Empire State Realty Trust, Inc. (ESRT) Q4 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to the Empire State Realty Trust Fourth Quarter and Full Year 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Greg Faje, Vice President of Investor Relations. Thank you, sir. You may begin.

Good morning. Thank you for joining us today for Empire State Realty Trust's fourth 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 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 relating to those 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 2018 earnings conference call. At Empire State Realty Trust we have derisked embedded growth and generate market-leading cash leasing spreads from redevelopment of our office space. Our balance sheet, liquidity and strength differentiate and position us for opportunity and we have no exposure to the weak balance sheets of the new wave of shared office and enterprise space concepts. Our portfolio offers tenants a value price point between trophy Class A and Class B properties which provides investors with both upside opportunity and downside protection. Our fully modernized portfolio is centrally located near Mass Transit and we are an industry leader in sustainability and energy efficiency. During 2018 we leased over 1 million square feet and today Tom Durels will speak about the fourth quarter's approximately 247,000 square feet of leases, market demand for our properties and our market-leading leasing spreads. Then David Karp will address our financial performance, our balance sheet and provide some perspective on 2019. Finally Tony Malkin, our Chair and CEO will provide some additional comment in conclusion. I’ll now turn the call over to Tom Durels. Tom?

Thank you, John, and good morning. Our fourth quarter numbers reflect further progress on our four drivers of topline derisked and embedded growth over the next five years. The breakdown of these top line revenue growth drivers which as of December 31, 2018 we estimate to be $112 million, can be found in our investor presentation available in the investors section of our website. For reference, this compares to $537 million in trailing 12 months cash rental revenue and tenant reimbursements and $390 million in trailing 12 months cash NOI as of December 31, 2018. In the first quarter we signed 35 new and renewal leases totaling approximately 247,000 square feet. This included approximately 219,000 square feet in our Manhattan office properties, 23,000 square feet in our Greater New York Metropolitan office properties, and 5,000 square in our retail portfolio. Significant new office leases signed during the quarter include a 41,800 square feet lease for full floor with hospital insurance company at 111 West 33rd Street where in early recapture of a redeveloped floor yielded a termination payment by the prior tenant and a 9% positive cash rent spread. Also a 20,700 square foot full floor expansion lease with Signature Bank at 1400 Broadway and a 14,300 square foot full floor expansion lease with Uber at 1400 Broadway. The expansion leases with Uber and Signature highlight our success in attracting and retaining tenants that have prospect for growth. Since 2013 we have had 163 tenant expansions totaling over 1.1 million square feet within our portfolio. In Manhattan alone in 2018 we signed 25 of these expansions for a total of approximately 245,000 square feet. We also amended our lease with our largest tenant Global Brands Group. In the process we increased annual cash rent by approximately $4 million as of October 29, 2018. As a reminder we maintain updated disclosure on potential vacates and renewals for leases that expire. You can find the full quarters for 2019, a full year disclosure for 2020, all this 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 release those spaces at higher rents to better quality tenants. Given the timing delay between the move-out of the existing tenants and the commencement of replacement new leases, a further delay between legal commencement and GAAP revenue recognition, our occupancy can vary quarter-by-quarter and these timing lags impact our reported revenue. During the fourth quarter rental rates on new and renewal leases across our entire portfolio were 23.9% higher on a cash basis compared to prior escalated rents. And at our Manhattan office properties, we signed new leases at a positive cash rent spread of 30%. Of course leases spreads always depend on the expiring fully escalated rents, in the near-term leasing spreads will benefit from the lease up of vacant redeveloped office space which had prior fully escalated rents of $52 per square foot which is well below current market. Our future leasing spreads will be influenced by rents on our future lease expirations which we 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. We raised our rents in our Manhattan office buildings in 2018 and just implemented our first rent increases of 2019 for certain spaces. We have give a healthy pipeline of leases and negotiation across the portfolio for both full floors and prebuilt. 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?

