Empire State Realty Trust Inc (ESRT) 2014 Q2 法說會逐字稿

Greetings and welcome to the Empire State Realty Trust second-quarter 2014 earnings call. (Operator Instructions) A question-and-answer session will follow the formal presentation. (Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to turn the conference over to your post, Mr. Thomas Keltner, General Counsel at Empire State Realty Trust. Thank you, sir. You may now begin.

Good morning. Thank you for joining us today for Empire State Realty Trust's second-quarter 2014 earnings conference call. In addition to the press release distributed last evening, a quarterly supplemental package with further detail on our results has been posted in the Investor Relations section of 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. Examples of forward-looking statements include those related to revenue, operating income, and financial guidance, as well as non-GAAP financial measures such as FFO, core FFO, same-store results, and EBITDA.

As a reminder, forward-looking statements represent management's current estimates. They are subject to risks and uncertainties which may cause actual results to differ from those discussed today. Empire State Realty Trust assumes no obligation to update any forward-looking statement in the future.

We encourage listeners to review the more detailed discussions related to these forward-looking statements contained in the Company's filings with the SEC. We also caution that prior-period results which are referenced in any comment today may not necessarily be reflective of the results for Empire State Realty Trust if it had truly been a stand-alone entity during the periods presented.

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 directly comparable GAAP measures are included in the earnings release and supplemental package, each available on the Company's website.

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

I am delighted to welcome you to our second-quarter 2014 earnings conference call. On today's call I will begin with a brief review of our Company with some highlights from the second quarter.

Tom Durels, our Executive Vice President and Chief of Property Operations and Leasing, will then provide an update on our portfolio. And David Karp, our Chief Financial Officer, will review financial results in more detail and discuss our balance sheet.

Empire State Realty Trust is a pure-play Manhattan and New York City metro area office and retail real estate portfolio. We believe our portfolio offers a unique opportunity to capture upside through the continued renovation and repositioning of our properties, bringing their occupancies to market, and leasing them at market rates. Our ability to execute this strategy should try drive meaningful growth in cash flow and create long-term value for our shareholders.

In the second quarter of 2014, we continued to make excellent progress on leasing and implementing our redevelopment and repositioning programs, and our results were fully consistent with our expectations. The Empire State Building Observatory is meeting our expectations for its performance, and I am pleased that we had a record number of visitors for the month of June.

On July 15, we acquired our option properties -- the long-term ground leaseholds of two Manhattan office properties at 112 W. 34th Street and 1400 Broadway on which we had previously announced we had exercised our options. As we have explained previously, through our predecessor we have operated these properties. We have nearly completed their capital improvement programs, and we are well underway with their redevelopment and leasing programs. With approximately 700,000 square feet remaining of space to vacate, redevelop, and release at what we believe will be very positive spreads from current, fully-escalated rents, including nearly 90,000 square feet of prime retail directly opposite Macy's on 34th Street, we believe these quality properties offer a great opportunity to enhance further shareholder value.

We encourage you to join Tom Durels for one of his well-regarded tours to view these assets for yourselves. Remember, we still have a large amount of our portfolio to vacate and redevelop -- approximately 700,000 square feet at the Empire State Building and 1.6 million square feet in the balance of our portfolio, including our new acquisitions at 112 W. 34th Street and 1400 Broadway. Tom Durels will give more detail on this in his comments.

Even with these acquisitions, our balance sheet remains a core strength with one of the lowest leverage levels in the industry, which provides us with the capacity and flexibility to finance our capital programs and support incremental opportunities that may arise. As we move through the second half of 2014, we believe we have the portfolio, balance sheet, and strategy to continue to drive growth and create meaningful valuation for our shareholders. Our core management team has decades of experience and a track record of value creation 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, my family remains a major stakeholder in Empire State Realty Trust, and our interests are aligned with shareholders with the same objectives of value creation, capital appreciation, and a growing and safe current return. As a shareholder I am really pleased with the progress made by the ESRT team in taking on the challenges and opportunities of becoming a public company.

As a CEO, I am impressed by how quickly we have moved from the complexity of our predecessor ownership structures and are thriving with our centralized management, simplified organization, high level of execution, and unified balance sheet. I have said this many times, and I will repeat it here: we are truly happier, more efficient, and more productive as a public company.

Now I would like to turn the call over to Tom Durels.

Thank you, Tony. Good morning, everyone. On this morning's call I will review our overall leasing activity in the second quarter, including our continued progress at the Empire State Building, and discuss leasing opportunities at our recently acquired properties, 1400 Broadway and 112 W. 34th Street.

