Empire State Realty Trust Inc. Q1 2023 Earnings Call

Greetings and welcome to the Empire State Realty Trust first quarter 2023 earnings call. At this time all participants are in a listen only mode. A brief 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.

Now my pleasure to introduce Heather Houston, Senior Vice President Chief Counsel, corporate and Secretary. Thank you you may begin.

Good afternoon. Thank you for joining us today for Empire State Realty Trust's first quarter 2023 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.

Our 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 and events.

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 discussions 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 in core 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 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. What a great day. It is and how pleased we are to report solid first quarter results to start the year.

Good updates on strong leasing balance sheet recycling and observatory results and discuss our positive outlook for the rest of 2023.

More than a decade focused on modernization amenities energy efficiency indoor environmental quality and a strong balance sheet really puts us in a good place.

We're in a great position with a differentiated balance sheet and multiple value drivers, we're able to act and benefit from the current environment.

And in the first quarter of 2023, we did we.

We are in New York City focused landlord with four diverse drivers of income office, our observatory experience retail and our growing multifamily portfolio as shown on slide four of our new investor presentation. We.

We are primed to take advantage of New York city's recovery resiliency and progress towards a new normal.

According to the Department of Labor, New York City office, using employment now exceeds pre pandemic levels and the narrative around in office work has changed for the better yes. There is a cohort of employees cast adrift by the banished fruit bowls, pampering and compensation and retention based on.

Whether they return to the office or stay at home and complain we focus more on the new narrative about the importance for companies to gather in person to plan mentor learn build and execute together and move forward towards an through uncertain times.

This is a cycle.

It is a down cycle right now.

What about which we spoke and for which we prepared for years with a fortified balance sheet with low leverage.

<unk> modernized portfolio as well monetized leads and healthy buildings energy efficiency and indoor environmental quality is 100% carbon neutral and renewable wind powered as well located near mass transit and serves.

As a desirable place for employees to return.

We see brokers and tenants, who focus on landlord quality and balance sheet lenders and investors, who look at hard data science based targets and reporting on sustainability and challenges from floating rate borrowers who have to go to lenders for T I accommodations and lease decisions.

Our quality office portfolio is resilient and esri benefits from the flight to quality trend, we had another solid quarter with over 200000 square feet leased at positive leasing spreads and made continued absorption progress with a 180 basis point increase in Manhattan.

Office occupancy and a 110 basis point increase in Manhattan office leased percentage sequentially.

We have always said that our goal is to get the best deals in good times and get the deals in challenged times and draw a consistent leasing volumes through cycles.

Tenants seek a compelling value proposition and well located buildings owned by landlords, who are planned for where the puck will be and gotten there with a solid balance sheet.

We've added a great news slide on page five of our new Investor deck that we introduced introduced at the Citi REIT Conference.

To showcase how our portfolio benefits from the flight to quality and that this is not just a quote new versus old unquote narrative.

Yes, our T offers a high quality experience and trophy prewar assets at our attractive price point importantly, we are also a landlord who has the balance sheet stand behind its commitments and obligations with an economically accessible winning portfolio.

It makes a big difference in today's environment and helps set us apart as a landlord we know what we have to do and we are absolutely focused.

Tom will cover the quarter in more detail discuss our 2023 pipeline and speak to two great deals just signed yesterday.

The observatory is off to a strong start in 2023.

In the first quarter of 2023 Observatory NOI reached 110% pre Covid 2019 levels.

The Empire State building is true authentic New York City, and the true International brand.

Prior to the pandemic. The observatory contributed approximately 25% of total company NOI on a full year basis, and we are on track to recapture that performance with tourism ongoing return.

We own the number one position in our observatory cash flows are reliable.

The resilience of our observatory through cycles, new competition, and a pandemic speaks for itself and as demonstrated on slide 16 of our investor presentation.

We have spoken about the strength that ESR to use balance sheet for years, we have a clean balance sheet and simple capital structure, our leverage is well below our peer average.

We proactively manage our debt maturity schedule and rent roll and have neither near term debt maturities, nor floating rate debt exposure yes.

ESR T owns 100% of our office assets with no complex JV structures and that allows for great optionality and flexibility for future financing and capitalization.

Our balance sheet strength helps us win new tenants, who look to partner with a financially stable landlord, who will maintain high quality standards at their assets and deliver on their commitments to tenants.

Our balance sheet allows us to indulge and prudent omnivorous opportunism b share repurchases at the bottom of the cycle new acquisitions.

Or capital recycling.

We will go where we see opportunity to enhance shareholder value.

We remain resolutely focused on our sources of capital and seek attractive entry points on assets, which offered cash flow growth after capex.

We have transitioned out of various suburban assets and reinvested tax efficiently into Manhattan multifamily yes.

The addition of multifamily to our portfolio since December 2021, further diversifies, our cash flow stream and we are very pleased with the performance.

