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Edited Transcript of ESRT earnings conference call or presentation 21-Feb-19 2:00pm GMT

Q4 2018 Empire State Realty Trust Inc Earnings Call

New York Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Empire State Realty Trust Inc earnings conference call or presentation Thursday, February 21, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony E. Malkin

Empire State Realty Trust, Inc. - Chairman & CEO

* David A. Karp

Empire State Realty Trust, Inc. - Executive VP & CFO

* Greg Faje

Empire State Realty Trust, Inc. - VP, IR

* John B. Kessler

Empire State Realty Trust, Inc. - President & COO

* Thomas P. Durels

Empire State Realty Trust, Inc. - EVP of Real Estate

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Conference Call Participants

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* Craig Allen Mailman

KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst

* Daniel Ismail

Green Street Advisors, LLC, Research Division - Analyst of Office

* James Colin Feldman

BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst

* Jason Daniel Green

Evercore ISI Institutional Equities, Research Division - Analyst

* John William Guinee

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Michael Bilerman

Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research

* Piljung Kim

BMO Capital Markets Equity Research - Senior Real Estate Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the Empire State Realty Trust Fourth Quarter and Full Year 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Greg Faje, Vice President of Investor Relations. Thank you, sir. You may begin.

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Greg Faje, Empire State Realty Trust, Inc. - VP, IR [2]

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Good morning. Thank you for joining us today for Empire State Realty Trust's Fourth Quarter 2018 Earnings Conference Call. In addition to the press release distributed last evening, a quarterly supplemental package with further detail on our results has been posted on the Investors section of the company's website at empirestaterealtytrust.com.

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 and expense. 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. 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 relating to those forward-looking statements in the company's filings with the SEC.

Finally, during today's call, we will discuss certain non-GAAP financial measures such as FFO, modified and core FFO, NOI, cash NOI, and EBITDA, which we believe are meaningful in evaluating the company's performance. The definitions and reconciliations of these measures to the most directly comparable GAAP measures are included in the earnings release and supplemental package, each available on the company's website.

Now I will turn the call over to John Kessler, President and Chief Operating Officer.

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John B. Kessler, Empire State Realty Trust, Inc. - President & COO [3]

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Good morning. Welcome to our fourth quarter 2018 earnings conference call. At Empire State Realty Trust, we have de-risked embedded growth and generate market-leading cash leasing spreads from redevelopment of our office space. Our balance sheet liquidity and strength differentiate and position us for opportunity. And we have no exposure to the weak balance sheets of the new wave of shared office and enterprise space concepts.

Our portfolio offers tenants a value price point between trophy Class A and Class B properties, which provides investors with both upside opportunity and downside protection. Our fully modernized portfolio essentially located near mass transit. And we are an industry leader in sustainability and energy efficiency.

During 2018, we leased over 1 million square feet and today, Tom Durels will speak about the fourth quarter's approximately 247,000 square feet of leases, market demand for our properties and our market-leading leasing spreads. Then David Karp will address our financial performance, our balance sheet and provide some perspective on 2019. Finally, Tony Malkin, our Chair and CEO, will provide some additional comments in conclusion.

I'll now turn the call over to Tom Durels. Tom?

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Thomas P. Durels, Empire State Realty Trust, Inc. - EVP of Real Estate [4]

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Thank you, John, and good morning. Our fourth quarter numbers reflect further progress on our 4 drivers of top line de-risked and embedded growth over the next 5 years. The breakdown of these top line revenue growth drivers, which as of December 31, 2018, we estimate to be $112 million, can be found in our investor presentation available in the Investor section of our website. For reference, this compares to $537 million in trailing 12-months cash rental revenue and tenant reimbursements, and $390 million in trailing 12-months cash NOI as of December 31, 2018.

In the fourth quarter, we signed 35 new and renewal leases, totaling approximately 247,000 square feet. This included approximately 219,000 square feet in our Manhattan office properties, 23,000 square feet in our Greater New York Metropolitan office properties, and 5,000 square feet in our retail portfolio.

Significant new office leases signed during the quarter include a 41,800 square foot lease for fourth floor with hospital insurance company at 111 West 33rd Street, where an early recapture of a redeveloped floor yielded a termination payment by the prior tenant and a 9% positive cash rent spread. Also a 20,700 square foot full-floor expansion lease with Signature Bank at 1400 Broadway and a 14,300 square foot full-floor expansion lease with Uber at 1400 Broadway. The expansion leases with Uber and Signature highlight our success in attracting and retaining tenants that have prospect for growth. Since 2013, we have had 163 tenant expansions, totaling over 1.1 million square feet within our portfolio.

In Manhattan alone, in 2018, we signed 25 lease expansions for a total of approximately 245,000 square feet. We also amended our lease with our largest tenant, Global Brands Group. In the process, we increased annual cash rent by approximately $4 million as of October 29, 2018. As a reminder, we maintained updated disclosure on potential vacates and renewals for leases that expire. You can find the 4 quarters for 2019, a full year disclosure for 2020, all of this can be found on Page 9 of our supplemental. This chart shows tenants to be relocated within our portfolio and vacates to be replaced by new tenants with whom leases have been signed. We have continued with our proven strategy to vacate and consolidate spaces, redevelop them and release those spaces at higher rents to better-quality tenants.

Given the timing delay between the move out of existing tenants and the commencement of replacement of new leases and a further delay between legal commencement and GAAP revenue recognition, our occupancy can vary quarter-by-quarter and these timing lags impact our reported revenue.

During the fourth quarter, rental rates on new and renewal leases across our entire portfolio were 23.9% higher on a cash basis compared to prior escalated rents. And at our Manhattan office properties, we signed new leases at a positive cash rent spread of 30%. Of course, leasing spread always depend on the expiring fully escalated rents. In the near term, leasing spreads will benefit from the lease-up of vacant, redeveloped office space, which had prior fully escalated rents of $52 per square foot, which is well below current market.