Great work Tom, and our entire property team. Good morning, everyone. For the fourth quarter we reported core FFO of $87 million or $0.29 per diluted share. Cash NOI was $113 million up approximately 15% from the prior year period. In our Observatory operations which are highlighted on Page 16 of our supplemental, revenue for the fourth quarter 2018 increased to $34.5 million or 5% from the prior year period. Net operating income was $25.6 million down slightly from the fourth quarter of 2017. In early November we implemented a price increase of just over $1 and tickets sold through our retail channel. A combination of price increases, implementation of dynamic pricing, and a better mix of ticket types largely offset the year-over-year increase in expenses. The expense increase was driven by number of factors with the single largest being higher technology costs for software consultants and maintenance agreements related to our new experience partially offset by lower labor costs from the efficiencies we realized in stages of the new Observatory which have open to-date. The Observatory hosted approximately 945,000 visitors in the fourth quarter 2018, a decrease of 4.6% compared to the fourth quarter 2017. For the fourth quarter we estimate that bad weather days resulted in approximately 43,000 fewer visitors than in the prior year period based upon an increase in the number of bad weather days. For the year ended December 31, 2018 Observatory revenue was $131.2 million, a 3.2% increase compared to the prior year period. Net operating income for the year was $98.5 million, up 1.7% 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. Adjusting the first quarter 2018 revenue for the 102nd floor observation deck due to its closure for that period which was $1.9 million in 2017, Observatory revenue would have increased 4.8% in 2018 as compared with 2017. The Observatory hosted approximately 3.81 million unique visitors during 2018, down 3.4% compared to 3.94 million in the prior year period. As a reminder, we now report unique visitors and do not include sales of extra premium upgrades. For your models remember that in 2019 the Easter holiday will fall entirely in the second quarter compared with 2018 when the holiday was split between the first and second quarters. Also at year-end, we renewed our intercompany lease with the Observatory taxable REIT subsidiary. We had created our first lease with the TRS at the time of the IPO under the terms of the new lease the intercompany rent payment will be higher reducing taxable income and lowering our income tax expense. We expect no material change in how the Observatory operations are reflected in our overall performance due to this renewal. Moving to our balance sheet our low leverage joint venture free and flexible balance sheet including significant cash on hand give us a competitive advantage to execute our plans and undergo external growth in any market environment. As of December 31, 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 a weighted average term to maturity of 8.1 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 December 31, 2018 our consolidated net debt to total market capitalization was 23.4% and consolidated net debt to EBITDA was 3.6 times. And we had cash, cash equivalents and short-term investments of $605 million. As we look ahead to 2019 let me provide some additional perspective on items that will impact full year results. First we recorded $20.8 million in lease termination fee and other end of lease income in 2018 of which $18.7 million alone was recorded in the fourth quarter. As we reported on page 18 of our supplemental from 2014 to 2017 we averaged $7.4 million new lease termination fee and end of lease income. Second in accordance with new accounting standard guidance non-contingent leasing costs can no longer be capitalized and will therefore be recorded as an expense. Going forward this figure will be dependent upon leasing volume with context our capitalized leasing costs were approximately $4.5 million per year over the past three years. Third regarding the Observatory as a reminder we closed the 102nd floor observation deck in early January 2019 for a period as long as nine months as part of our larger Observatory capital project. This could result in approximately $8 million of lost revenue for the period in which the 102nd floor is expected to be closed. Additional detail on historical 102nd floor revenue can be found on page 16 of the supplemental. We anticipate the run rate on Observatory expenses to approximate this figure reported for the fourth quarter of 2018 due to higher HVAC, IT and marketing expenses associated with new experience. Fourth, the amended GBG lease will result in approximately $4 million and higher annual cash rent. And lastly we had $32 million of annualized free rent in which $21 million will be realized in 2019 with the majority of the balance in 2020. Furthermore, we had $20 million of signed leases not commenced of which we expect $3 million to be realized in 2019 revenue with an additional $15 million in 2020 and an additional $2 million in 2021.

David, wait one second. Tony Malkin here, just a few things I'd like to say. Well I'm not pleased with our stock price. I'm very pleased with ESRT's execution for Q4 of all of 2018 and for the value we have created for stakeholders. We have a solid leasing quarter and once again delivered market-leading cash leasing spreads. We have a lot of leasing to do in 2018 and we did it. ESRT continues to differentiate itself from our peers. We have number one, embedded internal derisked growth opportunity currently sized at $112 million and expected topline expansion at current market rates from our four growth drivers over the next five years. Just to be clear, that compares to $97 million, 12 months ago. Our 5 year expectation for top line growth as embodied in our four drivers has increased from $97 million at year end 2017 to $112 million today. While at the same time our cash rental revenue increased by $15 million and our GAAP rental revenue increased by $9 million. Number two, we are committed to maintain our low levered liquid and flexible balance sheet to support substantial future growth potential relative to our size. This is who we are, this is what we do. We have not used our balance sheet to cash out selling investors, shrink the Company, and reduce our potential for external growth. Three, we have no exposure to the new wave of co-working enterprise office providers. I've been very clear for years and the world now recognizes that these companies seek to disrupt the relationships amongst tenants, landlords and brokers with outsized risk from weak equity dependent business models. I maintain that landlords, investors and lenders will regret the day they decrease the probability of their future cash flows with the leases they have made with these tenants. Most importantly, we have not had to lease to these players to fill our buildings. Four, our market position remains secure between trophy Class A and Class B properties with both upside opportunity and downside protection. Tenants like our locations, our buildings, our services, our amenities and our quality. And five, we continue to be industry leaders in sustainability and energy efficiency. We have more work to do in 2019. We will continue to execute on our internal strategy and we will complete the nearly 4 years of planning and execution on our observatory redevelopment. It will be a pleasure to have the benefit of the most important new additions that work for us. We are invigorated by the challenges and the opportunities ahead. We know we build value for our investors every day and we are confident that the stock price will sort itself out. So I guess now we can go to Q&A.

