years.
So.
I think we're in really good shape. There is a lot of great things happening at liberate a lot of great things that we're doing with expansion of our amenities that I commented on earlier a lot of fantastic things happening at the Empire State building you got to look at the videos look at that Linkedin video that Tony mentioned and looked at the videos about the expanded amenity offerings, both at the Empire State building and the <unk>.
Broadway Plaza campus.
Great Thanks for that color.
Tony on the Observatory is there any color you can just provide on the mix of tenants between say domestic and international and what is your expectation for that mix going forward and how might that impact kind of per capita pricing in the back half of the year.
Okay.
I think you met visitors and I'll answer it as mix of visitors.
Look first of all we are thrilled to be able to share the quarter with you folks strong leasing strong performance from the observatory really firing on all cylinders our.
Residential has done well.
We typically as you know in the past have seen.
A larger percentage of international visitors versus domestic visitors that international component continues to grow and as that international component grows.
And as visitor ship in general at the Observatory grows we're having a very good week this week.
What we see is a higher percentage of participation in past programs and.
People, who come in through our tour and travel partners.
That said.
On a revenue per cap, even with comparable blend to what we have seen in the past where much higher though there is some dilution by the fact that more people have come in through our as we have said would happen over the prior quarters.
Through our pass program tour and travel partners.
I really think that we have yet to see the full force of the observatory visitor from overseas I think there are really three factors, which come into play one.
I think that they've really botched the reopening everyone can see they bought the reopening of their airports I think it makes internal travel in the United States looked like a dream.
The August travel season declines.
Over there we expect to see more people able to travel in September who are typical visitor who come in off season.
Number two.
I think with the.
The fact that the dollar is strong.
We will focus more on the authentic experiences out there.
<unk> already seen a significant deterioration over time and the performance of one World Trade Center, we have similarly seen the bright shiny penny effect as I referred in prior quarters of the edge.
Visitor ship there is down.
Look we've already clocked over 1 million visitors at the Empire State building this year and the summit has announced that some time in the near future. They expect to hit the 1 million visitor Mark since they opened in October .
We are really we are the number one attraction not just by Tripadvisor as rating and we think that with inflation.
And with the change in currency, the visitors who come to New York and they will continue to come because that's what they've done in the past through various currency transitions and inflation points.
We'll stick with the most authentic and we do need to be prepared though that as has been in the past I think more of them will come through our tour and travel partners I will note because we're reservations only that gives us an opportunity to sell them upsells visits to the 102nd floor other.
That they might like to pay for and that's been part of our revenue per cap success to date.
Okay.
Thank you. Our next question comes from the line of Michael Griffith with Citi. Please proceed with your questions.
Hey, Thanks for taking the question just wanted to ask on guidance. It seems like it implies a deceleration into the back half of the year and I'm kind of curious if you can give some additional color on that maybe it was from the expense side or anything you can add there that would be.
Would be helpful.
Okay. Thanks for the question Michael So.
Our earnings release on page five we actually lay out a key assumption table and what we outlined there as we expect operating expenses to go up by about 10%.
And if you look at the numbers in the first half of the year. We're at that level that were around 7%. So that implies a ramp up in the back half that will have some impact.
Other areas, we do have a recovering observatory, but we also have expenses trending upward.
<unk> from $7 million a quarter in the first half to $8 million to $9 million a quarter in the back half as we continue to ramp up that portion of the business. So you can see overall, we expect very clear results across the business that we reiterated at but we do have some excellent picking up in the back half and Griffin.
I would add one additional point and that is that as occupancy increases our cost of operation of our properties, we need to provide more services for instance, we have materially expanded the hours of our gem at the Empire State building based on demand and increased membership. So as we as we look at the amenities we are.
Operate and the services, we provide and the number of square feet, we have to clean it depends on occupancy building occupancy and asset building occupancy has continued to grow those expenses growth.
Great. So it appears to be just like a timing issue more so than anything just given the beat.
No change in guidance kind of adjusting for that lease termination income.
Correct.
Okay, Great and then.
Next one was on.
Just a multifamily portfolio. Obviously you guys entered it early late last year and we've seen reports about other apartment guys in New York kind of lightning their exposure I'm curious why it would make more sense to add exposure there and maybe any additional color I think <unk> touched on it a little bit but any color you can give there as to why it might make sense to.
