Q2 2024 Empire State Realty Trust Inc Earnings Call
Greetings and welcome to the Empire State Realty Trust's second quarter 2024 earnings Conference 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.
It is now my pleasure to introduce your host Heather Houston, Senior Vice President and Chief Counsel Corporate Secretary. Thank you you may begin.
Good afternoon. Thank you for joining us today for Empire State Realty Trust second quarter 2024 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 rieck dotcom.
On today's call management's prepared remarks and answers to your questions may contain forward looking statements as defined in applicable securities law.
Speaker Change: Including those related to market conditions property operations capital expenditures income expense financial result, and proposed transactions out of that.
As a reminder, forward looking statements represent managements current estimates there.
They are subject to risks and uncertainties, which may cause actual results to differ from those discussed today.
Empire State Realty Trust assumes no obligations to update any forward looking statements in the future. We encourage listeners to review the more detailed discussions related to these forward looking statements in the company's filings with the SEC.
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 property cash NOI EBITDA and adjusted EBITDA, which we believe are meaningful in evaluating the company's performance the definitions and reconciliations of these measures to the most directly comparable.
Well got 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 and Chief Executive Officer.
Thanks, Heather and good afternoon to everyone.
Yesterday, we reported ESR team's strong second quarter and year to date results.
We are happy to report continued strong leasing momentum observatory growth and capital recycling progress. So let's dive into our discussion of our results for <unk> and our outlook for the rest of 2024.
In the second quarter, we delivered once again on office leasing absorption and positive rent spreads.
Here's the big leasing story for New York City Office.
Jamie ESR to put points on the board again with our 10th consecutive quarter of leased percentage growth, that's 10 quarters in a row and our 12 consecutive quarter of positive New York City, Mark to market lease spreads.
Positive lease absorption.
Positive lease spreads.
New York City is strong and our modernized and monetized energy efficient properties with indoor environmental quality are in demand.
Our observatory performance continues very nicely.
It was named number one destination attraction in the United States for the third consecutive year.
And number one destination attraction in the world for the first time and Tripadvisor as best of the best.
We have contracted to expand the retail component of our NOI with additional retail.
Speaker Change: <unk> North six submarket of the remarkable Williamsburg submarket of Brooklyn.
And we maintain our best in class balance sheet.
In 2020 for you.
U S. R. T is on our front foot.
And we are eager to create additional value for our shareholders and the current real estate cycle.
Year to date, we have leased 640000 square feet.
Of which 270000 square feet.
We're at least in the second quarter.
Our Manhattan office portfolio.
We had 170 basis points of positive leasing absorption year over year and is now 93, 3% leased.
Our redevelopment work over the past decade has produced a unique top tier product that tenants want to lease.
Please see a new slide on page nine of our Investor deck that features great before and after pictures.
Yes, <unk> commitment to service and tenant relationships.
Continue to drive strong tenant retention and expansion within our portfolio over time.
Since our IPO and this is a new number that just continues to grow we have seen 2.8 million square feet of new leases comprised of tenant expansions.
Speaker Change: Dennis appreciate that we have the lowest leverage of any New York City region.
Strong liquidity position and have addressed all meaningful debt maturities until December 2026.
Our balance sheet diligence leases.
Year to date Observatory NOI.
It is up 6% year over year.
Driven by continued improvement in revenue per caps and increase in visitation.
Our NOI per cap towers above the competition.
Our global brand awareness has no equal.
And as noted in June the Empire State building deck was absorbing Tory deck was named the number one attraction in the World and Tripadvisor is 2024 Travelers' Choice Awards best of the best things to do and the number one attraction in the United States for the third consecutive year.
Thomas John Observatory team I would take a pie in the space. If we achieve this great result.
And watch our social channels for that very occurrence soon.
Seed slot see slide 17 of our Investor presentation for more on the Observatory performance story.
Sustainability continues to be a cornerstone of ESR Key's business philosophy, and we are the leader in environmental stewardship and healthy building performance.
Just last week the Empire State building earned the building owners.
Owners Management Association Paloma 2024 International Earth Award.
That is a big deal and we are so happy for the recognition of our team.
Please read our 2023 sustainability report to see what leadership looks like.
Our track record of successful sustainability partnerships with companies and their employees attract tenants and contributes to our leasing success.
Tom Christina and Steve will provide more detail on our progress and how we plan to accomplish these goals and the balance of 2024.
Now I'd like to hand, it over to Tom.
Hey, Thanks, Tony and good afternoon, everyone.
In the second quarter, our office and retail portfolio continued its steady trajectory of positive absorption.
This was the 10th consecutive quarter in which our team increased our leased percentage.
That's an increase of 690 basis points since the fourth quarter of 2021.
