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spk02: Greetings and welcome to the Empire State Realty Trust fourth quarter and full year 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. It is now my pleasure to introduce Tom Keltner, Executive Vice President and General Counsel, thank you. You may begin.
spk03: Good afternoon. Thank you for joining us today for Empire State Realty Trust's first quarter 2021 earnings 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 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 the company's performance. The definitions and reconciliations of these measures to the most directly comparable gap 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, our Chairman, President, and Chief Executive Officer.
spk06: Thanks, Tom, and good afternoon to everyone. We remain confident in the recovery of New York City, realistic with regard to where we are and through what we will have to go to get to that recovery, and well positioned with a balance sheet that gives us a long runway and the ability to take advantage of growth opportunities. The U.S. vaccination rollout, stimulus spending, and reduction in New York State pandemic-linked restrictions all speak to a much better spring than any period we have had since lockdown in March of 2020. Daily, there are new announcements from arts, cultural, hotel, hospitality, and entertainment venues, which all serve the remarkable and growing demand from New Yorkers to get out and enjoy their city. Rental apartment occupancy is up and apartment sales have increased. Schools are back in session. Airlines have announced rehirings and increased domestic flights. Even if the much-discussed 100% of 2019 domestic schedules by summer does not occur, Directionally, this is good news. Our number one international tourist source for the Empire State Building Observatory, the United Kingdom, is well advanced in their inoculation program. As dark as people would like to paint the picture, the near-term future is brighter than it has been for more than a year. As I've said for several quarters, I still believe that it will be the end of Q1 2022 before we see predominantly positive overall news stories on New York City, office utilization, retail sales, tourist visits, and quality of life issues. We are well positioned to bring back employees and tenants with confidence to our buildings, operate efficiently, and encourage Empire State Building Observatory visits. New York State has just announced the return in May of up to 75% of office capacity. Our tenant presence has grown slightly since last quarter, and our building utilization stands now at approximately 13% in our New York City portfolio and 32% in our greater New York portfolio. Many tenants plan their return to the office around the widespread rollout of vaccinations, with major tenants' announcements of return to office beginning around July 4 in Labor Day. Importantly, even the incredibly negatively biased reporting around the, quote, death of the office, unquote, has now shifted to an acknowledgement of the challenges, inequities, and worries about divided workplaces between home and office work and the impossibilities posed by the thought of onboarding new employees and the future of businesses without an office. The awareness of the selective discriminatory impacts on minorities, women, youth, and the service jobs of COVID, lockdown, school and child care shutdowns, and the absence from the office paint the roadmap to solutions driven by the reopening of our great city. All of this is good news to ESRT. We are well positioned with our flexible balance sheet. Our collection levels have been stable for several months. and we have shifted our focus from successfully implemented cost reduction measures to a rethink of our processes and practices around new ways to reduce our costs permanently. All this works to our advantage as we look to utilize our balance sheet flexibility and seek ways to deploy our capital through external growth opportunities. We have done more work on that external growth in the last quarter than our entire prior period as a public company. Visitors to the Empire State Building Observatory continue to grow off a very low base, with no discounts offered and fantastic visitor feedback from our largely local visitorship to our attraction that features top-of-the-line indoor environmental quality, including MERV 13 filters, ventilation, and active bipolar ionization. Driven in part by our timed reservation ticketing, local and regional visits and limited utilization by our visitors of past programs and online travel agents, our per-cap revenues have never been higher. People are prepared to pay for quality and welcome the opportunity to enjoy our destination attraction with confidence. First quarter attendance was at nearly 9% of 2019 comparable attendance, a gradual improvement from 2020 levels and consistent with our hypothetical admissions forecast. Visitation is primarily domestic, retail, and website-driven, which bolsters revenue per capita. Visitors remain very pleased with our focus on health and safety, an area where we excel with more than half a decade-old focus on healthy buildings and indoor environmental quality. We have no change to our hypothetical observatory admissions shown on page 13 of the investor presentations. WE HAVE SAID IN PRECEDING QUARTERS THAT WE EXPECT 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 A BROAD RESUMPTION OF INTERNATIONAL AIR TRAVEL THAT WE ANTICIPATE WILL OCCUR SOMETIME IN 2022. Our number one