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spk09: Greetings, and welcome to the Empire State Realty Trust third quarter 2020 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Anthony Malkin, Chairman and CEO. Please go ahead, sir.
spk07: Good afternoon. Thank you for joining us today for Empire State Realty Trust's third quarter 2020 earnings conference call. In addition to the press release distributed yesterday, the quarterly supplemental package with further detail on our results and our latest investor presentation were posted in the investor 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, including ongoing developments regarding the COVID-19 pandemic, 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. Certain of our disclosures today are added specifically in response to the SEC's direction on special additional disclosure due to the changes in our business prompted by the COVID-19 pandemic and are unique to this instruction. We do not expect to maintain the same level of disclosure when we resume normal business operations. 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 a company's performance. The definitions and reconciliations of these measures to 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 Tony Malkin, Chairman, President, and Chief Executive Officer.
spk02: Thanks, Tom, and good afternoon to everyone. ESRT continues to adjust on a daily basis to smooth tenant reentry, collect rents, manage observatory visits, assist survival of our local retail tenants, and ensure ESRT employee safety. Our tenant presence in our buildings in our greater New York metro area has grown materially to 45% in our Westchester properties and 55% in our Connecticut properties. Our New York City buildings continue to see slow growth off a low base, with the lowest utilization by our largest Our lower New York City physical occupancy impacts our retail tax, and that is where we have targeted our proactive work, a temporary shift to percentage rents in order to help these small businesses survive. Visits to the Empire State Building continue to grow off a very low base, with roughly two-thirds of our typical visitor traffic from overseas. Potential attendance is limited by reductions in capacity to maintain our stringent COVID-19 protocols and also by border controls against interstate and international tourist travel. The Empire State Building Observatory 86-floor deck reopened on July 20th, and the 102nd floor reopened on August 24th. Despite the travel restrictions, we have seen steady weekly increases in visitors. Through October 25th, attendance was at nearly 6% of 2019 comparable period attendance, an improvement but below the 10% projection hypothetically set forth earlier by us for traffic in October. We are fortunate to be well positioned to manage the challenges that we face with our flexible balance sheet, continued success with collections, successfully implemented cost reduction measures, and new management team members. All this works to our advantage as we look to utilize our balance sheet flexibility, no current requirement to pay a dividend, and look at ways to deploy our capital to buy back our stock and pursue external growth. Our more than a decade of industry-leading focus on indoor environmental quality has positioned our buildings for our tenants to return safely to their offices and to compete for new tenants. ESRT has the first U.S. commercial portfolio to achieve the Well Health Safety Rating, an evidence-based, third-party verified rating for all facility types focused on operational policies, maintenance protocols, emergency plans, and stakeholder education to address a post-COVID-19 environment now and broader health and safety-related issues into the future. This rating validates our work to provide tenants with healthy and safe environments. Additionally, our foresight and planning around energy efficiency means the company has no fines in 2024 under New York City's Local Law 97 to reduce greenhouse gases. While the macro environment remains challenged and the outlook is uncertain, I feel confident that work done to position ESRT for the long term to thrive and deliver shareholder value leaves us in an enviable position compared to others. To summarize, we have spent over $1 billion as part of our redevelopment work to modernize our properties for the 21st century. with a focus on energy efficiency and indoor environmental quality. We have consolidated previously-demised smaller spaces and redeveloped them for new, bigger, and better credit tenants on longer leases. We lead in the areas of energy efficiency, indoor environmental quality, and sustainability, which I will cover in more detail shortly. We maintain a flexible balance sheet to execute our strategy and take advantage of potential opportunities that may arise. We have undertaken a series of broad-based and proactive cost cuts to address the current macro environment, and we continue to evaluate further actions. ESRT's leadership and redevelopment and our focus on energy efficiency and indoor environmental quality comprise our competitive edge. Our buildings and their unique combination of location, value, and leadership in sustainability and indoor environmental quality could never have been more necessary. In a post-COVID world where health and safety are paramount, tenants are focused on the provision to their employees of a clear pathway to return to the office, To demonstrate our leadership position, we applied and were awarded the Well Health Safety Rating, the most stringent third-party standard in the world to verify a safe and healthy workplace. ESRT is the first and only commercial portfolio in the United States to achieve this rating. This third-party rating is a validation of the work that we have done for more than a steps that we have implemented to improve indoor environmental quality in our portfolio. The $165 million redevelopment completed in December 2019 of the Empire State Building Observatory mitigates direct, indirect, and aerosol transmission of COVID-19 and other viruses through MERV 13 filtration, increased fresh air ventilation, and bipolar ionization air purification. Similar measures have been made to upgrade health, safety, and