Q3 2024 Empire State Realty Trust Inc Earnings Call
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Speaker Change: Greetings and welcome to the Empire State Realty Trust third quarter 2024 earnings call. At this time, all participants really listen only mode. If anyone should require operator assistance. Please press star zero on your telephone keypad there'll be a question and answer session. Following the formal presentation. You mean places question sure.
Speaker Change: By pressing star one on your telephone keypad as a reminder, this conference is being recorded.
Speaker Change: My pleasure to turn the call over to Jason Mccarthy Senior Associate Investor Relations. Please go ahead Jason.
Jason Mccarthy: Good afternoon. Thank you for joining us today for Empire State Realty Trust third quarter 2024 conference call.
Jason Mccarthy: 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 <unk> Dot com.
Jason Mccarthy: 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 results and proposed transactions and events.
Jason Mccarthy: 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.
Jason Mccarthy: 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.
Jason Mccarthy: During today's call, we will discuss certain non-GAAP financial measures such as <unk> modified and core <unk> NOI same store property cash NOI EBITDA and adjusted EBITDA, which we believe are meaningful in evaluating the company's performance.
Finishes and reconciliations of these measures to the most directly comparable GAAP measures are included in the earnings release and supplemental package each available on the company's website.
Speaker Change: Now I will turn the call over to Tony Malkin, Our chairman and Chief Executive Officer.
Thanks, Jason and good afternoon to everyone.
Tony Malkin: Yesterday, we reported <unk> strong third quarter and year to date results.
Speaker Change: We are happy to discuss today, our continued strong leasing.
Speaker Change: Observatory execution and more on our latest acquisition and capital recycling activities.
Speaker Change: In the third quarter <unk> came in above consensus.
Speaker Change: Our leasing team again put points on the board with over 300000 square feet leased in the quarter.
Speaker Change: Our 11th consecutive quarter of leased percentage grows and our 13th consecutive quarter of positive New York City office rent spreads.
Speaker Change: Our commercial portfolio leased rate today extends in the mid 90% range on pace with the performance of newly built Trophy office assets.
The demand for <unk> top tier space, well located modernized a monetized energy efficient sustainable and unique value proposition remains.
Speaker Change: <unk> as a destination for the flight to quality in the market today and draws from a deep well of tenant demand and the New York City office market.
Speaker Change: Tripadvisor is number one attraction in the world.
Speaker Change: Observatory continued its performance with third quarter sequentially and year over year growth.
We are still below our overall 2019 levels of volume and have plenty of room for upside as visitation levels improve.
Speaker Change: See page 19 of our quarterly supplemental for further details on our performance year to date.
Our focus remains to provide visitors with an unmatched customer experience to drive topline growth manage expenses and never consider our work good enough.
Speaker Change: We closed on a substantial portion of our previously announced acquisition of Prime retail assets on North sixth Street in Williamsburg, and have entered into a contract to acquire an additional retail asset on the street.
Speaker Change: The Williamsburg story has a long run ahead of value creation as the best retail corridor in Brooklyn, and one of the best in New York City.
Speaker Change: Our best in class balance sheet has no unaddressed debt maturity until December 2026.
Speaker Change: Maintenance of a great balance sheet allows ESR, itchy and tremendous flexibility to lease and acquire properties and to stay on our front foot and create value for our shareholders.
Speaker Change: Tenants look to partner with a financially stable landlord, who maintains high standards for service quality at their assets.
Speaker Change: We have the lowest leverage of any New York City REIT at a strong liquidity position that is attractive to tenants, especially in today's market.
Speaker Change: Yes, our T remains to quantitate, a sustainability leader in the office real estate sector.
Speaker Change: For more than a decade, we have been happy to deliver on innovation and execution portfolio wide and to help inform policy with practice.
Speaker Change: As we announced just over one week ago, Yes, our Ts overall aggressive score ranked first amongst all U S listed companies.
In the Americas for the second year in a row.
Speaker Change: Of course that means as well we were first and the most competitive peer group.
Speaker Change: After the team for all their work on this tremendous accomplishment.
Speaker Change: Tom Christina and Steve will provide more detail on our progress in the third quarter and how we plan to accomplish these goals as we finish out the year in the fourth quarter Tom.