international tourist source for the Empire State Building Observatory, the United Kingdom, is well advanced in their inoculation program compared to any other international nation. Our hypothetical suggests that we can reach 60% of 2019 attendance levels by the end of 2021 and return to 100% by the end of 2022. Please remember these points for your modeling. We believe we can essentially maintain our current observatory operating cost structure and achieve up to 60% of our 2019 attendance. With more distant and international inbound tourists, we will see growth from lower margin passes and online travel agent tourists in the future. as inbound tourism mixes with our current local and regional customers, and that will lower our per caps. Our ESG leadership continues. I encourage all stakeholders to read our first-ever annual sustainability report that highlights our leadership, accomplishments, and certifications in this area, and that also can give you a clear understanding that we are well positioned for where the puck will be in the future on issues of energy efficiency, healthy buildings, and indoor environmental quality. Our sustainability report can be found at EmpireStateRealtyTrust.com. Again, the full first annual sustainability report can be found at EmpireStateRealtyTrust.com. In January, we announced that Our portfolio is now 100% powered by renewable wind energy. This action builds on our earlier success with the Empire State Building, which has been 100% renewable powered for a decade. In April, we were awarded the Energy Star Partner of the Year designation in recognition of our contributions and leadership in the fight against climate change. And I am pleased to say that we are currently 76% ENERGY STAR certified by the number of square feet in our portfolio. That said, our first annual sustainability report covers many more issues, many more certifications, and many more facts, and I hope that you will view it online. New developments, as of just last week, we joined New York State and the New York State Energy Research Development Authority in a commitment to the Empire Building Challenge, a $50 million state initiative to accelerate progress towards a reduction of 85% of greenhouse gas emissions statewide by 2050. Our prior work at the Empire State Building, which we have extended throughout our entire portfolio over the past decade, provided us with knowledge of what is possible and a skill set on how to execute. We believe these commitments to a carbon-free future will offer us a competitive edge in a tenant-driven marketplace that increasingly focuses on ESG and how their occupied spaces can help them achieve their corporate goals. As I have said, I am confident and I am a realist. We are still in a time of uncertainty, and I have said and still believe we will not hit the bottom of the market until the end of the first quarter of 2022. Through the noise, we hear the sound of real companies that now approach real space needs with clarity and vision of how they want to use offices for their teams to work and grow together. We will have uncertainty in the press about return to the workplace, large amounts of sublease space on the market, and challenges with leasing and the reestablishment of New York City as the great world capital it is. I believe ESRT is well positioned in 2021 with our well-priced and competitive product, operational prowess, flexible balance sheet, focus on prudent capital allocation, and leadership in ESG. I believe that ESRT is well positioned to thrive and deliver long-term shareholder value. And now, folks, Tom Durrells.
spk04: Thanks, Tony, and good afternoon, everyone. In the first quarter, we signed 26 new and renewal leases totaling approximately 172,000 square feet. That included approximately 143,000 square feet in our Manhattan office properties, 28,000 square feet in our greater New York metropolitan office properties, and 1,000 square feet in our retail portfolio. Significant leases signed in the quarter were a 33,100 square foot expansion office lease with Burlington Stores at 1400 Broadway, where it will now occupy approximately 68,300 square feet. A 31,400 square foot new office lease with Zentalis Pharmaceuticals at 1359 Broadway that will occupy space to be vacated by Lee and Fung later this year. and a 30,600 square foot new office lease with a law firm at one Grand Central place. Our mark-to-market results are always driven by the escalated rents of leases that have expired. And in today's market, we will focus on retention of tenants, and that may result in reduction of rents on a mark-to-market basis on renewals. That said, during the first quarter, rental rates on new leases signed at our Manhattan office properties increased by a healthy 14.7% on a cash basis compared to the prior escalated rents. Spreads on renewal leases at our Manhattan office properties were down 11.6% on 32,000 square feet and 10 deals. New and renewal office leases across our entire portfolio were up 6.8%. We estimate net effective rents in our portfolio today versus pre-COVID levels have declined 10 to 15 percent on a comparable space basis. Net effective rent is a combination of face rent, free rent, length of lease term, and tenant work, all of which vary by deal and depends on the space condition, location, tenant credit, and other factors. Our total portfolio leased percentage is 88.7 percent, unchanged from last quarter. Occupancy of 85% was down 90 basis points from the prior quarter due to anticipated tenant move-outs. And for the balance of 2021, we