Our future leasing spreads will be influenced by rents on our future lease expirations, which we disclose on Page 11 of our supplemental. We continue to see demand for our product, locations and price points and feel confident in our offerings. We raised our rents in our Manhattan office buildings in 2018 and just implemented our first rent increases of 2019 for certain spaces. We have a healthy pipeline of leases and negotiation across the portfolio for both full floors and pre-built. As a reminder, leasing volume may vary significantly by quarter given the timing of particular deals. We remain focused on our strategy to vacate and redevelop space that we will bring to market for future lease-up.

Now I'll turn the call over to David Karp. David?

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David A. Karp, Empire State Realty Trust, Inc. - Executive VP & CFO [5]

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Great work, Tom, and our entire property team. Good morning, everyone. For the fourth quarter, we reported core FFO of $87 million or $0.29 per diluted share. Cash NOI was $113 million, up approximately 15% from the prior year period.

In our Observatory operations, which are highlighted on Page 16 of our supplemental, revenue for the fourth quarter of 2018 increased to $34.5 million, or 5% from the prior year period.

Net operating income was $25.6 million, down slightly from the fourth quarter of 2017. In early November, we implemented a price increase of just over $1 on tickets sold through our retail channel.

A combination of price increases, implementation of dynamic pricing and a better mix of ticket types largely offset the year-over-year increase in expenses. The expense increase was driven by a number of factors with the single largest being high-technology costs for software consultants and maintenance agreements related to our new experience, partially offset by lower labor cost and the efficiencies we've realized in stages of the new Observatory, which have open to date.

The Observatory hosted approximately 945,000 visitors in the fourth quarter 2018, a decrease of 4.6% compared to the fourth quarter 2017. For the fourth quarter, we estimate the bad weather days resulted in approximately 43,000 fewer visitors than in the prior year period based upon an increase in the number of bad weather days. For the year ended December 31, 2018, Observatory revenue was $131.2 million, a 3.2% increase compared to the prior year period.

Net operating income for the year was $98.5 million, up 1.7% from the prior year period. This strong performance was achieved despite the fact that the 102nd Floor observation deck was closed in the first quarter of 2018 for the replacement of the original elevator machinery with a new higher-speed glass elevator. Adjusting for first quarter 2018 revenue for the 102nd Floor observation deck due to its closure for that period, which was $1.9 million in 2017. Observatory revenue would've increased 4.8% in 2018 as compared with 2017.

The Observatory hosted approximately 3.81 million unique visitors during 2018, down 3.4% compared to 3.94 million in the prior year period. As a reminder, we now report unique visitors and do not include sales of extra premium upgrades.

For your models, remember that in 2019, the Easter holiday will fall entirely in the second quarter compared with 2018 when the holiday was split between the first and second quarters. Also at year-end, we renewed our intercompany lease with the Observatory taxable REIT subsidiary. We created our first lease with the TRS at the time of the IPO. Under the terms of the new lease, the intercompany rent payment will be higher, reducing taxable income and lowering our income tax expense. We expect no material change in how the Observatory operations are reflected in our overall performance due to this renewal.

Moving to our balance sheet. Our low leverage joint venture free and flexible balance sheet, including significant cash on hand, give us a competitive advantage to execute our plans and undergo external growth in any market environment.

As of December 31, 2018, we had total debt outstanding of approximately $1.9 billion and no borrowing under our $1.1 billion unsecured line of credit. The debt has a weighted average interest rate of 3.84% and a weighted average term to maturity of 8.1 years. Our debt maturities are well laddered with only a single $250 million issue, maturing before 2022. None of our outstanding debt has variable rates.

As of December 31, 2018, our consolidated net debt total market capitalization was 23.4%, and consolidated net debt-to-EBITDA was 3.6x. And we had cash, cash equivalents and short-term investments of $605 million.

As we look ahead to 2019, let me provide some additional perspective on items that will impact full year results. First, we recorded $20.8 million in lease termination fee and other end of lease income in 2018, of which $18.7 million of loan was recorded in the fourth quarter. As we've reported on Page 18 of our supplemental, from 2014 through 2017, we averaged $7.4 million in lease termination fee and end of lease income.

Second, in accordance with new accounting standard guidance, noncontingent leasing cost can no longer be capitalized and will therefore be recorded as an expense. Going forward, this figure will be dependent upon leasing volume. For context, our capitalized leasing costs were approximately $4 million to $4.5 million per year over the past 3 years.

Third, regarding the Observatory. As a reminder, we closed the 102nd Floor observation deck in early January 2019, for a period as long as 9 months as part of our larger Observatory capital project. This could result in approximately $8 million of lost revenue for the period in which the 102nd Floor is expected to be closed. Additional detail on historical 102nd Floor revenue can be found on Page 16 of the supplemental. We anticipate the run rate on Observatory expense to approximate, this figure reported for the fourth quarter of 2018, due to higher HVAC, IT and marketing expenses associated with the new experience.

Fourth, the amended GBG lease will result in approximately $4 million in higher annual cash rent.

And lastly, we have $32 million of annualized free rent, of which $21 million will be realized in 2019 with the majority of the balance in 2020. Furthermore, we have $20 million of signed leases not commenced, of which we expect $3 million to be realized in 2019 revenue with an additional $15 million in 2020 and an additional $2 million in 2021.

