Empire State Realty Trust Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 22, 2024

There are 11 speakers on the call.

Operator

Greetings, and welcome to the Empire State Realty Trust Third Quarter 20 24 Earnings Call. At this time, all participants are in a listen only mode. There will be a question and answer session following the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Jason McGrath, Senior Associate, Investor Relations.

Operator

Please go ahead, Jason.

Speaker 1

Good afternoon. Thank you for joining us today for Empire State Realty Trust's Q3 2024 Conference Call. In addition to the press release distributed yesterday, a quarterly supplemental package with further detail on our results and our latest investor presentation posted in the Investors section of the company's website at esrtreit.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, expense, financial results and proposed transactions and events. As a reminder, forward looking statements represent management's current estimates.

Speaker 1

They are subject to risks and uncertainties, which may cause actual results to differ from those discussed today. Empire State Realty Trust assumes no obligation to update any forward looking statement in the future. We encourage listeners to review the more detailed discussions related to these forward looking statements in the company's filings with the SEC. During today's call, we will discuss certain non GAAP financial measures such as FFO, modified and core FFO, NOI, same store property cash NOI, EBITDA and adjusted 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.

Speaker 1

Now I will turn the call over to Tony Malkin, our Chairman and Chief Executive Officer.

Speaker 2

Thanks, Jason, and good afternoon to everyone. Yesterday, we reported ESRT's strong third quarter and year to date results. We are happy to discuss today our continued strong leasing, Observatory execution and more on our latest acquisition and capital recycling activities. In the 3rd quarter, FFO came in above consensus. Our leasing team again put points on the board with over 300,000 square feet leased in the quarter, our 11th consecutive quarter of leased percentage growth and our 13th consecutive quarter of positive New York City office rent spreads.

Speaker 2

Our commercial portfolio leased rate today stands in the mid-ninety percent range on pace with the performance of newly built trophy office assets. The demand for ESRT's top of tier space, well located, modernized, amenitized, energy efficient, sustainable and unique value proposition remains. ESRT is a destination for the flight to quality in the market today and draws from a deep well of tenant demand in the New York City office market. TripAdvisor's number one attraction in the world, The Observatory continued its performance with 3rd quarter sequentially and year over year growth. We are still below our overall 2019 levels of volume and have plenty of room for upside as visitation levels improve.

Speaker 2

See Page 19 of our quarterly supplemental for further details on our performance year to date. Our focus remains to provide visitors with an unmatched customer experience to drive top line growth, manage expenses and never consider our work good enough. We closed on a substantial portion of our previously announced acquisition of Prime Retail Assets on North 6th Street in Williamsburg and have entered into a contract to acquire an additional retail asset on this street. The Williamsburg story has a long run ahead of value creation as the best retail carter in Brooklyn and one of the best in New York City. Our best in class balance sheet has no unaddressed debt maturity until December 2026.

Speaker 2

The maintenance of a great balance sheet allows ESR and T tremendous flexibility to lease and acquire properties and to stay on our front foot and create value for our shareholders. Tenants look to partner with a financially stable landlord who maintains high standards for service and quality at their assets. We have the lowest leverage of any New York City REIT at a strong liquidity position that is attractive to tenants especially in today's market. ESRT remains the quantitative sustainability leader in the office real estate sector. For more than a decade, we have been happy to deliver on innovation and execution portfolio wide and to help inform policy with practice.

Speaker 2

As we announced just over 1 week ago, ESRT's overall GRESB score ranked 1st amongst all U. S. Listed companies in the Americas for the 2nd year in a row. Of course, that means as well we were 1st in the most competitive peer group. Hats off to the team for all their work on this tremendous accomplishment.

Speaker 2

Tom, Christina and Steve will provide more detail on our progress in the Q3 and how we plan to accomplish these goals as we finish out the year in the Q4. Tom?

Speaker 3

Thanks, Tony, and good afternoon, everyone. Our office and retail portfolio continued its trajectory of positive absorption in the 3rd quarter. That was our 11th consecutive quarter with increased lease percentage. Today, our Manhattan office portfolio stands at 93.6 percent leased, an increase of 30 basis points compared to last quarter, up 170 basis points compared to a year ago and an increase of 660 basis points since the Q4 of 2021. In the Q3, our Manhattan office occupancy increased by 40 basis points compared to last quarter and is up 140 basis points year over year to 89.2 percent.

