Empire State Realty Trust Inc (ESRT) 2014 Q1 法說會逐字稿

Greetings and welcome to the Empire State Realty Trust first quarter 2014 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I will now turn the conference over to your host, Mr. Brad Cohen. Thank you, you may begin.

Good morning. We'd like to thank you for joining us today for Empire State Realty Trust's first-quarter 2014 earnings conference call. In addition to the press release distributed last evening, we have posted a quarterly supplemental packet with additional detail on the Company's results in the Investor Relations section on the Company's website at www.empirestaterealtytrust.com.

On today's call, Management's prepared remarks and answers to your questions may contain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are just matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today. Examples of forward-looking statements include those related to revenue, operating income, financial guidance, as well as non-GAAP financial measures, such as funds from operations, core FFO, same-store results, and EBITDA.

We encourage listeners to review the more detailed discussion related to these forward-looking statements contained in the Company's filings with the Securities and Exchange Commission. We also caution that prior-period results that are referenced to any comment today may not necessarily be reflective of the results had Empire State Realty Trust truly been a standalone entity during the period presented. As a reminder, forward-looking statements represent Management's current estimates. Empire State Realty Trust assumes no obligation to update any forward-looking statements in the future.

Finally, during today's call, we will discuss certain non-GAAP financial measures, which we believe are meaningful in evaluating the Company's performance. The definitions and reconciliations of these measures to the most direct the comparable GAAP measures are included in the earnings release and supplemental package, each available on the Company's website.

This morning's conference call is hosted by Empire State Realty Trust's Chairman, President, and Chief Executive Officer, Anthony Malkin; Chief of Property Operations and Leasing, Tom Durels; and Chief Financial Officer, David Karp. They will make some introductory comments, after which we will open up the call to your questions. Now I will turn the call over to Mr. Anthony Malkin. Anthony?

Hello, I am Anthony Malkin, and I am delighted to welcome you to our first-quarter 2014 earnings conference call. The run-of-show for today's call will include -- I will give a brief review and overview update of the Company; Tom Durels our Executive Vice President and Chief of Property Operations and Leasing will give a brief review of our portfolio; and David Karp, our Chief Financial Officer, will review financial results and discuss our balance sheet.

Empire State Realty Trust is a pure-play New York City metro area real estate portfolio. We like our assets and believe they are well-positioned to generate long-term value creation and cash flow growth. We believe our portfolio continues to offer embedded growth and the unique opportunity to capture upside through our continued renovation and repositioning of our properties, bringing their occupancies to market and leasing them at market rents.

Our results for the first quarter were fully consistent with our expectations for operations and financial performance. One point to highlight is that the Empire State Building Observatory delivered record first-quarter revenue. In spite of the shift of Easter from the first quarter in 2013 to the second quarter in 2014, higher zero-visibility days than in prior years, and thousands of disrupted visits to due to flight cancellations from very severe winter, we overcame a decline in visitors through higher admission pricing and a better mix of ticket sales. Our customer research tells us that tourist satisfaction with our attraction has improved and that our visitors greatly enjoyed our upgraded experience and our new hand-held multimedia tour, which is included with the purchase of the ticket.

Our balance sheet remains a core strength, with one of the lowest leveraged levels in the industry, which provides the capacity and flexibility to finance our capital programs and support incremental opportunities that may arise. In that regard, Management continues to prepare its recommendation to our Board as to whether or not to purchase our option properties. We will comment further at the appropriate time once a final decision on the option properties has been made. Under the terms of the options, the final decision whether or not to make the acquisition is due no later than July 18, with closing no later than 105 days after our final decision.

As we move through 2014, we believe we have the portfolio, balance sheet, and strategy to continue to drive growth and create meaningful valuation for our shareholders. I am really pleased with the work by our Management team in executing on our strategy and delivering our decades of experience through many cycles in the ownership, operation, redevelopment, and repositioning of office and retail properties in Manhattan and the greater New York metropolitan area. Lastly and importantly, our interests are aligned with our shareholders; my family remains a major stakeholder with the same objectives of value recognition and capital appreciation and the growth of our current return. Now I'd like to turn the call over to Tom Durels. Tom?

