Empire State Realty Trust, Inc. (ESRT) Q1 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the Empire State Realty Trust First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. 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, General Counsel for Empire State Realty Trust. Thank you. Mr. Keltner. You may begin.

Good morning. Thank you for joining us today for Empire State Realty Trust first quarter 2016 earnings conference call. In addition to the press release distributed last evening, a quarterly supplemental package with further detail on our results has been posted in the Investors' section of the company's website at www.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 statement in the future. We encourage listeners to review the more detailed discussions related to these forward-looking statements contained 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, same-store results 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, our President and Chief Operating Officer.

Good morning. We are delighted to welcome you to our first quarter 2016 earnings conference call. During the first quarter, we continued to execute on our strategy and again delivered strong results. Last night, we reported core FFO of $0.22 per share, which is a 10% increase over the same quarter last year. We saw strong demand for our space as completed approximately 256,000 square feet of total leasing during the quarter. Tenants continue to be attracted to our value price point and well located quality building. In line with our strong results last year, we achieved average leasing spreads of 51% on our new Manhattan office leases, and 43% on all new and renewal leases across our entire portfolio. Additionally, we're pleased with our performance of our observatory where we saw a 16% increase in admission. And finally, our balance sheet remains very strong. During the quarter, we completed $50 million refinancing on 10 Union Square East which David will discuss in more detail. Empire State Realty Trust is a pure play Manhattan and New York City metro area office and retail and real-estate portfolio. We believe our portfolio offers a unique opportunity to grow income, as we continue to redevelop and lease our properties at market rents and bring occupancies to market level. Since inception, we have delivered and we expect to continue to deliver embedded de-risked growth. 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 will take your questions. I'll now turn the call over to Tom Durels. Tom?