indoor environmental quality protocols throughout the ESRG entire portfolio. Our well rating is just one representation of the work we are doing in ESG under the leadership of Dana Robbins Schneider, our Senior Vice President of Energy and Sustainability and Director of ESG. Earlier this year, we announced our intent to participate in the GRES Real Estate Assessment, and based on initial feedback, we feel quite confident that when the final results are available later in November, our accomplishments will be clear. With more than a decade of work in this area, Dana's leadership and the cooperation of our entire team of ESRT colleagues I am confident that our decision to measure ourselves through several widely accepted metrics on sustainability will be rewarded with good results. Our focus is not just on our leadership and preservation of the environment. We also have a major focus on the social aspects of ESRT's participation in our larger community. To that end, I would refer you to our new slide, through 30 in our investor presentation. As Walter Gretzky advised his son Wayne, our focus is to, quote, skate to where the puck is going, not to where it has been, unquote. Our investors should expect in the future to see increased communication of our ESG leadership, actions, and commitments. This is all part of ESRP's continued efforts to adapt to the involving environment with the ability to flex and pivot, all the while with a focus on our goal to deliver long-term shareholder value. We continued to engage in share repurchase activity at our stock's significantly discounted public market pricing. In aggregate, we have purchased $133 million of our common stock at a weighted average price of $8.33 through October 27, 2020. At quarter end, we held $373 million in cash, which provides us with an operating runway amidst an uncertain macro environment. We also have our $1.1 billion line that is undrawn at this time. We continue to evaluate opportunities to deploy capital for external growth focused on opportunities in which our balance sheet strength and our redevelopment expertise can be brought to bear. To date, we have not seen widespread distress as lenders have generally been accommodated to borrowers and there have been few investment transaction data points. Our new investment team, led by Aaron Rassner, makes progress every day on our efforts to find value opportunities for our investors. That said, we are a marathon, not a sprint, and we will deploy capital when an opportunity presents itself that will lead our growth in the next cycle. Switching gears, here's an update on the observatory now that we've been open for just over three months. Our focus on indoor environmental quality, in which we've been leaders for more than a decade, yielded air filtration from MERV 13 filters, an aggressive response to viruses with active bipolar ionization, and a massive capacity to ventilate the observatory, all as part of our redevelopment. When combined with comprehensive protocols and employee training, this allowed us permission to reopen on July 20th and of other attractions in New York City. Observatory revenue for the third quarter, 2020, was $4.4 million. That included the following components. $2 million of deferred revenue from unused tickets that we were able to recognize and earned income from tour and travel partners, as well as $1.2 million of fixed license fee for the gift shop. Observatory expenses were $5.9 million in the third quarter of 2020. This represents a reduction from a $35 million annualized expense run rate pre-pandemic to a current $25 million annualized run rate for 2020 driven by reduced hours of operations and staffing. Month-to-date through October 25th, Attendance is at nearly 6% of 2019 comparable period attendance, a gradual improvement but below the 10% projection for traffic in October. This is a slow-going bill that is strong next to other comparable attractions. Visitation is primarily retail and website-driven, which bolsters revenue per cap to its highest level in our history. amongst the tri-state market. This is consistent with our anticipation that initially we will have a higher local visitor mix, followed by a ramp-up of regionally then nationally sourced travel, and then followed by a restoration of our typical visitor mix that is approximately two-thirds international that will not be achieved until our anticipation of a broad resumption of international air travel sometime in 2022. No attraction in any city has a higher brand value and international recognition than the Empire State Building Observatory. Authentic and iconic. Lonely Planet's second annual bucket list just rated the Empire State Building the number one attraction in New York City. We believe that when the pandemic passes, we will emerge stronger than ever, as the enduring brand and icon of New York City and its resilience. As I've communicated previously, there are certain fixed staffing and operational costs, regardless of volume levels. Yet we continue to look for ways to optimize our cost base. We believe that we have ample bandwidth in our current cost structure to handle our anticipated wrap-up and admission volume Finally, I would like to reinforce our optimism and enthusiasm for New York City. It is possible both to be a realist about where we are and to be confident in our future. The passage through COVID-19 has four phases. Lockdown, number two, pre-vaccine therapy treatment, number three, post-vaccine therapy treatment, and number four, cleanup and restart. This phase four is important. The day after Woodstock, Mr. Gasker could not simply go and plow his fields and plant crops. He had to clean up the stage, speaker towers, fences, cables, bottles, cans, sleeping bags, and other human debris. Similarly, there will be work and investment required to restart our economy. I've said for some time now that I think we will know our bottom in Q1 2022. and that growth recommences from that point. ESRT has the runway and continues to work to make the most of the environment in which we find ourselves from the balance sheet, capital allocation, expense, CapEx, and organizational perspective. With that, I would like to turn the call over to Tom Durrells.
