Empire State Realty Trust, Inc. (ESRT) Q2 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to the Empire State Reality Trust Second Quarter 2018 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I’d now like to turn the conference over to your host, Mr. Thomas Keltner, General Counsel at Empire State Reality Trust, please proceed.

Good morning. Thank you for joining us today for Empire State Realty Trust's second quarter 2018 earnings conference call. In addition to the press release distributed last evening, a quarterly supplemental package with further detail on our results has been posted 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 relating 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 second quarter 2018 earnings conference call. At Empire State Realty Trust our fully modernized portfolio is centrally located near Mass Transit. Our market position offers tenants a valued price point between Trophy, Class A and Class B properties, which provides us with both upside opportunity and downside protection. We have a de-risked, embedded growth strategy and generate market-leading leasing spreads from redevelopment of our office space. We have the lowest levered balance sheet among office REITS, a significant cash position and no outstanding borrowings against our line. And we are an industry-leader in sustainability and energy efficiency. Today, Tom Durels will speak about the second quarter's approximately 143.000 square feet of leases, market demand for our properties, and our market-leading leasing spreads. Our leasing results included LinkedIn’s approximate 30,000 square-foot expansion at the Empire State Building. Their sixth expansion since they joined us as a tenant in 2011. And then David Karp will address our financial performance and our balance sheet. After that our team is here to answer your questions. I'll now turn the call over to Tom Durels, Tom?

Thanks John and good morning, everyone. Our second quarter numbers reflect further progress on our four drivers of top line, derisked, embedded growth over the next five to six years. The breakdown of our full revenue growth drivers, which as of June 30, 2018, we estimate to be $100 million, can be found on Page 9 of our investor presentation available on the investor section of our website. For reference, this compares to $377 million in trailing 12 months cash NOI and $536 million in trailing 12-month cash rental revenue and tenant reimbursements as of June 30, 2018. Just as a reminder, the $100 million is revenue growth and not all of this will flow through to NOI. In the second quarter, we signed 37 new and renewal leases totaling approximately 143,000 square feet. This included approximately 111,000 square feet in our Manhattan office properties; 31,000 square feet in our greater New York Metropolitan office properties; and 1,000 square feet of retail. Significant new office leases signed during the quarter include a 30,200 square-foot full floor expansion lease with LinkedIn at the Empire State Building. We have updated the disclosure on potential vacates and renewals for leases that expired by year-end 2019, which can be found on Page 9 of our supplemental. This chart shows tenants to be relocated within our portfolio and vacates to be replaced by new tenants with whom leases have been signed. We have continued with our proven strategy to vacate and consolidate spaces, redevelop them and re-lease those spaces at higher rents to better tenants. As a reminder, the resulting occupancy can vary quarter-by-quarter. There is a timing delay between the move out of these existing tenants and the commencement of the replacement new leases, and further delay between legal commencement and GAAP revenue recognition. These timing lags impact our reported revenue. During the second quarter, rental rates on new and renewal leases across our entire portfolio were 17.9% higher on a cash basis compared to prior escalated rents. And at our Manhattan office properties we signed new leases at a positive rent spread of 26.5%. Of course, leasing spreads always depend on the expiring fully escalated rents, which we’ve disclosed on Page 11 of our supplemental. We continue to see demand for our product, locations and price points and feel confident in our offerings. Heading into the third quarter, we have a very healthy pipeline of leases and negotiation across the portfolio for both full floors and pre-builts. As a reminder leasing volume may vary significantly by quarter given the timing of particular deals. We remain focused on our strategy to vacate and redevelop space that we will bring the market for future lease-up. Now, I'll turn the call over to David Karp. David?