According to the Census Bureau, New York City has more residents today than it did pre COVID-19.

And that drives strong leasing demand and our growing multifamily family platform now a true fourth leg of ESR to use cash flow stream.

Our industry leadership, and environmental stewardship, and healthy building performance matters more and more each year at a tenant's lenders and shareholders, we uphold our values and adhere to the highest standards and reporting.

<unk> all of you to read our just released 2023 <unk>.

Sustainability report available on our website.

That contains full details on our recent accomplishments and new investments and return based goals.

Justin This year ESR T has received the 2023 energy Star sustained Excellence award was certified as a 2023 great place to work.

Our first year of survey participation.

Earned at the International well buildings award for leadership and the implementation was included in the 2023 Bloomberg gender equality index for the second consecutive year and was recognized as a platinum green lease leader for the sixth consecutive <unk> consecutive year.

Year.

And we also won the 2023 better project a better practice award from the Department of Energy's better buildings initiative.

We are committed to the delivery of long term value.

To our shareholders.

And our teammates through continued excellence in ESG.

Yeah.

ESR T outperforms because of our people because of our team who worked together and each of whom understand his her and their role towards our goals.

Our differentiated portfolio strong balance sheet and leasing progress.

We see disruptions in the market and we will manage through them.

The current cycle poses its challenges.

And presents opportunities are.

Our priorities are unchanged lease space sell tickets to the observatory manage the balance sheet achieve sustainability goals and short put points on the board. These actions together enhance shareholder value.

We believe in New York City, and we offer four ways to play it.

Office, the Empire State building Observatory.

Retail and multifamily.

New York City is resilient and ESR T as future ready and well positioned to drive value for E. S. R T shareholders in 2023 and beyond.

Tom and pristine and Kristina will provide more detail on our progress and how we plan to accomplish these goals and the balance of the year, let's go over to Tom now.

Thanks, and good afternoon, everyone I want to emphasize what Tony just said.

We invested nearly $1 billion into our assets to create fully modernized buildings build of new amenities and new tenant spaces with our leading I E two and healthy building standards.

Which we deliver at a compelling price point.

What we know from past cycles is that those buildings, which capital has not been invested are the ones that inevitably suffered the most.

And owners with great balance sheets make a difference to brokers and tenants.

We've done the work invested the capital and how the balance sheet to put us in a position to compete and win deals.

As a result, we have continued to increase our Manhattan office portfolio occupancy and leased percentages occupancy in our Manhattan office portfolio increased by 180 basis points over the last quarter and increased 390 basis points over the past 12 months.

The leased percentage in our Manhattan office portfolio increased by 110 basis points compared to last quarter and was up 210 basis points compared to a year ago, we delivered positive mark to market spreads the seventh quarter in a row and most of the 202000 square feet.

Total leasing volume this quarter was for new leases in our Manhattan office portfolio, where.

Sure.

Where we are now 97% leased.

The narrative that only new development can compete and attract tenants as wrong as demonstrated by our results. We are a destination in the flight to quality and tenants have decided that our differentiator product central locations near mass transit.

Fully modernized buildings quality service in building and neighborhood amenities and value proposition is what they choose to lease.

I encourage you to see page five of our latest investor presentation.

In times like this tenants and brokers become hyper focused on the financial strength of landlords with whom they depend.

This two represents a flight to quality trade that ESR tea possesses to give tenants confidence that we can and will deliver on our commitment to build turnkey quality office space on time and deliver superb services without interruption.

In the first quarter, 90% of our approximately 202000 square feet of total leasing volume was for new leases, we signed 19, new and renewal leases, which include a 183000 square feet in our Manhattan office properties.

18000 square feet in our Greater New York Metropolitan Office properties, and about 1000 square feet in our retail portfolio.

Notable leases signed in the first quarter include a new 16 year lease with S. T V. A multinational engineering firm for 65000 square feet at the Empire State building.

An 11 year lease with a nonprofit organization claims conference for 34000 square feet at 13 59 Broadway.

And we signed leases for 11 pre built office suites and.

And after quarter end just this week, we signed a long term full floor 30 year lease for 29000 square feet with rising ground at 13, 33 Broadway and just yesterday afternoon's side of 25000 square feet leased with Skanska, who has committed to stay at the Empire State building for another 11 years.

Ears.

We have active deals in our pipeline throughout the portfolio, including prebuilt suites in full floors, and we have $61 million in incremental initial cash revenue from signed leases not commenced and free rent burn off.

As reported by the FDIC the Flagstar subsidiary of New York Community Bancorp bought substantially all customer deposits and retail branches of signature bank, whose lease with us covered 326000 square feet of office space.

Our understanding of the terms of the agreement with the FDIC is that flagstar has the right to assume signatures leased by May 19th.