spk03: Thank you, Tom. Thanks, Tony, and good afternoon, everyone. In the third quarter, we signed 18 new and renewal leases, totaling approximately 247,000 square feet. This included approximately 137,000 square feet in our Manhattan office properties, 105,000 square feet in our Greater New York Metropolitan office properties, and 5,000 square feet in our retail portfolio. The most significant leases signed in the quarter 3,500 square foot new office lease with Lee and Fung at the Empire State Building. Lee and Fung replaced an existing global brand group lease for the identical space with no change in rent, tenant concessions, or lease term. And a 63,200 square foot new office lease with Berkeley Insurance at Metro Center, which backfills the Thompson Reuters move out from the second quarter. Subsequent to quarter end, we signed a 212,000 square foot new office lease with Centric Brands at the Empire State Building for space, which Centric had previously subleased from Global Brands Group. This transaction is a triple win. We retained a 212,000 square foot tenant who rejected their sublease in bankruptcy and was close to signing a lease at 237 Park Avenue. reduced the burden on Global Brands Group, who would have had to pay rent on space for which it had no need, and all with minimal leasing costs. While the leasing spread was negative 15% based on initial face rent, this transaction was approximately neutral on a cash flow basis inclusive of all related transaction costs and related lease termination fees. Excluding the lien fund and centric leases, new leasing activity in our Manhattan office portfolio during the third quarter was reduced due to the impact of COVID-19 pandemic, and we expect reduced leasing volumes in the fourth quarter. During the third quarter, rental rates on new leases signed at our Manhattan office properties increased by 6.9% on a cash basis compared to the prior escalated rents. The lien fund transaction, which replaced an existing GBG is included as a new lease within our reported leasing spread. New and renewal office leases across our entire portfolio were down 5.1%, driven largely by leasing spreads in our greater metropolitan New York portfolio and the aforementioned lien fund transaction. Our total portfolio leased percentage is 89.7%, an increase of 10 basis points from the prior quarter. Occupancy of 85.9%, the third quarter. And as a reminder, we have 459,400 square feet of signed leases not commenced as shown on page six of our supplemental. As Tony mentioned in his remarks, tenants are focused on providing their employees with a safe environment for return to the office. And to this end, we implemented new health and safety protocols earlier this year on which we have received very favorable feedback from our tenants. We have more than a decade's focus on indoor environmental quality. MERV's 13 filters were standard throughout our portfolio prior to COVID, and we begin using bipolar ionization pre-COVID. And ESRT is the first U.S. commercial portfolio to achieve the Wealth Health Safety Rating, which validates our work to provide tenants with healthy and safe environments. We have maintained our improved monthly rent collection as shown in the table on page 10 of our investor presentation. We collected 94% of third quarter 2020 total billings, with 96% for office tenants and 84% for retail tenants. These collection rates are before application of any security deposits and without any adjustment for deferral agreements. We have aggressively reduced our property operating expenses throughout our portfolio achieving a reduction of $14 million in the third quarter 2020 compared to the prior year period and $26 million reduction year to date. We achieved these cost savings without reduction of services to our tenants and after the cost of implementing new health and safety protocols. Keep in mind that a portion of the reduction in operating expenses will be offset In summary, we signed significant leases that stabilize and diversify our rent roll. Our industry leadership and experience in indoor environmental quality combined with implemented health and safety protocols allows our tenants to return to the office with confidence that their employees will be safe. We reduced property operating expenses by $26 million year-to-date. and we have seen meaningful overall improvement in our rent collections. Now I'll turn the call over to Christina. Christina.