Our second-quarter leasing results included 69 new and renewal leases signed, totaling 211,000 square feet of office and retail space. Approximately 210,000 square feet of this leasing activity took place within our office portfolio, with approximately 171,000 square feet in our Manhattan office properties.

At June 30 of 2014, our portfolio was 88.6% occupied, an increase of 140 basis points from the end of the first quarter. Including signed leases that have not yet commenced, our portfolio is 89.6% leased, an increase of 80 basis points from the end of the first quarter. On a year-over-year basis our portfolio occupancy is up 530 basis points, and our signed leases not commenced percentage is up 320 basis points.

We signed several significant leases during the second quarter: at the Empire State Building, a new full-floor lease with Bulova Corporation for over 33,000 square feet; and at One Grand Central Place, we executed a nearly 13,000 square foot lease with Robertson Foundation, a private grant foundation established by Tiger Management Company founder Julian Robertson. Along with sustained leasing demand for our office properties, we've continued to see strong rental growth spreads; and during the second quarter, rental rates on new and renewal leases across our entire portfolio were 19.2% higher on a cash basis compared to prior escalated rents.

Our Manhattan office portfolio rental rates were 25.8% higher for the quarter. Our average cost for tenant improvements and leasing commissions during the second quarter on all new and renewal leases within the portfolio was $60.85 per square foot.

Now, at the Empire State Building, new amenities -- which we have highlighted on earlier calls -- include a restaurant with private executive dining and event space, tenant-only conference center, and a 15,000 square foot tenant-only fitness center. The conference center has been completed and is open for tenants' use. The fitness center and restaurant will be ready for opening in September. With these new amenities in addition to ones already in place, including four existing on-site dining options; cell phone service throughout all floors; and state-of-the-art building systems, we continue to execute on our plan to create Manhattan's premier urban campus, a completely unique experience for tenants and their employees. Currently we are 85.6% occupied at Empire, and our signed leases not yet commenced percentage is now 86%, up 150 basis points from the end of the first quarter.

The work to consolidate smaller spaces to create more efficient, larger blocks of space is ongoing. We started the year with four full tower floors, and since then we have leased one floor to LinkedIn and another floor to Bulova. We have an additional lease-out for signature on the third floor, and we are actively marketing the other. Four additional full floors will be consolidated and ready for marketing to prospective tenants by year-end.

Now I would like to turn to our recent acquisition of a long-term ground leasehold at 112 W. 34th Street and 1400 Broadway, which we acquired in July pursuant to our option agreements and which were disclosed in our formation documents. The addition of these two premier Midtown office buildings adds 1.64 million square feet to our Manhattan portfolio, an increase of about 26%.

As we have stated before, we believe our acquisition of these high-quality Midtown office properties represents an opportunity to further enhance shareholder value. We know these properties well. Their capital improvement programs are nearly complete, and their strategic repositioning of tenant spaces are underway. And we believe there is excellent upside in the re-leasing of the office and retail space at both properties.

112 W. 34th Street is a 26-story, approximately 650,000 square foot office tower with 92,000 square feet of retail space. The property's office and retail space is 77.5% occupied and 83.2% leased as of June 30.

As we had mentioned last quarter, we signed a new 131,000 square foot lease to Macy's, the department chain, with options for significant expansion. We are looking to consolidate and create additional full office floor availabilities in the next 24 months. Additionally, we are marketing an 89,000 square foot retail space on three levels directly opposite Macy's flagship store that will be available in 2016. This space is currently leased, with an in-place, fully escalated rent of under $30 per square foot.

1400 Broadway is a 37-story, approximate 880,000 square foot office tower with nearly 20,000 square feet of retail space located in the vibrant Broadway quarter of Times Square South. The property's office and retail space is 92.6% occupied and 92.7% leased as of the end of the second quarter.

Throughout our portfolio we continue to execute on our strategy to consolidate smaller, unimproved spaces into larger blocks of space that we vacate, redevelop, and lease up at higher rents to better-quality tenants. As we have said before, as we do this work, you should be prepared for our occupancy not to move upward in a straight line.

For some time to come, our business plan will include creating new vacant space to redevelop and lease at higher rents. Now we have approximately 700,000 square feet of space left to redevelop and re-lease at the Empire State Building, and approximately 900,000 square feet left to redevelop and re-lease at the balance of our Manhattan office properties prior to the acquisitions of the two optioned properties. Those two optioned properties add approximately 700,000 square feet of additional space to redevelop and re-lease, for a total of nearly 2.3 million square feet to redevelop and re-lease at what we believe will be very positive spreads against in-place expiring fully escalated rents.

Overall, we continue to like the market, and we like our competitive position within it. We see good activity across the board at all our properties and in all space types. We are encouraged by the steady number of showings and the healthy volume of deals which we presently have under discussion.

