Q4 2022 Empire State Realty Trust Inc Earnings Call
Greetings and welcome to the Empire State Realty Trust fourth 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. If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded its now my pleasure to introduce Heather Houston, Senior Vice President and Chief Counsel corporate and Secretary.
Thank you you may begin.
Good afternoon. Thank you for joining us today for Empire State Realty Trust fourth 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.
Of the company's website at E. S. R T REIT dotcom.
On today's call management's prepared remarks and answers to your questions may contain forward looking statements as defined in applicable securities laws, including those related to market conditions property operations capital expenditures income expense financial result, and proposed transactions as an event.
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 obligation to update any forward looking statement in the future. We encourage listeners to review the more detailed discussion related to these forward looking statements in the company's filings with the SEC.
During today's call, we will discuss certain non-GAAP financial measures such as F. F. L modified EMCORE F. L. 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, Heather and good afternoon to everyone.
This is Heather is first hand on the wheel on our earnings calls since the retirement of Tom Keltner, We're delighted to have her here with us and we will always be grateful and appreciative, Tom Keltner as more than 40 years of commitment and contribution to ESR tea and its predecessor entities.
Yes, our T is pleased to report strong fourth quarter results to close out the year provide updates on our capital recycling activities and leasing and our outlook for 2023.
Alright, yes, Archie team accomplished a lot this year.
<unk> top priorities are to lease space sell tickets to the Empire State building Observatory make good use of our balance sheet cheap our sustainability goals and do all of this with an unrelenting focus on shareholder value.
We had a very solid leasing year, we leased over 1 million square feet at consistently positive leasing spreads and made meaningful absorption progress with a 210 basis points increase in Manhattan office occupancy and a 260 basis points increase in Manhattan office lease percentage throughout.
The year.
Our buildings represent affordable options and the flight to quality.
Character full modernization, great locations near mass transit great amenities in place with more to come and industry leadership in energy efficiency and indoor environmental quality.
Our goal is to get the best deal in good times and get the deals in challenged times and draw consistent leasing volumes through cycles.
Existing tenants, who know and love our products growing our portfolio.
We have completed 258 expansions, which total $2 5 million square feet since the company went public.
We continue to build our leased percentage and that will drive higher occupancy and earnings in the future.
Tom will cover 2022 in more detail and now it's a great leased just completed.
And discuss our 2023 pipeline.
Our quality portfolio is resilient and yes, Archie benefits from the flight to quality trend.
Our entirely re imagined Empire State building Observatory is the beneficiary of a $165 million renovation and new exhibits completed just prior to the pandemic and our introduction of our timed ticketing operation.
The customer experience has been improved by the exhibits and by reduced crowds with generally no lines.
Now that we know when customers will be there we plan better our staffing and control expenses.
Now reap the rewards of these efforts.
Tripadvisor is number one attraction in the United States number three in the world.
Is the authentic experience that benefits by comparison to all the other new entrants in the market.
We hit our observatory NOI expectations in 2022.
Largely driven by growth in revenue per capita prudent expense management exceptional brand awareness and a shared commitment to excellence by the entire leadership team.
In December 2022 Observatory NOI reached 99% of pre Covid 2019 levels.
Visitation reached 88% of pre Covid 2019 levels.
We are an international brand.
We have spoken about the strength of <unk> balance sheet for years. It helps us win new tenants, who look to partner with a financially stable landlord, who maintain high quality standards and their assets and deliver on their commitments to tenants and its seek a compelling value proposition, yes, our T offers a high quality.
The experience in trophy assets at an attractive price point.
Our balance sheet allows us to be nimble and engage in share repurchases, new acquisitions and capital recycling.
We derive our income from diverse sources office rentals Observatory income retail rentals and residential rentals.
The addition of multifamily to our portfolio since.
December 2021, further diversified our cash flow stream.
We have recycled our balance sheet acts efficiently through the sale of various suburban assets and reinvestment into Manhattan multifamily.
We have broadened our industry leadership in environmental sustainability and healthy building performance over the past year.
Yes, our team achieved carbon neutrality in 2022.
And we continue to make progress towards our goal of zero net net zero emissions by 2035.
We published the Empire building playbook for de Carbonization of existing buildings in partnership with the New York State Energy Research Development Authority.
Our guide for others on how to achieve sustainability goals.
We received target validation approval from the science based targets initiative.
With their most advanced one five degree target right.
Platinum recognition with Green lease leader is maintained at the highest possible recipe ratings and global sector leadership a distinction.
And achieved.
Recertification for well health safety fit well and energy Star.
We were the only in New York City commercial landlord on the local law 97 implementation Advisory Board and we are the only in New York City commercial landlord on the New York City Sustainability Advisory Board.