Thank you, Tony. Good morning, everyone. On this morning's call, I will review our leasing activity in the first quarter, update you on our transition to in-house Management, discuss our progress at the Empire State Building, and comment briefly on conditions we see within the market. Let me begin with a review of our first-quarter leasing results, in which we signed 50 new and renewal leases totaling 191,319 square feet of office and retail space.

Nearly all of this activity took place within our office portfolio, with approximately 172,000 square feet in our Manhattan office properties. On March 31, 2014 our portfolio was 87.2% occupied, an increase of 110 basis points the start of the year. Including signed leases that have not yet commenced, our portfolio is 88.8% leased. Again, an increase of 110 basis points from the end of 2013. On a year-over-year basis, our portfolio occupancy is up 720 basis points and our leased percentage is up 500 basis points.

We signed a number of significant leases during the first quarter. At the Empire State building, we signed a 43,000 square-foot expansion lease with LinkedIn, bringing their total commitment to nearly 159,000 square feet. LinkedIn has also taken an option on an additional 31,000 square-foot floor, which it can exercise by August 2014.

At One Grand Central Place, we executed a 17,000 square-foot renewal and expansion lease with Johnson Controls, a global technology and industrials leader and a 13,000 square-foot new lease with 3i Debt Management, a leading international private equity investor that will be relocating from the Seagram's building on Park Avenue. At First Stamford Place in our Greater Metro New York portfolio, we signed an 11,000 square-foot lease with American Express.

We are also seeing strong demand for our pre-built office suites, for which we signed 19 leases for over 58,000 square feet during the quarter. As previously stated, these pre-builts can be in the future released with little additional capital costs over time. At one of our option properties, 112 West 34th Street, we signed a new 131,000 square-foot lease with Macy's, the department store chain, with options for a significant expansion.

These leases with companies in industrials, retailing, technology, financial services, and private equity demonstrate the broad appeal of our properties to all industry types. We continue to see solid rental growth spreads, and during the first quarter, rental rates on new and renewal leases across our entire portfolio were 15.8% higher on a cash basis compared to prior escalated rents.

Our Manhattan office portfolio rental rates were 22.8% higher for the quarter. Our average cost for tenant improvements leasing commissioned for the first quarter on new and renewal office leases were $68.11 per square foot. Overall, these leasing results will produce strong cash flow growth in the coming years, and we believe, speaks to the health of the market, the success of our redevelopment strategy, and the talent of our leasing team. During the first quarter, we also concluded our transition to in-house property management from third-party agents. This transition further centralizes our Organization, which we believe will result in greater control and operational and cost efficiencies.

Let me move on to the Empire State Building, where we are creating the premier urban campus in New York City, a completely unique experience for tenants and their employees. New amenities currently under construction to be delivered this summer include a restaurant with private executive dining and event space, tenant-only conference center, and a 15,000 square-foot tenant-only fitness center. These new amenities will be combined with four other existing on-site dining options, a distributed antenna system by Extenet to provide cell phone service throughout all floors of the building, recent platinum certification by WiredNYC, and state-of-the-art infrastructure and building systems all housed in an architectural masterpiece.

We are creating a workplace experience unlike anywhere in New York City. Currently we are 83% occupied at Empire, and including signed leases that have not yet commenced, our leased percentage is now 84.5%, up 220 basis points from the end of 2013. While the work to consolidate smaller spaces to create more efficient, larger blocks of space is ongoing, we began the quarter with four available full tower floors. One of these full floors was leased during the quarter to LinkedIn, per my earlier remarks, and we now have other full floor leases in negotiation. As stated previously, we expect that by the end of 2014, we will vacate and demolish four additional full floors to be marketed for future lease up.

Finally, let me provide some comments on the current state of the New York City office market as it pertains to our Manhattan portfolio. New York City continues to see steady job creation in the types of companies which are leasing in our buildings. Midtown Manhattan remains a desired market for tenants looking for central locations and convenient access to mass transportation.

The Broadway corridor in Times Square South continues to its rapid transformation into a preferred corporate office neighborhood, with new street-level restaurants and shops on the way. Asking rents for office and retail space in Midtown Manhattan are rising and we believe that our portfolio is well-positioned to compete and take advantage of these improving market fundamentals.