Add more multifamily to the portfolio would be appreciated.
So first.
First of all we're very pleased with the performance of the multifamily property so far.
Demand environment in New York City is strong and the occupancy at our two properties increased again this quarter and we continue to see strong mark to market increases and reduce concessions and outside broker commissions.
The rationale for our investment in multifamily.
It's consistent with our previously stated focus on New York City office retail and multifamily assets.
And we do need to look at the fact that we are a New York City play. We are office. We are a destination attraction. We are multifamily we are retail.
And.
We don't play in other markets, we play in this market within this market when we look at multifamily when we have an opportunity to trade out of assets.
Where we see the opportunity to perhaps sell properties that are better suited to a new owner.
And we can exchange for more efficient cash.
Use and growth.
That's something a trade that we're prepared to do we like the inflation adjustment of multifamily just as we loved the inflation adjustment of our observatory, we have inflation protection through operating pass through.
With our office.
However that does not adjust the rents on a regular basis with the greater periodicity of multifamily.
So we like that.
The fact that we.
We think we can buy multifamily when we choose to buy it in a way that is capital efficient not just when we apply the capital to purchase but also as we go forward through our ownership.
Okay I appreciate the color there thanks for the time.
Thank you. Our next question is coming from the line of John Kim with BMO. Please proceed with your questions.
Thank you.
On page 10 of your supplement.
Provided some more clarity on your 2023 explorations, both on the positive or negative.
I'm just wondering if you could provide some commentary on the leasing activity you've done to address that as well as some of the additional.
Vacates.
Sure John .
You've seen the breakdown that we provide on page 10, just.
Some comment on that.
We do expect the largest renewal in our New York City.
Office portfolio to be at 30% 33 Broadway.
About 60000 square foot tenant.
Rest are relatively.
Mid size or smaller smaller tenants.
Not a lot of change on our forecast of Vacates. A reminder, as we do with new tenants whether it be.
Given your or early renewals that come off of that reports.
Entirely so we haven't changed our forecast significantly from the past quarter as it relates to vacate.
Renewals are good comments previously on the.
The health of the leasing market look we have got two really strong quarters back to back this past quarter being.
Really strong with improvement in net effective rents over the prior quarter and certainly over over a year ago.
We continue to see activity throughout our portfolio and I am excited about the expansion of our amenities.
Mentioned earlier I think it's we're getting a really great response from brokers.
And prospective tenants.
A reminder, all of the things that tenants are looking for today and the focus on in terms of health wellness.
In building amenities neighborhood amenities convenience to mass transit newly built spaces, which we've been investing in our portfolio for.
Well before Covid. These are all the things that we provide that attract tenants.
We're benefiting from this.
To quality, so we've got good activity going into the into the third quarter.
And I'm pleased to what we see.
Yes.
And Thomas has the.
Capital markets and pause in hiring.
Has that led to any.
Indecision on leasing decision.
What we've seen is we saw a bit of slowdown in tours over the past four to six weeks. Some of that I think is due to the normal summer slowdown, but as I mentioned earlier, what we're seeing is that the tenants that are out touring space are much more decisive and where our conversion from tour to.
Lease has has improved over prior periods.
So.
I would say that the tenants that were engaged with are being decisive with combined with as I mentioned a bit of a slowdown of tour activity. That's typical for this time of year, so that will be we'll see.
As we get into latter part of the summer and into Labor day.
Maybe a question for Tony or Christina can you just provide an update on the priorities you have on investments between multifamily.
Office and retail just given probably the big price disparity among the three.
And then also versus additional buybacks.
Yes, sure John So as we've mentioned that is our.
Focus area all three categories. So it really depends on finding the right deal. So I think we ended up speaking more on multifamily.
That's an area that we get asked on more net new additions to the portfolio as of late last year, but similarly, we look for the right return and we will look at all three of those categories and ways in which we can add value and generate upside for our shareholders and I'm glad you brought up the point on buyback because in all instances if not at.
The extent that not doing buyback. So fortunately, we have a well positioned balance sheet and then we also have an eye towards capital recycling as Tony elaborated on earlier and that means if we have added value and it makes sense to consider a sale. We can take those proceeds and redeploy it into any other category.
Maybe multifamily could be office or retail and to the extend capital recycling satisfied.
