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Edited Transcript of ESRT earnings conference call or presentation 23-Feb-17 1:30pm GMT

Thomson Reuters StreetEvents

Q4 2016 Empire State Realty Trust Inc Earnings Call

New York Feb 23, 2017 (Thomson StreetEvents) -- Edited Transcript of Empire State Realty Trust Inc earnings conference call or presentation Thursday, February 23, 2017 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Thomas Keltner

Empire State Realty Trust Inc - EVP & General Counsel

* John Kessler

Empire State Realty Trust Inc - President & COO

* Tom Durels

Empire State Realty Trust Inc - EVP & Director of Leasing and Operations

* David Karp

Empire State Realty Trust Inc - EVP & CFO

* Tony Malkin

Empire State Realty Trust Inc - Chairman & CEO

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Conference Call Participants

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* Jamie Feldman

Bank of America - Analyst

* Brad Burke

Goldman Sachs - Analyst

* Blaine Heck

Wells Fargo Securities, LLC - Analyst

* John Guinee

Stifel Nicolaus - Analyst

* Craig Mailman

KeyBanc Capital Markets - Analyst

* John Kim

BMO Capital Markets - Analyst

* Tom Lesnick

Capital One Southcoast, Inc. - Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to Empire State Realty Trust's fourth-quarter 2016 earnings conference call. A question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Thomas Keltner, Executive Vice President and General Counsel for Empire State Realty Trust. Thank you, Mr. Keltner. You may now begin.

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Thomas Keltner, Empire State Realty Trust Inc - EVP & General Counsel [2]

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Good Morning. Thank you for joining us today for Empire State Realty Trust's fourth-quarter 2016 earnings conference call. In addition to the press release distributed last evening, a quarterly supplemental package with further details on our results has been posted in the investor 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, 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 statements in the future. We encourage listeners to review the more detailed discussions related to these forward-looking statements in the Company's filings with the SEC. Finally, during today's call we will discuss certain non-GAAP financial measures such as FFO, modified and core FFO, 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 Kessler, Empire State Realty Trust Inc - President & COO [3]

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Good morning. We're delighted to welcome you to our fourth-quarter 2016 earnings conference call. Empire State Realty Trust is a pure play Manhattan and greater New York Metro area office and retail portfolio that offers a unique opportunity to grow income as we continue to redevelop and lease our properties at market rents and bring occupancies to market levels. Since inception, we have delivered and we expect to continue to deliver our embedded de-risked growth.

During 2016, we continue to execute on our focused strategy and again delivered strong results. We leased just under 1 million square feet at above market spreads. We grew Observatory revenue to a record.

We issued new shares totaling 9.9% of the fully diluted equity of the Company at $21 a share and we increased our revolving credit facility borrowing capacity. We continue to see strong tenant demand for our value price point and well located quality buildings.

During the fourth quarter, we completed approximately 211,000 square feet of total leasing. We continue to capture a significant upside in rents achieving average leasing spreads of 24.3% on our new Manhattan office leases and 21.8% on all new and renewal leases across our entire portfolio.

Our Observatory produced a 22.1% year-over-year increase in revenues in the fourth quarter and 11.2% year-over-year increase in revenue for the full year. We continue to introduce new visitor options and improve the overall experience.

In our broadcast operations, in the fourth quarter we signed a long-term lease and license renewal with WPIX at the Empire State Building. We previously disclosed that we have successfully renewed lease and license agreements with Univision, MS and ABC. And we remain in ongoing negotiations with our other broadcast tenants.

We were busy internally as well in 2016. We completed the move to our new headquarters space at 111 West 33rd Street, and it's great to have the bulk of the Company on one floor in our open plan offices. We strengthened our team and we brought in-house functions we had historically outsourced.

Tony and I are proud of our team's hard work over the past year and we thank them for their efforts. We believe will continue to drive growth and unlock value as we redevelop and re-lease our space at attractive spreads.

We believe our portfolio and strategy can outperform regardless of market conditions. And with our highly liquid and low lever balance sheet, we're well positioned for additional opportunities in 2017 and beyond.

Our prepared comments this morning will be fairly brief. Tom Durels, our Executive Vice President and Director of Leasing and Operations will provide an update on our portfolio and David Karp, our Executive Vice President and Chief Financial Officer will then review financial results in more detail and discuss our balance sheet. After that, our team including our Chairman and CEO, Tony Malkin, are here to answer your questions. I will now turn the call over to Tom Durels. Tom.

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Tom Durels, Empire State Realty Trust Inc - EVP & Director of Leasing and Operations [4]

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Thanks, John and good morning, everyone. On today's call I will provide an update on our four key growth drivers, review our overall leasing activity in the fourth quarter, give an overview of our current and future space availabilities and discuss the timing of new lease commencements.

As you know from our Investor Day in March 2015, we set forth our four key growth drivers from our existing portfolio. At that time, we presented revenue growth of $90 million to $100 million from these four core drivers over the following five to six years. As I look back upon the completion of 2016, I am very happy with our accomplishments, which have been better than we presented on that day.

In just two years when we exclude the contributions to NOI growth from the Observatory, and adjusted for the mid-2014 acquisitions of 1400 Broadway and 111 West 33rd Street, we have delivered $50 million in cash NOI growth. This is a net of the loss of income from the vacancies that we create through our redevelopment and releasing program. Our updated numbers for our four key growth drivers are: one, upside from signed leases not commenced of $13 million.