Thanks, John and good morning. On today's call, I will review our overall leasing activity in the first quarter and provide a summary of our current and future space availabilities. Our first quarter results reflect our continued progress on our four key growth drivers which are; one, upside from signed leases not commenced which equates to approximately $28.1 million as of March 31, 2016; two, the mark-to-market on our expiring Manhattan office leases; three, lease-up of developed vacant office space; and four, the mark-to-market and lease-up of our available retail space. In the first quarter, we signed 47 new and renewal leases totaling approximately 256,000 square feet. This included approximately 183,000 square feet in our Manhattan office properties, nearly 14,000 square feet of retail and 59,000 square feet in our Greater New York Metropolitan properties. These totals included a number of significant leases at 250 West 57th Street we signed a lease for 38,000 square feet with the insurance provider, Guildnet. At the Empire State Building we signed a 25,000 square foot expansion lease with Shutterstock, who now occupies over 105,000 square feet. And we signed a retail lease with Tacombi a popular and genuine Takorea concept with locations in Midtown South. This is the seventh on-site food option at the Empire State Building and a very exciting addition to our Urban Campus. We signed additional retail leases with Bank of America at 250 West 57th Street, Papyrus at 1359 Broadway and FedEx at One Grand Central Place. All of these retail leases commenced this year for a total of $2.8 million in incremental annual revenue. And finally as we mentioned on our fourth quarter call, we renewed and extended our TV broadcast leases with two Univision stations from their current expirations in 2016 and 2018 to a new expiration in December 2025. We continue in our negotiations with our television and radio broadcast tenants and we look forward to providing you future updates. We feel very good about leasing pipeline and our pace of showings which continue to show good results from our strategy to vacate, consolidate and redevelop spaces so that they may be leased to larger better credit tenants at higher rents. At March 31, 2016, our total portfolio was 88.2% occupied and including signed leases that have not yet commenced, our portfolio was 89.8% leased. Our portfolio occupancy was up 90 basis points from the fourth quarter and including signed leases not commenced, our leased occupancy percentage was up 70 basis points from the fourth quarter. At our flagship property, the Empire State Building, we were 89.2% occupied, up 250 basis points from the prior quarter. Including our signed leases not yet commenced, our leased percentage was 90.7%, which is flat compared to the prior quarter. As John mentioned, throughout our portfolio we continue to capture strong rental growth spreads. During the first quarter, rental rates on new and renewal leases across our portfolio were 42.9% higher on a cash basis compared to prior escalated rents. We again achieved strong spreads for our Manhattan office properties as we were able to sign new leases at spreads of 50.9%. Our average cost for tenant improvements and leasing commissions on all new and renewal leases within the portfolio was $78.74 per square foot. At 250 West 57th Street, we have reacted to the opportunities created by the transformations along this Billionaire's Row. We are under construction on new lobby elevators and store fronts designed by Gensler architects and have begun to execute on a consolidation program for 5.5 floors this year, totaling 108,000 square feet. We have already leased 2.5 of those floors before work started to Guildnet and to COOKFOX. At 111 West 33rd Street, renamed from 112 West 34th Street we are underway with a new building lobby with 33rd Street's entrance and new elevator cabs all designed by STUDIOS Architecture. There we are consolidating five floors totaling 198,000 square feet. All other -- work is previously completed and 111 West 33rd Street will soon be the home of ESRT's new headquarters. We are excited about these new projects which we believe are already generating better leasing results and we believe we'll enhance shareholder value. Within our Manhattan office portfolio, we have approximately 1.64 million square feet of space left to redevelop and re-lease; 430,000 square feet of this space is at the Empire State Building and 1.21 million square feet is in the balance of our Manhattan office buildings. We are currently on track to redevelop approximately 310,000 square feet of space by year-end 2016. And we expect to vacate approximately 528,000 square feet of office and retail space in our Manhattan portfolio through year-end, though this is offset by over 311,000 square feet of signed lease that have not yet commenced. We may see a short-term increase in our vacancy between the time that existing tenants move out and before we complete our work and new leases commence. In our Manhattan office portfolio, we currently have 880,000 square feet of unleased vacant space, of which approximately 609,000 square feet is already redeveloped space that includes pre-builds and white-boxed full and partial floors ready for lease up. Approximately 63,000 square feet is being held off the market until it can be consolidated for future redevelopment and the balance of our vacant space is being planned for redevelopment. On March 31 of ‘16, we had seven full floors of 190,000 square feet throughout the portfolio that were vacant and available for lease-up. And another nine full floors of 185,000 square feet will be consolidated and delivered by the end of 2016. This includes the 3.5 floors that have already been leased to Guildnet, COOKBOX and Shutterstock. And in our retail portfolio, we will consolidate and redevelop approximately 40,000 square feet including nearly 8,000 square feet at street level and directly opposite Macy's flagship store that will be demised, white-boxed and ready for showings by late summer; 5,600 square feet of street level space fronting 34th Street located at the Empire State Building and another 5,700 square feet of prime, corner retail space at Union Square. 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 improvement strategy to consolidate, vacate and delivery redeveloped space in order to lease to new, better credit tenant at higher rents, increased NOI and improved shareholder value. Thanks everyone. And now I'll turn the call over to Dave Karp. David?