Speaker Change: Today, our Manhattan office portfolio stands at 93, 3% leased an increase of 60 basis points compared to last quarter and is up 170 basis points compared to a year ago in.
In the second quarter, our Manhattan office occupancy increased by 120 basis points year over year to 88, 8%.
The second quarter was also our 12th straight quarter with positive Mark to market lease spreads in our Manhattan office portfolio.
Speaker Change: New and renewal leases were signed with positive mark to market rent spread of 2%.
Leasing volumes continued continue to be strong with 272000 square feet of total leasing in the second quarter inclusive about 55000 square feet of early renewals. This increases the total leases signed year to year to date to 642000 square feet.
We have added new disclosure in our supplemental on pages 11 to 12 to include early renewals.
Defined as leases that have renewed two or more years ahead of lease expiration.
Nearly all of the early renewals signed year to date, we're done in connection with expansions.
Well it has always been our practice to seek opportunities to extend the lease term of existing tenants. We did not previously include these numbers and our reported renewal statistics.
Notable office leases signed during the second quarter include an 11 year 41000 square foot expansion lease with Pantera solutions, who relocate to the Empire State building from their current 11000 square foot space at 111, West 30 <unk> Street.
And 11 year 28000 square foot new lease on the two highest office floors at the Empire State building with global management consulting firm journey.
And an 11 year 25000 square foot new lease with the William Carter Company at 13 50 Broadway.
And 11 year 12000 square foot expansion lease at one Grand Central place.
And we signed leases for 17 pre built office suites that totaled 87000 square feet.
At the Empire State building and one Grand Central place, we have increased asking rents in response to strong demand.
Additionally, we have begun to reduce the amount of free rent offered in proposals on deals throughout the portfolio.
As shown on page 10 of our supplemental we have $42 million and incremental cash revenue from signed leases not commenced and free rent burn off.
Speaker Change: And just this morning, we received a signed lease from a tech firm for fourth floor of 24000 square feet at 13 50 Broadway.
Our leasing results demonstrate that our fully modernized buildings located in Midtown with access to mass transit.
<unk> strong balance sheet, Great service best in class indoor environmental quality and sustainability.
And in an accessible price point continued to attract quality tonnage.
Yes, our key offers topic to your product in our price bracket and our portfolio offers what tennis watch.
You've heard us talk about the $1 billion spent to fully modernized and monetize our portfolio. Please make sure to check out our new slide on page nine in the Investor presentation with before and after pictures to help visualize just how many four portfolio transformation has been.
It is because of this redevelopment work over the past decade carried out by our exceptional leaders, Ryan Kass, and leasing and property management, Dana Schneider and sustainability and Peach showing in construction that we have top tier assets today that attractive leasing demand.
And when in flight to quality.
In addition to the previously mentioned 24000 square foot lease that was signed today, we have a healthy pipeline of another 150000 square feet of leases in negotiation of which 70000 square feet of new deals and the balance are renewals.
In our Manhattan office portfolio, we have modest lease expiration for the balance of 2024 with 190000 square feet of known Vacates and 12000 square feet is undecided at this time.
Looking forward to 2025, we have only 162000 square feet of known Vacates and 114000 square feet of tenants who are undecided.
This is against the backdrop of an average 827000 square feet of annual leasing for the past three years in our Manhattan office portfolio.
Our multifamily portfolio with occupancy of 97, 9% at quarter end.
Can use to perform exceptionally well and benefit from strong market fundamentals and recent property improvements.
In summary in the second quarter.
We signed over 272000 square feet of commercial leases, we increased our Manhattan office lease percentage by 170 basis points from a year ago to 93, 3%.
We have a 10th consecutive quarter of increased leased percentage.
Our Manhattan office occupancy increased by 120 basis points compared to last year to 88, 8%.
We have a healthy pipeline of activity and we continue to have strong performance in our multi peril multifamily portfolio.
With that thank you I will now turn the call over to Christina.
Thanks, Ken.
Christina: Continued to make progress with our capital recycling initiative.
As disclosed in our earnings release subsequent to quarter end, we entered into two agreements to acquire prime retail assets in Williamsburg, Brooklyn for $195 million in the aggregate with anticipated closing date in <unk>.
The first portfolio is $403 million of asset located on North sixth Street between light and Bury Street.
These assets, Dan approximately 40000 square feet across five retail storefronts that include high quality tenants, such as Nike and Nomad.
These assets are 86% leased with near term upside from signed leases that have not yet commenced in addition to vacancy Lisa.
The in place retailers have a weighted average lease term of seven and a half years, and we estimate significant mark to market upside as leases roll.
The second portfolio is for $92 million of Prime retail asset also on North Tech Street due to confidentiality requirements more details on this additional portfolio will be disclosed.
Clothing.