anticipate tenant move-outs of 300,000 square feet, which will be offset by signed leases that we anticipate will commence before year-end of 305,000 square feet. Please refer to the tables on pages 6 and 10 in our supplemental. We have seen a noticeable increase in tour volume during the past six weeks in our Manhattan office portfolio to about two-thirds of pre-COVID levels. While the recent increase is a positive sign that some tenants are beginning to re-engage, the lease transactions that come from these tours will likely appear in the second half of the year. Healthy buildings and indoor environmental quality remains front of mind for nearly all tenants and is the most asked about topic before and during space tours. We reduced property operating expenses by $11 million in the first quarter of 2021 compared to the prior year period and a cumulative total of $50 million since the pandemic onset. We achieved these cost savings without reduction of services to our tenants and after the cost of implementing new health and safety protocols. As previously mentioned, most of the cost reductions were primarily driven by low building utilization. However, we continue to focus on ways in which we can change our processes and reduce expense beyond savings driven by lower occupancy. Keep in mind that a portion of the reduction in operating expenses will be offset by a reduction in tenant expense recoveries from existing leases. And looking ahead to the second half of 2021, with a greater increase in vaccination distribution and a return to the office, we expect a gradual increase in operating expense levels. In summary, we had a good leasing quarter that included expansions of existing tenants and the addition of new tenants to the portfolio. Our industry leadership and experience in indoor environmental quality and sustainability enhances our ability to attract and retain quality tenants. And we continue to manage property operating expenses tightly with a cumulative reduction of $50 million since the pandemic onset. Now I'll turn the call over to Christina. Christina.
spk01: Thanks, Tom. For the first quarter, we reported core FFO of $41 million, or 15 cents per diluted share. Same-store property operations, if you exclude one-time lease termination fees and observatory results from the respective period, yielded a 3% cash NOI increase from the first quarter of 2020. This increase was primarily driven by lower property operating expenses, partially offset by lower revenue as compared to the prior year period, driven by receivable write-offs and increased vacancy. Our rent collections remain stable at 94% of first quarter 2021 total billings with 96% for office tenants and 86% for retail tenants. The company recorded a non-cash reduction of straight line balances of 0.6 million and wrote off 0.5 million of tenant receivables assessed as uncollectible during the first quarter of 2021. Switching to observatory results, observatory revenue for the first quarter of 2021 was 2.6 million, and that included 0.1 million of deferred revenue from unused tickets and earned income from our tour and travel partners. Observatory expenses were 4.6 million in the first quarter of 2021, which is our seasonally lightest quarter, and we continue to expect run rate expenses to be approximately 6 to 7 million per quarter for the balance of 2021, depending upon the pace of visitor ramp up. Turning to our balance sheet, as of March 31st, 2021, the company had 1.4 billion of liquidity, which is comprised of 567 million of cash and 850 million of undrawn capacity on our new revolving credit facility entered into at the end of the quarter. The credit facility has an initial maturity of March, 2025, and has two six-month extension options and a sustainability-linked green pricing mechanism that reduces the borrowing spread if certain benchmarks are achieved each year. The company had total debt outstanding of approximately $2.2 billion on a growth basis and $1.6 billion on a net basis at March 31, 2021. The company's total debt has a weighted average interest rate of 3.9%, and a weighted average term to maturity of 7.9 years. We have a well-laddered maturity schedule with no outstanding debt maturity until November 2024. Our net debt to total market capitalization was 32.6%, and net debt to adjusted EBITDA was 6.5 times. Year-to-date through April 27, 2021, the company repurchased $3.5 million of common stock at an average price of $9.22 per share. This brings the cumulative total since the stock repurchase program began on March 5, 2020, through April 27, 2021, to $147.2 million at an average price of $8.34 per share. Our balance sheet flexibility provides us with an operating runway to engage selectively in share buybacks, and evaluate opportunities to deploy capital for external growth. Our investment team continues to underwrite office, retail, and multifamily opportunities actively. As we have emphasized, we will prudently deploy capital when an opportunity presents itself. Looking ahead, there are a few items to touch upon for your modeling consideration. We reduced property operating expenses by roughly $11 million in the first quarter of 2021 on a year-over-year basis, driven primarily by reduced building utilization. The company expects property operating expenses in the second quarter of 2021 will approximate our current levels based on continued low building utilization relative to 2019 levels. Also, the company expects annual G&A to be approximately $58 million. And now we will turn it over to the operator for Q&A.