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Anthony E. Malkin, Empire State Realty Trust, Inc. - Chairman & CEO [6]

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David, wait one second. Tony Malkin, here. Just a few things I'd like to say. While I'm not pleased with our stock price, I'm very pleased with ESRT's execution for Q4, for all of 2018 and for the value we've created for stakeholders. We had a solid leasing quarter and once again delivered market-leading cash leasing spreads. We had a lot of leasing to do in 2018 and we did it. ESRT continues to differentiate itself from our peers. We have: number one, embedded internal de-risked growth opportunity currently sized $112 million and expected top line expansion at current market rates from our 4 growth drivers over the next 5 years. Just to be clear, that compares to $97 million 12 months ago. Our 5-year expectation for top line growth as embodied in our 4 drivers, has increased from $97 million at year-end 2017 to $112 million today, while at the same time, our cash rental revenue increased by $15 million and our GAAP rental revenue increased by $9 million. Number two, we are committed to maintain our low levered liquid and flexible balance sheet to support substantial future growth potential relative to our size. This is who we are, this is what we do. We have not used our balance sheet to cash out selling investors, shrink the company and reduce our potential for external growth. Three, we have no exposure to the new wave of coworking enterprise office providers. I have been very clear for years and the world now recognizes that these companies seek to disrupt the relationships amongst tenants, landlords and brokers with outsized risk from weak equity-dependent business models. I maintain that landlords, investors and lenders will regret the day they decreased the probability of their future cash flows with the leases they have made with these tenants.

Most importantly, we've not had to lease to these players to fill our buildings. Four, our market position remains secure between trophy Class A and Class B properties with both upside opportunity and downside protection. Tenants like our locations, our buildings, our services, our amenities and our quality. And Five, we continue to be industry leaders in sustainability and energy efficiency. We have more work to do in 2019. We will continue to execute on our internal strategy, and we will complete the nearly 4 years of planning and execution on our Observatory redevelopment. It will be a pleasure to have the benefit of the most important new additions that work for us. We are invigorated by the challenge and opportunity ahead. We know we build value for our investors every day, and we are confident that the stock price will sort itself out.

So I guess now we can go to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Craig Mailman with KeyBanc.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [2]

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Just a few follow-ups. David, the 2019 outlook is helpful, I guess, just a couple of follow-up questions on that without pushing you guys to give guidance. But you, kind of, mentioned the $3 million signed leases not commenced as they are in a flow during 2019. I'm just curious though if you can give some more clarity as we think about the $23.5 million of base cash rents that are going to contribute in '19. Can you give us a sense of kind of the quarterly flow-through or how we should think about the actual amount, that $23.5 million, that's going to contribute in '19?

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David A. Karp, Empire State Realty Trust, Inc. - Executive VP & CFO [3]

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Yes, Craig. I guess, the best thing we can do if you look both within supplemental and in the corporate presentation with respect to the signed leases not commenced because if we're talking about flowing through on a GAAP basis, it'll be teed off for the commencement dates. We do give expected commencement dates in that schedule and that's probably the closest we can do in terms of quarter-by-quarter scheduling for you.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [4]

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No, I get that on the commenced -- the signed leases not commenced. But just on the -- there is almost $21 million of free rent burn off for commenced leases in the free-rent period. How should we think about the trajectory of straight line throughout the year? I mean, how much of that $21 million is actually going to contribute in '19 to AFFO?

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David A. Karp, Empire State Realty Trust, Inc. - Executive VP & CFO [5]

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You know the entire amount -- the entire $20 million does go in 2019, that's not an annualized number. That's the amount that gets credited to the income statement in that year.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [6]

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Okay, perfect. And then on the $250 million debt, that's going to roll this year, kind of updated thoughts on whether you use cash to repay that or roll into something else?

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David A. Karp, Empire State Realty Trust, Inc. - Executive VP & CFO [7]

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Yes. I think with respect to that, we feel pretty good about where we stand on the exchangeable. We have a lot of options available to us, including we can retire with cash on hand, we could borrow under our $1.1 billion revolver, on which nothing is currently drawn. We can refinance with another exchangeable, if that makes sense. We can refinance with the bank term loan. We can refinance with the private placement of unsecured debt or we could potentially tap the public debt markets. But the important thing is we've got a lot of options. It's a small amount, and we feel very good about our options. In addition, remember, we did enter into a forward-starting interest rate swap in the amount of $250 million, which we could apply to any refinancing we enter into connection with that maturity.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [8]

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Yes, can you remind me where that swap locks you in?

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David A. Karp, Empire State Realty Trust, Inc. - Executive VP & CFO [9]

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It's 7 year on LIBOR at 2.958%.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [10]

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And then just the GAAP impact, that $250 million, your GAAP interest expense I think is in the 4s, even though the coupon is sub 3% is that...

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David A. Karp, Empire State Realty Trust, Inc. - Executive VP & CFO [11]

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It's correct.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [12]

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Okay. So the dilution, if you guys just do a term loan this is going to be pretty minimal from an FFO perspective?

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David A. Karp, Empire State Realty Trust, Inc. - Executive VP & CFO [13]

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That's correct.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [14]

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Okay. And then just one last one for me. Tony, I appreciate your views there on co-working and you guys not kind of putting them in your portfolio. But just as the industry is kind of evolving, how are you guys thinking about enhancements to the service offerings that you guys may offer to attract or kind of keep pace with the amenity base that other buildings are kind of implementing with bringing these co-working guys. And I mean, I know you guys do the pre-built program. But is there any thought process about kind of a higher-level service to compete from the amenity standpoint, without bringing in an external provider. So it would be kind of ESRT-managed, is that on the table at all?