Two, lease up of developed vacant office space of $37 million. Three, the mark-to-market on our expiring Manhattan office leases of $21 million. And four, the mark-to-market and lease up of available retail space of $13 million.

So based on our updated numbers, we estimate these drivers will contribute approximately $84 million of growth over the next five to six years as of December 31, 2016 and that's relative to our trailing 12 months cash NOI of $356 million. Remember, we calculate these numbers based on our view of current market for starting rents without consideration for potential increases in future starting rents.

As we discussed every quarter, we expect our occupancy will fluctuate from quarter-to-quarter as we vacate and consolidate spaces in order to redevelop and re-lease those spaces at higher rents to better tenants. There is a timing lag between the move outs of existing tenants and when we complete our work before lease up and when new leases commence. Specifically for pre-builts, overall downtime is generally nine to 18 months following last date of occupancy by prior tenant to allow time for redevelopment and lease up.

There could be less or more depending on the space and our overall inventory. And for fourth floor's overall downtime including time for redevelopment work and lease up can be 10 to 24 months following last date of occupancy by prior tenant, again, depending on the space and our total inventory.

As we execute our strategy, we unlock the embedded growth within our portfolio and drive significant increases in rental rates and future cash flows. In the fourth quarter, we signed 64 new and renewal leases totaling approximately 211,000 square feet. This included approximately 120,000 square feet in our Manhattan office properties; 79,000 square feet in our greater New York Metropolitan properties; and 11,600 square feet of retail.

At quarter end, our total portfolio was 88.1% occupied, which is up 20 basis points from the third quarter and including signed leases that have not yet commenced, the total portfolio leased to percentage was down 10 basis points from the third quarter at 90.2% leased. At our Flagship Property, the Empire State Building, we were up 40 basis points from the third quarter 2016 to 90.5% occupied. Including our signed leases not yet commenced, our leased to percentage was 91.8% up 30 basis points from the last quarter.

As a result of our redevelopment strategy, we continue to capture healthy rental growth spreads, which are in line with our regular investor and analyst meetings and investor deck update. During the fourth quarter, rental rates on new and renewal leases across our entire portfolio were 21.8% higher on a cash basis compared to prior escalated rents. And at our Manhattan office properties, we signed new leases at rent spreads of 24.3%.

We're pleased that we continue to meet leasing spreads at the levels we have set forth in our corporate presentations. Throughout our total portfolio as of December 31, 2016, we had 1,209,000 square feet of vacancy against which we have 216,000 square feet of signed leases not commenced for a net total of 993,000 square feet of unleased space. Which is comprised of Manhattan office vacancy of 822,000 square feet; retail vacancy of 73,000 square feet; and Greater New York Metropolitan office vacancy of 98,000 square feet.

Now of that 822,000 square feet of unleased Manhattan office space, approximately 604,000 square feet is consolidated and redeveloped space that includes pre-builts and white boxed space. Approximately 81,000 square feet is being held off market until it can be consolidated for future redevelopment. And the balance for vacant space is being planned for redevelopment.

Looking ahead, we expect to vacate 324,000 square feet in our Manhattan office portfolio by year-end. Within place fully escalated rents of just under $47 per square foot, we will redevelop the space and really set at much higher rents. As a reminder, as of December 31, 2016, we have signed leases that have not yet commenced of 216,000 square feet, all of which are expected to commence by early 2018 and will add $13 million in NOI growth.

Returning to our office availabilities, we currently have 10 full floors totaling 224,000 square feet throughout our Manhattan portfolio -- our Manhattan office portfolio including three floors at 250 West 57th Street and two floors at 111 West 33rd Street. At both of these buildings we're currently underway with a new building lobbies and entrances, elevator [jobs] and storefronts. And we also have one full floor at the Empire State Building, two floors at 1400 Broadway and two full floors at One Grand Central Place.

Turning to our retail business, we signed seven leases in the quarter for 11,600 square feet in total. Rental rates on both new and renewal leases were 44.3% higher than prior fully escalated rents. These new and renewal leases will contribute $1.9 million in annual NOI growth.

Significant leases signed during the fourth quarter include the food purveyor, Maison Kayser for 2,600 square feet at 1400 Broadway, that was a new lease. Sprint for 3,200 square feet renewal lease on 86th Street and Doc Martens for a 1,800 square foot new lease at 1333 Broadway. Within our larger retail portfolio we're currently marketing at 112 West 34th Street approximately 40,000 square feet including nearly 8,000 square feet at street level and directly opposite Macy's Flagship store. The space looks fantastic with 20 foot ceiling heights and great 34th Street frontage, with it's over 100 million in annual foot traffic.

And at the Empire State building, we're marketing a 14,200 square foot availability that includes 5,600 square feet on ground-level with 100 feet of frontage on 34th Street. We feel very good about our leasing pipeline, and I am very confident in our team's ability to execute and deliver on our four key growth drivers. Overall, we continue to see steady demand for our properties, which offer prospective tenants an attractive combination of location and amenities at a value-price point.

We continue to lease up our vacant space and execute on our proven strategy to consolidate, vacate, and deliver redeveloped space in order to lease to new better credit tenants at higher rents, increase NOI, and improve shareholder value. Now, I'm going to turn the call over to Dave Karp. David.

