Empire State Realty Trust, Inc. (ESRT) Q4 2017 Earnings Report, Transcript and Summary

Greetings and welcome to the Empire State Realty Trust Fourth Quarter and Year End 2017 Earnings Conference Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Thomas Keltner, Executive Vice President and General Counsel at Empire State Realty Trust. Thank you, Mr. Keltner. You may begin.

Good morning. Thank you for joining us today for Empire State Realty Trust fourth quarter 2017 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 empirestaterealtytrust.com. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements as defined in applicable securities laws, including those related to market conditions, property operations, capital expenditures, income and expense. As a reminder, forward-looking statements represent management's current estimates. They are subject to risks and uncertainties, which may cause actual results to differ from those discussed today. Empire State Realty Trust assumes no obligation to update any forward-looking statement in the future. We encourage listeners to review the more detailed discussions related to these forward-looking statements in the company's filings with the SEC. Finally, during today's call, we will discuss certain non-GAAP financial measures, such as FFO, modified and core FFO, NOI, cash NOI and EBITDA, which we believe are meaningful in evaluating the company's performance. The definitions and reconciliations of these measures to the most directly comparable GAAP measures are included in the earnings release and supplemental package, each available on the company's website. Now, I will turn the call over to John Kessler, President and Chief Operating Officer.

Good morning. Welcome to our fourth quarter 2017 earnings conference call. Empire State Realty Trust is a pure play Manhattan and Greater New York Metro area office and retail portfolio. Our focus remains on our long stated plans to redevelop our well located portfolio and deliver embedded de-risk growth and maintain flexibility for external growth through a strong, flexible and low level balance sheet. In the fourth quarter, we signed approximately 275, 000 square feet of leases and saw steady demand for well located, fully modernized for the 21st century building at our value price point. 2017 leasing volume set a record for us. In the fourth quarter, we achieved average leasing spreads of 33.9% on new Manhattan office leases and 26.8% on all new and renewal leases across our entire portfolio. Moving to our balance sheet. During the quarter, we entered into an agreement to issue and sell four $450 million of long tenured attractively priced unsecured notes in a private placement. As a result of certain financing transactions completed subsequent to quarter end, we have now fully addressed all of our 2018 maturities through a combination of mortgage payoffs and re-financings. We managed our balance sheet to enable future growth and to create value for shareholders. This morning Tom Durels will provide an update on our portfolio including much more detail on our record leasing and how much space we plan to vacate and redevelop. And then David Karp will review financial results in more detail and provide more information for you to model 2018 and beyond. After that our team including Tony Malkin is here to answer your questions. I'll now turn the call over to Tom Durels. Tom?

