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Edited Transcript of ESRT earnings conference call or presentation 25-Jul-19 12:30pm GMT

Q2 2019 Empire State Realty Trust Inc Earnings Call

New York Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Empire State Realty Trust Inc earnings conference call or presentation Thursday, July 25, 2019 at 12:30:00pm 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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* Blaine Matthew Heck

Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst

* Craig Allen Mailman

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

* 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

* Jordan Sadler

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

* 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 Second Quarter 2019 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Greg Faje, Director of Investor Relations for Empire State Realty Trust. Thank you. 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 Second Quarter 2019 Earnings Conference Call. In addition to the press release distributed last evening, a quarterly supplemental package with further detail on our results and our latest investor presentation have been posted in the Investors section on 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 statements in the future.

We encourage listeners to review the more detailed discussions relating 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, 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'll 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. And thank you, Greg. Welcome to our second quarter 2019 earnings conference call. At Empire State Realty Trust, though it is not that popular these days, we are a New York City focused office in retail REIT with fully modernized assets, central locations and easy access to mass transit.

Our 4 drivers of growth deliver embedded upside and peer-leading cash leasing spreads. Our portfolio is well-positioned, priced between trophy/Class A and Class B properties to outperform in any market. We have a fortress balance sheet with significant cash, undrawn line of credit and low leverage, and we are an industry leader in sustainability and energy efficiency.

Today, Tom Durels will speak about the second quarter's approximately 261,000 square feet of leases, market demand for our properties and our market-leading leasing spreads. For our discussion of financial performance and our balance sheet, we will hear from Greg Faje. As we all know from our prior filing, our CFO David Karp's last day is a week from today and David is here with us and has signed off on all our numbers for the quarter. As part of our transition plan going forward, Greg will be our lead with investors and analysts and he will report to me and today he assumes David's prepared remarks role for the call. Then David will say a few words. And finally Tony Malkin, our Chair and CEO will provide some comments on David and our CFO transition. As always, we also have with us in the room, Drew Prentice, our Chief Accounting Officer and Treasurer, who will shortly, as per our filings, be our acting CFO, and John Hogg, who many of you know, our head of financial planning and analysis. 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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Thanks, John, and good morning, everyone. In our second quarter numbers, we made more progress on our 4 drivers of top line, derisked and embedded growth. The breakdown of these top line revenue growth drivers, as of June 30, 2019, over the next 5 years we estimate to be $96 million to be found on Page 7 of our investor presentation. For reference, this compares to $543 million in trailing 12 months cash rental revenue and $386 million in trailing 12-months cash NOI as of June 30, 2019.

In the second quarter, we signed 55 new and renewal leases, totaling approximately 261,000 square feet. This included approximately 175,000 square feet in our Manhattan office properties, 53,000 square feet in our Greater New York Metropolitan office properties and 33,000 square feet in our retail portfolio, which included 27,000 square feet of parking garage space. Significant new office leases signed during the quarter include a 26,000 square-foot new lease at 111 West 33rd Street with the Interpublic Group and a 21,000-square-foot, full-floor new lease with L'Occitane also at 111 West 33rd Street. In addition, we leased 14 new pre-builts or 81,000 square feet predominantly at One Grand Central Place, 1350 Broadway and 111 West 33rd Street.

As a reminder on Page 9 of our supplemental, we maintained updated disclosure on potential vacates and renewals for leases that expire for the remaining 2 quarters of 2019 and full year 2020. 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. There is a delay between the move out of the existing tenants and the commencement of replacement leases and a further delay between leased commencement and GAAP revenue recognition, so our occupancy varies quarter-by-quarter and delays impact our near-term reported revenue.

During the second quarter, rental rates on new and renewal leases across our entire portfolio were 12.2% higher on a cash basis compared to prior cash escalated rents. And at our Manhattan office properties, we signed new leases at a positive cash rent spread of 22.2%.

Of course, leasing spreads always depend on the expiring fully escalated rents. Our vacant redeveloped office space had prior cash fully escalated rents of $53 per square foot, which is well below current market. On Page 28 of our investor presentation, we estimate our future cash leasing spreads on Manhattan office leases will vary between 12% and 24%, based on the assumption of current market rents without any increase. We have raised our weighted average asking rents in our Manhattan office buildings by over 4% on a trailing 12-months basis following increases throughout 2018 and demand for our product locations and price points remains good. As we show on Page 12 of our investor presentation, our trailing 12 months net effective rent growth on a year-over-year basis for new Manhattan office increased by 6.2%, the third straight quarter in which we have experienced net effective rent growth in excess of 5%. We have a healthy pipeline of leases in negotiation across the portfolio for both full floors and pre-builts.

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 Greg Faje. Greg?

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Greg Faje, Empire State Realty Trust, Inc. - VP, IR [5]

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Thanks, Tom. For the second quarter, we reported core FFO of $65 million or $0.22 per diluted share. Cash NOI was $94 million, down approximately 3% from the prior year period. Excluding the Observatory results, on which I will comment momentarily, cash NOI was flat.

On Page 6 of the supplemental, we have added a new disclosure and response to helpful comments from the investors and analysts. This new quarterly schedule commenced leases and a free rent period provides visibility to when the cash contribution to NOI is realized. Also for your models, note our property operating expenses will be impacted in the next 2 quarters by one-time R&M expense associated with our quinquennial Local Law 11 and tower work at the Empire State Building. These expenses are expected to total approximately $5 million in the second half.

Page 16 of our supplemental highlights our Observatory operations. Revenue for the second quarter of 2019 decreased to $32.9 million or 6.6% from the prior year period. Four factors combined for these results: $3 million of reduced revenue related to the closure of the 102nd floor observation deck and bad weather, offset by improved pricing and the shift of Easter to the second quarter. Net operating income for the Observatory was $24.5 million or 10.9% lower than the second quarter of 2018 due to the aforementioned revenue drivers and higher expenses relating to the Observatory redevelopment. Our present schedule is to open the new galleries on the second floor on the 29th of July, the new 102nd floor in September and the new 80th floor, the final phase, in November.