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David Karp, Empire State Realty Trust Inc - EVP & CFO [5]

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Thanks, Tom and good morning, everyone. I will start with a review of our financial performance and follow with an update on our balance sheet.

For the fourth quarter, we reported core FFO of $74.2 million or $0.25 per diluted share. Modified FFO, which is defined as FFO plus adjustments for any above or below market amortization, was also $74.2 million or $0.25 per fully diluted share. Cash NOI was $96.3 million up 15.9% from the prior year period.

For the full year ended December 31, 2016 core FFO was $269 million or $0.97 per fully diluted share. Modified FFO was $268.4 million or $0.97 per fully diluted share. Cash NOI was $356.1 million up 9.5% from the prior year period.

As Tom mentioned, at our Investor Day in March 2015, we set forth our four key growth drivers from our existing portfolio. At that time we presented revenue growth of $90 million to $100 million from these four growth drivers over the following five to six years. As I look back upon the completion of 2016, we're pleased that our performance has been better than what we presented on that day.

In just two years, excluding the Observatory, we've delivered $50 million in cash NOI growth. Again, our updated four key growth drivers numbers are -- one, upside from signed leases not commenced to $13 million.

Two, lease up of developed vacant office space of $37 million. Three, the mark-to-market on our expiring Manhattan office leases of $21 million. Four, the mark-to-market and lease up of available lease space of $13 million.

For our updated total, we estimate these drivers will contribute approximately $84 million of revenue growth as of December 31, 2016 over the next five to six years relative to our trailing 12 months cash NOI of $356 million. As we continually highlight, our occupancy has fluctuated from quarter-to-quarter as we vacated and consolidate spaces in order to redevelop and re-lease those spaces at higher rents to better tenants. We believe this timing lag between move outs of existing tenants and when we complete our work before lease up and when new leases commence will continue.

Our strategy is to unlock the embedded growth within our portfolio and drive significant increases in rental rates and future cash flows. The $84 million of new revenue, which together with the NOI growth we have already achieved, will put as well ahead of the original embedded growth figures we had shared at our Investor Day.

Turning to our Observatory operations, revenue for the fourth quarter 2016 included 22.1% to $33.7 million from $27.6 million in the fourth quarter 2015. The Observatory hosted approximately 1.07 million visitors in the fourth-quarter 2016 compared to 949,000 visitors in the fourth-quarter 2015, an increase of 12.5%. The increase in revenue is attributable to more tourist visits, improved ticket mix, and new product offerings.

In the fourth quarter 2016 there were 14 bad weather days, five of which fell on weekend days, compared to 15 bad weather days, one of which fell on a weekend day in the fourth-quarter 2015. For the full year ended December 31, 2016, the Observatory hosted approximately 4.25 million visitors up 4.6% compared to 4.06 million visitors in the prior year period.

Observatory revenue was $124.8 million up 11.2% compared to $112.2 million in the prior year period. The revenue increase was due to more tourist visits, favorable weather conditions, improved ticket mix, and new product offerings.

Turning to our balance sheet, our strong-joint venture-free and flexible balance sheet, including significant cash on hand, remains a competitive advantage for us in any market environment. We continued to increase our financial flexibility and capacity, lengthened our maturities and lowered our cost of capitals.

As we reported in our third quarter, we saw $29.6 million of newly issued class A common shares and raised $622 million in gross proceeds. We increased our borrowing capacity by $300 million to a total committed borrowing capacity of $1.1 billion and we can further increase our capacity to an additional exercise of the according feature to $1.25 billion.

At December 31, 2016 we had total debt outstanding of approximately $1.6 billion. Approximately $1.35 billion of this debt is fixed rate with a weighted average interest rate of 4.54% and a weighted average term to maturity of 4.5 years. The remaining $265 million of debt is variable rate with a weighted average interest rate of 2.37% and a weighted average term to maturity of 5.4 years.

At the end of the fourth quarter, we had no outstanding balance on our revolver and $554.4 million in cash and cash equivalents. Our leverage ratio reflected by consolidated net debt to total market capitalization was 14.9% and our consolidated net debt to EBITDA was 3.1 times. I will now update you on our redemption requests.

For operating partnership units our lockup period expired one year after issuance which was October 7, 2014 for units issued in the IPO and July 15, 2015 for units issued on the acquisition of 111 West 33rd Street and 1400 Broadway. Upon such expiration, orders of such operating partnership units could have their holdings redeemed for class A shares, which are listed and traded on the NYSE. As of December 31, 2016 we have had conversions from operating partnership units and class B common shares to class A common shares totaling 28.1 million shares or approximately $565 million at the closing share price of $20.19 on December 31, 2016. This represents a 34% increase in the number of class A shares since our IPO.

Finally, our Board of Directors approved a quarterly dividend of $0.105 per share for the fourth quarter of 2015. This dividend was paid on December 29 to shareholders of record on December 15. With that, I would like to open the call for your questions. Operator?

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Questions and Answers

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David Karp, Empire State Realty Trust Inc - EVP & CFO [1]

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(Operator Instructions)

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Operator [2]

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Jamie Feldman, Bank of America.

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Jamie Feldman, Bank of America - Analyst [3]

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Great. Thank you, and good morning. I was hoping you could talk more about the leasing market, maybe changes you've seen since the election or since the beginning of the year in terms of what types of tenants are out there, what's the leasing volume look like, and maybe some ability to push rents?