Thanks John. And good morning everyone. Throughout 2017 I reported that we had steady demand and that led to a record leasing year. Thus far in the first quarter 2018 of we continue to see steady demand. We feel really good about our differentiated product type, our price points, our locations and the brokers and tenants we are attracting. On today's call, I will provide you with an update on our four key growth drivers, review our leasing activity in the fourth quarter and full year, give an overview of our current and future space availabilities; and discuss some of our recent redevelopment work. To make things easier and cut the length of these calls, certain areas of my quarterly update can now be found in our supplemental. Our fourth quarter numbers reflect further progress on our four long-term growth drivers, which are one: upside from sign lease not commenced $17 million and burn-off a free rent of $26 million, which together total approximately $43million of contracted growth. Two: lease of developed of vacant office space of $26 million; three, the mark-to-market on our expiring Manhattan office leases of $18 million. And fourth, the market-to- market and lease-up of available retail space of $10 million. Based on these updated numbers we estimate these drivers will contribute approximately $97 million of revenue growth over the next five to six years December 31st, 2417 relative to our trailing 12 months cash NOI of $381 million. In the fourth quarter, we signed 55 new and renewal leases totaling approximately 275,000 square feet. This included approximately 214,000 square feet in our Manhattan office properties. 38,000 square feet in our Greater New York Metropolitan office properties and 23,000 square feet of retail. This brings our 2017 total to 167 new and renewal releases for company record of approximately 1.29 million square feet. Significant office leases signed during the quarter include Universal Music Group, PVH, Hoguet Newman and MSG ventures. And subsequent to quarter end, we signed a new office lease with Uber for a fourth floor of approximately 35,000 square feet at 1400 Broadway. To make this lease the prior tenant made of payments to terminate its lease early which allowed us to avoid future downtime and capture revenue while we achieved a 9% positive mark-to-market increase of starting rent over prior fully escalator rent. Our redevelopment strategy allows us to continue to capture healthy rental growth spreads. During the fourth quarter rental rates on new and renewal leases across our entire portfolio were 26.8 % higher on a cash basis compared to prior escalated rents. And at our Manhattan office properties we signed new leases at positive rent spread of 33.9% .For this quarter and going forward; we will provide detail on our vacancy in our supplemental. Here are some highlights for portfolio as of December 31st of 2017. We had a net total of 792,000 square feet of un-leased space which is comprised of Manhattan office vacancy of 595,000 square feet. Retail vacancy of 44,000 square feet and Greater New York Metropolitan office vacancy of 153,000 square feet. Of those 595,000 square feet of un-leased Manhattan office space, approximately 425,000 square feet is consolidated and redeveloped pre-built and white box space ready for lease up. Within our Manhattan office portfolio, we currently have available eight full floors ranging in size from 8,500 square feet to our largest single floor of 42,000 square feet. These eight floors total 145,000 square feet and include three floors at 111 West 33rd Street, two floors at 250 West 57 Street and one for each at 1350 Broadway , 1400 Broadway and 1 Grand Central Place. We expect that occupancy will go up and down as we continue our strategy to deliver de-risked embedded growth, and we vacate and consolidate spaces and redevelop and re-lease those spaces at higher rents to better tenants. 2018 we expect to vacate an additional 700,000 square feet but the two-thirds of this space is taken offline in the first half of 2018 we expect year end occupancy to be lower than we started the year. As we have shown quarter-over-quarter, when we redevelop we lease up a materially higher rents. This space represents in place fully escalated rents of $49.34 per square foot portfolio-wide similar to the recent lease with Uber, we are also actively working on opportunities to take back underutilized space that we can in turn lease directly to new or expanding tenants at higher rents. As always there is a timing lag between the move outs of existing tenants and when new lease is commenced which impacts revenue. In addition, there is a timing lag between legal commencement and gap revenue recognition. Turning to our retail business, we found a significant lease with T.J. Maxx for 19,000 square foot fourth floor expansion and overall lease extension at 250 West 57th Street during the fourth quarter. The T.J.Maxx now leases a total of 47,000 square feet. Our street retail portfolio located in high-traffic areas with excellent -- within excellent sub markets is 92% occupied and 93.9 % leased. A strong execution and leasing results delivered by our team has positioned us well with only 8% of our retail spaces expiring in the next two years. As previously announced at the Empire State Building, for the first time since the building is opening a gut redevelopment of all retail space is underway. The first phase on 33rd Street has been successfully completed, fully vacated and 100% re-leased approximately 21,000 square feet of grade and 9,200 square feet on the second floor to Walgreens Juice Press, Starbucks, Sushpteria, Chopped, STATE Grill and Bar and most recently Tacombi. Phase II on 34 Street is in progress, where we have vacant and are currently marketing 7,900 square feet on grade and 18,000 square feet of contiguous concourse space. By December 31st of 2019, we anticipate we will have another 6,700 square feet of grade, 1,200 square feet on concourse and 5,000 square feet on the second floor vacant for redevelopment .As we have stated before our new 34th Street Observatory entrance will bring 4 million-plus visitors annually past our stores there and enhance the value of all of our 34th Street retail space. We remain very confident about our leasing pipeline and in our team's ability to execute. Demand for a well located and amenity rich properties as steady as we continue our proven strategy to consolidate, vacate and deliver redeveloped space and lease to new, better credit tenants at higher rents. As a reminder, please remember to review our supplemental for information historically provided in this call. Now I'll turn the call over to David Karp. David?