Thanks Tom and good morning, everyone. For the second quarter, we reported core FFO of $71 million or $0.24 per diluted share. Cash NOI was $96.6 million, essentially flat with the prior-year period. Starting this quarter, we reported interest income as a separate line item on our income statement on Page 18 of our supplemental and now include short-term investments as a separate line item on our balance sheet on Page 17. Turning to our Observatory operations, which are highlighted on Page 16 of our supplemental. Revenue for the second quarter of 2018 increased to $35.2 million or 3.6% from the prior-year period. NOI was $27.5 million, up 2.7% from the second quarter of 2017, despite a lower visitor count this year. A combination of previously announced price increases, implementation of dynamic pricing, and a better mix of ticket types drove the year-over-year improvement in NOI. The Observatory hosted approximately 1.08 million visitors in the second quarter of 2018, a decrease of 4.3% compared to the second quarter of 2017. This year, the Easter holiday was split between the first and second quarters, whereas in the prior year, the Easter holiday fell entirely within the second quarter. We estimate that this shift in the Easter holiday resulted in approximately 49,000 fewer visitors in the second quarter of 2018, as compared to the second quarter of 2017. For the second quarter, we estimate fewer bad weather days resulted in approximately 19,000 more visitors than in the prior-year period. For the six months ended June 30, 2018, Observatory revenue was $56.5 million, a 2.8% increase compared to the prior-year period. Net operating income for the first six months of 2018 was $41.4 million, up 2.4% from the prior-year period. This strong performance was achieved despite the fact that the 102nd floor observation deck was closed in the first quarter of 2018, for the replacement of the original elevator machinery with a new higher-speed glass elevator. Excluding first quarter revenue from the 102nd observation deck, which was $1.9 million in 2017. Observatory revenue would've increased 6.4% for the six months ended June 30, 2018, as compared with the same period in 2017. The Observatory hosted approximately 1.74 million visitors in the firsts half of 2018, down 1.4% compared to 1.76 million in the prior year period. Moving to our balance sheet, our low leverage joint venture free and flexible balance sheet, including significant cash on hand, remains a differentiating and competitive advantage for us in any market environment. As of June 30, 2018, we had total debt outstanding of approximately $1.9 billion and no borrowing under our $1.1 billion unsecured line of credit. The debt has a weighted average interest rate of 3.84% and weighted average term to maturity of 8.6 years. Our debt maturities are well laddered with only a single $250 million issue maturing before 2022. None of our outstanding debt has variable rates. As of June 30, 2018, the company's consolidated net debt to total market capitalization was 19.7%, and consolidated net debt-to-EBITDA was 3.6 times. And we have cash, cash equivalents and short-term investments of $652 million. With that, I would like to open the call for your questions. Operator?

Thank you, sir. [Operator Instructions] Our first question today comes from Craig Mailman of KeyBanc. Please go ahead.

Hey good morning guys. Tom may be to start with you. Just curious, you guys have been really successful since the IPO is kind of moving rent levels up at your redeveloped buildings. I'm just curious, if the overall market you guys are in or some markets you are in, become a little bit tougher from a market rent growth perspective. Just curious how you guys kind of view your ability to continue to push your price point higher, given the money you’ve put in. And how you think maybe your assets stack up to kind of what the average that's in some of the market statistics?

Sure Craig. We have seen some modest rent growth year-to-date and year-over-year. I think that as far as being able to drive rents, I would say that the office market feels healthy. Our offerings and submarket – certainly our submarkets are healthy. As we continue to see employment growth numbers continue to be positive and given the study activity we see for our product, our locations and price point, I think, going forward, we can expect to see some modest rent growth. As we've always said, we provide a unique offering between Class A properties and traditional Class B. We offer a great value and modernize properties and create great locations. So as long as we continue to see good employment numbers, I think, we will be continue to see modest rent growth for offerings.

That’s helpful. And then could you guys just talk to, I think, 2019 vacates were up about 100,000 square feet looks like maybe that was mostly in the greater New York portfolio. Could you just talk whether that’s due to kind of visibility or kind of move out that you guys have four out about? Or is that just updated thoughts given what's expiring?