Thanks, Tom and good morning everyone. I'll start with a review of our financial performance and follow with an update on our balance sheet. For the first quarter, we reported core FFO of $58.2 million or $0.22 per diluted share. Modified FFO, which is defined as FFO plus adjustments for any above or below-market ground lease amortization, was $57.5 million or $0.22 per fully diluted share for the first quarter 2016. Turning to our Observatory operations, first quarter observatory revenue was $21.2 million, a 16.5% increase from $18.2 million for the same quarter of the prior year, which can be attribute in part to increased tourist visits and our revenue mix. For the first quarter of 2016, the observatory hosted approximately 719,000 million visitors compared to 622,000 million visitors in the comparable period of the prior year a 15.6% increase. This year's Easter weekend fell in the first quarter as opposed to the second quarter of last year and weather conditions were favorable in the first quarter of 2016 with only two bad weather days that fell on weekends as compared to nine in the same period in 2015. Based on our experience, we believe there is an increase in the results for the first quarter 2016 over the same period 2015 beyond the adjustments due to the Easter shift and weather. We recently reviewed our public relation costs at Empire State Building and determined that the primary beneficiary of this cost is the observatory taxable REIT subsidiary, not the office and retail spaces. As a result, we now record this public relation expenses as an observatory expense, instead of a property operating expense for debt and tax purposes. Please refer to our supplementary where we have made the reclassification for all periods presented. This is simply a reclassification of where we allocate certain expenses, and has no impact on our overall net results. Turning to our balance sheet, we continue to believe our low-levered balance sheet remains a strong competitive advantage for us in any market environment. We are focused on increasing financial flexibility and capacity, lengthening our maturities and lowering our cost of capital. During the quarter, we refinanced a $20 million loan secured by 10 Union Square East with a new 10 year $50 million mortgage loan. The loan had a little over a year remaining prior to maturity and by refinancing, we lowered the coupon from 6% to 3.7%. The additional proceeds we used to term out borrowings under our revolver. We did write-off $200,000 of unamortized cost and incurred $400,000 prepayment penalty. However, this is offset by the interest cost savings we achieved and we are delighted to have completed our first deal with MetLife, the lender on this financing. At March 31, 2016, we had total debt outstanding of approximately $1.6 billion. Approximately $1.4 billion of this debt is fixed rate with a weighted average interest rate of 4.55% and a weighted average term to maturity of 5.3 years. The remaining $265 million of debt is variable rate with a weighted average interest rate of 2.03% and a weighted average term to maturity of 6.4 years. At the end of the first quarter, our leverage ratio reflected by consolidated debt to market capitalization was 26% and our net debt to EBITDA was 4.9x. Finally, our unsecured revolving credit facility has a total capacity, including the accordion feature, of $1.25 billion. At March 31, 2016, there was no outstanding balance on our revolver. I will now update you on our redemption requests. As you may recall, our operating partnership units issued at the time of our IPO, our lockup period expired on October 07, 2014, at which time holders of such operating partnership units could have their holdings redeemed for Class A shares which are listed and traded on the NYSE. As of March 31, we've had redemption requests from operating partnership units in Class B common shares to Class A common shares totaling 23.6 million shares or approximately $414 million, at the closing share price of $17.53 on March 31, 2016. This represents a 28% increase in Class A shares since our IPO. On February 19, 2016, our Board of Directors approved a quarterly dividend of $0.085 per share. This dividend was paid on March 31 to shareholders of record on March 16th. With that, I would like to open the call for your questions. Operator?

We'll now be conducting a question-and-answer session. [Operator Instructions]. Our first question is from Blaine Heck of Wells Fargo. Please go ahead.

Thanks. Good morning. Just one the observatory results, I guess just more broadly in prior quarters you talked about some difficulty in the observatory business, given the decrease in international tourism. But David you commented that even without the Easter weekend and better weather, you think you guys would have been up year-over-year. So, do you think tourism might get better this year or are there other factors in play here?

Hi, Blaine, Tony Malkin here. We are very happy with our results and we continue to like our competitive position. Observatory revenues increased over 16.5% from the first quarter last year and that can be contributed in parts to increased tourist visits, favorable weather conditions, yes the calendar shift, but also our revenue mix. We were lucky with the weather, we had two bad weather weekend days in the first quarter of ‘16 and the first quarter of ‘15 which fell on a weekend and ‘16 we had nine in the first quarter in ‘15. Easter is a calendar event and we really did well on increased visits beyond that. July and February were not impacted by Easter and they were great for us. Q1 2016 admissions at 719,000 with the second highest Q1 on record only surpassed by 2008. And the revenue mix was a big help. One contributor to the revenue mix was the early termination of the Skyride, virtual reality ride tenant, we had on the West side of the second floor. They had the right to buy our tickets at a discount and sell our ticket on the street, now we capture the vast bulk of that business and our ticket offers at full price, and of course the streets are a lot nicer. As for what we see going forward, we like what we see and as always, we look forward to providing results as we achieve them. We don't project, we just report. That being said, we like the contributions from the different sectors and frankly, the good news for us we really view it as and across the Board all things going in the right direction.