Thanks Tom and good morning everyone. For the first quarter, we reported core FFO of $74.9 million or $0.25 per diluted share. Cash NOI was $99.7 million, up 3.5% from the prior year period .For the full year 2017; core FFO was $286.9 million or $0.96 per diluted share which includes approximately $0.045 per diluted share of lease termination income. This was partially offset by the write-off of straight line rent receivables associated with the terminated leases of approximately half a penny per share and of course we have reduction in rental revenue from these terminated leases until such time as revenue commences on replacement leases. Cash NOI was $381 million, up 7% from the prior year period. In the first quarter of 2017, we changed our revenue recognition practices for leases in which the tenant constructs tenant improvements in which we share the funding obligation. We recognize rental revenue at the earlier of cash rent commencement or completion of tenant improvements. Previously, we started rental revenue recognition when the lease legally commenced. This new accounting practice resulted in approximately$1.6 million less revenue for the fourth quarter 2017 compared to the practice in place to the prior year period. This practice does not represent a reduction in lease revenue, but does represent a delay in the GAAP commencement date for new leases which will continue to have an impact into 2018 and beyond. This quarter, we added to our supplemental disclosure to assist the investment community to model better our business, specifically we now breakout the current year's lease explorations by quarter. We have reformatted our quarterly NOI, cash NOI and leasing activity data into a consolidated rolling five quarter format for easier trend analysis. We added the number and the impact of bad weather days on observatory attendance. We provided a detailed schedule of signed leases not commenced, and we have added in the detailed vacancy breakdown Tom cited earlier. Moving to Observatory operations. Revenue for the fourth quarter 2017 decline 2.4% to $32.9 million from the prior year period, supported by lower operating expenses NOI was $25.7 million essentially unchanged from the fourth quarter 2016. The Observatory hosted approximately 1.01 million visitors in the fourth quarter a decrease of 2017, a decrease of 5.1% compared to the fourth quarter 2016. For the full year 2017, the Observatory hosted approximately 4.05 million visitors, down 4.6% compared to the prior year period. Observatory revenue was $127.1 million, up 1.8% compared to the prior year period, while net operating income grew 2% to $96.8 million from the prior year period. As a reminder, we always look at the Observatory results on a holistic annual basis .Keeping that perspective, we are pleased with the revenue and NOI improvement we reported 2017. A combination of active revenue management to ticket price increases dynamic pricing mix improvement and new visitor offerings such as the am/pm experience along with expense management offset the impact of fewer visitors. In connection with the elevator modernization at the Empire State Building, the elevator servicing the 102nd floor will be impacted with the result that the 102nd floor observatory will be closed to visitors for the first quarter of 2018. As a point of reference, sales for the 102nd floor were approximately $1.9 million dollars in the first quarter of 2017. Turning to a Broadcast business, as we discussed last quarter, we have essentially concluded our negotiations with current operators. Based on the agreements, we have completed in which we have discussed previously we expect that our broadcast revenue inconclusive of tenant reimbursements will be reduced in the current annualized revenue run rate of $19.4 million to a stabilized level of approximately $15 million. The revenue impact from renewals and non-renewals will phase in during 2018 as detailed in supplemental. Moving to our balance sheet, our low leverage joint venture fee and flexible balance sheet including significant cash on hand remains a differentiating and competitive advantage for us in any market environment. During the quarter, we considered market conditions and made a strategic decision to enter into an agreement to issue $450 million of senior unsecured notes via a private placement. The notes consist of three series with 10, 12 and 15 year tenures, all with coupons in 4% to 4.5% range. The 10 year series was issued in December 2017 and the remaining two series will be funded in March 2018. We will use the net proceeds from these issuances to repay the 111 West 33rd Street and 1350 Broadway mortgage indebtedness before the maturity dates in early April 2018 and to maintain cash balances. We believe that the ability to take care of opportunity for long-term value creation for our shareholders outweighs the short-term cost. In January, we increase the mortgage debt on 1333 Broadway from $66.6 million to $160 million due February 2033 with interest fixed at 4.21%. A portion of this increase was applied to release the $75.8 million mortgage lien on 1400 Broadway. These recent financing activities combined with the mortgage refinancing completed earlier in 2017 and our interest rate hedges were at approximately $12 million, or $0.04 per fully diluted share to our 2018 interest expense as compared with 2017. With the private placement and subsequent mortgage refinancing, we're very pleased to accomplish several important objectives. First: we've completely addressed our 2018 mortgage maturities. Our debt maturities are well laddered with only a single $250 million issue maturing before 2022. We made a deliberate decision to go long, resulting in an extension of our weighted average maturities to 6.2 years as of year-end. With the closing of the 1333 Broadway refinance and the funding of the 12 and 15 year tranches of the private placement in March 2018, our weighted average maturity will further increase to 8.9 years. Second: we reinforced and expanded our lender relationships with four leading life insurance companies. Lastly, we enhanced our cash balance with these financing transactions leaving us well-positioned with liquidity and capacity to redevelopment and external growth opportunities. As of December 31, 2017, the company has total debt outstanding of approximately $1.7 billion. The debt has a weighted average interest rate of 4.05%. None of our outstanding debt has variable rates. The company's consolidated net debt to total market capitalization was approximately 16.6% and consolidated net debt to EBITDA was 3.5x. We have the lowest leverage in the office REIT sector and at quarter hold cash and cash equivalents of $464.3 million. A as we look ahead into 2018, let me provide some further perspective. As Tom mentioned, as part of a redevelopment program, we currently expect to vacate 700,000 square feet in 2018 which will reduce occupancy during the year. In total, this space represents about $34.5 million of annual revenue, and we expect roughly two thirds of this space to be taken offline in the first half of the year. Against this as detailed in the supplemental on page 6, we have $17 million assigned leases not commenced for which we expect $800,000 to be realized in 2018 revenue with an additional $10 million in 2019, and an additional $6 million in 2020. Further, we have $26 million of annualized free rent of which $13 dollars will be realized in 2018 with a majority of the balance in 2019. Consistent with what we have always said and what you have heard from the team today, the additional vacancy and the impact on revenue in 2018 is inherent in our strategic plan to deliver embedded de-risk growth and shareholder value. With that I would like to open the call for your questions. Operator?