Craig, it's due to the expected non-renewable of a 96,000 square-foot tenant. I'd comment that the space that that tenant occupies is old. They've been there for more than 25 years [indiscernible] it needs to be rebuilt for today’s workplace environment.

Okay, that's helpful. Then just on the Observatory, I mean, you guys had a good rebound in ticket price, kind of mix and where it came in. Just curious on your thoughts that you guys kind of, opened the new entrants for the Observatory and continue to fund the $150 million. Kind of what you guys view as your ability or appetite to kind of push through additional ticket price increases that would offer some volatility in visitors?

Hey there Craig, Tony Malkin here. We very much look forward to the opening, which is just a few weeks away. We absolutely believe that this is offense for us, which is exciting. We look forward to that. The fact is while we don't speculate on results when we just report, we have been able to put together some per cap price increases and ticket mix improvements. We think the new Observatory presentation will help us do more in both areas and then providing a reason to go to the Empire State Building even when the views are weather impacted. So by the way don't forget it's not going just to drive the bottom line behind the Observatory, these changes are going to increase the desirability of our 34th Street retail opportunities and it's the reduction tourist volume. And our Fifth Avenue lobby is going to help improve the environment for office tenants and there visitors, not help us to raise rents to make ESB – as we think ESB is a more desirable to tenants. So we absolutely think that this is a plus for us. We're very excited to get this out.

Great thanks guys.

The next question is from Jamie Feldman of Bank of America Merrill Lynch. Please go ahead.

Great, thanks. Just following-up on the 96,000 square foot move out in the suburbs next year, can you just talk maybe about average rent or just what the earnings implications might be from that move? I assume it's a pretty low rent compared to the portfolio average.

As compared to the entire portfolio average, that 96,000 square-foot space is occupied by a tenant that is – rents that are roughly half our average rents that we're seeing in New York City. So I think that's a good relevant question in the sense that it's equivalent to a tenant half that size in New York, as it impacts our overall rent roles. And then as far as – yes, go ahead.

No, I’m sorry, go ahead.

Yes, I am good thanks.

And then do you expect to take that property out of service for a full rehab? Or is it just certain spaces?

As I mentioned before, that space has been occupied by tenant for more than 25 years. It's old and needs to be completely redeveloped. So, yes, we would take it offline, and redevelop it and re-lease it.

Is it a full building now?

No.

Okay. And then sticking with the schedule, it looks like maybe some of your, I might be wrong here, but I think, some of your tenant vacates got pushed back to the third quarter. There's just some moving pieces from your 2Q actual versus your 2Q projected last quarter, and then even with the third quarter now versus the third quarter in the last supplemental. Can you just talk us through the moving pieces of both tenant vacates and intentional vacates?

Jamie, as it relates to the tenant vacates, most of this increase in the third quarter is due to the rollover of some month-on-month leases and some short-term extensions. You'll see on a new line was added on Page 9 of the supplemental for short-term renewals and hold of our tenants. We've also added a footnote with regard to month-to-month tenants. That accounts for the bulk of that change.

Okay, and then, as you could think about your – you guys always give the statistics on how much space you have that's developed ready to lease. Can you just talk about the leasing pipeline for that space? Are you seeing and how may be it has changed over the last year. So are you seeing more larger tenants, smaller tenants? Just kind of frame what might ahead in the next 12 months or so?

Jamie I feel good about our portfolio and our pipelines of deals under discussion. As I mentioned in my opening remarks we have a solid pipeline of activity for our Manhattan office space for both full floors and pre-built suites. We have a variety of offerings and we have sold activity and a solid pipeline currently. So we continue to see demand for our product, locations and our price points, and at ranges in both our pre-builts and our full floors of a variety of sizes.

Okay. And then I guess, just a final question from me on the Observatory. I mean given all the kind of global noise out there, can you give us some color on the types of visitors you're seeing? Are you seeing more domestic? Are you seeing more international? Any trends on just kind of visitors to New York and visitors to the Observatory specifically?