Speaker 3

We also closed our 13th consecutive straight quarter with positive mark to market lease spreads in our Manhattan office portfolio. New and renewal leases were signed with positive mark to market rent spreads of 2.6%. Leasing volumes continued to be strong with 304,000 square feet of total leasing in the 3rd quarter. This brings year to date leasing volume to 946,000 square feet. Notable office leases signed during the quarter include an 11 year 27,000 square foot expansion full floor lease with Hecker Fink at the Empire State Building, an 11 year 25000 Square Foot new full floor lease with Dynamic Corp.

Speaker 3

At 1350 Broadway, an 11 year 24,000 square foot new full floor lease with Bloomsbury Publishing at 1359 Broadway, and we signed the leases for 17 prebuilt office suites that total 87,000 square feet. We have a healthy pipeline of another 150,000 square feet of leases in negotiation, of which 95,000 square feet are new deals and the balance of renewals. We also have $45,000,000 in incremental cash revenue from signed leases not commenced and free rent burn off as shown on Page 10 of our supplemental. We continue to attract and retain quality tenants who desire our fully modernized buildings that are located in Midtown Manhattan with convenient access to mass transit, quality amenities, strong balance sheet, great service and leadership and sustainability offered at an accessible price point. As highlighted on Page 7 of our investor presentation, we have consistently demonstrated our ability to expand existing tenants.

Speaker 3

Since our IPO in 2013, we have signed 293 expansion leases for a total of 2,800,000 square feet. For the remainder of 2024 and through the end of 2025, our Manhattan office portfolio faces only modest lease expirations. We effectively managed our rent roll such that we have only 107,000 square feet of known vacates and 6,000 square feet of undersidings remaining for 2024. In 2025, we have 144,000 square feet of known vacates and 118,000 square feet of undecideds. With an average annual leasing activity of 827,000 square feet over the past 3 years in our Manhattan office portfolio, we are well positioned to boost occupancy in 2025.

Speaker 3

In the Q3, we opened a new Empire State Building, Empire Lounge that includes a multi sport court for basketball and pickleball, full service bar, golf simulators and 250 person town hall presentation area. The ESB club level also features our top of class 15,000 Square Foot Fitness Club and private dining offered by state. We've already received excellent feedback from many tenants and brokers. As Tony mentioned, we continued to expand our retail portfolio on North 6th Street in Williamsburg, Brooklyn. With these additions, we own the largest retail frontage located on the 2 best blocks within the best retail neighborhood in Brooklyn.

Speaker 3

We're very excited to own these assets and Christina will provide more details. Our multifamily portfolio with occupancy of 96.8% at quarter end continues to perform exceptionally well and benefit from strong market fundamentals and recent property improvements. In summary, in the Q3, we signed over 304,000 square feet of commercial leases and closed our 11th consecutive quarter with increased lease percentage. We increased our Manhattan office lease percentage by 170 basis points from a year ago to 93.6 percent. Our Manhattan office occupancy increased by 140 basis points compared to last year to 89.2%.

Speaker 3

We had our 13th consecutive quarter with positive mark to market lease spreads in our Manhattan office portfolio. We have a healthy pipeline of leasing activity. We continue to have strong performance in our multifamily portfolio, and we've made a very exciting addition to our retail portfolio in Williamsburg. And now I'll turn the call over to Christina.

Speaker 4

Great. Thanks, Tom. In the Q3, we closed on $143,000,000 of the previously announced $195,000,000 acquisition of prime retail assets on North Sixth Street in Williamsburg, Brooklyn with the balance of the acquisition expected to close in the Q4. In aggregate, the assets comprise approximately 81,000 square feet of retail space leased to high quality tenants including Hermes, Nike, Santander Work Cafe, The North Face, Everlane, Warby Parker, DS Njurga, Buck Mason, Chanel, Vireto and Google. These assets are 90% leased with a weighted average lease term of 7.4 years and upon completion of 1 retailer space under construction expected in late 2025, we will have an initial yield of approximately 4% and yield of just over 6% by 2027 with further mark to market upside over time as leases roll.

