Empire State Realty Trust Inc (ESRT) 2015 Q3 法說會逐字稿

Greetings and welcome to the Empire State Realty Trust Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Thomas Keltner, General Counsel at Empire State Realty Trust. Thank you, Sir. You may begin.

Good morning. Thank you for joining us today for Empire State Realty Trust's third quarter 2015 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 Investors 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, modified 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.

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 and Chief Executive Officer, Anthony Malkin; President and Chief Operating Officer, John Kessler; Director 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 Tony Malkin.

Good morning. We are delighted to welcome you to our third quarter 2015 earnings conference call. During the quarter, we continued to execute on our strategy and delivered strong results. Our prepared comments will be fairly brief. John Kessler, our President and COO, will begin with an overview of overall results; Tom Durels, our Executive Vice President and Director of Leasing and Operations, will then provide an update on our portfolio; and David Karp, our Executive Vice President and Chief Financial Officer, will next review financial results in more detail and discuss our balance sheet. After that, we will open up the call. Now, I will turn the call over to John Kessler. John?

Thank you, Tony; and good morning, everyone. Let me begin with a brief summary of our strategy, which remains unchanged from the days of our IPO road show. 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 grow income through our continued redevelopment and leasing of our properties at market rents and through increasing occupancies to market levels.

Since inception, we've delivered and we expect to continue to deliver embedded, de-risked growth as we execute our strategy. We continue to make good progress, and our leasing and financial performance remain very strong. Through the first three quarters of 2015, we've leased over 1 million square feet of space, well ahead of last year and observatory revenues have remained steady.

On the investment front, through our market connections, we identified an off-market acquisition and entered into a purchase agreement. The purchase agreement included a right for the seller to seek a higher purchase price from another buyer in exchange for the payment to us of a break-up fee. The seller obtained a materially higher sales price. We stuck to our view of value and we repaid a $2.5 million breakage fee.

We continue to work to identify attractive external investment opportunities. We remain focused on off-market transactions, which fit well with our business. We have compelling embedded de-risked growth to deliver as we execute on our plan, have a clear view of value and are unwilling to overpay for assets. We continue to believe in cycles and discipline.

Next, an update of our Broadcast business. At the Empire State Building, we leased space and charged license fees to TV, radio and telecom tenants, who broadcast their signals from the top of our mast. Our major TV broadcasting tenants include CBS, ABC, NBC, FOX, WPIX, among others. Our total license fee and space rental income before expense reimbursements is approximately $21 million annually or roughly 3% of our 2014 revenue which totaled $635 million.

Our TV and radio leases and licenses expire between 2016 and 2023, and we are engaged in active renewal negotiations. The business of broadcasting TV and radio signals over the year is in flux due to deteriorating industry fundamentals and the upcoming FCC spectrum auction, and there is also a new competitor in the market at One World Trade Center.

We have made preliminary renewal proposals which would yield reduced revenues, higher operating expenses and/or higher capital expenditures. As and where there is any material event, we will inform you. Our broadcast revenue is relatively small to begin with and naturally reduces as a proportion of our total revenue as we grow significantly the rental revenues from the redevelopment and lease-up of our office and retail portfolio.

Finally, as part of our ongoing effort to enhance our balance sheet flexibility and lower our cost of capital, we closed on a new $265 million unsecured term loan in August. The new term loan has a seven-year term with variable interest for the first two years and fixed interest for the final five years.

We are pleased with our demonstrated ability to access the unsecured debt markets and lengthen our maturities and are grateful for the ongoing support of our lender group. David will provide more detail.

The central themes here are the same themes about which we as a management team have spoken since our IPO. As we execute on our plans and deliver on our de-risked and embedded growth, we are very excited about future here at ESRT.

I'll now turn the call over to Tom Durels. Tom?

Thank you, John. Good morning, everyone. On today's call, I will review our overall leasing activity, provide a summary of our current space availabilities that we are actively marketing, and provide an outlook on space that we plan to vacate and redevelop in order to re-lease at higher rents.

Our third quarter results continued to reflect the progress we are making to execute on our strategy and capture our four growth drivers which are upside from signed leases not commenced, the mark-to-market on our expiring Manhattan office leases, lease-up of developed vacant office space, and the mark-to-market and lease-up of vacant retail space.

In the third quarter, we signed 67 new and renewal leases totaling 338,000 square feet of office and retail space. Approximately 284,000 square feet took place in our Manhattan office properties, 51,000 square feet took place in our Greater New York Metropolitan properties and 3,000 square feet took place in our retail portfolio.

As John mentioned, year-to-date, we've signed leases for over 1 million square feet. At September 30, 2015, our total portfolio was 87.4% occupied and including signed leases that have not yet commenced, our portfolio was 90% leased. Our portfolio occupancy was down 60 basis points from the second quarter and including signed leases not commenced, our leased occupancy percentage was unchanged. On a same-store basis, our portfolio occupancy was down 110 basis points year-over-year and including signed leases not commenced, our occupancy percentage is up 80 basis points year-over-year.