[Operator Instructions] Our first question comes from the line of Craig Mailman with KeyBanc. Please proceed with your question.

Just a few follow-ups. David, the 2019 outlook is helpful. I guess just a couple follow-up questions on that without pushing you guys to give guidance. But you kind of mentioned the $3 million signed lease is not commenced and they're going to flow during 2019. I'm just curious though if you could give some more clarity as we think about kind of the $23.5 million of base cash rents that are going to contribute in 2019, can you give us a sense of kind of the quarterly flow through how much we should think about the actual amount that $23.5 million that's going to contribute in 2019?

Craig, I guess the best thing we can do is if you look both within supplemental and in the corporate presentation with respect to the signed leases not commence because if we're talking about flowing through on a GAAP basis, it'll be cued up for the commencement dates. We do give expected commencement dates in that schedule and that's probably the closest we can do in terms of quarter-by-quarter scheduling for you.

No, I get that on the commence on the signed leases not commence but just on the - there's almost $21 million of free rent burn off for commenced leases in the free rent period, how should we think about the trajectory of straight line throughout the year? I mean how much of that $21 million is actually going to contribute in 2019 to AFFO?

The entire amount, the entire $20 million, that's going in 2019. That's not an annualized number. That's the amount that gets credited to the income statement in that year.

And then on the $250 million debt that's going to roll this year, kind of updated thoughts on whether you use cash to repay that or roll into something else?

Yes, I think with respect to that we feel pretty good about where we stand on the exchangeable. We have a lot of options available to us, including we can retire with cash on hand. We could borrow under our $1.1 billion revolver on which nothing is currently drawn. We can refinance with another exchangeable if that makes sense. We can refinance with a bank term loan. We can refinance with a private placement of unsecured debt or we could potentially tap the public debt markets. But the important thing is we’ve got lot of options, it’s a small amount and we feel very good about our options. In addition, remember we did enter into a forward starting interest rate swap $250 million which we could apply to any refinancing we enter into in connection with that maturity.

Can you remind me where that swap locks you in?

It’s seven year on LIBOR at 2.958%.

And then just of the GAAP impact that 250 million your GAAP interest expense I think is the 4s even though the coupon is three is that?

It’s correct.

So the dilution if you see that you just do a term loan is going to be pretty minimal from an FFO perspective?

That's correct.

And then just one last one from me. Tony I appreciate your views their coworking and you guys not kind of putting them in your portfolio. But just as the industry is kind of evolving how are you guys thinking about enhancements to the service offerings that you guys may offer to attract or kind of keep pace with the amenity base that other buildings are kind of implementing with bringing these coworking guys in. I know you guys do the prebuilt program, but is there any thought process about kind of a higher level service that compete from the amenity standpoint without bringing an external provider. So it will be an ESRT managed is that on the table at all?

Well look we were the first landlord to do this in a significant way in Manhattan with the Empire State Building which as you know has now 8 different dining options, tenants only conference so facility, 16,000 foot tenants only fitness facility really in urban campus within a building. And so with that in mind, we look at our entire portfolio from the perspective of amenities. We look at the retail at the basis of our buildings, so when we look at that the Broadway area that the South of Times Square North of the Macy's district we find ourselves with all sort of varieties of retail options at the basis of buildings. And we look at lounges and other options within each building and develop them ourselves. I think that you’ll see some exciting and interesting things from us that we've been working on for the last six to seven months begin to be unveiled in 2019 around the prebuilt program. And it’s something where we've candidly focused on rolling it out right now, it’s already being done with tenants and with brokers. But since there are competitors who will listen on the phone, I'd rather then have to do a little more legwork to figure out what we’re doing. I think the most important note of all is as you mentioned this expansion of activity. Number one, remember an awful lot of this is being done by folks who are private equity owners, who are looking to enhance buildings in order to lease them and sell them. And you talk to your different service providers and they’ll tell you that meaning that people are offering these services aside from just the folks with leasing space and spread base business, number one. Number two, we’re leasing a lot at very high lease spreads, the highest cash lease spreads of any of our peers within our market or not. We don’t need to do this stuff so I think the key is what we're doing is very competitive, it’s very successful. We led with this as a concept, we look at it on a daily basis and there are some areas in which we're innovating right now which we've been working on since well back in 2018 to rollout. And there are things we've already rolled out to brokers and tenants and there are new things which will be rolling out through the year

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

I guess just starting out the lease termination fees in the quarter. Can you talk about the follow-through NOI is there reduced level of NOI for the rest of 2019 from some of those termination?