spk00: Thank you. At this time, I would like to take any questions you may have. As a reminder, if you would like to ask a question over the phone, please press star then 1 on your telephone keypad. 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. The first question comes from Steve Sakwa at Evercore ISI.
spk09: Thanks. Good afternoon. I was hoping that maybe Tom could speak a little bit more about the demand. And I guess specifically, just sort of thinking about how tenants are looking at density as they're looking for new space and for the deals that, you know, you said you got an increase in activity. Are those for just kind of reloads? Are they new deals? Are they expansions, downsizing? Just a little color would be helpful.
spk00: One moment, please.
spk04: To about two-thirds of our pre-COVID pace for space tours. Of course, any of these showings that lead to proposals will likely occur in the second half of the year, but it's a really good sign that tenants have reengaged in the market. IEQ, indoor environmental quality and healthy buildings, remains the primary focus by most tenants, and it's often a gating issue before tours are scheduled. And it's certainly the most frequently asked about topic during tours. And, of course, we encourage everybody to look at our inaugural sustainability report on our website. I'd say about half the proposals on new activity that we see right now represent tenants that are growing, and the other half are lateral moves. But if you look at this quarter, we're pleased with the expansion lease we did with Burlington. and the new leases with Zentalis and Belkin. These represent growth by tenants who committed to long-term leases in the middle of the pandemic. On spaces, we haven't really seen any change or significant change in what tenants are designing. There's an awful lot of discussion on the topic, but I'd say we've seen some slightly less dense furniture layouts, though Pre-COVID, many of our tenants were focused on employee productivity and really rarely occupied space to the maximum density. We've seen some increase in phone rooms, breakout rooms, some additional offices being added, but that does not mean that there's a conversion to all built offices. So overall, we had a really good quarter, 172,000 square feet of leases done. And, you know, I think that we're seeing a mix of tenets in legal, tech, financial services, government, media. So it's a good mix of tenets that we're seeing.
spk09: Okay, thanks. I guess second question, I guess, Tony, in your comments as well as in the press release, you sort of talked about a real step up in your activity levels looking at transactions. And I also noticed the share buyback. volume was, you know, rather de minimis this quarter. I don't know if those two are tied together, but could you maybe speak a little bit more about, you know, the types of deals that you're seeing, if it's more distress or, you know, just the fact that the markets are getting better and the debt markets are open that, you know, more product is coming to market?
spk06: Sure. Thanks, Steve. Our team is busy. That means our new team and our seasoned players like Tom Durrell and his property team and John Hogg and his FP&A team. And we're looking at a broad variety of situations. Our focus remains New York City office, retail, and multifamily. We're in conversation with families, many of whom were not so interested in talking about transactions four or five years ago who are more interested now. We've seen widely marketed transactions. We've seen off-market transactions, M&A. We spend time on it all. At the same time, I want to make sure that we're not distracted by this bright, shiny penny topic, if you will. When we have something, we will let you know and we'll give our rationale. As far as the source and motivation of the transactions that we see, I would say quite similar to the leasing. Things just have begun to move. there's a little bit less of, shall we say, the squirrel that's hunkered down in the middle of the road, not knowing to which way to go. We're actually in a process in which people have begun to make moves, come out of their shells, recognize things they have to do, recognize things they would like to do. So I think it's all kinds of different motivations. And I think we will begin over the next few months to see price discovery come out on different assets as more deals are announced and we'll see more folks come to grips with are they in a good position with a good runway or do they need help?
spk09: And maybe just as one follow-up there, Tony, does the potential for a cap gains tax or the elimination of 1031s kind of accelerate some of that activity or you don't think either of those have kind of a big driving factor in transaction volume?
