Empire State Realty Trust Inc (ESRT) 2015 Q4 法說會逐字稿

Greetings and welcome to the Empire State Realty Trust fourth-quarter and full-year 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I will now turn the conference over to Mr. Thomas Keltner, General Counsel for Empire State Realty Trust. Thank you, Mr. Keltner, you may begin.

Good morning. Thank you for joining us today for Empire State Realty Trust's fourth-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 applicable securities laws, including those related to market conditions, property operations, income, and expense. 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. The Company 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 such as FFO, modified and core FFO, same-store results and EBITDA, which we believe are meaningful in evaluating the Company's performance. The definitions and reconciliations of these measures to the most directly comparable 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 fourth-quarter 2015 earnings conference call.

During the quarter, we continued to execute on our strategy and again delivered strong results. Our business is simple: no development, no joint ventures, no bidding or buying at current cap rates, and no lending. We remain a pure-play Manhattan and Greater New York Metro office and retail business with embedded de-risked growth which we continue to unlock as we redevelop and re-lease our space. For the full-year 2015 we generated spreads nearly 54% on new Manhattan office leases. And we drove returns from 9% to 22% by our placement of below-market in-place rent as we vacate and redevelop space. Our low leverage on our balance sheet gives us a lot of comfort and flexibility. We believe we will continue to outperform regardless of market conditions. We like our performance, and our outlook is positive.

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 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.

As Tony mentioned, 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 as we continue to redevelop and lease our properties at market rents and bring occupancies to market levels. Since inception, we have delivered and we expect to continue to deliver embedded de-risked growth.

In 2015 we made good progress. We leased over 1.2 million square feet of space. Observatory revenues remained steady, and we lowered our cost of capital with a new $265 million unsecured term loan. Specifically, on the leasing front, we are pleased with the demand we are seeing from prospective tenants for space in our well-located newly renovated pre-war trophy assets. Our fourth-quarter leasing activity was robust, with nearly 200,000 square feet of leases signed, including several full-floor leases. And we saw strong demand for our pre-built spaces. To put our leasing activity into perspective, the 1.2 million square feet of leases signed over the full year 2015 represents an increase of 54% over the prior year's activity. Tom will provide more color on this during his comments.

In 2015, revenues at the Empire State Building Observatory rose by 0.6% to approximately $112 million despite headwinds from international travel. We continue to focus on the elements of this business that are in our control, including improving the experience, simplifying ticketing, and enhancing our revenue stream. The Observatory remains an iconic must-see attraction in New York City.

We continue to engage in active renewal negotiations for our TV and radio broadcast leases and licenses which expire between 2016 and 2024. We previously disclosed that we have successfully renewed and extended our leases with Univision from their current expirations in 2016 and 2018, to a new expiration in December of 2025. Additionally, three of our existing television broadcast tenants -- CBS, NBC and WNET -- will vacate the Empire State Building at the end of their current lease terms. These non-renewing leases generated approximately $6.3 million in aggregate revenue in 2015, inclusive of expense reimbursement. And their leases will expire in 2017 and 2018. Revenue from Univision totaled approximately $2.9 million in 2015, inclusive of expense reimbursement. Effective beginning in January 2016, annual revenue from Univision will adjust to an initial amount of $1.9 million, inclusive of expense reimbursement.

This broadcasting business is a small component of Empire State Realty Trust's revenue, which totaled approximately $658 million in 2015. And neither the extension nor non-renewal of broadcast leases has, or is expected to have, a material impact on our financial results. We have provided additional disclosure related to broadcast expirations in our quarterly supplemental package. In order to reduce uncertainty around this small aspect of our business, when there are significant developments with regard to broadcasting we will provide updates.

With respect to our balance sheet we continue to work to enhance flexibility and lower our cost of capital. Over the past year we completed several important financings, including the new $265 million term loan, a private placement of $350 million of unsecured notes, the recast of our $800 million unsecured revolving credit facility, and we locked in interest rates for an upcoming mortgage refinancing in 2017. At the end of the second quarter of 2016 we will consolidate our offices and move our team to 111 West 33rd Street. This will free up valuable space in One Grand Central Place to redevelop and re-lease. We look forward to bringing our team together and the efficiencies of our new offices.

In closing, we are proud of our team's hard work over the past year and we thank them for their efforts. Looking ahead, we believe we will continue to unlock growth within our pure-play Manhattan and Greater New York Metro office and retail portfolio as we redevelop and re-lease our space at attractive spreads. We believe we will continue to outperform regardless of market conditions. And with our low levered balance sheet we are very excited for 2016 and beyond.