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Anthony E. Malkin, Empire State Realty Trust, Inc. - Chairman & CEO [15]

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Well, look, we were the first landlord to do this in a significant way in Manhattan with the Empire State Building, which as you know has now 8 different dining options, tenants-only conference facility, 16,000-foot tenants-only fitness facility, really an urban campus within a building. And -- so with that in mind, we look at our entire portfolio from the perspective of amenities. We look at the retail at the bases of our buildings. So when we look at that Broadway, the south of Time Square, north of the Macy's district, we find ourselves with all sorts of varieties of retail options at the bases of buildings. And we look at lounges and other options within each building and developing them ourselves. I think that you'll see some exciting and interesting things from us that we've been working on for the last 6 or 7 months, begin to be unveiled in 2019 around the pre-built program. And it's something where we've candidly focused on rolling it out right now. It's already being done with tenants and with brokers but since there are competitors who listen on the phone. I'd rather them -- have to do a little more legwork to figure out what we're doing. I think the most important note of all is with -- as you mentioned this expansion of activity. Number one, remember, an awful lot of this is being done by folks who're private equity owners, who are looking to enhance buildings in order to lease them and sell them. And you can talk to your different service providers and they'll tell you that, meaning the people who're offering these services aside from just the folks who are leasing space in the spread-based business. Number one -- number two, we're leasing a lot at very high lease spreads. The highest cash lease spreads any of our peers within our market, or not. We don't need to do the stuff. So I think the key is what we're doing is very competitive, it's very successful. We led with this as a concept. We look at it on a daily basis and there are some areas in which we're innovating right now, which we've been working on since well back in 2018 to roll out. And there are things we've already rolled out to brokers and tenants and there are new things which will be rolling out through the year.

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Operator [16]

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Our next question comes from the line of Jamie Feldman with Bank of America Merrill Lynch.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [17]

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I guess, you're starting out the lease termination fees in the quarter. Can you talk about the follow-through NOI? Is there a reduced level of NOI for the rest of '19 from some of those termination?

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David A. Karp, Empire State Realty Trust, Inc. - Executive VP & CFO [18]

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Yes, Jamie. A meaningful portion of the fourth quarter lease termination fees and the other end of lease income is attributable to former broadcast tenants and this has a minimal impact on office vacancy, building occupancy and downtime. Based upon the way most of you've seen to construct your models, of those tenants who terminated in Q4, the GAAP rent recognized by them in Q4 was approximately $1 million. So that can give you a sense of how that would roll forward into 2019.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [19]

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So just a $1 million lower run rate for that NOI?

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David A. Karp, Empire State Realty Trust, Inc. - Executive VP & CFO [20]

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On a GAAP basis.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [21]

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On a GAAP basis. Okay. And then you talked about the global brands lease, rent goes up by $4 million. But -- I mean -- what -- how was that lease restructured? Is there any square footage impact? Just what were the moving pieces there?

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David A. Karp, Empire State Realty Trust, Inc. - Executive VP & CFO [22]

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Well, just a little background on that. On October 31 of 2018, Differential Brands Group, which recently was renamed as Centric Brands, announced that it had acquired a significant portion of GBG's North American licensing business. And in connection with their request for an approval of the sublease to Centric Brands, we had the opportunity to modify the terms of the lease and to increase the rent and achieve other certain improvements in turns. So we're somewhat restricted through nondisclosure in terms of what we can talk about. We can talk about the fact that we did increase the rent on a cash basis. It's a $4 million increase per year. The impact during the quarter was -- on a GAAP basis, it was about $330,000.

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Anthony E. Malkin, Empire State Realty Trust, Inc. - Chairman & CEO [23]

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So I just think it's important to note, we're allowed, Jamie, to tell you but we have to disclose for disclosure purposes. But other than that, color commentary and things which are not required for disclosure purposes, we are not allowed to discuss.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [24]

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Okay. I guess can you say, are they giving back any space? So they are expanding?

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Thomas P. Durels, Empire State Realty Trust, Inc. - EVP of Real Estate [25]

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No.

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Anthony E. Malkin, Empire State Realty Trust, Inc. - Chairman & CEO [26]

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No.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [27]

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So it's the same space, it's just a higher rent?

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Thomas P. Durels, Empire State Realty Trust, Inc. - EVP of Real Estate [28]

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Correct.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [29]

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Okay. And is there a big DI spend?

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Thomas P. Durels, Empire State Realty Trust, Inc. - EVP of Real Estate [30]

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No, none.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [31]

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Okay, all right. And then just thinking about some of the changes to the expiration and vacate summary. I mean, one of the things that stuck out to me was you know I have about 80,000 square feet more in tenant vacate in '19. Can you just talk -- I don't want to just focus on that 1 number, but can you talk about some of the moving pieces? And what's in that line item?

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Thomas P. Durels, Empire State Realty Trust, Inc. - EVP of Real Estate [32]

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Sure, Jamie, this is Tom. The most significant change there, it relates to 1 tenant of 60,000 square feet. They are a nonprofit entity named [Alysk], they currently pay a fully escalated rent of $33 per square foot. They occupy 2 full floors of 501 Seventh Avenue. The spaces are already consolidated. Floor plates are remarkably efficient, excellent side core, great access and steps to Penn Station. And so with an in place fully escalated rent of $33 per square foot, this is a very meaningful opportunity for us to generate significant positive cash rent spread. So that was the 1 change from last quarter to this quarter, we've previously had -- listed as an unknown, they're now vacating. We look at this as a great moneymaking opportunity for us.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [33]

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Okay. And is that space already redeveloped or no?

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Thomas P. Durels, Empire State Realty Trust, Inc. - EVP of Real Estate [34]

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Yes, we haven't classified as redeveloped because it's already been consolidated and debated. So the base building cost as to go around would be significantly less than it has -- if it were a first-generation space. And we're already marking the space, and so again, I feel really good about having that space back.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [35]

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Okay. And what would you say the retention rate is for redeveloped spaces and what the leasing spread looks like for just the redeveloped spaces on renewal?

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Thomas P. Durels, Empire State Realty Trust, Inc. - EVP of Real Estate [36]

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Well, we haven't really posted -- haven't really presented anything on retention rate for redeveloped space. Still there's a lot of movement within our portfolio. We're not a stabilized portfolio. You see, we're relocating tenants, we've got a lot of growth from tenants that have initially coming on pre-built redeveloped space and then grown with this, such as you've seen this quarter with say, tenants like Uber expanding with us. But on leasing spreads, as I've commented previously, we're going to experience excellent leasing spreads, given that the prior escalated -- fully escalated rents on vacant redeveloped space is only $52 square foot. And then the average in place escalated rent on all of our office space, as shown on Page 11 of the supplemental, is just under $56 square foot. So that's a significant discount to current market. And then of course, in the investor presentation we show our anticipated leasing spreads on future of Manhattan north, lease office, lease expirations that anywhere from 14% to 22%. So I'll give you a pretty good expectation on future spreads.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [37]

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Or is it 14% to 22%, is that on redeveloped space? So that's on pre-redeveloped or under developed?