Excluding the second quarter 2018, 102nd floor revenue, but including the benefit of the entire Easter holiday during the second quarter of 2019, revenue increased 2.3% year-over-year and NOI was flat over the same period. As reported on Page 16 of the supplemental, the Observatory hosted approximately 968,000 visitors in the second quarter of 2019, a decrease of 81,000 visitors compared to the second quarter of 2018. Of this 81,000 decline, we estimate that bad weather days resulted in approximately 67,000 fewer visitors in the prior year period. In addition, we estimate that the shift in the Easter holiday, which fell entirely within the second quarter this year and in the prior year was split between the first and second quarters, results in a benefit of approximately 20,000 visitors. That leaves 34,000 fewer visitors attributable to other factors.

For the 6 months ended June 30, 2019, Observatory revenue decreased to $53.4 million or 5.3% from the prior year period due to a similar mix of factors I just mentioned. Net operating income was $37.5 million, 9.4% lower than the prior period. Excluding the 102nd floor revenue in 2018, Observatory revenue was roughly flat and NOI was down 2.5% over the same period. The Observatory hosted 1.57 million visitors in the first half of 2019, down 7.3% compared to the 1.69 million in the prior year period.

Moving to our balance sheet. As of June 30, 2019, 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 7.6 years. None of our outstanding debt has variable rates. Our debt maturities are well-laddered and our $250 million exchangeable bond matures this August 15.

We plan to retire the debt utilizing some of our existing cash in our balance sheet and we continue to consider our options to replenish the cash balance in the fourth quarter of 2019 with long-term fixed-rate financing for many of the following options: Bank term loan, private placement, public bond offering or secured mortgage financing. As of June 30, 2019, our consolidated net debt to total market capitalization was 23.6% and consolidated net debt to EBITDA was 3.9x. And we held cash, cash equivalents and short-term investments of $525 million. I would now like to turn the mic over to David. David?

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David A. Karp, Empire State Realty Trust, Inc. - Executive VP & CFO [6]

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As per our press release on the subject, next week I will step down from my responsibilities as CFO and return to the West Coast. I joined ESRT back in November 2011 and I take pride in the role I played in our company's IPO, the creation of our extraordinary balance sheet and the accounting, financial planning, and analysis investor teams I built here. To our investors, vendors and sell-side analysts, I have enjoyed our collaboration and the time we spent together. I'm particularly proud of just knowing that some of you can now tell the difference between an IPA and a farmhouse AR. So with that, I will say thank you and I look forward to when our paths next cross. Now I'll turn the call over to Tony for some remarks before we open the call for your questions. Tony?

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Anthony E. Malkin, Empire State Realty Trust, Inc. - Chairman & CEO [7]

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First of all, on behalf of our Board and leadership team, we all want to thank David for his service to ESRT. You all know and we here all recognize that the company is run by a team and ESRT is no different. Our great team here has worked together and will continue to work together to maintain our low leverage, liquid and flexible balance sheet. We look forward to continue our excellent relationships with our investors, lenders and analysts. The accounting team led by our soon to be acting Chief Financial Officer, Drew Prentice, the financial planning and analysis team led by our 2.5-decade veteran John Hogg, and Investor Relations team led by Greg Faje, will all be guided by John Kessler as we move through our transition to a new CFO. We have engaged Korn Ferry International in our search for our next CFO, and we have tremendous inbound interest in the position from outside the company and interest from within. We thank David for his leadership and contribution and wish him the best of luck out there in California and Oregon.

Now let's turn the call over to the operator for 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 Jason Green with Evercore ISI.

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Jason Daniel Green, Evercore ISI Institutional Equities, Research Division - Analyst [2]

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Given where the stocks sits today and what seems to be an inability to find an acquisition in the marketplace that make sense, has there been any change in thinking surrounding buybacks?

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

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It's John. I think our view on buybacks continues to be where it was in the past as you know. We're focused on trying to grow the business rather than shrink it and deploying capital into buyback reduces our share count, et cetera. We'd rather -- we have the balance sheet that we've constructed, the cash and liquidity for a purpose which is to create optionality for future and for growth and that continues to be where our mind is at.

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Jason Daniel Green, Evercore ISI Institutional Equities, Research Division - Analyst [4]

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Okay. And then I guess beyond bad weather days, what are you guys seeing in the general tourism market that potentially might be driving visitation down in the Observatory?

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Anthony E. Malkin, Empire State Realty Trust, Inc. - Chairman & CEO [5]

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I would say -- Tony here -- the competitive landscape for destination attractions has been very challenging in general. The performance has been, for across the board, quite sketchy when I look at everything from One World Trade Center which is down at 33% from last year through our vendors who we share and which is our only source of input vendors meaning that folks who sell our tickets and in common with other venues. We know we're outperforming on Top of The Rock though we don't have a full picture of their performance the way we do from One World Trade. We know that Circle Line and some other attractions are down. Public announced numbers for the first 6 months of 2019 show the Metropolitan Museum and some other museums down. And at the same time, you've got Hudson Yards that has opened, which initially reports folks tracking sell data, upwards of 70,000 people a day on weekends.

Now that same sell data reports less than half that number per day. I think we should anticipate that the noise from competing transactions, including One Vanderbilt and the press and advertising around them and tourist trends will continue for some time. We did see this with the opening of the 911 Memorial Museum in One World Trade Center and even the reopening of the Top of The Rock. That said, we've always grown revenue. I think it's a moment just to say a couple of words about the redo of the Observatory and to set the table as to where we are and to give you guys an expectation of what we're going to be doing. Phase I, which was the new Observatory entrance opened in August 2018 and has already increased the desirability of our 44th Street retail space abilities and cleaned up our Fifth Avenue lobby and 5th Avenue experience for tourists and office users alike. Phase II which are our new galleries on the second floor will open on the 29, this Monday, 29th of July. And I have to say that you will have to see it to believe it, but it is extraordinary. Phase III, which is our complete redo of the 102nd floor will open by the end of September. Phase 4, which is our complete redo of the 80th floor, will open by the end of November.