[Operator Instructions]

Are we live? I want to apologize to everybody for our technical difficulties; we were blocked off of the call. This is Tony Malkin here. I'll take this opportunity to make a couple of comments if I may. First of all, aside from the conference call, I want to thank the team for work and the update that we've provided, sorry for the glitch, but we just finished our fourth year as a public company. As I look back I'm very happy with what we have accomplished. We've done exactly what we have said we would do since inception. We have vacated and modernized the New York portfolio for the 21st century, redeveloped our spaces and leased it outside spreads to better tenants on longer lease terms and higher rents. We are differentiated from our peers in our markets and in our segments. We have delivered outsize growth through our embedded de-risks opportunities within our portfolio, and as the team is laid out, we have more to deliver over the next few years. Along the way, we have created a best-in-class balance sheet with ample liquidity and flexibility to take advantage of external growth when we see something on which we want to act. We have also built our disclosure to investors and the analyst community, and have a truly capable team built around a culture of hard work, service and accountability. Our portfolio is solidly in its own category by combination of quality, price point and locations. 2018 sets the stage for more of our internal growth story. We are going to vacate a lot of space, redevelop it and we believe the steady demand we see will allow us to execute as we have to date with market and sector leading leasing spreads. Looking forward, we are fully engaged and I personally am very excited with our position and growth prospects internally, and our ability to take advantage of external growth. Again, I apologize for the interruption maybe if we're lucky we'll be able to get to questions now.

Our first question comes from the line of Rob Simone with Evercore ISI. Please proceed with your question.

Hey guys, thanks a lot for taking the question. I was just wondering if you guys can maybe talk about, and obviously office REITs broadly have been beaten up pretty severely over the last month and a half or so. And your stocks trading well below NAV, but I guess I was wondering given how many deals I know that you guys underwrite, have you seen any movement on cap rates on the private side relative to how much public REIT cap rates have move?

Hey, Rob, it's John Kessler. Yes, h I think what we have seen in the capital markets are certainly that transaction activity slowed down. We saw that in certainly in 2017. I think as it relates to pricing and cap rates, we haven't really seen in the private market any kind of meaningful movement in pricing, and obviously we're cognizant of where the treasury is. And but that would be our response.

Sure, sure. And then just on the cash balance, I mean I came up with an estimated kind of like unrestricted uncommitted cash balance about $600 million plus or minus after you guys completed refinancing. I guess could you maybe speak to what your view on timing is overall, so kind of what that sit on earning on your balance sheet. Just assuming that the environment doesn't change all that much and you guys kind of don't see that bigger opportunity you've been waiting for.