If flagstar does not assume the least the FDIC controlled British bank hasn't till July 10th to reject the lease while there has been no official announcement flagstar remains current on its rent obligations.

From a leasing perspective, flagstar occupies desirable base and tower floors with four usable terraces at 1400 Broadway where the office space is currently 100% leased to an excellent tenant roster.

With 1400, new tenant lounge, and town Hall amenity due to open this summer.

Along with access to campus amenities should flagstar terminate its lease we are prepared and confident in our ability to lease the space.

<unk> assumes that signature lease we are well positioned to increase our leased percentage by year end since we managed our rent roll and executed earlier renewals such that in 2023, we expect only about 223000 square feet of tenants to vacate which will be offset by additional new leasing.

We have invested nearly $1 billion into our assets to create fully.

Healthy fully modernized buildings, our tenant spaces are newly built with our leading standards for I E Q and sustainability.

We are adding to our robust and building and campus amenities.

All our assets are centrally located near mass transit.

Our strong balance sheet allows us to compete in today's environment and give tenants and brokers confidence that we will deliver on our promises and we have an exceptional dedicated team that executes daily on behalf of our tenants and demonstrated our ability to lease space through all cycles.

Well Kristina will provide details on our financial results in a moment same store property operating expenses remain below pre pandemic levels through disciplined cost control and despite the effects of inflation and union contract rate increases. We expect 2023 same store property operating expenses will be.

Below our 2019 levels.

I am extremely proud of our team who delivered outstanding results and accomplished the successful sale of assets amidst a challenging environment 500, Mamaroneck Avenue 10 Bank Street, and our Westport retail all closed during the past five months.

We effectively executed our business plans.

Harvested value creator for our shareholders and reinvesting proceeds into our latest acquisition to 98 Mulberry Street.

We are encouraged by our early success at 298, more Barry where demand exceeds our initial projections and we see opportunity for future growth.

Across our entire multifamily portfolio, we are experiencing strong demand with an average occupancy rate of 97, 2%.

Positive mark to market increases and solid market fundamentals.

All our multifamily properties are strategically located and we're proactively making property improvements to enhance future performance.

In summary, we had another solid quarter with 202000 square feet of total office and retail leasing and signed a long term full floor lease for 29000 square feet. After the quarter end, including and another 25000 square feet as just announce at the Empire State building, we increased our Manhattan office portfolio lease percentage by 110 base.

<unk> points over the prior quarter and by 210 basis points from a year ago to reach 97% leased.

We are well positioned to further increase our lease percentage in 2023 and.

And we continue to see strong fundamentals and performance and our growing multifamily portfolio and now I'll turn the call over to Kristina Kristina. Thanks.

Thanks, Tom for the <unk>.

First quarter of 2023 reported core <unk> of $43 million or <unk> 16 per diluted share, which compares to <unk> of $49 million or <unk> 18 per diluted share for the first quarter of 2022.

Notably in the first quarter, we have decided to have a court at 2.4 cent reserved on the straight line rent receivable of our tenants signature bank that I will discuss in more detail.

Same store property cash NOI, excluding lease termination fees declined 11, 4% year over year, primarily due to low operating expenses and <unk> 22, amid lower building utilization coupled with a number of one cat one time cash revenue items and <unk> 22.

On the expense side <unk> 'twenty, two expenses were still coming off a lower level from the meaningful and proactive expense cuts implemented by our team and then lower building utilization during the pandemic, which contributed to positive year over year same store NOI growth throughout 2020 and into early 2021.

The largest year over year operating expense increases and <unk> 23, or R&M and payroll and in particular cleaning real estate taxes were also higher in <unk> 23, and this was partially offset by higher tenant reimbursement income.

On the revenue side as noted in our earnings call last year. Why don't you 22 results included a number of one time cash revenue items that aggregated approximately $3 3 million inclusive of lease modification payment receipt.

Excluding these one time items in <unk> 'twenty two the same store property cash NOI decline would be 7%.

The observatory generated NOI of $14 $3 million in the first quarter up significantly from NOI of $7 million in the first quarter of 'twenty to.

Notably first quarter NOI was 110% of 2019.

Observatory expense was $7 $9 million in the first quarter. The observatory's NOI recovery has outpaced visitation as a reminder, the observatory historically contributed roughly a quarter of the company's NOI and stands at approximately 23% on a trailing 12 month basis with the first quarter.

Our balance sheet as of March 31, 2023 had total liquidity of $1 $1 billion, which was comprised of $273 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 two years.

Our ratio of net debt to adjusted EBITDA, which are all below peer averages at five seven times, we have no floating rate debt exposure and we have a well lettered maturity schedule with no debt maturity until November 2024, when a $78 million mortgage macquarrie.

We have the balance sheet flexibility that the uncertain times demand to generate shareholder value. We can repurchase our shares pursue investment opportunities that are additive to our New York City focus portfolio and recycle our balance sheet in short, while we have a solid defend our thoughts and focus our new point unemployed.