Well, I will tell you that – Tony here Jamie. I will tell you that from our perspective when we look at the impact on the strong international market connection that we have, no I think, we see two things occurring: One is there is no question that the U.S. image and how we view it internationally is less positive than it was. At the same time, NYC & Company is reporting increased cross border traveling to the United States. Look, will we historically have seen no relationship between foreign currency movements and Observatory revenue, in today’s world, we’re seeing a slight decrease in all attractions across New York City of cross-border visitors. Our sales efforts under our new sales leader have begun to take effect. However, I think our goal is to get more of the cross-border visitors, particularly long haul than we have historically. And they pay the higher prices. And we think we’re already beginning to see the benefits of those efforts in our ticket mix and our ticket pricing. Beyond that, candidly, we have a strategy where the Empire State Building Observatory is going to succeed regardless of overall trends. But at the moment, I would say that we still have – the majority of our visitors are from overseas, and we see that continuing going forward.

Okay, alright, thank you.

The next question is from Rob Simone of Evercore ISI. Please go ahead.

Hey guys, thanks. Just a quick question – a follow-up to Jamie’s question earlier. That 96,000 square-foot move out, that’s going to occur in 4Q of next year correct, which means, obviously, the earnings impact flows primarily into 2020. Is that correct?

That’s correct. That lease expires at – in November of 2019.

Got it. And you said it’s roughly half the New York average on the rent side?

That’s correct.

Okay. And then just two quick follow-ups if there’s time. It looks like the unknown bucket on your leasing was down and then about – down by about 126,000 square feet and vacates bucket between intentional and stated was up by about 105. So call it like a net 20,000 square feet that’s out there. Is it safe to assume that that was space that was leased in this quarter full forward? Or is that kind of moving around elsewhere in that break? I was just trying to understand how that moves.

Well I’m not sure, which periods you’re comparing.

[Indiscernible], sorry.

Okay. Again the big change there was moving the 96,000 square-foot tenant in a greater New York Metropolitan office portfolio from an unknown to a tenant vacate. And then the others are just updated forecast as we currently see it. The big change was that one tenant change in Connecticut.

Yes, I get that. Like if I compare the 2019 number this quarter to what you guys reported for 2019 last quarter, it seems like about 20,000 or so square feet if I just look at those vacate buckets plus the unknown, it looks like there was a reduction by about 20,000 square feet. So does that mean that was already leased, or as a portion of 140,000 square foot of what leasing you did in this quarter, or am I thinking about that the wrong way? I mean, that’s really the question.

If you’re referring to the total portfolio and a change of about 20,000 square feet, it should be comprised of a number of small changes. I can’t point to one single thing. So again this 2019 – instead of 2019 period it’s simply our updated our forecast.

Okay, understood. And then just lastly for me on the – David on the short-term investment, I guess, a) was that technically – it looks like your interest income as you restated or broke it out, excuse me, started to tick up in Q1. Was that in – a) What did you guys invest in to the extent that you talked about it? b), Did that kind of start in Q1? And c) What was the intention there? Was it kind of just an opportunity to enhance yield as you re-leased the portfolio, just trying to understand that a little bit more?

Yes, Rob. So we placed $400 million in the series of time deposits with ratted tenants to nine months and we did this with some leading national and regional banks. We did this in mid-June. And we believe this is a prudent way to retain access to our cash balances, while taking advantage of rising rates. So you’ll see that it had an impact in Q2 a little bit. It will have a larger impact as we go into Q3.

Great thanks. I appreciate it guys.

The next question is from John Guinee of Stifel. Please go ahead.

Great John Guinee here thanks, a couple of questions. First David, looks like your cash, plus restricted cash, plus notes around $700 million now with $750 million end of the first quarter. You look at your bend for phase building renovations for both the CBD and in the suburbs, your re-leasing cost and the Observatory cost. When do you turn cash flow positive? And what do you – in what quarter? And what do you expect your total cash balance to be when you turn cash flow positive, assuming no acquisitions or dispositions?