We are very pleased to increase our scale and there's prion retail corridor of Williamsburg. Following our prior acquisition I mean retail asset underwrite sixth Street in September 2023.
Christina: Can use to benefit from increasing population density.
Strong household income and new multifamily and hospitality development recently completed and underway.
Christina: We see the Williamsburg story to be a decade ahead of value creation.
Please see slides 19 to 20 for more color on these transactions and the strength of this retail sub market.
These all cash acquisition are consistent with our strategy over the past couple of years to recycle capital and balance sheet capacity for non core suburban assets into strong New York City asset.
Christina: As shown in a new slide 10 in our Investor deck, we have disposed of five non core assets in Westchester and Connecticut in 2022, and recycled into nearly $650 million of high quality, New York City multifamily and retail assets that have great growth prospects and less capital expended.
Christina: Sure requirements over time.
Christina: As a result of this capital recycling, we had improved our sector diversification.
Christina: Pro forma for the latest retail acquisition and the previously announced disposition of suburban office Alright, NOI composition is approximately 58% office.
12% retail, 5% multifamily and 25% Observatory.
Importantly, we strategically executed on the capital recycling transaction, while maintaining our peer leading balance sheet strength and below average leverage.
Christina: Going forward, we will continue to focus on investment opportunities with attractive upside potential. In addition to dispatch transaction that we expect to arrive in the cycle.
Christina: In July we executed an agreement to refinance the mortgage on our Metro Center property that was due to mature in November 2024.
Christina: Beginning November 2020 for the new loan balance of $72 million will be interest only at the same interest rate of three 6% with a maturity of November 2029, inclusive of a one year extension option.
As previously mentioned, we intend to use a portion of the proceeds from our recent unsecured notes issuance to pay down the $100 million maturity in March 2025, as a result, we have no meaningful uncovered gap maturity to address until December 2026, when a $175 million term loan mix.
Christina: All right.
At quarter end the company had $2 3 billion of total debt outstanding with a weighted average interest rate of 4.27% and a weighted average term to maturity of five eight years pro forma for the recent Metro Center refinancing and the planned Paydown of our March 2025.
Christina: Debt maturity.
We have strong liquidity no floating rate debt exposure, while ladder debt maturity schedule and the lowest leverage among all New York City focus reads at five one times net debt to EBITDA.
Please note that we do expect leverage to tick up from this level once the Williamsburg acquisitions are closed and after we utilized cash from the recent unsecured notes offering to pay down maturing debt in March 2025.
As we have said for many years, we are prepared to increase leverage and take advantage of value opportunities to grow our business. We view approximately six times net debt to EBITDA as a more stabilized leverage level to think about going forward.
And now I will turn the call over to Steve to discuss our results and outlook for the remainder of 2024.
Thanks, Christina for the second quarter of 'twenty 'twenty, four we reported core <unk> of $56 billion or 24 cents per diluted share.
Same store property cash NOI increased seven 4% year over year, primarily driven by higher revenues from cash rent commencement, which was partially offset by increases in property operating expenses, which we anticipated in our guidance, albeit the increase was less than initially guided partially due to lighter utility expenses than expected note that the second quarter also included approximately.
$2 million of positive onetime revenue items, excluding these nonrecurring items from the current period and prior year period second quarter adjusted same store cash NOI increased by approximately 6% year over year.
Moving to our Observatory business, we generated net operating income of $25 million in the second quarter, approximately 2% higher than the prior year period.
<unk> expense was $8 $9 million in the second quarter keep in mind that the shift of the Easter holiday into the first quarter of this year versus the second quarter of last year impacts comparability.
Year to date net operating income for the observatory it was $41 million, an increase of approximately 6% year over year.
Revenue per capita remains high and year to date admissions continue to improve year over year.
Speaker Change: Now onto our outlook for 2024, we continue to expect 2020 for F. F O to range between 90, and 94 cents per fully diluted share.
Within this range our key assumptions are as follows.
Same store cash net operating income for the commercial portfolio or to range from zero to 3% relative to 2023 levels. This represents a 100 basis point increase from our original expected range.
The increase was largely driven by our expectation for property operating expenses and real estate taxes to come in towards the lower end of our previous range of 6% to 8% increase over the prior year, we now expect an approximate 6% to 7% increase year over year.
The improvement is primarily due to later than expected utility and payroll expenses within this range. We continue to expect positive revenue growth, which assumes commercial occupancy of 87% to 89% by year end 2024, driven by a strong pipeline of signed leases not yet commenced and manageable lease explorations in 2024.
We continue to expect 2024 observatory NOI to be approximately $94 million to $102 million. The average observatory expenses of approximately $9 million per quarter.
Our guidance range takes into account variability in our observatory results due to tourism fluctuations and bad weather in any given quarter and the recent capital markets and transaction activity announced year to date.
