Q3 2022 Empire State Realty Trust Inc Earnings Call
Yes.
Greetings and welcome to the Empire State Realty Trust third quarter 2022 earnings call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
Now my pleasure to introduce Heather Houston, Senior Vice President Deputy General Counsel and corporate Secretary.
You may begin.
Good afternoon. Thank you for joining us today for Empire State Realty Trust third 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 are posted in the investors section.
The company's website at <unk> 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 result, and proposed transaction isn't it.
As a reminder, forward looking statements represent managements current estimates.
They are subject to risks and uncertainties, which may cause actual results to differ from those discussed today.
Empire State Realty Trust assumes no obligations to update any forward looking statements 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.
The Covid situation has normalized and we will no longer include specific COVID-19 disclosure unless one.
During today's call, we will discuss certain non-GAAP financial measures such as SSL modified in core EDA.
Your line same store NOI cash NOI and EBITDA, which are we believe are meaningful in evaluating the company's performance. The definition and reconciliation of these measures. The most directly comparable GAAP measures are included in the earnings release and supplemental package each available on the company's website.
Yes.
Now I will turn the call over to Tony Walker, Our chairman, President and Chief Executive Officer.
Thanks, Heather and good afternoon to everyone.
We are pleased to report strong third quarter results updates on our capital recycling activities and share the outlook for the balance of our year with you today.
Yes, our teams focus is unchanged lease space sell tickets to the observatory and enhance shareholder value through proactive portfolio management capital allocation.
ESR T remains well positioned with a modernized portfolio to take advantage of the flight to quality signed.
Signed leases that will contribute to earnings and a strong and flexible balance sheet to take advantage of investment opportunities.
There is no doubt about it New York City is busy again, we are a great way to benefit from New York city's upside with multiple revenue streams from office tourism residential and retail.
Some of you may have noted certain sell side commentary that we exceeded expectations in some areas and fell below and others that is the beauty to our revenue composition.
We have four revenue streams and therefore, if you want to bid on New York City, we are the best way to make a balanced investment.
Our modernized buildings close to mass transit with great amenities and more to come and our industry leadership in energy efficiency and indoor environmental quality help us draw consistent leasing volumes in the third quarter was no exception.
We find some great independent validation of how the market values our portfolio.
In the video by our 250 West 57th Street tenant Fox Architects and we have that on page five and our updated investor presentation.
In fact, there are several videos and our investor presentation. They are all worth the time that anyone who wants to understand our company.
The Empire State building Observatory as Tripadvisor is number one attraction in the United States and number three in the world.
In today's world customer rates, the experiences and amplifies the brand.
Our customers have made our iconic brand universally and internationally important and our visitors right more highly than ever are best in class experience.
Our strong and flexible balance sheet with no floating rate debt exposure.
And a well ladder maturity schedule with no debt maturity for the next two years.
Makes us very well positioned to allocate capital strategically.
We continued our buyback activity during the third quarter and beyond.
Our identification of cash accretive external growth with an eye to how we can recycle our portfolio for better cash performance.
And given E. S. R. T. It's next legs of growth it's been very successful.
Kristina will comment on our current balance sheet recycling.
We built our business to create success in unstable markets and we see an opportunity ahead.
Tom to Ralph will cover our healthy leasing this quarter, which totaled 335000 square feet with strong mark to market spreads on new leases signed in our Manhattan office portfolio.
<unk> T is a beneficiary of the flight to quality trend.
Tenants focus on buildings with amenities.
Healthy building features energy efficiency low emissions indoor environmental quality and convenient access to mass transit.
Tenants are attracted to our modernized buildings and they're accessible price points, particularly in this environment.
Existing tenants, who know and love our product grow in our portfolio.
The recent expansion of Universal services of America follows expansions with I capital and Burlington signed last quarter and signature bank prior to that.
Linked in our largest office tenant has expanded many times within ESR to use portfolio and recently created a great video showcasing how their office space at the Empire State building is an asset that helps them attract and retain talent.
The link to that video can be found on page six and our updated investor presentation.
We continue to build our leased percentage and that will drive higher occupancy and earnings in the future.
Third quarter visitation to the Empire State building Observatory totaled 687000 visitors and we continued to benefit from strong revenues per cap.
A variety of factors, which include airport operation disruptions War in Europe , and the continued shutdown of China slowed the pace of growth of international travel to the United States through the quarter.
Third quarter recapture rate of 2019 levels was 66%.
We have modified our hypothetical fourth quarter visitation recaptured to remain at the third quarter's level.
While it will take longer than we previously expected to reach full recovery of the observatory business back to pre pandemic levels, we remain confident in the full recovery.
We have effectively managed the business through market downturns before as seen on page 15 of our investor presentation.
Our team continues to focus on effective expense management made so much easier and more effective through our all reservation ticketing and reservation system implemented during the Covid shutdown deliver.
Delivery of our best in class experience.