Jamie a meaningful portion of the fourth quarter lease termination fees and the other end of lease income is attributable to former broadcast tenants and this has a minimal impact on office vacancy, building occupancy and downtime. Based upon the way most of you see in the construction models of those tenants who terminated in Q4, the GAAP rent recognized by them in Q4 was approximately $1 million. So that can give you a sense of how that would roll forward into 2019.

So just $1 million lower run rate for that NOI?

On a GAAP basis.

On a GAAP basis, okay. And then you talked about the Global Brand lease rank goes up by 4 million but how is that lease restructured is there any square-foot impact, what were the moving pieces there?

Just a little background on that on October 31 of 2018 differential brands group which was recently was renamed as Centric Brands announced that it had acquired a significant portion of GBG's North American licensing business. And in connection with their request for an approval of a sub lease to Centric Brands we had the opportunity to modify the terms of the lease and to increase the rent and achieve other certain improvements in turns. So we're somewhat restricted to a nondisclosure in terms of what we talk about. We can’t talk about the fact that we did increase the rent on a cash basis it's a $4 million increase per year. The impact during the quarter was on a GAAP basis was about $330,000.

So I just think it’s important to note we allowed Jamie to tell you where we have to disclose for disclosure purposes but other than that color commentary and things which are not required for disclosure purposes we are not allowed to discuss.

I guess can you say are there giving back any space are they expanding?

No.

It’s the same space but just the higher rent?

Correct.

Okay and is there big GI spend?

No.

And then just thinking about some of the changes to the expiration and vacate summary I mean one of the things that stuck out to me was you now have about 80,000 square feet more in tenant vacate in 2019. Can you just talk I don’t want – just focus on that one number but can you talk about some of the moving pieces and what’s in that line item?

This is Tom the most significant change there it’s relates to one tenant of 60,000 square feet they are a nonprofit entities named delist. They currently pay a fully escalated rent of $33 per square foot. They occupy two floors 501 7th Avenue the spaces already consolidated the floor plates are remarkably efficient, excellent side core, great access and stuffs to pen station. And so with and in place fully escalated rent of $3 a square foot this is a very meaningful opportunity for us to generate significant positive cash rent spreads. So that was the one change from last quarter to this quarter we had previously had them listed as unknown they are now vacating we look at this as great money making opportunity for us.

And is that space already redeveloped or no?

We have it classified as redeveloped because it’s already been consolidated and debated so the base burning cost is to go around will be significantly less than it had if it were first generation space. We already marking the space and so again I feel really good about having that space back.

And then what would you say the retention rate is for redeveloped spaces and what the leasing spreads look like for just the redeveloped spaces on renewal?

Well we haven’t really - presenting anything on retention rates for redevelop space still there's lot of movement within our portfolio. We're not a stabilized portfolio. You see we're locating tenants, we've got a lot of growth from tenants that have initially come in on prebuilt redeveloped space and then grown with this, such as you've seen this quarter with say tenants like Uber expanding with us. But on leasing spreads, as I've commented previously, we're going to experience excellent leasing spreads given that the prior – fully escalated rents on vacant redeveloped space is only $52 a square foot. And then, the average in place escalated rent on all of our office space – as shown on Page 11 of the supplemental is just under $56 a square foot. So that's a significant discount to current market. And then of course in the investor presentation we show our anticipated leasing spreads on future Manhattan – office lease expirations at anywhere from 14% to 22%. So that will give you a pretty good expectation on future spreads.

But is the 14% to 22% is that on redeveloped space or that's on pre-redeveloped?

That on all of our future Manhattan office lease expirations over the next five years.

I guess what I'm trying to figure out is, what's kind of a same-store rent growth number. I know you've mentioned there's a select basis where you've been able to push rents. Maybe if you could just provide a little color on that like what do you think kind of same-store rent growth looks like in the portfolio on a net effective basis?