In summary, we believe that the office market remains healthy. We are comfortable and confident with our competitive position. Our repositioning plans continue to progress as anticipated and we remain focused on attracting and leasing to quality tenants, enhancing NOI growth, and creating long-term value for our shareholders. Now I'd like turn the call over to David Karp, our Chief Financial Officer. David.

Thanks, Tom, and good morning everyone. I will begin with a review of our first-quarter results, followed by an update on our balance sheet, and after that, we will be happy to take your questions. Last night, we reported FFO of $41.3 million, or $0.17 per diluted share, for the first quarter 2014. Our results in the first quarter were consistent with our expectations, as we continued to execute on our stated operating and capital strategy.

Included in our results is the performance of the Empire State Building Observatory. We are pleased to report that Observatory revenue for the first quarter grew 3.6% to $17.3 million compared to the first quarter of 2013. This was due to higher admission pricing and a more profitable mix of ticket sales that we implanted during 2013.

The Observatory hosted approximately 664,000 visitors in the first quarter 2014, representing a 6.3% decrease from the same period of 2013. We believe the decrease in attendance at the Observatory was due to two factors. Number one, the first quarter of 2014 had a greater number of days impacted by severe weather than were experienced in the first quarter last year. And two, this year we experienced a normal decrease in visitors to the Observatory during the last week of March, due to the fact that Easter this year fell during the month of April.

Observatory expenses increased $1.5 million, as anticipated, in the first quarter of 2014, compared with the first quarter of 2013, led by three primary factors: costs related to our new audio tour package, payroll costs resulting from union contract salary increases, and higher levels of staffing in connection with our ambassador program and general security and advertising expenses.

As a result of these anticipated increases, Observatory net operating income was $10.3 million in the first quarter 2014 compared with $11.2 million last year. As we move into our seasonally strongest quarters for Observatory activity, we expect the performance of our revenue drivers, which consist of the number of visitors, pricing levels, and ticket mix, to support sustained or improved income and margins.

Next I will turn it to our balance sheet. As we have communicated, our balance sheet is low levered, with significant capacity as we continue our capital investment program. At March 31, 2014, we had approximately $1.2 billion of total consolidated debt outstanding, with a weighted average interest rate of 4.55%. Approximately $830.9 million of this outstanding debt is fixed rate, with a weighted average interest rate of 5.78% and a weighted average term to maturity of 2.4 years.

The remaining $372.7 million of debt is variable-rate, with a weighted average interest rate of 1.81% and a weighted average term to maturity of four years. At the end of the first quarter, our leverage, reflected by debt-to-market capitalization was 24% and we continued to maintain one of the lowest leveraged balance sheet in our industry.

At March 31, 2014, the outstanding balance on the Company's term loan and revolving credit facility was $325 million. Our credit facility has a total capacity, including the accordion feature of $1.25 billion. In 2014, we have $196.5 million of debt maturing, which carries a weighted average interest rate of 5.48%. Given our stated intent to achieve an investment-grade rating, we continue to explore alternatives to address our debt maturities to maintain maximum flexibility and capacity within our balance sheet. In 2015, we have $90 million of debt maturing.

Finally on February 21, 2014 our Board of Directors approved a quarterly dividend of $0.085 per share. This dividend was paid on March 31 to shareholders of record of March 14. With that, I would like to open the call for questions. Operator?

(Operator Instructions)

Craig Mailman, KeyBanc Capital Markets.

Good morning, guys. Jordan Sadler is on the line with me as well. May, can we just get an update on attendance so far in April at the Observatory? Has the later Easter season been a boost and also have you guys been able to hold ticket prices similar to the levels that you guys had in 1Q?

Let's be clear. Tony Malkin here, Craig. We are not reporting interim numbers on the Observatory so I could just tell you we are perfectly happy with how things are going at the Observatory. On the ticket pricing, we made a ticket price increase and that increase is done. It was not a temporary -- we don't do variable pricing. We have been holding the ticket price increase just fine and our recent ratings, as I said in my comments, are very positive about the experience, in spite of the ticket price increase. Improved significantly over the prior years' surveys.

Has there been any pushback on the ticket pricing increases or is really the snow or weather and Easter really the driver behind the roll down on attendance last quarter?

