Greetings and welcome to the Empire State Realty Trust Third Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Greg Faje, Director of Investor Relations for Empire State Realty Trust. Thank you. You may begin.

Good morning. Thank you for joining us today for Empire State Realty Trust third quarter 2019 earnings conference call. In addition to the press release distributed last evening, a quarterly supplemental package with further detail on our results and our latest investor presentation have been posted in the Investors section 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 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 company’s 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 and thank you, Greg. Welcome to our third quarter 2019 earnings conference call. At Empire State Realty Trust, we are a New York City focused office and retail REIT with fully modernized assets, central locations and easy access to mass transit. Our four drivers of growth deliver embedded upside and peer leading cash leasing spreads. Our portfolio is well positioned priced between trophy Class A and Class B properties to outperform in any market. We have a fortress balance sheet with an un-drawn line of credit and low leverage and we are an industry leader in sustainability and energy efficiency.Today, Tom Durels will speak about the third quarter’s approximately 389,000 square feet of leases, including our 189,000 square foot expansion lease with LinkedIn, market demand for our properties and our market leading leasing spreads. And then Greg Faje will review our financial performance and balance sheet. As always, we are joined by Drew Prentice, our Chief Accounting Officer, Treasurer and Acting CFO and John Hogg, our Head of Financial Planning and Analysis who can also assist with questions. During the quarter, our Observatory opened its first set of galleries, the second floor interactive museum. And on October 12, we opened the 102nd floor observation deck. Visitor feedback has been positive and the social media and press which accompanied the October 12, 102nd floor opening was extensive and very positive.Finally, since our last call, we welcomed Patricia Han to our board with her wealth of digital commerce and social media experience, Dana Robbins Schneider as Senior Vice President and Director of Energy and Sustainability. For more than a decade, Dana has led ESRT’s energy efficiency work as an outside consultant and we are fortunate to have her join us full time. We have appointed Justine Urbaites, Senior Vice President and Senior Leasing Attorney as our Director of ESG, a new role for us and lastly, Suresh Rangarajan, as our Senior Vice President and Chief Technology Officer to address the growth of importance of technology to our business.I will now turn the call over to Tom Durels. Tom?

Thanks, John and good morning. In the third quarter, we made more progress on our four drivers of top line embedded growth. The breakdown of these top line revenue growth drivers which as of September 30, 2019 over the next 5 years we estimate to be $97 million can be found on Page 7 of our investor presentation. For reference, this compares to $551 million in trailing 12-month cash rental revenue as of September 30, 2019. In the third quarter, we signed 25 new and renewal leases totaling approximately 389,000 square feet. This included approximately 286,000 square feet in our Manhattan office properties, 89,000 square feet in our greater New York metropolitan office properties and 14,000 square feet in our retail portfolio. Significant new office and retail leases signed during the quarter include a 189,000 square foot expansion office lease at the Empire State Building with LinkedIn that I will discuss in more detail shortly and a 14,000 square feet new retail lease with First Republic Bank at One Grand Central Place.As a reminder, on Page 9 of our supplemental, we have updated our disclosure on potential vacates and renewals for leases that expire for the remainder of 2019 broken out 2020 by quarter and introduced full year 2021. This chart shows tenants to be relocated within our portfolio and vacates to be replaced by new tenants with whom leases have been signed. Our expansion lease with LinkedIn at the Empire State Building involved early recapture of 3 floors totaling 159,000 square feet from Coty, an expansion of another 30,000 square feet. Coty’s move out and the commencement dates for each of the four floors in LinkedIn’s new lease will take place over time and is detailed in our signed leases not commenced schedule on Page 6 of our supplemental.…