Again I haven't broken it out separately like that and I think you're trying to get into the difference between developed and undeveloped space and so much of our leasing activity has been on first generation redeveloped space. Again on future spreads on re-leasing of space the rolling over the next five years again the best thing I can and I think is the 14% to 22% mark-to-market based upon today's current market rents.

I think another way Jamie, Tony here on which to look at it, is that we had 12 months ago $97 million of embedded de-risk growth from our internal drivers. And today we look at that and say we've got $112 million of that same growth. So a chunk of that represents taking the number out a year or so no we're still projecting out the same distance. We're incorporating a new year but a big chunk of that is increase in rent, both from rents that have been received and the fact that we adjust our rents so that every time we report to you the potential upside, we report to you at the current market rents. So I wouldn't say that we've increased rents in an isolated fashion over 2018. We got some pretty across the board meaningful rental rate increases in 2018.

And you're saying that's on kind of an apples-to-apples basis without any development spend or you're just saying across the board?

Across the board.

Then Tony final question for you just going back to the flexible lease co-working story. I mean we've seen Softbank’s capital flows and we don’t expect they flowed and CBRE is come out with a Hana platform. Now that we're a couple years into this or several years into this, what do you think is the landscape looks like from here given it does seem like there's some changes especially in the capital flows front?

I think that but these businesses exist on the third-party basis because they consume and are provided with equity. And when they start getting equity they have to stop spending this much. So then when you look at companies like Hana or Convene or others who are looking to move into well we’ll do things as a consultant to the landlord. We'll do things as a service provider as opposed to entering into the commitment and spread business by taking down space. That's another way to whack at it. Look I would not be surprised to see other major players other than just CBRE begin to offer this up. I think it's the bright shiny penny. And the fact is if I thought it were a good business with which we should engage, we'd lease to them, I don't. I think this disruptive on the one hand and on the other hand I think that their models are weak, their business models are weak. So we're watching it. Again, we see no need, we had no need. We demonstrated terrific results without going into this category of tenant as – in our portfolio and I read the summaries of the consultant's reports on what they think about the future for shared office space and enterprise leasing models are, and I think that - it's unusual to go to some of these firms economist for true economic advice anybody can put together a straight line graph. I think under some of the statistics which have been battered about even on the calls which you guys have posted on this matter, within seven years from now 135% of all office space will be handled by co-working and other enterprise office providers. And I just don't think that's going to happen. I think it's seen its bright spot and I think that it’s dimming. Not going away, but I don't see the big expansion either way we don't have to expose ourselves and our stakeholders to it.

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

David looks to me like just looking over the last four quarters, your cash marketable securities, restricted cash is going down about $50 million a quarter or $200 million a year, which is 2.5%, 3% total enterprise value. When does that stop when do you – are you done with your Observatory spending, your base building spending, your releasing spending so that that number turns positive?

Yes, John we don't provide guidance what we try to do is provide you with enough of the pieces that you can put in a model that could reasonably project when we'll get there. Having said that as you know we have spent a fair amount on redevelopment program as well as on the Observatory capital project. When we look at just in this past quarter the cash movement, we had cash from operations of about $92 million, CapEx of about $73 million, less than $1 million of principal repayment and then dividends of about $30 million, which resulted in the $13 million reduction in cash balances. If you - as we said, we will be nearing the end of the Observatory capital program at the end of this year. We've given you some pretty good visibility on the CapEx spend for the redevelopment. So without giving guidance, and I think you can take a look at the next 12 to 18 months and start seeing assuming on an operating basis an inflection point.

We provided all that detail and it should be – we can walk you, anyone who wishes through where the details was located if that would be helpful on our follow-up call.

So let me just ask it in another way Tony. The 605 that you discussed as of 4Q, 2018, year-end 4Q, 2018; what does that look like in 4Q, 2019 all other things being equal?

Tony doesn't want to answer, so I'm going to answer it. I think I get it, it's dependent upon a number of assumptions what we decide to do with the exchangeable. As I mentioned one of the alternatives is to use cash to pay that down. We may or we may not. It's going to be a function of performance on the Observatory. It's going to be a function of our pacing of redevelopment and we've given you within the investor deck. Our best guess as to the amount of space – we developed over this period, things do change as we're either able to accelerate because we're able to get space back earlier or it may slowdown because we don't get the same consolidation opportunities that we expected at the beginning of the year. So there are number of variables. We're going to plan to decide – I really can't sit here today and tell you what the cash balance is going to look like at the end of this year.

Then the second question, the vast majority of the lease term fee was associated with broadcast tenants which I think you said was about $4 million annual run rate decrease going forward as you took the lease term fee in the fourth quarter. Can that space be leased again is there any demand for that space?