And the procurement of the best partnerships for iconic brand.
The Empire State building Observatory has unmatched brand recognition and is the authentic must due for a visit or to New York City. This was recognized by Tripadvisor, who declared E. S. B Observatory as the number one attraction in the United States and number three in the world.
We continue to underwrite new acquisition opportunities that 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 the ability to be nimble with our very well positioned balance sheet.
We also continue to review our portfolio to monetize assets in which we have added value and reinvest the proceeds and cash accretive acquisitions, which Kristina will touch upon shortly.
Yeah.
We are happy to report additional sustainability milestones achieved during the quarter.
ESR T achieved carbon neutrality for our entire commercial portfolio in 2022.
Yes, Archie accomplished this through its industry leadership.
In building energy efficiency retrofit work, which has reduced operational emissions, 54% at the Empire State building and 43% portfolio wide to date since 2009.
Combined with renewable wind racks.
Its renewable energy credits.
<unk> offset 100% of our electrical usage and preservation of close to 9000 acres of biodiversity forest to offset 100% ESR Ts non electric fossil fuel usage.
Yes, our T has made notable strides in emissions reductions.
Our reductions due to the important building energy efficiency retrofit work that we've done over the last decade, coupled with ongoing tenant engagement and collaboration.
Yes, our T is America's first commercial office REIT to join the United Nations Global compact and commit to the women's empowerment principles.
And lastly, we announced just earlier this month that ESR team earned the highest possible grasp five star rating and Green Star recognition for the third consecutive year with a score of 95.
Additionally, <unk> received a score of 96.
Highest in the U S diversified group and an a rating and the public disclosure of assessment, which measures E. S. G disclosure activities.
We are extremely happy with these accomplishments and recognition within the ESG space This quarter and will continue to build on these going forward.
Now I will turn it over to Tom <unk>.
Thanks, Tony and good afternoon, everyone.
We had another solid quarter headlined by 335000 square feet of total leasing volume across our commercial portfolio.
Which include a strong mark to market spreads in our Manhattan office portfolio for new leases studied tenant demand for our prebuilt spaces and over 182000 square feet of renewals.
The facts show continued improvement from the environment, we were in one year ago and that our fully modernized energy efficient and healthy buildings continue to be a destination for tenants flight to quality, we offer newly built tenant spaces with latest in indoor environmental quality technologies at a great price point with convenient.
Access to mass transit and fantastic amenities to which we continue to add.
In the third quarter, we signed 34, new and renewal leases totaling approximately 335000 square feet at a weighted average lease term of approximately eight years, which includes 179000 square feet in our Manhattan Office properties 115000 square feet in our Greater New York Metropolitan Office properties.
And 41000 square feet of retail.
Notable leases signed this quarter include a 79000 square foot renewal lease with Franklin Templeton at first Stamford place.
And with this most recent renewal and previously signed direct leases with former Subtenant of Franklin Templeton. We have now released all of Franklin Templeton's 138000 square feet that was set to expire in September 2024, you also signed a 59000 square foot direct lease.
Without for donor at 13, 33 Broadway that formerly occupied the space under a sublet from G. P. G.
And an expansion lease with Universal services of America, who relocated within our portfolio from one Grand Central place to 501 seventh Avenue, where they more than doubled in size to 30000 square feet.
Versus original space at one Grand Central places already leased to another tenant.
And a 28000 square foot new lease with the New York City School Construction Authority, a 10 10 third Avenue, which backfill the entirety of the space vacated this quarter by Ethan Allen.
We also signed leases for 16 pre built office suites in Manhattan, and we've had good success leasing our pre books. This year and are on pace to match our annual average pre books leased between 2017 in 2019.
We saw good improvement in leasing spreads this quarter Bloodedly spreads signed out of Manhattan office properties improved to a positive 10% on a cash basis compared to prior escalated rents driven by new leases up 23, 6%.
Leased percentage within our portfolio continued to increase in the third quarter.
Consistent with our expectations, which we can communicate it during our last earnings call. The total commercial portfolio leased percentage was up 70 basis points quarter over quarter in the third quarter to 88, 5%.
And off lease office leased percentage increased 110 basis points quarter over quarter to 89, 4% and has increased by 240 basis points year to date.
We have now leased over 974000 square feet year to date following another strong quarter and have only 68000 square feet of known tenant vacates through the end of this year.
We have active deals in our pipeline and we'll continue to push forward to signed leases in negotiation that have the potential to drive portfolio leased percentage higher.
Our focus continues to be on increasing our leased occupancy, which will translate to higher portfolio occupancy over time, and we maintain our projected 2022 year end occupancy of 84% to 86%.
Looking ahead to 2023, we have manageable upcoming lease expirations with only five 5% or 540000 square feet expiring in 2023 of which of which we expect to vacate about 208000 square feet to vacate and 98000 square feet of tenants who are.
Decided.