Thanks, Tom. For the third quarter, we reported core FFO of $72 million or $0.24 per diluted share. Total same store cash NOI was $99 million, flat with the prior year period. Excluding lease termination fees and the Observatory results on which I will comment momentarily, same-store property cash NOI was up 2%. Changes to the supplemental, in response to helpful comments from investors and analysts include the addition on page 5 of our same store cash NOI calculation, as well as summary disclosure on our ground leases. We continue to review our supplemental and consider additional enhancements.On the new lease to LinkedIn, we have the following information to help you refine your models. Coty vacates its space in 2Q 2020 as seen on Page 9 of the supplemental and we detail the expected commencement dates on both a GAAP and cash basis for each of LinkedIn’s floors on page 6 of the supplemental. The downtime between the departure of Coty and the beginning of GAAP revenue recognition is partially offset by lease termination income that will be amortized over the remaining 10 years of Coty’s lease. The net effect of the transaction is a reduction in GAAP revenue of $2.6 million in 2020 and an increase in GAAP revenue of $3.4 million, starting in 2021 with additional growth thereafter.Turning to the Observatory, Page 16 of our supplemental highlights our Observatory operations. Revenue for the third quarter of 2019 decreased to $37.6 million or a 6.6% decline from the prior-year period, driven by $3 million of reduced revenue relating to the closure of the 102nd floor observation deck, offset by improved pricing. Net operating income for the Observatory was $28.5 million, 9.2% lower than the third quarter of 2018 due to the aforementioned revenue drivers and higher expenses relating to…

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Craig Mailman with KeyBanc Capital Markets. Please proceed with your question.

Hey, good morning guys. Tom, maybe I’d start with you. You talked about healthy pipeline of deals, could you just give a little bit more color around, kind of where some of your bigger availabilities are on floors that have been already redeveloped and maybe give us a sense of where you are in negotiations or kind of depth of demand for some of these spaces?

Sure, Craig. First, I’d say that we feel really good about our pipeline of activity across our entire Manhattan office portfolio. We have leases or proposals in negotiation on both full and partial floors at 250 West 57th Street, 1333 Broadway, 1400 Broadway and 501 Seventh Avenue. So I am really pleased about the steady demand that we’re seeing and we also have steady demand for our pre-built at – where we have pre-built at One Grand Central Place and Empire State Building from a variety of tenant types. And we’re seeing demand in various industry sectors including TAMI, consumer products, financial, professional services and others. I am pleased about with the third quarter results. Specifically, we are actively marketing Full Floors at 250 West 57th Street, 1400 Broadway and 501 Seventh Avenue. We only have one floor available at Empire State Building and one floor available at 1333 Broadway, so, overall coming off of a really strong quarter in the third quarter and feel good about the activity going into the fourth quarter.

That’s helpful. And the one thing that I think the LinkedIn lease demonstrated was just the embedded mark-to-market you guys still have in the, I guess, I don’t know if you call them second generation redeveloped space. As you guys look to the portfolio, is that more of an anomaly? I kind of calculated mid 30% mark-to-market on that or is that something that you guys will start talking about a little bit more as an extension of kind of the embedded growth in the portfolio even after the redevelopment program ends?

Yes. Well, thanks for pointing out. This was a great example of our ability to unlock embedded mark-to-market rent growth on previously redeveloped space within our portfolio. As we pointed out previously, we believe that are in-place fully escalated rents are on average, below market. The LinkedIn lease and the Coty take back was a great example of a long-term partnership with both tenants and particularly with LinkedIn with whom we’ve worked to accommodate their growth over more than eight expansions. We will always look for opportunities to accommodate growth from our existing tenants, as we’ve done successfully in the past and we will certainly look for opportunities in the future.

That’s helpful. And then just maybe for Tony, in the Observatory the visitation continues to be a little bit challenging, it’s clearly being offset by – by better mix and ticket price increases here. But as you guys look, is it solely kind of harder Visa attainment for China or are you seeing any trends across kind of your primary visitor bases in different countries? I mean, is there anything you can share?

My understanding of the market, it is weak and we are better off to most of the attractions to which we compare ourselves. Cross-ocean is the weakest sector. Those are longer stays, pay higher dollars at the sentiment move we think. I think we will let you look to the hospitality companies to find out what’s going on in the U.S. generally and in the New York market, specifically. But there are, there are headwinds. And the good news is, from our perspective we think we will compare well in any market to our competition, but the market overall remains challenging.

That’s helpful. Just one last quick one on the debt deal, you guys paid off the $250 million kind of, is the plan still to backfill that with new debt or, and if so, kind of timing and what could that look like from a rate perspective?