Tom: Thanks, Tony and good afternoon, everyone.
Our office and retail portfolio continued its trajectory of positive absorption in the third quarter that was our 11th consecutive quarter was increased lease percentage today.
Tom: Today, our Manhattan office portfolio stands at 93, 6% leased an increase of 30 basis points compared to last quarter up 170 basis points compared to a year ago.
Tom: And an increase of 660 basis points since the fourth quarter of 2021.
Tom: In the third quarter, our Manhattan office occupancy increased by 40 basis points compared to last quarter and is up 140 basis points year over year to 89, 2%.
Tom: We also closed our 13th consecutive straight quarter with positive mark to market lease spreads in our Manhattan office portfolio.
Tom: New and renewal leases were signed with positive mark to market rent spreads of two 6%.
Leasing volumes continued to be strong with 304000 square feet of total leasing of the third quarter. This brings year to date leasing volume to 946000 square feet.
Tom: Notable office leases signed during the quarter and include it.
Tom: At 11 year 27000 square foot expansion full floor lease with Hecker, Frank at the Empire State building.
Tom: At 11 year 25000 square foot, new full floor lease with dynamic Corp. At 13 50 Broadway.
Tom: And 11 year 24000 square foot, new full floor lease with Bloomsbury publishing at 13 59 Broadway.
Tom: And we signed the leases for 17 pre built office suites.
Tom: 87000 square feet.
Tom: We have a healthy pipeline of another 150000 square feet of leases in negotiation of which 95000 square feet or new deals and the balance of renewals.
Tom: We also have $45 million in incremental cash revenue from signed leases not commenced and free rent burn off as shown on page 10 of our supplemental.
Tom: We continue to attract and retain quality tenants, who desire our fully modernized buildings that are located in Midtown Manhattan with convenient access to mass transit.
Tom: Quality amenities strong balance sheet great.
Tom: Great service and leadership in sustainability offered at an accessible price point.
Tom: As highlighted on page seven of our Investor presentation, we have consistently demonstrated our ability to expand existing tenants.
Tom: Since our IPO in 2013, we have signed 293 expansion leases for a total of 2.8 million square feet.
Tom: For the remainder of 2024 and through the end of 2025, our Manhattan office portfolio faces only modest lease explorations, we effectively managed our rent roll is such that we have only 107000 square feet of known Vacates in 6000 square feet of undecided is remaining for 2002.
94.
In 2025, we'd have about 144000 square feet of known Vacates and 118000 square feet of undecided.
With an average annual leasing activity of 827000 square feet over the past three years in our Manhattan office portfolio, we are well positioned to boost occupancy in 2025.
Tom: In the third quarter, we opened a new Empire State building Empire Lounge that includes a multi sport court for basketball and pick a bowl full service bar golf simulators, and 250 person Townhall presentation area.
Tom: The ESP club level also features are top of class 15000 square foot fitness clubs and private dining offered by states.
Tom: We've already received.
Tom: <unk> feedback from many tenants and brokers.
As Tony mentioned, we continue to expand our retail portfolio in North sixth Street in Williamsburg, Brooklyn.
With these additions we own the largest retail frontage located on the two best blocks within the best retail neighborhood in Brooklyn, We're very excited to own these assets and Kristina will provide more details.
Tom: Our multifamily portfolio with occupancy of 96, 8% at quarter end quarter end continues to perform exceptionally well and benefit from strong market fundamentals and recent property improvements.
Tom: In summary in the third quarter, we signed over 304000 square feet of commercial leases and closed our 11th consecutive quarter with an increased lease percentage.
We increased our Manhattan office lease percentage by 170 basis points from a year ago to 93, 6%.
Tom: Our Manhattan office occupancy increased by 140 basis points compared to last year to 89, 2% we.
Tom: We had our 13th consecutive quarter with positive mark to market lease spreads in our Manhattan office portfolio, we have a healthy pipeline of leasing activity.
Tom: We continue to have strong performance in our multifamily portfolio.
Tom: And we've made it a very exciting addition to our retail portfolio in Williamsburg, and now I will turn the call over to Christina <unk>.
Christina: Thanks, Tom.