Yes, John, in summary, the change in the cash balance quarter-over-quarter the biggest was the move of that $400 million in the short term investments. And then of the remaining difference the decline was principally due to the CapEx and the leasing cost, which was about $55 million; quarterly dividend, which was $32 million and this was all offset by operating cash flow, which was positive of $41 million. As we look forward, while we don’t provide guidance, we feel that we become a – we no longer a net use of cash into 2019. I can’t give you specific quarter.

And what do you think you’re – right now you have $650 million of cash plus short-term investments and $50 million of restricted cash. What do you think your balance is at that time?

Well, again, that’s – if you go back, the reason we put that cash on the balance sheet was specifically for a purpose. And that was to position ourselves well for investment opportunity. Our goal is to retain that liquidity and that cash on the balance sheet. So as we use cash for other items such as capital expenditures, we will be considering how much of that cash we want to continue to retain for future investment and how much of it we will allocate to funding our capital expenditures. So I can’t give you a specific answer right now.

Okay. And then you do a great job, your scheduled initial free rent burn off, your lease is signed not commenced on Page 6 – I guess, Page 6. But then on Page 4 you, basically, you have a pretty much of a flat percent lease than a flat percent occupied. Do you guys have an economic occupancy number you could provide? Because it’s awfully difficult to try to go through all of the ins and outs, and a economic occupancy number quarter-over-quarter would give people a sense of the upside from here. Do you have the economic occupancy number handy?

We don’t have it handy right now. I mean, it’s something you often see more with some of the apartment REITs and companies like that typically or we haven’t typically seen it with many of the office companies. We can certainly take a look at it. We have looked at in the past and felt that it was not really necessary appropriate in the context of what we report. But happy to revisit that. And if you have some thoughts on it off-line, I’d be happy to talk to you about it.

Okay. And then last couple of quick question is Manhattan office property expiring leases on Page 11, looks like you average about $54 in 2019 and 2020, very different than the sub-$50 expiration over the last year or two. Do you still think you can get the very healthy mark-to-markets that you’ve been getting, 26%, I think this last quarter? And then the other question, I guess, that’s for Tom. The other question is there a strike price on the exchangeable notes due in ’19 [ph]?

John, this is Tom. First on the rent spreads, they will always depend on the expiring fully escalated rents as you’ve pointed out. And I would highlight the fact that the prior fully escalated rent on our vacant developed Manhattan office space was $48.39 per square foot. Given that that represents some of the significant leasing opportunity and that our asking rents are for spaces ranged in the high 50s to low 70s per square foot for the near future, we expect to achieve superior rent spreads.

Okay.

And with respect to your question on the exchangeable bond, the exchangeable matures in August of 2019 and the current right strike price is roughly $19.35, I believe, it’s $19 and change.

Okay. So out of the money right now.

Correct.

Okay. Thank you.

The next question is from Blaine Heck of Wells Fargo. Please go ahead.

Thanks, good morning. John or Tony, just to touch on or get back to the investment picture, you’ve got all of this cash, some of which will go to redevelopment, but there are a few significant properties on the market and few that have recently treated. Can you give any color on whether you guys are pursuing anything right now and whether there are specific opportunities for, kind of, challenged assets as Tony has said, spill on the table today?

Good morning, Blaine, it’s John. Look, we continue to look at and pursue opportunities that are in the markets that we think would make a good use of our balance sheet. But we continue to be discipline in terms of our decision-making and deployment of that cash. We do think our balance sheet gives us a lot of flexibility and is a tool that we can use to deploy in the right situation. And so far, certainly we’re following what’s happening the market and we’re looking hard at certain things. But that we believe that continues to be the best opportunity for us as the investment in our portfolio, which you’ve seen us continue to do. And we think we’re certainly well positioned should there be an opportunity that’s attractive.