So yes first I want to clarify, when you say it's a run rate on that, that’s one on the termination, not exactly correct. I mean remember, our objective and our philosophical approach to these termination is to avoid downtime when possible. We want to secure ramp up where possible and rent-to-quality tenants. And so what we'd actually done is achieved that if you look throughout the year at a number of the lease terminations. For example, the Uber space was a result of – the Uber lease was a result of an early termination of another tenant. We were able to reduce the downtime or eliminate the downtime. And so in a number of these cases particularly as it relates to the office space and the office terminations, there is an opportunity to release that space. And in many case that space and when you look at the greater New York Metropolitan area portfolio, I remember those deals were done with tenants in hand. So, we're focusing on the broadcast piece, which is a little bit of a different animal. I'm going to turn to Tom and get his perspective on that.

Yes, John, I think I've commented on this before. The most significant space that we recaptured from broadcast tenants fortunately is at the top of the stack at Empire State Building. We are in the process of consolidating and demolishing and wide boxing a full floor of about 23,000 square feet. We have an asking rent north of $80 a square foot is the highest office full floor in the building. So I'm excited about having that space back. And then we also recaptured space [inaudible] on the 79th floor that later this year we'll be constructing some prebuilt units of about 10,000 square feet. So, that I think responds to your question about the opportunity to convert broadcast space for office.

We didn't understand that fully. Thank you. And then the last question is going back to the Global Brands Group lease, $4 million increase cash NOI of no TI spend, no space give back. Two questions if you're able to answer it; did the term lease term shorten and what's the GAAP NOI change?

Lease term did not shorten…

Yes, lease term did not shorten and the GAAP change is just - it’s going to be just over penny a share.

Our next question comes from the line of Jason Green with Evercore. Please proceed with your question.

I was wondering if you could talk a little more about the specific expense increases at the Observatory and whether or not these are one-time increases in nature or if it's going to increase the run rate expense moving forward?

Yes, right now we anticipate that the run rate on expenses to approximate what we experienced in the fourth quarter of 2018, which represents an increase over the 2017 expenses due to a number of factors, which are; one, we have higher HVAC cost due to new technology that has to been maintained at a constant temperature and humidity level. Two, we have higher IT expenses mostly maintenance and consulting, which is associated with the new ticket kiosks and entrance hardware and software. And three, we have higher marketing expenses. This anticipation is based upon early experience with this technology and as new systems and technology are stabilized, we'll have a better sense of the run rate as the year progresses.

Okay. And then just curious on share buybacks; I appreciate the color on the balance sheet but given the stock earlier this year it was trading at a five year low and you have a $500 million in authorization currently. I guess broadly speaking, what has to happen for you guys to feel comfortable and start buying back shares?

That's an interesting question. What needs to happen to make us feel comfortable? Well, we'll be comfortable doing anything which we think is in the long-term interest of stakeholders. Our objective is to take a look at all the factors that go into making most decisions and do that in close consultation with our Board. We're getting an 8% ROI along with other CapEx project that we do on our reinvestment on our Manhattan redevelopment program. And our view is we're nine-and-half years into an economic cycle, we're getting these internal results, we're increasing our internal growth from our four drivers of growth as we continue to raise rents through the market both as it exists but also the position of our properties within the markets. We attract better and better tenants. We have better and better alternatives for better and better tenants. So fundamentally, we believe there is value in having significant cash on hand with sizable liquidity and low leverage that we'll be able deploy at an appropriate time. We have all the tools to allocate capital prudently, to create value for shareholders. And if I were to sit here and tell you today: we're never going to repurchase stock, that would be a rash thing to say. But I can tell you right now our focus is on growing the business. If we had repurchased stock when people started pressuring us to repurchase stock, we would have lost a lot of money right now. And I would add one last thing that historically when you talk about this and you look at things from a historical perspective, stock repurchases don't do a hell of a lot of good over the long-term. It doesn't, maybe a short-term piece. We're not looking to take the Company private, we're not looking to reduce our flow, and we are looking to use our balance sheet to grow the business. In the meantime we're not suffering because we're getting terrific results and the excellent work by the team and building stakeholder value through our redevelopment and our re-leasing.

Our next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your question.

First question maybe for Tom. Looking at your greater New York portfolio and your leasing run rate over the last few quarters versus what you have expiring this year. It looks like you could have an additional 4% vacancy in your portfolio by year end. Is there anything to address that will not be the case?