We had been included in the Bloomberg gender equality index for two consecutive years.
These ESG accomplishments and initiatives are increasingly important.
Both tenants and their employees as well as investors and remain a top priority for E. S. R. A T.
Our stock outperformed.
CBD office peers.
From 2020 to 2022 and year to date for many of these reasons.
Even though we think it is obvious and it still trades at a crazy discount.
Lastly, we introduced guidance for the first time in 2022 to give the street more clarity on the earnings trajectory and outlook for our company and actual results.
Which exceeded our.
Our initial expectations.
This is the work of a great team that has navigated through challenges.
And rises to the occasion.
With incredible focus on our company's four priorities and demonstrated progress.
We move forward into 2023 with the same goals lease space sell tickets to the observatory proactively manage our portfolio achieve our sustainability goals and manage our balance sheet and drive shareholder value.
Tom and Kristina will provide more detail on our progress and how we plan to accomplish these goals in 2023.
Before I turn it over to Tom I also want to congratulate Kristina on her promotion to Chief operating Officer. In addition to Chief Financial Officer This quarter.
Christina is a great partner to all of US a great leader and has tremendous value.
Our new title reflects the roll into which he has grown.
Great Fellow Executive Officer, Tom and me and she is involved in every strategic decision.
Tom.
Thanks, Tony and good afternoon, everyone.
We had a very solid year in 2022, and 2023 shows real promise.
During the year, we signed over 1.1 million square feet of leases, which is consistent with our pre COVID-19 three year average lease volume for 2017 to 2019.
In our Manhattan office portfolio, we achieved a positive mark to market lease spreads in each of the last four quarters.
Experienced studied net effective rent growth throughout the year and signed a major new and expansion leases with quality tenants.
Clothing, I capital signature Bank progeny Crown Castle, and others and leased to just shy of 300000 square feet of prebuilt, starting the year nearly matching our total volume of prebuilt leased in 2019.
Well manhattans market wide office availability rates increased in 2022.
Yes, our Ts Manhattan office leased percentage rate improved by 260 basis points and occupancy increased by 210 basis points for the year.
We benefit from the flight to quality trend and our outperformance demonstrates tenants desire for our fully modernized energy efficient and healthy buildings, which are conveniently located near mass transit with in building a matter to us access to neighborhood amenities and.
An exceptional tenant services and at an attractive price point.
In the fourth quarter office leasing spreads remained positive with new and renewal lease spreads signed at our Manhattan office properties up 5% on a cash basis compared to the prior escalator rents, we signed 29, new and renewal leases totaling approximately 144000 square feet, which includes.
93000 square feet under our Manhattan office properties dominated by healthy activity in our smaller prebuilt suites.
50000 square feet in our greater New York Metropolitan Office properties and over 1000 square feet of retail.
After year end, we signed a 16 year 65000 square foot lease with an engineering firm at the Empire State building.
Combined with fourth quarter leases, we have signed nearly 100000 square feet of new leases at the Empire State building, where we have significantly increased our leased percentage.
We have active deals in our pipeline throughout the portfolio, including prebuilt suites, and several full floor leases that should drive portfolio leased percentage higher.
We're well positioned and confident in our ability to drive our leased rate higher in 2023, we invested approximately $1 billion in tourer assets since our IPO to create healthy buildings that are fully modernized we are adding to our robust and building amenities.
Empire State building and shared campus amenities in our times square South portfolio.
Our tenant spaces are newly built with the best in indoor environmental quality and energy efficiency, which lowers tenants occupancy costs, while increasing employee health and productivity.
Our assets are well located your neighborhood amenities and mass transit hubs.
The recent opening of the east side access to Grand Central station will greatly benefit us at one Grand Central place.
After years of consolidating smaller spaces to create move in ready prebuilt suites and full floor turnkey spaces. Our hard work is done with over 95% of our tenant spaces now redeveloped and our vacant space is ready for immediate lease up.
We proactively managed our rent role such that only five 1% or 494000 square feet of leases are set to expire in 2023, and we have $54 million of contracted incremental rent from signed leases not yet commenced and free rent burn off.
Our strong balance sheet affords us the ability to compete in today's environment and gives our tenants and brokers confidence that we will deliver on our promises.
We have an exceptional dedicated team that executes daily on behalf of our tenants and their brokers.
And although New York City office, using employment has recovered and now exceeds pre pandemic levels.
It's close to 200000 office using jobs have been added since the second quarter of 2020.
We have demonstrated our ability to lease space through all cycles.
We've done the hard work to position ourselves to increase our leased percentage.
And achieved positive absorption in 2023.
Same store property operating expenses and real estate taxes were up this year as contemplated in our guidance, but were approximately 7% below pre pandemic levels in 2022 due to a combination of permanent cost saving measures by the excellent work of our operations team.
