Empire State Realty Trust Inc (ESRT) 2018 Q3 法說會逐字稿

Greetings, and welcome to the Empire State Realty Trust Third Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce 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 2018 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 empirestaterealtytrust.com.

On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements as defined in applicable securities laws, including those related to market conditions, property operations, capital expenditures, income and expense. As a reminder, forward-looking statements represent management's current estimates. They are subject to risks and uncertainties, which may cause actual results to differ from those discussed today.

Empire State Realty Trust assumes no obligation to update any forward-looking statement in the future. We encourage listeners to review the more detailed discussions related to these forward-looking statements in the company's filings with the SEC.

Finally, during today's call, we will discuss certain non-GAAP financial measures such as FFO, modified and core FFO, NOI, cash NOI and EBITDA, which we believe are meaningful in evaluating the company's performance. The definitions and reconciliations of these measures to the most directly comparable GAAP measures are included in the earnings release and supplemental package, each available on the company's website.

Now I will turn the call over to John Kessler, President and Chief Operating Officer.

Good morning. Welcome to our third quarter 2018 earnings conference call. At Empire State Realty Trust, our fully modernized portfolio is essentially located near mass transit. Our market position offers tenants a value price point between trophy, Class A and Class B properties, which provides us with both upside opportunity and downside protection.

We have a de-risked embedded growth strategy and generate market-leading leasing spreads from redevelopment of our office space.

We have the lowest levered balance sheet among office REITs, which are not in liquidation, a significant cash position and no outstanding borrowings against our line, and we are an industry leader in sustainability and energy efficiency.

Today, Tom Durels will speak about the third quarter's approximately 354,000 square feet of leases, market demand for our properties and our market-leading leasing spreads. Our leasing results this quarter include new leases with Signature Bank at 1400 Broadway and Diligent at 111 West 33rd Street as well as HNTB's expansion at Empire State Building. And then David Karp will address our financial performance and our balance sheet.

Before I turn the call over to Tom, I want to comment on one additional third quarter item. We were excited to open the new Observatory entrance on 34th Street in late August. We are already seeing staffing efficiencies and faster visitor processing. The new entrance marks the first phase of a reimagination of the entire visitor journey.

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

Thanks, John, and good morning. Our third quarter numbers reflect further progress on our 4 drivers of top line de-risked and embedded growth over the next 5 to 6 years. The breakdown of our 4 revenue growth drivers, which as of September 30, 2018, we estimate to be $105 million, can be found on Page 9 of our investor presentation available in the Investors section of our website.

For reference, this compares to $376 million in trailing 12 months cash NOI, and $537 million in trailing 12-month cash rental revenue and tenant reimbursements as of September 30, 2018. Just -- as a reminder, the $105 million is revenue growth and not all of this will flow through to NOI.

In the third quarter, we signed 43 new and renewal leases totaling approximately 354,000 square feet. This included approximately 315,000 square feet in our Manhattan office properties and 39,000 square feet in our Greater New York Metropolitan office properties.

Significant new office leases signed during the quarter include a 91,200 square foot lease for 3 full floors with Signature Bank at 1400 Broadway. A 44,700 square foot new lease for a full floor and a half with Diligent at 111 West 33rd Street, and a 26,800 square foot full floor expansion lease with HNTB at the Empire State Building. And subsequent to quarter-end, we signed an expansion lease with Uber for 14,300 square foot full floor at 1400 Broadway. With these expansions by Uber and HNTB and a 5,300 square foot expansion by Workday, we have now had 152 tenant expansions within our portfolio, totaling over 1 million square feet since 2013.

We have updated the disclosure on potential vacates and renewals for leases that expire by breaking out the quarters for 2019 and introducing full year disclosure for 2020, which can be found on Page 9 of our supplemental.

This chart shows tenants to be relocated within our portfolio and vacates to be replaced by new tenants with whom leases have been signed. We have continued with our proven strategy to vacate and consolidate spaces, redevelop them and release those spaces at higher rents to better tenants. As a reminder, there is a timing delay between the move out of existing tenants and the commencement of replacement new leases and a further delay between legal commencement and GAAP revenue recognition. The resulting occupancy can vary quarter by quarter and then these timing lags impact our reported revenue.

During the third quarter, rental rates on new and renewal leases across our entire portfolio were 24.1% higher on a cash basis compared to prior escalated rents. And at our Manhattan office properties, we signed new leases at a positive rent spread of 27.3%. Of course, leasing spreads always depend on the expiring fully escalated rents. In the near term, leasing spreads will be impacted by the lease-up of vacant redeveloped office space, which we -- which had prior fully escalated rents of $50 per square foot, which is well below current market. Our future leasing spreads will be influenced by rents on future lease expirations, which we disclose on Page 11 of our supplemental.