In the first quarter and through April 25, 2023, the company repurchased $11 6 million of its common stock at a weighted average price of $6 11 per share.

This brings the cumulative amount, we purchased $292 $2 million at a weighted average price of $8.20 per share, which represents approximately 12% of total shares outstanding as of March five 2020, the date our share buyback program began.

And our focus on capital recycling, we look hard at each and every one of our assets and pursue dispositions, where we have executed on the business plan and or it can recycle the proceeds into assets that align with our long term portfolio cash flow growth objectives.

As mentioned in the first quarter, we completed the disposition of our retail assets in Westport, Connecticut for a purchase price of 40 million and subsequent to quarter end, we closed on our previously announced disposition of five into a Meronek Avenue in Harrison New York for a purchase price of $53 million the acquisition of 298, Mulberry Street and disc.

Remember 2022 was funded by proceeds from the disposition.

We would note our cash balance as of quarter end does not yet reflect net proceeds from the sale.

Now I'd like to take a moment to add additional details on signature bank.

Our balance sheet is among the most well positioned in the sector and we operate a well diversified business with four income stream from office multifamily retail and the observatory, along with a well diversified tenant roster cigna.

Signature represents only two 5% of total company revenue and that percentage will be further diluted when one factor than the ongoing recovery of the observatory.

As Tom said signature is located in a very desirable asset and our highest leased office building with many contiguous floor plates that will be attractive to market should we ultimately get the feedback.

At this point there is no definitive decision yet on signature bank, obviously flagged.

Flagstar Bank and FDIC are still within their 60 day, and 120 day periods, respectively to accept or reject the lease and as of April the tenant is current on its rent obligation.

Importantly, while we do not yet know the outcome of receivership, we proactively prepare for all outcome given the uncertainty of the outcome for the entirety of the remaining lease term the appropriate accounting policy with the reserve the straight line rent receivable balance, which is reflected in our first quarter results and we will account for rent.

Collected on a cash basis going forward.

We have adjusted our 2023 guidance to account for this decision as a result, our 2023 <unk> guidance range is reduced by two cents due to the onetime straight line rent receivable reserve taken in <unk> 23 for signature.

We assume continued rent cash rent collection and the balance of the year.

Our updated full year <unk> guidance range is now 80 to 84 cents per fully diluted share.

Our same store commercial occupancy guidance is unchanged at 85 to 87 as we stated last quarter. This factors in some conservatism on the revenue side, particularly in terms of leasing assumptions and timing of leasing.

Our cash same store NOI guidance is also unchanged at a range of 4% to 6% year over year decline. We expect the decline in same store NOI will be more pronounced in the first half of the year down roughly 10%, primarily due to low operating expenses and <unk> 22, a bit lower building utilization, coupled with a number of onetime cash rent.

New items and <unk> 22 as discussed earlier, we expect same store NOI growth in the second half of the year will be closer to flat on average.

This range still assumes an approximate 8% increase in forecasted property operating expenses and real estate taxes, which is partially offset by higher tenant reimbursement income the.

The increase in operating expenses is largely tied to assumptions for increased building realization in 2023, we would note that even with this increase full year property operating expenses are expected to be approximately 3% below 2019 level, which reflects some permanent cost savings and efficiencies we achieved from pre COVID-19 levels.

To summarize the only impact where our guidance from signature at this time is the <unk> straight line rent receivable reserve tied to accounting treatment and our assumption for signature Cashman collection occupancy and same store NOI contribution for 2023 are unchanged at this time.

As mentioned Flagstar Bank and FDIC are within their 60, and 120 day periods, respectively to accept or reject the lease and we will revisit our guidance. When we report <unk> results as relevant that said, we want to provide full transparency in the meantime on the additional potential impact to guidance should be outcome be following.

Production of the lease inception event and assuming no additional cash rent is collected in the second half of the year the impact on yearend commercial occupancy would be negative 320 basis points. It would have an additional approximate 2% adverse impact on our full year same store NOI growth production. It would have an additional.

<unk> <unk> adverse impact on our <unk> guidance range and the balance of the year, which could still come within our guidance range, albeit at the lower end subject to the performance of our other underlying guidance assumptions.

Our other underlying operating assumptions are unchanged. The leasing pipeline remains on track expenses are in line with our prior expectations and our observatory has performed well for the Observatory. We continue to expect 2023 NOI to be approximately $88 million to $96 million up from $75 million in 2022.

As a reminder, pre pandemic the observatory generated 95 million in NOI.

NOI guidance assumes observatory expenses at approximately $9 million per quarter on average for 2023.

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 potentially unfavorable timing in terms of leasing assumptions and lease commencement.