So now I will turn to call over to David Karp, our Chief Financial Officer. David?

Thanks, Tom, and good morning, everyone. I'll begin with a preview of our second-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 core FFO of $55 million or $0.22 per diluted share for the second quarter 2014. Our results in the second quarter were the result of the continued execution of our stated operating and capital strategy.

For the six months ended June 30, 2014, core FFO was $96.3 million or $0.39 per fully diluted share. Core FFO excludes certain expenses and gains that we expect to be nonrecurring. In the second quarter of 2014 these items included approximately $735,000 of acquisition costs, approximately $950,000 of issuance expenses related to our private perpetual preferred exchange offering, and approximately $540,000 of gains net of income taxes received by us upon the settlement of a lawsuit related to the observatory. Combined, these nonrecurring expenses and income net of expenses totaled approximately $1.15 million, which was excluded from FFO in the second-quarter 2014 to determine core FFO.

Turning to our Observatory operations: the Observatory hosted approximately 1.2 million visitors in the second quarter 2014, representing a 3.8% increase from the same period in 2013. A portion of this gain was due to the shift of the Easter holiday week from first-quarter 2013 to second-quarter 2014. June in particular was the strongest it has ever been, with nearly 418,000 visitors.

We are pleased to report that Observatory revenue for the second quarter grew 11.4% to $30.4 million compared to the second quarter of 2013 due to higher admission pricing and a more profitable mix of ticket sales, based on our implementation of a revised pricing matrix that we put in place during 2013. Observatory expenses increased 16.4% in the second quarter of 2014 compared with the second quarter of 2013, driven by increased operational and payroll costs related to our new audio tour package and higher tour operator salaries.

Despite these anticipated higher expenses, Observatory net operating income increased 9.9% in the second-quarter 2014 compared to last year. We are in a seasonally strong part of the year, and we expect that we will continue to generate strong attendance at the Observatory.

With regard to our balance sheet, as we have stated previously, our strategy is to maintain a strong balance sheet with low leverage and significant capacity to support our capital investment program and select opportunities for growth. At June 30, 2014, we had approximately $1.2 billion of total consolidated debt outstanding, with a weighted average interest rate of 4.47%.

Approximately $826.2 million of this debt is fixed rate with a weighted average interest rate of 5.78% and a weighted average term to maturity of 2.1 years. The remaining $402.6 million of debt is variable rate, with a weighted average interest rate of 1.77% and a weighted average term to maturity of 3.7 years. At the end of the second quarter, our leverage, reflected by consolidated debt to market capitalization, was 23%. And we continue to maintain one of the lowest levered balance sheets in our industry.

Our credit facility has a total capacity, including the accordion feature, of $1.25 billion. At June 20, 2014, the outstanding balance on the Company's term loan and revolving credit facility was $355 million.

In 2014 we had $193.6 million of debt maturing, which carries a weighted average interest rate of 5.48%. $89.8 million of debt was set to mature on August 1, and we have extended the maturity date for six months as we pursue plans for our longer-term capital strategy. In 2015 we have $88.4 million of debt maturing. 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.

On May 22, 2014, our Board of Directors approved a quarterly dividend of $0.085 per share. This dividend was paid on June 30 to shareholders of record on June 13.

Lastly, I would like to give you a little more detail on the completed acquisition of our option properties at 112 W. 34th Street and 1400 Broadway. The 39-year leasehold and fee title to a small, contiguous property at 112 W. 34th Street were acquired for approximately $423.6 million or approximately $570 per square foot, consisting of $87.7 million by assumption of existing mortgage debt with an average interest rate of 6.07% and a term to maturity of 3.8 years, $106.9 million in cash, and $229 million in shares of Class A and Class B common stock and Series PR OP Units. The 63-year leasehold at 1400 Broadway was acquired for $310 million or approximately $346 per square foot, consisting of $80 million by assumption of existing mortgage debt, with an average interest rate of 5.78% and a term to maturity of 3.6 years, $79.7 million in cash, and $150.3 million in shares of Class A and Class B common stock and Series PR OP Units.

As part of these transactions, the Company issued 2.7 million shares of Class A and Class B common stock at a per-share price of $16.65 and 20.1 million Series PR OP Units at a unit price of $16.65. We filed an 8-K on July 21 which presents more information on these assets and their impact to our income statement and balance sheet.

And with that, I would like to open the call to questions. Operator?

(Operator Instructions)

While the operator is polling for questions, please let me clarify one item: the leasehold at 112 W. 34th Street is 49 years; and at 1400 Broadway, 63 years.