That said, we feel confident in our ability to achieve positive absorption in 2023, despite current economic headwinds based on our proven ability to lease space through cycles. Additionally.
Additionally, we have $57 million of contracted incremental rent from signed leases not yet commenced and free rent burn off.
As previously announced we will expand our amenity offerings in 2023 across our Manhattan office portfolio to include a 10000 square foot 400 person all hands presentation presentation room basketball in Pickle ball Court.
Tenant lounge with bar service and two golf simulators at the Empire State building.
And just announced this week, the new Starbucks reserve spanning 23000 square feet and three floors at the Empire State building will open on November 16th.
The new reserve will be a one of a kind destination with exclusive offerings interactive experiences curated food in force surplus cocktail menus.
Tenants located in our times square South campus will benefit from shared access to new amenities planned for 2023 that include a 300 person townhall presentation room.
And lounge at 1400 Broadway.
A new rooftop lounge with private cabanas at 13, 33 Broadway and we derive cost synergies from the proximity of our assets such that other buildings of similar size are unable to deliver comparable amenities.
Despite the increased work from home flexibility is that companies have offered their employees over the last two or more years.
Few of our tenants have decided to operate under a hotel model and our high quality buildings offer healthy workplace.
To attract and retain their employees.
Additionally, New York City office using employment has fully recovered and are now exceeds pre pre pandemic levels.
That's close to 200000 office using jobs have been added since the second quarter of 2020.
Same store cash operating expenses and real estate taxes in the third quarter was $71 $5 million.
An increase of $7 $1 million from second quarter levels and.
And an $8 $9 million increase from the third quarter of 2021, due to real estate taxes utilities labor and repair and maintenance.
Weighted to increase utilization.
We continue to anticipate same store operating expenses for the full year of 2022 will 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.
Turning to our multifamily assets.
Occupancy remains strong at 98, 4%.
And we continue to see strong mark to market increases reduced concessions, which will validate our earlier investment decision.
In summary, we had another solid leasing quarter with 335000 square feet of total office and retail leases signed at strong and improved mark to market leasing spreads.
We increased our Manhattan office lease percentage by 110 basis points quarter over quarter, and 240 basis points year to date.
And we're well positioned to increase our portfolio occupancy and we continue to see strong fundamentals in our multifamily properties now.
Now I'll turn the call over to Kristina Kristina. Thanks.
Thanks, Tom I'm pleased to provide comments on a solid quarter that emphasizes the competitive strength of our portfolio comprised of quality office assets at accessible price point.
Empire State building Observatory and number one attraction in the United States.
Strong everyday retail assets with 95% national retail tenancy and are well located and monetize multifamily asset.
For the third quarter of 2022, we reported core <unk> of $56 $5 million or 21 cents per diluted share, which compares to <unk> of $55 $3 million or <unk> 20 per diluted share for the third quarter of 2021.
In line with our 2022 earnings outlook same store property cash NOI, excluding lease termination fee was down seven 5% year over year, primarily due to the normalization of the operating expenses and a higher building utilization as well as the impact from the occupancy loss of <unk> in late 2021.
For the third quarter of 2022, the Observatory hosted 687000 visitors and generated NOI of $24 5 million up significantly from 255000 visitors and $6 $4 million in the third quarter of 2021.
We continue to generate strong revenues per capita tightly manage expenses and remain confident in the path back to pre pandemic levels of pro forma however, as Tony mentioned earlier, we expect a full recovery will take longer.
As a reminder, the observatory historically contributed roughly a quarter of the company's NOI and stands at roughly 19% on a trailing 12 month basis through the third quarter.
Turning to our balance sheet as of September 30th Tiny 22, the company had liquidity totaling $1 $2 billion, which is comprised of $387 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 of three 9% and a weighted average term to maturity of six seven years.
Notably we are well positioned in a rising rate environment with no floating rate debt exposure and a well ladder maturity schedule with no debt maturities for the next two years.
Ratio of net debt to adjusted EBITDA was five six times well below peer averages.
Our well positioned balance sheet affords us flexibility to engage in activities that generate shareholder value.
This included the repurchase of our shares the pursuit of investment opportunities that are additive to our New York City focused portfolio.
Potential capital recycling.
In the third quarter and through October 24, 2022, the company repurchased $21 million of its common stock at a weighted average price of $7 per share.
This brings the cumulative amount repurchase to $275 million and a weighted average price of $8 36 per share, which represents approximately 11% of total shares outstanding as of March 2020, the date, our share buyback program began.
Subsequent to quarter end, we entered into agreement to sell 500 Mamaroneck Avenue in Harrison, New York and 10 Bank Street in White Plains, New York at an aggregate gross asset valuation of $95 million.
Expect to close in the first quarter of 2023 subject to customary closing conditions and redeploy the proceeds in 10 31 transaction.
Turning to our guidance, we now expect 2022 <unk> to range between 83, and 85 cents per fully diluted share.