Speaker 4

Notably, this transaction is consistent with the company's strategy to recycle capital and balance sheet capacity in a tax efficient manner from non core suburban assets into strong New York City assets and the anticipated cash flow and cash flow growth prospects of these new acquisitions is a significant improvement compared to our prior steady state. Furthermore, in the Q3, we entered into an agreement to acquire an additional prime retail asset on North 6th Street in Williamsburg, Brooklyn for approximately $30,000,000 As with past transactions, we will maintain confidentiality on this asset for now and more details will be disclosed closer to closing that is expected in mid-twenty 25. We are very pleased to increase our scale in this retail corridor of Williamsburg following our initial acquisition of a retail asset on North 6th Street in September 2023 that continues to benefit from increasing population density, strong household income and new multifamily and hospitality development recently completed and underway. Pro form a after these acquisitions, ESRT will own the largest prime retail portfolio on the shopping blocks of North 6th Street between White Avenue and Bedford Avenue. Please see Slides 19 to 22 in our investor presentation for more color on these transactions and the strength of this retail submarket.

Speaker 4

In a market that continues to have relatively limited high quality investment opportunities given the dislocation in capital markets, we are very pleased to execute on these transactions. Going forward, we will continue to focus on investment opportunities with attractive upside potential. At quarter end, the company had $2,300,000,000 of total debt outstanding with a weighted average interest rate of 4.27 percent and a weighted average term to maturity of 5.3 years. In August, we entered into interest rate swap agreements that will fix the SOFR component of our $95,000,000 unsecured term loan facility over its duration to 3.3 percent effective March 2025 when the previous swap agreement expires. We continue to manage our balance sheet in a proactive manner with strong liquidity, no floating rate debt exposure, a well laddered debt maturity schedule and the lowest leverage among all New York City focused REITs at 5.2 times net debt to EBITDA.

Speaker 4

As we have said for many years, we are prepared to increase leverage as logical to take advantage of value opportunities to grow our business. We expect leverage to tick up modestly in the coming quarters, trending towards 6 times net debt to EBITDA with the closing of our recent acquisitions and after we utilize cash from the unsecured notes offering earlier in 2024 to pay down maturing debts in March 2025. Now I'll turn the call over to Steve to discuss Q3 results and our outlook for the remainder of 2024.

Speaker 5

Thanks, Christina. Okay. For the Q3 of 2024, we reported core FFO of $69,000,000 or $0.26 per diluted share. Same store property cash NOI, excluding lease termination fees, increased 5.2% year over year, primarily driven by higher revenues from cash rent commencement and partially offset by increases in operating expenses. Included in the year over year net increase was approximately $1,700,000 of non recurring revenue items comprised primarily of bad debt recovery from a prior tenant and rental revenue generated from a short term lease agreement.

Speaker 5

When adjusted for these non recurring items, same store cash NOI excluding lease termination fees increased by approximately 2.6%. Moving to our Observatory business. We generated net operating income of $30,000,000 in the 3rd quarter, approximately 6% higher year over year. Observatory expense was $9,700,000 in the Q3. Year to date, net operating income for the Observatory was $71,000,000 an increase of approximately 6% year over year.

Speaker 5

Now on to our outlook for 2024. We raised the midpoint of our core FFO guidance for 2024 to $0.93 per fully diluted share. And within this, the key assumptions are as follows: same store cash net operating income excluding lease termination fees for the commercial portfolio to range from 3% to 4% relative to 2023 levels. This represents a 200 basis point increase at the midpoint. The increase is primarily driven by the non recurring revenue items, which drove this quarter's 5.2% year over year increase as well as higher than initially forecast tenant expense reimbursements and this is partially offset by a rise in operating expenses related to the timing of a number of repair and maintenance projects that we now expect in the Q4.

Speaker 5

We now guide to an approximate 8% increase year over year in same store property operating expenses. We now assume commercial occupancy of 88% to 89% by year end 2024, an increase of 100 basis points at the low end of our range. We expect 2024 Observatory NOI to be approximately $96,000,000 to $100,000,000 maintaining our midpoint at $98,000,000 while tightening the overall range and average Observatory expenses of approximately $9,000,000 per quarter. Our guidance range takes into account variability in our Observatory results due to tourism fluctuations and bad weather in the balance of the year, as well as all capital markets and transaction activity announced year to date. Also included within our FFO guidance range is 20.24 G and A of approximately $70,000,000 which reflects costs associated with our additional SEC filings, the impact of the recent NEO promotions and the accelerated recognition of certain non cash stock based compensation expense as a result of executives reaching or approaching retirement eligibility.