Thank you, David -- Tony Malkin here. That will correct the statement on the recording of 39 years. So it's 49. David, do you want to repeat that again, please?

49 years at 112 W. 34th Street and 63 years at 1400 Broadway.

Thank you.

Brad Burke, Goldman Sachs.

Hey, everyone. Nice quarter. Wanted to touch upon the option properties. It sounds like the mark-to-market on the leases is a pretty significant opportunity. So I was hoping you could give us a sense of where you are seeing the embedded rents compared to what the market levels are, and whether that's before or after you are deploying the capital to redevelop the properties? And then, if you can, give us some color specifically on what you are thinking about on the mark-to-market on that retail space on the 34th Street property?

Brad, if you could do us a favor, please -- it's very hard to hear you -- if you could repeat your question from the top, and speak much more loudly?

Can you hear me now?

Yes, that's much better. Thank you.

Great. Yes, that's a tech problem of mine.

So the mark-to-market on the option properties -- it seems like that's a pretty significant opportunity. So I was hoping you could just give us a sense of what you are thinking about between the embedded rents on those properties versus the market levels, and whether those market levels are before or after you have to deploy any capital for redevelopment?

And then also, Tom, you had mentioned the 89,000 square feet of retail space that's coming in a few years and has an embedded rent of $30 a square foot. If you could just give us some color on what you are thinking the market rate on that space might be once you lease it out?

Yes, Brad. Starting first with the retail space that we are currently marketing of about 89,000 square feet on three levels -- as I mentioned in my remarks, the in-place, fully escalated rents are below $30 per square foot.

That retail space sits directly opposite Macy's, Macy's flagship store. It's within the 34th Street retail corridor, which is a very dynamic retail location. In advance of the lease expiration for the existing tenant, which is mid-2016, we are already seeing strong activity. We have proposals in hand.

What I can say is that it was previously reported in the press, when we had signed a lease with Swatch for a smaller store of about -- just about 1,500 square feet on grade. That deal was done on an average rent of $1,000 a square foot. Keep in mind that only about 24,000 square feet of our 89,000 square feet is on grade. So needless to say I think that we are going to see very significant, healthy rent spreads on that particular retail space.

Moving on to the office at both properties -- 112 W. 34th Street and 1400 Broadway -- we will be implementing our redevelopment strategy to consolidate smaller, older spaces into larger, full-floor availabilities. We have targeted over the next -- throughout the end of 2016 about 400,000 square feet of space to be redeveloped.

So it's executing the same game plan that we've done in our other properties: consolidating smaller spaces; redeveloping those for larger, full-floor availabilities. And we've got targeted through the end of 2016 about 400,000 square feet. And we've been doing this -- executing on our redevelopment and consolidation plan -- for years at all of our other properties. So we feel good about where we are at and our competitive position. And, of course, we've been doing it at 112 and 1400 as supervisor since we took over control of these assets.

That's correct.

Okay. And I guess, staying on a similar theme, the mark-to-markets on the leases this quarter were obviously impressive, second quarter in a row. So I'm just trying to think about -- you know, how much of that is market improvement versus you getting a return on your investment to redevelop that space? And I'm also wondering whether you can give me an idea of whether the mark-to-markets you are realizing now and in Q1 are above or whether they are in line with what you were thinking about when you were originally underwriting that development?

Mostly in line with our expectations for this quarter. I would say that the mark-to-market is based upon both factors -- the success and the appeal of our redevelopment program, which is attracting a broad base of tenants from various industries, as well as the improvement in the market and the improvement in our submarkets. And we think that the market is coming to us.

So keep in mind that going forward, the mark-to-market all depends on the in-place escalated rents. So you are going to see variability from quarter to quarter and on space to space. But given the performance to date, I think we feel very good about where we are at.

Okay. And then maybe just a bigger-picture question -- I know last year, obviously, the IPO was a big focus; and I assume that the option properties were obviously a big focus of management's attention this year. So now that the IPO is in the rearview mirror, and you have the option properties finally on the balance sheet, is there something new that becomes the next area of focus?

Tony Malkin here. Thanks for the question. I think it's safe to say that we are continuing with the same focus that we have stated all along. We are very focused on our redevelopment and the re-leasing of aggregated and assembled full floors and achieving this spreads that we have been achieving.

Of course, we would always like to do more; we will see what happens. Beyond that, I have stated that I have conversations and will have conversations with other families. We react to opportunity as and when we see it. At the moment, the best opportunity we see is within our own portfolio. When we have something new to say, we will say it.

Okay. I appreciate it. Thank you.

Craig Mailman, KeyBanc Capital Markets.

Good morning, guys. Jordan Sadler's on the line with me, as well.