Hey, Craig. It’s Greg here. Yes, we are continuing to examining our options to replenish our cash balance within the next two quarters through new financing. We have a variety of options we’re considering at the time. And as we stated on the prior call, the cash coupon for the note that was repaid was 2.625% and on a GAAP basis, which incorporates a non-cash portion of the equity option and the amortization of the deferred financing costs was 3.93%. We had a swap at 2.958%. And if you look at the current spread of approximately 150 basis points to 200 basis points depending upon term length and all-in coupon would be in that 4.5% to 5% range.

Great. Thank you.

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

Good morning. Just a question on Observatory visitation, I know we can look back and say the 102nd floor contributed $3 million in 3Q18. But have you been able to quantify whether by survey or other means how many visitors you lost in the quarter, specifically due to the 102nd floor being closed?

The answer is we are not able to survey the people who don’t come, but we do know that the 102 is the source of a transaction, which is not only the additional premium associated to 102, but other premium attraction opportunities at the same time. And nothing since the opening of 102 has changed our view about this from an historic or current perspective. So, one could argue that there is a type of customer who is attracted specifically to that opportunity.

Okay. And then a question on Manhattan leasing, obviously a strong quarter from a volume perspective, but given a significant amount of the 300,000 square feet was one tenant and the number of leases signed during the quarter was only 18 versus a quarterly average of around 30. Does that represent any slowdown you are seeing in leasing pipeline or do you think absent, only then deal the number of deals would have been higher?

We are not seeing any slowdown. We are really pleased with the quarterly results as I kind of commented previously. I am delighted with the level of activity and the pipeline of deals that we have in negotiation currently. It was a great execution by our team this past quarter and I am not seeing any slowdown in general. So, we are pleased with the activity that we are seeing right now going into the fourth quarter.

Okay, great. Thank you.

Thank you. Our next question comes from the line of Mann Korchman with Citigroup. Please proceed with your question.

Hey, it’s Michael Bilerman here with Manny. Tony, I had a question for you on the buyback. So last quarter you said there was absolutely a specific price at which you would act on buying a stock. So my question is, should we assume then that the $13 was not that price that – or were you’re working on something that would have used up a lot of your capacity?

I think the only takeaway, you can take from that Manny is just that we haven’t disclosed any purchases since I made that statement and through to today.

It’s Bilerman. So you said there was a price and your price went down to $13 and had a [indiscernible] $14 in the quarter. Are we to assume then that was not the price that you were referring to or was there something you were working on that would have tied up the capacity, so that if maybe $13 or $14 was the price. I’m just trying to understand in the context of your comments from last quarter in regards to share buyback.

Again, we haven’t, Michael, bought any stock. It would have been disclosed if we did. And I think that that’s just the only answer we have right now.

Well, I know you didn’t buy any stock. But I’m referencing your comment that there was a price to which you were willing to act and I just want to ensure that the $13, $14 which it hit in August and September was not that price or you would have acted. So it’s arguably something lower or there was something else you were working on, that would have tied up the capacity that would have been better. That’s the context Tony that I’m trying to understand better maybe $13. What’s the pricing; you were in blackout or you had other things? That’s where I am just trying to piece it together relative to your specific comment to that there was a price to which you would act. That wasn’t time-weighted. You said there was a price. And so that’s what I am trying to understand.

Hey, Michael, I think that’s really asked and answered. We are happy to answer any other question. We have got four other folks on the call. We did get comments from the last call that we really want to – people want us to move on from this discussion for our folks on the call. So you don’t mind happy to talk about this further with you and Manny at another point, but maybe we could move on to any other question you have about our leasing results or spreads, our mark-to-market or else we might move on to Jamie Feldman.

So why don’t we talk about the LinkedIn Coty? How is the – there is a mention of a lease term fee being amortized, how is that – can you just talk through the economics of that? Is that in the spreads numbers that you are showing in terms of the GAAP rents?

And Michael, it’s Greg here. The lease termination payment that we received is going to be amortized with the remaining 10 years of Coty’s lease. So that will be rolled into rental revenue over the next 10 years.

No. But specifically on the lease spread disclosure that you show for the leasing activity during the quarter, which I believe the LinkedIn Coty deals isn’t there. Are you amortizing that in terms of – in the new lease or in the old lease in capturing the spread, i.e., is the spread higher because you’re amortizing the higher lease term fee into the numbers?