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Tom Durels, Empire State Realty Trust Inc - EVP & Director of Leasing and Operations [4]

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Sure. Jaime, this is Tom, and good morning. First, I would like to start off by saying we had a very strong 2016 with nearly 1,000,000 square feet of leases signed for the year. Despite of a bit of a market watch slower momentum in the fourth-quarter, we're very pleased with the 211,000 square feet of leasing that we signed during the quarter.

But I would say since the beginning of the year, we have seen a steady increase in activity based upon the inbound calls, number of showings, RFPs number proposes that are being exchanged, and leases in negotiation. You may have read about our announcement last week that we signed a full floor lease with Mount Sinai for 26,000 square feet at 250 West 57th Street. I would say we are also in negotiation on four floors for office and the remaining retail space at 111 West 33rd Street.

I am very pleased with the activity that we are seeing in both 111 and 250. Well before the completion of our lobby work. The new storefronts and entrance of 250 looks fantastic.

We received very positive comments back from touring brokers and tenants. Both the lobbies that 250 and 111 are unconventional but they are going to look fantastic so I'm feeling very positive.

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Jamie Feldman, Bank of America - Analyst [5]

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Okay. Would you say there's a shift all in incisive tenants looking at your portfolio?

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Tom Durels, Empire State Realty Trust Inc - EVP & Director of Leasing and Operations [6]

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No. We've always focused on and have been successful leasing to a wide variety of tenants, in diverse industries. If you look at our fourth-quarter leasing, we leased to tenants in the fire sector, professional services, consumer goods, healthcare, some legal, tech, it's been very broad-based, and I can't say that there is a significant noticeable change in anyone industry type.

As I look at the leasing activity that we have throughout the portfolio, it ranges from fire sector both at One Grand Central, ESB, healthcare, not-for-profit, some tech, and a media tenant. So it runs the gamut.

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Jamie Feldman, Bank of America - Analyst [7]

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Okay. Thanks. And then, the balance sheet is in good shape here, you have capital. Can you maybe talk about potential-- what you're seeing on the investment fronts maybe what you've looked at in the past over the quarter? And what might be in the pipeline.

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John Kessler, Empire State Realty Trust Inc - President & COO [8]

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Good morning, Jaime this is John. No comment right now about future plans. When we have something to say we will certainly let you guys know.

Until then, we really like the strong balance sheet that we have, and we thank are low leverage and liquidity position as well for any situation. We continued to pursue off-market opportunities that we see, that we think can provide all shareholders with long-term value. In our low-levered balance sheet and cash balance certainly give us flexibility to take advantage of opportunities when we see them.

Importantly for the next couple of years, our business does not need to make acquisitions to grow NOI, given the significant growth that we have from the redevelopment and releasing of our space. And as you heard earlier in our comments, we currently have $84 million in growth relative to our existing NOI base of $356 million that we see yet to deliver and we're getting really good returns on the redevelopment of our space. I think when we see that we can invest at prices which compete with the returns that we get, through investment in our own portfolio, we will certainly pursue that.

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Jamie Feldman, Bank of America - Analyst [9]

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Okay. Are there certain property types that maybe you've seen more dislocation than others and more opportunities than others? I know we've seen some pullback in retail rent.

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John Kessler, Empire State Realty Trust Inc - President & COO [10]

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I think from a capital market perspective we still see New York as being very, very competitive across asset types.

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Tony Malkin, Empire State Realty Trust Inc - Chairman & CEO [11]

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Tony here, Jaime. I would just add that as we've always said, we are much more focused on complicated things than on the market transactions. Again, we feel that's in our DNA.

We have a unique advantage there, being able to understand complicated things and people who have complicated situations where we can provide help. On a pound-per-pound basis things are very competitive and remain very competitive.

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Jamie Feldman, Bank of America - Analyst [12]

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Okay, great. Thank you.

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Operator [13]

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Brad Burke, Goldman Sachs.

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Brad Burke, Goldman Sachs - Analyst [14]

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Good morning, guys. Tony, I wanted to ask about the Observatory. The results this year were obviously great. Looking at ticket sales, ticket mix, revenue up 11%, the costs were staying flat. As you look at it at this point how much more upside to think is left to push Observatory income higher?

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Tony Malkin, Empire State Realty Trust Inc - Chairman & CEO [15]

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First of all, thanks, Brad and good to hear from you. I will have another comment about your particular exploits earlier this month, shortly. (laughter)

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Brad Burke, Goldman Sachs - Analyst [16]

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Great.

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Tony Malkin, Empire State Realty Trust Inc - Chairman & CEO [17]

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Again, we want to be helpful in helping you guys understand our business. So on the investor -- from the Investor Day forward, we brought forth this broader disclosure. On the Observatory, we've always been very shy from really saying anything other than reporting what we do.

But we have looked at a couple of different metrics. At 4.25 million visitors, we are at 50% occupancy. What can we do to improve on that?

Well we can try to improve reasons to come during bad weather. We can try to improve the comfort of people during cold weather. We can look at the opportunity in our [shoulder] periods where, frankly, we've made good progress.