Just want to start on the space to be taken back and then redeveloped over time, the 2.3 million square feet. I appreciate the comments on what you guys are planning to do at the two option properties, but just kind of wondering if you guys could give us a schedule of how you see it over the next year or two of that space coming back -- average spend on the re-dev of that space? Is it a good kind of place to think about a 10% return on that investment? Just maybe some color on that?

Sure. First, on the timing of redevelopment out of the 2.3 million square feet, I already commented on the two option properties, what we have our sights set on through the end of 2016. And just like at the two option properties throughout the entire portfolio, we have been managing our lease expiration dates to line up smaller tenants so that we can intentionally vacate space and execute on that consolidation or redevelopment of both office and retail space, again, throughout the whole portfolio.

So if you look at our lease expiration dates, you'll see that there is a good amount of roll in 2015 and 2016 that was lined up intentionally. Through that period of -- end of 2016, we are looking at somewhere in the range of probably 900,000 square feet that we've got targeted for redevelopment that will change, plus or minus, over time as we continue to manage our rent roll.

And then on spend, it's really market. As we redevelop and we demolish space, we abate it; we put in base building HVAC and electric. And then it's market TI contributions. So it's really consistent with the market. And keep in mind that that initial base building spend for demolition, abatement, HVAC, and electric is really a one-time spend that we will not incur again.

And Craig, with respect to the question on the return on investment, the 10% to 12% return estimate that we had provided prior to the IPO or at the time of the IPO -- it's still a number we feel comfortable with. I would point out that we have added additional information within the supplemental, which will help you understand that better.

Clearly, we believe that we are getting better returns from our existing properties than what we are currently seeing generally in the marketplace. But with respect to understanding driving returns going forward, again, I would refer you to the information in the supplemental. And if you find that you need more information than that, please let us know, and we will be happy to consider that for you.

Okay, that's helpful. Tom, at this point, market TI packages -- is it -- would you call it $90 with the base building work in TIs? Is that a fair kind of --

It varies. P&I contribution for the larger space is really going to vary. It could be anywhere from $55 to $65 a square foot. I think most of it ends up in that $60 to $65 per square foot range. It all depends on the economics of the deal.

Certainly, the rent and the free rent is part of that overall equation. In the pre-builts, our turnkey pre-builts, on base building work, where we are doing a TI contribution for the work I mentioned -- HVAC, demo, abatement, electric, and the like -- it's going to be a range. It really depends on the specific space and the building, because we have got a variety of conditions. And keep in mind, it's a one-time spend. But to give you some visibility on that, it's a range of anywhere from $30 to $55 a square foot, depending on the space.

Okay. And just one last one on this topic -- of the 900,000, how much of that is the Empire State Building?

We have about 700,000 square feet of redevelopments to execute at Empire State Building that's remaining to be done. Through the end of 2016, a bit over 300,000 square feet is what we kind of have our sights set on, so that by the end of 2016, I think you are looking at a remaining balance of only about 400,000 -- plus or minus -- square feet to be redeveloped at Empire.

Okay. That's helpful. And then on the demand side, just curious -- the makeup of the tenants you are seeing. Is it mostly TAMI, or has financial services come back? And just curious -- with Google's announcement that they may take back 500,000 square feet at 111 East, are you guys hearing from any of those tenants that may be displaced?

The good news is we are seeing demand from a very broad-based set of tenants, meaning in a variety of industries. I think that's a testament to the central, convenient location of our properties with great access to mass transit and the success of our redevelopment program. But we are seeing everything from the TAMI tenants, insurance, finance, consumer products, professional services, and legal.

And we are seeing strong -- I'd say strong demand from a broad-based set of tenants. With respect to any tenants coming from Midtown or Midtown South, we are seeing movement from both those areas to our properties.

Okay. Then one quick follow-up -- what's the commencement date on the Bulova lease?

It has already commenced. We were able to effect possession and commencement of that lease immediately upon signing. Now, there is free rent of about -- you know, roughly 10 months, but the commencement occurred upon signing.

Great. Thank you.

Jamie Feldman, BofA Merrill Lynch.

So I guess just sticking with the Times Square South submarket, can you talk a little bit about net effective rents today and where they had been trending? It sounds like you've seen an improvement in the market. How should we be thinking about where they stand today versus, say, a year ago?

Yes, we've seen a steady, positive trend. Specifically, you are asking about the Times Square South market in that Broadway corridor. So we've seen a positive, steady trend, really, over the last two quarters. Most of the leasing that we've done in that Broadway corridor has been in our pre-built suites.

And we've steadily increased our asking and taking rents since the start of the year. To give you some kind of visibility on that, from the start of the year, depending on the space, it's been an increase in asking and taking of anywhere from 8% to as much as 12%.