No, the answer is no. The leasing spreads and the impact of the LinkedIn transaction is captured in our overall leasing spread disclosure for the third quarter. The amortization of any termination payment is not captured in leasing spreads.

So of an apples to apples and then the lease term fee is on top of that.

Correct.

Okay, thank you.

You bet.

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

Thank you. Can you talk about – have you seen any noticeable change in the leasing market since WeWork has pulled this IPO?

No, no. Jamie, this is Tom. As I have commented twice now, we are seeing steady activity across the – our entire portfolio from a variety of kind of types. So I think that this third quarter results is a great example and reflects that level of demand and activity. We are seeing employment growth from a broad base of different tenants. And the answer is simply is no, no change in activity, no change in momentum related to WeWork.

I guess what I am asking is, have you seen an improvement in demand like tenants who otherwise would have gone that route maybe thinking more about going to wreck?

Hi, Jamie. Tony here. You got to remember, we didn’t do anything with WeWork. So from our perspective, we always have been attracting tenants who were interested in being in buildings without them present. So, it really hasn’t changed our business.

Okay, that’s helpful. So we have seen an acceleration in your New York City office peers doing asset sales, can you talk about your thoughts on that, whether it’s suburban or your Manhattan assets?

Yes, good morning. Jamie, it’s John here. As we said before, we continue to focus on wanting to grow the business rather than shrink it and whether that’s the greater New York Metro assets or New York assets, our focus is not on selling but trying to grow the business.

Okay, alright. You mentioned you added same store NOI to your supplemental this quarter, I assume that that reflects a more optimistic outlook going forward. If you look at prior quarters you had some negatives in there. Can you give just based on your kind of known move-ins move out, do you have any thoughts on how that number should trend over the next year or so?

Jamie, it’s Greg here. Yes, we have added that disclosure to help make it easier for the Street to compare us to the peer set. At this point we are not providing forward guidance. So, I would just leave the results to speak for themselves and we are pleased with the number we showed you in the third quarter.

Okay. And at the beginning of the call you have mentioned several new hires and promotions. Can you talk about what that does to the organization and if there is any change in kind of what you guys are focusing on, and then also an update on the timing of the CFO search?

Sure. With regard to the new appointments, Tony here Jamie, we are just really happy with what we are doing, I will call it, if you will, ESRT 2.0. We are thrilled with Patricia. She offers tremendous exposure for us to an area, which is very important, not just to our observatory activities, but to the ongoing development of the real estate business. Dana has worked with us very, very closely for more than a decade. She was the lead on the original Empire State Building energy efficiency work, which we then rolled out through the portfolio. And it’s really very simple having her in-house gets her undivided focus, particularly as we move on toward the challenges of Local Law 97 and City Council amendment 1253-A. So we’re going to call that sort of the ESP energy efficiency retrofit work 2.0 which needs to be taken a look at just being as a real talent for us absolutely terrific and wanted to make it different culturally. So ESG being a focus of I think not just investors but of intelligent companies. It’s not just for her to work on the proxy, but it’s also really who works within the company, which is really going to be a plus. And Suresh is just – it’s a whole quantum leap forward. And again we are taking on challenges. From a technology perspective, everything from building systems with regard to energy efficiency to how we handle our online presence and communication and construction of community which we referred to before in our prior calls, as well as the fact that how we do our leasing and how we handle our this day to day activities logically has to change, become more efficient. So in general, I think you can talk about ESRT version…

Okay thank you. That’s helpful. As you think about kind of excuse me, 2.0 or you know how you feel about the platform, do you think this makes you more attractive as an acquirer of assets for some of these other platforms you – or families you’ve been talking about for so many years? Is there a strategic advantage that would help these companies if they were to sell to you?

Look I think that our – coming out of our redevelopment phase is helpful for all our investors. And the results that we will be able to show will be helpful for everybody to understand the value that’s been created by the work that we’ve gone through. And the more than $1 billion we’ve put in to the portfolio from improvements and tenant installations commissions, since we first sold our shares to our friends and cutter. And since we raised additional debt in the business, we raised a lot of money, we spent a lot of money and we look forward to sharing the results.