Well, it's the same question really about deploying the balance sheet, we have significant cash as you know including our un-drawn credit facility and as we think about deploying it we're going to continue to measure investment return on that capital versus the returns we're getting on the redevelopment of our portfolio, and as you know, our cash NOI and our business grew by7% in 2017 over the prior year. So we're still getting very good growth, We still have about a million, close to a million square feet to redevelop in the portfolio and we're going to continue to remain patient and disciplined, if we see something in the external markets that is attractive relative to the internal return opportunities that we're getting our own portfolio, we're going to we're going to take action, but we're going to continue to be patient.

Rob, Tony here. As I've said many times, the old Yogi Berra-ism when we come to a fork in the road, we'll take it and sometimes that fork has got to be presented to you, sometimes it's you stumble upon it, sometimes you have to find it. So in short though the cash we have on our balance sheet, our primary objective with that the flexibility we have in our balance sheet, the low leverage we have in our balance sheet. The primary objective is directed towards external growth and our focus remains on growing the business even through individual acquisitions or private or public M&A and that's always the sharp the bright shiny penny when we talk about external growth. And we talk about M&A. So I think John's comments are very focused on discipline as it as they should be. And it's certainly not our intention to look back in ten years from now and to be proud of the fact we've maintained our over a ten-year period our leverage at that17% and net debt to enterprise value. That's not our goal.

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

Great, great, thank you .I'm not sure who's the right person to address this is but 700,000 square feet of renovation out of 930,000 square feet of the lease is expiring in 2018, assumes a very low retention rate one. And then two, how much money should is being budgeted per square foot for that 700,000. Is this $200 a foot in base building, TI's and re-leasing costs or is say $300 a foot? And then could you also go through the remaining spend on the observatory and then also the remaining spend on all of the retail repositioning?

So, John, this is Tom. Out of the700, 000 square feet that we expect to vacate in 2018, as a reminder, the in place full escalated rent that is about $49 per square foot that represents an opportunity for significant mark-to-market. About 525,000 thousand square feet is in our Manhattan office portfolio, the balance is part of the retail redevelopment on 34th Street and Empire State Building and our Greater New York Metropolitan office portfolio. So out of the 520,000 square feet that we are vacating an2018 in our Manhattan office portfolio, we develop about 300,000 square feet of that. As to cost, as we've said before depending on whether we build space with a cap contribution following a white box or build a pre-rebuild those all in cost including base building which is a one-time expense TI whether it be a contribution or the build-out of a pre-built and leasing commission can range between about $180 to $210 per square foot all in.

And in John with respect to a question on the remaining spend on the observatory; to date we've spent $36 million on the observatory capital project. And as we've said in the past, we expect that project over the three year time horizon commencing in mid 2017 when we started the project through the end to run a total of approximately $150 million dollars.

Okay and then regarding the observatory I think you said that you're going to go down from $19.4 million in a total gross annualized rent down to about a $15 million run rate, essentially you've got $5 million at least of annualized rent expiring at 2018, is this another way of saying that expect all of the remaining $15 million to go away as these leases expire or from 2019 on can you expect to maintain a $15 million run rate indefinitely?

Hey, John, it's John Kessler. Just to clarify I assume you meant the Broadcast.

Yes, Broadcast, I am sorry, yes, broadcast

And the answer is that today the trailing 12 months revenue is $19 million, we project as you can see in our supplement that with rollovers we'll get to approximately $15 million of annual run rate by the end of the year, and what we're saying is that we believe that as a reasonable stabilized run rate for that business going forward. Inn other words, that's where we that's where we end up at the $15 million rate.

No more leakage with the $2 million of lease expirations in 2020or the 1.4 million square feet in 2020 when you get it done.

Yes, John, it would be really -- we're pretty much done with all of our lease renewals. We have -- we have like one radio guy out there but I expect them to stay and there's going to be some offsets. There's some opportunities for modest improvement in income from point to point, some backup situations. So as John said, we view this as stabilized at $15 million bucks.

And then the last question which I know you won't answer but I'll ask anyhow is the $150 million of spend for the observatory, is that expected to generate increasing NOI or just more of a defensive expand, and we expect that maybe the run rate on the observatory stays about the same.

Hi, John. Tony here, I certainly look at this as anything that we do which is offensive inherently as defensive but this is absolutely in our view offense. That is our hope and intention.

Great, thank you.

So as an offense, I mean putting more points on the board.

