Q4 2024 Empire State Realty Trust Inc Earnings Call
Speaker Change: Greetings and welcome to the Empire State Realty Trust fourth quarter 2024 earnings call. At this time, all participants are in a listen-only mode. The question and answer session will follow the formal presentation.
Speaker Change: If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Heather Houston, SVP, Chief Counsel, Corporate and Secretary. Thank you. You may begin.
Heather Houston: Good afternoon. Thank you for joining us today for Empire State Realty Trust's fourth quarter 2024 earnings conference call.
Heather Houston: In addition to the press release distributed yesterday, a quarterly supplemental package with further detail on our results and our latest investor presentation were posted in the investors section of the company's website at esrtreet.com.
Heather Houston: 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.
Heather Houston: As a reminder, forward-looking statements represent management's current estimates. They are subject to risks and uncertainties, which may cause actual results to differ from those discussed today.
Heather Houston: 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.
Heather Houston: During today's call, we will discuss certain non-GAAP financial measures such as FFO, Modified and Core FFO, NOI, Same-Store Property Cash NOI, EBITDA, and Adjusted EBITDA, which we believe are meaningful in evaluating the company's performance.
Heather Houston: The definitions and reconciliations of these measures to the most directly comparable GAP 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.
Thank you.
Tony Malkin: Thank you and welcome back to you Heather. Congratulations on your new addition and good afternoon to everyone.
Yesterday, we reported ESRT's strong fourth quarter and 2024 results.
Tony Malkin: We are happy to discuss today our continued leasing momentum, observatory execution, and our outlook for 2025. In the fourth quarter, FFO came in above expectations.
Tony Malkin: Our leasing team again put points on the board with approximately 380,000 square feet leased in the quarter. We now have achieved more than three years of consecutive quarterly leased percentage growth and positive New York City office rent spreads.
Tony Malkin: For the year, we leased 1.3 million square feet, up from 982,000 square feet in 2023.
Tony Malkin: Our Manhattan office portfolio is over 94% leased, and that reflects the desirability of our top-of-tier, modernized, amenitized, well-located, energy-efficient, sustainability-leading portfolio.
Return to office is no longer a question.
Tony Malkin: as leasing momentum in the Manhattan market has told the story for itself.
Tony Malkin: The need to provide a good workspace is a boon for ESRT, and the price gap between brand new offices and our product has enabled us to raise the rents and reduce concessions.
Speaker Change: TripAdvisor's number one attraction in the world, the observatory continued its performance with year-over-year growth in fourth quarter and full year 2024 net operating income that exceeds 2019 levels.
Speaker Change: As this benchmark has been passed, we will no longer refer to our performance relative to 2019 results.
Speaker Change: Our focus remains to provide visitors with an unmatched customer experience to drive top-line growth, manage expenses, and continue to build exceptional brand awareness.
Speaker Change: In 2024, the Empire State Building had over 485 billion global media impressions, an increase of 25% year-over-year, and generated globally over $950 million in advertising value equivalency.
Speaker Change: We enter 2025 on our front foot. The leasing environment in New York City continues to benefit our product and price point. In fact, it has allowed us to increase rents and reduce free rent.
Speaker Change: The office sector statistics illustrate the results of haves and have-nots.
Speaker Change: The HAVs are buildings like ours, which have been modernized, are well located near mass transit, are sustainability leaders, have great amenities, and are owned by a financially stable landlord.
Speaker Change: Our product meets the demand of informed, better credit tenants. While it may be bumpy with our reduced inventory of space to lease, we expect positive occupancy absorption again for the full year 2025.
Our observatory deck remains the leader.
Speaker Change: Our average check size per visitor increased year over year, and we expect continued growth in 2025 as we introduce a new dynamic pricing model designed to monetize high demand times through the day.
Speaker Change: We are still below overall 2019 levels of volume and have room for upside as visitation levels improve.
Speaker Change: We continue to scour the market for additional transaction opportunities and are prepared to act when we see opportunities to enhance growth, either through expansion or trade out of our existing portfolio.