Okay, thanks. And then finally just one housekeeping question. So, you guys talked about a $5 million up – $5 million uptick in expenses in the back half of the year for some of the work at the Empire State Building. Is that in the third quarter numbers or is that going to be more of a fourth quarter hit?

Hi, Jamie. This is Greg. We spent approximately half of that number in the third quarter as we sought to maximize the seasonally favorable weather.

Okay, alright. Thank you.

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

Great, thank you. Comment not question, when Tony and Mr. Bilerman, when you guys have that conversation just please publish the transcript for all of us, that’s one. Second, hey, I’m looking at page 15 from last quarter, I’m looking at page 15 from this quarter and I see least opportunity inventory vacant space. And it went from 998,000 square feet to a 1.73 square feet. And then when I look at page 12, I see you’ve got a big 130,000 square foot move out this quarter for the greater New York. I kind of thought that that part on page 15 was supposed to go down with both the decrease versus increase. Do you guys have any sense for how that leasing opportunity moves in 2020?

John, this is Tom. A few things. Number one, the increase in vacates in our greater New York metropolitan office portfolio is largely derived from the move out of one tenant of approximately 96,000 square feet in our New York property as we have been communicating for several quarters now. That was anticipated. We are actively marketing that space, but we really won’t have an opportunity to completely prepare that space for showing until the tenant moves out at the very end of this year. Manhattan office portfolio where we have greater opportunity to create rental revenue growth, we have 472,000 square feet of redeveloped Manhattan office space. About 40% of that is pre-built, about 60% is accelerated form of partial floors. And of course against our total vacancy in the whole portfolio we have 228,000 square feet of signed leases not yet commenced. We are actively marketing the redeveloped space. We have a proven ability to lease up our redeveloped space. A lot of the spaces that we have vacated are coming off of prior, below market rents. In fact the higher fully escalated rents on our vacant Manhattan redeveloped space was $51 a square foot and represents great opportunity for us to create rental revenue growth and shareholder value.

Got it. Let me ask it again. This time next year, will, this number still be in the $1 million to $1.1 million range or will it decrease?

John, we’re working every day to lease up all of our vacant space. We’ve got a proven ability, we’ve had great success in the past. We’ve been in leasing over $1 million square feet for 3 years consecutive. And the pace of vacates is starting to slow. We provided the detail of that on page 9 in our supplemental in great detail. And so, I would also point out that out of that we have redeveloped 7.4 million square feet in our Manhattan office portfolio and only have about 570,000 square feet of undeveloped space remaining within the whole portfolio. As we get spaces back on second gen basis, those space that have been previously redeveloped will make it easier for us to release those spaces. And we’ll also have the impact of lowering our average leasing costs as reflected in our reported really strong net effective rent growth this past quarter. As shown on page 12 of our investor presentation, we reported 17.8% growth in net effective rent on a year-over-year basis for a Manhattan office portfolio. So I would just say that we’ve done a lot of hard work, we’re really in good position, we are confident of our ability to lease up our vacant space.

Great, thank you.

Thank you. Our next question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.

Thanks. Good morning, Tom you guys still have some room to increase occupancy in the suburban portfolio. Can you just talk about the leasing environment out there and whether you’re seeing any change in demand or conversations with tenants out there recently?

Sure, Blaine. I would point out, first of all we are 89% leased, we signed 89,000 square feet of leases. During the third quarter, we renewed two significant tenants, one of about 26,000 square feet of first ever place and the other of about 23,000 square feet at Metro Center. We did 250,000 square feet in 2018, of total leasing. We are 97% leased at 10 Bank Street. We are under way, as previously announced, with an upgrade of our common areas and amenities, including improvements to gyms, dining, coffee lounges, lobbies and conference centers. The early feedback from brokers and tenants like have been very favorable. We are not yet done with that work, but I’m very pleased with the feedback that we’ve gotten thus far. So we’re really well positioned. As I commented previously, we’ve just begun marketing the 96,000 square feet that is expected to be vacated in our North property at the end of this year, but we really don’t have a good opportunity to show that space toward white-boxed at the end of the first quarter of next year. Overall, we’ve seen some rent growth in our White Plains property and in Stafford it’s early, it’s generally flat. But it’s early in response to the improvements that we are making on our properties. So, I feel good about our competitive position there. We are located right next to mass transit in downtown Stamford and feel confident that that we will be able to lease up our vacant space as we move forward.