And gradual return to office throughout the year.
Property operating expenses alone were 13% below pre pandemic levels and through continued disciplined cost control.
We forecast 2023, our property operating expenses will be approximately 3% below our 2019 actuals.
Kristina will provide more detail in a moment.
Yeah.
Turning to our multifamily assets as previously announced we closed on the off market acquisition of 298 Mulberry Street in late December and are thrilled to add this property to our growing multifamily portfolio.
298, more berries, a 96 unit fully occupied multifamily asset.
Located in a highly desirable neighborhood at the confluence of the Knowhow, No leader and East village Submarkets.
Which have a limited supply of market rate full service product.
And is in walking distance to NYU.
Importantly.
This asset is 100% free market and we see upside opportunity through mark to market on in place rents and future rent growth.
Total multifamily occupancy, which now includes the newly acquired 298 Mulberry remained strong at 96, 3%.
And we continue to see good mark to market increases and steady demand across the board, which validates our investment decision.
In summary.
As I said at the start we had a very solid year.
We've done the hard work invested in our assets over many years and are exceptionally well positioned to lease space and achieve positive absorption again in 2023.
We signed office and retail leases up 144000 square feet in the fourth quarter and over $1 1 million square feet during the full year.
We increased our Manhattan office portfolio leased percentage by 260 basis points.
And achieved positive absorption of 210 basis points in occupancy over the prior year.
We signed a new lease for 65000 square feet at the Empire State building after year end and we have grown our multifamily portfolio, where we continue to see strong fundamentals and performance.
Now I'll call I'll turn the call over to Kristina Kristina.
Thanks, Tom let's start out with an overview of results for the year, we reported core <unk> of $224 million or 90 cents per diluted share, which compares to <unk> of $195 million or 70 cents per diluted share for 2020 one.
2022 core F. All exceeded our most recent guidance range of 83 to 85, then largely driven by stronger performance at the observer trade towards year end and lower than expected year over year decline in full year same store NOI of four 1% driven by modest same store revenue growth offset by an.
Approximate 9% higher property expenses as expected.
For the fourth quarter of 2022 we've appointed core S S $59 million or 22 cents per diluted share, which compares to <unk> $50 million or <unk> 18 cents per diluted share for the fourth quarter of 2021.
Same store property cash NOI, excluding lease termination fees were down three 3% year over year.
Largely driven by higher property operating expenses and real estate taxes, partially offset by higher revenues from cash rent.
The Observatory hosted 660000 visitors and generated NOI of $23 $8 million in the fourth quarter up significantly from 360000 visitors in NOI of $10 $7 million in the fourth quarter of 2021.
Observatory visitation recapture in the fourth quarter with 74% of comparable 2019, visitation, which exceeded our revised hypothetical forecast of 66% of comparable 2019 visitation largely driven by strong December demand when visitation exceeded 88% of comp.
2019 level.
Notably fourth quarter NOI recapture as a percentage of 2019 with 82% and a testament to our team's execution.
For the full year Observatory NOI totaled $74 $9 million, which represented NOI recapture as a percentage of 2019 of 79%.
We continued to tightly manage expenses at the observatory and generate strong revenue per capita which were up 18% in 2022 versus comparable 2019 level as a result, the NOI recovery has outpaced visitation relative to pre pandemic levels.
We will be focused on the NOI outlook going forward as we provide guidance to the street on the Observatory performance from here as a reminder, the observatory historically contributed roughly a quarter of the company's NOI and stands at approximately 21% and in failing 12 month basis through the fourth quarter.
Our balance sheet as of December 31st 2022 had total liquidity of $1 $1 billion, which was comprised of $264 million of cash and $850 million of undrawn capacity on our revolving credit facility at.
At year 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 four years.
Our ratio of net debt to adjusted EBITDA with 5.7 times, well below peer averages, notably we have no floating rate debt exposure and a well ladder maturity schedule with no debt maturity until November 2024, when a $78 million mortgage macquarrie.
Our balance sheet affords us flexibility to engage in activities that generate shareholder value. This includes the repurchase of our shares the pursuit of investment opportunities that are additive to our New York City focused portfolio and capital recycling.
For the full year of 2022, the company repurchased a total of $88 $9 million of its common stock at a weighted average price of $7 78.
In the fourth quarter and through February 13, 2023, the company repurchased $8 $2 million of its common stock at a weighted average price of $6.70 per share.
This brings the cumulative amount repurchase to $281.2 million at a weighted average price of $8 31 per share, which represents approximately 11% of total shares outstanding as of March 5th 'twenty 'twenty to date, our share buyback program began.