spk05: Thanks, Tom. For the third quarter, we reported core FFO of $35 million, or $0.12 per diluted share. This is net of $0.02 per share of expense from a reserve against tenant receivables and non-cash reduction in straight-line rent balances and excludes $3.2 million in one-time charges and expenses, which I will address later. Same-store property operations, if you exclude one-time lease termination fees and observatory results from the respective periods, yielded a 9.3% cash NOI increase from the third quarter of 2019. This increase was primarily driven by lower property operating expenses and free rent burn-offs, partially offset by lower revenues. More detail on the breakdown of our collections can be found on page 10 of the investor presentation. During the quarter, we recorded a number of unique one-time items that are add-backs to core SFOs. Specifically, we recorded a $1.3 million impairment charge net of reimbursement related to the write-off of prior capitalized expenditures on a development project, an $800,000 one-time severance charge due to the elimination of positions, and a $1.2 million one-time accrued expense due to an estimated liability stemming from IPO-related arbitration. We also recorded a $5.8 million reduction in rental revenue for a two-cent FFO impact in the third quarter, comprised of a $4.4 million reserve against tenant receivables and $1.4 million against straight-line rent balance. The annualized impact of the reserve against tenant receivables equates to approximately 3.2% of our annualized rental revenue as of September 30th, 2020. We reached this determination after review of each tenant's career status, security deposit balance, and management assessment of the path towards the resolution and viability of the tenant. Turning to our balance sheet, as of September 30th, 2020, the company has $1.5 billion of liquidity, which is comprised of $373 million in cash, and $1.1 billion of undrawn capacity on our line of credit. The company has total debt outstanding of approximately $2 billion on a growth basis and $1.6 billion on a net basis. The company's total debt has a weighted average interest rate of 4% and a weighted average term to maturity of 8.3 years. Our net debt to total market cap was 46.3% and net debt to adjusted EBITDA was 5.6%. We have a well-laddered maturity schedule, no debt maturity until November of 2024. Our revolving credit facility expires in August 2021 and has two six-month extension options. Amidst uncertainty about the credit market at the March 2020 onset of COVID-19 lockdown, we drew down $550 million on our revolving credit facility. Given increased confidence in the banking system's ability to fund line drawdown, On September 1st, we decided to fully repay the revolver balance. This results in annualized interest expense savings of approximately $7.5 million at current interest rates. Concurrently, we announced our decision to suspend the third and fourth quarter 2020 dividend. We expect to have no taxable income in 2020 and therefore no requirement to pay any dividends. The management team and the board believe that payment of a dividend is currently not the highest and best use of our balance sheet, given continued uncertainty in the macro environment, benefits of maximizing our operating runway, and the significant discounted valuation of our stock. During the third quarter and through October 27th, the company repurchased 18.4 million of its common stock at a weighted average price of $6.36 per share. On a year-to-date basis, the company repurchased a total of $132.9 million of its common stock at a weighted average price of $8.33 per share. As we noted last quarter, we undertook a series of proactive steps to reduce costs across the company. This includes our G&A expenses, property operating expenses, capital expenditures, and costs of operating our observatory business. We continue to anticipate 2020 G&A expenses of $60 million, excluding one-time severance charges, which reflects an $8 million reduction year-to-date. As mentioned last quarter, 2021 named executive officer annual equity compensation will be reduced by $3.9 million. We currently expect 2021 G&A will total approximately $58 million. We continue to authorize We continue to optimize our operating expenses across the company in a variety of areas. Year-to-date through September 30th, the company reduced property operating expenses by $26 million compared to the prior year period, driven by reduced tenant utilization and the company's cost reduction initiatives. The company also expects $4 million of permanent cost reduction on an annualized basis from 2021 onwards. We anticipate that 2020 capital expenditures for building improvements compared to 2019 will be approximately 24 million lower as we focus on mandatory spending and work previously commenced. Observatory expenses are expected at an annualized run rate of $25 million, down 10 million from our pre-COVID annualized run rate of 35 million. We believe these proactive measures are aligned with stakeholders and reflect our efforts to preserve cash operate efficiently, and maximize our bottom line in uncertain times. We will continue to seek efficiencies and cost reduction opportunities in operating our business. Before I open the call for your questions, I would like to say that I am now in my sixth month in the CSOT. I am excited to be a part of ESRT. I want to thank my colleagues and our board for their assistance in my assimilation, as well as their cooperation as I begin to affect my plans for the future. Additionally, I thank our investors and lenders for their candor and comments, from which I learn each day. Now for questions. As always, we kindly ask that each participant limit him or herself to one primary question and one follow-up, and rejoin the queue if there are additional questions. We will stay on the call as long as we have questions. Operator?