I will now turn the call over to Tom Durels. Tom?

Thank you, John, and good morning, everyone.

On today's call, I will review our overall leasing activity in the fourth quarter, 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 2016 in order to re-lease at higher rents. Our fourth-quarter results continued to reflect the progress we are making to execute on our four key growth drivers, which are: upside from signed leases not commenced, which equates to approximately $26.4 million as of December 31, 2015; 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 our vacant retail space.

In the fourth quarter, we signed 39 new and renewal leases totaling 198,000 square feet of office space. This included approximately 174,000 square feet in our Manhattan office properties and 24,000 square feet in our Greater New York Metropolitan properties. As John mentioned, for the full-year 2015 we signed 245 new and renewal leases for over 1.2 million square feet. At December 31, 2015 our total portfolio was 87.3% occupied. And including signed leases that have not yet commenced, our portfolio was 89.1% leased. Our portfolio occupancy was down 10 basis points from the third quarter and, including signed leases not commenced, our leased occupancy percentage was down 90 basis points. These changes are consistent with our announced plans and strategy to vacate and redevelop spaces so that they may be leased to larger, better-credit tenants at higher rents.

During the fourth quarter we signed a number of significant leases at 250 West 57th Street. We signed a full-floor 18,000 square foot lease with COOKFOX Architects. At 1400 Broadway we signed a 13,500 square foot lease for the duplex penthouse with Coyne Public Relations. At 1359 Broadway we signed a 10,000 square foot expansion with Ipreo, bringing their total space leased to 58,000 square feet. And our pre-builds continue to attract quality tenants, including a 9,000 square foot lease to Expedia at the Empire State Building. In early 2016, following the end of the fourth quarter of 2015, we signed a full-floor 25,000 square foot expansion lease with Shutterstock, bringing their total leased space at the Empire State Building to 104,000 square feet. And we look forward to announcing additional leases soon.

At our flagship property, the Empire State Building, as of December 31, 2015, we were 86.7% occupied, up 300 basis points from the prior quarter. Including our signed leases not yet commenced, our leased percentage was 90.7%, a decrease of 50 basis points from the prior quarter. These results are consistent with our announced plans and strategy to vacate and redevelop spaces so that they may be leased to larger, better-credit tenants at higher rents. The Empire State Building's unique urban campus with its high-quality amenities -- including six on-site dining and cuisine options; two Starbucks, including the world's first in-building delivery; New York City's largest tenant-only fitness center and tenant-only conference center -- all within a fully modernized architectural masterpiece continues to attract brokers and prospective tenants.

Throughout our portfolio, we continue to drive strong rental growth spreads. And during the fourth quarter, rental rates on new and renewal leases across our portfolio were 34% 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 57.5%. Our average cost for tenant improvements and leasing commissions on all new and renewal leases within the portfolio was $62.48 per square foot. As mentioned, for the full year we leased approximately 1.2 million square feet of space in our entire portfolio and achieved leasing spreads of 73.7%. 959,000 square feet of this space was in our Manhattan office properties at spreads of 43.3%. Spreads for new leasing in our Manhattan office properties were 53.8% for the full year.

As we have discussed, occupancy may fluctuate in the short term as we take space off-line in preparation for redevelopment and re-leasing. To that end, we expect to vacate approximately 425,000 square feet of space in our Manhattan portfolio in 2016. 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 1.76 million square feet of space left to redevelop and re-lease. 470,000 square feet of this space is at the Empire State Building and 1.29 million square feet is in the balance of our Manhattan office buildings. We are currently on track to redevelop approximately 460,000 square feet of space by year-end 2016.

In our Manhattan office portfolio, we currently have 950,000 square feet of unleased vacant space, of which approximately 649,000 square feet is redeveloped space that includes pre-builts and white-boxed full and partial floors ready for lease-up. Approximately 77,000 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 December 31, 2015, we had eight full floors of 215,000 square feet throughout the portfolio that were vacant and available for lease-up. And another nine full floors of 185,000 square feet will be consolidated and delivered by the end of 2016, two of which have already been leased to COOKFOX and Shutterstock.