As previously mentioned, we focus on capital recycling and we take a hard look at each and every one of our assets and pursue dispositions, where we have executed on the business plan and or I can recycle the proceeds into assets that align with our long term portfolio cash flow growth objectives.
We are pleased that during this period of significant market uncertainty the company successfully executed on our capital recycling strategy.
In terms of disposition in the fourth quarter. The company closed on the sale of an office asset located at 10 Bank Street in White Plains, New York at a gross asset valuation of $42 million.
500, Meronek Avenue inherits in New York, I mean under contract for sale for $53 million with an expected closing in the first quarter subject to customary closing condition.
Subsequent to year end in February the company closed on the disposition of its retail asset located at 69 Dash 97, and one O three dash one O seven main street in Westport, Connecticut, and a gross asset valuation of $40 million.
The Westport sale with a related party transaction approved in accordance with the company's protocol.
The proceeds from these suburban office and retail dispositions were redeployed in a tax efficient manner into the $115 million acquisition of 298, Mulberry Street that we announced in our December 2022 business update.
In a market with limited investment opportunities given dislocation in the capital market, particularly those of high quality. We are pleased that our investment team was able to source this off market transaction.
Importantly, this acquisition enabled the company to redeploy disposition proceeds in a tax efficient manner into an asset with a more favorable capex profile.
Further given yes, sarkies flexible balance sheet with strong liquidity, we were able to acquire the asset on an unlevered basis and contribute this to our unencumbered pool.
This represents yes, Archie third multifamily acquisition as we continue to strengthen strengthen our position as a New York City focused company with a strong balance sheet and portfolio with multiple sources of upside that include fully modernized office buildings that benefit from tenants in search of a quality and a strong value prop.
Position everyday retail and high foot traffic locations near mass transit.
Empire State building Observatory, a high margin business, which continues to experience a strong recovery with even stronger brand recognition compared to pre COVID-19.
And our multifamily portfolio of Wella monetize well located asset.
Turning to guidance, we expect 2023 core <unk> to range between 82 cents to 86 cents per fully diluted share.
This compares to 2022 core S. F. L of 83 cents, excluding lease termination fee income.
As a reminder, our guidance range does not include any meaningful future lease termination fees, which totaled seven cents in 2020 two.
Let me spend a moment to discuss the assumptions used in our guidance in 2023, we expect same store cash NOI, excluding lease termination income to be down in the 4% to 6% range from 'twenty to 'twenty two level.
The change is primarily due to an approximate 8% forecasted increase in property operating expenses and real estate taxes, which is partially offset by higher reimbursement income.
The increase in Opex is largely tied to assumptions for increased building utilization in 2023 for.
For reference even with this increase property operating expenses will be approximately 3% below 2019 level, which reflects some permanent cost savings and efficiencies we achieved from pre COVID-19 levels.
The increased property operating expenses are partially offset by modest revenue growth anticipated, which has seen same store occupancy of 85% to 87% by year at similar.
Similar to 2022 guidance, we have factored in some conservatism on the revenue side, particularly in terms of leasing assumptions and timing of leasing it.
Turning to the Observatory, we expect 'twenty twenty-three observatory NOI to be approximately 80 $896 million up from $75 million in 2022.
As a reminder, pre pandemic the observatory generated 95 million in NOI.
This NOI guidance assumes observatory expenses of approximately 9 million per quarter for 2023.
The low end of our guidance range reflects the potential for a slower than expected observatory ramp up due to uncontrollable factors that could impact travel and tourism and conservatism around property revenues, particularly in terms of leasing assumptions and timing of at least.
The high end of our range reflects a ramp up and observatory performing and marginally exceed pre pandemic level.
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 unannounced future property acquisitions dispositions or capital markets activity.
In summary, the company has executed well on its priorities, we executed on our capital recycling strategy with completed dispositions of two suburban office asset to suburban retail assets and one additional suburban office asset pending closing in.
In each instance, the transactions were structured to enable the company to redeploy the proceeds in a tax efficient manner.
We sourced through off market transactions, three attractive Manhattan multifamily assets, which now comprise approximately 5% of yes, our Ts NOI and contribute approximately four cents to 2023.
We remained active and executed on approximately $90 million in share buyback from 'twenty to 'twenty, two which brings our cumulative buyback total to $281 million or 11% of total shares outstanding since the buyback program began in March 'twenty 'twenty.
We did all of this while prudently and strategically managing our balance sheet to have no floating rate debt exposure no debt maturity until late 2020 for our revolving credit facility that remains undrawn and matures in 2025, plus has two six month extension a strengthened unencumbered pool that now include small piece.
Family and continued strong liquidity to enable the company to take advantage of attractive investment opportunities that may emerge in this period of uncertainty and capital dislocation.