Also included within our <unk> guidance range, we expect a larger than usual increase in 'twenty 'twenty four G&A to approximately $68 million for the full year to reflect the recent any oh promotions and accelerated recognition of certain noncash stock based compensation expense as a result of executives approaching retirement eligibility.
Well, we do not provide a from our outlook for 2025, yet we do believe it is important to share a few items that could impact next year does include one the full year run rate of higher G&A as just discussed and to the nine month impact of the higher interest rate on our recent unsecured notes issuance.
I will now turn the call back to the operator for the Q&A session operator.
Speaker Change: Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Speaker Change: A confirmation tone will indicate your line is my question.
You May press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Thank you. Our first question comes from the line of Steve <unk> with Evercore. Please proceed with your question.
Ah yes, thanks, good afternoon.
Maybe starting on the just the pipeline time in sort of the leasing activity that you're saying.
Just any additional thoughts and color that you can provide around kind of expansion opportunities and just kind of the discussions that you're having with tenants and and you know I noticed that you had that new disclosure about early renewals. You know is that something that you're hearing and seeing more of today and tenants are willing to come to you early.
Maybe sooner than they have to to kind of lock in space today.
I'll take the second part of your question first Steve.
We have always executed on early renewals and certainly we make them part of our discussion with existing tenants often it comes in connection with an expansion of an existing tenant where we're looking to use that opportunity to extend their existing lease on the back of their of their current term.
And so there's always been kind of are part of our diet.
And so we see that really more the case.
The as far as pipeline, we've got look as I mentioned before we are we.
We just received a signed lease for a full floor 24000 square feet of 13, 50 Broadway between that and the.
You always saw with quarters, it's going to bring that building into the mid 90% leased.
We've got another call it 160000 square feet of leases in negotiation 150 of that is in Manhattan for our office portfolio.
And we're look we're we've been approached by a tenant at the Empire State building for an expansion, we haven't yet tissue paper on that but they're talking to us about taking an additional full floor. So what we're what we're seeing more often is that more and more tenants have moved beyond this whole.
The issue of work from home, they're committing to.
Space in New York City, they want for their employees their employees what should be in the office and you see more and more of that decisiveness.
By tenants and Thats reflected in look the Antarctic leasing results, we've had to date and the good pipeline, we're seeing now.
And the only thing I'd add to that Steve Tony Malkin here is that people come to us brokers come to US we are on the list because.
And that's.
Pushing our own book here they come for the modernization of monetization the energy efficiency. The IQ. They look at that and say these are key attractive for their employees.
Brokers come to us because of our balance sheet and they know that there's no issue of speaking with us and a lender that we can do the whole transaction ourselves and take care of everything based on our reputation.
And the existing tenants are huge advocates for us we see it we see now a lot of new tenants come to us on the basis of recommendation our current tenants.
We are in a different zone.
Cork City in general is recovering we are not recovering we are we're forward.
Okay, Great and then second question Kristine I know you can't provide maybe tons of detail on the on the retail transactions, but maybe on the bigger one can you kind of provide anything about going in yields and maybe where you think that.
Speaker Change: Portfolio might stabilize you know couple of years out you know how do you think about the NOI growth on that portfolio over the next maybe 234 years.
Sure. So we will definitely provide more details at closing and just given confidentiality agreements are not public yet we can't provide that much more at this time, what I can say as a reference point, which should be helpful is our acquisition last year of prime retail in Williamsburg was just under 6% for a stabilized asset with no.
Near term Capex and strong upside over time and as we alluded to both in my remarks and in our Investor deck for the <unk> acquisition. These are prime retail assets with some near term ramp up from signed leases not yet commenced and vacancy lease up while it's had characteristics of long term upside that we believe will create a lot of value over time.
So hopefully that's helpful in the landscape.
I would add to that Tony again.
If you look at this this won't repeat.
Soho meatpacking, but it's going to run with.
Meat packing and we think there is.
Solid 10 year run.
One of growth.
And and what will happen here.
And this remarkable sub market. So we're really pleased to have been able to transact and.
We were giving you more detailed them, we gave on the residential acquisitions and hopefully that.
Is better for you guys.
Great. Thanks, that's it for me.
Our next question comes from the line of John Kim with BMO Capital markets. Please proceed with your question.
Thank you just a follow up on the retail acquisition I was wondering if you could provide.
Where do you think market rents are for Williamsburg on our corridor and where you think it could go to I mean, if we're looking at Costar.
Data it would suggest the cap rate or initial cap rate around 2%, which seems pretty low I don't know if that if that data is accurate, but I just wanted some color on market rents.
Look.
As Christina said right.
We're bound by confidentiality in general.
The location is fantastic two prime blocks on north six freezes, where where these properties are located.
You can look at.
At various market data out there were deals are getting done.