In our retail portfolio, following the close of the fourth quarter, we signed leases with Bank of America at 250 West 57th Street and Papyrus at 1359 Broadway, these two leases totaling 5,600 square feet at nearly $1.9 million in incremental revenue. And retail space that will be consolidated and redeveloped to create new lease-up opportunities in 2016 include approximately 40,000 square feet, including nearly 8,000 square feet at street level and directly opposite Macy's flagship store at 112 West 34th Street that will be demised, white-boxed, and ready for showings by late summer; 5,500 square feet of street-level space fronting 34th Street located 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, construction, and operations is energized and excited for the coming year. We believe the real estate market remains healthy and we are seeing very good activity in our sub-markets, with consistent demand and a steady pipeline of potential deals 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 will turn the call over to David Karp. David?

Thanks, Tom, and good morning, everyone.

I will start with a review of our financial performance and follow with an update on our balance sheet. For the fourth quarter, we reported core FFO of $66.2 million or $0.25 per fully-diluted share. Modified FFO, which is defined as FFO plus adjustments for any above- or below-market ground lease amortization, was $56.2 million or $0.25 per fully diluted share for the fourth-quarter 2015. For the full year ended December 31, 2015 core FFO was $257.7 million, or $0.97 per fully-diluted share. Modified FFO was $257.8 million, or $0.97 per fully-diluted share for the same period.

Turning to our Observatory operations. For the full year 2015 the Observatory hosted approximately 4.1 million visitors, compared to 4.3 million visitors in the comparable period of the prior year. Observatory revenue was $112.2 million, a 0.6% increase from $111.5 million for the prior year. For the fourth quarter of 2015 compared with the fourth quarter of 2014, there was a 4.8% 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 fourth quarter 2015, Observatory revenue was $27.6 million, a 1.8% decrease from the same quarter of the prior year. Observatory expenses increased 4.2% over the fourth quarter of 2014. Observatory net operating income for the quarter decreased by 4.2% year over year.

Finally, as John noted, starting in January of this year, our revenue from one of our broadcast tenants, Univision, will be adjusted from $2.9 million annually to $1.9 million per year pursuant to our renewal lease agreement. We will not incur any impact from CBS, NBC, and WNET's non-renewals until 2017 and 2018.

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. Over the past year, we enhanced our access to a variety of capital sources and protected our balance sheet from a rising rate environment. During the third quarter, we closed on a new $255 million term loan and entered into a forward interest rate swap agreement that locked in rates for our 2017 mortgage refinancing. In the first quarter we completed the private placement of $350 million of unsecured notes and we recast our $800 million unsecured revolving credit facility. We believe our balance sheet positions us well as we begin 2016.

At December 31, 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 5.3 years. The remaining $305 million of debt is variable rate, with a weighted-average interest rate of 1.97% and a weighted-average term to maturity of 6.2 years. At the end of the fourth quarter, our leverage ratio, reflected by consolidated debt-to-market capitalization, was 25% and our net debt-to-EBITDA was 4.9 times. Finally, our unsecured revolving credit facility has a total capacity, including the accordion feature, of $1.25 billion. At December 31, 2015, the outstanding balance on the Company's revolver was $40 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 expired 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 NYSE. As of December 31, we have had redemption requests from operating partnership units and class B common shares to class A common shares totaling 21.9 million shares, or approximately $396 million at the closing share price of $18.07 on December 31, 2015. This represents a 27% increase in class A shares since our IPO. On December 3, 2015, our Board of Directors approved a quarterly dividend of $0.085 per share. This dividend was paid on December 31 to shareholders of record on December 15.

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

(Operator Instructions)

Craig Mailman, KeyBanc.

Curious if, on the demand side, given the volatility this year, have you guys seen any change in attitude from some of your smaller tenants -- or really any of your tenants -- in terms of hesitancy or more pushback on rents?

Craig, this is Tom. We had a very good fourth quarter with 198,000 square feet of leasing completed. And then of course, with 1.2 million square feet of leasing in all of 2015, that exceeded our leasing projections at the start of the year.

But we are not seeing any pushback on our asking rents and we're seeing a steady drum beat of demand from the smaller- to mid-sized tenants. We're seeing the steady leasing momentum continue based upon the number of showings, number of proposals being exchanged and leases in negotiation.

Remember, we offer centrally-located properties with great access to mass transit, renovated common areas, new building systems and newly built modern office space, at an affordable price point. So we're offering fantastic value. As such, I think that our properties are always going to be in demand and we're not seeing a change.

Okay. And just thoughts and inventory you guys have. You said 650,000 of vacant development and another 70,000 that you're holding off and another 460,000 that gets redeveloped during 2016. How do you guys think about the inventory you want by the end of the year with your internal projections on the face absorption, given your pipeline of leasing prospects?

Well, it's a combination of factors but basically we're putting our game plan together on an annual basis and updating it on a quarterly basis. We're targeting 460,000 square feet of space to be redeveloped in the coming year, and really set the wheels in motion at the latter part of last year.