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Thomas P. Durels, Empire State Realty Trust, Inc. - EVP of Real Estate [38]

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That's on all of our future Manhattan office lease expirations over the next 5 years.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [39]

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I guess, what I'm trying to figure out is, what's the same-store rent growth number? I know you've mentioned there is a select basis, where you've been able to push rent. Maybe if you could just provide a little color on that. Like, what do you think kind of same-store rent growth looks like in the portfolio on a net effective basis?

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Thomas P. Durels, Empire State Realty Trust, Inc. - EVP of Real Estate [40]

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Well, again, we have -- I haven't broken it out separately like that. And if you're trying to get into the difference between developed and undeveloped space and so much of our leasing activity has been on first-generation redeveloped space. Again, on future spreads on releasing of space, they're rolling over the next 5 years. Again, the best thing I can quote you is the 14% to 22% mark-to-market based upon today's current market rents.

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Anthony E. Malkin, Empire State Realty Trust, Inc. - Chairman & CEO [41]

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And I think another way, Jamie. Tony here, in which to look at it, we have, 12 months ago, $97 million of embedded derisk growth from our internal drivers. And today, we look at that and say, we've got $112 million of that same growth. So a chunk of that represents taking the number out a year. So we know we're still projecting out the same distance. We're incorporating a new year but the big chunk of that is increase in rent, both from rents that have been received and the fact that we adjust our rents so that every time we report to you the potential upside, we report to you at the current market rents. So I wouldn't say that we increased rents on an isolated fashion over 2018. We had some pretty across-the-board meaningful rental rate increases in 2018.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [42]

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And you are saying that's on kind of apples-to-apples basis, without any developments then? Or no, you're just saying across the board?

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Anthony E. Malkin, Empire State Realty Trust, Inc. - Chairman & CEO [43]

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Across the board.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [44]

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Okay. All right. And Tony, final question for you, just going back to the flexible lease co-working story. I mean, we've seen Softbank's capital flows [and we do not expect] they've slowed and CBREs come out with Atana platform. Now that we're a couple of years into this or several years into this. What do you think if the landscape looks like from here, given it does seem like there's some changes, especially on the capital flows front?

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Anthony E. Malkin, Empire State Realty Trust, Inc. - Chairman & CEO [45]

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I think that, that these businesses exist on the third-party basis because they consume and are provided with equity. And when they stop getting equity, they have to stop spending this much. So then when you look at companies like Hana or Convene or others who're looking to move into the -- well we'll do things as a consultant to the landlord, we'll do things as a service provider as opposed to entering into the commitment and spread business by taking down space, that's another way to whack at it. Look, I would not be surprised to see other major players other than the CBRE begin to offer this up. I think it's the bright shiny penny and the fact is if I thought it were a good business with which we should engage, we'd lease to them. I don't. Thing is disruptive on the one hand. And on the other hand, I think that their models are weak. Their business models are week. So we're watching it. Again, we see no need. We had no need. We've demonstrated terrific results without going into this category of tenant as -- in our portfolio. And I read the summaries of the consultants' reports on what they think about the future for shared office space and enterprise-leasing models are and I think that it's unusual to go to some of these firms economist for true economic advice, anybody can put together a straight line graph. I think under some of the statistics, which have been embedded about even on the calls which you guys have hosted on this matter. 7 years from now, 135% of all office space will be handled by co-working and other enterprise office providers. And I just don't think that's going to happen. I think it's seen its bright spot, and I think that it's dimming. Not going away, but I don't see the big expansion. Either way, we don't have to expose ourselves and our stakeholders to it.

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Operator [46]

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Our next question comes from the line of John Guinee with Stifel.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [47]

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David, looks to me like, just looking over the last 4 quarters, your cash marketable securities restricted cash is going down about $50 million a quarter or $200 million a year, which is 2.5%, 3% total enterprise value. When does that stopped? When do you -- are you done with your Observatory spending, your base-building spending, your releasing spending, so does that number turns positive?

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David A. Karp, Empire State Realty Trust, Inc. - Executive VP & CFO [48]

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Yes, John. As you know, we don't provide guidance. What we try to do is provide you with enough of the pieces that you can put up a model that could reasonably project when we'll get there. Having said that, as you know, we have spent a fair amount on redevelopment program as well as on the Observatory capital project. When we look at just in this past quarter, the cash movement, we had cash from operations of about $92 million, CapEx of about $73 million, less than $1 million of principal repayment and then dividends of about $30 million, which resulted in the $13 million reduction in cash balances. If you -- as we said, we will be -- during the end of the Observatory capital program at the end of this year, we give you some pretty good visibility on the CapEx spend for the redevelopment. So without giving guidance, and I think you can take a look at the next 12 to 18 months and start saying, assuming on an operating basis, a -- an inflection point.

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Anthony E. Malkin, Empire State Realty Trust, Inc. - Chairman & CEO [49]

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We provided all that detail. And it should be -- we can walk you -- anyone who wishes through the -- where the detail was located, if that would be helpful on a follow-up call.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [50]

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So let me just ask in another way, Tony. The $605 million that you discussed as of 4Q '18 -- year-end 4Q '18. What that look like in 4Q '19, all other things being equal?