So there's nothing like the Empire State Building and there's nothing like we will deliver here in the world, period, full stop, no exceptions. We've all done this work while operating the Observatory. This is truly impressive by our ESRT professionals and outside creative and execution team. If you add to that the fact we have had scaffolding up for our quinquennial Local Law 11 work, it has not been simple to move millions of tourists in addition to all of the contractors and laborers and trades and creative folks that we've had in and out of the Observatory. So just to shine a little light on the Observatory, I think, it's just worthwhile to note there's going to be noise out there, number one. And number two, we full well recognize that we're executing on a very high level on the office. We're delivering, Tom Durels will be able to go into it, great trailing 12-month net rent growth. We're delivering fantastic credits on long-term leases to our buildings, very busy. But we've had a significant hurdle to overcome, which we have, which was the reduction in our broadcast income. And we know that if the Observatory doesn't deliver that a lot of that great result on the office leasing isn't going to show. So the Observatory, we're excited for the opening. The competitive landscape is all over the place. Don't forget, we had -- as you know, we had heinous weather, the worst in years for the first half of this year. If we adjust for the closure of 102nd observation deck, second quarter revenue was up 2.3% last year and first half revenue was flat. And our per caps on trailing 12-months of the 6% increase versus last year. That said, there will be a lot of noise coming for the upcoming period. And if I -- I'm sorry, if I've gone on too long but I figured that I'd answer a lot of questions about this all at once.

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Operator [6]

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Our next question comes from the line of Craig Mailman with KeyBanc Capital Markets.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [7]

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David, congrats and best of luck with the next phase and thanks for your help over the years. Just want to hit on the cash NOI growth though in the quarter. I guess, maybe Greg or David, could you guys just walk me through -- I would've thought given the conversation last quarter about the $3 million that would kind of flow-through more so in 2Q then a little bit more on top of that that we may have had kind of bigger pick up this quarter. Can you just kind of talk about the puts and takes that may have kind of offset that on the margin?

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Greg Faje, Empire State Realty Trust, Inc. - VP, IR [8]

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Sure, this is Greg here. If you look on a sequential basis, we did show some property cash NOI growth of about 3%. And if you look more closely at the cash rental revenues, the increase is about $1.3 million on the sequential basis from first quarter to second quarter. This increase consisted of two parts really. If you [win] approximately $3 million of free rent burn off and that was partially offset here by 10 vacates of about 700,000 and holdover rent that occurred in 1Q in the first quarter of about 600,000 and a few other small miscellaneous items.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [9]

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Okay. So the way it looks we should still -- it looks to be more 2020 kind of a ramp at this point just because [auctions] going up, but on a cash basis you're probably not going to get till next year, given kind of the enhances disclosure you guys gave.

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Greg Faje, Empire State Realty Trust, Inc. - VP, IR [10]

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Yes, I think if you look at the new schedule you saw there on Page 6, that gives you little more clarity in terms of the timing as it comes in quarterly. We built that in there specifically to help people model it better. And then you've got the vacate schedule in Page 9 that I would also -- you have to look at that in terms of offsets that you'll see over the course of '19 and early '20.

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Anthony E. Malkin, Empire State Realty Trust, Inc. - Chairman & CEO [11]

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The only thing I'd add to that is, look, we're always opportunistic to generate additional revenue where we can from existing tenant lease. And so if you look at the underlying recurring business, it's actually doing very well. We had other income from other tenant-related transactions, and we will always do that to the extent that we really prefer to do direct leases with new tenants than enable subleasing in our spaces. We like to get tenants to buy their way out of leases, which produces extra revenue and covers our cost of re-tenanting rather than let the market pick up the scrape of the discount. And so that can distort the excellent performance we're achieving on the recurring basis.

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

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That's helpful. And maybe, Tony, just thoughts here. I mean, you kind of -- the commentary today's been good. The results have been good on the net-effective, rent growth side, the occupancy side, but yet the stock still trades under a pretty wide discount here in New York. Last time I checked it's still a pretty good global market. So I was just curious, your thoughts overall, kind of, what do you think you guys need to do or the market needs to understand on the disconnect here between public and private values and fundamentals versus sentiment?

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Anthony E. Malkin, Empire State Realty Trust, Inc. - Chairman & CEO [13]

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First of all, I very much appreciate your question because it gives me a chance to explain to Jamie Feldman that I do more than just the Observatory. Second of all, I think there are few things, which really stand out. Number one, there's a reason we went public. The reason we went public was to resolve a series of antiquated partnerships and limited liability companies, bring in modern government structure and an unified balance sheet and make things more efficient. And that process was difficult. We glad we did it. If I sit down with other brethren in the REIT business right now, public companies - brethren and sistren, I would say. I would say that there's a -- the common refrain that I hear is that the reason you're public is to be able access capital markets and the discounts at which we're trading, we can't access capital market so why should we be public.

I think that speaks to two things: One, we don't need to access capital markets right now to grow externally. We've got a great balance sheet, long liquidity, great access to additional cash through our line and that we have low leverage. So I'm very mindful of the general scale about that, that you hear from the CEO side and of how we're differentiated there. I'd also say -- I had -- something put together for me by Greg Faje which takes a look at the different REIT sectors and their premia or discounts to NAV as determined by Green Street -- whether that's accurate or not it's a consistent measure in July 2017 compared to July 2019. And we had the lowest discount in our peer group in July 2017, and we were trading at a slight discount, a single-digit discount. If you look at that same chart today, July 2019, office REITs are down there with malls. But if you blow open that office sector, you will see the bottom 4 properties are all New York City-based REITs, SL Green, Vornado, Paramount, and ourselves. We still have the lowest discount to that NAV.