Speaker 5

We will provide our formal outlook for 2025 on our Q4 earnings call, but do believe it is important to note a few items that we expect to have an adverse net impact on 2025 FFO of approximately $0.05 These include positive net impact from the acquisition of Williamsburg Retail Assets

Speaker 2

compared

Speaker 5

to the loss of FFO contribution from the disposition of First Stamford Place. Adverse net impact from the aggregate capital movements between the private placement notes issuance earlier in 2024 at a higher interest rate, pay down in March 2025 of $100,000,000 of maturing debt and $120,000,000 currently drawn on our revolver and foregone interest income from the cash deposits following various uses of cash, including the recent $195,000,000 all cash acquisition. And as noted last quarter, an adverse impact from the previously mentioned recognition of non cash stock based compensation expense of awards granted to executives that are nearing retirement eligibility. Again, we will provide additional detail on our 2025 outlook when we report our full year results. With that, we now turn the call back to the operator for the Q and A session.

Speaker 5

Operator?

Operator

Thank you. We'll now be conducting a question and answer session. Our first question is coming from Steve Sakwa from Evercore ISI. Your line is now live.

Speaker 6

Great. Thank you. Good afternoon. Maybe starting off with Tom Durels. I'm just curious the conversations you're having with tenants and I'm just wondering if there's any increase in urgency or desire to sort of come to you guys on renewals like earlier?

Speaker 6

I'm just trying to get a sense for kind of the tightening of the market. You guys have done a good job pushing up your occupancy and percent leased. And I'm just wondering if things are getting a little bit tighter for tenants and how they're thinking about renewals?

Speaker 3

Yes. We actually have been working on early renewals. HNTB is a good example of that. We extended their lease term by 5 years in connection with a lease that we did there. We took back space with them, at least to Cap and Hecker and then extended HNTB's lease term.

Speaker 3

And so we're always actively, practically managing our rent roll and we are seeing examples of that and that's a good one. In terms of urgency, I think that we're seeing is that tenants recognize that there are few inferred choices of quality properties, quality spaces with quality landlords. And that's why we're seeing the positive results. So that despite maybe the headlines on the overall stats in the market, I think it's waiting for tenants where they see, gee, that as they look about the offerings in the marketplace, there are really few choices with quality product, buildings that are modernized, well amenitized, great location, great access to mass transit and from landlords who have the balance sheet to go execute and deliver on promises. So I think all of that speaks to the results that we've generated steadily over the last 11 quarters.

Speaker 6

Great. Thanks. And maybe Tony, just on the Observatory, I know you don't manage necessarily for visitors, but it's interesting to note the last two quarters, the visitors have been down slightly on a year over year basis. And I'm just curious from your perspective, what ultimately gets the visitor growth kind of back up into positive territory? Is it Chinese visitors coming back where they've been sort of noticeably absent?

Speaker 6

Is it just international tourism? Has it been other competition in New York? What do you think gets the visitor count growing again?

Speaker 2

Well, keep in mind that a major component of the lower performance in the second quarter was that Easter shifted out of that quarter. So that was a theme that we see every time that that holiday shifts from 1 to the next, number 1. Number 2, throughout New York City, you see softer third quarter tourist visits. And therefore, the thing that will drive

Speaker 7

increased

Speaker 2

visitation at the Observatory really will follow the visitor numbers, Steve. We do feel very good that the visitors we have seen have actually opted for special additional components on our scale of what's available to buy. So our net per person is very high and that of course has driven stronger NOI. And we have actually by the way in China it was off a low number, but we see a doubling of our visitors from China. Keep in mind, we don't do the Chinese bus tourist travel at all.

Speaker 2

We made that break many years ago. We just do independent travelers. Overall, visitors to New York City, 3rd quarter softer. At the same time, we're very happy with our performance with what we've been able to charge and with how we've been able to control expenses with our whole reservation model.

Speaker 6

Great. Thanks.

Operator

Thank you. Next question today is coming from John Kim from BMO Capital Markets. Your line is now live.

Speaker 8

Thank you. So, so far you've announced or closed $225,000,000 of retail acquisitions in Williamsburg. I think there was an indication, Christina, of doing more in the region. But just wanted to know how big this can get for Empire State and how you get from that initial 4% to 6% yield given the lease maturity seems like it's pretty long.