And we also look to come up with continuing new on-the-margin offerings. Be it our Sunrise Experience, which we have put in place, which is primarily a warmer weather event but we did the Sunrise Experience with special tours for Chinese visitors during the Lunar New Year and of course he Empire State Building was lit by the ambassador counsel general for the Chinese Lunar New Year with a lighting scheme put together by the Chinese Academy of Fine Arts.

So our brand is very strong in China and things like that, actually, when you add them up along with our premier experience, our special guided tours, which when people have them, they're thrilled with them. These things on the margin add a drop to the bottom line and then of course it's our ticket mix and getting rid of Skyride and the hawkers up front greatly improved the overall experience for our visitors, our brand, our trip advisor scores have gone way up, getting rid of those hawkers on the sidewalk.

Most importantly, however, it drives our traffic that walks to the building to our ticket office, which is a higher margin product for us. We did disclose a price increase in April 2016 for our tour and travel, we increased our prices on November 2016 to $34.00, we have certain peak pricing in place. We're just heartened by what we see as the power of the brand and what really strong brand and attractions are able to accomplish.

Disney announced a 5% increase in its ticket price at Disney World. From our perspective remember, we are not a price leader but we are always pricing ourselves consistent with what other offerings are and then our job is to drive the most traffic towards our stated price, which is different from what a lot of other attractions do. A lot of other attractions work with a stated price and then really operate based on discounting.

So, long answer to a short question, which I think gets to a lot of different things about which people might be thinking. Our branding efforts, which we started really 10 years ago in earnest, when we took over the day-to-day operation of the Empire State Building has just helped what was already an international icon be even more prominent.

If you read about in the news yesterday about a crack in a glacier in Antarctica, which was the width of the Empire State Building or the asteroid the size of the Empire State Building that might hit Earth, it's become a form of measurement around the world. So that brand and capitalizing on that brand and delivering those people a full price to our front door as well as premium product availability based on how much of our occupancy we use at about 50% and different things we could do to improve the customer experience -- are all what we think opportunity.

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Brad Burke, Goldman Sachs - Analyst [18]

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Okay, I appreciate the expanded thoughts. Switching over to the property NOI on a GAAP basis. In the fourth quarter it seemed like there were a number of signed leases that were going to commence and you also had a modest uptick in occupancy.

I'm surprised that from Q3 to Q4 there wasn't a sequential increase in property NOI on a GAAP basis. Was there something else that maybe offset some of the signed leases commencing?

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David Karp, Empire State Realty Trust Inc - EVP & CFO [19]

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Brad, it's David. I think what we saw throughout the year and whether you are comparing it to quarter-over-quarter year-over-year, we did have a number of leases that are in their free rent period in the fourth quarter. And if you look at the prior year, some of those leases were rent paying. So for example, we had Foot Locker, which a year ago was rent paying and this past quarter was in a rent-free period.

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Brad Burke, Goldman Sachs - Analyst [20]

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Okay, but on a GAAP basis even if they are in the free rent period recognizing GAAP income on them, correct?

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David Karp, Empire State Realty Trust Inc - EVP & CFO [21]

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That's correct. Once they commence.

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Brad Burke, Goldman Sachs - Analyst [22]

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Got it.

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Tom Durels, Empire State Realty Trust Inc - EVP & Director of Leasing and Operations [23]

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Brad, this is Tom. I was going to add to that as a reminder there is a lag -- downtime between the time that a prior tenant vacates, where we vacate space intentionally, with the intent of releasing a space at higher rents, time for us to consolidate, redevelop that space and lease it up, and the time period before the new lease commences. So just as a reminder, there is that lag period.

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Brad Burke, Goldman Sachs - Analyst [24]

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Got it. Just a couple quick modeling questions. David, sorry if you mentioned this but what drove the big uptick in other revenue and fees? And also on G&A, if there was anything specific that drove the sequential increase?

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Tom Durels, Empire State Realty Trust Inc - EVP & Director of Leasing and Operations [25]

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These cancellation income, which can vary quarter to quarter, parking income from Metro center, insurance settlements, sales from our restaurant at the Empire State Building Steak Grill and Bar, they're all components of other revenue and fees. This past quarter, lease cancellation income was $7.2 million.

This was primarily driven by one large $6 million termination payment that we received from a departing tenant at 10 Bank Street. Where I'll point out we've already released the entire full floor to Sidney Frank, the spirits distributor and a half floor to Mitsui Plastics. That will be the driver behind the other revenue.

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David Karp, Empire State Realty Trust Inc - EVP & CFO [26]

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With respect to the increase in the G&A, this is really primarily attributable to higher compensation expense related to our performance driven cash bonuses, which we accrued for in the fourth quarter.

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Brad Burke, Goldman Sachs - Analyst [27]

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Okay. Thank you.

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Operator [28]

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Blaine Heck, Wells Fargo.

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Blaine Heck, Wells Fargo Securities, LLC - Analyst [29]

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Thanks. Good morning. Just a follow-up on Jaime's last question. Maybe this is for David, what do you think your investment capacity would be whether it be for one large acquisition or a series of deals before you hit any of your internal leverage targets or limits?

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David Karp, Empire State Realty Trust Inc - EVP & CFO [30]

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I think we've talked about our leverage targets or where we want to be. I think it's important to note that we had tremendous capacity already. As of December 31, we pointed out that our net-debt to enterprise value was only 14.9% and our net debt to EBITDA was 3.1 times.