spk09: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions. Your first question comes from the line of Craig Mailman with T-Bank Capital Markets. Please proceed with your question.
spk06: Hey, everyone. Just kind of curious here, you know, traditionally your portfolio has been sort of the value product in your markets, you know, price below kind of traditional midtown office and not really competitive with new supply, but clearly sublease availability is rising today. in core midtown markets, and rents are expected to fall here. Can you guys just give a sense of how you're thinking about kind of how your product is positioned today in that environment, your ability to kind of hold rents here, and whether you've seen any changes in tenant profile that are in kind of the leasing pipeline?
spk03: Hey, Craig, this is Tom. First, I would remind you of the attractive value proposition that we make. We have always traditionally been priced below Class A and deliver a better product than Class B. We're incredibly well located, centrally located near mass transit. And I remind you that we've invested over a billion dollars within our portfolio and to modernize our entire portfolio and have redeveloped 94% of all of our space So we're delivering modernized product, great location, and at a price point that is still incredibly affordable. As far as trends, it's really early to say. There's a limited amount of leasing activity. Certainly we're operating on lower volumes than this time last year. And so I'd be hesitant to say where the trend is exactly. We have probably given more on concessions than discount on base rent. But if you look at our average net effective rent, it decreased by about only 3% compared to the second quarter. And that's, I think, reflective of relatively low leasing costs. We are seeing tenants preserve capital. We are trying to preserve capital, but of course we have space that's been redeveloped, and that helps in that regard. As far as the sublease market, look, there's been an increase in sublease availability in the overall market. We saw some increase with our own portfolio this quarter, but much of that was anticipated. And some of that already appeared on space we expect to get back in 2021 reflected on page nine. So it really wasn't a surprise or a result of COVID per se.
spk06: Okay, that's helpful. Then just quickly on the observatory, Tony, it was helpful for you to run through the buckets of where the income came from. Just as we move into fourth quarter and next year, how much of those kind of deferred ticket sales do you guys kind of have to come through and give a boost relative to if actual attendance stays at these kind of trough levels here?
spk05: Yeah. Unused tickets are always part of the business. They're always in the number in some fashion. What's unique this period is the buildup because we didn't take them in during the period where it was closed, expecting that the ticket had potential to be used. So the $2 million represents a higher than usual number. We say you can expect a couple hundred thousand per quarter in the next several quarters, keeping in mind tickets have a one-year expiration period. So by the time we last, you know, second quarter next year, that number would deplete. And one additional point, we've now also moved to time ticketing, which sort of expires on the spot, so we don't have this typical issue.
spk09: Gotcha.
spk06: Thank you.
spk09: Your next question comes from the line of Manny Korchman with Citi. Please proceed with your question.
spk11: Hey, everyone. Good afternoon. Tony or Christina, if we can just talk about the buybacks for a moment. How do you sort of figure out the pace and the timing of those? You've done $133 million to date, but a lower volume here in this quarter when the stock was under pressure. So just as you look at other opportunities, as you look at your own liquidity, how do you think about how much you should be buying each quarter?
spk02: Thanks, Manny. As I mentioned, we believe we have a long path ahead going through the different phases. And in consultation with our board, we continue to exercise patience and prudence as we evaluate all of our options. What we really do is we look at the opportunity of how to utilize each dollar at a time when there is competition. We didn't do the the dividend because we felt we had an asset on our balance sheet, no requirement to pay a dividend. So we decided to take advantage of that as a good capital allocation decision. We will similarly look at repurchase opportunity as a capital allocation decision each time we look at our balance sheet capital available and what else we might do. So the board and management continues to review our priorities and We just don't see a really quick snapback in the economy for New York. In our business conditions, that's part of the reason for our pace.