John, the most significant anticipated vacate is attendant in 97,000 square feet that we commented on in the past. So, clearly that will have an impact. We've reported on this in the past. The space that they occupy is again is 97,000 square feet, its old, it’s inefficient, it needs to be completely rebuilt for today's workplace environment. They've been in there for some 20 years plus and so that is the one standout that's going to impact us in the greater New York and metropolitan portfolio. We are already actively marketing that space. That said, I'm very pleased with some of the leasing we did this quarter most significantly at the Metro Center, where we leased space to Zimmer Biomet, which is a great fantastic tenant. We've seen good traction for small units at 10 Bank Street. And as you know as I've commented in the past, we're well into our redevelopment program that we project to spend about $40 million starting last year through 2020. It's only about $21 square foot overall but it's going to give us an opportunity to refresh lobbies, gyms, dinning, clubs, facilities, quarters and the baths, and that’s going to help boost our leasing activity.

Are there any assets in your suburban portfolio that are on your list that you potentially [inaudible]?

I think the key point is that our goal - we really want to grow the Company, not shrink it. And we've got plenty of capital and strength on our balance sheet as we've been discussing. So we don't have the need to sell any assets in order to generate capital for our corporate purposes. And so I don't really see a reason there. In addition, we have three of the properties as I think everyone knows are subject to tax protection and their sale would result in meaningful indemnification payments, which we don't think makes sense. Certainly, we have more flexibility in the other two but we don't have anything to say regarding those at this point.

At the Observatory, even if you adjust for bad weather days in the quarter, the visitors were down year-over-year and this is despite the new entrance that's put in. So I'm wondering, I know cash is more important than visitors but were you disappointed or concerned that the traffic wasn't improved given your investment in the asset?

Look, if we look back - it's a great question and it highlights some things about which we've been speaking for some time. The U.S. brand for cross-ocean and long-term visitors is suffering significantly along with the brand of the United States. And while NYC & Company statistics which traps everyone coming into New York City regardless if New York City is the final destination or not, doesn't really give a true picture. You're seeing long-term stays from high paying across ocean visitors, number one. Number two, you can take a look at what happened with other attractions which we've started before. The NFL experience, the Grand Ole Opry, both in Times Square closed after less than a year of operations. The Natgeo exhibit which was put in there was doing terribly. There is another very small attraction which had sort of a miniature world of New York City that was featured. They're gone out of business. So there is this issue of attendance in general. We know from tracking the admit numbers that are shown in the One World Trade entry which we go down and count every month, they're not available for November and December because they use the screen for a holiday scene display. They are 40% by our calculations in January 2019 over January 2018. So when we look at - we have other market information on other attractions. We are outperforming the market. Significantly our per caps absolutely on an actual and on a rate of change are tremendously outperforming of what's going on in the market in general. So, the market in general is driving traffic through greater discounting. We continue to refine our models through pricing and how we deal with our key volume deliverers of visitors. I'll give you one example. I'm not going to give you specific numbers even though David is across the table from me, he could still kick me from a long distance. But China, the inbound visitors from China who visit by bus tours are been focused on One World Trade because what one World Trade does is they sell at a very big discount to these two operators, a ticket that has a higher face price on it even then what their ordinary charge is. And them those two operators actually then turn around and sell on the bus to their visitors a higher price ticket, and they pocket the difference. Those are not our targets. What we are after and what we're growing very well is the FIT, the independent traveler who is buying the package or the ticket to visit with us actually in China. And we pretty much offset our loss of bus traffic by direct in-China purchases coming to the Empire State Building. So we've changed an awful lot, we absolutely, I would have to say it. Is it that we're doing this investment for defensive purposes? Well, every piece of good defense is offense. All offense takes pressure off the defense. We demonstrated we can deliver per cap increases and ticket mix improvements. We feel really good about what we're doing and we're really looking forward to having the growth out there, from the full exhibit.

That's interesting. Thank you. Tony, while I have you, what are your views on Empire State Building? Do you think there'll be a lot of demand for anything like that and if there's some - is there - serious consideration for your company.

It's John here again. We've looked at the Chrysler building and we're under strict NDA so we can't make any other comment beyond that.

Our next question comes from the line of Daniel Ismail with Green Street Advisors. Please proceed with your question.

Just a quick one on the retail portfolio. Can you discuss the activity on leasing up the rest of the vacancy particularly in light of repositioning the Observatory entry?

We only have two significant vacancies in Manhattan, which both are unique. You mentioned the one Empire State Building and then one at - the other is at One Grand Central Place. We do have activity on that space at One Grand Central Place. And then in Empire State Building, we're still early in the process in which team had discussions with a variety of tenants. As I said in the past, this is an incredibly unique offering. There is incredible foot traffic at this location. This place has a great frontage on 34 Street. We opened our new 34 Street observatory entrance which brings additional shoppers past these stores. I would simply say that we're working on some very interesting concepts and look forward to reporting.