Speaker Change: The maintenance of a best-in-class balance sheet allows ESRT tremendous flexibility to lease and transact opportunistically and to create additional value for our shareholders
Speaker Change: Our entire organization remains laser-focused on the company's five priorities to lease space, sell tickets to the observatory, manage our balance sheet, identify growth opportunities, and achieve our sustainability goals.
Speaker Change: Tom, Christina, and Steve will provide more detail on our progress and how we plan to accomplish these goals in 2025.
Thanks, Tony, and good afternoon, everyone.
Speaker Change: In 2024, our property team delivered another year of exceptional performance.
Speaker Change: We leased over 1.3 million square feet in our commercial portfolio.
which was our highest annual volume since 2019.
Speaker Change: Our Manhattan office portfolio stands at 94.2% leased, an increase of 10 basis points compared to last quarter and up 160 basis points compared to a year ago, and an increase of 670 basis points since fourth quarter of 2021.
Speaker Change: For the 12th consecutive quarter, our office and retail portfolio achieved higher leased percentage and positive absorption.
Speaker Change: We had our 14th consecutive quarter with positive mark-to-market lease spreads in our Manhattan office portfolio Where our average net effective rent per square foot increased by 13 percent year-over-year
Speaker Change: We signed major office leases with quality tenants across our portfolio, including Burlington, Sault de Janeiro, Bloomsbury Publishing, A.T. Kearney, and Pontera.
Speaker Change: We enhanced the amenities at the Empire State Building with the opening of a multi-sports court for basketball and pickleball that converts to a 275 person presentation room, a new tenant lounge with full-service wet bar for hosting tenant events, and a golf simulator lounge.
Speaker Change: We continue to deliver an exceptional tenant experience and superior service, which contributed to our impressive track record of tenant retention and expansions.
Speaker Change: In 2024, approximately 450,000 square feet of our annual lease volume came from early renewals with existing tenants, where we proactively extended future lease expirations.
Speaker Change: Since our IPO in 2013, we have signed 299 current tenant expansion leases totaling 3 million square feet compared to our current total portfolio size of 8.6 million square feet.
Speaker Change: Our multifamily portfolio with occupancy of 98.5% at year-end continues to excel, benefiting from robust market fundamentals, strategic property improvements, and improved operations.
Speaker Change: This has proven to be a great exchange of existing properties for what we perceive to be better for ESRT's growth.
Speaker Change: We finished the year strong, and in the fourth quarter we leased a total of 379,000 square feet.
Speaker Change: including an 11-year, 37,000 square foot expansion lease with Booking Holdings at the Empire State Building, which along with a seven-year, 27,000 square foot lease extension, more than doubles their footprint to 64,000 square feet.
Speaker Change: We were told that Booking Holdings consolidated their New York City offices into the Empire State Building because of their employees' experience and our partnership on sustainability.
representing a 56% growth in that tennis footprint.
Speaker Change: along with a two-year lease extension of their existing space and brings their combined total to over 200,000 square feet of space expiring in 2041.
Speaker Change: That company has further expansion rights as part of their newly amended lease.
Speaker Change: We also signed a 16-year, 39,000-square-foot expansion lease with NYSERDA at 1333 Broadway.
Speaker Change: And we signed the leases for 13 prebuilt office suites, which total 64,000 square feet.
Speaker Change: In the fourth quarter, the average lease duration was 12.3 years, excluding early renewals and extensions.
Speaker Change: And new and renewal leases in our Manhattan office portfolio were signed with an average positive market-to-market cash rent spread of 10.8 percent.
Speaker Change: Thomas Durels, Heather Houston, Stephen Horn, Anthony Malkin, Stephen Horn, Heather Houston,
Speaker Change: We're well positioned for strong performance in 2025, during which our Manhattan office portfolio faces modest lease expirations.
Speaker Change: We have only 186,000 square feet of known vacates and 64,000 square feet of undecideds for 2025.
Speaker Change: We expect that we will see higher overall leased percentage in 2025 though our known vacates will be early in this year and could cause our leased percentage to dip temporarily at the start of the year.