The high end of our range reflects a ramp up in observatory per finance that marginally exceed pre pandemic levels. Please note that the guidance estimate 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 made further progress in our capital recycling strategy in 2023 with the completed dispositions of two suburban retail asset and one additional suburban office, we remained active on share buyback, which aggregated $292 million or 12% of total shares outstanding since then.

Section of the buyback program, we prudently and strategically manage our balance sheet and have strong liquidity, which enables the company to take advantage of attractive investment opportunities that may emerge in this period of uncertainty and capital dislocation.

Our capital structure is clean with 100% owned office assets and no complex JV, which also allows for optionality and flexibility for future financing and capitalization. Our commercial portfolio is now 86, 7% occupied and 89, 4% leased and we continue to benefit from tenants demand for.

Our high quality assets, a strong value proposition and landlords with strong balance sheets, who can deliver on their commitments. Our observatory recovery continues with good momentum to start the year and the fourth leg of growth multifamily continues to perform well and contribute to the resiliency of <unk> cash flow.

I started my work at Yeah, Sorry Kids CFO , just three years ago. In April 2020, My time here from Covid to recovery has been one of accomplishment for the entire ESR team and our stakeholders as we maintain our acute focus on execution and results and all the ways in which we deliver stakeholder value with our wealth.

Additionally, and flexible balance sheet, a focus on disciplined capital allocation and continued commitment to ESG. This is a fantastic journey with a great team and I. Thank all my colleagues at ESR T. Our board Investor and analyst community lenders and advisors for their partnership which have been key to the success is yes Archie.

Has had today and.

And I look forward to the benefits to all of us through hardware and intelligent work and preparedness in the years ahead and with that I'll turn the call back to the operator for Q&A operator.

Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question you May press star two if you'd like to remove your question from the queue.

Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys one.

One moment, please while we poll for questions.

Okay.

Yeah.

Thank you. Our first question is from Steve Sochua with Evercore ISI. Please proceed with your question.

Yeah, great. Thanks.

Look I understand the signature bank is a very fluid situation and in hard to kind of pinpoint.

My understanding is that the you know the flagstar was acquired by a N Y C. B and you know, they're got a suburban footprint and headquarters I guess I'm just trying to really understand the operational aspect of what takes place in New York and how to think about maybe what pieces of that 300000 feet could stay and how.

It might be duplicative with you know what N Y C. B has maybe out in the suburbs.

Great questions, Steve I will just tell you that our view is pretty straightforward. We know the build out that there are that they have there and they have underway and we're really just going to let them tell their story, it's not up for us to speculate we feel actually pretty good about it at the same time.

Prudent for us to take the Mark that we did and that's why we did what we did and we look forward to be able to update based on their decisions when they have the opportunity to tell us their final outcome.

Yes, Steve I would just add.

Steve I would just add that look as I mentioned before they occupied really desirable five base floors of 14 or Broadway six tower floors. All the floors are consolidated most of them had been recently built Fortunately Broadway is fully modernized we're adding to the amenities there.

And.

They're current on their rent.

And beyond that I think that we've given the.

You know the dates.

Before.

Right just just to make sure I heard you correctly. So they have kind of a decision may 15th and if they opt not to I guess, except the lease then it goes to July and then that July is kind of a drop dead date with the FDIC is that am I reading that or hearing that correctly.

Yeah, there's two see Theres two operative date that Tom outlined to the persist flagstar is and the second is FDIC. So you have that correct and we await a response and are very much prepared either way.

Okay, Great and then I guess second question just in terms of the investment landscape. Obviously, you know things have changed a lot in the last I don't know, 30% to 45 days, so either Tony Tom or the rest of the team. How are you sort of thinking about new incremental investments and have you changed your investment hurdle.

<unk> for where or how you would deploy capital meaning are you have you know I guess, forcing yourself to get a higher IRR in todays environment, given where the stock trades as an as an alternative.

Gosh I think that.

What we are doing right now is what we have done when we when we do go into a 10 31 situation. We operate in really compressed timeframe and we have to put that money to work identify within 45 days execute within 180, and Thats a slightly different drill and it's really based on we look at side by <unk>.

<unk> cash flows and we look to recycle the balance sheet in that situation and go to where we can go cash flow accretion and growth.

When it comes to deploy new capital.

We have no real time bond.

That's a different story and we continue to look frankly.

We're in the best position out of all the cycles in which.

Tom and I have worked together for 30 years plus on this are the best positioned Freddie cycle, we've ever had and we've got a very clear view of our balance sheet and how we can put it to work and we've got very good conversations about how to look at other sources of capital in order to be able to execute deals when we see them. So right now we're super pleased.

The way the team has executed on these 10 31 and as we go forward and we look to the future.

We will react as price discovery and more and more decisions driven by lenders occur.

And Steve just as we've discussed we're.