There has been, in our view, zero pushback on ticket price increases. Zero. We had, to be clear, when you compare Easter weekend last year with the corresponding weekend this year, we saw the meaningful drop of attendance for that week and we look at that as the weekend before Easter, the week during, and the weekend of Easter, which is typically where vacations fall for families taking trips. The higher number of zero visibility days than historically experienced that did impact the Observatory and there were also a very historically high number of canceled flights to and from New York City due to the severe weather, which also played a role. Our statistics, we feel, are entirely impacted by the factors that we stated and not having to do with the ticket price.

Okay. That is helpful. And then Tom, I know you were talking about some full floor negotiations here at the Empire State Building. Just could you give us maybe some numbers around what pipeline looks like at this point for the Empire State Building in terms of leasing?

Sure, Craig. First, I would say that we're seeing activity across all industry types and for -- at Empire State Building, specifically, everything from our pre-builts to our full floors. While we're not providing guidance on our future activity, I will say that I like the activity we are seeing, I like the -- we're seeing good traffic, and I am pleased with the results that we achieved in the first quarter and I am pleased with the fact that we got some leases in negotiation across the board, again, on full floors as well as our pre-builts.

Hi, it's Jordan Sadler. I wanted a quick question on -- in terms of where you are spending your time. Tony, I am curious, obviously, the leasing side, New York conditions seen a very good and you've got some opportunity in existing portfolio and I appreciate your comments on the option properties and that decision not being made yet. But how much time are you spending looking at the investment market and incremental opportunities beyond the existing portfolio at this point?

To be clear, we have our own internal initiatives pertaining to investment. We clearly want to make our most intelligent decision first with regard to our option properties. What is available for sale in New York, which is visible to everybody is visible to everybody and that is extremely competitive set right now. Those things which we are doing which are private, we are certainly going to keep them private.

But we're always looking, we're always making considerations, and we are actively dialoguing, both with people outside the Company with whom we might like to do transactions and we are also actively dialoguing inside with Management to see how we feel about where we should be spending our money and when. We have got a couple of the objectives in front of us, having to do with the redevelopment and execution of our existing portfolio. You should recognize that we consider that the main predictable driver in our growth in value and in distributions for the foreseeable future.

Okay. Thank you.

Brad Burke, Goldman Sachs.

Hey, good morning, guys. Wanted to touch on the Observatory, and David, you had outlined some of the reasons for the expense increase, but just was hoping to get more detail because the increase was pretty significant quarter-over-quarter. Is this something that we ought to be thinking about as a new run rate or was there some choppiness or some seasonality or some weather-related issues that were impacting the quarter?

You've touched on some good themes there and it is important to understand that we had anticipated these costs increasing due to the introduction of the audio tour, given payroll costs associated with our new ambassador program, and other payroll costs, and lastly, the increases in advertising that we undertook. These are recurring costs and so you should expect them to continue and increase on a seasonally adjusted basis.

Okay. But if I heard you right, you're also expecting sustained or improved income in margins in the Observatory. So if I'm thinking about this being the new run rate for costs, that would imply a pretty meaningful uptick in revenue expectations, as well, to get to a flat to slightly up number? Is that being driven by expectations on increased visitation or is ticket pricing mostly the driver on that?

Again, we don't provide specific guidance on our Observatory revenue. However, as we've discussed in the past, the second and third quarters are typically the strongest in terms of attendance. We feel pretty good about the progress we have been making in growing revenue and as you recall there are really three legs to the stool here in terms of our revenue. One is increasing admissions, two is increasing ticket prices, and three is improving upon the mix between our direct sale and our indirect sales, and we feel good about the progress we have been making on all three legs.

Okay. And then sticking with the Empire State Building, obviously very good progress in the quarter on leasing. But I'm trying to get a sense of how I should be thinking about occupancy trending over the year, because you still have some decent-sized lease expirations for the rest of the year and I assume that some of that is related to the space that you are purposely going to let expire for redevelopment.

But at the same time, it also sounds like you have a decent pipeline of potential new leasing opportunities. So with all the moving parts, is it fair to think about the occupancy we're looking at now as being a level that you will hold or improve on, or is there reason to think that you might see some volatility in that number over the course of the year?