Within its revised 2022 quite SFO range. We now expect 2022 observatory NOI to be approximately $67 million to $70 million compared to $74 million to $77 million. We continue to expect observatory expenses of approximately $8 million to $9 million for the fourth quarter we.
In fact 2022 same store cash net operating income excluding lease termination income to be down in the 8% range from 2021 level. We expect same store occupancy to be between 84 and 86% by year end up from 82, 4% at year end 2021.
Lastly, as a reminder, in January of 2021 reflected certain temporary cost savings and then there's a rising cost environment, we expect fourth quarter G&A to be similar to the third quarter.
Please note that the guidance estimates and assumptions just described do not include the impact of any meaningful future lease termination fee income or any potential future property acquisitions dispositions or capital markets activity beyond October 22022.
As we look ahead, we advanced through the balance of 2022, with a well positioned and flexible balance sheet.
Focus on disciplined capital allocation and continued commitment to ESG.
We also look forward to benefiting from New York City is upside with multiple revenue streams from office tourism residential and retail and with that I will now turn the call back to the operator for our Q&A session operator.
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Our first questions come from the line of Camille by now with Bank of America. Please proceed with your questions.
Hi.
Starting with your guidance expectation for Observatory NOI was lowered from the origin all projections our guidance midpoint and was up by one said just doing the quick math here, what's driving this as strong got it.
Highlight any drivers to clear performance that keeps you comfortable with that level for the remainder of the year.
Sure. Thanks Camille.
So just a quick point I know analysts tend to look at midpoint. So technically it went up but from our vantage and it wasn't really raising the mid point, we started with a <unk> 10 range and as we get down to the latter part of the year, we were able to narrow the range from five to three.
And the previous wider range of head room for other downside from uncertainties in the market, including leasing starts higher opex and slower than expected recovery in observatory. So now with that revised observatory range and better visibility on the balance of the year, we were able to keep the same high end and able to reduce a little bit.
Of that downside, Iran, and narrowed the range to 83 to 85 cent, which inherently brings the midpoint up by a penny and Camille I. Just pointed out you know this is our inaugural year of guidance. Some people may have forgotten that and so we're quite pleased how this went for our first year after <unk>.
<unk> run a shadow guidance program last year. So we're happy with their S. P. N N. We're happy with how the team is has come through.
Okay great.
Can you update us with your latest thoughts on capital allocation with a backdrop of limited access to bank financing, even though empire state doesn't have any debt coming due soon and below average.
Just how are you balancing investment opportunities such as development or acquisition first.
Purchases.
Camille you're cutting in and out could you. Please repeat that question or maybe we could move you to the back of the queue and you could dial back in on a line that's a more constant.
Hi, This is Claire.
We have a bunch of give another shot.
Can you please update us with your latest thoughts on capital allocation with the backdrop of limited access to bank financing.
You have no you don't have any got coming to I guess I'm wondering how are you balancing investment opportunities such as funding our acquisitions versus share repurchases.
Yeah sure.
So you're correct in noting that we have no debt coming due for the next two years. Additionally, we're fortunate we have no floating rate debt exposure, so that places us in a very good position.
Coupled with a high cash balance and an undrawn credit facility and so with that we really do focus on ways to enhance shareholder value. So share buybacks continue to be a strategic part of how we think about capital allocation. If the market does not recognize the value that we bring within our portfolio and how we operate the business at <unk>.
Is a good opportunity to buyback our shares. Additionally, we have been very clear we are focused on opportunities in the market that are the right deal and that makes sense and we continue to be active on that front and last piece is capital recycling. So we have the balance sheet that affords us flexibility all of our commercial assets are 100% owned.
It affords us additional flexibility and if we see that there are certain assets, where we've added value completed the business plan and can monetize and redeploy into other opportunities that make sense and generate good cash flow growth going forward for the company. We will certainly take advantage you're right in that the debt market are really tricky.
And I think not having to access first fully is an advantage that we have a clearly we're all looking for that the last thing that I'll mention and I think we've noted this before but maybe if it's relevant is that we do have net operating loss a balance that we disclose.
And in our 10-K right. So as of that date. It ran in the mid 70 million and I mentioned that because currently our dividend Brian that about one third of our previous levels and we've always said, we'll monitor the dividend level, we actively discuss that between management and the board and we'll find the right point in time.
I'm sure you bring that back up and clearly we're entering into peak uncertain market period, and so I mentioned, the Nols because our job is not to hold back the dividend, but as we determine the pace of ramp up and other alternative uses of that capital including share buybacks, we can definitely use.
Some of the NOL effectively monetize on that and allocate the cash instead towards share buyback. So everything is on the table everything is with an eye towards generating and maximizing shareholder value.
Okay I appreciate that color.
And finally, our we've been hearing from other office landlords. That's we've got demand from occupiers Smoky weaker in 2020, right you had a solid quarter of leasing activity and I know you mentioned absorption will remain positive but are you expecting the rate of leasing for your portfolio to slow.