Thanks. That's helpful, Tony. May be a follow up with you or even John, can you guys just talk about the investment landscape and anything you're seeing on the market that may be interesting to you from an acquisition standpoint?

Good morning, Blaine. I'd just say in general, we continue to be very focused on delivering on our embedded growth and our portfolio and we think that's the way we are going to create value for our shareholders. As we have a low levered balance sheet, it gives us a lot of flexibility and as we see opportunities out in the market, we see something interesting, we'll let you know.

Great. Thanks, guys.

Thank you. The next question is from Jamie Feldman of Bank of America. Please go ahead.

Thanks. Good morning. I guess a question for Tom here. Can you just talk us through how the first quarter felt in terms of leasing with the market volatility and kind of greater concerns about New York City? If you think about may be by month, how did things go and then how are things built today in terms of the leasing pipeline?

Jamie, we had a very good first quarter with over 256,000 square feet of leasing completed, bear in mind that 158,000 square feet was new leasing. We're seeing solid demand for our property locations and unique product and we are seeing leasing momentum continuing based upon the number of showings that we're getting. The number looks from prospective tenants, proposals that are being exchanged in leases and negotiation. All I could say is that our property show well, they show fantastic. We offer structurally located properties with great access to mass transit, improved buildings with renovated common areas and modern built office space. So, we feel very good about the market, we feel good about the results that we had in the first quarter and we feel good about the momentum we're seeing.

Okay, thanks. That's helpful. Are you seeing any shifts in the type of tenants that are looking at your properties versus last year's though?

If you look at who we lease to during the first quarter, a wide range of diversified industries including medical, private equity, not-for-profit, tech, industrials, insurance and others. I think that that activity that we saw in the first quarter reflects the diversity that you'll find in our existing role and I think it speaks to the quality of our property. Properties -- the convenience of the location of our properties and how well they show and the condition that they're in and the product that we're delivering. So I think going forward I think we'll continue to see tenants in a wide range of industries.

Okay. And I know that you guys touched on it about the broadcasting licenses, can you talk a little bit more about, I think you've got 30% expiring in 2017. May be talk a little bit more about timing and some of those discussions and any updated outlook?

Sure, this is John. As you know, we renewed and extended our leases with Univision from their expirations in 2016 and ‘18 to 2025 which we're very pleased about. We also announced that three of our TV guys, CBS, NBC and 13 notified us that they are going to be leaving in ‘17 and ‘18 when their leases and licenses expire. As it relates to the other TV and radio broadcasters that we have, we're talking to all of them and what we'll do is we'll continue to keep you updated when we have news to announce but we're in discussion[ph].

Okay. And then just last question for David, First Stamford mortgage looks like it expires in 2017 I know that's a way for now, but it's a big one. Any early thoughts on what might happen there?

Jamie, it is a little early, we are looking at a number of financing alternatives. As you may recall, we did enter into a forward interest rate of $200 million which effectively locked our treasury cost for financing at roughly 2.5%. So we are preparing for that, but in terms of what direction we'll go in with respect to that financing, we do have a number of options available to us and we'll be considering them as we get closer.

Okay. Great. Thank you.

Thank you. The next question is from Craig Mailman of Keybanc Capital Markets. Please go ahead.

Good morning guys. Tom, just want to follow up on the leasing. You mentioned that the pipeline's good here. Hoping that you could just give a little bit more color kind of how that pipeline makes you feel given the fact that you guys have a decent amount of vacant space to develop. You guys are going to deliver another 200,000 square feet before your – just trying to get a sense of how you think it could work from the timing perspective how much kind of embedded demand you guys may have as you chip away at that?