We're fortunate to have a balance sheet, that's positioned where we can do all of those things and we're not forced to pick one or the other the shares are attractive buybacks, our strategic part and we will continue we will continue to recycle of the balance sheet in a way that aligns with our long term objectives and we.

Maintaining the capacity to be opportunistic so we feel very fortunate we have all those options and the team is very active and engaged in pursuing all this opportunity.

Okay, and just one last one for Tom just in terms of the pipeline.

Industries that are maybe most active that you're sort of talking too.

In your portfolio today would be what.

It's a diversified.

Set of industries Steve.

It's anywhere from professional services nonprofit.

Our consumer.

Consumer brands.

Some far suntech, but those first three I mentioned is probably the dominant activity and of course, we decided a nonprofit and then skanska a M.

Empire State buildings. So that gives you we've always attracted a wide diverse set of industry types.

Let's just be clear, we cater to the deepest pool of office space users in New York City.

With tremendously price.

Very competitive proper.

Property offerings.

Entities modernization energy efficiency indoor environmental quality and.

Brokers and tenants really differentiate now based on sponsorship and based on where they know commissions will be paid tenant installations will be funded and there'll be able to enjoy quiet enjoyment with the landlord with whom they sign their deals in the first place.

Great. Thanks, that's it for me.

Thanks Keith.

Thank you. Our next question is from John Kim with BMO Capital markets. Please proceed with your question.

Thank you just on that Flagstar space I.

I was wondering if you can give any color on how utilized it was physically and what the mark to market is of their space versus where it would at least today.

Well, they're in place fully escalated rent is about $58 a square foot so I put that.

Maybe just below market.

And as I said, they they have a 11 floors of 1400 Broadway both.

Base floors, and tower floors, or very desirable or been fully consolidated we've turned over all of the space to.

Signature pre flagstar, except for one floor of about 24000 square feet.

And there they are in use of the space.

And Tom I don't know if you mentioned the pipeline that you have today as far as.

You know where it is today versus last quarter and also on that skanska space that you signed yesterday, but did that represented expansion or the same amount of space or contraction.

Skanska will occupy about the same footprint that they have now they're they're relocating of taking a full floor in the building that was occupied by one of our less I'll call. It legacy tenants.

Cheap about a 60% plus mark to market spread on the lease up of that space.

And so it's a it's a lot of movement as far as our pipeline I feel good about it we've got activity quite a bit of prebuilt activity.

A few full floors I mean this is in addition to the again the two leases that we just signed this week that exceeds 50000 square feet in total.

And I feel good about the pipeline and so you know we have three full floors prebuilt. That's you know a lot of activity and interest you got a lot of showings. Therefore, our forefathers built at Empire State building one at 13 50 Broadway.

And one at $2 50, West 57th Street.

And as I mentioned before it's we're getting activity from.

Professional services nonprofit consumer products.

A variety of industry types and as Tony said look tenants or are they are looking for a landlord that can deliver but looking for modernized buildings newly built office space healthy buildings that are modernized energy efficient space amenities, they want convenient access to mass transit.

Central location that want access to a neighborhood amenities, we deliver all of this at an attractive price point and that's why we attract the wide variety of tenants that we do as well as terms from a variety of sub markets.

Okay and my final question is on multifamily when you look at acquisition opportunities today.

Where is pricing.

In your markets and if Theres any difference between Manhattan, Brooklyn Jersey City Long Island City some of the other submarkets outside of Manhattan.

I think grip the best thing to do would be to consult the John Lewis.

To my glasses aren't on I've got a cold.

Best thing you'll be to consult with the brokerage community on this.

Most everything we've done is off market. So we haven't done anything that's that's probably market and so we haven't been involved in any of those processes and if you really want that kind of an overview, there probably better people to go to them to us.

Okay fair enough. Thank you.

Thank you. Our next question is from Michael Griffin with Citi. Please proceed with your question great.

Great. Thanks, I mean, I'm not a hockey fan, but I appreciated the park allegory in your opening remarks, maybe next quarter, we can do something around football, but I just wanted to touch on bell leasing and hotspot side.

It looks like the number came up sequentially.

Figure out how can we be thinking about the cadence of that sort of throughout the year you talked about the 200000 square feet leased in the quarter or a couple of new deal signed I think Tony said yesterday, so any kind of color around how that will trend throughout the year would be great.

Well as I've stated before we have a modest move outs in 2023, and our Manhattan portfolio.

Have only about a 176000 square feet of known move outs in the total portfolio is about 223000 square feet of move outs and so it's I think.

Spread somewhat evenly throughout the quarter look we just came off of about 390 basis points positive absorption in occupancy year over year, and 180 basis points increase in lease percentage in our Manhattan portfolio.

And that you know.

When combined with a modest move outs for the year on the leasing that we're doing I think you're going to see kind of a pretty smooth cadence for the balance of the year.

Gotcha. Thanks.