spk11: And then just on the observatory rent, is there any risk that that gift shop rent would get cut for any reason? I understand it's contractual, but at the same time, obviously, that's a tenant that's under a lot of income pressure right now.
spk02: We have to talk to all of our tenants all the time about the prospects that they have for their business. We've afforded opportunity for tenants to have rent deferrals, abatements, changes, and we may in fact end up in a discussion with that particular gift shop operator. I would not anticipate we end up with a period of no rent, but it's possible at the month-to-month rent could be adjusted.
spk11: So the $1.2 million, if I'm not mistaken, that was as contractual or that was already adjusted? Pre-adjustment.
spk02: That was contractual. And we'll have bona fide updates as and when they develop. Okay.
spk11: Thanks, everyone.
spk09: The next question comes from the line of Steve Stockwell with Evercore ISI. Please proceed with your question. Great.
spk04: Thanks. Christine, I know you guys took another kind of large round of charges this quarter, and I guess relative to the uncollectibles, I think 3% maybe of the 5% is now, you know, effectively on effective cash accountings. I just, how do you think about sort of the remaining couple percent that's not collected or not really dealt with? And, you know, what sort of resolution do you think you get and when?
spk05: Yeah, we will continue to evaluate. You know, in some instances, as we show on page 10, we do have a security deposit that covers those amounts. And we will be in continued discussion with the tenant to see if we can collect. So I think that, you know, with 3% or 3.2% of the five, we've addressed most of it. As mentioned, you know, our key criteria is, again, the arrear status, security, deposit balance, how those discussions are going, and whether it's a viable business. And as mentioned in our earlier remarks, for those that are food vendors, you know, and really need some support in terms of percentage rent to get to a period where the buildings are experiencing low utilization, we will focus our energy on that and get to a win-win situation, knowing that even if you have a replacement tenant, they'd be in the same situation. So we feel pretty good about where we're going, but we will continue this discipline of being very transparent and writing off anything that we deem unquestionable.
spk04: Okay, and then maybe just kind of circling back on the buyback and the leverage, you know, I think, I don't remember if it was Tony or you, Christina, that said you're 5.6 times net debt to EBITDA. Just remind us kind of what are your targets or sort of what is the upper bound that you would take that number to as you think about buybacks and new investments?
spk05: Yeah, so, you know, we think about it a little bit differently. It's not a specific target that we're trying to avoid or try to limit ourselves to. It's really about the availability of capital. You know, so to the extent it's easy to replenish liquidity that you put out, we might have a different view. What we are seeing today is that the market is definitely moving into a more have and have not environment. You know, capital is available, but it's becoming a little more selective, favoring certain sectors, favoring specific profile of buildings, you know, assets with lease term and not. So we're aware of all those factors and we'll be extremely prudent and patient in how we deploy capital. I think the buyback activity reflects that, which is, you know, when we announced our decision to suspend the dividend for 3Q and 4Q, we made it very clear. We're acutely aware of how attractive our discounted share prices is on the agenda. The opportunity to buy back our portfolio at the per square foot or implied valuation is extremely compelling. Having said that, It is a very uncertain environment, right? Cody mentioned several phases, and even after that, we need a return. So having operating runway is extremely important. We do not want to be in a position where we're forced to sell assets when it doesn't make sense. So taking all those elements into consideration, we will continue with the buyback activity, but it will be at a prudent and measured pace.
spk04: Okay, great. And then last question, you know, you guys mentioned the utilization differences between the suburbs and New York City. I'm just curious if Tom is seeing a real pickup in suburban office demand, either from, you know, existing New York tenants, you know, some sort of hub and spoke or, you know, potentially complete moves out of the city to the suburbs.
spk03: Steve, we've seen some new post-COVID activity from tenants coming out of New York City. looking to open up a satellite office and a couple of potential relocations, but I wouldn't call it a major trend. We signed three leases with New York City-based tenants to date that total just under 10,000 square feet. We're trading papers with other tenants that represent a little under 40,000 square feet. A couple of tenants we may relocate from one of our New York City properties. to one of our Connecticut properties. But I think that the square footage that I just gave you puts it into context. Of course, we're in a great position to take advantage of any tenants seeking to relocate or have a second office outside of New York City because of our reputation, our relationship with the New York City brokers, and then our great access to mass transit.
spk09: Your next question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.