In the third quarter, we closed on $143 million of the previously announced $195 million acquisition of Prime retail assets on north extreme in Williamsburg, Brooklyn, but the balance of the acquisition expected to close in the flex black.
Christina: In aggregate the assets comprised approximately 81000 square feet of retail space leased to high quality tenants, including Nike.
Christina: And tender, where cafe and north eighth ever Lane, or I mean Parker D. S in Paragon.
Christina: And now I laid out and Google.
Christina: These assets are 90% leased with a weighted average lease term of seven four years and upon completion of one retailer space under construction expected in late 2025, we will have an initial yield of approximately 4% in yield of just over 6% by 2027 with further mark to market upside over.
Christina: Fine as leases roll.
Christina: Notably this transaction is consistent with the company's strategy to recycle capital and balance sheet capacity in a tax efficient manner from noncore suburban assets into strong New York City assets and the anticipated cash flow and cash flow growth prospects of these new acquisition is a significant.
Christina: Inquiries named compared to our prior steady state.
Christina: Furthermore, in the third quarter, we entered into an agreement to acquire an additional prime retail asset in north six feet in Williamsburg, Brooklyn for approximately $30 million as with past transactions, we won't maintain confidentiality on this asset pronounced and more details will be disclosed closer to closing at us.
In mid 2025.
Christina: We are very pleased to increase our scale in this retail corridor of Williamsburg. Following our initial acquisition of a retail asset in north extra range. In September 2023 that continues to benefit from increasing population density strong household income and new multifamily and hospitality development.
<unk> completed and underway.
Christina: Pro forma after these acquisitions, yes, Archie will own the largest prime retail portfolio in the shop and blocks of north extreme between wipe Avenue in Bedford Avenue.
Christina: Please see slides 19 to 22 in our investor presentation for more color on these transactions and the strength of this retail submarket.
Christina: In a market that continues to have relatively limited high quality investment opportunities given the dislocation in capital markets. We are very pleased to execute on these transactions going forward, we will continue to focus on investment opportunities with attractive upside potential.
Christina: 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 three years in August we entered into interest rate swap agreements that will fix the sulfur component of our $95 million unsecured term.
Loan facility over its duration of three 3% effective March 2025, when the previous swap agreement expires.
Christina: We continue to manage our balance sheet in a proactive manner.
Christina: Liquidity, no floating rate debt exposure, while ladder debt maturity schedule and the lowest leverage among all New York City focus rates at five two times net debt to EBITDA.
Christina: As we have said for many years, we are prepared to increase leverage as logical to take advantage of value opportunities to grow our business.
Christina: We expect leverage to tick up modestly in the coming quarters trending towards six times net debt to EBITDA with the closing of our recent acquisition and after we utilized cash from the unsecured notes offering earlier in 2020 for them to pay down maturing debt in March 2025.
Now I'll turn the call over to Steve to discuss third quarter results and our outlook for the remainder of 'twenty 'twenty four.
Steve: Thanks, Christina Okay for the third quarter of 2024, we reported core <unk> of $69 million or 26 cents per diluted share.
Steve: Same store property cash NOI, excluding lease termination fees increased five 2% year over year, primarily driven by higher revenues from cash rent commencement and partially offset by increases in operating expenses.
Steve: Included in the year over year net increase was approximately $1 7 million of nonrecurring revenue items comprised primarily of bad debt recovery from a prior tenant and rental revenue generated from a short term lease agreement.
Steve: When adjusted for these nonrecurring items same store cash NOI, excluding lease termination fees increased by approximately two 6%.
Steve: Moving to our observatory business, we've generated net operating income of $30 million in the third quarter, approximately 6% higher year over year.
Steve: Observatory expense was $9 $7 million in the third quarter year to date net operating income for the observatory was $71 million, an increase of approximately 6% year over year.
Steve: Now onto our outlook for 2024, we raised the midpoint of our core <unk> guidance for 'twenty 'twenty four to 93 cents per fully diluted share and within this the key assumptions are as follows.
Steve: Same store cash net operating income excluding lease termination fees for the commercial portfolio to range from 3% to 4% relative to 2023 levels. This represents a 200 basis point increase at the midpoint.