Our commercial portfolio is now over 85% occupied and over 88% leased and we continue to benefit from tenant demand for high quality asset.
Strong value proposition and landlords with strong balance sheets, who can deliver on their commitments.
As we look ahead, yes, Archie advances into 'twenty, and 'twenty, three where the wild position and flexible balance sheet, a focus on disciplined capital allocation and continued commitment to ESG, which we believe will allow us to continue to perform despite the economic headwinds and uncertainty in the market.
And with that I'll now turn to the operator for Q&A operator.
Thank you we will now be conducting a question and answer session.
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Please while we poll for your questions.
Our first questions come from the line of Steve Sakura with Evercore ISI. Please proceed with your questions.
Yeah. Thanks, Good afternoon, I guess, a couple maybe a starting with Tom on the AR on the leasing you know I guess I'm trying to understand maybe a little bit more of the demand that you're seeing and to what extent are you seeing you know maybe demand coming out of some of these buildings that are being redeveloped and the pen market you know from sort of class b assets in the class.
Hey assets and you know is that pushing some of these more value oriented tenants are into your portfolio.
Yes, Steve we continued to benefit from a flight to quality as we've seen in the past and we continue to benefit us because we're giving tenants what they once were delivering healthy buildings that are fully modernized.
Our robust amenities to which we're adding a newly built tenant spaces, great access to mass transit.
Latest in indoor environmental quality and order an accessible price point.
So where we're seeing tenants from you know across the market not just the Penn buildings, but from from from all areas that generally is this flight to quality and that's evidenced by the excellent year that we have.
With over $1 1 million square feet of leases signed which.
Nearly equals our average three year average from 2017 to 2019, which was a pretty robust leasing market.
We just signed as I mentioned earlier 65000 square foot lease with.
With an engineering firm at the Empire State building that was signed in January following the close of the quarter. So you look at leases signed over the fourth quarter and into January we signed approximately 100000 square feet of leases at the Empire State building, we are marketing a full floor high end prebuilt AR of 26000 square feet of it.
At Empire, where we hired a broker event last week, that's creating some good buzz amongst brokers and I'm excited about what we're doing because we're adding to our robust amenities. We've spoken before about the new multi sports court Ah that converts to a 400 person townhall presentation room at Empire, where the tenant lounge bar service too.
<unk> simulators.
With the Starbucks reserve that opened up in November of 23000 square feet on three floors and this is on top of the existing spectacular amenities that we have that include a 15000 square foot fitness Center executive Jim Copper Center eight on site food and beverage options. So I think we're incredibly well positioned to improve our leased percentage in too.
'twenty three that's going to drive our occupancy up.
And Steve Tony here, I'll add that that tenant 65000 square feet that just came to just at least at Empire and they have not announced to their own people. Yet. So we will announce that at the beginning of March with the name of the tenant is it's great tenant.
That is actually come from.
Park Avenue South.
An area that was hot before and they're coming to quality with more amenities energy efficiency indoor environmental quality with a specific mandate to get a space that will be an attraction to talent and retention for talent.
Okay second question just on on the Observatory as you guys think about the continued recovery in you know using the ticketing system that you've got.
How are you sort of balancing volume and price, you've obviously been able to dramatically increase the average.
Ticket price are you know through Covid and I'm, just wondering as tourism comes back Tony how do you sort of think about that balance between volume and price.
Look we will always go for NOI over volume that's part one part two.
We are very happy with the performance of the Observatory.
In 2022, we're very happy with the month of January .
It has been quite strong.
When we look at our goals.
We keep in mind. The fact that we can always add hours to the observatory.
Based on demand.
Right now because we're all a reservation, we know what ours, we need to operate whereas before we just stayed open in order to capture provide the opportunity to capture 10 visitors when they came through.
So we.
We feel very good.
We have the best per caps, we've had you know when we look at the mix that we've added.
And that means more pass program is still on a comparable basis to at the same ratio.
Our our per cap is dramatically higher our brand has never been stronger we are a true global brand.
The the branding opportunities to co branding, which we get now people come to US we don't pay for it they come to us and that only builds our brands further and that builds more direct demand for the attraction.
And as volume increases will add hours, but we won't do however has diminished the customer experience and that's what got us to number one attraction in the United States number three in the World. We will maintain the customer experience. We are the only authentic play in New York City.
Since 2013, Ive heard Oh, it's going to be one world Trade Center, Oh, it's gonna be edge, Oh, it's got to be the summit.
<unk> continued to perform and continue to improve our game and that's what we'll continue to do.
Great and then last question for me I don't know who wants to take this I saw under the transaction activity that are you guys sold this 40 million dollar asset up in a I guess Westport, Connecticut, and its where it was described as a related party transaction I just didn't know what sort of details or information you could sort of provide on that.