Speaker Change: We have signed 50,000 square feet of leases during the first quarter of 2025 and have a healthy pipeline with 130,000 square feet of leases in negotiation.
Speaker Change: With increased occupancy, reduced availability, and improvement in the market, we were able to increase rents and reduce concessions last year, and we will continue that trend and push harder on rents and reduce concessions in 2025.
Speaker Change: Lastly, we have $62 million in incremental cash revenue from signed leases not yet commenced and free rent burn-off as shown on page 10 of our supplemental that reflects our leasing success.
Thank you.
Speaker Change: And with that, I'll turn the call over to Christina. Christina.
Thanks, Tom.
Speaker Change: We continue to manage our balance sheet in a proactive manner with strong liquidity, no floating rate debt exposure, a well-ladder debt maturity schedule, no unaddressed debt maturity until December 2026, and the lowest leverage among all New York City focused REITs at 5.3 times net debt to EBITDA as of year-end 2024.
Speaker Change: Our tax-efficient capital recycling diversified ESRT into attractive multifamily assets in Manhattan and prime retail assets in Williamsburg, Brooklyn, with better growth profiles and lower CapEx in the years ahead.
Speaker Change: Over the past year and a half, we established our presence and further scaled our footprint on the prime retail corridor of North 6th Street in Williamsburg with $221 million of acquisitions executed and another $30 million acquisition expected to close in mid-2025.
Speaker Change: In a market that has had relatively limited high-quality investment opportunities, we are very pleased to execute on these transactions.
Speaker Change: Our best-in-class balance sheet is primed to provide operating runway and flexibility to execute on attractive investment opportunities. We actively underwrite deals across all three sectors which we target, retail, multifamily, and office, with a focus on New York City.
Speaker Change: Investment transaction volumes are still not back to historical levels, but in recent months we have seen more transactions come to market from motivated sellers and debt default driven transactions.
Speaker Change: We will continue to underwrite prudently and be patient to find the right deals which have attractive upside and are additive to our New York City-focused portfolio.
Speaker Change: Steve will cover our outlook for 2025 in a moment, but I would like to discuss our longer term growth objectives.
Steve: We expect to drive solid cash flow growth beyond 2025 driven by strong execution in the following areas.
Steve: Near completion in our shift from non-core suburban assets towards high-quality New York City multifamily and retail assets with lower capex and higher growth prospects in the years ahead.
Steve: Our healthy leasing pipeline with solid prospects for higher rents and reduced concessions on new deals due to strong tenant demand and limited availability of top-of-tier office supply in the market.
Steve: Favorable mark-to-market upside in the years ahead as leases roll and we now show on page 7 of the investor deck.
Steve: continued performance of our observatory business and potential NOI upside driven by our new dynamic pricing model and improved visitation.
Steve: As a reminder, 2024 NOI exceeds pre-pandemic levels of NOI with approximately 74% of the visitors compared to 2019.
Steve: Contractual growth expected from the Williamsburg retail acquisitions as NOI ramps up over time, driven by both lease up and mark-to-market run growth as leases roll over time.
Steve: Multifamily continues to perform well with solid occupancy and continued rent growth and adds to the resiliency of ESRT's cash flows.
Steve: And finally, we are well positioned to do additional deals to enhance our cash flow growth profile in the years ahead.
Steve: And with that, I'll turn to Steve to discuss our fourth quarter results and outlook for 2025.
Steve: Thanks, Christina. For the fourth quarter of 2024, we reported core FFO of 24 cents per diluted share.
Steve: Results for the quarter included approximately one cent of non-recurring items.
Steve: Mostly related to credits received against prior year utility expenses, which we recognized in other income. For the full year 2024, we reported core FFO of $0.95 per diluted share, or $0.91 when adjusted for the $0.04 of non-recurring items and lease termination income we recognized throughout the year.
Steve: Same-store property cash NOI was down 2.9% in the fourth quarter year-over-year, primarily due to less benefit by approximately $1.9 million from positive non-recurring items recognized in 2023 and increased operating expenses.