I might add to John’s comment that we’ve got very good ideas and things to do. We’ve done a lot of work. We just aren’t able to bring anything to fruition at this point. But we’re working hard, we’ve looking to be sensible. Pricing remains high, will there are [indiscernible] on New York City office. Pricing of opportunities would indicate that the writers of articles who are declining the value of the New York City or reducing the value of New York City office do not see things the way the writers or checks do. So we’re in a position where we want to stay disciplined.

Okay, that’s fair. Tom, a couple of quick ones for you. Are there any chunky leases – are there chunky leases within 128,000 square feet of unknown leases in 2019 that could move that number around as we look forward? Or will any changes likely be smaller in the future?

Really the largest lease that we have expiring in 2019 is in the 30,000 square foot range. The rest are we got a tower floor at One Grand Central Place 12,000 square feet. And then – so it’s a mixed bag, we got a lot of small to midsize tenants, so nothing significantly chunky.

Okay, that’s helpful. And then CapEx seem to be quite up in the quarter and the lease term on executed leases was down. Was that just a mix issue, or there may be any underline trends there that we should think about?

Well they have come in the past or reported cost for TI and leasing commissions is going to vary on quarter depending upon the length of term, the space type, including white-box, pre-built, first-gen, or second-gen space, and the ratio of new and renewal leases. During this quarter, about three quarters of our Manhattan office leasing was for new leases and which typically a higher leasing cost then renewals. And then we did have a more first-gen, pre-built leasing of the percentage of our overall leasing this quarter. So as you pointed out, our first quarter leasing cost in Manhattan, actually, decreased from the prior quarter. So it's going to vary based upon those things that I just mentioned.

Okay, thanks guys.

I'm sorry Blaine, I want to clarify actually our largest tenant that expires next year in Manhattan is a 60,000 square foot tenant, the next is like it’s in the 30s and the rest is smaller than that.

So that 60,000 is still in the unknown bucket?

Yes.

Thanks.

Our final question will come from John Kim at BMO. Please go ahead.

Thank you, good morning. On your intentional vacates, can you provide some color on how long it takes specifically to aggregate the space and redevelop and then have it ready for lease?

So typically, our overturn downtime can range from 9 to 24 months. It really depends upon whether we're going to convert that space into a pre-build or full floor. We've been successful at leasing some floors in advance of tenants vacating. But given the overall construction duration, marketing time and lease they can range anywhere from 9 to 24 months.

And then when the tenant vacates, is that available for lease immediately or will that take some time off?

We begin marketing many of our spaces in advance of tenants leased expiring. However, truly from a marketing standpoint it's a much better showing particularly for pre-builds when they're built and ready for show, though we have been successful leasing pre-builds, while they're under construction. And then similarly for full floors we like to get our full floors in a white box condition for a better showing. But as I said, we start to market process in advance of existing tenants, lease expirations.

And then on your inventory of current vacant space, you have 498,000 of redeveloped Manhattan office space. Can you tell us how much of that is available for lease today versus what you're moving on is available for lease today versus what you're holding on for aggregates in that space?

Out of our total current inventory of vacant space about 1,177,000 square feet of approximately 498,000 square feet is redeveloped Manhattan office space. All of that is currently available what we're marketing at. As I said in my opening remarks we have good pipeline of activity for both our pre-builds and our full floors. Of our redeveloped Manhattan office space approximately have pre-build and half are consolidated for our partial floors. There is a breakdown of our inventory of vacant space on Page 17 in the investor presentation, that's available on our website.

Okay. Turning to 111 West 33rd Street, I think, just pointed one out there, but it's been under leased for the past several quarters meaning 70% or less leased. I know you signed Nespresso deal recently, but is there something about that asset that makes it challenging to get a leased up?

It reflects our program to vacate, consolidate and redevelop space. We've renovated the lobby. We're almost done all of elevator caps. The building show is fantastic. The floors that we have redeveloped show great. We're currently marketing six full floors that they're relatively new inventory, and they’ve ranged in size and we have good pipeline of activity currently. And that comes on the heels of some very successful leasing that we've done, including the Nespresso deal that you just mentioned.