Deal and maybe how that was priced in sort of the mechanics behind that deal.
I'm sure. This is how they're Houston I can I can take that one I'll, let kristina add to it. So the buyer was affiliated it's an entity affiliated with Tony Malkin and the transaction was conducted in compliance with all related transaction protocol include.
Including that the company reviewed with outside counsel all best practices for related party transaction and took additional precautions to ensure an arm's length process. There were separate counsel and appraisals for both the buyer and the seller.
The independent members of our board conducted an independent review under the guidance of outside Counsel and then approved the transaction and full disclosure of the transaction will be made in our 10-K, which we plan to file next week.
Yes.
Thank you. Our next question is coming from the line of Camille bottle with Bank of America. Please proceed with your questions.
Hello within your same store NOI guidance is expecting modest revenue growth can you. Please comment on your expectations around leasing spreads in particular for your Greater New York Metropolitan Office and retail portfolios.
Sure Camille.
For.
Of course this quarter free in our Manhattan office, we achieved a 5% pas positive spread we would have negative spreads in the greater New York Metropolitan Office portfolio. This past quarter, it's all going to depend going forward. The leasing spreads are going to depend on the mix of spaces that we lease and what types of spaces. They are and what the prior fully escalated rents are.
If you look at our in place rents are for you asked specifically about Greater New York Metropolitan Office, We're probably you know.
It was just going to see flat to modest negative spreads in the greater New York Metropolitan portfolio as we go forward and leasing up our vacant space in Manhattan, given the prior escalated rent was around $53 per square foot and we're doing goes above $60 square foot and where we can move the needle more significantly I would expect positive.
Spreads on new leasing in Manhattan, and then on retail we really don't have a tremendous amount of retail space rolling over the next several years, but if there is if its flat to markdown is going to be more than offset by.
The value of the lease up of vacant space that could be in the range of 5 million $6 million, well, well offset to any any modest negative spreads that we might see on leases expiring.
Okay and on the point around higher operating expenses due to utilization just how much is the anticipated impact to your same store NOI outlook will be front end weighted given the tougher comps in the second half of 'twenty to 'twenty two.
You mean, how much would it be front line in terms of the increased operating expenses I would expect that we're going to see a gradual increase in operating expenses due to utilization of.
Some of the increased cost that worse, where that we'll see next year will be things like union rate increases so that would be spread over the year and then we've got some one time expenses that it'll be a bit lumpy. So yeah.
Basically it's bit of a mix, you'll see some of our expenses that will gradually rise due to utilization I know theres been a bit lumpy.
Okay and final question can you. Please comment on what's been driving the lower leasing and leasing commissions and tenant improvement costs throughout the year and if Q4 is a good level.
Or where are these costs will be in 'twenty to 'twenty three.
Well what were our leasing cost increased this quarter compared to last quarter. The cost as you see historically varied by quarter and they really depend on the length of term the space type, whether it's white box of prebuilt first generation and second generation space and you're going to see the you know the the lease cost per year of term as a person.
Centers of initial rent.
This quarter was really in line with the past.
Four year range, it's kind of in that 15% to 19% range. This quarter on an aggregate basis or dollars per square foot, we were around $54 per square foot and that's well below our last five quarters that average about $79 per square foot, but we really think of leasing cost.
And we focus on net effective rents and what we saw in 2022 is our average weight of net effective rent increased on a year over year basis by about 5%. So we think that that's a you know a.
A very positive start and that's what we keep our eye on going forward.
Very helpful. Thank you.
Thank you. Our next question that's come from the line of Michael Griffin with Citi. Please proceed with your questions.
Great. Thanks, just maybe on expectations for 2023 guidance.
I mean, the midpoint with the run rate of 22 cents in the fourth quarter is this the way that we should be thinking about it I mean, I'm I'm calculating is kind of back of the envelope math, you're getting a 6% benefit from inquiries to NOI in the observatory, calling it eight cent impact from higher Opex in real estate taxes, maybe a penny increase from from occupancy.
Those numbers sort of give me toward that higher end, maybe a little bit above anything else I might be missing there that gets us sort of closer to that midpoint.
Hey, Greg I think you have it and those are the key ingredients and we do try to be very transparent in terms of the building blocks I'm showing you exactly what drives the same store NOI I'm. So you have those components right.
The other thing I would mention is you know when you think about whether you can annualize the last quarter I'm just be a little bit cautious with that there is some seasonality element to the observatory results you Wanna be careful not to just take the fourth quarter and annualize that in any given year. The second component is you got the NOI decline, but the other component is on the capital recycle.