Yeah.
Well first we had a really solid quarter with 335000 square feet and that's follows.
Three solid quarters prior to that we have a good pipeline of activity heading into the fourth quarter and whether it's those tenants, who with whom we are in negotiation right now close in the fourth or first quarter. The good news is we've got activity from abroad.
Range of industry tried types that includes financial services professional services healthcare tech legal and and others and you know.
Look I would say that we benefit from a flight to quality as tenants are focused on the things that our portfolio provides so I think we'll outperform our.
Our competition, because we offer healthy buildings that are modernized for the 21st century, the latest technologies I E. Two newly built energy efficient tenants a tenant spaces, great access to mass transit, our great amenities to which we're adding an order an accessible price point and remember we've invested $1 billion into our asset upgrade and common.
Areas building systems, and we've redeveloped, 95% of our tenant spaces to deliver modern efficient office spaces that tenants seek today. So those tenants are looking at their alternatives I think that we are well positioned.
To outperform so we have not given our guidance for 2023 and of course, we will be preparing that and that will be.
Provided him.
In a later quarter, but right now where we sit today I feel very very good about our portfolio and our offering.
Okay. Thank you for taking my question.
Thanks, Dan.
Thank you. Our next question is come from the line of Blaine Heck with Wells Fargo. Please proceed with your questions.
Great. Thanks, good afternoon.
So now that we've moved past Labor day I'm curious what you guys are seeing in terms of tenant space usage or your estimate of utilization and also days in the office per week at your your office properties.
So I think that.
We can look at a couple of things there I think that the statistic, which I like to look the most is.
It is not certainly not castle systems, we don't have it in all of our portfolio and a lot of that data is incorrect that gives you the daily in and out it doesn't tell you how many times individuals' or in the office through the week.
We actually look at Oh I like the most is the utilization of the Empire State building Fitness Center.
That's N only tenant only fitness center and I can just tell you that we're close to two thirds of the restored memberships from 2019.
Check our utilization so what we find is that.
We don't think that the commonly stated statistics are accurate we think that work is.
Has changed and at the same time, what we we think tenants understand and our tenants understand.
As you don't want a scenario in which people are walking around as though they're at an airport lounge, saying are you done with this space.
As I sit here are you moving on and that's what we've seen the most with our tenants who have the leased space expanded space.
And I think another big issue for US is that we are.
Flight to quality, we've got great amenities, we've got at both existing and on the way.
We've got great healthy environments with energy efficient spaces in terrific locations at very accessible price points and that all dictates towards tenants, who have workers they need to occupy space and the lease with us ask Tom if he's got any other comment on this.
Look.
Definitely the way tenants work.
Has changed but you can see the vibrancy of New York City, you walk around the streets look at the activity in general and where.
Not seeing a diminishing that demand for tenants because of the change in the way they use our space.
Certainly I asked our leasing folks what are tenants, saying why are they leasing the space needed fundamentally they still want a place to work place further their employees together to collaborate and work together, regardless of the daily utilization that everybody. So so fixated on what looked at the real the real measuring stick is the 335.
<unk> thousand square feet of leasing that we just posted this quarter.
Okay.
Very helpful commentary thanks.
And then switching gears here, a little bit there seems to be a healthy debate emerging here around asset values or cap rates and the increasing interest rate environment. Since there aren't many transactions at the point to Tony I wanted to get your take on how you think asset values or cap rates may have moved this year given the increase in cost of debt and low availability.
And you know maybe you can touch on both office and multifamily.
Well, it's sort of interesting if if kristina and I sound a little slower. This morning, it's because we both got in late last night from Dallas from Urban Land Institute, where we got to chat with a lot of different folks and our counsels.
People with whom we met and I'd throw a few things out first of all the primary activity of new acquisitions right now appears to be 10 31.
And we fit in there and it's logical from that perspective, I suppose people, who sell assets and want to 10 31, our active number two don't focus on the headline cap rate focus onto what people underwrite and there are two ways you can underwrite.
Your cap rate other than just what's the entry level. One is you look at the.
Make a make a choice as to what you think the interest rates will be over the time of your hold.
There's no question that we.
Approach, we're not there yet we approach.
And the peak of the fed activity.
We had one remember that the San Francisco fed.
And a former member of the Dallas fed comment that they.
They expect another $75 75, and 25 over the next three meetings as far as increases.
And number two is also well there could be some assets, which are run properly or well or which had been star from from capital where you might buy at a cap rate of four or four and a half.
Or even three and a half however, you have the opportunity over time to improve their performance.
So I think theres been a widening.
At certain levels as far as what people are prepared to pay I think.
Actions, we know transactions are fewer and then you'll get a print like the one that Boston properties, just announced the partial purchase 205th Avenue.
So when you look at that.
I'd say that it's a little early to call anything other than a modest.