And maybe just turning to capital allocation I think one of the earlier questions was maybe around buyback.

So acquisition I mean, I think with the district and you might be seeing in the market I mean do they go on the private side, maybe it might be public REIT.

Your balance sheet to be opportunistic.

I know you're off to Bruce our mineral boards, I think I got that wrong, but any one property type maybe.

Out or take advantage you know could it be that department and any color on that would be helpful.

Yes, so we've been very clear our opportunity set continues to be New York City office retail and multifamily and we look for opportunities. Because today is issue is there's not a ton for sale. There is a lot of behind the doors workout and processes going on.

We're still watching thing.

Reveal itself and unfold and the team is very active in evaluating any potential opportunity.

And we are interested in distress just has to make sense for the portfolio on your comment on leveraging the balance sheet. So we're fortunate we have the capacity to do so which was our point Laurie leverage versus peers have a net debt to EBITDA at five seven and has some ability to trend down just from continued recovery in observatory business.

And we have the ability to JV. If we wanted to there are a lot of levers that are available to us should we choose to go down that path without putting ourselves in an unhealthy or stress situation.

And then maybe just one on the financing side of things.

Maybe for building that arent necessarily a trophy product. If there is financing that has to get done do you think this is feasible writ large or we might see it more in kind of a one off contact card every office building is unique so to say.

Yeah. Every office building is unique I think every relationship is unique as well and so as the data points in fall of keep an eye out for sponsorship.

And the type of debt that they are obtaining right you may not be able to get long term, maybe you can get something shorter term are there guarantees. So I think it really runs the gamut.

The short answer is probably there is money out there for sure and people are looking for these higher rates of return on that but they will be selective in their opportunity.

Wonderful.

Thanks, so much.

Thank you.

Thank you. Our next question is from Blaine Heck with Wells Fargo. Please proceed with your question.

Great. Thanks, Good afternoon, Tony you touched on this a little bit already and on the call, but there's obviously been a lot of discussion around debt maturities in the office sector in the wave of maturities were facing over the next few years. So just really wanted to get your view on how this all plays out do you expect a significant amount of Forrester.

Distress transaction to emerge or not and what's that mean for asset pricing in the office sector and again, you know potential opportunities for you guys to invest.

So it's interesting.

First of all were very early there are a few major forces out there we've got physical contraction to correct unparalleled peace time fiscal and monetary stimulus.

That goes against an ordinary credit cycle the business cycle. There is secular overbuilding and there is selective obsolescence, you'll look at all of these buildings out of which we work and so at least at least these tech tenants will be rolling out those are the places where those leased those were those are non functional buildings in the first place.

So when we look at this along with post Covid adaption and adjustment gosh. There's so many things out there. They are moving around that said I think the biggest impact we think the biggest impact is.

Low negative interest rates and greater availability of credit and enhanced our returns and allowed a lot of people to borrow a lot of money. My grandfather always said low interest rate environment as borrowers little as you need high interest rate environment buyer as much as you can afford.

And I think a lot of people bought as much as they could afford in a low interest rate environment and there are over their skis.

And the market doesn't have a really good clearing mechanism and certainly the the fed and the regulators.

We are not speaking to each other treasury and the regulators not speaking each other it was just down at the real estate Roundtable at the board meeting a couple of days ago early this week.

And.

This is the topic that the.

It's quite amazing, Washington, D C Treasury and the fed theyre not even in the office.

They just were instructed to develop plans to return to the office so from our view.

Happy with what we've got as far as our balance sheet very happy with our recycling and we really do expect to see problems.

And we expect to benefit from them and in the meantime, we think it's early days, we've got low levels of <unk>.

It's all fixed rate long average term of debt outstanding so from our perspective.

We're well positioned to execute and.

We will focus on the opportunities that we see when we when we see them arise.

Realistically, though we're talking about an interest in time over the next six months to 18 months.

Great very helpful color. There are switching gears to the leasing tenant improvement cost and leasing cost per square foot rose to one of the highest levels. We've seen since the pandemic began.

Can you just talk about weather.

Mix this quarter had anything to do with that or whether you expect those costs to continue to rise this year and also whether youre seeing any noticeable trends in free rent.

Yes.

This quarter you guys look at the fact that 90% of our leasing was for new leases and we signed long term leases with STB and claims conference and those leasing costs are amortized over.

The long term.

As far as trends look the the lease cost in our Manhattan portfolio was about just under $11 a square foot, which is in line with the past four year range that goes anywhere from eight to $14 per square foot per square foot. So we really look at our leasing costs as a function of the overall net effective rent and it's where.

We're pretty much in line with the past four years.

Great. That's helpful. Thanks, guys.

Okay.

Thank you. Our next question is from Camille bottle with Bank of America. Please proceed with your question.

Hello, just a follow up on the previous question around tenant improvement costs.

So for the remaining 430.