And just to do the quick math for people. It's about 2.7, then in terms of hit on the F O offset by 1.7 cents from the contribution of 298 Mulberry that gets you to another penny, but do you have the right conclusion.
Great. Thanks, and then maybe we can shift over to the multifamily for a second I mean, it seems like this has been a growth Avenue recently, Tony you talked about it a bit in his prepared remarks, you know looking at the investor deck, the pro forma including Mulberry. It makes up about 5% of the portfolio you've talked about being more of a New York City focused REIT. So I'm just curious how big a piece of the pie.
You you think this could grow to be in sort of the the near to medium term.
And so we definitely mentioned our interests on any asset class. It makes a ton of sense for us as a New York City focused player to have quality office drivers to have the everyday retail had the observatory business and having residential demand makes a ton of sense. As we've previously responded to this line of questioning we don't think it's prudent.
But it's hard to get out there and say, we'll achieve it no matter what because the reality is multifamily is very sought after the fundamentals are very healthy and so we want a balance and say we are interested we have strong liquidity positioning, but we want to be prudent in the way we source deals and go after transaction.
Great.
And if I, if I may graph two things one.
I have three actually one we really got dumped on when we announced our first multifamily transaction.
We thought it was the right time to do it everybody thought it was the wrong thing to do we and number two we are omnivorous opportune divorce. So we will go where we see opportunity to develop shareholder value.
Three.
When we know our occupancy of 96% that that Tom noted, we actually have units under renovation in our portfolio. So that is not an adjusted for units not.
In circulation that's the gross number so there's a little bit of play there and I I just might add again, our focus is on cash cash delivery, we focus less on S. F O and we focus more on cash. So we're really pleased with what we've done and we will continue to look at that opportunity as we go forward on acquisitions.
That's great John I appreciate the additional color that's it for me.
Thank you.
Thank you. Our next question is coming from the line of Blaine Heck with Wells Fargo. Please proceed with your questions.
Okay. Thanks. Good afternoon first question just to follow up on the leasing environment are you seeing signs that tenants or any more likely to look at hotel ing or hot desking as a way to kind of efficiently use their office space and a more hybrid environment.
No.
Short answer is no Blaine. The there are examples of tests that we're doing a hotel in pre Covid and there are examples of tenants that are doing hotel in post COVID-19, but in an environment, where employers are looking to attract and retain talent.
And just about everybody speaks about the need to get folks together for things like.
Our collaboration a creative creativity team building mentoring training all of these things the desire by employees. He has to have their individual work space.
And that's what drives the you know the demand for office space, but I think that the concept that tenants are moving towards hotel ing because of change of work habits is we're just not seeing that.
Yeah.
And I attended a conference back in 2019, which I was asked with two other prominent exacts in real estate to comment on the future of.
Short term office space use we work convene industrious no tell.
And one person decided a statistic from an economist at Jones Lang Lasalle that by within five years, 30% of all office space would be occupied on short term users.
Short term users for short term flex space clearly that Hasnt happened.
I know and it won't happen.
I would also comment on the irony of articles and how difficult. It is to be fired when your remote and you don't have an office environment within which to work and to relate to your peers, we feel very confident that ultimately the office plays.
The central role and businesses going forward.
As per our comments, we've made in the past, it's probably 2024 before that settles down completely.
Alright, that's helpful. Thanks, Tom and Tony I'm for my second question I wanted to switch gears to same store NOI.
Recently is last quarter, you guys had guidance for negative 10 to negative 12% same store NOI in 2022, you significantly beat that number at negative four 1% for the year I'm just using that as context, I guess, how should how should we think about the negative four to negative 6% same store guidance for 'twenty three and ultimately you know how much.
Conservative is built into that forecast I guess is there a scenario in which you could beat that forecast to the degree that you did here in 2022.
Yeah. So clarification, so last quarter in our remarks, we did say it was closer to about 8% down we still beat it but it was about 8% down so the printing reflect that and it did reflect conservatism. So a couple of things Opex. We wanted to make sure. It came in and the result was.
Opex came in in line relatively in line with our expectations and on the revenue side, we had higher reimbursement revenue higher rental revenue and a few other income items and that resulted in a better outcome. There is conservatism in 2023 and as much as we can we hope to.
Our pro farm, what we promise, but we do try to be conservative, reflecting the uncertainties in the market and we hope to deliver the result, as we increase guidance over any given period.
Great. Thanks, Kristina that's it for me.
Okay.
Thank you. Our next question is coming from the line of John Kim with BMO capital markets. Please proceed with your questions.
Thank you Tony Kudos on your Samsung we work in a lot of US gave you a hard time on that a few years ago.
But speaking of blow back you did receive a lot in the press went Empire state building celebrated the Eagle NFC Championship victory, but Theres a lot of new Yorkers both of them are giants in jet side.