At our flagship property, the Empire State Building, at September 30, we were 83.7% occupied, down 130 basis points from the prior quarter. However, including our signed leases not yet commenced, our leased percentage was 91.2%, an increase of 150 basis points from the previous quarter. At the start of the third quarter, as previously announced, we signed an expansion lease with LinkedIn for 126,000 square feet over two floors, bringing their total square footage leased to 280,000 square feet. This brings our total full floor leases signed year-to-date at the Empire State Building to six, four floors.

Empire State Building's unique urban campus with its spectacular amenities including six on-site dining and cuisine options; two Starbucks, including the first in-building tenant delivery unit in the world; New York City's largest tenant-only fitness center and tenant-only conference center, continue to drive traffic and tours from brokers and prospective tenants. And our existing tenants reap the benefits of enhanced employee productivity.

Throughout our portfolio, we continue to drive strong rental growth spreads and during the third quarter, rental rates on new and renewal leases across our portfolio were 34.5% higher on a cash basis compared to prior escalated rents.

We again achieved strong spreads for our Manhattan office properties as we were able to sign new leases at spreads of 41%. Our spreads are new and renewal retail leases were 94.6%. As we lease up our available inventory, we continue to consolidate, vacate and redevelop space in order to lease to better-quality tenants at higher rents throughout our Manhattan portfolio. As we have discussed, occupancy will fluctuate in the short term as we take space offline in preparation for redevelopment and releasing.

Now, to that end, we vacated 510,000 square feet year to date in 2015 and we expect to vacate an additional approximate 220,000 square feet of space in our Manhattan portfolio by year-end. This is intentional and consistent with our proven strategy to unlock the embedded growth and achieve our remarkable leasing spreads.

Within our Manhattan office portfolio, we have approximately 1.93 million square feet of space left to redevelop and re-lease. 480,000 square feet of this space is at the Empire State Building and 1.45 million square feet is in the balance of our Manhattan office buildings. We are currently on track to redevelop approximately 590,000 square feet of space by year-end 2016.

In our Manhattan office portfolio, we currently have 870,000 square feet of unleased vacant space, of which 483,000 square feet is redeveloped space that includes prebuilds and white-boxed full and partial floors ready for lease-up. Approximately 85,000 square feet is being held off market until it can be consolidated for future redevelopment, and the balance of our vacant space is being planned for redevelopment.

As of September 30, we had six full floors of 150,000 square feet throughout the portfolio that were vacant and available for lease-up, and another three full floors of 75,000 square feet will be consolidated and delivered by year-end.

In our retail portfolio, we have approximately 26,000 square feet of vacant ground floor retail availabilities at 250 West 57th Street, 1333 and 1359 Broadway and other locations. And future retail space that will be consolidated and redeveloped to create new lease-up opportunities in 2016; that include approximately 38,000 square feet, including nearly 8,000 square feet at Street Level at 112 West 34th Street, 5,600 square feet of street-level space, fronting 34th Street at the Empire State Building, and 5,700 square feet of prime, corner retail space at Union Square.

Our entire real estate team in leasing, marketing, operations and construction continue to execute at a high level as demonstrated by these excellent results.

In summary, we believe the overall market is healthy and we continue to see steady activity in our submarkets with consistent demand for our well-located, modernized office and retail properties. We continue to lease up our vacant space and execute on our proven strategy to consolidate, vacate and deliver redeveloped space in order to lease to new, better credit tenants at higher rents and improve shareholder value.

Now, I'd like to turn the call over to David Karp. David?

Thanks, Tom; and good morning, everyone. I'll start with a review of our financial performance and follow with an update on our balance sheet.

For the third quarter, we reported Core FFO of $70.6 million or $0.27 per diluted share. For the third quarter 2015, Core FFO excluded the $2.5 million break-up fee, $2.3 million net of costs, related to the purchase agreement, which John mentioned. Modified FFO, which is defined as FFO plus adjustments for any above or below-market ground lease amortization, was $72.9 million or $0.27 per fully diluted share for the third quarter 2015.

For the nine months ended September 30, 2015, Core FFO was $191.5 million or $0.72 per fully diluted share. Modified FFO was $191.6 million or $0.72 per fully diluted share for the same period. One item of note on our income statement is that the tenant expense reimbursements increased from $18.6 million in the second quarter of 2015 to $23.1 million in the third quarter of 2015, primarily due to a seasonal increase in electric expense reimbursement of $3.1 million.

Turning to our Observatory operations, year-to-date, the Observatory hosted approximately 3.1 million visitors compared to 3.3 million visitors in the comparable period of the prior year. Observatory revenue was $84.5 million, a 1.4% increase from $83.4 million for the nine months ended September 30, 2014.

For the third quarter of 2015 compared with the third quarter of 2014, there was a 5.5% decline in attendance at the Observatory. We believe this was primarily due to a decrease in international tourism and international tourism spend in New York City, which has been negatively impacted by weakness in the global economy.

For the third quarter, revenue was $37.5 million, same as the third quarter of 2014. Observatory expenses increased 2.5% over the third quarter of 2014. Observatory net operating income for the quarter decreased slightly by 0.5% year-over-year.