Sure, Craig. Let me first go through the numbers with you out of total of approximately 628,000 square feet in our portfolio of office and retail leases that expire in 2016, 468,000 square feet is in our Manhattan office, 117,000 square feet in our retail and 43,000 square feet in the Greater New York Metropolitan properties. We have 311,000 square feet of signed leases that have not yet commenced, so that's an important number to keep an eye on. We do expect to vacate approximately 411,000 square feet between now through the year-end, that's on top of the 117,000 that we vacated in the first quarter for a total of 528,000 for the total year. But we expect that there's a chance our occupancy in 2016 may decrease at mid-year mostly due to the lease expiration of Footlocker at 111 West 33rd Street before recoveries by year-end. And keeping in mind that we have already leased 135,000 of Footlocker's 175,000 square feet to support Macy's and then reconfigure new Footlocker store. I think if you look at the leasing that we've done historically, the leasing that we did in the first quarter combined with those numbers, you can draw your own conclusions, but as we said before, we are highly confident that as we deliver developed space, we will lease it up.

Just to clarify, so the 600-so thousand square feet of developed vacant space, is the 311,000 square feet a net against that or is that incremental to the 311,000 square feet you guys already have signed but not yet commenced?

Well think of the 311,000 square feet of signed leases not yet commenced that it goes against current vacant space and some space that is rolling over.

Okay. So it's closer to about 300,000 net that you guys would have available plus what you're bringing on.

That's correct. Yes.

Okay. All right. That's helpful. And then as we look at the mark-to-market on the renewals, I know it's a small piece but historically it seems like it'd been little bit more flattish. Are you guys getting to the point where you're renewing leases that had already been redeveloped at the start of the program that are now come up for renewal or is that just sort of a one-time kind of mix thing?

Our mark-to-market renewals will depend on obviously on the fully escalated rents that are in place. During a roll over for the balance of the year the space is rolling over the fully escalated rents is something like $47 per square foot, so we have certainly an opportunity to achieve good mark-to-market on that. In the fourth quarter of last year which was commented on previously, we had a flattish mark-to-market on renewals that was really driven by a renewal option that Aéropostale had 111 West 33rd Street. Aéropostale being a luxury tenant whose lease was committed by a predecessor managing agent. That brought that renewal mark-to-market down in the fourth quarter and you saw it rebound here in the first quarter.

Okay. And then, just lastly the $20 million backlog, could you give us a sense of when the big chunks of that commence throughout the ‘16 and into ‘17?

Sure. $28.1 million of signed leases not yet commenced, the significant leases in there are approximately $15 million comprised of Footlocker and Sephora. Footlocker's existing lease expires at the end of this month. We are already executing on landlord's obligated work in advance of their lease expiration but there will be some downtime between the expiration of the Footlocker's existing lease expiring and completion of the balance of our work before they turn the space over and the new leases commence with the new Footlocker store, Sephora and then the Macy's office space above.

So when would that $15 million hit?

I think you can approximate third quarter in terms of lease commencing.

Okay. And then the other $13 million that's just of sprinkled in?

It's spread out between now through the end of the year.

Okay. Great. Thank you.

Thank you. The next question is from John Guinee. Please go ahead.

Okay, John Guinee here. First, David just so I understand it, someone decided that the originally that the certain expenses were attributable to the office building and then changed their mind and decided that they were attributable to the observatory. What expenses were those again?

John, as we stated in the earnings release tables and the supplemental, we reviewed our public relations cost at the Empire State Building and determined that the observatory taxable REIT subsidiary is really the primary beneficiary of these costs, not the office and the retail spaces. So we believe that this is a better and more accurate presentation for these costs. It also lowers the taxable income of the observatory. And these PR costs…

Which rocket scientists decided that the public relations cost were attributable to the building versus the observatory in the first place?

It was really a more of a legacy, remember prior to being a public company and having a need naturally on a public basis it really wasn't as much focused on how we allocated those costs between the observatory and the office building. And now as we're more focused on the proper allocation we've gone through an identified a major cost which was the public relations cost as being more appropriately charged to the observatory. Again, at the end of the day, it has no impact on our overall results, it's just an allocation between the observatory TRS and REIT for both GAAP and tax reporting purposes.