Well below north of 300 Bucks a foot.
And I think at this point, we'll have more to disclose.
Closing is specific to our.
Speaker Change: Transaction.
Combined with I guess.
Combined with the characteristics here that these are.
This property type is one with which we've had a lot of familiarity, particularly going into developing neighborhoods historically.
In Union square.
Prime example of that.
And the fact is that these will produce a heck of a lot of cash flow out of their NOI.
That's what attracts us to this this asset category and we again, we see tremendous growth here in this in this market area.
Yeah.
Okay and my second question is on the new disclosure you had on early renewals. So it looks like because of the early renewal disclosure your first quarter leasing activity picked up as you include 122000 square feet. I believe my question is where did you disclosed that before was that as the leases.
Commenced that number was the answer you just basically poll pulling forward that leasing activity or was it just not previously disclosed.
Well first of all we.
Alright.
Yeah, I'll start first of all.
Was excluded from our reported leasing statistics are on.
On transactions, however, where it would appear.
Speaker Change: Is simply in the annual lease explorations.
So as leases get pushed out would simply show up in the rollover schedule that appears in our supplemental we thought it was helpful to give any additional color on these early renewals defined as a lease extensions done where there's more than two years of remaining lease term.
Left.
Okay, I mean, I'm, just when I look at the first quarter.
Disclosed this quarter and last quarter activity picked up and then the lease spreads also moved a little bit.
So I'll get a little bit confused as to whether or not you're just pulling this off and previously that was.
Disclosed when those leases come on.
But I'm happy to take the top line.
Sure.
I'm not sure yes.
Happy to spend more time with you afterwards, but.
I think the.
Further disclosure on the leasing on the early renewals.
Bruce really straightforward.
Great. Thank you.
Yeah.
Our next question comes from the line of Michael Griffin with Citi. Please proceed with your question.
Great. Thanks, maybe just getting back to kind of a forward outlook in leasing pipeline.
Tom I think in your prepared remarks, you mentioned I think free rent starting to stabilize and go down but have you seen really a change on other concessions, whether its tenant improvements or or other things and then can you give us a sense of kind of how net effective rents have been trending.
So glad you asked that question because I was expecting some questions on our leasing costs, which one.
One Mike.
Read into that they went went up slightly this quarter, but on a year to date average theyre really very much in line with 2023.
But if you look at our net effective rents over the last three years two five to three years, where we're up about 10% from 2021 on an average.
For year to date.
And so I think that's a pretty healthy indicator look we focus on net effective rent because of factors in all the lease economics, not just the leasing cost, but certainly the topline rat.
The deals that we did with Xiaomi and Pantera theyre going to average over $80 a square foot during the term of their lease.
And so generally.
Speaker Change: We're look we're moving in the right, where we're moving in the right direction I'm heartened by the fact that we're we're tightening up on our free rent and so on.
Offering we still deliver turnkey built space, we have a lot of pre book product. That's already built in second generation, keeping our leasing costs down and a full floor deals will deliver turnkey space for tenants because they look to us to design and build the space for them. So that they can focus on the business and we execute on what we do best.
And I would I would add to that.
Where we do see movement right now is in our rents and our free rent.
And Youll see the.
The effects of that and as we report in the future.
With greater definition.
Number one number two what really helps distinguish us.
Amongst other landlords is we have an integrated team of architecture.
Completely qualified construction team led by Pete Sherlund.
And the sustainability piece and our ability to turn key for people high performing spaces with indoor environmental quality is a huge attracting so the fact that people have all tenants of all sizes very few tenants who come to us build out their own space. It's an added feature and benefit to a transaction.
With ESR T.
Great appreciate the additional color there Tony.
Then just on sort of distressed opportunities that youre seeing out in the market I mean, it seems like the Williamsburg acquisition might've been more stabilized maybe not as much here on that but for other things that you're seeing out there I mean, we're seeing in the distressed more in one property type is it.
Office that is providing maybe more attractive returns or you still see opportunities within retail and multifamily in order to benefit from some of the distress out there.
Yeah.
So I would tell you that in multifamily because of the GSE knees.
Speaker Change: Uh huh.
The fatty Fannie.
And the popularity there the real issue there is that if you have a low interest rate your equity is it differently hit or could evaporate due to a refi.
We don't really qualified them as distressed because we see a lot of attention there.
Did do a very good purchase at 298 Mulberry.
I don't think that anybody thought that was distressed we just got it in there and we found ways to create a lot of value.
We do see opportunities.
Developing in that area based on property Handovers can see a lot of attention from buyers.
With regard to the retail we purchased Youre correct, if we look at that and say.
We think we pared paid a fair price.
Two a willing seller.
And then just over time with our duration, we see a great opportunity for synergy with what we've already bought and we really understand feet on the ground how to how to work on that.