Turning to our balance sheet, we maintain a low-levered balance sheet and we focus on maintaining ample capacity and flexibility to fund our redevelopment program and to put us in a position to outperform over the long term. At September 30, 2015, we had total debt outstanding of approximately $1.6 billion. Approximately $1.3 billion of this debt is fixed rate with a weighted average interest rate of 4.61% and a weighted average term to maturity of 5.5 years. The remaining $285 million of debt is variable rate with a weighted average interest rate of 1.76% and a weighted average term to maturity of 6.7 years.

At the end of the third quarter, our leverage ratio reflected by consolidated debt to market capitalization was 26% and our net debt to EBITDA was 5.0 times.

As part of our ongoing effort to proactively manage our balance sheet and position our Company for growth, during the quarter, we closed on a new seven-year $265 million senior unsecured term loan facility. This facility is expandable by up to $100 million under certain circumstances. Interest is calculated at the rate of LIBOR plus 1.6% at September 30, 2015. Pursuant to a forward interest rate swap agreement, the Company effectively fixed LIBOR at 2.1485% for the $265 million of the term loan facility beginning August 2017 through maturity. With this transaction, we've extended our debt maturities from 3.1 years at the initial public offering to 5.7 years less than two years later. Proceeds from this financing were used to reduce borrowings under our unsecured revolving credit facility.

Also in the quarter, we entered into forward interest rate swap agreements that provide us with a rate lock on the 10-year treasury rate at 2.505% for $200 million of expected 2017 mortgage refinancings.

We are pleased with our continued access to the unsecured debt capital markets, which we believe is an endorsement of the quality of our portfolio and balance sheet. And as always, we appreciate the support of our lender group as we grow our business and execute on our strategy.

Finally, our unsecured revolving credit facility has a total capacity, including the accordion feature, of $1.25 billion. As of September 30, 2015, the outstanding balance on the Company's revolver was $20 million.

I will now update you on our redemption requests.

As you may recall, for operating partnership units issued at the time of our IPO, our lockup period expires on October 7, 2014, at which time holders of such operating partnership units could have their holdings redeemed for Class A shares which are listed and traded on the New York Stock Exchange. As of September 30, we've had redemption requests from operating partnership units in Class B common shares to Class A common shares totaling 19.8 million shares or approximately $337 million, at the closing share price of $17.03 on September 30, 2015. This represents a 24% increase in Class A shares since our IPO. On August 25, 2015, our Board of Directors approved a quarterly dividend of $0.085 per share. This dividend was paid on September 30 to shareholders of record on September 15.

With that, I would like to open up the call for your questions. Operator?

Thank you. At this time, we will conduct a question-and-answer session. (Operator Instructions) Blaine Heck, Wells Fargo Securities.

Hey, good morning. I was hoping we could start on the Observatory. For the past couple of quarters year-over-year, NOI growth has been flat, but before that, we were seeing 5% to 10% increases. I know you talked about trends in tourism affecting growth, but just trying to get a sense of how much of the slowdown is due to these trends and how much maybe due to competition and whether we should expect lower growth in this income stream going forward.

Sure. Tony Malkin here. Thanks for the question. Our market research tells us there has been a dip in tourist visits to New York City across all destination attractions, with many attractions seeing reductions of approximately 20%. Macy's reported a drop in tourist visits and a drop in tourist spending in its Herald Square store, publicly reporting hotels, particularly better hotels and I know there are some reporting today have seen a weak Q3 and Q4 is not meeting expectations for a recovery. We believe this is reflective of the weak current global economic climate. There is particular weakness in Europe, Latin America, Australia, certain Asian points of visit are origination, so we continue to feel good about our positioning in the market. We're focused on the demand drivers that we can control.

As far as the Observatory, we've never predicted that business. The only other thing that I might add is this does point out that our comments since the road show, the Observatory is largely non-correlated with the fundamental real estate office and retail, which we operate. And the growth there in the office and retail is way more than making up for anything that's happening in the Observatory.

Okay. That's helpful. And then, I was hoping you guys could give a little bit more color on the deal that you pursued, but ultimately were outbid. I think the message has been that you guys were going to pursue off-market deals, but obviously you guys weren't the only bidder for this property. So, can you just talk a little bit more about that situation and maybe a little bit about other acquisitions you might be pursuing or submarkets you might be targeting?

Sure, this is John. In my prepared remarks, I commented that the transaction was off-market. It did fit our business and our investment criteria, which we've outlined to you as office and retail properties in Manhattan and with a preference for assets where we can create value through redevelopments. We did source it ourselves through our own connections and the purchase agreement did include a right for the seller to seek a higher price from another buyer in exchange for a break-up fee, but the property wasn't formally marketed. Seller obtained a higher sales price and we stuck to our view of value and we repaid a $2.5 million fee. I think the message we want to convey is that we have a clear view of value and we are unwilling to overpay for assets, and we also continue to believe in cycles and being disciplined.