Increased sort of maybe a 50 to 75 bps increase in cap rates.
If there were arm's length transactions that were not $10 31.
Very helpful. If I could just do one follow up to that Tony you've talked about before about your interest in kind of accomplish complicated transactions and based on some kind of broker conversations we're having it sounds like there might be some distressed opportunities that come about on the office side is that something you've got.
Just would be interested in or is your focus more on growing the multifamily portfolio.
I've said this before we are omnivorous opportune of ours and it really comes down to not just F F O accretion, but cash accretion.
And it comes down to how we can structure things are we.
Most of what we have on our plate right now really the only things in which were active right now are either failed transactions from quite some time ago.
Or transactions that have not even hit the market.
I think that office.
Will be interesting to us.
When it reaches a point of attraction, we haven't seen anything to date that reaches that point.
Very helpful. Thank you.
Yeah.
Thank you our next questions come from the line of Steve <unk> with Evercore. Please proceed with your questions.
Thanks, Good afternoon, I guess I was hoping you guys could talk a little bit about the widening spread between the percent leased in the percent occupied it's up from about 300 basis points to kind of 430 basis points and it's nice to see the percent lease moving up.
Just curious kind of when you start to expect that gap to close and I guess, how tight cannot GAAP actually yet.
Steve This is Tom Yes, certainly keep an eye on our lease percentage that will drive our occupancy has signed leases commence.
Later, this year and into 2023, where we're confident in our stated goal of 84% to 86% portfolio occupancy by year end to those who I think will be more towards the middle or high end of that range, depending on when certain leases commence.
This year in our <unk>.
In the fourth quarter, we only have about 68000 square feet of tenant move outs offset by roughly a quarter of million square feet of leases that are signed that should commence in the fourth quarter or first quarter of 'twenty three so depending on when those leases commence and they will commence we will see positive absorption.
<unk> shown an increased occupancy in the near term are well over 100 basis points and then in 2023, we only have about five 5% of our portfolio leases expiring were about 539000 square feet. We've identified about 280000 square feet of known move outs, but that's offset by.
Another 179000 square feet of shop leases that should commence in 2023, plus any additional leasing that we do so given the signed leases that.
That are due to commence in the near term and in 2023, a very modest lease rollover and tenant move outs, where we're well positioned to move our occupancy up which obviously trails are leased percentage.
Great, Thanks, and I guess on the dispositions.
You know in the press release, you made mention that you would be looking to 10 31, the proceeds from the two suburban sales.
And I guess I'm. Just curious you know was that sort of a hard and fast you know, we're definitely looking to buy something or we need to buy something for tax protection does he NOL help offset that and might share repurchases may be a better use of.
Of that capital.
So thanks, Steve.
So I think 10 31 is part of the business plan as you mentioned, we do have the NOL. So that additional optionality and we also have cash on the balance sheet. So that always provides us an avenue.
Could you share repurchases and without any.
We all need to unfortunately pay down debt, we can allocate capital in that fashion towards buybacks until all of those are options for us and I think 10 31 is an appealing line because that allows us to monetize the Nols and other ways to generate shareholder value.
Continues to be the interest in in terms of what category you know as we've mentioned we focus on New York City, It's off office multifamily and retail I mean, you know we have interest in.
In multifamily in the right assets that complement the portfolio.
Right I guess last question Tony on the Observatory I realize international travel sort of stalled out a little bit with the strengthening U S. Dollar.
Does that give you any sort of pause for concern just around the ramp into 'twenty, three and I guess do you need.
Strong international tourism to kind of get back to the prior peak levels.
So I guess.
And I know, Steve you, probably expect this that I'll defer it with the concept of stalled out.
We know our sources of traffic.
Some of our international sources are virtually near 100%.
Some are or not.
Yes.
One of the things that hit in the third quarter.
There is a reduction and the seasonality of our domestic travel and an increase.
In our international and.
That's what smooths it out.
To be quite honest.
We're a little perplexed how.
Countries, which are adjacent to each other have very different.
Return to.
U S visits.
Right.
Do hear a lot more foreign languages and accidents at the observatory so.
Our real initial thought is that people are so scarred from the horror stories of airports travels and lost luggage and.
And experiences that they just said, we're just not going to go anywhere until things calm down so.
So we will see in the meantime.
The key to us is.
And this is really important.
We know we are number one.
Based upon public disclosures, we can tell you that during the period for which SL Green disclosed the summit had $1 1 million visitors and we had $1 7 million visitors.
And that's a period that covers.
Guys have heard me say that so many times, they're bright shiny penny unquote moment.
So we're actually very happy.
With the performance we are thrilled even as volumes increase.
How well the reservation system has worked.
It has reduced crowds and produced a much better quality experience for our visitors.
The visitors love it.
Our offering is absolute premier number one and they have more time.
So they're not running up because they havent waited in line so even our sales in the.
The gift shop or higher.