We continue to see demand for our product, locations and price points and feel confident in our offerings. Heading into year-end, we have a healthy pipeline of leases and negotiations across our portfolio for both full floors and prebuilt. As a reminder, leasing volume may vary significantly by quarter given the timing of particular deals, and we remain focused on our strategy to vacate and redevelop space that we will bring to market for future lease-up.

Now I'm going to turn the call over to Dave Karp. David?

Thanks, Tom, and good morning, everyone. For the third quarter, we reported core FFO of $73 million or $0.25 per diluted share. Cash NOI was $99 million, down slightly from the prior year period.

Before I dive into some of the details around this past quarter's performance, I would like to highlight a couple of changes we've made in our reporting to assist you with your models. First, we further improved our signed leases not commenced disclosure within our schedule of initial free rent burn off on Page 6 of the supplemental to better provide visibility of when the cash contribution to NOI is realized. Second, we have adjusted our Observatory admissions figure, which now reflects the performance against the unique visitors within the period. Our calculations are based on the number of unique visitors who passed through the turnstile and we no longer tally visitors who make a second visit at no additional charge. We made this change to give you a more clear number for the revenue per unique visitor. This admissions figure is presented in our supplemental on Pages 4 and 16, and the revenue per unique visitor is on Page 21 of our investor deck.

In our Observatory operations, which are highlighted on Page 16 of our supplemental, revenue for the third quarter of 2018 increased to $40.2 million or 2.4% from the prior year period. NOI was $31.4 million, up 2.4% from the third quarter 2017, despite a lower visitor count this quarter. A combination of previously announced price increases, implementation of dynamic pricing and a better mix of ticket types drove the year-over-year improvement in NOI.

The Observatory hosted approximately 1.17 million visitors in the third quarter 2018, a decrease of 5.6% compared to the third quarter 2017. For the third quarter, we estimate that bad weather days resulted in approximately 24,000 fewer visitors or approximately 30% of the total decline than in the prior year period, based upon the timing of the bad weather days.

For the 9 months ended September 30, 2018, Observatory revenue was $96.7 million, a 2.6% increase compared to the prior year period. Net operating income for the first 9 months of 2018 was $72.8 million, up 2.4% from the prior year period. This strong performance was achieved despite the fact the 102nd floor observation deck was closed in the first quarter of 2018 for the replacement of the original elevator machinery with a new higher-speed glass elevator. Adjusting for first quarter 2018 revenue from that 102nd floor observation deck, due to its closure for that period, which was $1.9 million in 2017, Observatory revenue would have increased 4.7% for the 9 months ended September 30, 2018, as compared to the same period in 2017.

The Observatory hosted approximately 2.86 million visitors in the first 9 months of 2018, down 3% compared to 2.95 million in the prior year period. As a reminder, we will close the 102nd floor during a portion of 2019 as part of our larger Observatory capital project. We will keep you updated on the progress.

Starting in January 2019, in accordance with the new accounting standard guidance which applied to all REITs, noncontingent leasing costs can no longer be capitalized and will, therefore, be recorded as an expense. Going forward, this figure will be dependent upon leasing volume. For context, our capitalized leasing costs were approximately $4 million to $4.5 million per year over the past 3 years.

Moving to our balance sheet. Our low leverage joint venture free and flexible balance sheet, including significant cash on hand, remains a differentiating and competitive advantage for us in any market environment. As of September 30, 2018, we had total debt outstanding of approximately $1.9 billion and no borrowing under our $1.1 billion unsecured line of credit. The debt has a weighted average interest rate of 3.84% and a weighted average term to maturity of 8.3 years. Our debt maturities are well laddered with only a single $250 million issue maturing before 2022. None of our outstanding debt has variable rates.

During the quarter, we entered into 2 forward interest rate swap agreements with an aggregate notional value of $250 million that effectively fixed LIBOR over a 7-year period at 2.958% related to potential future borrowings. Given all of the work we have undertaken with our balance sheet over the past few years, we're very comfortable with how well positioned we are for a rising rate environment.

As of September 30, 2018, the company's consolidated net debt to total market capitalization was 20.4%, and consolidated net debt to EBITDA was 3.7x. And we have cash, cash equivalents and short-term investments of $630 million. Subsequent to the quarter-end, the Board of Directors authorized a 500 million Class A common stock and publicly traded operating partnership unit repurchase program through December 31, 2019. We remain focused on having all the appropriate tools to allocate capital prudently to increase shareholder value.

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

(Operator Instructions) Our first question is coming from the line of Steve Sakwa with Evercore ISI.

David and John, I don't know if you can provide a little more detail on, sort of, the buyback. I realize that providing guidance and all that is not sort of in your DNA. But how do we sort of think about the program and given where the stock is, how do we just sort of kind of assume that gets executed?