Steve: When adjusted for the non-recurring items in each period, fourth quarter same-store property cash NOI was roughly flat on a year-over-year basis.
Steve: In our observatory business, we generated net operating income of approximately $29 million in the fourth quarter and $100 million for the full year, which reached the high end of our guidance range for 2024 and reflects a 6% year-over-year growth rate.
Steve: We generated FAD of approximately $3 million and $91 million for the fourth quarter and full year 2024 periods, respectively.
Steve: FAD was impacted in the fourth quarter from the timing of a $23.5 million disbursement of tenant improvement allowance related to leases signed in 2018 and 2021.
Steve: Excluding the timing impact from this TI spend, fourth quarter and full year 2024 FAD was approximately $27 million and $114 million respectively, resulting in adjusted FAD payout ratios of 36% and 33% respectively.
I'll now move into our guidance for the upcoming year.
Steve: In 2025, we expect core FFO will range from $0.86 to $0.89. This compares to 2024 adjusted core FFO of $0.91 after the aforementioned exclusion of $0.04 of nonrecurring items and lease termination income.
Steve: As previewed in our third quarter earnings call, certain items will contribute to the year-over-year decline. First, lower interest income.
by approximately five cents.
Steve: As $195 million of balance sheet cash was used towards retail acquisitions in the second half of 2024, and $220 million of cash will be used to pay down the balance drawn on a revolving credit facility in our Series A Senior Unsecured Note in March 2025.
Steve: and the assumption of an approximate 125 basis point reduction in the deposit rate applied to our cash.
Steve: Second, higher G&A by approximately one and a half cents, half of which is attributed to the accelerated recognition of non-cash stock-based compensation expense of awards granted to employees that are nearing retirement eligibility and related cash bonus elections.
Steve: The remaining increase is primarily attributed to increased non-cash equity expense related to the 2024 NEO promotions and standard inflation-based payroll increases.
Steve: Other key assumptions that are factored into our 2025 guidance are as follows. Adjusted same-store property cash net operating income growth, excluding lease termination fees and non-recurring items recognized in 2024 to range from half a percent to four percent.
Steve: Within this range, we expect positive cash revenue growth, which assumes commercial occupancy of 89 to 91 percent by year-end 2025, up from 88.6 percent at year-end 2024, and driven by free rent amortization and manageable lease expirations in 2025.
Steve: On the expense side, we expect an approximate 2% to 4% increase in property operating expenses and real estate taxes, which will be partially offset by higher tenant reimbursement income.
Steve: While we do not guide to quarterly performance, we do expect a slight skew of same-store cash NOI to the back half of 2025 due to the expected timing of cash rent commencements on leases currently and their free rent period.
Steve: Of note, we expect an increase in straight line rent in 2025 by approximately one and a half cents year over year as a portion of our pipeline of signed leases commences but remains in the free rent period, so it will not contribute to same store cash NOI, but will contribute to gap rental growth.
Thanks for tuning in. We'll see you next time.
Steve: We expect 2025 observatory NOI to be approximately 97 to 102 million.
Steve: This NOI guidance assumes observatory expenses of approximately $9 to $10 million per quarter for 2025. Our guidance range accounts for uncertainty around tourism fluctuations and bad weather that could impact results in any given quarter.
Speaker Change: With that, we 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 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue.
Speaker Change: for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys. One moment, please, for the first question.
Speaker Change: Our first questions come from the line of Steve Sackwa with Evercore ISI. Please proceed with your questions.
Speaker Change: Yeah, thanks, good afternoon. Maybe Tom, just going back to your comments on leasing, I'm just curious sort of the dynamics and the pull forward of activity and
Speaker Change: You know, the discussion you're having with tenants, it seems like you're able to pull deals forward or maybe they're getting a bit anxious about renewals, so maybe just give a little more flavor about the leasing and, you know, where ultimately do you think the portfolio settles out on a percent lease basis?
Speaker Change: Sure, well, I mean, firstly, we've had a really good run here with positive absorption over the last three years. We've got a very good pipeline relative to our reduced inventory of available space.