Our next question comes from the line of Jamie Feldman with Bank of America. Please proceed with your question.

Great, thank you, good morning. I was hoping to just dig a little bit more into the visitor trends at the observatory. And I guess year-over-year you did have fewer bad weather days, but total visitors were down. So just any insight you can provide onto what you're seeing, what types of just kind of trends and which driving volume and if you should it -- we should expect to see a more subdued volume going forward?

Well, we do present certain materials in our presentation on the breakdown from the Observatory. And we have made the comment before which is still consistent Jamie that the biggest issue is the cross border. And I'm not referring about tourists from Canada. That the US brand as a destination for tourism is definitely damaged by the rhetoric out of DC, and that hurt us in 2017, it hurt the whole industry. I do think that it's best to take a look at what the hotel association and other entities which have more to say on this subject and then we would undertake to go into on this call I have to say. But in the meantime for us there was a reduction in cross border and if we get a little tired I think in the end. We're putting the weather information in the supplemental because to some degree I feel like we're a retailer talking about coat sales. And I don't want to overdo it in the end we look at these things holistically, did we have worse weather in 2017 on specific dates, yes, although there may have been fewer bad weather days. Overall, we got specifically hit very hard with zero visibility during peak periods in August, where we had terrible weather but in the end the overall trend in 2017 was not positive for cross-border visitors. And that's the majority of our visitors to the Empire State Building.

Okay. Do you see any signs of this changing or anything year-to-date that giving you a different view?

I do know that there are a number of industry groups getting together and approaching the White House on this issue specifically, but from our perspective, our job in the end is to get a higher percentage of people coming to New York City by giving them a better attraction , better reason to come. And in addition to put more people through the door during off-peak periods, which is where we have a lot of capacity. And again I think with a better attraction will have a better prospect of doing that. And of course, through all of that we're looking to drive our per cap revenue.

Okay. And then can you just talk about the Uber term fee or the Uber -- the lease that Uber's backfilling what kind of impact that might have on 2018 earning and the timing for them to backfill?

Well first as I mentioned, Jamie, that was involved a recapture of space from an existing tenant and we achieved about 9% mark-to-market increase on that over the prior fully escalator rent. There at least we'll commence this year and then they go into a free rent period generally for the spaces they took without going into specifics for confidentiality, I can say we were asking in the in the low 60s at 1400 Broadway or ask price all the way to the tower goes up into the high 60s per square foot.

Okay and if the termination fee was that recorded in 2018 or I mean 2017 or 2018.

2018

Can you talk about the magnitude?

No, prefer not for confidentiality.

Okay.

It obviously --it'll be reported in our first quarter numbers along with whatever at least can other lease cancellations we generate.

Okay and then last question for me is and it's hard to tell just kind of on a same-store basis how much rents are growing or what leasing spreads are given the amount of redevelopment spend in the portfolio. Can you just give us some color on what you think kind of apples-to-apples rent improvements have been in the portfolio this year?

Well, sure, first of all, the rent growth is a function of supply and demand and I feel good about the activity we have in our portfolio, and we have strong demand for our product or locations and our price point where we like our position in the market because we're less expensive than Class A. We've delivered better product than Class B. As we look back we've outperformed the market in terms of rent growth based upon a redevelopment work particularly at Empire State Building 111West 33rd Street and 250 West 57 Street, where as we look back over the past 40 months or so, we grew our rents anywhere from to 19% to 47% depending on the spaces, our asking rents in those buildings and the actual taking about 12% to 34%. We think that is a significant outperformance of the market. Overall, we see steady activity our portfolio, the market feels healthy and given that I think we should see some modest improvement in rent growth in the coming year.

Our next question comes from the line of Craig Mailman with KeyBanc Capital. Please proceed with your question.

Hey, good morning, guys. David appreciates the incremental color here on kind of a puts and take for 2018. I mean is it fair to say that kind of taking a step back 2018 sort of a transition here for you guys from an earnings perspective and to really kind of mark maybe a near-term bottom that you can accelerate off of? Is that how we should think about it?