Steve: The increase was primarily driven by the nonrecurring revenue items, which drove this quarter's five 2% year over year increase as well as higher than initially forecast tenant expense reimbursements and this was partially offset by a rise in operating expenses related to the timing of a number of repair and maintenance projects that we now expect in the fourth quarter, we now.
Steve: Two an approximate 8% increase year over year and same store property operating expenses.
Steve: We now assume commercial occupancy of 88% to 89% by year end 2024, an increase of 100 basis points at the low end of our range.
Steve: We expect 2024 observatory NOI to be approximately $96 million to $100 million.
Retaining our midpoint at $98 million, while tightening of the overall range and average observatory expenses of approximately $9 million per quarter.
Steve: Our guidance range takes into account variability in our observatory results due to tourism fluctuations and bad weather in the balance of the year as well as all capital markets and transaction activity announced year to date.
Steve: Also included within our <unk> guidance range is 2020 for G&A of approximately $70 million, which reflects costs associated with our additional SEC filings the impact of the recent any oh promotions and the accelerated recognition of certain noncash stock based compensation expense as a result of executives reaching.
Steve: Our approaching retirement eligibility.
Steve: We will provide our formal outlook for 2025 on our fourth quarter earnings call, but do believe it is important to note a few items that we expect to have an adverse net impact on 2025 <unk> of approximately five.
These include positive net impact from the acquisition of Williamsburg retail assets compared with a loss of F. F O contribution from the disposition of first Stamford place.
Steve: Adverse net impacts from the aggregate capital movements between the private placement notes issuance earlier in 2024 at a higher interest rate pay down in March 2025 of 100 million of maturing debt and $120 million currently drawn on our revolver and foregone interest income from the cash deposits. Following various uses of cash.
Steve: Including the recent 195 million all cash acquisition.
Steve: And as noted last quarter and adverse impacts from the previously mentioned recognition of noncash stock based compensation expense of awards granted to executives that are nearing retirement eligibility.
Steve: Again, we will provide additional detail on our 2025 outlook when we report our full year results.
With that we'll now turn the call back to the operator for the Q&A session operator.
Speaker Change: Okay. Thank you and I'll be conducting a question and answer session. As a reminder, if you'd like to be placed in the question queue. Please press star one on your telephone keypad.
Speaker Change: We do ask you ask one question and one follow up and return to the queue if you'd like to remove your question from the queue. You May press star two once you're going to star one to be placed into question QM. Please ask one question one follow up then return to the queue.
Speaker Change: Our first question is coming from he was talking about from Evercore ISI. Your line is now live.
Oh, great. Thank you good afternoon, maybe starting off with Tom to Rouse I'm, just curious the conversations you're having with tenants in and.
Speaker Change: I'm just wondering if there is in any increasing urgency or you know desire to sort of come to you guys on renewals Ike earlier I'm, just trying to get a sense for kind of the tightening of the market you guys have done a good job pushing up you our occupancy and percent leased and I'm. Just wondering if you know things.
Saar or you know getting a little bit tighter for tenants in and how they're thinking about renewables.
Speaker Change: Yeah, we actually have been working on early renewals.
Speaker Change: <unk> TV is a good example of that we extended their lease term by five five years.
Speaker Change: In connection with our Oh at.
Speaker Change: At least that we did there we took back space with them at least to Kaplan Haecker, and then extending the extended <unk> lease term and so were always actively practically managing our rent roll and we are seeing examples of that and that's good.
Speaker Change: Good good good one.
Speaker Change: The urgency I think that we're seeing is that tenants recognize that there are feeling for choices of quality properties quality spaces with quality landlords and that's why we're seeing the positive results. So that despite maybe the headlines on the overall stats in the market.
Speaker Change: Waking for tennis, where they see that.
Speaker Change: As they looked about these new offerings in the marketplace.
Speaker Change: There are really few choices with quality product go to is that our modernized well a matter of those great location, great access to mass transit.
Speaker Change: From landlords, who have the balance sheet to build execute deliver on promises. So I think all of that speaks to the the results that we've generated steadily over the left.
11 quarters.