And on the CapEx side out there, are you seeing any trends both from a tenant improvement standpoint and free rent standpoint?

No, I think it’s been relatively stable in terms of the TI and free rent concessions. I would say that it’s been relatively flat both on rental rates in downtown Stamford and on the concession packages that we’re seeing.

Okay, that’s helpful. Last one for me. Tony or John, just to expand on the investment picture, can you give us any color on whether you guys are pursuing any acquisitions right now, whether there are specific opportunities for challenged assets or unique situations that are still on the table today? And maybe what size of check you guys would be able and willing to write for the right opportunity?

Hey, Blaine, it’s John. We’re definitely continuing to follow the market very closely. I think the headline is that there is a lot of equity and debt capital out there that’s available and it’s resulting in low returns for investment opportunities. As it relates to distress, again, I think in part driven by how strong the debt markets are, we haven’t really seen any meaningful distressed situations. Today, it’s pretty easy for owners to refinance. And I guess as it relates to size of check I think what I would say there is just, as you know, we have a low levered balance sheet, we have meaningful liquidity and I think we have significant capacity for investments should we see something attractive. But – and I think we boxed ourselves in on a particular size.

Got it. Thanks guys.

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

Great, thank you. Just maybe one for Tony, just any update to the greenhouse gas laws passed earlier this year in New York and any update in terms of Empire State tracking to those regulations?

Sure. Thanks. We have no exposure in the 2024 thresholds as the rules are presently defined. The rules associated with this legislation will some of them still have to be written. And we’ll have, can have significant impact on how achievable the 2030 thresholds are for all landlords. Don’t forget there are 2030 thresholds, 2035 thresholds and they continue to go and get more difficult from there. An example is the coefficients that are assigned to various energy sources can have a material impact on the calculations. We have a very good position to address these challenges with the appointment of Dana Robbins, Schneider’s Senior Vice President of sustainability and energy. And we are proactively at work on what it looks like from our experience with our first effort here. It’s really very simple, we look at all the solutions all the combinations and put together a cost curve comparing investment to return against what signs might be levied and see what the crossover points are. So I will say that I think the vast majority of folks in Manhattan by number of people, not necessarily by owners of the square feet they own are completely numb to what’s going on and not focused on it at all, and have no starting point. So, I’d also add that the City Council bill requires an Advisory Council of eight members appointed by the council and by the mayor’s office and the Department of Buildings to do this rule making. The bill was passed in April of 2019 and that Advisory Council has not even been formed yet.

And when you guys are out there underwriting new acquisition opportunities, how much of a factor, does this play into that underwriting? Does this limit a potential investable universe for you guys?

I think that it’s important to look at it in the following way. Right now, in order to make an acquisition, our view off of the underwritings that we do and we continue to underwrite new assets for acquisition. Our view is that you have to suspend disbelief in order to put your money to work. You have to continue that the market growth and demand continues unabated, you have to imagine that rents continue to go up, you have to project no downturn and you have to project no costs for the greenhouse gas coefficient bill and fines. And when you put all that together, you have to assume an interest rate, which remains the same as it is today. And finally, and perhaps most importantly, when you look at all of that, you have to be prepared to look at an unlevered IRR in the 5.5% to 6.5% range. I think this is just a component of what we’re doing here in the market when we look at – how we’re underwriting and the prices which people are paying when they do conclude transactions.

That’s helpful. Thanks. And just one maybe a cleaner question for Greg, the local law 11 work, how much of that, if any, is pass through to tenants?

Part of it does get pass through to tenants, but there is a lag on the timing.

Okay, great. Thanks guys.

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

Thank you. You discussed Coty, downsizing and transitioning to [Technical Difficulty] LinkedIn, which is a favorable outcome. But can you also discuss why Coty decided to downsize and longer term where are they going to go as far as [indiscernible]?