We do see the biggest distress and office there is no question.
And a lot of the office distress out there.
It's all a matter of basis, and we've got to get to the right basis, where we can attract capital to partner with us.
To acquire property and we really think that the pricing needs to be able to deliver.
Hey.
Three times multiple of invested capital over a seven to 10 year timeframe in order to attract capital partner with our balance sheet to do those transactions, we do not see either the property types.
By.
Location floor plate, we've seen one office property on which we bid.
And J P. Morgan Chase has contracted to acquire because it's next to their new headquarters and.
And outside of that we are biting our time are waiting for the right pricing.
Speaker Change: With that in mind.
I think on the overall perspective that focus on the number of transactions and dollar volume of transactions are tremendously down and remain tremendously down we do see more properties coming to the market.
And the other area, where I think we might see distress coming in the future also thoughts of sub market is there.
This <unk>.
Medical research.
Biotech purpose built lab.
Lab space, where.
There's just not as much demand and there's been a lot of product put out there.
But I don't think that's something we will pursue.
Tom or Christine anything you want to add to that color on the market.
Yeah.
Now he said it well.
Thanks.
I'm sorry. Please proceed with your question.
Mr Griffin.
Yes, I just finished my questions.
Jim.
Speaker Change: Our next question comes from the line from Blaine Heck with Wells Fargo. Please proceed with your question.
Great. Thanks. Good afternoon, just following up on the acquisitions can you talk a little bit more about how the transactions where source were they off market or marketed deals and also whether you think the NOI mix that Christina whenever is optimal for your portfolio or should we expect the non office exposure to kind of continue to grow.
So there is a universal shaking our heads of know around the table, we really don't want to comment on the sourcing will just say that we work hard on this stuff and we want to respect our partners on the other side of this transaction. So we really don't have anything to say there.
And as far as the mix look we remain as we've said over time, where I've never it's opportune divorce and.
We really we like how our NOI mixed as a it will develop.
This initial.
Initial acquisition has a starting point, but then we will.
We will have greater value over time, there's a component of our NOI mixing in the meantime barrel. We've got other things, which are also developing very well as far as NOI on the on the resi and on the office side. So I do think a thing that is of interest to US is when we come to NOI in F. F O, what's really hitting the bottom line in the form of cash and we've mentioned this.
Prior earnings call and that's really our focus everything we do.
This space sell tickets deliver on our sustainability objectives manage the balance sheet slow cash to the bottom line. So that we have greater flexibility as we go forward.
And so we really will remain opportunistic we've got us a lot of areas, where we can where we can deploy capital with confidence when we see the right opportunity.
Great. Thanks, Tony and just following up on that I guess, how did you guys waived its purchase of retail assets versus <unk>.
Investing more in your own stock through repurchases that you know potentially higher return, but at this point.
We definitely look at this.
I think with duration will deliver a very high.
Hi returned to us relative to where we think.
Our purchases of our stock we think it will greatly help our stock.
We go forward.
We just think there's tremendous upside.
If you have duration here.
So we do have duration and we can live through a couple of lease cycles on this I don't know if Kristina Tom Kristina comment.
I would just say we have buybacks on the agenda, we've done it in size. It remains a strategic part of capital allocation and as we mentioned earlier unique opportunity.
Scale on a very prime retail corridor, and a great location high foot traffic proximate in Manhattan, Great demographics. We've mentioned this market also has more opportunity for reach out more opportunity for residential great long term upside overtime.
Asset class that has a different capex profile birthday op, Ed so far a lot of reasons and he just made a lot of fun. So Fortunately we have a great balance sheet I think it's off the table well evaluate everything but this is a really unique and great opportunity for the company.
Great.
That's very helpful and then.
It seems as though your.
The optimism around the return to office or Tech companies has been building you know layoffs has come through and some of the companies are managed mandating more in person office time.
Great to hear about the least this morning and you guys have additional tech exposure in your portfolio. So can you just talk about expectations with respect to leasing activity amongst tech tenants and whether youre seeing kind of any shift in their prep preference to be in New York versus the more traditional footprint on the west coast.
Well I'll give you two examples the at least that we just signed at 13 50 Broadway for full floor of 24000 square feet that's tech firm.
And that represents growth by the expansion by them.
The other trends that I mentioned, that's looking to expand at Empire State building during Covid.
They had given us shut some space elsewhere outside of our building.
Yeah, I was looking back and saying Gee, we want our employees in the office and they want to be in the office and they all deserve to have destiny Whatsapp desks, and so theyre looking at an expansion with us by by a fairly significant amount.
More than doubling their size.
So those are two very good examples of what we're seeing in the tech space.
And look.
As you know our rent roll is very diversified we're not focus on one single industry, we attract tenants from from all industry and the examples I gave in the commentary I just gave about got it.