While I don't really want to speculate on target per se, what I would say is we're comfortable here -- where we are in our leverage and we're comfortable with where we were when we went public. So a lot of capacity, happy with our leverage levels.

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Blaine Heck, Wells Fargo Securities, LLC - Analyst [31]

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Okay, that's fair. Tom, can you talk a little bit about the greater New York office portfolio. It looks like it was a really strong quarter from a same-store NOI perspective.

Can you give some color on what was driving the increase in revenues? They were up 32% sequentially, even given the downtick in occupancy. Did that have to do with the termination fee you mentioned at 10 Bank Street?

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Tom Durels, Empire State Realty Trust Inc - EVP & Director of Leasing and Operations [32]

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Sure. Thanks for asking about the greater New York metropolitan portfolio. As I've said in the past, we have and actively addressing our upcoming maturities and that's exactly what we did in 2016 with 215,000 square feet of leases signed.

We will remain in active discussions with other tenants on other early renewals. As Dave mentioned, we signed a number of leases in the fourth quarter where we avoided downtime, collected termination income through the early recapture space from an existing tenant, extended term and signed leases with new quality tenants as Dave mentioned Sidney Frank, Mitsui Plastics, and then another tenant [ONF], what was also announce following the close of the quarter, we signed a nearly 57,000 square foot lease with PartnerRe at First Stamford Place.

We've been busy. We're just under 95% leased. We have modest role in 2017 of only about [119,000] square feet and we're actively working on renewals. With regard to the cash NOI update, if you want to field that --

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David Karp, Empire State Realty Trust Inc - EVP & CFO [33]

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The question is why has the cash NOI gone up? A major driver of that is the lease termination income we received in the fourth quarter. As I pointed out we had $6 million from one tenant, which was at 10 Bank Street in greater New York Metropolitan area portfolio.

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Blaine Heck, Wells Fargo Securities, LLC - Analyst [34]

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That is included in the $25 million, roughly, on revenue in the quarter?

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David Karp, Empire State Realty Trust Inc - EVP & CFO [35]

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Yes.

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Blaine Heck, Wells Fargo Securities, LLC - Analyst [36]

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Great. Thanks.

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Operator [37]

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John Guinee, Stifel.

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John Guinee, Stifel Nicolaus - Analyst [38]

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Thank you. A couple questions. First, I was at the [Eastdale's] 50th anniversary event about a month ago saw Mr. Karp and Mr. Kessler and if you believe Eastdale, the chances of you finding competitive investment opportunities are pretty darn slim. You've got an amazing amount of institutional capital chasing almost anything that comes up. And I realize you guys have a OP unit advantage and the complexity advantage but -- so a couple questions.

One, how small will you go in terms of deals? How far off the island will you go in terms of deals? And three, is there a share price at which you would be interested in buying back your shares?

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John Kessler, Empire State Realty Trust Inc - President & COO [39]

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John, this is John here. We agree that the New York City market is competitive and a lot of capital trying to get invested. Our bias is -- when we look at where we spend our time, we're definitely focused on larger situations, larger opportunities that are more complex and I think our view is that, that's -- that there are fewer competitors that can compete in those types of situations and therefore we have a better chance to succeed.

Certainly, we think the OP unit currency is something that is a tool that's unique in that it represents not only tax efficiency but also way for a seller to participate in our growth. And I think we are continuing to focus on the relationship aspects of trying to source off market opportunities.

But again, I think the focus is bigger and more complex. We like the markets that we're in here in New York so I think that will continue to be our primary focus from a geographic perspective. And then, I guess your last question was on potentially buying back stock, is that right?

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John Guinee, Stifel Nicolaus - Analyst [40]

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Yes. Is $18 a number or $19 a number or $20 a number which you would be buying back your own shares.

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John Kessler, Empire State Realty Trust Inc - President & COO [41]

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Those are all definitely numbers. I was an English major but I know that 18, 19 and 20 are numbers but aside from that -- it's all on a relative basis to us. We put together this balance sheet in order to have maximum flexibility and in order to really take advantage of any opportunity, which is compelling to us.

I am a very big shareholder so whatever is good for me is going to be good for shareholders and that's really the way we look at this. We're all equity-based here so as far as the price at which we might buy back in, this comes up from time to time with the Board but certainly we have no hard and fast -- and we are looking to grow the business at an intelligent time. We still believe in cycles and we still believe that our extraordinarily low leverage, high flexibility liquidity, and access to borrowing are all unique advantages for ESRT.

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John Guinee, Stifel Nicolaus - Analyst [42]

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The second question, there's a couple of REITs out, one REIT in particular -- couple of REITs that are threatening to redevelop Penn Station. Are you involved at all in any discussions with the city in terms of the big Penn Station redevelopment and how does that affect your portfolio?

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John Kessler, Empire State Realty Trust Inc - President & COO [43]

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John to answer the first question, we are not involved in the discussion with the city on the redevelopment. However, we are following it and we think it's all positive for us. Certainly we would a beneficiary of the improvements to Penn Station and the surrounding area.

We transform the Times Square South sub-market we've got a great access to mass transient we view Penn Station as a key transportation hub that serves our tenants and so any improvement there will be a vast improvement for us. It's all good news for us. We would like to see it go forward.

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John Guinee, Stifel Nicolaus - Analyst [44]

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Great. Thank you.

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Operator [45]

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Craig Mailman, KeyBanc.