And John, Tony here, I'm an English major you can fault me for my lack of rocket science.

Okay. I just had to ask that question because it's – never mind.

And answer it.

Yeah, a real question. You've got -- looks to me like your operating expenses in your Manhattan office portfolio run about say $28 a square foot, is that a decent number or rough? And the reason I ask that is what I'm trying to figure out is what your increases are on your net rents? If you look at page five your previously escalated numbers were $35 gross and your new escalated rent or your new lease rent is about $70 gross. Is it appropriate to say that the net rent increases from $17 to $52 or was there also adjustments in the expense stops or the operating expenses which would have reduced that net rent increase from roughly $17 to $52 net? You follow me?

John first, let me clarify on the operating expenses which for our office buildings were ranged anywhere from $19 to $26-$27 square foot on average. But then Empire State Building being the one building that has much higher operating expenses that about $37 square foot for the adjustment that was just commented on. So using those numbers against our gross lease amounts, you will come up with the margin on our office leasing.

And I think, Tony here, I think it's important to note that as we said over time, the very act of doing improvements has increased our operating expenses, because we do have to run buildings particularly Empire State Building, really operates 24x7, had operated 24x7, it's diminishing somewhat, because of all the work going on in the buildings in general as well. And then, in addition as we consolidate spaces and we do full floor tenancies and multiple floor tenancies, we are reducing the amount of cost on a per square foot basis. So we think that that's a decent snapshot for today, but it's not where we were and it's not where we are going.

Gotcha. Thank you.

Tom, you want to…

Just to point out also John that remember as we leased up vacant space virtually all of that flows that into the bottom line because we're already incurring the operating real-estate tax for the property.

Got you. Okay, thank you.

Thank you. The next question is from John Kim of BMO Capital Markets. Please go ahead.

Thank you. We see the impressive release in spreads but I'm wondering if you could comment on asking rents so far this year and where you see it heading for the remainder of the year?

Well first as I commented before John, we continue to see good demand as measured by our space showings and the proposals being exchanged and second, we increase our rents regularly during the course of 2015 and we have not experienced any resistance to our pricing or asking rents where they stand today, are up about almost 7% on a year-over-year basis from where they were in the first quarter of 2015. We believe we offer an excellent value, right? We offer well located properties, they're fully redeveloped with newly built modern spaces at a very attractive price point, that speaks value to our tenants and I think that's why we see the activity that we do. Going forward, we are going to continue to monitor and adjust our asking rents to be in sync with the market as we've done in the past. But as we've pointed out previously, we're going to do very well and achieve significant mark-to-markets regardless whether the market is static, goes up or goes down lot of that driven by the in place fully escalated rents that are below market.

So, do you think asking rents will be driven more by the market or by vacancy you have in your portfolio?

Well certainly we are going to continue to respond to the market as I said, commented on the fact that we've increased our rents pretty considerably on a year-over-year basis and we did not receive any push back. We'll continue to monitor it as we go forward. Right now, I'd like what we're seeing, I like the activity that we're seeing and things go pretty healthy.

Okay. And then we hear a lot about TAMI demand and may be some gravitation to many of your asset as that increases, but overall, Li & Fung is your biggest tenant. And I'm wondering if you see a similar gravitation from other consumer goods companies or international companies as a result?

I think that I addressed this in a prior response that as we continue to build a very durable and diversified rent role, diversified by industry type, we saw the same during the first quarter and I expect the same going forward. Again, we're leasing to TAMI, financed consumer products, industrials, advertising, media, tech, but bear in mind that we do continue to focus on leasing to quality tenants that give us prospect for growth as well as certainty of payment of rent.

What's our actual number of technology tenant as a percentage of total portfolio?

Of the total portfolio, we're at about 3.5% and…

I think that's the -- I mean people look at the headline of price -- LinkedIn Shutterstock, on debt capital, eBay, but they don't realize that that's all we have, that's it. We don't have any others.

Right. I was thinking your assets are uniquely positioned especially for international companies looking to expand in New York.