And just another quick one on construction cost. I think most of your peers are seeing construction cost rise from last few years from a low single digit. Wondering if you guys are seeing something similar and your expectations for 2019 construction cost increases?

We're experiencing the same things that our peers are. I think if you follow the major indexes out there, you'll see that construction costs in New York are generally in the low to mid single digit, say in that 4% to 5% range per year and have been over the last couple of years. I don't see that slowing down because the market overall is pretty robust and there's tremendous demand out there. But we're impacted equally like all others. That said, we pay very close attention to our lease economics. As we reported, we are achieving an 8% cash and cash return on invested capital and we redevelop and re-lease our space. And that is in light of those changes in construction costs.

Due to time constraints, our final question will come from the line of Manny Korchman with Citi. Please proceed with your question.

It's Michael Bilerman here with Manny. Tony, question for you. So back in summer of 2016, QIA bought 10% of the Company at $21 bucks right that gave you - they invested $620 million. Part of that was clearly for external growth which hasn't materialized given pure conservatism on the marketplace. Can you talk about that relationship today given the stocks 30% below that value, I got to assume that other investments that QIA has made in hard assets and hard real estate probably down 30%. So you can talk a little bit about the relationship and how it's going to go forward?

Well, first of all we're in regular touch with QIA. So I think the relationship is very good. The fact of the matter is I'm not going to comment on their overall portfolio. We see and speak with them on a regular basis. They have shareholders, they have additional rights. For a period of time should we do anything which requires a JV, they have top up rights which they have filed as necessary when they do a top up. But other than that, it's - I don't know what you're looking for this. There's not a lot of drama there. We're in regular touch and I think things are good.

Well, I'm just thinking about you know you do talk - share buyback about just taking up selling pressure from others. You issued the equity at 15 - 21, is there an opportunity to buyback QIA stake, at a price uniquely below your where the value of the real estate is? And if that's not part on the table, is there something else that can be done to leverage that capital? Because I got to assume status quo is not ideal in this situation.

Well, I don't understand what you mean by not ideal. As I said, they bought shares, they are under no restrictions. They can sell shares whenever they like. They haven't sold shares, they bought shares and we're in regular touch with them and they know what we've been saying over the same period of time that everybody else does. So, I know what - you're suggesting we should go to them and offer to buyback their stake with their own money, I'd give the same answer I'd give to anything else. We want to grow the company, not shrink it. We want to use that balance sheet, we consider it super valuable for the purposes of expanding the business and we're showing terrific internal growth with great top line growth. We feel really good about our execution and we feel really good as David said that people can look and see where we're going to be. No longer consuming cash but producing cash and, hey, I'm all for a higher dividend as and when it's justified.

Is there anything on the external growth front that's closer to putting capital out?

Absolutely. But closer than one. If they're stuck we've been working on for a long period of time markets-to-market and we've been focusing for quite some time on off market activities.

Do you contracts there or I mean how close is close?

Well, let's see if I can answer that with any more detail.

David, you sit as far away on the table [inaudible] so you can --

That is exactly - he's exactly, you can't see, he's sitting on my shoulder with a - threatening me with a mace. Now there's no further details we're going to give on this. Let's be really clear, we feel pressure only to perform and we've been - 2018 was a terrific year of achievement for the Company with great leasing, great spreads. We got another year ahead of us. We'd like very much the activity as Tom Durels has said that we're seeing on the leasing front. This thing is both for the long-term. We focus on tenant credit, we take advantage of opportunities to improve the bottom line when we can. And as far as external growth, no one would like it more than I would. I don't think anybody is more frustrated than I am but we're playing a long game here.

Well, you can be buying stock. But I think it's up to the other options. Management purchases if you believe [inaudible] company buying it?

Terrific. Actually I think right now I can't buy stock. I'm in a blackout period. Yes, so I can't buy stock, no.

Well, when you come out you can, I guess.

I appreciate the thought here and at the same time we've given the answer.

Thank you.

We thank you all very much for your time and questions. We look forward to meet with you all in the months ahead, many of you in just a few days at the city CEO REIT conference. Want to talk to you more about the outstanding work we have done and will do. Finally, I understand we will see a few investors and analysts at this year's Empire State Building run up. Don't forget, as an added inducement David and John will be in the bar to buy you drinks when you're done. So we look forward to seeing you out there and other than that all the best. We're just going to stay here and keep working.

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