<unk> expense in tenant out by state, but we're hearing that more and more from other tenants there.
<unk> or the indecisive Miss around the work from home.
And beyond that they're making clear plans definitive plans to place their office and have their employees in the office in New York City.
And I'll just add two things I wanted to be careful on this this this use of the term tech firm.
Hi.
Both of these companies of which Tom just spoke of.
Our highly profitable.
Yes.
They are not startups.
They've got very good business models.
And so we do is as you know a real underwriting of these businesses and their viability.
Before we sign a tenant our largest tenant Linkedin started as a single floor at the Empire State building that was the time when everyone thought they were just another tech startup and we did that research. We said no. No. This is a real this is a real business with real business growth prospects. So let's be careful we have not changed our underwriting standards one bit.
Number two.
New York City is absolutely positively the preferred destination for new Tech jobs.
Yes, because that's where the employees the colleagues to team members want to be that is a statistic.
New York City is alive.
It is it is vigorous I was in San Francisco on Tuesday, and Thursday, Tuesday, and Wednesday, excuse me of last week.
There is simply no comparison between the two markets New York City is topping in the energy is tremendously attractive not just two recent college grads, but also to people who want to move.
Locate where there is going to be activity and there's going to be a life as our lead director says, it's where people want to create their lives meet their future life partners and enjoy life.
And the last thing that I'll say is.
With regard to this is.
We see tremendous interest in us by virtue of tenants' responses to their employees and colleagues attendance in the office and our buildings.
And the tenant who looks to expand at the Empire State building.
They have looked to shed other office spaces at the same time. They saw the number one location for an employee in office participation not a bear locations was the Empire state building.
And they said okay.
More space, there, because that's where people show up.
So.
I think that just to round it out I want to make sure from a balance sheet perspective to understand we're not taking additional risk New York City is definitely the desired location and our portfolio, particularly as attractive on the basis of existing tenants experiences with our own employees and colleagues.
Very helpful. Thanks, everyone.
Our next question comes from the line of Camille Bonnell with Bank of America. Please proceed with your question.
Hi, Tom I wanted to follow up on your comments around leasing costs being lower because of the strategies implemented. This year. So looking forward as you worked through leasing these turnkey spaces I wanted to get a better sense of what's going on in the general market. Given there are reports that tenant improvements are increasing in Manhattan.
Dan.
Are you seeing these trends too and the portion of the market that you operate and whereas there's less of a concern because theres enough demand to continue implementing that turnkey solution.
I would say.
I say this.
As I mentioned earlier, our average net effective rent has increased by 10% over the past three years and that factors in the topline gross rents as well as the leasing costs and that's the number to really keep an eye on.
As I mentioned earlier.
As Tony mentioned, we're moving our rents were tightening up on free rent and that's having an.
And impact on improving our net effective rents we benefit from having built space throughout our portfolio as I mentioned earlier, we have an inventory of second generation pre built space that is less expensive to.
Turn it back into service for a new tenant and that helps lower our <unk>.
<unk> costs.
Having previously already invested the capital in those spaces and then generally nothing has changed over the last five to six years in terms of what we deliver to tenants by way of for turnkey service. It's always been part of our offering we deliver pre built space ready for move in and.
And we deliver turnkey spaces, where we're talking to a tenant for taking it to a large full floor space for a long term. It would just custom design and build that space for that tenant.
What we're offering on Ti.
It's been pretty has been pretty consistent we're benefiting from again, having invested capital previously.
All in all our net effective rent has improved 10% or over the past three years, so hopefully that.
Give us a better perspective.
In answer to your question.
Got it and shifting to your observatory business. It continues to show good growth so.
What do you attribute to the lower visitor count versus last year, despite having less bad weather days.
Yeah.
Tony here.
First of all we did have a shift of Easter into the first quarter of this year and that always produces a shift.
So and last year's comp Easter was in the second quarter.
Number one number two.
We were managing the demand.
In order to maximize the.
The benefit to the visitor.
And we do see that we have.
From time to time.
We cap our attendance but.
But the biggest shift is.
From Easter that's the first piece.
I will say, there's one other piece and that is that.
There is unquestionably a much lower.
International travel or presence in New York City. This summer full stop you can get it from the airlines.
Even the New York City official travel Bureau.
Will grudgingly acknowledged this.
Speaker Change: When we when you look at established venues from the 911 Museum.
On across.
New York.
That you have Liberty you name it everyone has recognized and commented on this and so what we see is a.
Big domestic demand, which comes with domestic travel pieces the international demand.
Is it is not as robust it is still gathering back strength and yet when I would draw attention to is we've continued to grow the top line. We've continued to grow the bottom line and our NOI per cap continues to tower above any other competitor.