Yes, Craig, I'll just kind of point you back to Tony's comment that that he made at the conclusion of our prepared remarks, and that is we're looking at 2018 as an important year in the future growth and the completion of this first phase of our redevelopment process. There is as Tom mentioned there is a lot of space coming off line and we've tried to quantify what that impact will be in terms of the lost revenue associated with the space that goes down and is offset by the sign leases not commenced and the burn off a free rent that we have to back fill that. So but I think we've also indicated that occupancy will -- we do expect our occupancy to drop at the end of the year as compared to the beginning of the year. So it is a very active year for us but it's nothing unusual and it's consistent with what we've been saying all along that our occupancy will go up and down, and that you know will be taking space offline will be reinvesting with it all towards the end goal of substantially increasing our recurring revenues, as well as enhancing our total shareholder value.

Tony here, just to add to that it is central to our thesis from the moment the conception of this company that we had a tremendous amount of tenancy which was the vast, vast, vast majority which was undesirable small low credit short term leases and unable to pay better rents and many of them unable to pay the rents that they were contracted to make payment. In order for us to redevelop the space we must vacate the space that's a basic fact of life, and we view 2018 as an important year for our growth. I can understand how you might look at it from the perspective of well, gee, it said it's increased vacancy but for us this is all upside and that's the way in which we look at it all upside.

No, no and I appreciate that and we all know that you were going have dips and what not related to the redevelopment I was just getting at you know is you guys are 700,000 square feet offline, you have about a million left to redevelop, it seems like most of the dip from thinking that stays offline would kind of hit 2018, maybe early 2019 and then just trying to get a sense if that's how you guys are viewing the business you know this should be the trough from that activity --

Well, do me a favor maybe Tom could comment on some of the visibility that we have in our presentation with regard to spaces rolling in the future.

Sure. I mean Craig, I I've gone through those numbers previously. We have 930,000 square feet that's expiring in 2018. We have given the state on how much we expect to vacate in that year and then our role in the following years is rather modest. So we view 2018 as a big year of execution for us, but with coming off that year is 1.3 million square feet of leasing which is a record year for us in 2017 and going into the first quarter we have solid activity. I've absolute conviction in our strategy. We continue to build values as we execute on that strategy and I feel good about the activity we have for our product and our location and price point. So I feel good about taking this space back and executing on our strategy to lease that up at higher rent for longer term.

Yes. Craig, David, and just one other point you know again if you look at our investor presentation we have a slide in there which sets forth, it doesn't set forth what we're vacating but it does set forth what we expect to redevelop. And if you can -- this is on page 16 I believe of the investor deck, and we show that in 2018 we've got a fair amount of redevelopment and you compare it with, we are showing 225,000 square feet roughly of redevelopment in 2018, and then we look out over subsequent years 2019 that drops down to 90,000 in 2020 about 95,000. So, again, 2018 active year for us in terms of vacate and redevelopment which then feeds that growth for those subsequent years.

That's helpful. And then just I know we've talked about the cash balances you guys have and you guys are being deliberate about deploying. Just can you give us thoughts on not using some of that to pay down some of the mortgage debt in near term and kind of lessen the earnings dilution here from keeping on the balance sheet versus kind of putting it to work for that repayment?

Craig, it's John, that question I think it's similar to the others where we continue to take the view that are valuable to have the liquidity and the low leverage balance sheet that we have and we like to have the cash and liquidity on hand. I think we think there's a difference between liquidity and low leverage and we're going to continue to be you know take the tact that you've seen us take which is to preserve that liquidity. So we can be nimble if we see opportunity in the market.

Well, let's be really clear we want to be nimble when we see opportunity. We know we're going to see opportunity ad we are designed for growth not for just the same business being repeated year after year that's our goal, that's our orientation, correct.

And then just one last one taking the 102nd floor offline is there going to be a similar disruption to the main deck at any point as you guys do $150 million of spend, and also was there any way to get around taking the full-floor offline?

Of 102nd floor is accessed by one elevator and that elevator needed to be replaced and it's not practical to have people walk from the 86 floor to the 102 floor. There will be points in time in which different parts of the observatory which you presently walk through are not available due to construction. However, the 86 floors outside deck will remain open 100% throughout the entire construction period. And the reason 102nd floor elevator is offline now is because between January 1 and Easter is our slowest period. So working with Otis we're getting that work done. So we're open for when our peak periods resume, but at no point will the 86 floor observatory deck be closed under our present plans.

Thank you. Our final question comes from the line of John Guinee with Stifel. Please proceed with your question.