On a per cap basis, and close to where they used to be our use of our our pre fixed menus at our restaurants and we also know that we will have the benefit of this fantastic 23000 square foot three level Starbucks reserve that is about to open which is truly spectacular and will.
A mecca for Starbucks standard for tourists to New York. So we feel good at the same time keep in mind, we'll take a look at guidance for 2023, and when we give guidance, we'll probably give some indications of where we think the observatory comes through.
Great. Thank you that's it for me.
Thank you our next questions come from the line of Michael Griffin with Citi. Please proceed with your questions.
Great. Thanks, maybe we can go back to the leasing side.
I'm curious are there things that tenants are asking for now that they may not have been call. It earlier in the year end and have they been quicker or slower to make decisions recently.
Any color around that would be great.
On your second question.
I would comment that as we look at our tour volume.
While we're seeing total tours that are below maybe the high points of 2018 and 19, our conversion of deals to tour has increased significantly and so what that tells is clearly is that the bid.
Business leaders and decision makers, who were out touring space in spending.
Spending the time and are committed to Trans Trans Act, so that's kind.
And it's an interesting stat in Britain and in quite showing in terms of what tenants are seeking.
It goes back to the things that we are offering and we've been building.
Pre COVID-19 and as we Redeveloped, 95% of work portfolio space since IPO, including healthy buildings technologies.
<unk>.
Energy efficient space, obviously, it can be an access to mass transit certainly we are adding to our amenities as I mentioned before it is certainly that tenants are focused on but it's the right amenities and think we have we think we are delivering alright.
The right mix and a great. Great addition, particularly at Empire State building with our plans for a new basketball sports pick up all court, a 400 person all hands presentation room tenant lounge with bar service golf simulators.
That combined with the eight onsite food and beverage options. The 23000 square foot Starbucks that Joe was just mentioned.
The rooftop lounge at 30, 13, 33 Broadway the expanded lounge, a tunnel room at 14 or Broadway. So these are the things that tenants are looking for and of course remember we're in.
Great neighborhoods with great neighborhood amenities to complement our in building offering. So we think we deliver the right suite of package of amenities.
And efficient modern built office space that tenants are seeking.
Great. Thanks, and then just maybe going back on the guidance part it looks like.
Implies a deceleration into the fourth quarter I guess is this a function of expense timing or could there be something more there and then kind of looking to run right through to 2023, you know understanding you haven't given 'twenty 'twenty three guidance I guess, how should we think about this is this a good kind of starting point for that and any color on that would be great.
Sure. So in <unk>, we already mentioned the slower recovery of the observatory for the backdrop and the reasons that Tony has already mentioned.
That's reflected in there and we're still not through the end of the year. So as I mentioned the factors that are considered variable what else on the observatory what else on operating expenses and maybe some variation in leases going into commencement. So that's pretty much it and we're really transparent on each of the drivers.
And pretty consistent with the rest of our earnings guidance.
We have not given guidance yet for 'twenty, three but I think one comment we have made is regarding operating expenses. This was a year, where the increase in operating expenses compared to the prior year with accentuated because our team did a phenomenal job proactively lowering expenses when we weren't able to during very low.
A building utilization.
Drawback of that is on the way up it creates a tough comparison, yeah. So we're seeing that.
Yeah. So that's now back to normalization based on what you signed three catalysts expected in <unk>. So we should have a normal more normal path and assuming that's not the main drag on NOI. It gets us to a better trajectory. So that's all I'll say on next year, but that's one item that we've mentioned.
Awesome that's it for me thanks for the time.
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 going back to the asset sales I believe those have been on the market since at least earlier this year and I'm just curious how much did pricing change if at all from the first purpose out that's on the market to the final sale price.
Yeah, Hey, Dan. Thanks for the question. So those were on the market. Since then and like any process you go through back in for.
Penn Bank actually has assume about that and the other one has no debt on it and there are various factors so without getting into too much specifics you know we're still in the deal you have these conversations and you work through all of the plane.
And for US as we've mentioned, we're not forced sellers. So there's got to be a fair and reasonable price that makes it through NRI is on execution and how we redeploy the assets into a new one that makes sense for the portfolio in the future cash flow growth for the company, Yes, I would just add that the pricing came in where we thought the pricing would come in on.
The basis of where we launched the sales.
And.
There you go.
Got it and then Tony.
I guess, congrats on achieving carbon neutrality.
Just curious on local low 97, the Mayor's office released the new guidance a few weeks ago.
But I'm just curious Tony.
You know close.
Close to the implementation of the law, how do you think it's broadly.
Being implemented towards office. It did seem like there was some new technical changes in there which seems.
Unfair generally two office owners.
The technical definition of a carbon limits I'm just curious how you think broadly how how about new logging and flatbed and Matt how Empire state of the adjustments and changes.
Well as we've said we know we have no fines in 2024, and we have plans for how we get successfully through 2030, we'll see how that goes.
Yes.
I'm on the advisory.