spk06: Look, I think it's highly... conjectural at this point. We don't see anything that really evidence is there. I think the only thing about which we feel reasonably confident with regard to the tax situation is that the Biden administration would like taxes to go higher, that there is a dialectic in Congress, and that the Democratic majority in the House is not large. And therefore, in order to get any package passed, there is a contingent, a growing contingent of members of the House of Representatives who have said they will not approve anything without a removal of the cap on state and local tax deduction. And while we think it's hard to predict the outcome of any potential decision, any decision that lessens the burden on high-income earners in our region is very positive.
spk09: Great. Thanks. That's it for me.
spk02: Thank you. Our next questions come from the line of Manny Korchman with Citi. Please proceed with your questions.
spk05: Hey, Tony. You've spoken about this 1Q22 date a couple times now. You call it the bottom, but I guess what does the path to the bottom look like? Is that going to be an increase in vacancy or sublease space? Is that going to be rent dipping? Is that going to be tenants leaving the market? Others have maybe...
spk06: been sort of more on the path of we're seeing the bottom because activities up or at least you know leasing activities up or tours are up but you're you're saying that we have to wait a year to see sort of um when the bottom hits so what does the path to that look like uh i i think that what we see right now manny uh and thank you for the question are some uh uneven starting points of data i wouldn't say that it lays the foundation at this point for a this is where we are What we've seen in prior periods is far more space gets put on the sublet market than is ever sublet. Far more space is discussed to be shed than is ever shed. We also see at a time like this where things are not necessarily restarted entirely, a lot of folks will try to generate business with big incentives, big breaks in rent, Brokers will go out with initial proposals which are radically low. And I think that we don't, in the intervening period upcoming, expect to see a lot of what really sets the base. We'll see some halting commencement. We'll get price discovery. We'll get real demand discovery. So I think a lot of people don't know what's going on until they come back to the office I would say that a big component, I'm sorry if this goes off of your question, but I think it's something which needs to be addressed for everybody. With regard to this whole future of work is that the conversation has really turned. The conversation has turned about the return to office on the basis that the world has started to reopen. I think companies now recognize the difficulties with regard to culture team competition posed not just by work from home, but from the proposed hybrid or the discussed hybrid future. It's in the New York Times, Wall Street Journal, Economist, New York Post, the problems caused by this theoretical hybrid future. So I think that we understand there are a lot of motivations, exhaustion, disconnection, fear to take a day off, youth want to be in the office. There are a lot of things which are occurring which build back into clarity on what people's uses will be, and I think, Manny, that that will build on that base, the foundation, as we move forward. So I think that's where the puck will be, and I really don't think we have a clear vision of that where we don't get any more bad news until the end of the first quarter of 22. Directionally, things are greatly improved, and I think we'll continue to see them improved. I think that... A lot of reporters will have to learn how to write something which isn't negative.
spk05: Great. Thanks, Tony. Maybe you sort of touched on this a little bit in response to Steve's question, but when you say your team's the busiest it's ever been over the last three months compared to the entire history of the company, is that just looking under more rocks? Is that you've had more inbounds or more receptivity to inquiries or offers you've made is that the net is now just wider. So what are the levers you've pulled to bring in so much more activity or volume or work?
spk06: I would say it's three things. The first answer is E, all of the above. So in every avenue, and there are multiple families who have come back to us to discuss issues. that they've got that need resolution. They won't all lead to transactions, but people are assessing their situation more actively. People assess their situation more actively. Number two, I do believe that we have spent a fair amount of very productive time working with our board and our finance committee so that we get a good process in place. And the final piece is we've got a full team now And we're underwriting and analyzing a lot of different situations, looking at all the different structures we can put together to make us competitive. And we weigh it against our allocation of capital and how we use it. So hopefully that's helpful to you. But it's really coming from all angles. And it's the fact that we're getting back into an expansion mode where, candidly, we haven't been as a public company. And we're quite pleased with that.
spk05: Thanks, Tony.
spk02: Thank you. Our next questions come from the line of Lane Heck with Wells Fargo. Please proceed with your question.