Square feet expiring. This year do you expect to continue to offer similar packages to get these deals done.

Yes, it's consistent with the market, but of course, not all of this square footage Thats expiring. This year will vacate as I've mentioned before only about 220000 square feet is what we expect to vacate and of course, we benefit on the significant investment we've made into tenant spaces.

In the past, particularly with with our prebuilt and what's coming back is.

A mix of some pre built space on both spaces. Some space that we will have to to rebuild so it really depends space by space and as I said before our leasing costs have generally been within that range of eight to $14 per square foot per lease year and that's been the range over the last four or five years.

Okay, and I think you mentioned in your Observateur guidance that the second half of the year does factor in a slow down from the momentum we've seen in first quarter more broadly just given the seasonality and sensitivity to the consumer side and some of your income streams are you baking in any recessionary risk into.

The low end of your guidance.

I'm sorry to clarify we did not mention that an observatory and actually back half of the year you get a more favorable factors in terms of seasonality.

Our guidance Paul.

We've mentioned trending back to pre tax pre pandemic level in terms of whether our guidance has other assumptions, we do incorporate <unk>.

<unk> for the fact that timing can fluctuate some of our leasing assumption, but that also is offset by signed leases not commenced that are scheduled to come in and our contractual on operating expenses. We do factor in inflationary factors. So there's elements of what's going on in the market that don't require a sort of a follow on.

Downside.

Assessment, yes.

Would it be very clear we are we're very happy with the observatory, we're very happy with its performance, we're very happy with its recovery, we're very happy with our Rev. Revenue per capita per visitor.

Anyone who might have heard us say something about we're not sure and we seasonality again that investor presentation. There's a slide in there that points out during wars recessions New competition, we've always performed and we continue to do so and we will.

Thank you for the clarification, that's all for me.

Okay.

Thank you. Our next question is from Dylan Burzynski with Green Street. Please proceed with your question.

Hi, all thanks for taking the question just curious on the on the capital recycling front. If you guys have anything in the market today and if so what are some of the types of buyers that you're seeing out in the market.

So I can only comment on what we've already transacted on as I mentioned, we take a hard look at everything and so we keep our options open in terms of the buyers for the other two they were more local based in nature had others within their buyer group were interested in the entry cap rate.

And the potential financing that they could obtain to possibly get to positive financing spread and that was really the nature of the buyer. So there is demand out there I think the biggest question mark in the marketplace today, even for non core suburban assets.

Have you is the ability to lineup enhancing because thats not just up to the buyer it's up to the bank cooperating and the data were aimed within the capital markets.

That's helpful. Thank you and then just going back to the Observatory, obviously, a good first quarter.

Guidance is unchanged for the year, but just curious you know how the first quarter results compared to sort of your internal underwriting and you know where we are trending throughout April so far.

Well, let me clear that we've.

Now that we give guidance the observatory is obviously in our guidance.

I will just tell you that its vibrant.

It is active we see a return of international visitors.

<unk> continues to grow.

People are.

Extremely happy the reviews, we get online are extremely positive the transition that we did to the all reserved program.

Covid is a huge success and really we're very pleased with with not only the observatory.

Also with how we performed compared to the other attractions.

Or out there so.

As far as the Observatory, we feel good about where it's come in.

<unk> to our history and.

Well, we don't break it out what to say, we're quite pleased with the contribution that it made during the quarter.

It made us quite happy and us.

We progressed through the year, we because we provide the range 88 to 96 million, we will provide commentary of things off track. So you should assume it's in line. If we're reaffirming guidance and expenses are on track.

Great. Thanks for that detail I appreciate it.

Thank you.

Thank you there are no further questions at this time I'd like to hand, the floor back over to Tony Malkin, Chairman, President and CEO for some closing remarks.

Thanks, So much everybody great work team <unk> is a great way to play in New York City, our portfolio, a stronger and more diversified than it was a year ago, we are well positioned to perform and build on our well diversified income stream, our strong and flexible balance sheet empowers us to take advantage of investment opportunities, we are future ready to drive value.

For our stakeholders and we see opportunity ahead.

Remember I encourage everyone to read through our latest investor presentation on our new sustainability report.

They both include many great improvements in videos, including some great tenant testimonials that speak to the flight to quality that our portfolio offers many thanks to our great team, who have worked incredibly hard and I have confidence we will continue to do a great job on behalf of our stakeholders special callout to Christina on their third anniversary from Tom and me and the entire team.

And special words to our entire team and all of you out there who like US have a lot of children in your office today take your daughters and sons to Workday is on right now and we hope our future leaders have enjoyed their first earnings call. So thank you for your participation on today's call. We look forward to the chance to meet with many of it 90.

<unk> Roadshows and conferences and property tours in the months ahead until then thank you for your interest and onward and upward.

Yes.

This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.

Yeah.