My guess my question is any publicity good for the observatory or has your has the blow back really reconsidered your your stance on which teams you celebrate.
Hi.
First of all to be fair.
That was very funny.
Not your question, but the whole event.
Number two we will always celebrate the major sports events.
Our integration into the NCAA tournament.
What we do with the World series, what we did we do with the Olympics.
And you know I so the answer is.
We're a global brand.
The vast majority of our visitors come to us from outside New York City.
We have.
And a big driver in our office properties or retail properties, our residential properties along with the Empire State building and the Empire State building Observatory.
And I appreciate your calling attention to what became actually an.
An international phenomenon and that's what the Empire State building is.
I agree that it was amusing when it came out.
A question on guidance I know a lot of people are focused on that but Kristina you mentioned the same store revenue.
Being conservative, but I would've thought with increased occupancy that you're expecting this year, coupled with escalators did you have in place.
That you would start off at a starting point in the low to mid single digits on the revenue side.
Can you just comment on whats offsetting that.
You know we have the we have the modest revenue increases as you just mentioned the key driver is we have operating expenses going up as well until combined that's where we get to that four to six as the year progresses. We allow room for you know timing to lag and what hits. The numbers are we can certainly address that as well.
We get more clarity, but I think it's no secret there's an uncertain year, we're working very hard to drive positive results and will deliver more in communication on guidance as we as we do that.
And just to clarify the same store guidance does not include termination fees correct.
Excluding.
Okay.
My final question is on the Mamaroneck sale, what other use of proceeds on it I know you cited that.
This will be used to fund generally Mulberry street, but there are some excess funds on the sell side.
So have you determined what.
What are you supposed to start.
We have not determined on the balance so most of them will be redeploy them and as we have more information, we will deliver that to the market.
Okay. Thank you.
Oh.
Thank you. Our next question is come from the line of Dylan Brzezinski with Green Street. Please proceed with your questions.
Hi, guys. Thanks for taking the question.
Just curious I know you've done a good job of executing the suburban office sales a little bit of a standalone retail curious how you're thinking about them folio in terms of disposition candidates for the Manhattan office portfolio I know, there's obviously a tax considerations to take into account, but just wanted to hear your thoughts on that.
Yeah. Thanks for the question so as I mentioned in the remarks, we take a hard look at all of our assets.
So as we think about the characteristics and what makes sense in today's market and nothing is red line in terms of being for sale. We are aware that it's not the most popular time for office and being that we have balance sheet train we have no debt due until November 2024, and we have no floating rate exposure, there's no unnecessary.
Your honor to force a sale at an inopportune time, so we will monitor the market closely be very active in how we manage the asset and when the window opens for us to pursue a sale we will explore.
And then as you guys are kind of looking at acquisitions I think in the past you mentioned that you're primarily focused on multifamily and retail.
Is that still the case, where you're kind of guys that are kind of not looking at office at this point in time.
We've actually said, we're focused on New York City office residential and retail so ever I mean, those three categories and it's really predicated on entry prey. The amount of capital that goes in the cash flow profile and growth profile going forward and what makes the most sense for the company and the common theme if you.
Seeing is new York City multiple drivers of upside and we have very strong diversified resilient cash flows coming from different sources, we're proud of that and we want to increase our exposure to thing and that will add to that.
I appreciate the thoughts thanks.
Yeah.
Thank you there are no further questions at this time I would now like to hand, the call back over to Tony Malkin, Chairman, President and CEO for closing remarks.
Thanks, everybody ESR T is well positioned to perform take advantage of the flight to quality signed leases that will contribute to earnings and build on our well diversified income stream.
Our strong and flexible balance sheet empowers us to take advantage of investment opportunities and repurchase our stock.
<unk> is a great way to play in New York City, our portfolio was stronger and more diversified than it was a year ago and we are excited by the opportunity ahead. Thank.
Thank you all for your participation in today's call to conclude 2020 to Mark to your notable progress towards ESR team's top four priorities lease space.
With $1 1 million square feet leased in 2022, and meaningful occupancy and leased percentage was progress sell tickets to our completely re imagined observatory the only authentic brand amongst observatories one can visit it.
That's shareholder values through our capital recycling out of suburban assets and into multifamily, which is now the fourth leg of ESR jeez, well diversified cash flow stream, coupled with repurchases of our shares and continued leadership in ESG initiatives. We are fortunate to be backed by a strong and flexible balance sheet in this environment and feel confident in the company's ability to execute.
On our goals and drive growth for shareholders in 2023, many thanks to our great ESR T team, who have worked 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.
Thank you for your interest onward and upward.
Thank you that does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time and enjoy the rest of your day.