The proceeds for acquisition and our balance sheet can be utilized further share buybacks as long as the market continues to misprice our portfolio. So we view all of those as attractive opportunities provided we find the right deal and clearly with share prices at these levels. The shares are very compelling and I would.
Just add we bought a lot of stock.
In the last quarter, and we bought it well so we were pleased.
Second all of Christine's comment.
Okay.
I appreciate the color. Thank you.
Thank you.
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.
Great. Thank you.
Sounds like you're having some good success leasing up office here.
Some broader market headwinds, we've seen some some buildings get to hand, it back to the bank in your Submarkets I mean do you think that that's an opportunity for you now that maybe youre just doing something different than some of the competition.
Well look Jamie.
I'll start that and let Tom jump in if you'd like to our Kristina to add any other color.
We spent a lot of money.
When we modernized our properties focused on energy efficiency built out amenities and maintained indoor incremental environmental quality. So that we are in a position to offer outstandingly located asset.
At a great value and we are a receptor of flight to quality.
In our in our competitive set at the top of the price range.
And the fact of the matter is.
It takes a lot of money to do that work and we spent the money.
You need to have the right basis to spend that money to make.
The profit that's out there. So we will definitely continue to look at in our investment group looks at.
Office as an opportunity for sure.
And at the same time, we haven't seen anything that really.
<unk> is attractive to us at this point, that's just the Bottomline don't know Tom if you want to add anything.
Yes.
Tony said, we certainly keep our eye on everything and we will look at all of the certainly.
Office.
And multifamily and.
We apply our expertise and our knowledge when we are underwriting assets and so when we see an opportunity we'll certainly.
We're ready to.
Seize upon those opportunities.
Might throw in two other comments if I might.
Office is still in a price discovery.
If you look at.
The purchase price of $4 50 park and the cap rate there and you look at the just announced.
Transaction at 13, 30 Avenue, the Americas and the cap rate there is a material increase in the cap rate forget about the difference in assets.
There is a material increase in the cap rates and frankly less of.
Perhaps.
<unk> re leasing load at $13 30, So we still think office has a way to go in price discovery.
And we think that that.
That movement is is justified and again.
Our assets are extraordinarily well positioned all this conversation about older properties and everyone's going through in the newer stuff, but we said before not everybody wants to pay 150, 200, 250 Bucks a square foot for office space or even if they wanted to they can't and we are a primary beneficiary of there with us and it's shown.
By the strong leasing we did in the second quarter.
Okay. Thank you and would you say to pick up in leasing is are these tenants who didn't.
You didn't have office for a while like they kind of they shut down during the pandemic or these are tenants who are already in the city.
Didnt closed down at all or just looking to either upgrade or be in a different building.
We have a mix of tenants.
Our cap was an expansion at one grand central place that they've been in the office in.
Their business is doing well and theyre looking at the future needs and they've expanded with us.
Several times now.
<unk>.
Professional services firm that I mentioned earlier that moved from one Grand Central place and double their space to take a full floor at 501 seventh Avenue.
Again their business is doing well and.
And they've been in the office and other we renewed a sizable multi floor tenant at 13 33 Broadway.
We announced following the close of the quarter, an early renewal for 79000 square foot Franklin Templeton out in Stanford, Connecticut.
Fire sector.
So these these are all a mix of tenants that are see the long term needs further offices for their.
Place for their employees to work and for them to conduct their businesses are making long term commitments and it's a mix of new renewal and expansion tenants.
Again as is in our investor presentation with fantastic videos I might add.
$2 2 million square feet of expansions in our portfolio since October of 2013.
I don't think that's a coincidence it means that our tenants really like what we offer.
The price point is good.
And we choose our tenants well.
And that's a benefit I capital network <unk>.
Signature.
These are just the most recent meaningful expansions and we.
We continue to try to exercise very good tenant selection be very clear we built our portfolio. So we've got the best deals in the good times when we get deals in the bad times and that's what we've always said and Thats, what we hope to see.
That's helpful and then.
Do you plan to build out the amenity spaces and more buildings and can you talk a little bit more about the cost to do that.
Well, we have the three expanded amenity projects that I have mentioned and Thats all that we have planned for the time being again.
<unk>.
The basketball sports CT convertible to a 300 person tunnel presentation room with tenant lounge bar service and our golf simulators that is in addition to.
New York city's largest tenant only fitness center, a 15000 square feet, our executive Jim Copper Center and then the 23000 square foot Starbucks Reserve is opening up.