That being said, being the loudest mute in the choir, it's still a difficult spot in which to be. And there is no question that while we're focused on external growth, we have to look at that massive disconnect between what the private equity flows are and how that's driving values in the market and where we are as a public company. So first of all, while we're not exercising it now everybody knows that we've got a buyback privilege. We had that right and we made that capacity bigger the last time we reviewed it.

Number two, we've got a balance sheet which would allow that to occur should that something we want to pursue. When we look at a bigger picture and the things that we have to do, we have to continue to execute as an office and retail primarily New York focused REIT, we have to continue to execute at a high-level. We have to address the Observatory, which we're doing, which we saw 3 years ago, 3.5 years ago and all that work is coming to fruition now. And then I think you're right, we have to have existential conversations amongst the executive team and with our Board on a regular and recurring basis, which is what we do, which is how should we repositioning ourselves as a public company. What's the best way to deliver long-term value for the shareholders? How do we drive the bottom line? And in that, I would just tell you that we always look at every option. And we try not to do it daily because it gets in the way of executing our regular tasks, but we look at every option. It's a robust conversation and that the questions you're having is something that we answer with a variety of options, which we weigh every time we get together with our board.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [14]

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It's Jordan Sadler here with Craig. I had just one followup on sort of the buyback because John in response to the initial question that you guys want to grow the company and not shrink the capital base, which is understood but your cost to capital is quite high as implied by the market. Would you guys invest opportunistically in assets today at returns that are lower than those that could be garnered by -- just buying your stock?

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

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I think that if you would look at it at a current return with a prospect of improvement over time, the answer to that would be yes. I think if you were to look at buying 540 Madison Avenue with a 4.5 unlevered IRR, at least how we underwrite it, or 477 Madison at a similar number for a lesser asset, or I can run down a list of other transactions which have taken place in New York City, the answer is no way. It's absolutely better to have either the flexibility or to increase our return per share. But don't forget, we still have that $96-or-so million of top line growth, which we're driving our -- from our embedded growth drivers. We still believe that when you start to see the articles out there explaining why this economic cycle -- justifying and rationalizing -- why this economic cycle is virtuous and will never end, every time those articles have popped up it's a sign that the thing is pretty close to ending and those articles are popping up. We've got tremendous deficits and the government -- we have tremendous unfunded state liabilities. We have a trade war with China, which is impacting tourists visits along with flows of capital, sales of homes, you name it. We have a world in which -- the Europeans are talking about lowering their interest rates again. We've got negative spreads in Europe and in -- negative to 0 in bonds in Europe and Japan. At some point -- at some price, I would imagine giving the alternatives we could find ourselves in a position where we would say it makes more sense to buy our stock than to do anything else. But right now, I think John very correctly and succinctly expressed our view.

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Operator [16]

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Our next question comes from the line of Blaine Heck with Wells Fargo.

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Blaine Matthew Heck, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [17]

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Tony or John, just to expand on the investment picture. Can you give any color on whether you guys are pursuing anything right now and whether there are specific opportunities for the kind of challenged assets or unique situations that you talked about before?

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John B. Kessler, Empire State Realty Trust, Inc. - President & COO [18]

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It's John here. We are -- we do look at actively what is out there in the market and I think what just -- maybe going back to the prior question, I think, about would we -- how would we deploy capital? I think you can see that we haven't, right? We haven't made any investments in the current environment because of the super low returns that we're seeing that investors are getting in the private market because there's so much capital there. I think what we've continued to see is whether it is an income in place or a core deal or a redevelopment or value-add situation that the market continues to price it aggressively. And to date, we haven't found anything that's attractive to us and I think we haven't seen that change. We've also seen -- it seems like certainly the smaller transaction sizes also there's even more liquidity and they're more aggressively priced.

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Blaine Matthew Heck, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [19]

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Okay. That's helpful. And you guys, obviously, have the relationship with QIA. They have the right of first refusal on any JV you guys might like to do. So I'm assuming you guys have a regular discussions with them, can you give us any sense of their appetite for investing in New York office at this point?

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Anthony E. Malkin, Empire State Realty Trust, Inc. - Chairman & CEO [20]

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First of all, we're fortunate to maintain a very good and close relationship with our Qatari partners and these are excellent people with a long-term view. They have been terrific partners. Second of all, I think it's no secret to know that they still have capital to invest. They played a large role in the Vornado joint venture providing half of the new equity that went into the new capitalization of the retail on which they did transact -- they wrote a big check. They have the ability to write big checks. I think that it's also very clear these are smart, long-term thinkers and they are willing, ready and able to participate in anything where we present a compelling case, and we talk about this often. The reality, however, is, we haven't had anything where we've been able to present to them a compelling case. And we're not a private equity operation where we're seeking to aggregate capital, collect fees and get a hope certificate for optionality for upside in the future. So we take our partnership with them very seriously. We treat it with the highest respect and regard. And we know that if we discuss things with them, we have their ear. And if there are things which we advocate, we have a very high level of confidence that they will participate. As far as their interest generically in what they might do, I'm not in a position to comment on that, it's best to ask them. They remain very engaged with us and when we discuss ideas with them -- which we have -- where we're trying rub 2 sticks together and create value for our investors, they have been very supportive.

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Blaine Matthew Heck, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [21]

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Okay. That's helpful. Then lastly, Tom, we noticed you guys added 28,000 square-foot intentional vacate in 2020 to the retail portfolio, small in size, but for the retail it's kind of big. Can you just give some color on that decision and where that space is.