Well certainly we've seen our share of international companies lease space at the Empire State Building, point with Cody, and I think that we will continue to be an attraction for them, probably because they're known worldwide, they're the most famous building in the world and it's going to continue to attract international attention and interest from those tenants.

Okay. And then my final question is on WeWork I know that you've discussed in the past that you don't have them in your portfolio, but when you look at the top 20 tenants in New York, they are the one of the few that are growing and quite rapidly. And wondering if your stance on leasing to either WeWork or other shared office concepts has softened at all?

Tom, why don't you answer with regard to shared office. We don't hear what I've been saying.

The question is has our stance changed? The answer is no. Tony can elaborate on that, but the answer is no.

We do have – we have some traditional shared office service providers but I'll really repeat what I said before. Why should we take a ventured capital risk for the benefit of collecting rent? I don't see it. And these guys are successful, they'll keep the space off the market and the great thing is that we're leasing the fantastic tenant. The damage these guys do to buildings, all of our buildings are either actually physically or through staffing controlled access people blowing in and out of WeWorks on a regular basis, how do you handle that from a security perspective? They beat the hell out of the buildings, bathroom systems and again, as I said, why should we take a venture capital risk where our only upside is to collect rent?

I guess the counterargument to that is that there is an untapped demand that they're reaching at that you wouldn't necessarily want to deal with directly with small entrepreneurs?

I guess the counterargument to that is that we don't lease to those people in the first place why should we aggregate them and lease to them as a group?

Right, okay. Thank you.

Thank you. And our final question comes from Tom Lesnick with Capital One Securities. Please go ahead.

Thanks. Good morning. Just couple quick ones, I was wondering if you could talk about the announcement you made few days ago about the new type of tour at the observatory. I think it was the VIP experience but at a more expensive price point, and I guess I find it interesting at this junction because even though traffic was up pretty meaningfully year-over-year, the average revenue per visitor that growth was not nearly as meaningful suggesting may be the next improvement has stabilized somewhat here in kind of $29 $30 range. Do you have more upside there or is the new products really a – you guys trying to break through that ceiling?

First of all, I think our revenue is moving on quite nicely and we continue to work our mix quite favorably, number one. Number two, we are always working on increasing the capacity utilization of the observatory, and if you take a look at that VIP experience, it's a great piece which has gotten terrific response from tenants, actually from tourist but at the same time, it's limited to off peak periods. And that's what we do with that. We came out at one price we've increased it already to higher price, it's available to be booked it's very limited and it's just part of – there are all sorts of things we do around the edges on the observatory to improve revenue and that's just one of them.

Are you guys able to comment at all on the kind of demand you're seeing that are on the program?

You can go on espnyc.com, go to buy tickets and you can see what periods are available for booking.

Okay. And then one final one from me, obviously outside of Manhattan the Greater New York portfolio lease spreads continue to be somewhat weak, is there – about the activity you're seeing out there or could you perhaps comment on the percentage of rents out there that are still above market?

Keep in mind, we're 94.5% occupied as of 3.31% and we have very modest role in 2016 of only about 44,000 square feet. With regard to mark-to-market in some instance we are going to see higher fully escalated rents and in another instance we'll see a lower fully escalated rents and rent spreads are all dependent on the timing of when prior leases will shine. But bear in mind that the Greater New York Metropolitan properties represent a small component of the total economics of our portfolio. We like our properties there. We like our portfolio, we like our locations, they are all fully improved, fully amenitized and we like what we're seeing also and certainly Downtown Stamford and with the development of additional residential there. We're a long-term believer in that certainly in our locations in those sub markets but in the near term we have very little exposure there.

All right. Great. Thank you, that's all I got.

I guess we have no other question right now, so I want to thank everybody very much. Team continues to perform very well. I'm very pleased with our work. I like this market and how we're positioned within the market. I love our balance sheet. We will put it use for external growth at some point, but at the moment, I'm happy to continue to deliver our unmatched embedded de-risked growth. And we really appreciate your time with us today. So on behalf of the whole team thank you and onward and upward.

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