It's a combination of spaces that are rolling, co-tenancies, co-terminations and the in-place escalated rents and the condition of those spaces. So right now, we're happy with the inventory that we have. We're staying on track with executing on our game plan for 2016.

Okay. And then lastly, on the retail spaces, Foot Locker, sounds like you guys are -- is that a change in strategy you guys are going to white box and demise? Is that just because you guys -- has the demand fallen off for that space? Or do you just think that's where the market is to cut it up and you'll get better pricing?

Craig, on the space on 34th Street that's currently leased by Foot Locker and there's still in-occupancy of that space and that lease expires at the end of April. Internally, we never forecasted to lease that space until Foot Locker vacated and we demolished the space and white boxed it and had a period of showing and marketing of a clean space.

We were very fortunate to have secured Sephora. It was already on 34th Street, familiar with that marketplace. And certainly Foot Locker knows that location very well, with this being their number one performing store. So we were very fortunate to have landed and secured those leases well in advance of Foot Locker's existing lease expiring at the end of April.

But I think that internally we expect to vacate the balance of that space, get it demised, white boxed and then have a better showing for that. That's generally been our experience in the past in marketing these large blocks of space.

Have your rent expectations changed at all for that remaining 8,000?

Not really. Keep in mind that the in-place fully escalated rents of roughly $26 a square foot, compared to ground-floor rents where we've signed leases in excess of $900 a square foot on grade, regardless of whether there's movement in rents, we're going to make significant money on that space when we lease it up.

We're very happy with the space. It will get filled. It's going to show so much better once the space is demolished and white boxed. It's got fantastic ceiling heights, 20-foot on the ground, 14-foot on lower-level, sitting directly opposite Macy's, got great co-tenancy in the area and proven national and international tenants with huge foot traffic. So we're very optimistic that we'll do very well.

Great. Thank you, guys.

Brad Burke, Goldman Sachs.

Nice quarter. With the positive comments on the office market, and I'd say more positive versus what we're hearing from other Manhattan landlords, is that just a difference of opinion on the strength of the overall market? Or is it that you think your portfolio's going to outperform the overall market?

I'd go back to the fundamentals of what we're offering. We've said time and time again, we're offering centrally-located properties with great access to mass transit, fully renovated common areas, Empire State Building with a full suite of new amenities, newly built modern office spaces, ranging from pre-builts to full floors. We have a variety of product and space-size offering. And we're at an affordable price point. And we're in a very active segment of the market, with most of our space in the high $50s to low $70s per square foot. So all I can say is we're seeing steady demand coming through our door based upon showings, deals in negotiation and leases in negotiation.

I feel very good about where we're at the first quarter. As I commented following the close of the fourth quarter, we signed a full-floor deal with Shutterstock at Empire State Building and I mentioned the two other retail deals. I would simply say that we're seeing steady demand for our unique product and location.

Brad, this is John. I would just add to that, I think we've always said that we feel we're going to outperform the market regardless of what the market environment is. I think if the market gets more interesting here I think we still feel very comfortable with the product that we're offering.

Okay. And last quarter you said you had about $30 million of NOI projected to roll on from signed leases that hadn't commenced. I know a number of those hit in the fourth quarter, so I was hoping that we can get an update on that.

Yes, we're at $26.4 million as of 12/31.

Okay. And then switching to the Observatory, David, I know that you said that a lot of the year-over-year decline was because of tourism. Do you have any sense of how much of the decline is attributable to tourism? Is it the entirety of it or did weather have an impact? Or do you sense there was any impact associated with new competition?

Brad, I think one of the things -- we continue to see some headwinds from the tourism in New York, not only the number of visitors, but as we mentioned, the amount of money tourists are spending when they do come to New York. The last week of the year, we did have some tough weather. In January, though, we picked up with some very good weather. So I think from a weather standpoint, we gave you the number of bad weather days, quarter over quarter, year over year, so that does have somewhat of an impact in the performance of the quarter.

And Tony here, Brad. I would just add that the important take away for us in 2015 was that the One World Trade was new. That newness has worn off, through new social media and other means people understand what the offering is. When we look at what impacted our performance and we try to trace it. We disclose our numbers on a quarterly basis, we actually get to see the One World Trade Center Observatory numbers, anybody can on a daily basis, they post it on their entrance as each one comes through as part of their installation there.

We really enjoy what we're seeing. We're very comfortable with what we're seeing and we come away with it thinking, gosh, really we think it was the tourist trend.