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David A. Karp, Empire State Realty Trust, Inc. - Executive VP & CFO [51]

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Tony, there is one answer, so I'm going to answer it. I think, again, it's dependent upon a number of assumptions in what we decide to do with the exchangeable. As I mentioned one of the alternatives is to use cash to pay that down, we may or we may not. It's going to be a function of performance on the Observatory, it's going to be a function of pacing of redevelopment. Although we've given you within the investor deck our best guesses to the amount of space we will redevelop over this period. Things do change as we're either able to accelerate because we're able to get space back earlier or it may slow down because we don't get the same consolidation opportunities that we expected at the beginning of the year. So there are number of variables that are going to play into this. I really can't say here today and tell you what the cash balance is going to look like at the end of this year.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [52]

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Okay. Then the second question, the vast majority of the lease term B was associated with the broadcast tenants, which I think you said was about a $4 million annual run rate decrease going forward, as you took the lease term B in the fourth quarter. Can that space be leased again? Is there any demand for that space?

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David A. Karp, Empire State Realty Trust, Inc. - Executive VP & CFO [53]

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Yes. First, I want to clarify. We say it's a run rate on that -- that one, on the termination, not exactly correct. I mean, remember, our objective and our philosophical approach to this termination is to avoid downtime when possible. We want to secure a rent bump where possible and then to quality tenants. And so what we'd actually done is, achieve that if you look throughout the year at a number of the lease terminations. For example, the Uber space was a result of -- the Uber lease was a result of an early termination of another tenant. We're able to reduce the downtime or eliminate the downtime. And so in a number of these cases, particularly as it relates to the office space and the office terminations, there is an opportunity to release that space. And in many cases, that space when you look at the Greater New York Metropolitan area portfolio. And remember those deals were done with tenants in hand. So we're focusing on the broadcast piece, which is a little bit of a different animal. I'm going to turn to Tom and get his perspectives on that.

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Thomas P. Durels, Empire State Realty Trust, Inc. - EVP of Real Estate [54]

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Yes, John. I think I commented on this before. The most significant space that we recaptured from broadcast tenants, fortunately is at the top of the stock at Empire State Building. We are in the process of consolidating and demolishing and white boxing a fourth floor of about 23,000 square feet. We have an asking rent north of $80 a square foot, it's the highest office fourth floor in the building. So I'm excited about having that space back. And then we also recaptured space from broadcasters on the 79th floor that later this year we'll be constructing some pre-built units for about 10,000 square feet. So that I think responds to your question about the opportunity to convert broadcast space for office.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [55]

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Okay. We didn't understand that fully. And then the last question is going back to the Global Brands Group lease to $4 million increase cash NOI, no TI spend, no space giveback. Two questions, if you're able to answer it. Did the term -- lease term shorten? And what's the GAAP NOI change?

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Thomas P. Durels, Empire State Realty Trust, Inc. - EVP of Real Estate [56]

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Lease term did not shorten.

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David A. Karp, Empire State Realty Trust, Inc. - Executive VP & CFO [57]

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Yes, lease term did not shorten. And the GAAP change is -- it's just going to be just over $0.01 a share.

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Operator [58]

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Our next question comes from the line of Jason Green with Evercore.

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Jason Daniel Green, Evercore ISI Institutional Equities, Research Division - Analyst [59]

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I was wondering if you could talk a little more about the specific expense increases at the Observatory? And whether or not these are onetime increases in nature? Or if it's going to increase the run rate expense going forward?

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David A. Karp, Empire State Realty Trust, Inc. - Executive VP & CFO [60]

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Yes. Right now, we anticipate that the run rate on expenses to approximate what we experienced in the fourth quarter of 2018, which represents an increase over the 2017 expenses due to a number of factors: Which, for one, we have higher HVAC cost due to new technology. It has to be maintained at a constant temperature and humidity level. Two, we have higher IT expenses, mostly maintenance and consulting, which is associated with the new ticket kiosks and entrance hardware and software. And three, we have higher marketing expenses. This anticipation is based upon early experience with this technology and as new systems and technology stabilize, we'll have a better sense of the run rate as the year progresses.

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Jason Daniel Green, Evercore ISI Institutional Equities, Research Division - Analyst [61]

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Okay. And then just curious on share buybacks. I appreciate the color on the balance sheet, but given the stock earlier this year was trading at 5-year low, and you have a $500 million in authorization currently. I guess broadly speaking, what has to happen for you guys to feel comfortable to start buying back shares?

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Anthony E. Malkin, Empire State Realty Trust, Inc. - Chairman & CEO [62]

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That's an interesting question. What needed to happen to make us feel comfortable. Look, we'll be comfortable doing anything, which we think is in the long-term interest of stakeholders. Our objective is to take a look at all the factors that go into making those decisions and do that in cross consultation with our board. We're getting an 8% ROI along with other CapEx products that we -- CapEx project that we do on our investment on Manhattan redevelopment program. And our view is -- for 9.5 years into an economic cycle, we're getting these internal results. We're increasing our internal growth from our 4 drivers of growth as we continue to raise rents through the market, both if -- as it exists, but also the position of our properties within the markets. We attract better and better tenants. We're better and better alternative for better and better tenants. So fundamentally, we believe there is a value in having significant cash on hand with sizable liquidity and low leverage that we'll be able to deploy in an appropriate time. We have all the tools to allocate capital prudently, to create value for shareholders. And guys, if I were to sit here and tell you today, we're never going to repurchase stock, I thought that would be a rash thing to say. But I can tell you right now our focus is on growing the business. If we had repurchased stock when people started pressuring us to repurchase stock, we would've lost a lot of money right now. And I would add one last thing that historically, when you talk about this and you look at things from a historical perspective, stock repurchases don't do a hell of a lot of good over the long term. It doesn't -- maybe a short-term piece, we're not looking to take the company private, we're not looking to reduce our flow and we are looking to use our balance sheet to grow the business. In the meantime, we're not suffering because we're getting terrific results and the excellent work by the team on building stakeholder value through a redevelopment and a releasing.