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Thomas P. Durels, Empire State Realty Trust, Inc. - EVP of Real Estate [22]

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Well, the vacates in 2020 primarily relate to Heartland Brewery whose lease expires in early 2020. As a reminder, they occupy about 17,000 square feet. They occupy the corner of 34th and 5th at the base of the Empire State Building. We view this is a great opportunity for us to enhance the experience in the retail -- the retail at the base of the Empire State Building. We are actively marketing that space. And then we added some side street retail at 501 Seventh Avenue. It's occupied by some legacy garment tenants. We just think we can bring in a better type of tenancy to provide amenities and services to our office tenants. So those are the primary drivers of the vacates in 2020 for retail. But while we're on the topic of just the planned and known vacates and potential vacates. On the office side, whether it be the tenant vacates, the intentional vacates, some of the unknowns, we have space that represents great upside opportunity for us. There are floors that we will be getting back or potentially getting back that include tower floors at Empire State Building, with fully escalated rents of an average of $39 a square foot. We have full floors at 1400 Broadway and 501 Seventh Avenue also within place fully escalated rents of $39 a square foot. These are well below market. We are anxious to have the opportunity to release those spaces at significantly higher rents.

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Operator [23]

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Our next question comes from the line of Emmanuel Korchman with Citi.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [24]

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It's Michael Bilerman in for Manny. Tony, I wanted to come back to the buyback program just to understand sort of the board's perspective in authorizing the buyback last October, which was $500 million. The stock at that time, let's call it $16 to $17 over the course of the last 9 months. It's been anywhere down from 10% to 15% from those levels. So I have to imagine that when you put it in place, there were some expectation that the stock representing decent value at that point. And I understand that you want to have liquidity and you want to keep the balance sheet fresh, but why put one in place and then not even execute any of it even modestly at values that I would imagine you and the Board feel -- felt very comfortable when you put it in place as a tool and probably feel even more compelled now that it's 10% to 15% lower than that value.

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Anthony E. Malkin, Empire State Realty Trust, Inc. - Chairman & CEO [25]

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Sure. Thanks, Michael. I look at this in 2 ways. First, just by way of background. If you recall at the time we put this into place, we did announce that we had already had a buyback authorized and what we did with this authorization is recognize that we were going into new territory not just for us as a public company, but for the New York City office sector in general. And we decided that we wanted to make that authorization two things: One, bigger. And number 2 , public. And the reason we wanted to make it bigger was to make sure we could take advantage of opportunity should things really fall out of bed all together.

And number 2, we wanted to make it public because our plans is, if we were to execute, not to do it in drips and drabs to support the stock price but to do it, frankly, quietly and stealthily to acquire and aggregate value for ongoing investors as opposed to selling investors. With that in mind, what we've discovered through advice from counsel is if we didn't make that fact that we had a buyback program in place public, we could be exposed to litigation should we execute in that quiet and stealthy fashion. And having spent decades in litigation with various parties, I really have no interest in entering into that again in my lifetime. So it was a prophylactic measure.

The second thing I would say is, we look at ourselves not just in relationship to our value relative to our stock price, but we look at our stock price in relationship to peers with whom we might like to conduct M&A activity in New York City and they're all trading at bigger discounts than we are. And the fact is that we look at that relative value merger opportunity as a meaningful outlet for us, which we have regular discussions internally in which we, again, trying to rub 2 sticks together, we want to leave the option open for that.

So instead of just looking at our balance sheet and our stock price and our net asset value, I look at our balance sheet, our stock price, our net asset value and the surrounding environment and that's where I say what's the major distinguishing factor between us and the rest is we have a lot of cash and a lot of leverage ability within our balance sheet both to transact and to assist others with problems that might develop with liquidity on their peer watches in case of further disorientation. So when we have these discussions at the Board level and the Board is 100% aligned with management and management is 100% aligned with the Board, we look at that second factor very carefully. And again, on the first part of the response, we made that change as far as size and going public just to protect ourselves and increase our flexibility.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [26]

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When you think about M&A, putting aside public to public, I think one of the big things you've always talked about since the IPO process was the relationship that you and your family had with a lot of private owners that owned assets -- not just office assets but other property types within the New York and Metro area and that the ability to provide units to those holders that can buy into the Empire State Realty Trust was an advantage. And given where your stock is, can you talk a little bit about how those negotiations or those discussions have been going? Because one would assume that's it's a little bit more challenging given where the current stock prices relative to what you perceive as NAV value?

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Anthony E. Malkin, Empire State Realty Trust, Inc. - Chairman & CEO [27]

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You are a master of understatement there, Manny.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [28]

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It's Michael.

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Anthony E. Malkin, Empire State Realty Trust, Inc. - Chairman & CEO [29]

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So it's Michael, sorry. Well, Manny, you're silent. Michael, you're a master of understatement. I would say that when you look at 477 Madison, which is a slumpy, low ceiling, clear height, half block frontage on a -- with messed up retail because the Madison Avenue goes downhill there, so it's not even retail frontage. You're next to Saint Pat's Cathedral and The Palace Hotel. So when you look at these things and you say that building -- functionally when you look at the purchase price and what they have to spend on is easily $1,000 a foot. And when you look at that and the rents that can be achieved there and the operating costs and real estate taxes, you say to yourself, wow. Every single private owner of office in New York City assumes her/his value or her/his assets on a transaction is worth between $850 and $1,200 a square foot. And if there's a slight difference between the public value and the private value, it's a much easier bridge that you have to take to get over that gap of value.

That being said, we still firmly believe in the conversations we've had. We like to highlight that if there's a NexGen, which is not capable, if there's a NexGen which has such diffuse interests as far as continuing to receive distributions, wanting to increase distributions or wanting to cash out, if there is a NexGen which has disputes as to who's in charge, we're a terrific solve. I would make one other comment. It's not just the prices at which these properties are trading, but it's the availability of debt. We know of one family that has a property which is going to go 100% vacant with an over market or nearly at market lease that has debt maturing at the same time as the vacate. It has no depth to execute on an improvement program confronting the New York City 80x50 laws with regard to energy consumption and greenhouse gas coefficient carbon output. They've got proposals to take out their expiring, retiring, maturing loan and fund all of their improvements based on speculation and no new tenant. And so the availability in debt markets, the availability in capital markets, no question, it makes our tasks harder. Doesn't daunt us, doesn't stop us, but it definitely makes it harder.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [30]

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Just last thing. The buyback does expire at the end of this year. At what point do you reauthorize that -- and is the intent just to let the $500 million flow for another year? What's the process and discussions going on at the Board level for that?