I think as it relates to additional opportunities, while we're continuing to work on this regularly, we don't want to get distracted. We remained focused on a considerable internal growth that we have inherent in the redevelopment and re-lease of our portfolio, and we think this internal growth is a unique opportunity for us relative to our peers.

Okay, great. And then, maybe one more for Tom. Your lease rates stayed the same during the quarter, but the spread between the occupied and lease rate increased, so I was hoping you guys could give us an update to the potential NOI from signed leases not commenced. I think it was around $29.5 million last quarter?

Sure. First, on the spread between lease percentage and occupancy, I think that, that's a reflection of the execution of our strategy to vacate space, redevelop it and then re-lease it at higher rents. So while we continue to execute on that program, you will see a spread between leased percentage and physical occupancy. The number that for signed leases not commenced as of the end of the third quarter.

Yes. Blaine, it's David. As of the end of the third quarter, the signed leases not commenced would represent $29.9 million of net annualized base rent. And again, we would add -- consider most of that to flow through in net operating income.

And some of the leases on that include the previously announced deals with Sephora, Foot Locker, LinkedIn, HNTB and some others.

Okay, great. Very helpful. Thanks, guys.

You bet.

Thank you. Jamie Feldman, Bank of America.

Great. Thank you. Good morning. So can you talk about your 2016 expirations at this point? I mean looking at the schedule, some of the larger -- it looks like Foot Locker is still on here for April. I know you signed a new lease with them, but maybe just talk us through your thoughts on the stickiness of some of those tenants?

Sure. On the retail side, I think you hit upon one of the major lease rollovers at 112 West 34th Street on the office side. For the balance of this year, we do intend to vacate approximately 220,000 square feet out of the nearly 390,000 square feet of leases rolling by year-end. That's in order to execute on our program to unlock the embedded growth driver of mark-to-market rents through our redevelopment of spaces.

In 2016, I think that we will see some similar execution of vacating space. As we previously announced, we expect to redevelop nearly 590,000 square feet of space by the end of 2016 and that will involve intentionally vacating some of our Manhattan office space in order to execute on that program.

Okay. But I guess are there any large existing tenants that are known move-outs at this point that we should be aware of?

No, Jamie, it's -- keep in mind that as we've discussed in the past, we have intentionally lined up lease expirations, particularly in the balance of 2015 and 2016 and many of those lease expirations are comprised of smaller tenants that are occupying order unimproved spaces that we've targeted for vacating and redevelopment. So I can't speak to -- aside from the one large lease rollover for Foot Locker, which we've talked about in the past, I can't really point to any other one single large tenant rollover that makes a significant impact to our overall plan.

Okay. That's helpful. And then, focusing on the broadcasting NOI, we appreciate the color on the negotiations. Are you able at this point to ballpark maybe what kind of percentage change you may see without compromising your negotiation?

Yes, Jamie, this is John. As we said, we are in a process of discussion regarding renewals with our broadcasters and it is a negotiation. So at this point, we can't really say anything beyond what I said in my prepared remarks, where we did indicate that we think that based on proposals that we made that the revenues with respect to this business could diminish and we may have some higher operating expenses and/or capital expenditures, but at this point, can't give anything further.

Okay. And then I guess the final question for David with the unsecured debt raise, looking ahead to 2016, not much maturing. So, any capital plans for next year at this point?

Capital in terms of refinancing?

In terms of refinancing or just raises, any kind of raise you want to do?

We are very pleased with the execution of the seven-year term loan that closed last quarter. As you know, since the IPO, we've been undertaking a deliberate plan to [ladder] and extend our debt maturities and by closing on this seven-year term loan and paying down the revolver, we were able to extend the maturity on $265 million from just over three years to seven years. In addition, by entering into the swap agreement, we were able to reduce our exposure to floating rate interest rates during the back five years of the loan. We are also pleased that this transaction allowed us to expand and diversify our relationships with members of our bank group.

As we further transform and strengthen our balance sheet, we will continue to explore opportunistic possibilities to refinance existing debt. Having said that, and as you've noted, we have no debt maturities in the remainder of 2015, nor throughout the entirety of 2016. Our next maturing debt occurs in mid-2017 and as I noted, we've already taken steps to lock in treasury rates today in anticipation of refinancing that debt.

Okay. That's helpful. Thank you.

John Kim, BMO Capital Markets.

Thank you. I had a follow-up question on the purchase agreement transaction with the location of this asset in Midtown South and why do you think the buyer paid a materially higher price than you were willing to pay?

Well, as I said before, John. This is John. Thanks for the question. What we're prepared to say at this point is that the investment fit our criteria and that is consistent with office and retail properties in Manhattan, and I can't speculate as to why the other buyer paid more, but I think it certainly indicates that we had tied up an attractive investment at a good price and the market proved to determine a higher price.