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Operator [63]

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Our next question comes from the line of John Kim with BMO Capital Markets.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [64]

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First question maybe for Tom. But looking at your Greater New York portfolio and your leasing run rate of last 3 quarters. First, like you have expiring this year? Looks like you could have an additional 4% vacancy in that portfolio by year-end. Is there anything that suggests that it will not be the case?

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Thomas P. Durels, Empire State Realty Trust, Inc. - EVP of Real Estate [65]

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Well, John, the more significant anticipated vacate is a tenant in [Novak] 97,000 square feet, that we've commented on in the past. So clearly that will have an impact. We've reported on this in the past. The space that they occupy is, again, is 97,000 square feet. It's old, it's inefficient and needs to be completely rebuilt for today's workplace and environment. They've been in there for some 20 years plus. And so that's -- that is the one standout that's going to impact us in the Greater New York Metropolitan portfolio. We're already actively marketing that space. That said, I'm very pleased with the leasing we did this quarter. More significantly at the Metro Center, where we leased space to Zimmer Biomet, which is a great fantastic tenant. We're seeing good traction at for small units at 10 Bank Street. And as you know, as we've commented in the past, we're well into a redevelopment program where we project to spend about $40 million starting last year through 2020. It's only about $21 square foot overall, but it's going to give us an opportunity to refresh lobbies, gyms, dining, conference facilities, quarters and the baths and that's going to help boost our leasing activity.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [66]

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Are there any assets in your suburban portfolio that are on your list to potentially sell rather than pay the TI dollars and ride through near-term vacancy?

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John B. Kessler, Empire State Realty Trust, Inc. - President & COO [67]

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John, John Kessler here. I think the key point is that our goal -- we really want to grow the company, not shrink it, and we've got plenty of capital and strength on our balance sheet as we've been discussing. So we don't have the need to sell any assets in order to generate capital for our corporate purposes. And so don't really see a reason there. In addition, we have 3 other properties as I think everyone knows are subject to tax protection and their sale would result in meaningful indemnification payments, which we don't think make sense. Certainly, we have more flexibility in the other 2, but we don't have anything to say regarding those at this point.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [68]

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Okay. At the Observatory, even if you adjust for bad weather days this quarter, the visitors were down year-over-year. And there is despite the new entrants that's put in. So I'm wondering, I know cash is more important than visitors but were you disappointed or concerned that traffic wasn't improved, given your investment in the asset?

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Anthony E. Malkin, Empire State Realty Trust, Inc. - Chairman & CEO [69]

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Well, look, if we look back -- it's a great question and it highlights some things about which we've been speaking for some time. The U.S. brand for cross-ocean and long-term visitors is suffering significantly along with the branded United States. And while NYC & Company statistics which tracks everyone coming into New York City regardless if New York City is the final destination or not. It doesn't really give a true picture. You're seeing fewer long-term stays from high-Penn, cross-ocean visitors, number one. Number two, you can take a look at what happened with other attractions, which we've cited before, the NFL experience and the Grand Ole Opry, both in Times Square closed after less than a year of operations. The Nat Geo exhibit, which was put in there, is doing terribly. There is a -- another very small attraction, which had a -- sort of a miniature world of New York City that was featured there, gone out of business. So there is this issue of attendance in general. We know from tracking the admit numbers that are shown in the One World Trade entry, which we don't own and count them every month. They're not available for November and December because they use the screen for a holiday theme display. They're down 40% by our calculations in January '18 over January -- excuse me, January '19 over January '18. So when we look at -- we have other market information on other attractions. We are outperforming the market significantly. Our per caps absolutely on an actual and on a rate of change are tremendously outperforming now what's going on in the market in general. So the market in general is driving traffic through greater discounting, we continue to refine our model through pricing and how we deal with our key volume delivers of visitors. I'll give you a 1 example, I'm not going to give you specific numbers, even though David is across the table from me. He can still kick me from the long distance. But China, the inbound visitors from China, who visit by bus tours have been focused on One World Trade. Because what One World Trade does is, they sell at a very big discount to these 2 operators, a ticket that has a higher face price on it even than what their ordinary charge is. And then those 2 operators actually then turn around and sell on the bus to their visitors, a higher-priced ticket and they pocket the difference. Those are not our targets. What we are after and what we're growing very well is the FIT, the independent traveler who is buying the package or the ticket to visit with us actually in China. And we pretty much offset our loss of bus traffic by direct in China purchases coming to the Empire State Building. So we've changed an awful lot. We absolutely -- we have to say it, is it -- that we're doing this investment for defensive purposes, well, every piece of good defense is offense. All offense takes pressure of the defense. We've demonstrated we can deliver per cap price increases in ticket mix improvements, we feel really good about what we're doing and we're really looking forward to having the growth out there from the full exhibit.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [70]

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That's interesting. Tony, while I have you. What are your views on the Chrysler Building? Do you think there will be a lot of demand perhaps like that? And is there some -- is there -- could this be an answer because it's a serious consideration for your company?

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John B. Kessler, Empire State Realty Trust, Inc. - President & COO [71]

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John, it's John here again. We look at the Chrysler Building, and we're under a strict NDA, so we can't make any other comment beyond that.

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Operator [72]

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Our next question comes from the line of Daniel Ismail with Green Street Advisors.

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Daniel Ismail, Green Street Advisors, LLC, Research Division - Analyst of Office [73]

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Just quick one on the retail portfolio. Can you discuss the activity on leasing of the rest of the vacancy, particularly in light of repositioning the Observatory entrance?