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Anthony E. Malkin, Empire State Realty Trust, Inc. - Chairman & CEO [31]

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Let's put it this way. I can't talk about the future but I can talk about the current and the past and our view is and our view has been -- when I say our that means management and the Board -- that having stock buyback authorization, authorizations, I should say, because let's not forget there are couple different ways under which one can buy back stock. We believe it's very important to have this in place and it's an option, an arrow in our quiver and we want to make sure it's in there.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [32]

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An arrow that you haven't been able take out yet. It doesn't sound like any intent to take it out any time in the future?

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Anthony E. Malkin, Empire State Realty Trust, Inc. - Chairman & CEO [33]

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No, any time in the future is a long way to go. I would say that we haven't seen a reason to do it yet. I would say that standing here today or sitting here as we are, we absolutely have a specific price at which we would act. There's no question in that. At the same time if we were to get that and find out that every other New York City based REIT stock moved in concept with ours, we would look at that along with our own stock price in coming to a decision. But right now, I can tell you for sure that there is a number at which the board and we have agreed we would act.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [34]

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Right. I think if you look at SL Green from that perspective, they're selling assets and NAV and buying their stock back at a discount. Inherently, they're creating NAV value and real estate value. Arguably, what's going at the macro environment in New York is clearly affecting all of your stock prices but just purely from a capital allocation perspective, using that capacity, selling assets, selling interest in assets at market value -- which there's a large and liquid market that you've just talked about -- and then buying back that stock at some level of discount creates value, right? It's just math. You can't argue with it. So it would seem as though that strategy would be a good one.

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Anthony E. Malkin, Empire State Realty Trust, Inc. - Chairman & CEO [35]

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No. Look, SL Green spent a lot of money and their average buyback price is materially in excess of where their stock trades today.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [36]

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But I wouldn't look at the stock price as being the measure of success, I would look at the value creation in terms of selling assets in NAV and buying back stock below it. Where would their stock be if they hadn't done that? Where would their NAV be if they didn't do it, right? Its pure capital allocation. You can think of the hindsight, yes, one would like the stock to be higher but selling assets at NAV value and buying stocks back at a discount to that value creates value absent doing nothing. So I'll let the call go on. Thank you.

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Operator [37]

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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 [38]

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I guess just to follow up. I mean, do you guys think all about asset sales? Especially in your core New York, Manhattan assets?

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Anthony E. Malkin, Empire State Realty Trust, Inc. - Chairman & CEO [39]

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We've looked at this, Jamie, from the perspective that if we sell assets, particularly in our core locations in New York City and Manhattan, we have to look at: a, what we're going to do with that money? And b, we have to look at it and say, we're already a smaller company. And if we liquidate further, we will be a definitively smaller company. And I think it's -- at that point, there's not a lot that we can do which wouldn't really just say either we should liquidate the whole company or we shouldn't sell anything. And when we look at selling assets or portions of assets not only does that shrink the business, but when you're selling partial interest and taking in JV partners, we don't have any of that right now. And that gives us absolute flexibility to do whatever we want, whenever we want. So again, we look at everything, we discuss everything. But what we're doing right now is where we've come out after the robust discussions we've had to date.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [40]

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Okay. All right, shifting gears. You guys have talked about debt maturity coming up in the back half of the year. Can you talk about -- I know you talked about several different options to refinance. How should we think about the potential accretion or dilution from those different options? Or do you think it's more of neutral for earnings?

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David A. Karp, Empire State Realty Trust, Inc. - Executive VP & CFO [41]

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Jamie, it's David. So if you take a look at the existing exchange bond, on a cash coupon basis, we pay about 2.625%. And for GAAP purposes, which incorporates the noncash portion of the equity option and the amortization to its deferred financing cost, it's around 3.9%. With the swap in place, we put in place 7-year forward starting interest rate swap, which has a strike price of 2.958%. If we look at current spread, let's just say on a 7-year term loan, that's running about 150 basis points, that would put us in all-in coupon of about 4.5%. So on a cash basis, our interest cost would be about 190 basis points higher, which assuming a $250 million notional amount would translate into $4.7 million annually. On a GAAP basis, our incremental interest cost will be roughly 60 basis points higher which equates to roughly $1.5 million annually. Again, on that same notion of $250 million.

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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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Okay. I think you guys listed several different options. It sounds like that's you're most likely option is to roll it into long-term?

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David A. Karp, Empire State Realty Trust, Inc. - Executive VP & CFO [43]

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I'm just giving you that as one example. But yes, we have a number of options. We can do 7-year term loan, we can do a private placement, we could enter the public market and we could do a secured mortgage financing. So there are a lot of options to look at. I just gave you the term loan as one example.

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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. So I guess if you were to think about the best case scenario, would there -- I mean which of those would actually be accretive? Or would they all be kind of at least neutral if not dilutive?

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David A. Karp, Empire State Realty Trust, Inc. - Executive VP & CFO [45]

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They're all roughly in the same ballpark. And I think given that we have to swap in place of roughly 3% that's going to be the driver. The spreads are going to be somewhat comparable across executions, so I think that's really the difference.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [46]

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Okay. And then Greg you talked about this R&M expense in the back of the year. Can you talk more about that? And then if you look at your year-over-year expenses on the Observatory, they're up meaningfully. In fact, you compare the revenue decline year-over-year to the NOI decline year-over-year, it's a much bigger hit. Can you just talk about the expenses in the quarter? And then what to expect going forward?

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Greg Faje, Empire State Realty Trust, Inc. - VP, IR [47]

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Jamie, it's Greg. I'll touch on R&M and then I'll switch back to David to talk for the Observatory. The R&M work is work-related to Local Law 11, which is an annual -- 5-year -- every 5 years you have to do that work and that's primarily done at Empire State Building.