I might add to that, John, Tony Malkin here. When we are doing things which are off-market and we don't want to add comment, it's important for us to be able to continue to do things which are off-market, that's part of who we are, that's part of our relationship. We struck the transaction in a particular way so that the seller could feel good about doing business with us. We know the seller feels good about doing business with us. We're perfectly happy to take the net $2.3 million in and we are very conscious that this is a long process built on relationships and doing off-market transactions is a delicate subject. So we want to protect the identity of the party with whom we were dealing and we want to make sure that others who might do business know that we will treat things with care and confidentiality.

So going forward on off-market transactions, I realize you mentioned that you don't want to overpay for assets. But is the takeaway that the market has moved materially and you may be willing to change some of your underwriting assumptions?

No. Well, I think our view is the private market valuations for assets continues to be very strong and our message to all of you is that we are going to continue to do work on this, but we're also going to remain very focused on our execution of our internal growth story, which we think is very attractive in this environment.

Okay. And then, on retail, can you provide some more commentary on the re-leasing you've done this quarter with the 95% re-leasing spreads and how we should read that into next year's expirations in retail next year's -- I know you mentioned Foot Locker, but there is a very modest rent per square foot that's expiring next year?

Right. First of all, the leasing that we did this quarter is relatively small amount of under 3,000 square feet, but one of those leases, I think sent an important messages in terms of the type of tenant that are brought to the Broadway Corridor in Times Square South in the vastly transforming neighborhood and street front that is occurring there, first international brand coming to that part of the neighborhood. So I think it's a good message for us and the transformation underway there.

Previously, we have talked about one of our four embedded growth drivers being the mark-to-market and lease-up of our vacant retail space. As we previously have discussed, we see an opportunity on achieving mark-to-market rent spreads from now through 2019 as high as 115% really depending upon the in-place expiring rent for any particular space and that's applying just today's market rent without any growth rate going forward.

In 2016, I commented on the availability that we have coming up at Empire State Building, also some vacant space that we have at 250 West 57th Street, 1359 Broadway and some remaining space at 1333 Broadway. So that's what we are focusing on in the near term. Also, there's a corner space at Union Square that I also mentioned. So that's what we're focused on between now and end of 2016.

Some of those expiring leases, sounds like they would be much higher than $53?

I'm sorry.

Some of those expiring leases next year, sounds like they would be -- the market rent will be higher than $53, just trying to get a sense of Manhattan?

Yes, but keep in mind that in the total square footage that is expiring in 2016 includes approximately 85,000 square feet currently leased to and occupied by Foot Locker on three levels, at 112 West 34th Street. The in-place fully escalated rent for that space is about $26 per square foot, so that comprises a significant amount of the retail space that is expiring next year. As we've previously announced, we leased nearly 34,000 square feet of that through a renewal for part of the space to Foot Locker for over $6.2 million in annual rent and about 11,000 square feet of ground floor space to Sephora for about -- well over $10 million in annual rent and achieved very, very significant mark-to-market rents that were -- they previously reported. So that really makes up the bulk of the 2016 rollover.

Okay. And then, a final one from me is your broadcast, it looks like it's about 2.1% of revenue. Is it a commensurate amount of NOI as a percentage of total?

Well, John, the revenue number that we've commented on is roughly $21 million for base rent and license fees associated with the business and then we do receive some expense reimbursements as well. That equates to about 3% of our 2014 total revenue, but we don't provide any further disclosure beyond that in terms of NOI.

Okay, thank you.

Craig Mailman, KeyBanc.

Hey, guys. I appreciate you being a little close to West on the acquisition. I guess, just curious if you'd be willing to provide maybe what your underwriting returns look like for the building and what maybe the re-traded amount kind of would have brought that down to?

So Tony here. I guess, look, I would answer this question simply because I've spent the longest time dealing with private individuals in New York City on these transactions and we value our ability to operate below the radar and I think that without any prediction of when we might have something else to say over time, you'll get a better sense of how we value our capital. I think that it's safe to say that we are very conscious of, I think David the number you said was 17% return on investment when we get to how we value what we do in our own portfolio, and we wouldn't do anything, which would materially dilute that at this time, we have no reason to. We've got a great balance sheet, super low leverage. As we borrow to do our improvements. We maintain or lower that leverage to total enterprise value and for us to deploy our capital, we need to have a damn good reason. Now, we thought we had a good reason, made a lot of sense to us even in today's market; there were certain synergies, which we thought made a lot of sense, but we're not going to chase transactions, we're thrilled for people who are selling at higher prices. We're going to be around to help people who have other issues and other needs; and therefore, I think the thing on which to focus is the 10% to 17% return on investment that we're getting in our internal portfolio, when we look at doing a transaction, it's got to be an extremely good reason to deploy capital in today's market.

Okay. That color is helpful. Then John, on the broadcasting, it's kind of a wide range in terms of expiration years, can you give a sense of the amounts expiring, are there any spikes, is it more ratable? I guess, I'm just trying to put -- I know it's only 3% of revenue in context and kind of when that's at risk?

Yes, I would appreciate the question. As I think, I would just remind you again that it is a relatively small part and those expirations are between 2016 and 2023 and we're really in the middle of a negotiation right now with (technical difficulty)

Hello?

Ladies and gentlemen, please stand by. We are having technical difficulties. One moment, ladies and gentlemen, please stand by.