Turning to the observatory, I think, Tony mentioned that the investments will – the ability to increase the number of visitors and I wanted to ask about the magnitude of that increase. And to clarify is that additional visitors to the Observatory, or to the building itself?

Oh gosh, well everything that we talk about reflects increase in visitors to the observatory. That's absolute job one. Number two, I think, people have asked the question Kim, and just a little differently, do we think that we're going to be able to change the capacity of the Observatory through our work? And I think that I emphasize we want to use more of the capacity we have right now. So we're not in this work increasing capacity, but we do want to make time to visitors spend in the Observatory more entertaining, more pleasant, more enjoyable, number one. And number two, as I've mentioned, provide a reason for people to come even when the weather is not good. So that's our job, that's our past, that's what we set out to do. And we really like what we see, as our plans come to fruition and people will be able to see things for the first time in a few weeks themselves.

I may have missed this, but do you plan to announce like additional details on your investment later this year or at some point in the future?

Well, we plan to open the new Observatory entrance within the next few weeks. So we're right now burning in the electronics and the technology, which is a period of time which needs to – builds we need to go through and make sure that it works. But when you see it, and kind of visit, you'll see it's revolutionary in the approach and it's builds on the iconic relationships that people have with the building, in a sense that no new tower can have. But the fact of the matter what we're doing there is going to be absolutely unique onto itself and everything here and around making it more efficient, more pleasant and more profitable.

Sorry, just one more. Are you going to be able to attract more visitors even on bad weather days as a part of this investment?

We certainly hope so. That's the plan.

Looking forward to. Thank you.

The final question is a follow-up from John Guinee of Stifel, please go ahead.

Great. You've been talking a lot about this 96,000 square-foot lease in Norwalk, I guess, it is. Guys, question is, it looks like that you're in place rents are in the low 30s in that building. Is this a rent up or roll down, despite all the CapEx we’re going to put in the space?

Well, John, this is Tom. We've not identified which building or that space is expiring. It's integrated New York metropolitan office portfolio. And I would really point to Page 35 of our investor presentation that shows you the mark-to- market for our greater New York metropolitan office portfolio and that 96,000 square-foot space is captured within that Page 35 of the presentation.

I don't have that open, so I'm just looking at Page 10. And I've got your building in Norwalk has about $32 rent and Harrison has got about $29 rent. So I’m assuming it's one of those could be LinkedIn. It's not a big deal. I mean it’s at the minimus portion of our NOI. I'm just curious if there's any potential roll rents up on a deal like that. If you look at friends at So Green, who have a same sort of mix, it's the hand-to-wheel asset.

It's going to be – if you look at 2019 on Page 35 at investor presentation, it represents a modest markdown in rent. As far as our CapEx spends, we're doing that throughout the portfolio out there.

Got you. Okay, thanks a lot.

You bet.

I would now like to turn the call back over to Mr. Malkin for closing remarks.

Thank you very much. And thank you all for attending today's call. I'd like to complement our team. Our goal has been to get these calls shorter with more direct sites of our enhanced supplemental and investor presentation. I'm delighted to say that our prepared remarks today totaled a whopping 11 minutes and if we dropout General Counsel, Tom Keltner's broad disclaimers and comments and mine here, we're down to fewer than nine. So in addition to our lease spread metrics we lead our peers in earning calls efficiency. All seriousness, I'm very happy with our portfolio's value proposition and team’s execution. And we're very, very busy on lots of fronts. Something that really show up on every quarter, but we're very busy. The Observatory, we look forward to opening Phase I of the upgraded experience in the third quarter, and we look forward to hosting an event there for investors late in September. It looks fantastic as you we're about to open and it is only Phase I. So we thank you very much for your time and questions. We look forward to reporting third quarter results in just three months. And until then, all the best.

This concludes today's conference. You may now disconnect your lines. Thank you for your participation.