Speaker Change: As I mentioned earlier in the first quarter, we've already signed 50,000 square feet of leases and we have about 20 leases in negotiation for another 130,000 square feet.
Speaker Change: We've got about 50 active proposals for several hundred thousand square feet, and as typical for us in the past, we're seeing interest from tenants from a variety of different industries.
Speaker Change: Overall I think that there's a recognition that there's a tightening of the market for the better buildings, which we are. You know we've had and continue to have strong leasing momentum due to our quality product and quality buildings. Work from home is definitely not a factor.
We had the highest leasing volume in 2024 since 2019.
Speaker Change: We have low tenant move-outs this year. The amenities at Empire State Building show great. So I think there's a lot of positive momentum going into 2025. As I look at availabilities out there, I think that
Speaker Change: Clearly the choices for tenants are fewer and fewer for the quality buildings, quality landlords that are modernized. Buildings that are modernized have good amenities and are good locations and are not hamstrung by some you know high leverage.
Thank you.
Speaker Change: And just on the, I guess, lease percentage, Tom, like where do you think ultimately the portfolio settles out? Can it get to $95, $96?
Yes, you know, as we look at our modest move-outs...
Speaker Change: for the year. We only have about, for the portfolio, 200,000 square feet in New York City, about 185,000 square feet of no move-outs.
Thank you.
Speaker Change: Much of that will happen in the first half of the year.
Speaker Change: But we're setting ourselves up for coming off a base 94.2% lease in Manhattan. I can see easily us getting above 95%.
Speaker Change: by a year end. There's no real reason why we can't get 95 to 96 percent. On the occupancy front, similarly, we're going to see steady increase in occupancy throughout the year based upon the leases that we've signed previously.
Speaker Change: And we've given the midpoint of our guidance is 90%, but I can certainly see that higher on an occupancy basis in our Manhattan office portfolio.
Speaker Change: I think it's helpful to note, Steve, when you look at some of these renewals, a bunch of these early renewals and extensions are with tenants who have expanded as well.
Speaker Change: So, there is both the extreme success we have with retention and expansion of tenants and that leads to early renewals and extensions.
Steve Sackwa: I appreciate that, Tony. Thank you. Just on the observatory, I guess I was a little surprised that, you know, maybe that business was being projected to be sort of flattish, if you will, 25 over 24, and I realize
Speaker Change: You know you're not just going for pure volume that you know the experience is important. You've done a very good job raising pricing
Steve Sackwa: since you've gone to the time ticketing, but you know, just maybe your thoughts around.
Steve Sackwa: kind of the pricing that's moving forward and, you know, maybe where you see the upside. You know, is it more from pricing? Is it more from the visitors going up? Is it less bad weather days? I just would have thought maybe the NOI contribution would have been a little higher next year for 25.
Steve Sackwa: Right, so it's very early in the year. The low end of our guidance contemplates several macro factors that are not unique to our observatory.
There's dollar strength.
America is a brand for tourists.
Steve Sackwa: and Europe is you know under some threat. We saw this before in the prior administration.
Steve Sackwa: We also have an issue of airline seat capacity between China and New York City. In 2019, there were 72 direct flights each week from China to New York City. Now there are 10.
Steve Sackwa: And it's remained at 10 for quite some time. And we thought we'd see that number rise in 2024, and it did not.
Steve Sackwa: attraction and for it to maintain its preeminent position, our net revenue per customer towers over everyone else's in the marketplace.
Steve Sackwa: It's just a matter for us, it's early in the year and of course we look forward to updates as we move forward through the year.
Great. Thanks, Tony. Appreciate those comments.
Speaker Change: Thank you. Our next questions come from the line of Nick Joseph with Citi. Please proceed with your questions.
Speaker Change: a building that meets your kind of criteria to use the ESRT sort of special redevelopment sauce. And if you could kind of give us a sense of what kind of yields or IRRs you're underwriting to for prospective transactions, that'd be great.
Speaker Change: Well, first of all, let me touch on the second part.