Hello?

Mr. [Cowing], your line is back in conference.

Yes. We apologize for the technical difficulty and Craig, did you hear that answer?

(Operator Instructions)

Did you pull back out to Craig and in the meantime, we could take the next question and ask if Craig would like to come back.

Craig's line is open, he can speak.

Hey John, I didn't hear your question, it cut out your answer.

If you are asking about, sorry, we cut out there for a minute. You were asking about --

I was just asking about the kind of the expiration schedule for the broadcast over the 2016 [2023] timing, is it ratable or are there any chunks? I guess, I realize it's only 3% but I was just trying to get at when some of that revenue stream is most at risk and if it's just going to be gradual than it seems like it's something you guys may be able to deal with?

Right. So we have not disclosed this breakdown. And again, I'd remind you that this business, the rent license fees in aggregate comprise only about 3% of our 2014 revenues, you really got to keep this in perspective, I think relative to the overall business. And then, I think the other point is that we're really in the middle of negotiations with many of these broadcasters and we are in a competitive situation and for those various reasons, we don't want to disclose any further in terms of detail. We don't think it's in our interests or our shareholders.

Okay. And then, Tony, maybe you could just give us a little bit of color on the Observatory in terms of international tourism trends, I know it seems like the strong dollar and economic conditions are kind of weighing, but from what you guys are seeing, from a mix issue, are these tourists spending less in terms of the ticket kind of packages that they could get? Are you seeing any degradation there or is it just sort of slower pace of visitors?

Well, sure. Thanks. I want to apologize again. We're still trying to figure out why this phone is on and the other phone and our connection with the conference call actually went out, but with regard to the tourists, I think it's important to note that our overall revenue has been flat to slightly up for the year to date and we have had reduced tourists, so tourists are actually spending more. Our pricing mix has worked to our benefit. We do know anecdotally both from information that's been released by public companies such as international air travel, retailer sales, hotels that there is a real impact and whether or not it's the dollar or its economic malaise or a collection of the two. We are not going to make comment on that. What I will say is that we do have this tremendous growth in retail and office leasing, which is more than accommodating and I'm perfectly prepared for there to be a point in time in cycles to come where we're talking about how the Observatory is doing better than our office and our retail. It's just a mix. What we do also see by the way of some anecdotal information from speaking to real estate brokers in the retail environment and Tom Durels, maybe you could just add what we've heard from retail brokers about what's going on with retail sales in New York City.

Sure, there is some discussion that retail sales being flat in some cases declining, that's having an impact particularly on some of the higher-priced retail spaces, particularly maybe on (inaudible), but the good story for us is that our properties are in great retail corridors with high pedestrian counts and where retailers do business and we have activity on our sites, I think reflected by the fact that we're in strong locations where retailers continue to sell products.

So I get the benefit of being able to participate with brokers probably about 10 or 11 breakfasts a year and we do them with retail brokers as well and our most recent retail breakfast with top brokers in New York, which was attended by me and by Tom Durels, Fred Posniak who does our retail leasing.

When we look at the market, I would suggest anybody who visits New York, take a look at Broadway between 14th Street in South of Houston, take a look in Soho, take a look along certain places in 5th avenue south of the super-prime location. You're going to see a lot of vacant stores and the word on the street is that the landlords are asking for higher rents and the tenants are looking to take smaller stores and pay lower rents. And that's just a reflection of the reduction in retail sales and the performance of retailers in Manhattan. And as has been said in the Macy's comments, they attribute a significant component of that two international shoppers, buying less and actually a reduced footfall from international shoppers. Started to go on but you're asking, so we thought we'd share.

It's okay and it's helpful and I guess, it leads us to my last question, the remaining space at 112 West 34th, I guess there's been some press reports about potential tenants there, just kind of curious on the demand you're seeing and kind of the type of tenant you're seeing, whether it's more of a department store type or otherwise?

First of all, it's a super-prime location, directly opposite Macy's flagship store. And as a reminder, our in-place average escalated rent there is $26 a square foot and we just [maybe] achieved incredibly remarkable mark-to-market leasing spreads between the Sephora and the recast of the Foot Locker lease. The Foot Locker reports that this is their top-performing store. The footfall there is nearly 100 million pedestrian accounts passing through that area annually. And so this is a location where retailers want to be, to sell their product. This is not just a branding location, the type of tenants that we're seeing, it really varies, we could lease just the ground floor that is super higher rent per square foot or we could lease the entire ground floor or it is just the ground floor with the entire lower level and maybe a lower blended rent per square foot but still achieving an aggregate rent we think in excess of $6 million. So I think that it's within variety of retailers, it's not really one particular type. We were very fortunate in leasing Sephora and Foot Locker prior to the existing lease expiration, which is late spring 2016. There may be a chance, a good chance that we will wait for Sephora and the new foot locker are sort to be built, the remaining space to be demised and white-box before it really see the marketing of that take off.

Great, thank you.

Thank you. Brad Burke, Goldman Sachs & Co.