spk08: Great, thanks. Good afternoon. Just to follow up on that, Tony, and I know you don't want to focus too much on transactions until you get something done, but you and Christina both mentioned that you're looking at office, retail, and multifamily opportunities. You know, number one, are there more opportunities than any one property type than another? And then number two, I guess, you know, you guys have experience as a company in office and retail, but multifamily would be a different product. I guess, how do you think about your ability to compete in that space? How do your skills at office and retail translate to acquiring and operating multifamily? Is it just more of a matter of some of the product you're looking at has a multifamily component, or are you actually looking at true multifamily?
spk06: So I think I'm going to just focus on the last part of your question because the first part, I think, is pretty much straightforward in my prior response. On the multifamily piece, we've done a lot of multifamily historically, and outside of the REIT, my family still owns thousands of apartment properties not in the New York area. That's part one. They weren't included in the REIT because they weren't in the tri-state region, number one. We've developed multifamily for sale in New York City before, the Corinthian, the Alexandria. We have turned around assets before. Anyone who remembers what was known as the Grand Palais and became the Mondrian, we are the team that made that redo of that failed condo. We've done New York City multifamily before. And so members of our team who were involved in that and underwriting on that, the property side, the FP&A side, they're still here. So we believe we've got good experience in that area. And we find it interesting as potential additional wheel on our tricycle.
spk08: Okay, that's helpful. And then just shifting to kind of the balance sheet, you guys obviously have an enviable liquidity position. But leverage has been creeping up a little bit over the past several quarters. Christina, can you just talk a little bit about where you guys are comfortable on a debt to EBITDA basis? I think you're at 6.5 times now on a net basis. Are you running into any constraints on the share repurchase or potential investment side or not quite yet?
spk01: Yeah, no, not feeling constrained. We're happy with our liquidity position, right? That's over 550 million of cash and 850 on our new line, which has been now has a maturity in 2025. So we feel good about that. In addition, we have no debt due until 2024 in November. So we feel very good about the flexibility that we have in terms of net debt to EBITDA. I think I've answered You know, this question before, which is we don't really look to the exact max level. It's really about how you're able to access further liquidity. So the company has always had a relatively conservative stance on the balance sheet. We will continue to manage that responsibly. But the increase in net debt to EBITDA is largely driven by observatory revenues coming down. And in this quarter, we're now capturing the full impact of EBITDA. COVID, right, between 2Q, 3Q, and 4Q of 2020. And we are seeing a ramp up. We're managing expenses really well. So we feel very comfortable at these levels, not constrained, but we will continue to manage the balance sheet prudently.
spk06: I'd just like to add to Christina's comment that we've made before. People may forget. I know you folks on this call had a lot of different calls of which to keep track over today and over the quarters. But we are prepared to take our leverage up. And we're also prepared at the right time to issue more equity. We're also prepared to recognize that there's a virtuous cycle in which we may find ourselves when we commence growth. And we're also cognizant of the fact that we have bought a lot of stock back at a price which is below where we currently trade. And at some point, we could reissue that stock at a higher price and both make a gain on behalf of our investors and increase our liquidity. We really feel that we have all of the arrows in the quiver that we might like to have. We feel in a very good spot, very well positioned at this point. If there were one thought that I think we would want to communicate here, we feel very well positioned right now. We feel comfortable. We're working very, very hard. It's not the place where we'd like to be. We feel very well positioned for the future.
spk08: Very helpful. Thank you all. Thank you.
spk02: Our next question has come from the line of Craig Malman with KeyBank Capital Markets. Please proceed with your question.
spk07: Thanks, everyone. Maybe circling back to Tom and your commentary on the leasing front, obviously the pickup in tours is a good kind of future indicator here. But I'm just kind of curious, you know, you guys, your portfolio has always kind of served as a little bit of a value relative to traditional midtown or newer midtown office buildings. And typically in these situations you see a little bit of a trade-up of space among tenants. I'm just kind of curious, number one, has the demo of the tenants kind of shifted at all versus what you've seen in the past? And do you think, because we're hearing from everyone that tours are increasing, how much of an overlap do you think you guys are having relative to other portfolios where maybe the the net pool of tenants isn't necessarily increasing, it's just you're seeing, everyone's seeing the same ones over and over again.