Sure, I'd say that -- this is Tom Durels -- I would say that, while we expect that over time, the occupancy at the Empire State Building will increase, don't forget that we continue to generate vacant space as we move tenants out and execute on our program and strategy to consolidate smaller, older suites into larger, more efficient develop availabilities, including full floors and pre-builts. That said, the rollover for Empire State Building in 2014 is relatively modest at just around 117,000 square feet for the balance of the year.

We will vacate some of that space intentionally as we execute our consolidation strategy, but as I said before, the market is healthy. We are seeing good activity. We're getting good traffic. I like the activity that we see and it is on all space types, both pre-builts and our full floors. I would say that this is before we have brought online the amenities that I spoke about in my earlier remarks so I am feeling very positive about where we're at we and I feel very good about our competitive position.

Okay. And maybe staying with the market then, obviously very good mark-to-markets in Manhattan office. I'm trying to understand how much of this should be attributed to putting tenants into space that was recently redeveloped and that was driving the strong mark-to-markets or how much of it just overall market strength? And then thinking about it for the rest of the year, is this a level that we should think about being sustainable or were there some chunk year one-time items in the quarter that was driving the strong number?

Sure. I would say that, certainly at Empire State Building was a driver for our mark-to-market for the first quarter, and more specifically, the LinkedIn lease achieved very good positive spreads. You're going to see variability from quarter to quarter on our leasing spreads, but I would say that the result that we achieved is derived from two parts -- one, the general health of the market, and second, the success of our redevelopment program. As we commented before, there remains that embedded growth opportunity within our portfolio, as we execute on our redevelop strategy, but again, first-quarter Empire State Building was a significant driver and you are going to see variability from quarter to quarter.

Okay. I appreciate it. Think you guys.

(Operator Instructions)

Jamie Feldman, Bank of America Merrill Lynch.

Great, thank you, and good morning. Just be clear, you had said you're going to have -- you have four floors available now and you expect to get four more by the end of the year? And you said LinkedIn has expansion rights for one. Then can you just -- I know you're not giving guidance, but just to clarify what you guys did say in terms of how many of those are currently in discussions?

Sure, Jamie. We started the year with four floors available. We have leased one of those to LinkedIn. We will be delivering by the end of the year four more full floors that we will bring to market and those will then be available for lease-up. So as it stands right now, we are targeting seven full floors, three available now and four available towards the latter part of this year. We do have discussions ongoing with prospective tenants for some full floors. I look forward to giving you updates in our next quarterly we call.

Tony Malkin here. Please do keep in mind that we are trying to keep you guys current so, as the KeyBanc notes said last night, we already announced most of the leasing, which we disclosed in our comments. It would be reasonable to assume that we will continue to make periodic inter-quarter announcements of actual leases as they are done.

Okay. And then in terms of the seven floors available, can you talk about what floors they are on? Are they low in the building, are they higher in the building?

Generally they are all in the in the tower. Our lowest floor is the 29th floor and then the floors above that. We do have a block available on the 55th through 58th floor of about 104,000 square feet, but generally these, aside from the 29th floor, these floors are approximately 26,000 square foot in size. So again, we are seeing good activity, we're getting good showings, it is in advance of the new amenities coming online this summer. I feel very good about where we are at and the activity that we're seeing.

Okay. And then can you talk about your ability to push rents? Where are your asking rents today versus maybe a year ago and given the strength you're seeing in the market?

Sure. We have raised our asking prices across the portfolio twice since the start of the year, depending on the space, depending on the building, anywhere from 5% to 12%, I would say, since the start of the year. So we've -- the market is trending positive and the good news is it's broad-based, it's at all of our properties, it is for all of our space types, again for everything from the smaller suites to the larger blocks. There is not one particular part of the market, at least within our [sell] market, and our properties that is soft. Everything is looking very healthy and trending positive and those two price adjustments since the start of the year reflects that.

Okay. And then what were your price adjustments last year?

You mean during the course of the year or year-over-year? We raised our prices a bit throughout 2013, but the most telling stat is that percentage range that I gave you from year-end 2013 to where we are today.

So that you've really seen a material pick up?

Yes.

This year, year-to-date? Okay. And then finally, how should we think about the type of demand you're seeing for the Empire State Building versus your buildings on Broadway or even One Grand Central Place?