I had another follow-up on the acquisition breakup. I was just hoping you could remind us how you are thinking right now about the magnitude and the timing of any incremental acquisition activity. And the second part of the question, with the leverage below 30%, how we ought to think about you financing any incremental acquisitions?

Right. So Brad, it's John again. As we think about external acquisitions where we aren't -- we really, as I said before, we don't want to get distracted. We remain very focused on the internal growth story that we have been talking about and these great returns that we're getting on the redevelopment of our portfolio and it's a really niche opportunity for us (technical difficulty) here. So I think with respect to external growth, we're going to continue to be very deliberate and (inaudible) do anything, we're going to focus on relationship-driven situations and I think beyond that, now, further Dave.

Yes, just one other thing, Brad, with respect to your question about how we look to finance it. One of the benefits of doing the term financing was it allowed us to pay down our revolver and give us even more dry powder, as we look at potential acquisitions. We don't have any expectation at this point of having to issue equity in connection with an acquisition. So again, the game plan is to look to the dry powder that we have and utilize that going forward.

And if you were to make an acquisition, would you be comfortable taking the balance sheet where it's at right now and pushing it a little bit further in order to get that done, what sort of level would you be comfortable going to?

Yes, I think what we said consistently in the past is part of our strategy on the balance sheet is that we want to be prepared for opportunities that come our way, either in the form of acquisitions now or if we see a turn in the cycle in their broader opportunities, we are prepared to take advantage of that, if that means on a temporary basis bringing our leverage up, then we're prepared to do that with a longer-term strategy of restoring that dry powder in that liquidity to the balance sheet for the next opportunity.

But I think it's important, Brad, to know, Tony here, to finish up on an answer to this, there have been a lot of questions in this regard. While we are active in looking at off-market situations, we are not participating in any broadly marketed transaction right now. Just a reminder to anybody who hasn't heard me say that before, heard us say that before. We do believe this is a time in which private equity values are very high and we think that the best use of what's happening in the markets today on the hand-to-hand transactions that are being done by private or by public acquirers today, is to consider what that means to the value of our portfolio. That being said, our focus is on what we said from the beginning, delivering this tremendous de-risked embedded growth, which has a significant way to go and on which we're executing very well. And we don't have a need to put out capital today, we see no need to grow for growth sake. We are looking to drive shareholder value and to stay disciplined.

Okay. I appreciate that. And for Tom, I was hoping that you could help us think about the trajectory of occupancy. It's down just over 1% since last year, but as you noted, you've increased the number of leases that need to commence, but you also have a lot of expirations remaining in 2016, so just how we ought to be thinking about occupancy trajectory with all those puts and takes?

Yes, Brad. It's the same thing that I've discussed in the past. I'll try to give some visibility through the balance of this year during which we intend to vacate approximately 220,000 square feet that's on top of the over 0.5 million square feet that we vacated year-to-date. This is in connection with our execution of our strategy to consolidate and redevelop spaces so that we can unlock the mark-to-market and achieve the tremendous leasing spreads that we have going into 2016 and through the year-end, we expect to redevelop nearly 590,000 square feet of space that's comprised of the space that were vacating the final quarter, some in 2015 plus some of our vacant space were incredibly busy. We remain very active.

The good news is that it's really quickly as we've really developed, we are leasing it. We've proven that in the past that as we redevelop space, we lease it up. We have a good inventory of developed space now that I commented on earlier during my prepared remarks of both prebuilds and full and partial floor white-box space. And I think you can anticipate that going into 2016 will continue to execute on that and have somewhat similar experience. So that the occupancy will fluctuate and we will be bumpy and there will continue to be a spread between our leased percentage and physical occupancy, I think the number to keep an eye on is our leased percentage which is a benchmark of how well we're doing.

Okay. And maybe staying with the leasing, if I look over the last five quarters, you've signed almost 1.4 million square feet of leases. The average spread on that is almost 70% and just looking at that algebra that would say that you would eventually translate into an almost 10% increase to your average rent per square foot. So I was just trying to get a sense of how much of that recent leasing activity over the past five quarters is already reflected in your current results and how much should we think about is being on the way, but not yet reflected in third quarter?

Well, I think we've commented previously on the signed lease, not --

Yes, I think that's it Brad, that's the key. As we mentioned, this $29 million of signed leases not commenced. So that is something that you're not going to see in the current numbers and which will be reflected in future quarters.

Be in there and by time you had also called out that a lot of the retail, you made a lot of progress on the retail lease expirations for 2016. And I assume that that's not reflected in that almost $30 million of signed leases not commenced, but there's still some pretty significant bump associated with those when they actually do expire, is that right?.

included within the signed leases not commenced that they've just commented on all (inaudible) and the renewal of Foot Locker for portion of their space. Those will have lease commencements in 2016, so that is part of the signed leases, not meant.

Got it, okay. Thank you.

John Guinee, Stifel Nicolaus.

Great, three questions there. And since it's 9:30, you can answer them very, very quickly. First, ground lease, you have three buildings since you're a ground lessee, what's the chances of acquiring the underlying land in any of those three buildings in the near term?