Jason Mccarthy: Great. Thanks, and maybe Tony just on the Observatory I know you don't manage necessarily for visitors, but it's interesting to note. The last two quarters. The visitors have been down slightly on a year over year basis and I'm. Just curious from your perspective, you know what ultimately gets the visitor growth kind of back up into pause.
Jason Mccarthy: Ziv territory is it you know Chinese visitors coming back where they've been sort of noticeably absent is it just international tourism has it been other competition in New York You know what do you think gets the visitor count growing again.
Tony Malkin: Well keep in mind that a major component of that.
Jason Mccarthy: The lower performance in the second quarter was that Easter shifted at all.
Tony Malkin: Out of that quarter so.
Tony Malkin: That that was a theme that we see every time that that.
Tony Malkin: <unk> shifts from one to the next number one number two.
Tony Malkin: Throughout New York City, you see softer third quarter.
Tony Malkin: Tourist visits.
Tony Malkin: And therefore the.
Tony Malkin: The thing that will drive.
Increased.
Tony Malkin: This patient at the Observatory really it will follow the visitor numbers Steve.
Tony Malkin: We do feel very good that the visitors we have seen have actually opted for spec.
Tony Malkin: Special additional <unk>.
Tony Malkin: Components on our on our scale of what's available to buy.
Tony Malkin: Our net per person is very high.
That of course is driven stronger NOI.
Tony Malkin: And.
We have actually by the way in China. It was off a low number but if we see a doubling of our of our visitors from China keep in mind, we don't do the Chinese bus tourist travel at all we made that break many years ago, we just do independent travelers.
Tony Malkin: Overall visitors to New York City third quarter softer and.
Tony Malkin: And at the same time, we're very happy with our performance with what we've been able to charge and how we've been able to control expenses all reservation model.
Speaker Change: Right. Thanks.
Speaker Change: Yeah.
Speaker Change: The next question is coming from John Kim from BMO capital markets. Your line is now live.
Speaker Change: Thank you.
So so far.
John Kim: <unk> or close to $225 million of retail acquisitions in Williamsburg, I think there was an indication of Christina doing more in the region, but just wanted to know how big this can get for Empire state and how you get from that initial 4% to 6% yield given the lease maturity.
Speaker Change: It's pretty long.
Speaker Change: Sure. So I think we've achieved scale in a short amount of time initial acquisition.
Speaker Change: Six nine in September 2023, and 185 million and then there's 30 million. So I think we have pretty good scale right now we will be opportunistic in terms of opportunities that come about from this point on have a lot to work with I feel very good about this very prime retail portfolio, especially in a market where there hasn't been.
Speaker Change: At time of day.
Speaker Change: Well in the marketplace the way, we get to the increasing yeah yield is burn off of free rent of my last week lease up of the vacant space and so those are the key components and as we have moved me the weighted average lease term is over seven years, but there can be movement in between and below market rents could translate it.
Speaker Change: To further upside to the yields that I quoted and so we're very excited about this opportunity will continue to build scale. We have good scale and we'll see what comes along but not in a rush to chase anything as always.
Speaker Change: I might just add to that.
Speaker Change: Oh <unk>.
Speaker Change: We know and as I think many of the investors and some of the the sell side analysts know.
Speaker Change: Until our recent acquisitions Williamsburg was reasonably undiscovered under recognized and we don't think that's the case anymore and recent transaction evidence suggests a much higher pricing than what we bought so we want to be mindful and don't forget our goal here.
Speaker Change: It was to participate in our capital recycling and we're very happy with where we've ended up and we will exercise discipline as we look forward.
Speaker Change: Okay.
Speaker Change: Thank you. Your next question is coming from Blaine Heck from Wells Fargo. Your line is now live.
Blaine Heck: Great. Thanks, Good afternoon, just starting on guidance you guys beat by two cents during the quarter with the term fees, but only increased the full year guide by one sense were there any specific offsetting factors that you can talk about the kept you from increasing that full year guidance by the same amount at <unk> during the quarter or was.
Speaker Change: They're just some some level of termination fees that were already built into guidance.
Speaker Change: Sure so to level set when you adjust out the two and a half signs of one times, which are both the lease termination fees and the other one time items I called out in the same store cash NOI.
Speaker Change: I have about 23, five cents and the midpoint of our guidance implies a 22% fourth quarter. So that updated guidance includes considerations that the onetime items will not recur again in the fourth quarter.