Later this year so.
Incredibly robust amenity offering at the Empire State building the Broadway campus amenities that I mentioned.
The town Hall presentation, we were fortunate or Broadway alongside the tenant lounge at 1400 Broadway and Theyre very cool $13 33 outdoor space.
Space with private cabanas and landscape will be available to all of our tenants in this time square South portfolio. This is on top of the in building curated food and beverage options. We have 23 of them throughout the New York City portfolio and the neighborhood amenities. So that's what we have planned right now we think it is in it.
Credibly full offering.
We're quite excited about it.
Lastly, we're adding a wellness facility at our building at 250 West 57th Street with private showers, cabanas really for those that want to exercise bike run and such so forth in Central Park.
I would just add.
Among the amenities if you make note.
Some of it is a rooftop on one building another at the town Hall within another Belgium, we don't need came down the same amenity for each one of our buildings and that's a major benefit of having a campus wide portfolio. These set of amenities can benefit program by building one rooftop one town Hall.
That's amazing cost synergy and as we look at the marketplace and care more and more about amenity and you really need to question I think we all need to question should the building and rebuilding elder Gen elder rooftop there'll be centers and logo theme of return on that so it's definitely a trend it is in demand, but how many tenants.
Square feet can you service from that that we find the synergies to be very compelling.
And some amenity, we pay for it and the Buildout cost and Tom we benefit by adding it into the portfolio. For example on the Starbucks reserve concept that can be fantastic for yesterday.
Okay and is this in any way a revenue source or no. This is just purely amenities.
The space on $13 33 Broadway that roof when it is built.
Built out will be absolutely drop dead fantastic views of the Empire State building overlooking Herald square.
It's a very sizable place and because of the way $13 33 Broadway is configured we've actually decided that we will make that a separate entrance.
36th Street, rather than gum up the lobby.
With that we have excess freight elevators at 13 33 Broadway.
It was it was a former Manny.
The manufacturer shipment show building. So so we think that's a big opportunity.
For that and other than that though.
And the priority for <unk> 33 is definitely as an amenity for our tenants.
Okay, great. Thank you.
Thank you. Our next question is coming from the line of Blaine Heck with Wells Fargo. Please proceed with your question.
Thanks. Good afternoon, just a quick one here on your dividend you guys reinstated the dividend of 14 <unk> annually in May of 'twenty, one and it seems like that.
More than well covered at this point so how do you think about increasing that dividend level in the future versus kind of maximizing free cash flow for uses elsewhere, whether that be repurchases or other investments.
Sure. Thanks for the question Blayne, so on the dividend.
We review that quarterly and we have an eye toward having nacco back to higher levels as the business continues to recover so that's constantly on the agenda.
You might recall the history behind it.
We will do it based on REIT requirements. So if we have taxable income we will do it if not we will evaluate whether it makes sense and the alternative uses of that capital to return capital to shareholders, which does include share buyback as well as providing continued operating runway for our business and evaluating other opportunities that will certainly.
Divide a dividend to our shareholders and we look at when is the best way to generate value across the board.
Okay Thats helpful. Thanks.
Sure.
Thank you. Our next question is coming from the line of Michael Griffin with Citi. Please proceed with your questions.
Yes, it's Michael Bilerman here with Chris.
Tony you expressed a little bit about looking at your portfolio for sale opportunities and I was wondering if you could sort of frame for us maybe a goalpost of sort of how much capital you can draw out of the portfolio.
Say that just from the perspective of.
Think about some of your assets, obviously have tax protection, obviously, a number of your assets also have mortgage debt on them from time to complain asset that have tax protection a number of your assets have ground leases to them. Obviously the Empire State building and the Observatory is key to the company.
Christine I just walked through you think about the campus approach that you have with those buildings.
ESB I would imagine that all of the capital Youre spending you wouldn't want to then take an asset out of that so how should investors think about really the <unk>.
Total amount of capital that can be generated from asset sales and effectively the cost of that capital given some of the.
Limitations from a tax protection mortgage that ground lease on top of them.
Yes, no I appreciate the question I'll start and maybe Tony will add some comments. So as we mentioned we've taken a hard look at every asset and that includes <unk> that include <unk> capital needs that included some future prospect. So we take everything into consideration, having said that nothing is off limits, it's all about having the right team.