Speaker Change: It's very important to note that, as we've said before, the new acquisition, application of new dollars, is different from the 1031 like-for-like replacements that we have done.
Speaker Change: So, from that perspective, I think we probably, on a relative basis, have a higher expectation of benefit and return, number one. Number two...
Speaker Change: We just begin to see now movement on the office front. There's a fair amount of movement that has gone to... of what we have seen has gone for resi conversion from office.
Speaker Change: There was a very nice asset on Park Avenue that was taken on by JPMorgan Chase for itself, $250,000, which we thought would have been very attractive for us.
Speaker Change: but it's adjacent to their property. I think they wanted to preserve their neighborhood for their views and what they wanted to do.
Speaker Change: So from our perspective, it's early. We begin to see now in 2024, really in the fourth quarter, and we begin to see in the first quarter of 2025.
Speaker Change: more of these defaults by maturity and the fact that as interest rates are up...
Speaker Change: The property ownership is under pressure. The biggest impact that's had on our business so far
is in the haves and have-nots.
Speaker Change: and it's really made our product much more in demand and has allowed us to increase rent.
and Decreece Freerad.
Speaker Change: who are single service partners in the deal. They don't have to talk to the lender as well. And our great balance sheet is very helpful there.
In short, though, as we look at the office piece,
Speaker Change: We just haven't seen, the volume volumes are significantly below where they were in 2019. If you take out the transfers that are not partial
Speaker Change: There's a deal on 6th Avenue right now where it's a partner being taken out by a fund that wants to get liquidity. It's only partial. It's not controlled. If you start to look at these various moves...
Speaker Change: There's really nothing that's attracted our attention yet, and and we do remain very interested in residential And we do remain very interested in retail
Hope that's helpful.
Speaker Change: That is very helpful. Appreciate all the color there, Tony. And then maybe just one for Tom on the leasing side. Seems like the pipeline is.
Speaker Change: pretty strong for 2025. Have you noticed if, you know, that kind of tenant that might be looking for, you know, space in the high 90s, low triple-digit sort of rent, is there a big pool of those?
Speaker Change: potential types of tenants looking at, you know, your more affordable price point, you know, maybe moving down the price point curve just given the demand we've seen for, you know, A buildings in the city.
Speaker Change: Yes, we actually happen to be in negotiation with two tenants. One of them is a, I call it a household name tenant, that you would recognize.
Speaker Change: is looking at the Empire State Building and relocation and or had looked at some of the newer Penn area product.
Speaker Change: and what we find is tenants like the value that we provide.
Speaker Change: The full suite of amenities, the sustainability partnership, and so we're seeing, yes, interest from tenants that could afford and have looked at much higher price point product in our choosing our buildings.
For more information visit www.FEMA.gov
Great. That's it for me. Thanks for the time.
Speaker Change: Thank you. Our next questions come from the line of Blaine Heck with Wells Fargo. Please proceed with your questions.
Thank you. Bye.
Speaker Change: Great, thanks. Good afternoon. Just to follow up on the investment side, given a kind of tougher time, Tony, you described in finding high-yielding office deals, and
Speaker Change: You know retail and multifamily which I'm sure are pretty tight on cap rates
Speaker Change: I guess, where do you think stock buybacks rank in your preference for investment given where shares are trading at this point?
Speaker Change: I would say that what we always consider, that the board always considers, that what we are now...
are going to
Speaker Change: enter into a slightly different aspect of the, I'd say, shorter-term investment approach where we will look at a business we did very successfully prior to our IPO.
Speaker Change: of offering preferred equity investment on transactions. And we'll probably roll that out in 2025, first half.
Speaker Change: Let's see what we do there. It's slightly different from the kind of mez originations that a lot of people have done.
Speaker Change: So, from our perspective, we still look at it as a way to put money to work and create more return for our investors rather than, at this point at least, as we've discussed with the board, any material shift or forward-looking statement on buybacks.
Thank you.
Speaker Change: Great, that's interesting. And then shifting gears, can you guys just provide some color around CapEx in 2025? I know you guys don't guide specifically to AFFO, but given that this quarter saw some lumpiness, it'd be great to hear whether you expect some of that elevated CapEx spending to continue into 2025 since you've done so much leasing in the past several quarters.