Speaker 4

Sure. So I think we've achieved scale in a short amount of time, initial acquisition of $26,000,000 in September 2023, then $195,000,000 and then this $30,000,000 So I think we have pretty good scale right now. We will be opportunistic in terms of have a lot to work with, feel very good about this very prime retail portfolio, especially in a market where there hasn't been a ton available in the marketplace. The way we get to the increase in yield is burn off of free rent as well as lease up of a vacant space. So those are the key components.

Speaker 4

And as we have movement, the weighted average lease term is over 7 years, but there could be movement in between and below market rents could translate into further upside to the yields that I quoted. So we're very excited about this opportunity. We'll continue to build, feel we have good scale and we'll see what comes along, but not in a rush to chase anything as always.

Speaker 2

I might just add to that. As we know and as I think many of the investors and some of the sell side analysts know, until our recent acquisitions, Williamsburg was reasonably undiscovered and under recognized. We don't think that's the case anymore. And recent transaction evidence suggests a much higher pricing than what we bought. So we want to be mindful.

Speaker 2

Don't forget our goal here was to participate in our capital recycling and we're very happy with where we've ended up and we'll exercise discipline as we look forward.

Operator

Okay. Thank you. Next question is coming from Blaine Heck from Wells Fargo. Your line is now live.

Speaker 9

Great, thanks. Good afternoon. Just starting on guidance, you guys beat by $0.02 during the quarter with the term fee, but only increased the full year guide by $0.01 Were there any specific offsetting factors that you can talk about that kept you from increasing that full year guidance by the same amount as the beat during the quarter? Or was there just some level of termination fees that were already built into guidance?

Speaker 5

Sure. So to level set, when you adjust out the $0.025 of one times, which were both the lease termination fees and the other one time items I called out in the same store cash NOI, drive about $0.235 and the midpoint of our guidance implies a $0.22 4th quarter. So that updated guidance includes considerations that the one time items will not recur again in the Q4. Also higher G and A as we noted in our previous call related to those recent NEO promotions and the solid recognition of non cash stock based comp expense. And also now the additional costs related to our additional SEC filings.

Speaker 5

Also keep in mind that there's that not a solution we know what to expect in 2024 as a result of the capital markets and transaction activity. And then keep in mind too that we leave room in our FFO guidance for variability in Observatory performance, given the Q4 contains a larger amount of NOI relative to earlier quarters.

Speaker 9

Great. That's helpful. And leads me into the second question, which is just I wanted to ask on the transaction side. I think there's a little bit of concern around the dilution associated with the sale for Stanford and purchase of Williamsburg at a much lower cap rate. So just wanted to ask about any other specific opportunities you guys might be pursuing and maybe just get any thoughts on whether you'll look to balance these purchases out with transactions with higher going in yields or is this kind of mid single digit yield kind of what we should expect from you guys going forward?

Speaker 4

Yes, I think, appreciate the question. As we've always noted, this was very much part of our capital recycling initiatives, right. We started a few years ago and we sold out of non core suburban assets and we're down to one remaining asset. And in return, we've acquired New York City Multifamily and New York City Retail And we think that on a cash flow basis that is NOI after CapEx, much better growth profile and cash flow potential. On the go forward, we will continue to look for deals that have attractive upside when it comes pair of trade concept and for our fresh balance sheet capital, we expect to have even further upside, a little more opportunistic in perspective and it very much depends on what presents itself in the marketplace.

Speaker 4

And as we mentioned earlier, there hasn't been a ton. So the opportunity to get very high quality prime assets with great growth potential over a decade, we feel was very attractive and additive to the ESRT portfolio. We'll continue to look for deals that generate upside.

Speaker 2

Just to add to Christina's comments, we very much focus on the shift from First Stamford Place and specific and the recycling in general, not just on the FFO, NOI metrics. We focus on cash. So we're very comfortable and happy with what we did there and recognize that within the confines of those types of transactions, you need seller certainty for performance and you need to act within a very compressed time period. And on all accounts, we are very, very happy with what we've done as far as what we'll do for the cash over time And we're thrilled with where we were able to execute. And to further on that, the fact that really everything we've done so far has been off market, we still continue to work off market.

Speaker 2

We just have when we look at the deployment of new capital perhaps we have more flexibility. We have we can handle uncertainty of execution better and more easily. And we will look for the trade offs therefore on those two counts to produce higher

Operator

returns. Thank you. Next question today is coming from Michael Griffin from Citi. Your line is now live.