Okay. And then what's your expectation going forward? What are you guys able to get in terms of annual bumps?

We generally will get annual bump depending on the term of the lease; but even in our smaller suites, if it's on the short-term side of five years, we will still get a midterm bump. Generally, over a 10-year deal, you get a 10% bump midterm; on a five-year deal, you get maybe a 5% bump midterm.

Going forward, all I will say is that we've had good success to date. I think we are very well positioned. We are seeing good activity in our properties based on the number of showings, the number of leases in negotiation, and active proposals being traded. So we have had a good, positive trend to date. And I really won't speak to going forward.

Okay. And then in terms of your leasing spreads this quarter, they were very positive for the new leases, slightly negative for the renewals. Do you guys have a sense of what those were on a GAAP basis? I guess I'm thinking specifically about the renewals. I imagine with bumps, they are probably positive.

You know, we calculate our leasing spreads on a cash basis, comparing the starting cash rent to the fully escalated cash rents. So we haven't done a calculation for a GAAP leasing spread. We can certainly take a look at that.

Keep in mind, Jamie, on renewals -- as I commented earlier -- relative to the execution of our redevelopment plan, there will be times that we do short-term renewals to preserve some cash flow in order to line up lease expiration dates so we then can execute on our plan to consolidate an entire large block of full floor.

Do you think most of the renewals we saw this quarter were those types of leases?

I would say that the majority of the leasing we did -- over three-quarters of the leasing we did this year were for new deals. And some of those renewals were done for cash flow purposes, just on a short-term basis, to execute our consolidation and redevelopment plan.

Okay. And then as you guys are taking about your conversations with other families and potential acquisitions, how interested are you in drifting outside of this Times Square South, where you have clearly built a pretty good concentration?

Well, let's be clear. We have a presence in Times Square South, really, from Empire State Building up to 1400 Broadway, which is at the root of our legacy predecessor business model. And as we go forward -- I think I have made the comment before -- within the limitations of our focus, we are going to be omnivorous opportunivores.

That being said, we are not going to make any predictive statement. We have a tremendous amount of work to do in our internal portfolio, which we believe is going to drive growth -- not organic growth, but really material improvement beyond just the market.

I've said this before: if the market improves, I believe we will improve more than the market. If the market stays the same, we believe we will improve better than the market. And if the market goes down, we believe we will do better than the market.

So as far as looking where else we might go, it's really hard to tell. We are very, very return-oriented. We are very focused on capital allocation, and we are very focused that we have a lot of opportunity in front of us for a long time -- over 2 million square feet left to redevelop and re-lease. And we believe that's good work for us to focus on, particularly in this very capital-rich environment.

Okay. Thank you. And then, just finally, it looks like things get a little bit better in the suburbs. Can you talk about what you guys are seeing out there? Do you think that's a long-term hold for you, the suburban office assets -- or at least all of them?

Yes, I will say that our properties there -- we believe we've got the best properties in our particular submarkets. Three of them have direct access -- immediate adjacency -- to mass transit, with the Stamford train station and the White Plains Metro-North station.

Our properties show very well. They are all fully amenitized, fully improved. We are at about 92% leased, giving credit to leases signed but not yet commenced. We've got very little roll in the next two years, so I'm pleased with where we are at. I'm pleased with the activity that we've got, and I think that we compete very well within those submarkets, given the fact that we have the best properties out there.

And as far as whether or not these are holds or not, again, we are going to keep track of everything going forward. These are definitely part of the formation of the Company, number one; and number two, they are a very small component of value for the Company.

And number three, we will review all things at all times, as we have said we will do in the past. We are really focused on where we have capital, where we are putting capital to work, and where we think we can put capital to work.

Okay. But did you actually see a meaningful pickup in the second quarter, or it's more just specific leases look pretty good?

You know, I think that there has been some improvement, particularly in our direct competitive set in downtown Stamford. That's where we saw some pickup -- and in Norwalk and MerrittView. So there's been some modest improvement. Again, in our direct competitive set, I think the overall market stats can be skewed by certain large blocks that are not necessarily directly competitive with the CBD/Class A multitenanted office buildings.

Again, like, some modest improvements, as reflected in the results that we had -- and, again, keeping in mind we are 92% leased, which is giving credit to leases signed but not yet commenced. And we've got little rollover in the next two years. So I feel pretty good about where we are at.

Okay. Great. Thank you very much.

John Guinee, Stifel.

Great. A number of questions. First, obviously, the New York market in all product types is doing extraordinarily well. Can you help us think about how to value the leasehold position versus a fee position?