As I remarked earlier, we are seeing a broad-based demand at all of our properties. What's surprising is One Grand Central Place, where, if you look to maybe 18 months ago, it was much slower than it is today. It is very healthy and we're seeing good traffic and as soon as we make space available through pre-built or consolidations, it is getting activity. Like the other properties, we have raised rents at one Grand Central Place.

The Broadway corridor is doing very well. That whole submarket has been transformed. There is good momentum in that submarket. We were the leader in that area. We are -- again, we have raised prices on our pre-builts there, we really have no large availability in the Broadway corridor, and generally, we are building pre-builts and they are moving fairly quickly.

Jamie, Tony Malkin here. Please remember, when David and I did the road show, we made the comment, we've made it at other times, we feel that there are two things that have impacted and will continue to impact our pricing. We made the comment back in September and it has held true -- it holds true today.

One, is the overall market -- unavoidably our performance moves with the markets. But the other is the fact that we are delivering redeveloped properties to the market, so we are continuing to bring our properties overall to their potential and that potential continues to improve. When you look at the overall market, that is fine.

I might hazard a warning to folks, not necessarily to look at what we are doing and assume that, that is fully representative of the market because our portfolio coming to its full potential, not there, but coming to its full potential, is building momentum within the community and every deal we do is better than the last. Not just by rent, but also by the quality of broker and the quality of tenant coming to it. I just think that is something to consider as you look at our performance and as we make our comments, some of the comments are market-related, some of them are really portfolio-specific.

So where would you put -- if you guys are raising rents at 5% to 12% year-to-date, what do you think the submarket would be -- what do you think submarket rents have increased?

It varies by building and owner. I would say that -- I won't hazard to say where the others are moving their asking rents but I would say that overall, as I speak to my peers in the industry, there is a general trend towards raising rents, raising asking prices across the board.

Okay. All right. That's very helpful. Thank you.

John Guinee, Stifel.

Great. Tony, nice start, congratulations. Just a few clean-up questions. If I look at -- and this is idle curiosity -- your average lease executed about $49, $50, what you think the ballpark operating expense stop is on those leases?

It's going to vary building by building, John. As we've talked about in the past, there is going to be a meaningful difference between, say, the Empire State Building and then properties in the greater New York metropolitan area.

I'm just talking about Manhattan, I'm sorry? 46 leases, 173,000 square feet, $49.42 -- is what is the current OpEx on the Empire State Building and what is a good average OpEx on the other assets in the portfolio?

If you included the Empire State Building in the New York portfolio, we're probably around $22 to $23, all in taxes and insurance.

But keep in mind that we have commented on the operating expenses at the Empire State Building previously, and that embedded in those expenses, are some expenses that are Observatory-related, so it skews those numbers slightly.

Okay. Good. Then going next page, page 6, you've got about 420,000 square feet of retail in the Manhattan office properties. It looks like it is greater than just the first floor of those properties. What do you think, just rough numbers, of the 420,000 square feet, how much is first floor versus concourse versus second or third floor?

John, I don't have the number off the top of my head, but it's -- we have very little available retail space. There are the two significant pieces that we have, our one at 1359 Broadway of about 60,000 square feet, and about one-half of that is [on grade], the other one-half is lower level and mezzanine. At 250 West 57th Street, we have about 10,000 square feet, about 7,000 of that is on grade, the balance on the lower level. Those are our really our two most significant spaces that are available right now. We've got some space on 33rd Street at Empire State Building, those are all on grade, so that should give you some pretty good perspective on it.

Good. And then we were on a call yesterday with a Manhattan operator and they had signage income and they were building signs about the size of a football field. Do you have any signage income in your NOI or your gross revenues? Do have signage creation opportunities within your portfolio?

Very little. Honestly very little. It is governed by zoning. There are limits as to what signage one can put up on a building. It is very modest. We do things like, when we have vacant space, we have gotten some window signage income, but it is a very small amount. We have a side of the building at 501 Seventh Avenue, we've received some income for placing a sign there at various times in the past.

Okay. Great. Thank you very much.

Craig Mailman, KeyBanc Capital Markets.

Hey guys, just a few quick follow-ups here. On the existing or the remaining roll for the balance of the year, how should we think about the mark-to-market vis-a-vis the marks that you guys had this quarter? Should it be similar or is it going to be a little bit of variability depending on mix?