Speaker 7

Great, thanks. Just on the leasing pipeline, I'm curious if you can give us any insight into whether or not you might be seeing tenants that were paying some of the higher price point rents maybe move down into your more affordable range just given I think demand that we've seen for some of those high 80s triple digit rents? And then maybe if you can give us a sense sort of where concessions are trending, have you seen maybe an improvement in the concessionary environment or is it still pretty stable relative to recent quarters?

Speaker 3

Sure. First of all, we've always attracted tenants from really all submarkets, that's every all parts of Midtown, whether it be 5th Avenue, from the local Penn Station market to Midtown South, Times Square submarkets. So we attract tenants from all over. And you look at the quality of tenants that we attract, these are tenants that could really afford to pay up and pay anywhere and they choose our assets for the reasons that we've cited numerous times, modernized assets, great location, amenitized at a really at an accessible price point. The most active part of the market is in that $60 to $80 per square foot range and that's where we play.

Speaker 3

We are top tier. We offer the best product, the best services, really the best choice in that price range. And again, that's why we're seeing the excellent results that we are. Regarding leasing concessions, look, we focus on net effect of rent. We're benefiting from increased rents.

Speaker 3

This quarter was our highest rent quarter in the past three quarters. This quarter, we had the lowest leasing costs of any quarter for the past 3 years, and we've had the highest net effective rent this quarter of any quarter in the past 3 years. So we're benefiting from past investment in tenant spaces where we've built out turnkey and prebuilt tenant spaces that are re leased and renewed with modest TI and free rent. We've definitely pulled back on free rent. If we have a raw space that we need to deliver to a tenant, we are turnkeying and we've been doing that for easily last 5 or 6 years.

Speaker 3

So that has not changed, but you're seeing our lease cost per square foot per lease year come down because of the reasons I just cited.

Speaker 7

Very helpful. Appreciate that. And then maybe just on the transaction market, obviously, you've been busy with the retail acquisitions in Williamsburg. But are you starting to see any opportunities on the office side that might be a little bit interesting? And then maybe going a bit further, would you ever look to provide debt on a property or maybe a JV structure?

Speaker 7

Or you think you'll stick to acquiring properties outright if the opportunity comes up?

Speaker 2

We're just as we said so often omnivorous opportunivores and we'll remain that way. And we are open to anything that we think will deliver value to shareholders. We've had a number of very interesting conversations with new debt providers, private debt providers. We've had conversations about debt positions out in the marketplace. Fundamentally, our goal is to achieve long term value and that's sort of the big fat pitches for what we look, where we can really take all of the expertise we have, our expertise in redevelopment to help produce a better outcome than perhaps where our property is or where it's headed presently.

Speaker 2

That said, we're constantly on the lookout. We review a lot of different opportunities. We've got a very active investment group and we will be opportunistic.

Operator

Thank you. Our next question is coming from Dylan Brzezinski from Green Street. Your line is now live.

Speaker 10

Hi, guys. Thanks for taking the questions. Just curious, we were looking at lease percentage versus occupied percentage in the ESRT's portfolio. And it looks like today, the spread between those two is about a little over 100 basis points wide relative to the historical average, which suggests to us that occupancy should continue to grow over time. But just curious, any sort of guardrails around the timing of when that should start to compress towards the, call it high 200 basis point spread range that it has been historically?

Speaker 3

Well, look, we're focused on increasing our lease percentage and occupancy percentage will follow. But the big picture is we're well positioned. We've laid the groundwork and we proactively managed our rent roll to increase both our lease percentage and our occupancies percentage into 2025. If you look over the next 5 quarters, we have about a quarter 1000000 square feet of known vacates. So and that's offset or will be offset by the end of 2025 when over 315,000 square feet of signed leases that are not yet commenced will commence.

Speaker 3

And so that will help boost our occupancy percentage in 2025. And course, with the leasing success that we've had about 830,000 square foot average annual leasing volume over the past 3 years in our New York City office portfolio, look, we're well positioned to continue to improve both our lease percentage and occupancy percentage. But I would point to the over 315,000 square feet of leases that are signed, not yet commenced that will offset the known vacates by the end of 2025.

Speaker 10

Appreciate that detail. And then just one going back to the transactions and appreciate sort of the details and how you guys are looking at those from a cash flow perspective rather than an earnings perspective. But Christina, I think you mentioned part of that yield growth through 2027 on the acquisitions was related to leasing of vacant space. But I think the portfolio today is 90% leased. So just sort of trying to get a sense for where you think stabilized occupancy could be.