Speaker Change: So we feel very good about where we are and about what we're doing with our business there.
That color is very helpful.
And just finally, despite perceptions on how they define quality youre leasing teams continue to defy the norm. So I'm curious to get your views on where you see structural vacancy for your office portfolio do you expect to be able to grow your lease percent much further about the 90, 293% levels today.
Yeah.
Really well positioned based on all of the work that we've done.
For the balance of the year, we have about 190000 square feet of tenant Vacates.
And the space that we're getting back are our full floors of consolidated theyre very marketable some come with.
Tara outdoor terrace space. So we're confident that we will be able to lease those spaces.
And so that's a modest amount of lease expirations.
Tenant vacates.
And offset by the leasing activity in the pipeline that I mentioned earlier and then in 2025, because again, we've done a great job of proactively managing our rent roll, we only have about 162000 square feet of Vacates.
And 113000 square feet of Undecideds.
And that's.
Again, that's against the backdrop of over 820000 square feet of leasing that we typically have done in the past three years, our Manhattan office portfolio. So.
It may fluctuate quarter to quarter, but you see the trend that we've been on for the last two and a half years, we're well positioned going from now and into 2025 to continue to make progress on our leased percentage and as our lease percentage climbs our occupancy percentage will follow.
And I would add.
They'll always be variations, but when you look at our <unk>.
Forward numbers as Tom described we do manage the early renewals are a part of this is we as tenants expand we renew and extend their existing leases. So we were super active on on these activities and recognize something else.
We can help we don't wait for tenants leases to expire to be active. So we do a lot of leasing of tenants, who say I've got excess space, so before they ever get to the point, where they want to vacate.
We work with them to lease their space, while there is still an occupancy directly to a new tenant so lot of work in this regard.
And a lot of opportunity.
For us.
We're just very very happy with how the market receives our products.
And where we go with this.
Yeah.
Our next question comes from the line of Dylan Brzezinski with Green Street. Please proceed with your question.
Hi, all thanks for taking the question just wanted to touch on the reaffirmation of 'twenty 'twenty four <unk> guidance. I mean, you guys are doing this acquisition that's expected to close in <unk> you guys raise same property cash NOI growth guidance. So just curious sort of on the decision.
Deciding to reaffirm guidance given some of those positives.
Characteristics that I just mentioned I mean, what are some of the offsets to that I know you guys mentioned.
G&A, possibly being higher so kind of just curious you know anything else that we might be missing.
Sure. This is Steve here, so yeah, our <unk> guidance range is meant to capture a variety of scenarios.
And some of those live within the Observatory we have.
Tourism fluctuations of bad weather days to deal with and our <unk>.
Their NOI sorry is split typically 40% in the first half of the year of 6% in the second half of the year. So even though we're halfway through the year observatories performance there a little bit outside of the impact of the second half of the year.
As far as the transactions and capital markets activity. If you recall in the first quarters call.
We did note that with the new term loan a facility nearby out in the FSP sale added about <unk> <unk> dilutive impact on <unk>.
And there was also about $3 five.
Of onetime items that benefit revenues in the first half theory that we don't expect to recur in the second so with all that in mind.
We still feel good about our full guidance not changing and sticking to that 90 to 94 cents.
Sure as.
Speaker Change: As far as G&A.
We already had that modeled in our guidance for the year, just calling it out as a benefit for bottles for 25.
Great I appreciate the detail.
We will now turn the call back to Tony Malkin, Chairman and CEO for some closing remarks.
Okay.
Speaker Change: Yes.
As we move forward.
Yes, our key priorities are to lease space sell tickets to the observatory manage the balance sheet.
And achieve our sustainability goals these actions together enhance shareholder value.
We are pure play New York City more so now that we have honed our portfolio for diverse ways to play at our office portfolio top tier in the deepest market segment.
Our number one ranked observatory.
Growing everyday street retail and our multifamily platform.
We are a future ready portfolio and opportunity ready balance sheet.
We have options today, we're in a position to take advantage of opportunities created through market disruptions and capital dislocation.
We're confident in our team's ability to execute on our goals and drive further growth for our shareholders I want to thank the team on the call today and who People's work every single day incredibly hard.
We have confidence in you and we will continue to do a great job on behalf of our shareholders I want to take a moment to do a special callout to board member Grant Hill into.
The entire company and the board.
Our in support of our fellow Board member Grant Hill, as managing director of the United States Men's basketball team in the Paris Summer Olympics Grant we wish you all the best will be cheering for Ya.
Finally, I'd like to thank everybody for the participation in today's call. We look forward for the chance to meet with many of you at non deal Roadshows will be go into Europe, and the fall conferences property tours in the months ahead until then thank you very much for your interest and onward and upward.
Speaker Change: Yes.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.