I do think it's important to say that we're very happy with our competitive position. We continue to be very happy with our competitive position. Without going too far, I might say we're more happy with our competitive position in the first quarter. And we're quite happy with how we're doing.

Okay, I appreciate the color. Thank you

Jamie Feldman, Bank of America.

So can you talk about the year-over-year increase in Observatory expenses, or even sequential? Is there anything in that number that we might see go away in future quarters?

Yes, Jamie, in the fourth quarter more than about 300 basis points of the decline that you'll see in the Observatory margin is attributable to two nonrecurring expenses. First is the timing and expense related to union employee benefits and worker compensation. And second is marketing expenses, which were primarily for enhancements to our website, and specifically enhancements to the mobile experience, which is to capitalize on the shift from desktop to mobile e-commerce. So again, these are nonrecurring so I would not expect to see these types of expenses going forward.

So what do you see as a more normalized run rate?

Again, as you know, Jamie, we don't give guidance in term of normalized run rate. That would really be an expectation of what we expect to see. But if you take -- again, look at the year as a whole, and we don't look at -- with respect to the Observatory -- the quarterly as closely because of the seasonality and the variations. But I think we're comfortable with the level of expenses we incurred over the full year of 2015.

We're sitting today looking at going forward in 2016, what we may be doing with the Observatory and as part of our annual budgeting and planning. And when we have more clarity on what the year will look like, we'll certainly share that with you.

Okay. But it looks like for those two expenses were $500,000, $600,000?

Yes, roughly about $300,000 related to the employee benefit. And the marketing expenses over the third quarter were probably up about $600,000.

Okay, that's helpful. And then can you talk at all about your tenant watch list in terms of credit? Like have you seen any change in that over prior quarters?

We do maintain an internal watch list. As you know, Jamie, we take tenant credit very seriously. We have a full-time credit analyst who not only underwrites every prospective tenant that comes into one of our buildings, but on a regular basis, performs credit analysis on our larger tenants. So we do monitor that. I don't think there's anything of note that has been added to our watch list, and as we look at where it is today.

Okay. And then finally for me, if you could talk a little bit more about the street retail business in New York. Where are you seeing -- I know there's been -- if you think of the different sub-markets across New York City, we've certainly seen changes in terms of tenant demand and where stores are opening and where they're closing. Latest thoughts on the sub-markets you're in and even within those sub-markets, any kind of shift you're seeing in terms of where tenants want to be?

Sure. Notwithstanding prior discussion on some of the higher-end markets, particularly Fifth Avenue and Soho where we're not located, we're seeing activity in our sub-markets, particularly in Times Square South on the Broadway quarter. We really like what's happening with the changing neighborhood and the changing streetscape.

I think it's evidenced by the recent signing of Papyrus, RITUALS before that, the first international brand to come to that sub-market. We're excited that the Shake Shack will be opened up by the end of the first quarter. It's going to change the experience, the streetscape. So we really like with happening there.

We have one remaining space available -- I'm sorry -- two remaining spaces available on Broadway, the most significant one at 1359 Broadway. And up on 57th Street, as you know, as I commented, we signed a lease with Bank of America, so we're fully leased there. Down at Union Square, which is a fantastic location with huge street traffic, we have one corner location that's coming available later this year but we already have activity on that. And then I've talked about the 34th Street corridor and availability.

So despite comments that you may hear about changes in the upper end of the market, we're in locations where retailers want to be. They sell their inventory, they do business, and there is fantastic street traffic, pedestrian counts and co-tenancy.

Jamie, the one thing that -- Tony here again -- one thing I would say, you've heard this for so many years from us and we'll continue to say it because we believe it's going to continue to be accurate. Based on our locations and based upon our reinvestment and the price point that we offer, we really offer a unique product, both on the office and on the retail side. They're irreplaceable locations and we're improving those locations by virtue of the re-tenanting we're doing upstairs in that changing neighborhood.

And it's doing it all at a price point which allows us to show fantastic leasing spread, but still be very significantly below new construction costs. While at the same time, offering a product which is absolutely, measurably, definitively different from other pre-war assets. So we like our niche.

We believe, going back to the credit quality question, we lease to the right tenants, to the right businesses. They have a high prospect of maintaining those tenants over time. Because to move, they're either going to have to move to another location and pay much, much higher rent or go to a much lesser building, and the retail benefits from those same locational and upgrade in tenant quality improvement.

Okay, that's very helpful. Thank you.

Blaine Heck, Wells Fargo Securities.