Speaker 10

And then it also sounds like part of the narrative or story around these transactions is potential market rent growth potential. So just sort of wondering if you could provide any details as related to how you guys are thinking about potential market rent growth with the Street Retail acquisitions?

Speaker 4

Sure. On the vacancy point, there's one vacant space and there's one temporary space already in discussion. So we feel really good about it and it's a portfolio that could easily be full, less any frictional movement between tenancies. On the mark to market potential, as with any neighborhood that has experienced very strong growth, the first round is very much getting the retailers in, they come in at a certain rent and there's still probably work to be done in terms of mix of tenants, where they are on the street, size of the box. And as a result, there are a number of tenants along the street where they are well below market rents.

Speaker 4

So that below market translates into really good mark to market potential in the coming period, whereby if you have early termination, it's not your traditional, oh, here we have to deal with a vacancy, it's actually an opportunity to get your space back and re lease it. So we don't have anything sort of specific on that front, but that's more to answer your question. But the 4% to 6% is sort of already known in terms of vacancy that gets leased up, temp space that increases in rent and goes to another tenant and burn off of free rent, which is contractual. That help?

Operator

Thank you. Next question is coming from John Kim from BMO Capital Markets. Your line is now live.

Speaker 3

Thank

Speaker 8

you. Flagstar, your 2nd largest tenant, they announced layoffs about a 5th of their employee base. I'm wondering what you think that will have as far as impact on the space they lease with you and if you expect to see any of that space basically come back to you?

Speaker 2

Yes. Flagstar is on a long term lease. And so our view is they've got the right team in operation there. I feel a lot of confidence with Steve Mnuchin's group at the head. And we will always work proactively with any tenant who wishes to share to shed space.

Speaker 2

You see that in our extraordinary income, our non recurring income pretty much every quarter. So we look at any opportunity to recast our current tenant population even prior to lease expiration the same way we look at early renewals. Tom and his group are super active. Ryan Cass super active, maintain a very, very close level of contact with our tenants. And anyone doesn't utilize space, we would rather help them and lease directly to a new tenant who will be with us for a long time.

Speaker 8

And Tony, while I have you, your company has a very clean structure, clean balance sheet. You don't have any assets owned in joint ventures, I believe. How committed are you to wholly owning your assets? Or would you at some point consider joint venture sailing either retail, office or some part of your portfolio?

Speaker 2

We have maintained the cleanliness in our balance sheet and ownership of our assets because we haven't had a reason to do anything else. We certainly haven't needed to sell anything to generate capital. We do believe in this environment in which we currently operate particularly with interest rates popping back up again both candidates for President's programs are inflationary and we believe that will have an adverse impact on interest rates certainly on the longer term. We just believe there'll be more opportunities. And when we need to attract new capital to those opportunities, we will certainly consider joint ventures and people with whom we've spoken to date we've considered joint ventures.

Speaker 2

On the recycling of the balance sheet, we needed to own those assets 100% when we acquired new assets And that governed a lot of our actions on those activities. As we go forward, again, I'm nervous opportunivores. We will look at what we can get when we can get it and partner logically when there's a reason to do so. With our balance sheet and our available liquidity, it's not something we need to do, it's something we'll do by choice.

Speaker 8

Appreciate it. Thank you.

Operator

Thank you. We reached the end of our question and answer session. I'd like turn the floor back over to Chairman and CEO, Tony Nalker for some closing remarks.

Speaker 2

Thank you very much, everyone, to you for your attendance today. We remain focused on our 4 priorities: lease space, sell tickets to the Observatory, manage the balance sheet and achieve our sustainability goals all for the purpose of the creation of shareholder value. We continue to take advantage of opportunities as they arise and are confident in our ability to execute and drive further value for shareholders going forward. Today, Heather Houston, our Senior Counsel Corporate, we believe is delivering a new baby and we wish her the greatest success and happiness. If she isn't in the process right now, we know she's listening in.

Speaker 2

So good luck Heather. Thank you all for participation in today's call. We look forward to the chance to meet with many of you at non deal roadshows, conferences and property tours in the months ahead, onward and upward.

Operator

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

Powered by Quartr
Earnings Conference Call
Empire State Realty Trust Q3 2024
00:00 / 00:00