So we're definitely not for sellers as well.
Communicated based on our balance sheet positioning our debt maturity schedule and so we don't have pressure, but we will look at it opportunistically right buyer right prey rate TL rate structure that allows us to get around any of the items that you. We held off if it makes sense. It's available for sale is to generate value for shareholders.
It's available for sale and how we redeploy at play that that there's a number of options. It's about looking for the right deal and the categories that we've already mentioned in the market in New York City that we're focused on and there is also a share buyback if we can buy back more of our the rest of our portfolio of highly discounted valuation that's very much on the table as well.
So appreciate all those challenges that you mentioned, we definitely think about it and we will take that into consideration as we evaluate each and every one of our options.
Alright, and we'll just do this in this tax efficient and logical away as possible. We know the numbers we've done the calculations.
And we just approach it from there as the same effective way that we transferred out ownership that Merit view.
Right I'm, just trying to get a sense of how much of the portfolio really investors should expect could be liquidated now that you've gone through this review I don't know if its $500 million instead of $1 billion I'm, just trying to get some goalposts Tony around.
How much youre looking to sell because.
Youre not happy where.
The stock prices I recognize youre, not a forced seller but.
Where the stock is there is a pretty large disconnect from what you're talking about.
Well, we were certainly happy buyers in the last quarter and we bought several tens of millions of dollars and thats the benefit of having this fantastic balance sheet with no maturities until the earliest we've got one loan a mortgage in 2020 for late in the year. We've got a lot of cash we have 5% of our debt is floating.
Everything else is fixed.
Number one number two.
We really cant give any forward looking comment however, it's public knowledge that 500, Mamaroneck, and 10 Bank street or on the market we put.
Our real estate retail on main street in Westport on the market candidly, we had a price we like.
That potential buyers stock.
Sure.
Didn't work out so we like that.
Like the cash flow, we get from that we've got eight five years weighted average lease term left is compelling we won't sell it.
So that's where we are and outside of that we wage thing as we go we've got a lot of flexibility on our balance sheet cash on hand, Undrawn line in order to take advantage of things as we go forward.
Alright, and then to the <unk> the balance sheet is in good shape with that cash and low leverage.
If you take that hindsight approach of where the stock has come from.
Look over the last five years, the stock's down well over 60% underperforming peers significantly underperforming routes, but even benchmarking it relative to last October when you announced the multifamily entry the socks off.
25% to 30%.
Relative to reach downturn. So I just don't know how much time, you and the management team and the board are sort of just saying, okay. We've taken all the steps the market doesn't seem to be reacting the way we want them to.
What else can be done and that's where it's all sort of coming to a head and you can keep on buying back stock, but perhaps that there is other issues of why the stock is trading where it is I mean is that part of your and the board thinking.
Or is this it sounds like due to last quarter, Michael when you asked whats our reason for being.
No that's perfect.
Greg you were a public company, Tony I know you exist, but at some point and I think the board and CEO you have to look at how the market is pricing and if the market's not willing to price. It then maybe theyre not endorsing the strategy you are going down.
Totally appreciate this and I appreciate your.
Continued questioning I look forward to continue this conversation.
Conversation with you in the future. Our four priorities are clearly stated rent space sell tickets, we want to fulfill our goals on sustainability and we want to work with our strong balance sheet recycle and apply it as and where it makes good sense.
And as far as I'm concerned we have done a great thing by our investors with the start that we've repurchased we did a great thing by our investors with the.
The resi assets that we acquired and I just have a feeling that.
If you're asking me, whether or not I plan to push on a wet string to tow. The company forward no. We're just going to be intelligent and logical as we go through this period.
Thank you.
Thank you there are no further questions at this time I would like to turn the call back over to Anthony Malkin for any closing comments.
Thanks, everybody for attending please remember that forward looking statements, including guidance are meant to be helpful. With forward modeling and they are not guarantees.
Many thanks to our great team, who have worked incredibly hard.
The folks at the Observatory, who won that number one in the United States.
And the folks who've shown up everyday and really delivered on behalf of stakeholders. We look forward to the chance to meet with many of you at non deal Roadshows and conferences and property tours in the months ahead until then thank you for your interest and onward and upward.
Thank you. This does conclude today's teleconference. We appreciate your participation you may disconnect your lines at this time.
Joy the rest of your day.