I just wanted to get a little more color on the broadcasting tenants. In the press release you guys put out about a week ago, you had Univision renew, which was great. But I think the rent roll-down was in the 30% or so range. So is that just an indication of the competitive environment and we should expect similar roll downs with other tenants you're able to retain? Or was there anything anomalous with that?

Blaine, this is John. In general the over-the-air broadcast business is in a state of flux. We disclosed what we're prepared to disclose at this point about that business. We put out an update last week. We wanted to be timely and wanted to avoid distraction with respect to this business, which we don't think is material. And the impacts of these updates are far off with respect to our business.

We also gave some additional disclosure in the supplement, which I encourage you to look at. And when we have additional information, we're going to share it.

Okay, fair enough. Maybe just one more on that and I'll leave it alone. How much in CapEx do you think you guys are anticipating on spending on that space maybe in the next few years to replace that lost revenue or keep the tenants in place?

Again, same answer. This business is not material to our overall results and encourage you to just think about our core leasing business, our office and retail leasing business.

Okay. Maybe one quick one -- maybe for Tom. It looks like rent spreads on renewals signed in the fourth quarter were lower than previous levels at 1.8%. Was there anything one-time in nature there or maybe just a mix issue?

Well, rent spreads were very good with 57% positive spreads on our all-new office leasing in Manhattan for the fourth quarter. 34% across the entire office and retail portfolio.

Of course, the spreads in any given quarter are going to depend on the prior fully-escalated rents that expired. But given the fact that with our fully-escalated rents expiring in Manhattan office in the coming year, somewhere around $44 a square foot, and those spaces we're targeting for vacating and redevelopment lower than that, we're going to achieve very healthy and significant positive rent spreads.

Okay, thanks.

Erin Aslakson, Stifel.

Actually John Guinee here. Steve Durels, you have wonderful, wonderful daughters. I really enjoyed meeting them. Thank you. They told me you were very ethical and honest and would answer any questions we asked.

Hold on a second, John. Is Steve Durels on this call? (laughter)

Freudian. Sorry about that. (laughter)

Hold on, he's only a couple blocks away. Let's go get him.

Sorry about that. Question. (laughter) When is the mark-to-market all done? When are you 90% done with all the white boxing, et cetera, et cetera? Is that 2018, 2019, 2020, 2021? When is that story complete?

First, I think we've already clarified that Steve Durels isn't here. This is Tom Durels. (laughter) And just for the record, Kelsey Durels did beat John Guinee on the run-up at the Empire State Building. (laughter)

Getting back to your question on the positive rent spreads, if you look over at our fully expiring rents on the offside over the next four to five years, we're still in the $40s per square foot. That compares to where we're doing deals in the high $50s to $70 a square foot. So we see in the next four to five years, as we've laid out in our prior investor presentations and at the investor presentation and updated investor books that we've done, as well as on our website, you can see that we're projecting significant mark-to-market on our office leasing over the next four to five years.

Bear in mind that some of the leasing that we did with -- early in the cycle -- early in the cycle of the market as well as early in the cycle of our property redevelopment, are also now well below current market rents. So we feel very good about our opportunity to achieve positive mark-to-markets in the years ahead. Certainly next four to five years and beyond.

Great, thank you very much.

(Operator Instructions)

Tom Lesnick, Capital One Securities.

Obviously rent spreads have been a strong positive for you guys in Manhattan. But in some of the outer lying suburbs of New York City, rent spreads have been substantially weaker. I think they were slightly negative this quarter. Wondering if you can comment at all on the leasing environment out there and what we should expect to see?

Sure. First, we only did a modest amount of leasing in the fourth quarter in our Greater New York Metropolitan properties for about 17,000 square feet. Bear in mind that we're 94% leased with very little roll-over of only 65,000 square feet in 2016. So our mark-to-markets are going to depend on what the prior fully-escalated rent is in place on a lease that expires. But with the very modest leasing that can be done due to the modest roll-over and very little available space, it's really not going to have a significant impact on our business.

Rents in general for our properties have been flat to up 2% over the past two quarters. But our properties show very well. They are fully renovated, fully amenitized and in great locations next to mass transit.

Tom, it's David. Statistically I think, as Tom alluded, we only did one lease in the Greater New York Metropolitan area -- well, two leases, one of which was a renewal. So when you look at that mark-to-market, it really does not provide meaningful information regarding what's going on in our portfolio.

Got it. Appreciate that insight. Then just one housekeeping question. I know you've elaborated quite a bit on the broadcasting business so far but with regards to the known lease expirations for 2017 and 2018, are you able to comment a little bit more specifically on the timing within the year for those?