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Anthony E. Malkin, Empire State Realty Trust, Inc. - Chairman & CEO [48]

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Also known as quinquennial.

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Greg Faje, Empire State Realty Trust, Inc. - VP, IR [49]

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As well as some work at the top of the Tower there. We expect about $5 million expense in the second half relating to this -- these 2 combined.

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David A. Karp, Empire State Realty Trust, Inc. - Executive VP & CFO [50]

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And on the Observatory expense, the year-over-year increase was really attributable to the higher IT expenses both maintenance and consulting, which was associated with our new ticket kiosks and the entrance hardware and software. We had higher R&M expenses. We had higher marketing expenses. This was partially offset by lower payroll and benefits. But what I will point out is that we still anticipate the run rate on expenses to approximate what we experienced in the fourth quarter of 2018. And as I said before, this anticipation is based upon early experience with the technology. And as the new systems and technology has stabilized, we're going to have a better sense of what the run rate will be as the year progresses and we'll communicate to you if we feel there's going to be any differences from that run rate. Lastly, just on the labor savings that we realized from the reduction of cash is being somewhat offset by the higher technology costs.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [51]

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Okay. Does it come down from 2Q run rate and we should look at 4Q as an example?

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David A. Karp, Empire State Realty Trust, Inc. - Executive VP & CFO [52]

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Yes. I would -- I mean quarter-over-quarter there was an increase as well that was associated with some higher marketing, which is timing related and higher security and credit card fees which is seasonality. So we're always going to see some movement around the expenses for seasonality. We had the introduction of new software. But when we look at our expectations, I think a good run rate is what we saw in the fourth quarter of 2018.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [53]

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Okay. And then Tony you commented about some of the signs you're seeing giving a little bit of concern that we're late in the cycle on one the responses to one of the questions before. I'm just curious, are you guys seeing any kind of shift in tenant behavior? Whether it's the types of tenants you're seeing leasing space or their willingness to go long or short? Anything that's kind of telling you based on prior cycle that's something changing as well?

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

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As far on the leasing front, I would -- this is Tom by the way, on the leasing front, we're not seeing any change in the market that would indicate that we're late in the cycle. I would say that we feel great about the pipeline of activity we have in our office space. We've got leases in process of negotiations for full and partial floors for 111, 1400, 1333 and 250. We're seeing demand for -- across all of our properties or both pre-builts and full floors from a variety of tenant types that includes tech, TAMI, consumer product, professional services and another. And as I pointed out in my earlier comments, look at the net effective rent growth that we posted or our actual trailing 12-month net effective rent growth on a year-over-year basis for new Manhattan office leases increased by 6.2% this quarter. That's the third straight quarter in which we've experienced net effective rent growth in excess of 5% for new leases in our Manhattan office properties. And again, as a reminder, that's on Page 12 of our investor presentation and that we're seeing a lot of the leasing that we're doing is it does involve employment growth. All of these are good signs. We're not seeing any change at least out on the street, on the front lines where we're doing leasing.

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Operator [55]

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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 [56]

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Well, I'm worn out from that theoretical share buyback conversation. David, we are going to miss you. You do know that in California they only drink wine, they don't drink beer.

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Unidentified Company Representative, [57]

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That's why he's going to spend half his year in Bend, Oregon.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [58]

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So dealing with the more mundane day-to-day stuff here, your Page 6, Page 9 analysis or comparison is incredibly helpful. And if I look at the cash gains for commenced leases in free rent, I come up -- you come up with $29 million. And then if I look at the rest of this year and next year and I look at the tenant vacates and the intentional vacations, I get about 570,000 square feet and at your in-place rent that equates to about $30 million. So is this just a kind of yin yang where all the leases about to commence are offset by the rollouts in the next 18 months? Or is there a chance that we see some NOI growth?

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Greg Faje, Empire State Realty Trust, Inc. - VP, IR [59]

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This is Greg. We do give these schedules here to help you out and as you noted we give the new schedule on Page 6 that gives you a little more clarity into the timing there and I think it's important to look at that as both the vacates we give on Page 9. And just from a growth perspective, we do have the 102nd floor, observation floor, is currently out of service and will come back online at the end of September. And a few other factors that have sort of create the headwinds in 2018 that we discussed previously in terms of leasing costs that are previously cap but now being expensed. And so as we look forward, we expect to see some growth.

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

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And the other thing that's important and why we went to the court of the representation is that the timing of both the vacates and the burn off for the free rent are important. When it occurs, if you just took a convention mid-quarter or midyear or whatever, it might distort what is really expected to happen. So I'd take a closer look at the quarterly breakdown and that might help you fine-tune your model.

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Thomas P. Durels, Empire State Realty Trust, Inc. - EVP of Real Estate [61]

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John, this is Tom. Just one additional comment I'd like to make on that is just a reminder, we are intentionally vacating spaces to unlock the value creation through mark-to-market increase in rents, as I pointed out earlier. We have a number of spaces that either we're intentionally vacating or that if the tenant's choose to vacate, we re-lease those spaces at significantly higher rents because the in-place rents are significantly below market. So we view this as upside opportunity.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [62]

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Tom, great segue. Everything I read about Stamford, Connecticut and New York's suburban markets in that vicinity is pretty scary. Can you talk about the suburban market and the ability to re-lease this product given your $40 million capital spend? And then also a curiosity question, Heartland Brewery 17,000 square feet, will that be a roll up or roll down in rent? And what kind of capital do you think you'd have to expend there?