Essentially, when you are the ground lessee here, it's essentially a debt position, where the ground lessor has a pre-option over the asset at the ground lease termination. How should we value -- or what do you think it would cost you to get a hold of the fee position on these two assets?

John, let me address -- the first part of your question is: how do you think about valuation of a leasehold? I guess I would point you to and remind you of the process that we went through in determining the purchase price for the options. As you recall --

David, I perfectly understand how you arrived at the value for the positions. I'm just thinking about -- if you were to buy the fee or buy the ground, is that $100 per buildable foot or $1,000 dollars per buildable foot to buy the underlying ground position?

I don't know that we would express a view on what we would pay for the underlying ground. And whether or not we have an opportunity to do so will be something that will present itself, maybe or not, in the future.

Okay. And then second, G&A took a spike. Was there some one-time items in the G&A that I just missed?

Yes, I think the two things in G&A in this quarter is -- one, and probably the largest, driver is the shift in the income tax accrual related to the operation of our TRS. In Q1 we actually -- because of the way -- the seasonality of the income and the way our lease works between the TRS and the REIT, we generated a taxable loss which resulted in a negative income tax expense of about $2 million.

In the second quarter, with the seasonally-adjusted higher profitability of the Observatory, we ended up with a $2 million tax liability. So that's a $4 million swing right there.

The second driving piece of it was in 2Q, we had approximately $950,000 of expenses in connection with the private perpetual preferred tender exchange. So between $1 million of cost on the exchange and the big swing in the accrued tax liability on the taxable REIT subsidiary, that accounted for almost all of that spread between Q1 and Q2.

Okay. And do you expect the taxable issues to be run through G&A indefinitely?

Yes. As long as we are going to have seasonality in the performance of the Observatory, there will be those quarters where, in one quarter, we'll generate a much lower level of taxable income than we will in another. And as a consequence, there will be some volatility in the calculation of those quarterly accruals for income tax.

Got you. And then lastly, when I'm looking at your numbers, your operating expenses for the six months -- the Manhattan portfolio runs about $31 a square foot, and the greater New York office portfolio runs about $18 a square foot. Are those all fixed costs, which -- they should stay the same as your portfolio leases up? Or is there some variability to those costs?

Particularly the properties that are in heavy redevelopment, and specifically Empire State Building, I think we are seeing higher, I will call it, transitional costs as we are executing on our redevelopment program, particularly in the R&M line item.

I think that we could see some improvement over time. But also, as we have commented previously, the Empire State Building operating expenses -- there are some unique expenses that that building incurs, really, because of the diverse business nature of that building, including the Observatory.

Great. Thank you.

Brendan Maiorana, Wells Fargo Securities.

Thanks, good morning. Tom, out of the either 900,000 square feet over the next 2 1/2 years that you plan to redevelop or the 2.3 million kind of longer-term to be redeveloped, how much of that space is currently occupied versus space that's empty today?

Give me one second. You know, I'd say that probably about -- we've probably get about 200,000 or 300,000 square feet that is currently vacant that we are executing on our redevelopment plan; or we've got the space on hold, waiting to line up for an adjacent lease expiration date so that we can execute on our redevelopment plan.

But I think maybe more clearly to think of this is that over the next 2 1/2 years -- for this year, we are already executing on some of that redevelopment in the form of prebuilts, and demolition, and white box, and full floors. We've got about another 150,000 square feet to execute this year, probably about 0.25 million square feet in 2015.

And if you look at our lease expiration dates, we've got a pretty healthy roll in 2015. And that means that that will be redevelopment that occurs in 2016. So we look at 2015 and 2016 as being very, very busy years.

Okay. That's helpful. I guess what I'm trying to just piece together is you've got, call it, this 900,000 square feet to be redeveloped over the next few years. So, it sounds like, out of that there is, call it, a couple hundred thousand -- 200,000 to 300,000 square feet that's vacant today. And then you've also got, between the Manhattan portfolio -- including the option properties, somewhere around 900,000 square feet to 1 million square feet of vacancy today, if I'm just looking at the high-80s occupancy.

So how should we think about the occupancy progression? Is the space that's unoccupied today that's available outside of the 200,000 to 300,000 square feet to be redeveloped -- is that space that's easily leasable, and we should see an occupancy pickup on that portion of the portfolio?

I don't think you should think of our occupancy as moving -- trending as a straight line up. As we execute this redevelopment program, we will create vacant space, particularly at the option properties. With roughly 400,000 square feet to be developed between now and 2016, we are going to be vacating floors to execute on that redevelopment, with the intent of leasing to better tenants at higher market rents. So, again, I think that we will create vacancies over time as we execute that redevelopment program.