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Thomas P. Durels, Empire State Realty Trust, Inc. - EVP of Real Estate [74]

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Sure, this is Tom. We only have 2 significant vacancies in Manhattan, which both are unique. You mentioned the 1 at Empire State Building and 1 at -- the other is at One Grand Central Place. We do have activity on that space the One Grand Central Place and then an Empire State Building. We're still early in the process, and we continue to have discussion with a variety of tenants as I said in the past, this is an incredibly unique offering. There is incredible foot traffic at this location. The space has great frontage on 34th Street. We've opened our new 34th Street Observatory entrance, which brings additional shoppers past the stores. I would simply say that we're working on some very interesting concepts and look forward to reporting.

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Daniel Ismail, Green Street Advisors, LLC, Research Division - Analyst of Office [75]

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Okay. And just another quick one on construction cost, I think most of your peers have seen construction cost rise the last few years in the low single digits. I'm wondering if you guys have seen something similar and your expectations for 2019 construction cost increases.

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Thomas P. Durels, Empire State Realty Trust, Inc. - EVP of Real Estate [76]

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We're expecting the same thing that our peers are. I think if you're following the major indexes out there you will see that construction cost in New York are generally in the low to mid-single-digits, say in that 4% to 5% range per year and have been over the last couple of years. I don't see that's slowing down because the market overall is pretty robust and there is tremendous demand out there. But we're impacted equally like all others. That said, we paid very close attention to our lease economics. As we reported, we are achieving an 8% cash-on-cash return on invested capital and we redevelop and release our space and that is in light of those changes in construction cost.

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Operator [77]

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Due to time constraints, our final question will come from the line of Manny Korchman with Citi.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [78]

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It's Michael Bilerman here with Manny. Tony, question for you. So back in summer of 2016, QIA bought 10% of the company at $21, right? They gave you -- they invested $620 million. Part of that was clearly for external growth, which hasn't materialized given your conservatism on the marketplace. Can you talk about that relationship today given the stocks 30% below that value? I got to assume that other investments that QIA has made in hard assets, in hard real estate, probably it's [not] down 30%. So you can talk a little bit about the relationship and how it's going to go forward?

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Anthony E. Malkin, Empire State Realty Trust, Inc. - Chairman & CEO [79]

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Well, first of all, we're in regular touch with QIA. So I think the relationship is very good. The fact of the matter is I'm not going to comment on their overall portfolio, we see and speak with them on a regular basis, they are shareholder. They have additional rights for a period of time should we do anything, which requires a JV. They have top-up rights, which they have filed as necessary when they do top-up but other than that, I don't know what you're looking for. There's not a lot of drama there, we're in regular touch and I think things are good.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [80]

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Well, I'm just thinking about when you do talk, you went through a whole share buyback about just taking and selling pressure from others. You issued the equity at $21. Is there an opportunity to buyback QIA stake at a price uniquely below your -- where the value of the real estate is? And if that's not part on the table, is there something else that can be done to leverage that capital because I got to assume status quo is not ideal in the situation.

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Anthony E. Malkin, Empire State Realty Trust, Inc. - Chairman & CEO [81]

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Well I don't understand what 's your mean by not ideal. As I said, they bought shares, they are under no restrictions, they can shell shares whenever they like, they haven't sold shares they bought shares and we're in regular touch with them. And they know what we've been saying over the same period of time that everybody else knows. So I know what there -- you're suggesting we should go to them and offered to buy back their stake with their own money. I give the same answer I give to anything else, that we want to grow the company not shrink it, we want to use that balance sheet, we consider it's super valuable for the purposes of expanding the business. And we're are showing terrific internal growth with great top line growth. We feel really good about our execution and we feel really good as David said that people can look and see where we're going to be. No longer consuming cash but producing cash. And hey, I'm all for a higher dividend as and when it's justified.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [82]

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Is there anything on the external growth front that's closer to putting capital out?

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Anthony E. Malkin, Empire State Realty Trust, Inc. - Chairman & CEO [83]

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Absolutely. But closer than one. I mean if there's stuff we've been working on for a long period of time market-to-market, and we've been focusing for quite some time on off market activities.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [84]

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Do you have like eventually contracts out ? Or I mean how close is close?

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Anthony E. Malkin, Empire State Realty Trust, Inc. - Chairman & CEO [85]

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Well, let's see, if I can answer that with any more detail.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [86]

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David, you said, he was far away on the table, not to kick you. So you can...

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Anthony E. Malkin, Empire State Realty Trust, Inc. - Chairman & CEO [87]

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David is actually -- he's actually -- you can't see, he's sitting on my shoulder with a -- threatening me with the mace. No, there is no further detail we're going to give on this. We -- let's be very really clear, we feel pressure only to perform and we've been -- 2018 was a terrific year of achievement for the company with great leasing, great spreads, we got another year ahead of us, we like very much the activity as Tom Durels has said that we're seeing on the leasing front. This thing is built for the long term. We focus on tenant credit, we take advantage of opportunities to improve the bottom line when we can and as far as external growth, no one would like it more than I would. I don't think anybody is more frustrated than I am but we're playing the long game here.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [88]

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You can be buying stock (inaudible) other option, management purchases if you believe it's so cheap rather than the company buying in?

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Anthony E. Malkin, Empire State Realty Trust, Inc. - Chairman & CEO [89]

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I don't -- terrific. Actually I think right now, I can't buy stock, can I Tom? I'm in a blackout period. Am I? Yes, so I can't buy stock, no.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [90]

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So when you come back, you but you can, I guess.

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Thomas P. Durels, Empire State Realty Trust, Inc. - EVP of Real Estate [91]

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I appreciate the thought. And at the same time, we've given the answer.

So anyhow, we thank you all very much for your time and questions. We look forward to meet with you all in the months ahead, many of you in just a few days at the Citi CEO REIT Conference. I want to talk to you more about the outstanding work we've done and will do. And finally I understand we will see a few investors and analysts at this year's Empire State Building run up. Don't forget, as an added inducement, David and John will be in the bar to buy you drinks when you're done. So we look forward to seeing you out there. And other than that, all the best. We're just going to stay here and keep working.

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Operator [92]

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Ladies and gentleman, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.