Speaker Change: Also higher G&A as we noted in our previous calls related to those recent anyhow promotions and excited recognition of noncash stock based comp expense and also now the additional costs related to our additional SEC filings.
Speaker Change: Also keep in mind that there's that mile solution, we never jumped back in 2024, as a result of capital markets and transaction activity.
Speaker Change: And then keep in mind too that we leave room in our guidance for variability and Observatory performance.
Speaker Change: Given the fourth quarter contains a larger amount of NOI relative to earlier quarters.
Speaker Change: Great. That's helpful and leads me into the second question was just you know I wanted to ask on the transaction side, I think theres, a little bit of concerned around the dilution associated with the sale of her Stanford and purchased the Williamsburg at a much lower cap rate. So just wanted to ask about any other specific opportunities you guys might be.
Speaker Change: Pursuing and maybe just get any thoughts on whether you'll look to balance these purchases out with transactions with higher going in yields or is this kind of mid single digit yield kind of what what we should expect from you guys going forward.
Speaker Change: Yeah, I think I.
Speaker Change: Appreciate the question as we've always noted he this is very much part of our capital recycling initiatives right. We started a few years ago, and then sold out of non core suburban assets.
Speaker Change: Down from one remaining asset and in return we acquired New York City multifamily in New York City retail and we think that on a cash flow basis that is NOI after capex and much better growth profile and cash flow potential on the go forward. We will continue to look for deals that have attract.
Speaker Change: They are upside when it comes to capital recycling, we think of it more from the tariff trade concept and if our fresh balance sheet capital. We expect to have even further upside a little more opportunistic in perspective and it very much depends on what presents itself in the marketplace and as I mentioned earlier, there hasnt been a ton so the opex.
Speaker Change: They get very high quality prime assets with great growth potential over a decade and.
Speaker Change: We feel it's very attractive and additive to the ESR T portfolio will continue to look for deals that generate upside.
Speaker Change: Add to Christine's comments, we very much focus on the shift from first Stamford place and specific.
Speaker Change: And the recycling in general not just on the SFO NOI metrics, we focus on cash so we're very comfortable and happy with what we did there and recognize that within the confines of those types of transactions you need sellers certainty.
Speaker Change: For performance.
Speaker Change: Do you need to act in a very compressed time period and on all accounts. We are very very happy with what we've done as far as what it'll do for the the cash over time.
Speaker Change: And we're thrilled with where we were able to execute.
Speaker Change: And further on that.
Speaker Change: The fact that really everything we've done so far has been off market.
Speaker Change: We still continue to work on off market. We just have when we look at the deployment of new capital perhaps.
We have more flexibility, we have we can handle uncertainty of execution better and more easily and we will look for the tradeoffs. Therefore on those two paths to produce higher returns.
Speaker Change: Thank you next question today is coming from Michael Griffin from Citi. Your line is now live.
Speaker Change: Yeah.
Speaker Change: Great. Thanks, just on the leasing pipeline I'm curious if you can give us any insight into whether or not you might be seeing tenants that were paying some of its higher price point rents maybe move down into your more affordable range, just given I think demand that we've seen for some of those.
Speaker Change: High Eighty's triple digit rents and then maybe if you can give us a sense sort of where concessions are trending up have you seen maybe an improvement in the concessionary environment or is it still pretty stable relative to recent quarters.
Speaker Change: Sure well first of all we've always attractive tenants from really all submarkets, that's everywhere all parts of Midtown where there would be a fifth Avenue.
Speaker Change: From the local Penn station market to a Midtown South time square Submarket, So we attract them from.
Speaker Change: From all over and you look at the quality of tenants that we attract these are tenants that couldn't really afford to pay up and pay anywhere and they choose our assets for the reasons that we've cited numerous times.
Speaker Change: Modernized assets, great locations and monetize at a really at an accessible price point. The most active part of the market isn't that 60 to $80 per square foot range, and that's where we play and we were top tier we hope for the best product. The best services. It really is the best choice in that price range and again, that's why we're seeing the.
Speaker Change: The excellent results that we are regarding leasing concessions look we focus on net effective rents.