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Thomas P. Durels, Empire State Realty Trust, Inc. - EVP of Real Estate [63]

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So let me first hit upon the greater Metropolitan portfolio. As a reminder, we're just about 89% leased and we did do 53,000 square feet of leasing this quarter. As you mentioned, as previously announced, we're underway with an upgrade of the common areas and amenities, improvements to our gyms, dining, creating new coffee lounges, conference centers, lobbies and outdoor areas. And the work that we completed so far looks great. We received very favorable feedback from brokers and tenants. We're early in the marketing of some of the space that we know that we'd be getting back. As a reminder, we got the best locations within each of our submarkets, and we're conveniently located near mass transit stations and intersections of major thoroughfares. We're confident in our offerings and based upon the work that we've completed and the feedback that we've gotten, we're quite confident. We like our locations and we like our product. Moving on to the retail. It's -- I would simply say that, that corner space on Empire State Building is incredibly unique. We are focused on bringing in the right use for this space that will enhance the experience for both our office tenants and Observatory guests. We're working out with some prospects right now, some very interesting and exciting concepts. So whether it ends up being an increase in rents or not, I think, we're looking at more holistically as to what it does for the Empire State Building and the Observatory and for our office tenants and the overall experience. And we just don't think that the existing tenant does much for us right now.

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Operator [64]

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

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [65]

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My first question is on occupancy, the highest occupancy you've had as a public company. But at 90%, there's still room for upside. Do you see occupancy growing from here? Or is this just a blip? And with the tenant move out and so forth, kind of stays or hovers around 90% or below?

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Thomas P. Durels, Empire State Realty Trust, Inc. - EVP of Real Estate [66]

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This is Tom. Look, we've given a lot of information on Page 9 of the supplemental, which details, obviously, our future rollouts. You know the amount of leasing that we've done to date. Look, last year, we did about 3 quarters many square feet of new leasing in our Manhattan office portfolio. We had a very good quarter with 260,000 square feet of leasing. As we move into 2020, you can see just the amount of unknowns are shrinking and the amount of space that's targeted for redevelopment, where we have completed about 7.6 million square feet, only have roughly of 600,000 square feet left within the entire portfolio speaks to, as we go forward, less move out. So we gave a lot of detail on Page 9. We're confident in our ability to lease space. We're active right now. We've got active proposals and leases and negotiation across the portfolio. As a reminder, the occupancy is going to buff around from quarter-to-quarter. But on an overall trend, we feel confident where we're headed.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [67]

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I'm just wondering some of your peers are, let's say, 5% to 6% vacancy. I think the market overall is probably around 8% or 9% and your consistently above that as far as vacancy rate. But when do you get back to market or closer to your peers?

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Thomas P. Durels, Empire State Realty Trust, Inc. - EVP of Real Estate [68]

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Look, as I said before, we're going to continue to execute on our program to vacate spaces and consolidate smaller places in the larger offerings that -- so that we can re-lease those spaces to better tenants at higher rents. The purpose of providing you the detail on Page 9 gives you our best look s to what we expect will happen through the end of 2020, as we work our way through the balance of the undeveloped space. We will be marching more towards a stabilized portfolio.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [69]

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If I could ask the cash NOI contribution question in a different way and I appreciate disclosures you have on Page 6. But at the beginning of the year, you had $23.5 million of leases that will -- were to begin to contribute to cash NOI this year. And I realize you're not going to get all of that this year because of the timing when those leases start, for a lack of a better word that's a balance number. But on a cash flow basis, how much of that $23.5 million will you see contributing to cash flow in 2019?

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Greg Faje, Empire State Realty Trust, Inc. - VP, IR [70]

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I think if you look at the schedule on page -- John, this is Greg. If you look at the schedule on Page 6 there it is, as you pointed out, the balance number, right, so you've to look it as it gets realized over the course of the year. So if you're using the December 31 number, we should realize $21 million over the course of the year and then the additional schedule that we've now added in on Page 6 will give you some better sense the timing going forward and this clarity will help you.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [71]

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For 2019 or 2020?

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Greg Faje, Empire State Realty Trust, Inc. - VP, IR [72]

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2019.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [73]

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And then final question, maybe for Tony on the Observatory, all the additional exhibits and now most of them are on the 80th floor, how do you think this will impact revenue? Will it justify higher ticket prices? Or is it just really to make the experience better?

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Anthony E. Malkin, Empire State Realty Trust, Inc. - Chairman & CEO [74]

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First of all, it's absolutely, I think, important to differentiate ourselves from all the other Burj Khalifa's that are being put up in the marketplace. Second of all that we have a uniqueness to us, which is instilled in everybody's mind and heart, you name it, around the world. But finally, I think and most importantly while every single thing that has to do with offense is good for defense. This is offense. And we're definitely looking at a much better offering. Think of us is the only museum which is open from 8 a.m. to 2 a.m., 7 days a week in New York City or in the world. It's a museum level installation. Again, seeing it will be believing it. And we believe this will help us not only maintain but also our goal is to increase revenue. And by the way the increase reasons to come to the building on bad weather days as well.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [75]

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But it won't be a separate ticket price, right? It would just be all-in-one price to see the Observatory and all the exhibits?

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Anthony E. Malkin, Empire State Realty Trust, Inc. - Chairman & CEO [76]

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That is correct. Although, of course, as you know we do offer several different levels of experiences in our ticket pricing and there'll still be the express opportunity to bypass everything and the quickest visit. This is part of the "the ticket price". You don't do one or the other.

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Operator [77]

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Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back over to Mr. Malkin for any final comments.

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Anthony E. Malkin, Empire State Realty Trust, Inc. - Chairman & CEO [78]

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So first of all, I want to say that the team has been executing at an extraordinarily high level, continued great leasing, terrific execution on not only the redevelopment of our properties, but the redevelopment of the Observatory while all that's up and running. Just really pleased with what we're doing there and hats off to the whole team. Great leasing spreads, net effective rent growth and momentum, which we have seen continue into the third quarter. So we're delivering on our goals, and we look forward to the next time we report to you on our next quarterly earnings. I very much want to give a last hats off to David. We have taken our hats off so many times, no one has a hat left. We look forward to seeing you all in the months ahead, conferences, NDRs, property tours, calendared for the second half of the year. All of that, everybody. Thank you. Sorry for the long call.

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Operator [79]

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Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.