Great .Hey, Tony. Two follow up questions. First, no question with the big growth relocations coming to Hudson Yards that there's going to be a big vacancies in the office world, and also that there's going to be big dollars needed to take those tired buildings up to current standard. And you guys are obviously good at that but so are a lot of people. How does that get underwritten what sort of stabilize you on cost do you think is expected for those kind of deals? That's one question. And then the second question is I think you were very public on the upcoming Armageddon in the retail world in a street retail in Manhattan do you have any base on that?

Well what I might do is as much as I'd like to talk about other people's return means on redevelopment is to say just that from our own perspective, we know we're making 10% overall, 10% is slightly higher when we reinvest in our own properties on an ROI basis not an IRR basis. And that we have seen capital markets deploy capital at what we think are much lower IRRs let alone our ROIS. So I do think that with this redevelopment opportunity, look, we've seen many landlords today not improve their buildings or maybe put in the new lobby instead of doing anything really fundamental, and least frankly to secondary tenants at lower rents and give away much higher concession packages. And we don't think that that is a good strategy, however, when you look at their balance sheets, particularly, some of the public ones they're not in a position really to do more, that's what they can afford to do. And I think that they're probably people in the private market who will be looking at that as well. It's difficult to pay very high prices and then have money set aside to do meaningful upgrades to development, end of story. So our hope is that with higher interest rates, with people less able to plow on leverage with the skills needed in order to do this kind of work that will all combine to our benefit from a competitive perspective, and also right down to our benefit from a potential yield perspective. I'm going to ask Tom Durels to make a couple of comments on retail just from what we're seeing because I do believe that this Armageddon as it were I don't think its coming. I think, a; we're in it but I do think it's selective in nature and I think it's worthwhile just to talk a little bit about what we see as far as better locations versus non good locations and what's happening in the marketplace with retail and then I'll have a comment or two.

Sure. I would say that there's no question that while the retail market is slow and as I think that what we maintain is our retail which is located in high-traffic areas and in excellent some markets is always going to be in demand. If I could take a step back and look what we've accomplished as we set four strategies to really release our space a retail space at 37th Street Time Square South 34th Street in an Empire State Building, we set for the strategy to redevelop all of our street front at 57th Street where we 100% re-leased and 61,000 square feet to tenants T.J. Maxx, HSBC AT&T, Starbucks most recently with the expansion of T. J. Maxx that's 61,000 square feet is down on four floors fully leased. We've all of our availabilities on Broadway and look at the transformation of that sub market and the influx of interesting food and retailers re-leased all over space at 112 West 34th Street, and all of our 33rd Street to interesting food users. So now we're focused on our 34th Street frontage at Empire State Building. And I feel very good about the products that we have and retailers going to go where there's pedestrians free traffic and we have tremendous free traffic obviously on 34th Street.

Yes, in short, John, we know Sephora per square foot basis it's one of their -- one of their if not their top per square foot floor in North America, store in North America. Target doing great. Foot locker is doing great. So retail is not dead but there's too much retail in places which don't matter and then there are places where there are certain aspects of retail don't really matter at all anymore as the industry. So and that I think is really being that in SOHO, it's in some of the tourist areas doesn't help for some of these super luxury locations that that overseas have traveled into the US is down. So overall I think it's not coming, it's here, you're seeing it. And prices are coming way, way, and way down, but I think that speaks to demand. I thought John you're going to ask something different with which I'd like to close which is the along with thanks to everybody for participating today and sorry for the glitch. The most important piece of disclosure which is the outlook that the order has been finished alphabetically not by order of time for the run-up. We had the biggest field ever of analysts participating in the Empire State Building run-up and we'd like to thank Justin Deborah, Blaine Heck, Tim Hong, John Guinee, John Kim and Alex Nelson, who took on this February's challenge, was terrific. As an inducement remember John Kessler and David Karp buy free beer for everybody who runs up and buy you away you can collect those beers before you run or after you run. And any investor who would like to participate if you meet a certain minimum threshold of ownership of the stock, we can get you on board as well. So sorry for the disruption. We felt it was a great quarter. We're very excited with 2018. Thanks for your time.

Thank you. This concludes today's teleconference you may disconnect your lines at this time Thank you for your participation and have a wonderful day.