spk04: Sure, so I would point to the fact that Zentalis and Berlington were gross, right, and committed to long-term leases. And so we are seeing growth in the market. Probably half of our proposals that are active right now represent tenants that are growing. Both Zentalis and Belkin, the law firm that moved to One Grand Central Place, those were trade-ups, meaning they moved up to our property from what I'd call inferior property. And so what did they seek? They sought what we offer, which is well-located property next to mass transit in fully redeveloped, modernized buildings. with our tenant spaces that will be built in compliance with our state-of-the-art industry-leading standards for healthy buildings, IEQ, and energy efficiency, including active bipolarization, MERV 13, and ASHRAE 62.1 standards. Those are examples of tenants trading up in the market to come to our properties. We believe we still offer a great value proposition for the reasons I just stated. We're at an affordable price point. We're well located near mass transit. And we offer fully modernized buildings and newly built tenant spaces. And of course, 95% of our portfolio has been redeveloped. And we have some 270,000 square feet of pre-built space that's built and ready to go. And what's interesting, we've seen a healthy pickup in activity and interest both proposals and tours for our pre-built suites, which in the fourth quarter, you know, it was fairly slow in terms of the level of proposals we were exchanging. We've seen a big pickup this quarter. Now, I would caution a lot of that activity will translate into activity in the second half of the year.
spk07: Great. Thanks for the color. Then maybe, I don't know if this is for Tom or Christina, but you guys, you know, the $11 million reduction in OpEx, in the first quarter is strong. And I know you guys love some of that is due to lower utilization. But as we think about going forward, how much of that 11 million is kind of permanent? And as people come back, can you guys materially improve the NOI margins at kind of a stabilized point versus maybe historic levels?
spk04: So first, I'd say that echoing what Tony had mentioned, comments that he made in his opening remarks that we are actively looking at ways to improve our operational efficiency so that we can lock in permanent savings. The reductions made to date represent aggressively managing our expenses. Certainly the bulk of it was due to reduced physical occupancies related to COVID, but we have completed our redevelopment work, which allows us to reduce permanently certain expenses and certainly keep a cap on the growth in expenses we get into next year. So we do expect to lock in a portion of those. We haven't given a specific number, but I think that our benchmark will be 2019, which is our last year of full building utilization. And I think that we're going to see some improvement off of those numbers. Great. Thanks, guys.
spk02: Thank you. Our next questions come from the line of Jamie Feldman with Bank of America Merrill Lynch. Please proceed with your question.
spk10: Great. Thank you. Good afternoon. I was hoping you could talk a little bit about the smallest tenant leasing activity versus larger. You were able to keep your percent leased flat, which is impressive. It looks like you had a couple buildings that had occupancy dip a little bit. Just curious if there's any kind of read-throughs for, you know, small tenants versus larger tenants based on what you're seeing.
spk04: Sure. So, Jamie, the increase or the increase in vacancy or decrease in occupancy that you noted from the prior quarter was really due to known tenant move-outs which we had communicated last quarter. The most significant was the termination of a full-floor tenant. for 40,000 square feet, which we have already released to Clearview, which we announced last quarter, whose lease will commence by the end of this year. The most important thing is that our forecast of 300,000 square feet of tenant vacates in 2021 has not changed significantly from prior forecasts. And we have 305,000 square feet of signed leases that we expect will commence by year end. So I think from an occupancy standpoint, we're in very good shape. On the small tenant activity, as I just mentioned, we've seen a big pickup in activity and level of interest both on tours and proposals being exchanged for our small suites that are fully built to comply with our standards for IEQ and sustainability. We offer turnkey suites. That means for a price increase, we'll offer the suite fully furnished, fully wired, and provide move coordination. Comparing to where we were last quarter, I'd say we're probably about three quarters or 80% of our pre-COVID level, which represents a big increase from last quarter.
spk10: Okay, thank you. And then you had said you think net effectives are down about 10% to 15%. Can you break that out by, you know, face rents and concessions and free rent?
spk04: Well, first, I would say that Every deal is unique and really depends on the space condition, the location, the tenant credit, and other factors. For example, the Burlington expansion, the Zentalis and Belkin leases were all turnkey deals with leases that range from 11 to 16 years. Generally, there's been more negotiation around concessions, but one of those deals, we gave maybe a rent discount of $2 to $3 per square foot compared to pre-COVID levels. combined with three to four months of additional rent and a few dollars more in TI. Whereas the others, we held rent flat and gave more on concession. So it's really a mixed bag, and it depends on the individual deal and the negotiation. I would point out that our average lease cost per lease year for this quarter for TIs and commissions was about just under $9.50 per square foot. which are right in line with our leasing costs for all of 2019. And, of course, we had a weighted average lease term this quarter of 10 years, and that compares favorably with the last two to three quarters.