We're benefiting from increased rents this quarter were the highest rent.
Speaker Change: Quarter in and in the past three quarters. This quarter, we had the lowest leasing costs of any quarter for the past three years.
Speaker Change: And we've had the highest net effective rents this quarter of any quarter in the past three years. So we're benefiting from past investments.
Speaker Change: And tenant spaces, where we built a turnkey M. Prebuilt tenant spaces that are re leased and renewed with modest Ti and free rent, we definitely pulled back on free rents. If we have a raw space that we need to deliver to a tenant where trenching and we've been doing that for easily last five or six years is that that has not changed but youre seeing.
Speaker Change: Our lease cost per square foot per lease year come down because of the reasons I just decided.
Speaker Change: Very helpful. Appreciate that and then maybe just on the transaction market, obviously, you've been busy with the retail acquisitions in Williamsburg, but are you starting to see any opportunities on the office side that might be a little bit interesting and then maybe going a bit further you know would you ever look to provide that on a property or maybe a JV structure.
Speaker Change: Or do you think youll stick to acquiring properties outright if the opportunity comes up.
Speaker Change: And we're just as we said, so often omnivorous opportune divorce, and and and and will remain that way and we are open to anything that we think will deliver value to.
Speaker Change: To shareholders, we've had a number of very interesting conversations with new debt providers private debt providers, we've had conversations about that positions out in the marketplace fundamentally our goal is to achieve long term value and that's sort of the base that.
Pitches for what we look.
Speaker Change: Where we can really take all of the.
Speaker Change: Expertise, we have expertise in redevelopment to help produce a better outcome than perhaps where property is or where it's headed presently.
That said.
Speaker Change: We are constantly on the lookout, we review a lot of different opportunities, we've got a very active investment group.
Speaker Change: And we will be opportunistic.
Speaker Change: Thank you as a reminder, if you'd like to be placed in the question queue. Please press star one on your telephone keypad. Our next question is coming from doing Brzezinski from Green Street. Your line is now live.
Speaker Change: Hi, guys. Thanks for taking the questions. Just curious you know we were looking at.
Speaker Change: Lease percentage versus occupied percentage in ESR cheese portfolio and it looks like today.
Speaker Change: Spread between those two is it's about a little over 100 basis points why relative to the historical average which suggests to us that occupancy should continue to grow over time, but just curious any any sort of guardrails around the timing of when that should start to compress towards.
Speaker Change: Call. It high 200 basis point spread range that it has been historically.
Speaker Change: Well look we're focused on increasing our lease percentage and occupancy percentage will follow but the big picture is we're well positioned we've laid the groundwork and we proactively managed our rent role to increase both our lease percentage and our occupancy percentage.
Speaker Change: Into 2025, if you look over the next five quarters, we have about a quarter million square feet of known Vacates.
Speaker Change: And that's the offset or will be offset by the end of 2025 won over 315000 square feet of signed leases that have not yet commenced or will commence and so that will help boost our occupancy percentage in 2025 and of course with the leasing success that we've had about 830000 square foot.
Speaker Change: Average annual leasing volume over the past three years in our New York City Office portfolio look we're well positioned to.
<unk> to improve both our leased percentage and occupancy percentage, but I would point to the over 315000 square feet of leases that are signed not yet commenced that will offset the known vacates.
Speaker Change: End of 2025.
Speaker Change: I appreciate that detail and then just one going back to do the transactions and appreciate sort of the details on how you guys are looking at those from a cash flow perspective, rather than an earnings perspective, well Kristina I think you mentioned you know part of that that yield growth through 2027 on the acquisitions was related to two lease.
Speaker Change: No vacant space and I think at the portfolio today is 90% leased so just sort of trying to get a sense for where you think stabilized occupancy it could be and then it also sounds like part of the narrative as story around these transactions is its potential market rent growth potential. So just sort of wondering if you could provide any details as it relates to how you guys are thinking about.
Speaker Change: Market rent growth without the street retail acquisitions.
Speaker Change: Sure on the vacancy point, there's one vacant space and Theres, one temporary space already in discussions that we feel really good about.
Speaker Change: Got it and it's a portfolio that could easily be full by any friction on movement between tenancy on the mark to market potential.