Blaine Heck: Thanks for the question, Blaine. I mentioned in the remarks as far as the elevated...
for Qspend.
Blaine Heck: That's a timing issue, so you need to sort of back that out when you're thinking about run rates. There's about 23.5 million there.
Blaine Heck: that comes down, and then also 24 was a relatively heavier year on leasing spend, so building capex, TIs.
Blaine Heck: And so, you know, we do expect that overall amount to decrease heading into 25, but a big piece of that decrease is from, you know, the exclusion of that one-time item I called out.
Got it. Thanks, Steve.
Thank you.
Speaker Change: Thank you. Our next questions come from the line of John Kent with BMO Capital Markets. Please proceed with your questions.
Speaker Change: And the Williamsburg North 6 corridor went down on a rent-per-square-foot basis by $6.
Speaker Change: versus last quarter, but I was wondering if you could just update us on what you think the mark-to-market is in that corridor and an update on the existing vacancy at 8991 North 6th Street.
Speaker Change: First of all, I would say going into our, as we underwrote the properties in our acquisition, we forecast about a 30% overall market-to-market increase within the embedded rent roll.
Speaker Change: And then obviously the lease up of the one vacant space that we have will add to the bottom line coming off no rent that we collect there.
Speaker Change: As we have issued proposal and see the growing momentum and interest on North 6th Street, particularly as we've acquired property there, there's been an even an increased level of interest and I can see those market markets going going higher.
Speaker Change: Right out of the gate, we've got proposals with about a half-dozen well-known brands that are interested in the one vacant space that we have, and so I'm very optimistic on a go-forward basis.
Speaker Change: And I might add that when, you know, as we look at other transactions on North 6th Street,
Speaker Change: and we see where one was recently done and where there's one underway, our price of entry looks.
That very
Speaker Change: It was smart. I think, as I mentioned, we unfortunately, by our actions, probably highlighted the opportunity set for a lot of other people. And we look forward to, based on the early indications that we have, to a very successful outcome here.
Speaker Change: Tony, you sort of alluded to it, but the $30 million acquisition that you're looking to close this year, any commentary on pricing and how you view opportunities to invest there versus multi-family?
Thank you for tuning in.
I think that
Speaker Change: Look, our process is always let's talk about things once they're done, so we do look to talk about that at the end of the second quarter, and I think it will just cement further and support what I've said.
Speaker Change: Okay, I just had a quick question on some of your large tenants, Macy's and Kohl's in particular, that have announced corporate headcount reductions recently. Does that impact their usage of space or, you know, potentially does that lead them to put some of their space on the Sophie's market?
Macy's has subleased their space at 111 West 33rd.
Speaker Change: You know that that space is spoken for and won't really won't impact us in any way. Coal still has a remaining lease term And yet yet seen as to you know, but they're out there for they've got quite a bit of term left
Thank you.
Thank you. Thank you.
Speaker Change: Thank you. Our next questions come from the line of Dylan Brzezinski with Green Street. Please proceed with your questions.
Dylan Brzezinski: Hi guys, thanks for taking the question. I just wanted to touch on sort of the strong demand environment in New York. Obviously you use your guys' portfolios well at least. One of your peers
I mentioned on Erin's call that
Dylan Brzezinski: There's a potential building for possible net effect of rent spikes. So just curious sort of how you guys are sort of doing Your ability to be able to continue to push net effective rent growth across the portfolio as you guys continue to Push lease percentage within the portfolio that is already, you know, call it north of 90%
Tony Malkin: Well, as I said earlier, and Tony has emphasized, we have raised our rents and reduced free rent concessions throughout last year and we look to continue that into 2025.
Dylan Brzezinski: As I mentioned earlier, we had a 13% year-over-year increase in net effective rents.
Dylan Brzezinski: And we're setting up well for good net effective rent growth in the coming year based upon lower...
Dylan Brzezinski: Leasing costs, lower TIs, much of the leasing that we've done.