Sure, this is Tom. First of all Coty will vacate part of their space and they’ll vacate 159,000 square feet in 2020 in connection with the LinkedIn transaction. Coty will remain in occupancy of approximately 155,000 square feet as shown in our supplemental. And with the new lease expiration of 2030, they got in place average rent of $56 a square foot, beyond that not really prepared to make any further comments.

But, is there – the 155,000 square feet can be reduced going forward?

Well, currently they remain in occupancy on that 155,000 square feet with the lease expiration of 2030 and an in place fully escalated rent of $56 a square foot, which is well below market.

Okay. So they are using the space before they weren’t completely utilizing [Technical Difficulty]?

Look, I’ll comment a bit previously, alright that we accommodated the needs of both LinkedIn, and Coty in this transaction. It was a great execution and great result for our shareholders. And I am really pleased with the outcome, it’s a great deal.

Okay. On the same-store expense growth that was up 9% year-over-year, I think you discussed on the last call that was an R&M expense. I just wanted to clarify that that was one-time occurring in the second half of the year not recurring looking to 2020?

Correct. That’s work relating to local law 11 on top of the tower work.

Okay. Is the same store metric, something you’re providing guidance going forward?

Yes, I think the management, the Board continues to review guidance on a regular basis and if we elect to do so we will provide guidance at a future date. But we’re going to provide this metric for analysts use and consumption going forward.

Okay. And then a follow-up on the additional hires that you’ve made, it sounds like a lot of new positions within the company. What is the G&A impact going to be?

I think it’s important to note that Dana Schneider was already doing a lot of work for us just working for somebody else. So that actually works out well for us. Patricia Han, obviously is a new add on the Board. Justine Urbaites is already here at the company. Suresh is an additional cost perhaps to be offset by other changes under way in that department, but he is definitely, he’s a real talent and he is a different cost for us.

Great, thank you.

Thank you. Our final question this morning comes from the line of Jamie Feldman with Bank of America/Merrill Lynch. Please proceed with your question.

Great, thank you. Just as we think about the unknowns for next year and the tenant vacates, can you just talk about the larger pieces of those, there are any kind of chunky ones?

Sure. Jamie, this is Tom. In Manhattan, in 2020 we have about 183,000 square feet of what we call unknowns. But the larger tenants comprise of a full floor tenant at 4.5, [indiscernible] was an in-place full escalator rent of $38 a square foot. So we see a great mark-to-market opportunity there, whether they renew or whether they vacate. And also at 1400 Broadway, similarly, we have a full floor tenant of about 32,000 square feet paying $44 per square foot, again, well below market and a great mark-to-market opportunity for us. In 2021, we have similarly tenants ranging from 14,000 to 37,000 square feet paying rents of anywhere from $53 to $57 a square foot, all well below market. Many of these floors are already consolidated. Then we have a tower floor at One Grand Central Place that would get back and those are easily marketed. And I’m happy to be getting that space back. On the known tenant vacates, a number of these spaces that we’ve talked about in the past are also paying well below market in 2020. For example, we get a tower floor back from a tenant that’s paying $39 per square foot, generally everything over at the Empire State Building is well above $70 a square foot. So again, represents a great mark-to-market opportunity for us. And then another tower floor at One Grand Central Place well below market. So out of all of the unknowns and tenant vacates, has got really good position to create rental revenue growth as we release those spaces.

Okay, that’s helpful. And then looking at your top 20 list, Coty was number 3. I guess that will shrink, but are there any other tenants that you have a decent amount of retailers on there, are there any other tenants that have come to you and are contemplating downsizing?

I would simply say this that we’re always looking for an opportunity to enhance shareholder value and create rental revenue growth. The LinkedIn Coty transaction was a terrific execution by our team, it’s a great deal and it’s great result for our shareholders. We’re always going to look for opportunities. I think as we’ve pointed out nicely, we do have embedded growth within our existing rent roll and a much of the space. The vast majority of our space has been redeveloped to come from years of hard work and investment into our portfolio. And look, we look forward to reaping the rewards of our hard work in the years ahead. And direct answer to your question there, Jamie. We have no retailer, who has asked to downsize.

Okay, that’s helpful. Alright, thank you.