Speaker Change: As with any neighborhoods and has experienced very strong growth. The first round as very much getting the retailers and they come in at a certain rang and theres still probably work to be done in terms of mix of tenants, where they are on the street size of the box and as a result, there are a number of tenants along the street, where they are well below them.
Speaker Change: Market rents so that below market translates into really good mark to market potential in the coming period, whereby if you have early termination it's not your traditional Oh here, we have to deal with it they can see it's actually an opportunity to get their space back and re lease. It. So we don't have anything specific on that front, but that's.
Speaker Change: To answer your question, but the four to six is sort of already known in terms of vacancy that kept fleet that can say that increases in rent and goes to another tenant.
Burn off of free rent, which is contractual.
Speaker Change: That helps.
Speaker Change: Thank you. Your next question is coming from John Kim from BMO Capital markets. Your line is now live.
John Kim: Thank you.
John Kim: Flagstar your second largest tenant lay off for about a fifth.
John Kim: I'm wondering what you think that will have a impact.
John Kim: And pack and the same thing at least with you and if you expect to see any of that space.
Speaker Change: They should come back to you.
Speaker Change: Flagstar is on a long term lease and.
Speaker Change: So our view is they've got the right team and operation there.
Speaker Change: A lot of confidence with Steve Manoogian group at the head.
Speaker Change: And we will always work proactively with any tenant.
Speaker Change: Who wishes to share to shed space you see that in.
Speaker Change: Our.
Speaker Change: Extraordinary income or non recurring income pretty much every quarter. So we look at any opportunity to recast our current tenant population.
Speaker Change: Even prior to.
Speaker Change: Lease exploration in the same way, we look at early renewals.
Speaker Change: Tom and his group are Super active Ryan Kass Super active maintain a very very close.
Speaker Change: Level of contact with our tenants and anyone doesn't utilize space.
Speaker Change: We would rather help them.
Speaker Change: And leased directly to a new tenant who will be with us for a long time.
Speaker Change: And Tony I'm off while I have you.
Speaker Change: Your company has a very clean such very clean balance sheet. We don't have any assets owned in joint ventures, but I believe.
How committed are you to wholly owning your assets.
Speaker Change: Or would you at some point consider joint venture failing either retail or office or some part of your portfolio.
Speaker Change: We have maintained the cleanliness and our balance sheet and ownership of our assets because we haven't had a reason to do anything else, we certainly havent needed to sell anything to generate capital.
Speaker Change: We do believe in this environment, which we currently operate.
Speaker Change: Particularly with interest rates popping back up again.
Speaker Change: <unk> candidates for President programs are inflationary and we believe that will have an adverse impact on interest rates.
Speaker Change: Certainly on the longer term, we just believe there'll be more opportunities and when we need to attract new capital to those opportunities. We will certainly consider joint ventures and people with whom we've spoken to date, we've considered joint ventures on.
Speaker Change: On the recycling of the balance sheet, we needed to own those assets, 100% when we acquired new assets.
Speaker Change: And that governs a lot of our actions on those activities as we go forward again I'm nervous opportune horse.
Speaker Change: We'll look at what we can get when we can get it partner logically when Theres a reason to do so with our balance sheet and our available liquidity is not something we need to do with something we will do by choice.
I appreciate it thank you.
Speaker Change: Thank you we reached end of our question and answer session I'd like to turn the floor back over to chairman and CEO, Tony Malkin for some closing remarks.
Tony Malkin: Thanks, very much everyone to do you for your attendance today, we remain focused on our four priorities lease space selling tickets to the observatory.
Tony Malkin: Managed the balance sheet and achieve our sustainability goals all for the purpose.
Tony Malkin: The creation of shareholder value, we continue to take advantage of opportunities as they arise and are confident in our ability to execute and drive further value for shareholders going forward.
Tony Malkin: Today, Heather Houston, our senior counsel corporate.
Tony Malkin: We believe is delivering a new baby and we wish her the greatest success and happiness.
Tony Malkin: If she isn't in the process right now we know she's listening in so good luck Heather. Thank you all for participation in today's call. We look forward to the chance to meet with many of you at non deal Roadshows and conferences and property tours in the months ahead onward and upward.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.