spk10: Okay, thank you. And then I guess I know you've talked a lot about the investment activity, but just to be clear, would you consider assets outside of New York City or entity-level transactions if they did have assets outside of New York City?
spk06: We are – and thanks for that, Jamie. We are omnivorous opportunivores. I've used that word before. Our focus is Manhattan and the greater New York metropolitan area. In order to grow the business, we need to look at all types of transactions. I would just say that.
spk10: Okay. Is there – it's funny because I was going to use the same word, but I didn't want to take it out of your mouth. You've been using that for a long time. I mean, is there a regional limit? I mean, would you look at national stuff or west of the Mississippi River? Or not necessarily?
spk06: Gosh. I mean, I didn't know that the world existed west of the Hudson River. Is there something else out there? No, I think, joking aside, the last thing we want to do is generate speculation. I think as prudent... to our stakeholders as prudent investors, we really need to look at all things that could be logical. And how we allocate our capital, we look forward to have something to talk about other than speculation, and we'll be much more talkative as and when we do.
spk10: Okay. Thanks for that. And then just some thoughts on the suburbs. That portfolio looks like it's been – relatively flattish on the percent occupied side. I think you had a little bit of a dip at 10 Bank Street. Would you say there's been any pickup or it's been pretty flat?
spk04: Well, Jamie, remember we have a 63,000 square feet with Berkeley insurance that will commence later this year, and that comes on the heels of a fairly large earlier move out by a tenant at Metro Center. So that will help our occupancy numbers. We have seen a pickup in tours like in Manhattan. And that pickup since the start of the year brings us to tour volume today at about just at about pre-COVID levels, which I think is a positive sign. So I think that that's going to translate into activity in the second half of the year. So it is a bit early on that. Downtown White Plains, I think it's generally performing good. Downtown CBD Stanford is where we see a good amount of tour activity. Up in Norwalk, I'd say it's slower, but we are exchanging proposals with some fairly large tenants because we have a large block of about 80,000 to 90,000 square feet at our Merritt View property. And so we'll see if that translates into real activity later in the year.
spk10: I mean, is there anything in behavior during the pandemic that would make you want to grow transit-oriented suburban?
spk04: We like our portfolio. We think we're very well located next to mass transit. We did recently complete upgrade of all of our common areas, including gyms, dining, coffee lounge, conferences, lobbies, and outdoor areas. We've got a little bit more work to do at Metro Center, but properties show really well. And I think we're focused on leasing up our vacant space there.
spk06: Yeah, I would put it this way. I think it's important to note what you didn't ask is have we seen a big flow of tenants in that tour group out of New York City? And the answer is no, we haven't. A handful. Yeah, a handful. And some leases done, smaller leases under 10,000 square feet on which we've reported. Right.
spk10: Okay. All right. Thanks for all the .
spk02: Thank you. All right. As a reminder, oh, sorry. If anyone would like to ask a question, please press star 1 on your telephone keypad.
spk06: There being no further questions, we're going to, we'll finish up here. Oh, we have one, we have, we have no further questions. So, what we will do is we will go to one last comment and then get you all to your 1 o'clock. I do, again, want to compliment our great team. Without them, ESRT is nothing. Number one. Number two, please do review our sustainability report. Don't do it today, but do it when you've got a moment. It really will show you what's more than the 100% of renewable wind energy, what's more than healthy buildings. You get to see where the puck will be when you read our first annual sustainability report. And finally, we want to make sure that you understand that our forward-looking statements on plans to ramp up the observatory and return to business are for discussion purposes only and to help you with your models. They're not guidance, nor are they guarantees. We look forward to a chance to meet with you many at the upcoming NARIC conference, virtual. And we look forward to seeing you all return to office, return to here. We're healthy, we're vaccinated, and we're in a very, very safe place to come and visit. Say hello. I look forward to seeing you in person. Thanks a bunch.
spk02: Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.
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