Thank you. Now, our final question will come from the line of John Guinee with Stifel. Please proceed with your question.

Great. Hey, Tony and Greg you guys – Greg, you had mentioned that you’re going to lever up a little bit to increase your cash balance. But then, Tony, I think you very articulately discussed suspending disbelief and how aggressive one would have to underwrite a deal to make the numbers work, which leads me to believe that there is probably a 10% or a 20% bid ask gap in your mind. So why would you guys lever up if the market is still so distant from your underwriting for acquisition opportunities?

John, Tony, here. We see people and a number of folks we’ve seen this happen in prior cycles when things turned stuck in a box and unable to execute and take advantage of opportunity. We think that not being stuck in a box, not having to juggle assets in order to generate cash in order to recycle it or to pay for commitments that we’ve got under way. And it’s not just leverage, but its liquidity. It’s all about flexibility. So that’s – that’s from where we’re coming. And that’s where we stay focused.

Great, thank you.

Thank you, ladies and gentlemen. As our final question are – will come from Manny Korchman with Citigroup. Please proceed with your question.

Quick the third final of the finals, question, just going back to LinkedIn and Coty thing, I guess is there any sort of free rent period that you’re providing on the new lease to LinkedIn, and if so how long, what sort of TIs are associate in terms of capital were you providing? And then thirdly, the spreads that are on page 7, what would those spreads have been, the 31% excluding this deal?

So let me take those one at a time, if I could. Regarding the concessions, LinkedIn received a market rate TI concession package. I won’t – for confidentiality reasons, I won’t go into the exact specifics, but generally we’ve spoken of market TI concessions being in the range of $90 to $100 per square foot. And free rent, generally, it can be in the range of a year on a full floor deal. With that said, we do have a staggered commencement dates for LinkedIn. That is captured on page 6 of our supplemental for each of the four floors in LinkedIn new lease. So I would suggest you look at page 6 carefully. And regarding mark-to-market, the impact of the LinkedIn transaction is capturing in overall leasing spread disclosure for the third quarter. And while we haven’t broken out the mark-to-market leasing spread on LinkedIn specifically, like one can conclude, based upon the prior escalator rents for Coty what the mark-to-market was and we achieved very healthy mark-to-market leasing spreads on the balance of our leasing for this quarter.

So in the lease term fee just in aggregate, how much of that fee helped to offset the TI package you’re giving to LinkedIn?

It helps. I think Greg has given the financial impact in total for the LinkedIn, and Coty transaction. Beyond that, I think we provided already all the detail that we’re prepared to give.

I’m just trying to think about it over a 10-year basis, as Coty has stated in place, you’re are now doing this deal on an IRR, net cash flow basis, how much incremental net cash, are you generating by doing it. I know you’re solving both tenants, right, LinkedIn’s desire to increase their space and Coty’s desire to downsize, which is good relationship management. But I’m just trying to understand the 10-year economics if Coty didn’t decide and their business was doing great, they wouldn’t have decided to downsize and LinkedIn could have grown in other spaces in the building. So that’s where I’m just trying to understand the dynamics from a complete financial package. We get all these little pieces the lease spreads in one, TIs in another. I’m just trying to put it all together and really understand it on a 10-year stack basis how much incremental cash NOI you rare effectively generating for the capital you’re putting in?

If you take a look at it in our disclosure, you will see that it goes well beyond the 10-year horizon, number one, and it is extremely positive.

Okay.

So, if I may, I’m just going to move right into some closing remarks. And I want to thank everybody for the biggest opportunity to dialog. It’s really appreciated truly. And we look at our strong leasing spreads, great leasing net effective rent growth and the opening of the third phase of our re-imagine observatory, all very positive for ESRT, the hard work, really good results and a lot of thanks to the team. Again, just what I’ve already said, great transition work led by John Kessler on the CFO responsibilities and to the members of the team who have done that work. Thank you very much. Thrilled about the additions we have as we move toward to ESRT version 2.0. Thank you all very much for your time and your questions. Super helpful. Look forward to our chances to meet with all of you on the month ahead as we have NDRs, property tours scheduled for the remainder of the year, always welcome, one on ones with investors. And we look forward to reporting our fourth quarter results in February. Until then everybody all the best.

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