spk08: Great, thanks. Good afternoon. So, Tony, it was good to see a little bit of an increase in revenue and activity at the observatory this quarter. But as you point out, you're still running below your original projection. I guess I'm wondering if there's enough of a difference there to change those expectations and forecast at this point, or... Maybe do you think it's just a little delayed here in the beginning and you've still got a chance to kind of catch up to some of those projections in future quarters?
spk02: Well, you know, look, first of all, I appreciate the question. We are confident that travel will return and we are confident in the future of New York City. We also believe that we will not be out of the disruptions from COVID-19 until we see free travel in and out of New York City from states and countries. Just this week we have had reinforced the reality that we are not there now. So the way we look at this is number one, we do see steady growth. We are basically selling New York to New Yorkers right now. Our hypothetical growth targets remain as represented on page 18 of our updated investor presentations. We believe that the social media reviews that we have received since we reopened, which are five-star focus on cleanliness, safety, and the enjoyability of it, that that is what is encouraging more and more people to visit. We're very comfortable with the way we are outperforming based on our market intelligence, any other attraction that is comparable to us. That said, we'll take another look as we head into November through December and recognize that these are very low periods for us at any time of any particular year right now. Excuse me, any particular year, this time is slow. And if we think we need to take another look at the hypothetical layout that we gave, we will. Just want to make sure that you understand and everyone should understand. When we gave the original hypothetical outlook, we were really driven by the guidance from the SEC to address the potential impacts of COVID-19 on our business. And we thought it was really important to provide investors with the view that we had that the pandemic would be a long-term impact, something we thought that investors did not have at the time. I think that what we found is that the pandemic's had an even bigger impact than the larger impact that we thought of at the time when we first did this. We will try to update this hypothetical from time to time. I think the best thing to do is to track flights in and out of New York City. It's places from which people can visit which will drive our business higher. And that's good data. That's what we look at. That's what we track. Hope that's helpful.
spk08: Yeah, great. That's helpful commentary. And then second question, just on the Lee and Fong lease at the Empire State Building that replaced some of the global brands. I believe Lee and Fong is in space at 1359 Broadway as well. And it looks like that lease expires in phases starting at about a year. So I guess, does this lease at the Empire State Building have any implications for the space that will be coming up and expiring at 1359?
spk03: Sean Esterly Sure. Liam found a space at 1359 that some of it, as you mentioned, expires in 2021, and then other tranches expire out in 2023 and 27. We do anticipate we'll take some of that space back at 1359 in late 2021, a little over 65,000 square feet, and that's captured on Phase 9 of our supplement. We've always anticipated that, but overall, it's a net positive for us, and it locks Li and Feng into a much longer-term lease for approximately eight years at Empire State Building for the 103,000 square feet that they took there.
spk08: All right. Thanks, Tom.
spk09: Your next question comes from the line of Jamie Feldman with Bank of America Merrill Lynch. Please proceed with your question.
spk01: Great. Thank you. I guess Tony, I appreciate all your comments on the well rating. Did you have to make any additional investments in the portfolio to hit those numbers, or were you already on track to get there?
spk02: Hopefully, actually, Jamie, we were there already. If you've read our stuff in the past, I've felt that it was important for us not to cater to other people's metrics. We've decided to go ahead and submit ourselves to other people's review, and the well rating was just a validation of how far ahead we were of everybody else when it comes to indoor environmental quality and providing safe workspaces for people, safe and healthy workspaces. So we made no other change.
spk01: Okay, interesting. Thank you. And then just thinking through the schedule of your largest unknown and tenant vacates through next year, Can you provide some color on the true move-out risk or maybe the size of some of those leases, just so we have some idea of where the occupancy risk might be or maybe won't be?
spk03: Jamie, if you're referring to in Manhattan on the unknown, most of those, really all of those leases are below 10,000 square feet. And then out in the Greater New York Metropolitan Office portfolio in 2021, We have two tenants that are a little over 20,000 square feet each. The rest are relatively small. And then the balance that you see on the schedule are either already classified as known renewals, relocations, or vacates. So not a whole lot of unknown at this point. Only about 80,000 square feet in Manhattan and 62,000 square feet in the greater New York metropolitan portfolio.