Dylan Brzezinski: has been for built, previously built and paid for space, that's either second generation...
Dylan Brzezinski: pre-built or spaces that were fully built out for prior tenants and that's helping to keep a lid and reduce our go-forward tenant installation costs.
Dylan Brzezinski: So the combination of lower concessions, lower TI, and improvement in rents I think sets us up well for continued improvement in net effect of rents and of course just the overall good momentum in the market.
Dylan Brzezinski: And I would just add to that that, look, as tenants leave, we continue to, when tenants do leave, and even when we do renewals, we continue to see very good upward marks.
So, if we have a tenant who departs,
Dylan Brzezinski: We're very confident in the demand, and that would add to additional upmarks on the rents. And as far as spike, look, we have continued, as Tom said, good volume.
Good interest.
And we're doing some very high-rent leases, each
Dylan Brzezinski: Lease we do each quarter. We now review on every transaction on everything. We've got out there lease Discussions that go on too long. We've already had a handful from 24 where we upped the
Dylan Brzezinski: The price, because the lease proposal had gone out earlier in the year and where tenants actually accepted the higher price and have moved on with their transactions with us.
Thank you.
Appreciate that detail. And I guess just
Speaker Change: You know, larger tenants sort of get more active in terms of coming to the market and actually wanting to lease space, or is it still mostly that small to medium-sized user that is really active in the market today?
In terms of tennis, I think...
Speaker Change: coming to the market sooner. I think that that we've seen that as evidenced by the 450,000 square feet of early renewals that we concluded this
this past year, and as I said earlier,
There is a greater recognition by tenants.
Speaker Change: That there is a shrinking pool and supply of quality product in quality buildings with good landlords and so there is I think a greater sense of say anxiousness to execute on leases
Speaker Change: In terms of tenant size, we see interest from our prebuilt to full floors. Clearly, there's a lack of large block availabilities, particularly in the Grand Central area.
spaces that might otherwise be available are encumbered by
Speaker Change: a situation where the landlords cannot transact because the building is going through a recapitalization.
Speaker Change: And so we have our eyes going down in the future, you know, trying to look at opportunities to create large blocks where we can take advantage of that short supply.
Speaker Change: Yeah, we would just underscore the demand in New York City is very strong. We happen to be diversified across tenant types and spaces, but that is reflective of overall strength across New York City. And the key commonality is it is migrating towards high-quality assets, what you've heard us say, as have. And those buildings, us, as well as some of the other public New York City owners you're hearing in the comments, that's where they're seeing really good demand.
Speaker Change: And over time, there's a shortage of that space because it's not getting replenished as the space is getting leased up any time soon. And that's top of tier in every price range. There aren't that many tenants out there who can pay, you know, the...
Speaker Change: $185 to $250 square foot rents that new development today requires.
and as those
Speaker Change: Brand new buildings and A buildings as their as their rents move up our rents move up as well because we remain the
Speaker Change: great balance sheet landlord and as those prices go up there are a lot of people who look at us and as we've seen and say you know what we want to stay here and grow here.
Speaker Change: or we want to move here. So, you know, we feel like we're in a good position. We really do. And the market in New York is...
is good. We're happy with that.
Perfect. Appreciate all that detail, guys. Thanks so much.
Speaker Change: Thank you. We'll now turn the call back over to Tony Malkin, Chairman and CEO, for some closing remarks.
Speaker Change: So again, thanks everybody. We remain focused on our five priorities of leased space.
Speaker Change: sell tickets to the observatory, manage the balance sheet, identify growth opportunities, and achieve our sustainability goals, all for the purpose to create shareholder value. Those of you who keep track of that list will note that identify growth opportunities is a new fifth goal.
Speaker Change: We will continue to take advantage of opportunities as they arise and are confident that our ability to execute and drive further value for shareholders going forward remains strong.
Speaker Change: So, we thank everyone for your participation in today's call. We look forward to the chance to meet with many of you at non-deal roadshows, conferences, and property tours in the months ahead and onward and upward.
Speaker Change: Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.