Hi John, Tony, very long-term leases, we dialog from time to time with the feeowners. But the bottom line is in today's world, they've got a lofty view of their position. These are all set rents. They are extraordinarily low for a very long time. The primary decision makers involving these will not be alive, absent some remarkable active medical technology by the time they even get into their last years, so we look at this and say, we'll continue to maintain open dialogs, but at the same time there is no motivation for us to do anything now.

Got, okay. Then, real quickly if I find adding up signed leases not commenced mark-to-market lease-up developed space, lease-up vacant space, my recollection is that's close to $100 million, correct me if I'm wrong, David. And then, if I add up, I look at the Observatory at $83 million and the broadcast to $21 million, that's plus or minus $104 million. If I take the maximum downside on the Observatory and the broadcast combined, what percentage of that is relative to sort of in the bag, $100 million of mark-to-market et cetera?

Are you saying, if we shut down the Observatory and the broadcast --

I'm just saying when you look at your real downside, is it 10% of the $100 million, is it 20%, what's the maximum downside of these two?

Really John, it's going to be a function of what assumptions you want to make in terms of a downside. What we've said is over the next say five-year horizon, we see that $100 million of incremental NOI as an add to our current base of our cash NOI over the past 12 months was approximately $320 million. I can't tell you what to get in terms of a downside, that's really up to you, but that's the base off of which you'll work.

But we can remind people, John, is that the One World Trade Center fixed payment starting lease commitment from the Legends Group with $65 million and that had with it what was a publicly stated objective of spending $75 million in CapEx, which we think went higher. And then, of course, at the starting rent of $65 million and it goes up from there. So that --

Okay. Then, my quickly important question is what time is your Halloween Light Show, is it Friday and Saturday or just Saturday night?

It is Saturday night, it is at 6:45 and it is at 10:00 PM and you can listen to it at Z100.

Great, thanks.

Thank you. Tom Lesnick, Capital One. This will be our last question.

Hi, guys. Good morning. Just, given kind of the concerns about valuations in the VC space and maybe a softening IPO market, are you guys seeing any read-through in terms of tenant demand in that, kind of given the TAMI tenant exposure to Midtown South?

So from our perspective, I can only tell you that we only have three core technology tenants. We've got eBay, we've got LinkedIn, we've got Shutterstock. We don't do leasing to start-ups, you can see the comments I made in that regard on Bloomberg TV, I guess the day before yesterday. Outside of that, Tom, do you want to make any mark-to-market commentary?

Well, okay, I'll add to Tony's comments, it's only 3.9% of our total portfolio is leased to tech tenants, but the net names that Tony just mentioned, I would add to add, we leased a three building Empire State Building to a division of Priceline. So these are good, quality tenants to whom we're leasing in the media and advertising space. As you know, we have IPG and Media General, again very good tenants, inherent and embedded within our culture is focused on tenant credit quality. We employ a full-time credit analyst. Her write-ups and reports go to both Tony, John Kessler, Dave Karp, myself, we all look at those and review those and so we're very conscious of that when we're doing leasing. And it is very much on the forefront of the folks on our leasing team. We do have a diverse tenant profile and what we're seeing right now is that the location of our properties, the convenience, the modernized, redeveloped properties and the new spaces that we're delivering is still attracting a wide variety of tenants that include financial services, international engineering firms, consumer products and retail transportation. So I think the theme here is a good diversified rental is what we're creating made up of good, quality tenants.

Got it. Thank you. And then I know it's a relatively small portion of your business by comparison, but suburban rents spreads looked about flat for this quarter. Just wondering what's your prognosis for kind of those underlying assets and how should we expect rents to trend going forward?

Well, first of all, the Greater New York Metropolitan Properties represent a fairly small amount of our total NOI. We have only about 96,000 square feet of total vacant space, only about 20,000 square feet of rolling through the end of this year. We've got a very good tenant mix there with high-quality tenants or properties are fully improved and fully amenatized. Three of them are located right at mass transportation hubs, two of them being located at the second busiest Metro-North station, second only to Grand Central. I think they do contribute healthily to our bottom line and they produce cash. And so going forward, I think that we see it as a pretty stable situation.

Okay. And then, my last one is just on the operating margin of the Observatory business. I know it was down very slightly year-over-year. I'm just wondering, what's really driving that, is it higher payroll costs or something else?

If you noticed year-over-year, the operating expenses for the Observatory were up marginally and the revenue is relatively flat. It's a number of things, it's mostly on payroll. There was some additional non-payroll-related costs and taxes, et cetera, but nothing significant to point out.

Great, thanks.

I think that, that wraps us up. Really sorry about the technical interruption. We'd like to thank you for joining us. We look forward to seeing many of you at our upcoming Empire State Run-up that we will host. We know we have word of three analysts in the Analyst Flight, it will be running up the building. We always welcome more. Beyond that, we look forward to updating you on our full results when we report next year and of course, any material or meaningful leasing, we'll report as we do it. Well, thank you all very much and have a great rest of the earnings season.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a great day.