spk02: I just might add to Tom's comment when we look at what we've got as far as rollover and unknown on the outcomes. We look at all of this stuff with the context that we are in as much contact as we possibly can be with our tenants as to their needs, their uses, their return to office. I think the lease that we did with Centric combined with Global Brands Group is a huge triple win for us. The fact that we were able to take that space where they were aggressively out in the market through their restructuring team had an active lease underway to go to another building. We were able to preserve them at Empire State Building on a direct basis, deliver that to us on a long-term lease, and also relieve the burden of our direct tenant, Global Brands Group, of the need to cover space that it otherwise would have on its balance sheet, its obligations with its sub-tenant moved out. So we'll work super hard with all of our expirations, including the ones that the market throws up at us, and it will be very successful in that.
spk01: Okay, thank you. And then what about the category of known move-outs? How chunky are those?
spk03: In Manhattan, In 2021, as I mentioned earlier, in response to Blaine's question, we are getting back a little over 65,000 square feet from Liam Fung at the end of 2021. That's really our largest vacate next year. And then we've got some tower floors at Empire State Building. And one grant is in place, happy to get those back because they're already consolidated and They're powerful, so I anticipate that they'll be in good demand. That's really the largest known bank case next year.
spk01: Okay, great. Thank you.
spk09: Your final question comes from the line of Frank Lee with BMO Capital Markets. Please proceed with your question.
spk10: Hi, good afternoon, everyone. First question I have is on the observatory. Have you implemented any new marketing or Any changes in piping strategies that you think will help drive traffic?
spk02: Well, first of all, we are currently outperforming all of our comps, and we have our highest per caps in our history. We have not adjusted our pricing, nor do we intend to, except we did raise slightly the pricing that is paid during our sunset period. period, which is our peak period for visitors, as the building always has been. So that was always planned for when we reopened, and that's not represented any reduction. It's not created any reduction in our attendance from the sunset to it. And as far as what drives people to us, no, we haven't done any discounting. We know we are capturing the biggest component of the market as far as people go into destination attractions. The Edge is giving away free tickets to first responders. That's been a major source of their traffic. One World Trade is not open yet. They're talking about opening on weekends only. We have good insight as to our performance in comparison to Top of the Rock. We really see no reason to discount. We think we will get the visitors who want to come for a clean, safe, and uncrowded experience. And we really, out of all of our TripAdvisor comments since we reopened, we've had two negative comments about price, and we've had just a slew of incredibly positive comments about the quality of the experience, safety, and cleanliness.
spk10: Okay, thanks. And then on the direct lease with Centric, are you able to quantify the termination fee associated with the transaction, and should we expect this to be recorded in the fourth quarter?
spk03: I'll simply say what I had commented on earlier, that the transaction is neutral to slightly positive over lease term on a cash flow basis. Beyond that, really aren't in a position to share more detail on that. But as Tony mentioned earlier, I think it's a Fantastic outcome, a fantastic plan. So great result by the company.
spk05: And then on your question on booking, it will be booked over the remaining slice of the lease, so nothing chunky.
spk10: Okay, great. Thank you.
spk09: Ladies and gentlemen, we have reached the end of the question and answer session, and I would like to turn the call back to Mr. Anthony Malkin for closing remarks.
spk02: So, look, thank you, everybody. Thank you very much for participating in the call today. We will continue to improve our disclosures in both financial and ESG. We continue to make strides in both, and we're happy about that. Please remember that forward-looking statements on plans to wrap up the observatory and return to business are for discussion purposes only and to help you with your models. They are not guidance, nor are they guarantees. We feel good, we're all positioned with our portfolio, our leadership in energy efficiency, sustainability and indoor environmental quality combined with our flexible balance sheet and proactive cost reduction actions really we think represent not only long-term planning but our ability to pivot and flex and meet the challenges of these difficult times. I'd like to just say one thank you to our board who has been active in direct conversations with our major investors. and also thank our investors for their frank conversations with our board members. We feel that open dialogue and communication has great value in general, and especially so in today's world. So we look forward to the chance to meet many of you virtually, either through roadshows or our conferences in the months ahead. We're doing meetings here in our office, which has ventilation, RIRV13 filters, and active bipolar ionization. So as Steve and Michael will tell you, it's a safe place to come, a safe place to visit. And until then, we report in February for our full year. Stay safe, be smart, and onward and upward.
spk09: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
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