Implementation Board.
The advisory board for the implementation of local law 97, or the D. O b the only commercial landlord on it I don't think there's been anything unfair put out there.
I think it's a it's pretty straightforward I would say that <unk> is.
It is one level of performance achieve ability versus office.
There are other.
Challenges opportunities for achieve ability achievement of goals and retail and logistics.
The partnership that we developed with our tenants.
And Thats from our groundbreaking work led by Dana Schneider Who's R. R.
Our lead on this of energy sustainability and ESG.
We're very science based targets I think the big challenge for a lot of companies is that they've gone for soft targets to date and they might have lead.
And even <unk> to some degree is a softer target when you get to the local law 97, it's all about data and it's all about actual performance.
And it's pretty much in line with in many ways the sort of data and performance that we may have to produce under the SEC's proposed new reporting requirements, we'll see if they actually go into place.
And you may be aware that theres a lawsuit against local low 97.
We have no involvement in that so we'll see about the implementation of local law 97 that said, we believe it's good business.
To be an asset rather than a liability to.
Two users tenants.
Whose.
Actual companies.
The better credit quality companies have a greater and greater responsibility and burden and practice of disclosure.
Of their carbon footprint.
Of what they do and what space. They occupies makes a difference in their own scores. So we look at all of this strictly from a perspective, Daniel how do we compete best for tenants.
Does this put points on the board for ESR T. Everything we do is integrated to any other expense we have.
Lifecycle cost analysis included we spend the money we get the results, we attract better tenants on longer leases with better credit quality.
And we think better rents so we're accessible.
Through our price points.
Along with indoor and Brian a little quality and healthy buildings in those practices things we started to put in place back in 2009.
Our competitive advantage and local low 97 is something that occurs along the way yeah. I would just I would just add one more point, which is.
Our journey to carbon neutrality is very much about what we do within our operations.
As there is more focus on it it's not enough to just tease racks, and offset you really need to engage with the tenants to Tony mentioned being helpful to the tenant and thought to bring them along in the journey on what they can do and that's how we'll and all landlords will ultimately achieve it and the fact that we're ahead.
Even with these tweaks in the law it makes us much better positioned.
Alright, thanks, everyone.
Thank you our next questions come from the line of John Kim with BMO. Please proceed with your questions.
Thank you.
I realize it's only two assets, but I was wondering if you could provide any more color on how your multifamily portfolio has done and I know you mentioned, 98% occupancy, but the organic growth any.
Any additional commentary on same store revenue, where I know why and how that performed relative to your expectation.
No John they've done well.
I think that's the best color, we can say we are.
We're ahead of where we thought we would be when we acquired them and underwrote them and we love our partner.
The veteran organization.
And we think that the success, we've had with them and the work we do makes us quite appealing for others, who might like to recap.
And we've done well as we thought we would and we're happy that people can look at the wisdom of what we did although.
That people were not thrilled when we acquired them originally.
Okay.
Given the success of your multifamily investment and the economies of scale are you.
Inclined to build scale in multifamily or do you anticipate I don't know big dislocations in the market and I know youre not seeing signs of distress today, but I'm just wondering given your balance sheet. Given that you had previously talked about opportunities like this I'm wondering if you know potentially look at other asset types.
Use of proceeds.
Well, we already said that we're not really looking at office right now so that kind of narrows down the food groups.
Yeah, and John we've spoken on this we have interest in multifamily. This made it clear, but it's not just about we will get to scale at all costs are going to wait for the IPL, it's very healthy asset class, so probably not likely to see a ton of this fast I will look for situations and our team is hard at work on that.
And Tony You mentioned you retained your top position for the Observatory.
Are you surprised at all by the success of summit and the edge I mean, you've outpaced stomach, but its not open seven days a week, yet and I was wondering if that played it all apart in your outlook for the third time.
So we didnt outpaced summit, we crushed them.
What about pace.
Now, let's look at the numbers that I decided number one number two.
Our Rev per caps are awesome number three.
We know the performance of the edge and we'll just say that they are bright shiny Penny moment has passed and we anticipate the bright shiny penny moment of the summit will pass.
Our number one we are the international icon, our brand is fantastic and every continent.
In the world.
But what's the visitor count on on the edge.
They just read their disclosure I think we've run into the end of the call. So.
Unless we have any other calls I think we'd probably want to wrap up and let people go and you can also listen to what we said earlier in the call.
So please remember that forward looking statements, including guidance are meant to be helpful. With forward modeling, but are not guarantees.
Many thanks to our great team, who have red incredibly hard and I have every confidence we will continue to do a great job on behalf of stakeholders.
We look forward to the chance.
To meet with many of you at non deal Roadshows conferences and property tours in the months ahead until then thanks for your interest onward and upward everybody.
Thank you. This does conclude today's teleconference. We appreciate your participation you may disconnect your lines at this time.
Enjoy the rest of your day.
Yeah.