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Craig Mailman, KeyBanc Capital Markets - Analyst [46]

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Just a quick question on rent spreads. I know you don't give guidance here but maybe you can give some color on how we should think about that trending the next couple quarters. Obviously, some of the space that you have that's been vacant that you're going to lease up as lower expiration versus what we're seeing as the average expiration [for 2017] and there's different rent points for buildings and floors. I'm just kind of curious how we should and about that trending?

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Tom Durels, Empire State Realty Trust Inc - EVP & Director of Leasing and Operations [47]

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Sure. Good morning, Craig this is Tom. First, I would say that we're pleased with the recent rent spreads on an absolute basis and in comparison to the levels that we had anticipated in our earlier corporate presentations.

Remember, we're giving you cash spreads not GAAP spreads that means that the new starting rents against our fully escalated prior expired rents. Generally, our spreads on GAAP rents are going to be greater than our reported leasing spreads, which are on a cash basis since GAAP rents factor in rent increases that occur during the lease term along with free rent. As a reminder during the fourth quarter, our spreads were healthy at 24.3% on new office leasing in Manhattan in just under 22% overall.

Going forward, I think that we should think about that is that on the prior fully escalated rents on our developed vacant Manhattan office space was only about $42 a square foot. On the space that we intend to vacate during 2017 of about 324,000 square feet, the prior escalated rents on that is just under $47 a square foot. Now given in the fact that we're asking rents in the -- call it the high $50s to low $60s square foot, we expect to achieve superior rent spreads.

I wouldn't read too much into a quarter over quarter it all depends on what happens to be the prior escalating rents for the specific leases and spaces that we did during a given quarter.

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David Karp, Empire State Realty Trust Inc - EVP & CFO [48]

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Craig, I will add is always we will be updating our corporate presentation, which contains supporting details for our four growth drivers, one of which is the mark-to-market. This presentation should be available on our IR website within the next few days.

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Craig Mailman, KeyBanc Capital Markets - Analyst [49]

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That's helpful. Tom, maybe just on the leasing pipeline you're seeing. I'm curious, as you guys are marketing pre-builts versus full floors, any trends you're seeing in terms of velocity or demand in the different space sizes?

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Tom Durels, Empire State Realty Trust Inc - EVP & Director of Leasing and Operations [50]

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As I commented earlier, I'm pleased with the activity that we've been seeing following the beginning of the year. We've seen steady activity across the board. That includes four floors at 111 West 33rd Street and 250 West 57th Street where I mentioned we signed following the close of the quarter a 26,000 square foot, four floor lease with Mount Sinai.

We have activity on four floors 250 West 57th Street, 111 West 33rd Street Empire State Building, and at One Grand Central Place. As far as pre-builts, we have activity at all the buildings where we're delivering new pre-built inventory.

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Craig Mailman, KeyBanc Capital Markets - Analyst [51]

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That's helpful. One last one for David. I know we're going to hear about acquisitions when they happen but with you guys sitting on $550 million-plus of cash and looking at some maturities you have coming to, this year. Including one of the bigger ones in Stamford, is there any thought from just a cash management earnings management standpoint potentially using some of that cash to pay down some of these higher coupons mortgages. Then ultimately hitting the unsecured market at a point where it makes sense to fund acquisitions and go more towards unsecured strategy?

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David Karp, Empire State Realty Trust Inc - EVP & CFO [52]

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What I will say to that is we look forward to reporting our actions with regard to our 2017 mortgage maturities as they occur. I would make one comment and that is that we believe it is valuable to our shareholders to maintain a significant liquidity on our balance sheet and that's how we're looking at this.

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Craig Mailman, KeyBanc Capital Markets - Analyst [53]

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Thanks, guys.

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Operator [54]

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John Kim, BMO Capital.

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John Kim, BMO Capital Markets - Analyst [55]

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Thank you. Good morning. I had a question on your stronger Observatory growth this quarter. It seems like overall the visitor pie has gotten bigger, but I was wondered if you could comment on your Observatory market share and how that's trended especially now that One World has been around for more than one full year.

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Tom Durels, Empire State Realty Trust Inc - EVP & Director of Leasing and Operations [56]

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Sure. Thanks. We see that the -- we benefit -- our performance benefits from the market awareness of what we have versus other offerings and I would say that the biggest comment. And I would further say that while each tries its own unique way, all of these new observatories are pretty much offering up their own version of the Burj Khalifa and they don't have the iconic stature.

What the of these actually are I think matters as well but the cultural and emotional connection is really very different. When we look at this, I really do look at this and we look at this as a large group of people competing to be the other observatory that which people go.

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John Kim, BMO Capital Markets - Analyst [57]

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Is there an opportunity to recapture market share or increase market share going forward until the new observatories open up?

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Tom Durels, Empire State Realty Trust Inc - EVP & Director of Leasing and Operations [58]

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We work every day on our visitor ship and our pricing on the visitors we do get and we really think there is opportunity and we like our competitive position, and we like how we are performing.

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John Kim, BMO Capital Markets - Analyst [59]

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Okay. Looking at your total portfolio square footage, it went up almost 1% this year on the same-store pull. I'm wondering if this amount of increase when the reassessments occur is that customary or is it usually high this year based on redevelopment.