No, Tom, this is John. As you know, we've given a very detailed year-by-year disclosure in the supplement. Hopefully, that gives you a good sense of how that revenue expires over time. That's as much detail as we're going to provide at this point.

Okay, appreciate it. Thanks, guys.

John Kim, BMO Capital Markets.

In looking at your inventory of vacancies, it looks like over the last couple quarters you've had an increase in the amount of vacant developed space. Can you elaborate on this?

Sure, John, this is Tom. First, bear in mind that we have to line up our lease expiration dates and then vacate that space and then consolidate and redevelop. Out of the 950,000 square feet of vacant Manhattan office space, we have roughly 300,000 square feet of pre-builts, 310,000 square feet of white box and some other redeveloped space.

So it takes time for us to deliver that, which we've spoken on in the past. And that's fueling our inventory of space that we're now marketing. It's a function of, I think, one of timing, one of when spaces roll, when we line them up for intentional vacate and consolidation and redevelopment.

But we're happy with the inventory space that we have now, it was part of our plan. We fully intended to execute and develop that -- vacate and develop that space in 2015. And we're happy with the activity on it that we're seeing today.

I think you answered to a prior question from Craig that tenants are not pushing back on rent. I'm wondering, on the developed space, if it's taking longer for tenants to absorb or accept that it's a higher price point?

No, I wouldn't say that. I'm not seeing any change in that whatsoever.

Okay. Can you provide an update on the sub-lease space in your portfolio and maybe compare it to the third quarter?

John, we haven't really released the details on sub-lease space availabilities in our portfolio.

We've referenced from time to time that Global Brands Group was sub-leasing certain space. The reality is that they're done with their sub-leasing program. It was in the portfolio.

Outside of that, we could -- it's an interesting question which we haven't gotten before. We volunteered it with regard to Global Brands Group in the past. But what we might do is take that under consideration whether we will track that going forward. But I think it's safe to say that we don't see anything awkward or a harbinger of difficult times to come on the basis of tenants looking to shed space.

Okay, that's great. As far as potential acquisitions that you're looking at in the market, have you see any cases of more attractive pricing for maybe core-plus product. One of your competitors has suggested that's the case. I'm wondering if you're seeing the same thing?

John, this is John. We're always out there looking at opportunities. We're going to continue to focus on off-market situations we think are going to provide good value to our shareholders. We primarily focused on relationship-oriented situations.

That being said, I think we continue to be primarily focused on executing on our redevelopment and core leasing strategy that Tom's been talking about. I think we continue to think that the market is cyclical and we're going to be patient. So I don't think we have any further observations than that.

Okay. And then maybe a final question for Tom. Do you think you could disclose John Guinee's time on the run-up? (laughter)

But then I would have to disclose yours. So we're going to keep that confidential for the time being. (laughter)

That's a good idea. Okay, thank you. (laughter)

Craig Mailman, KeyBanc.

Hey, guys, just a few quick follow-ups here. David, on the, I think you said $26 million backlog assigned but not yet commenced, what's the TI and CapEx spend related to that that's left to go?

It's $26.4 million of signed leases not commenced as of the end of the quarter. In terms of the spend on that, we haven't broken that out. But I think if you take a look at some of the materials we provided in the past in terms of what we're spending on TIs, what we're spending on base building work, that will give you a sense of the total spend.

Now, understanding that some of that has already been spent in the quarter, particularly as it relates to leasing commissions, because we pay those leasing commissions at the time of lease signing. Then depending upon the nature of the build-out and the timing of when that commencement occurs, will tell us when we will incur that over the ensuing quarters.

Okay, all right. Then on the remaining Broadway retail spaces, Tom, could you run through -- I know you have the restaurant space at 1359, but can you run through exactly what you have and what the sizes are?

Sure. Aside from the space at 1359 Broadway, which is about 7,000 square feet on grade, we have another space of only like 1,900 square feet on Broadway. That's it. So two availabilities.

And how are the prospects there? I know you guys have been working on a higher restaurant for a while. Anything brewing?

On the smaller space, I think we have activity on that. I expect to see that leased certainly in the coming couple quarters. In the restaurant space, I would say that we have been selective. We've been down the road with a couple of name brand chefs, but those do not conclude. And we're being careful as to who we lease to. We really are focused on getting the right tenant in there.

We could've had the space leased to a lesser of a tenant that we don't think would be as meaningful to changing the neighborhood. I'm confident we'll get it leased, and we'll get it leased to the right tenant.