So if I'm hearing you correctly, it sounds like maybe to create the long-term value that's there, maybe occupancy actually goes down, even though you guys have done a great job moving occupancy up over the past 12 months; it's up about 500 basis points. Maybe it goes down near term before it kind of gets to stabilized levels in the low to mid-90s?

So let's be clear. Of course, our objective is to increase to 100%. We will see how we do. But as we've said in prior calls, and as we've said in meetings with analysts and investors, in order for us to do the work we need to do, we must vacate space. And we will produce vacant space in order to lease.

We will produce a trend line which is a flattening out of the ups and downs over time, which moves towards our objective of full occupancy. But we will generate vacancy as we take our portfolio to a stabilized position.

Yes. So -- I think that's Tony -- I completely understand all of that, I guess. And maybe you guys aren't in a position to kind of provide the outlook today.

I think what would be helpful is trying to get a sense of the directionality of that somewhat in the near term, so we can sort of measure your progress against what reasonable expectations are. So it's perfectly reasonable to think that there's going to be -- you've got to create some vacancy to add value to the portfolio. So we are just trying to get a sense of maybe what those near-term and longer-term expectations are.

If I could -- just last question for David: you've got some maturities on the debt side that are coming up, and it strikes me that the rates on some of those mortgages are high relative to market. How should we think about the financing plan for the upcoming maturities and maybe what you would replace those with?

As I noted in my opening remarks, we did have two near-term maturities at 501 7th Avenue and 1359 Broadway. Those loans were set to mature on August 1.

We did enter into a short-term extension of those for six months. The predecessor loans were priced at about 6%. We've extended those on the short-term basis at LIBOR plus 175. We do have -- our next maturity comes up in November of this year, and then we have two others at the beginning of next year.

In terms of how we expect to deal with those, we are currently working on our longer-term financing plan. We expect to refinance those with longer-term debt. We should have something to report to you on those shortly.

Any sense of where long-term mortgage debt or unsecured debt would price for you guys, if you were to do it today?

Well, I mean, I think if you are looking at the mortgage market, these are all high-quality assets in a gateway city. And we are seeing mortgage rates -- again, on our leveraged or advance rates, we typically do not push the envelope on our loan to value.

We are seeing pricing on mortgage debt somewhere in the 175 to 200 over the comparable Treasury term. And then with respect to unsecured debt or corporate debt, I don't even want to speculate where we are going to be, because we are not at that stage yet of providing a public issuance. But I think as you look at some of the other unsecured financings, the market can be anywhere from -- depending on the instrument you use -- anywhere from the mid-2s to the mid-3s.

Okay. All right. Thanks a lot.

I think it's important to note -- with regards to traditional lenders, we have been borrowing from major institutions for decades and during some of those decades, we had a lot of contentious issues out there with partners or processes.

We have always gotten most favorable pricing from our institutional lenders. I see no reason to think that having become a REIT with a unified balance sheet and a straightforward corporate governance structure, that that's going to do anything but stay the same or improve.

All right. Thanks. Thanks for the time.

Craig Mailman, KeyBanc Capital Markets.

Just two quick ones here. On the ground lease, are there any extension options on either property?

No, there are not.

Okay. And then just the other item: on the leases that you guys signed during the quarter, what was the average term for the new and renewals?

That's in the supplement on average. One second.

I'm sorry -- the question, again, was in which market, overall?

Just the average term on the leases you guys signed in the quarter, maybe broken out into new and renewal? You guys don't break it out in the supp; it may be helpful going forward.

Yes. I don't have it broken out by new and renewal. It will be -- we can get back to you with a breakout between new and renewal.

Do you guys have it just in aggregate?

We do. For the office leases, including both New York City and the suburbs, the average term was 7.2 years.

But keep in mind, that's not going to be a productive use of your time, because you are going to have to ask for detail -- which we don't give -- on short-term renewals of spaces where we are simply looking to warehouse cash flow while we prepare to aggregate floors. So I think we will take a look at that question and come back to you. I think to draw any conclusion from the number that you asked for as a backup, which is overall, is not going to produce a meaningful piece of information for you.

Okay. The other angle is if it's harder to break out and maybe not as meaningful in the new and renewals, maybe just give us what the TI and leasing commissions are on a per-year basis rather than just an overall square foot, so we can compare quarter over quarter? That's all I have, though.

Yes. We will take a look at that, and I will get back with you.

Great. Thanks.

Thank you. At this time I would like to turn the floor back over to management for any additional or closing comments.

We really would like to thank you very much for joining us today. We look forward to sharing our ongoing progress with you on our next call and through our disclosures along the way.

We are having a great time, and we very much enjoy your interest and the interest of our shareholder population. Thank you very much, and we will be in touch.

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