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Tom Durels, Empire State Realty Trust Inc - EVP & Director of Leasing and Operations [60]

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We always remeasure space to bring it to market on any leases that expire. I believe it may have also increased by add back of the space that have been off-line in our former offices at One Grand Central Place both the top floors on the [426th and 48th] floors. So that was probably the major driver. That combined with some remeasurement of other spaces.

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John Kim, BMO Capital Markets - Analyst [61]

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Okay. Finally, earlier this month [QIA] registered its shares for sale. I know that doesn't really impact ESRT directly but I was wondering if you could comment on this and maybe remind us what the [lockup] period is to them?

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David Karp, Empire State Realty Trust Inc - EVP & CFO [62]

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This was a requirement for the terms of the shareholder agreement, which we executed with them on August 23, 2016 ahead of the expiration of the six-month lockup on 50% of QIA shares. In addition to stockholders, we advised for an additional six-month lockup for the remaining 50% of QIA shares.

So nothing to be read into this. This was something that we have committed to do in the stockholder agreement to register these shares at a point in time and went ahead and did that.

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Tom Durels, Empire State Realty Trust Inc - EVP & Director of Leasing and Operations [63]

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I would just say consider partnership with our investors with QIA specific very strong. We maintain regular contact and I think from our most recent conversation they are very happy and we're very happy with them.

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John Kim, BMO Capital Markets - Analyst [64]

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That's great. Thank you.

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Operator [65]

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Tom Lesnick, Capital One.

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Tom Lesnick, Capital One Southcoast, Inc. - Analyst [66]

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Good morning. Most of my questions have been answered. Just a couple quick ones from me.

Looking at the capital expenditures and redevelopment program page in supplemental, it shows you guys have 190,000 square feet of undeveloped space expiring in 2017. Wondering if you can comment on how the cadence of that might be coming off line throughout the year?

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Tom Durels, Empire State Realty Trust Inc - EVP & Director of Leasing and Operations [67]

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Sure. Tom, as I commented before, we expect to vacate about 324,000 square feet in 2017 where the prior escalated rents is just under $47 per square foot. That space that we're [taking off] line with significantly fewer pipeline for additional redevelopment. As I gave the numbers previously, on a run down of our unleased space and how much is developed out of a total 993,000 square feet about 822,000 square feet is unleased office in Manhattan and about 600,000 square feet has been consolidated. And we have plans in place to consolidate and redevelop the balance along with the additional space that we are vacating this year.

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Tom Lesnick, Capital One Southcoast, Inc. - Analyst [68]

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Appreciate that but from a modeling perspective are you able to comment on weighted towards the front half of the year back half of the year? How should we be thinking about NOI coming off line?

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Tom Durels, Empire State Realty Trust Inc - EVP & Director of Leasing and Operations [69]

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It's pretty steady through the course of the year. We haven't broken it down by quarter and we're vacating space on a steady basis from now through the end of the year of that 324,000 square feet but it's not really lumpy in one given space. Mostly a lot of small spaces.

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Tom Lesnick, Capital One Southcoast, Inc. - Analyst [70]

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Okay, that's helpful. Last one for me. You guys spent $21.8 million on first-generation building improvements in the quarter. That's been a relatively consistent run-rate for you guys over the last few quarters.

What's left in terms of first-generation building improvements? What kind of capital expenditure should we see in that line going forward?

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Tom Durels, Empire State Realty Trust Inc - EVP & Director of Leasing and Operations [71]

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Most of the common area redevelopment consist of the work that I've talked about before at 111 West 33rd Street and 250 West 57th Street where we are installing new lobbies, building extra storefronts and elevators. Then we still have a good amount of work left at Empire State Building that consists primarily of elevator modernization, corridors and bathrooms.

Then as far as first [gen] work on -- in terms of the redevelopment of space that we take off-line and redevelop to deliver tenants we've gone through those numbers. As far as a specific number, we have not given that but that gives you an idea of at least the work that we have underway as well as the redevelopment of tenant spaces.

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Tom Lesnick, Capital One Southcoast, Inc. - Analyst [72]

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All right guys. That's all I've got. Thank you.

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Operator [73]

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At this time, I would like to turn the conference over to Mr. Malkin for closing remarks.

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Tony Malkin, Empire State Realty Trust Inc - Chairman & CEO [74]

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Thank you, everyone for attending today's call. We really appreciate the questions. We have enjoyed welcoming some of you here to our new offices and particularly those of you who come through with investors so keep that in mind.

We like to share what we're doing here at 111 West 33rd Street. We're very happy about our teams work and how we've executed on leasing and on delivering our embedded de-risked growth. We are very happy with our growth in NOI and our prospects for additional growth from our four drivers.

We are ahead of our goals, and we're ready for what lies ahead. As the Chairman and CEO, I am happy with the team and its work, and as a shareholder I'm delighted and I hope our investors are too. Now, I do have an important piece of disclosure and in alphabetical order, not by finish -- Brad Burke, Justin Devery, Scott Freitag, John Guinee and John Kim took on this February's Empire State Building run-up, our biggest analyst flight ever.

Congratulations on their victory in reaching the top. We have room for all in next year's race. There was a new feature this year, our President and COO, John Kessler bought beers for the analyst flight after the race. So free beer, why wouldn't you run up 86 floors?

Thank you, very much for your time. We're very much looking forward to reporting next quarter's results and until then, all the best.

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Operator [75]

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Thank you, ladies and gentlemen. That does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.