The only point I would add to that -- Tony Malkin here -- is that the fact is that while this is a decent-sized space, the rents which we're targeting for it in comparison to, let's say what one might achieve on 34th Street across from Macy's at 112 West 34th, they're just not comparable. This is not going to be a material outcome for us as far as revenue that it will produce. So we believe that the impact to the office up above is more meaningful.

Okay, that's fair. And then lastly, Tony, for you, not to pry too much but it sounds like -- maybe you can give a little bit more color what you mean by you're more happy with your competitive position in the first quarter. Does that have anything to do with Skyride not being there anymore?

Well, let's put it this way, we had a major change in that we were able to move out Skyride, a long-time tenant which operated an aged and unwanted virtual reality tour. We moved them out on December 31, 2015, six months early. And in fact, they paid to get out, which was nice.

That gave us the upper hand, finally, in controlling vendors on the street around the building, as we now have no street seller of our ticket to whom we are obligated to sell our tickets. This gives us a better control over the atmosphere around the building and enhances our ticket pricing mix, because it allows our retail customer to reach our retail window, which is a significantly better outcome for us. And frankly, it's a slightly better outcome for the retail customer as well than what Skyride was selling with their hordes of red-jacketed vendors.

I'd say in addition, the fact is that One World Trade is a known entity now. And we like our competitive position versus One World Trade. We like the fact that there has been, in our view, a reaffirmation of the iconic nature of a visit to the Empire State building, of the connection with New York City and with its history and with being in the center of New York.

So in short, without saying anything further, we're always eager to give you the results on a quarterly basis. We look very much forward to giving you the results for the first quarter, which is more than halfway through. We're very content with our competitive position and how we've done in the quarter to date.

If you hit a ballpark in the fourth quarter, what percent of sales maybe Skyride would be and how that would stack up versus, I think, the average ticket price was like about $29, or what the blended ticket price is. How much of an impact do you think that had? How much percent of sales do you think that they actually did?

Let's be clear, we know exactly how many sales they did and we know exactly what our margin was. But we haven't given that kind of detailed breakdown. We actually view our relationships with our tour and travel partners, the remaining ones with whom we do business, with whom we have excellent relationships. We're very, very happy with our relationships with our existing tour and travel partners. They work very well with us. We believe they provide a very helping service to us, particularly selling tickets to tourists in areas of New York City, which are distant from the Empire State building.

That being said, let's just say that we do with our tour and travel partners based upon our various agreements with them. We have different tiered pricing. What no one has remembered is a disclosure we have given in the past that, along with the ticket price increase that we did in 2015, we also announced that it's public information to the tour and travel trades, that effective April 2016, the tour and travel ticket pricing is going up.

So that being said as an aside, we are not giving detail on Skyride. Let's just say that it is a mosaic of different components of different-sized pieces of business for our ticket sourcing. And this is a nice pop for us in our margin for those ticket sales, which they are not any longer making.

Would you personally consider it a material piece of the business or just a nice little uplift that you guys may get?

I think it's a nice uplift.

Okay, thank you, guys.

Okay, I think we might go to a concluding few remarks. The first thing I would say is that I personally am really happy with how everyone is performing at ESRT. I am very, very happy with my continuing growing partnership with John Kessler who just passed a year with us, which I know seems to many of us like he's been here much, much longer. But it is just over a year from his beginning.

We're really happy with the way our properties are performing. We really love our competitive position. We like the offering that we have. And we like the fact that in many cases, the market is still welcoming our properties for what they are rather than what we were going to make them, and we see better and better looks from better and better tenants. We're very pleased with that. And we like to performance on the Observatory, and the team is functioning very well.

So with this in mind, I would just like to point out that -- and this is all in alphabetical order -- Brad Burke, John Guinee, and John Kim did duke it out with Steve Durels' niece, Kelsey Durels. (laughter) And my understanding is that Kelsey did UVA proud and that they did meet again at the top, number one, number two.

It's a very interesting thing -- I'm carrying on a little bit because I wanted to get to 56 minutes of management comments in the call but I think we may fall short. It's a very interesting thing for us to listen to all of the market and prognostication that is going on today in calls and in reports. We're not seeking to add to that noise. We're just sticking to our knitting, doing our work on our portfolio in our buildings and our sub-markets. We're feeling good it.

And as far as the broader market, we don't have a lot of comments to make. But we are looking forward to speaking with you all when we have chances to see you. And we look forward to reporting on the first quarter when we get the chance to do that. Thanks very much for joining the call.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.