As commented before, we are not giving forward-looking guidance so we're not giving forward-looking guidance on that.

What we're trying to do is we're trying to give you guys some inside perspective into our portfolio operations and any change in our present policy with respect to formal guidance will be in the future.

Okay. Great. Thank you. Then, David, just on the balance sheet, you said that you guys were thinking about some alternatives here for the debt maturities as we go through the year, given your desire to be investment-grade graded. Are you talking more about term loans, private placement for debt? What are you thinking about the debt maturities at this point?

The nice thing is that we do have the flexibility, given the strength of our balance sheet. We continue to improve upon that strength by creating more alternatives. Obviously, one of them is, as we stated in the past, is our goal to become an investment-grade rated entity so that we can avail ourselves of the unsecured bond market.

But we're looking at everything right now. We're looking at secured, we're looking at unsecured, bank debt, we've really got a whole menu in front of us and, as we consider our options, the fortunate thing for us is that those near-term maturities this year are very --whatever metric you look at, whether you look at interest coverage, loan-to-value, debt yields, they are all incredibly low levered, so we feel very comfortable with our ability to address those.

Okay. Do think you take any cash-out proceeds? I know some of those are pretty low leveraged here, some of the assets that are encumbered?

Again we haven't -- having not determined what form of financing we are going to take, I don't want to give any advice as to what we might be doing in terms of amounts.

Okay. That's fair. And then just one last quick one. I know the option property, you guys are still deciding what to do there, but as we think about how you guys are going to finance that, if you guys decide to buy them, the Helmsley estate, the only partner that can take all cash, would the rest of it you anticipate primarily being OP units? What would be the thinking there?

If we were to proceed with those, one or both of those investments, you are correct. The only cash requirements would be the pay the Helmsleys and some nonaccredited investors within the ownership group. The balance of the consideration will come in a combination of either assumption of existing debt and the offering of OP units in Class A stock.

Great. Thank you.

Brad Burke, Goldman Sachs.

Hi guys, I appreciate the follow up. Just again to touch on the debt maturities, and I realize that you are looking at a bunch of different things but I would imagine that, regardless of what you do, you still are going to be able to reduce the rate on those, and to your prior comment, probably be able to take out some cash, if that is what you decided to do. But in terms of the timing, is this something that we ought to be thinking about you waiting to come to a conclusion on the option properties before you figure out what you want to do with the maturities or are these completely separate decisions?

They are, by and large, separate decisions, but understanding, when we take a look at the balance sheet, we've got to look at it on an entire basis and see, under the scenario, if we were to adopt that, what would our balance sheet -- if we were to, I'm sorry, acquire those properties, what our balance would look like. So it does play into our analysis, but I don't think they are directly linked.

Okay.

It is important to note, the way we look at things is really very simple. We have an extraordinarily low level of leverage. We are giving serious thought to anything we would do which would change our level of leverage. We go back to the first statement, we have an extraordinarily low level of leverage.

Okay. I understand what you're saying. And then the last one, just a quick modeling one -- construction revenue and expense, I realize that -- there was a big increase, but I also realize that it largely nets out. That said, the increase in NOI quarter-over-quarter was almost $1 million, so I don't know if there was something specific driving and if we ought to be thinking about this as a run rate for the rest of the year?

I would hesitate to say look at it as a run rate. As we've said in the past, that business does have cyclicality to it. It is not [being this] in terms of contracts and so you can expect as you look forward to see that in the performance of that sector. But at the end of the day, it represents, from in NOI basis, a very small percentage of the total portfolio of operations.

Okay. I appreciate it. That's all for me. Thank you, guys.

At the time, I would like to turn the floor back over to Mr. Malkin for any additional or closing comments.

I would just like to say, first of all, thank you for everyone and your attendance. We appreciate the interest in the Company. Number two, I am really pleased with how our team is working. I can't emphasize that enough. We're executing at a very high level. In the meantime, let's face it, we only went public in October of 2013, and really pleased with how we are executing, while also transitioning to public Company operation. We'll look forward to being in touch with you over time going forward. I know we've got a road show visit up to Boston planned for next week to talk to folks. We appreciate your interest. Thank you very much.

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