Steve, it's David. First of all, this is an extension and an expansion of a prior authorization. We're announcing it now because of new advice that it's the best practice to do so. We continue to be disciplined in how we evaluate acquisitions and balanced in how we allocate capital. And this authorization insures that the company, as I said, has all the available tools to allocate capital prudently to create value for shareholders. And as we continue to execute on this strategic plan to deliver our embedded de-risk growth.

But there's nothing. I guess, I'm just trying to understand the timing and kind of the evaluation, obviously, the stock's been down for quite a while, I guess. Just what sort of triggers that? Or is it just -- we'll know it when we see it? Just trying to look for any kind of guideposts here.

Yes, I know. I appreciate the question, Steve. But I think what's important is that we've announced the program, and that's what really matters. And beyond that, we really don't have anything else to say on the subject.

Okay. Maybe just for Tom on, sort of, the leasing environment. You mentioned kind of a strong pipeline. I was just wondering, if you could provide a little more detail sort of around the pipeline today? Maybe how it compares to 3 or 6 months ago? And the types of tenants that are sort of in that pipeline?

Well, Steve, look, I feel really good about our portfolio and our pipeline of deals under discussion. What we see is that our product, locations and price points absolutely remain in demand. And I'm very pleased with our very strong third quarter results of 354,000 square feet of leasing. All I can say is that we have -- we got a solid pipeline of activity for our Manhattan office space for both full floors and prebuilts. For us a lot is -- it's been -- timing is going to -- it lays into this, and our results are going to vary by quarter, but as far as the pipeline goes, we've got a healthy pipeline of both full floors and prebuilt suites.

The next question is coming from the line of John Guinee with Stifel.

First, it looks, David, like you're running a burn rate of about $30 million a month, if I just look at the last couple of months in your cash balance. Is $30 million going to continue? And for how long until the Observatory and all of the base building work is complete?

John, I'm not sure you said $30 million a month. I'm not sure how you got to that for the quarter. Our cash balance is declined by...

I'm sorry, a quarter. A quarter, I'm sorry. $30 million per quarter.

You had me worried there for a second, John. So the question was where we see in terms of our continued capital expenditure on the Observatory and other CapEx?

Yes. How long will you continue to burn through your cash and short-term investments, until you're done with all your Observatory work and all of your base building renovations?

Yes. I think we've -- go ahead.

And then we're assuming that the $250 million of exchangeable gets -- matures in next August. So we're trying to get to a cash balance when that's also repaid.

Right. So with respect to the first question, as you know, we announced the Observatory project, is expected to cost us roughly $160 million over a roughly 3-year period, which started in middle of 2017. To date, we've spent about $79 million on the Observatory. So the balance will be spent pretty much between the end of last quarter and just the end of 2019, maybe creeping into a little bit of 2020. With respect to our capital expenditures [for] lease-up, and I think in the past we've gone through the math on that, given that we have roughly just under 800,000 square feet of space to redevelop, and we've given the cost per square foot, which should give you a sense for what that total spend should be. We're using roughly $195, which is the midpoint between our white box and our prebuilt. So that would imply approximately $150 million of capital for that. We talked about the capital that we're going to be spending in the Greater New York Metropolitan area, which is roughly $40 million over a 30-month period. So that gives you the gross spend. Now specifically to your question, we see, and without giving guidance, roughly by the end of 2019, getting to the point where we are self-funding our capital expenditure program before the dividend. Now with respect to the exchangeable, the $250 million exchangeable, which is due in August of 2019, we're very happy in that, we have a lot of options available to us to address that. Certainly, we can use any available cash on the balance sheet. We have availability under our $1.1 billion revolver, of which nothing is currently drawn. As you know, we've successfully accessed the private placement market twice in the past, most recently with a $450 million placement with Peru, MAT, Teachers and [AIG] . And certainly that's a market that's open to us, and there's always consideration of the public markets. And depending upon and where the stock price is at the time, there's potential for another [exchangeable] . So I guess what I'm saying is, we have a lot of options available to us, not all of them necessarily involve the utilization of cash on the balance sheet. And as we get closer, we'll be making determinations as to which way to go.

Okay. And then the next question, John Kessler, I guess, when you look at all the deals out there in the marketplace, and you look at your return threshold, do you think you're 5% low off the ultimate trade or 20% low off the ultimate trading price.

Well, here's the way I'd address that, John. We are continuing to look at opportunities in the market that we think are good use of the balance sheet. But as we look at those, we are looking also at the returns that we're getting on our internal redevelopment. And as you know from our materials, we averaged about 8% return on that redevelopment over the past 12 months. So the market continues to be, in our view, the private asset market pretty fully priced, reflecting a slight private equity capital that's there. So I think there's still -- we still find the best use of our capital is investing in our portfolio, but we're going to continue to work and be patient.

And to be clear. John, Tony here. I guess, if John and I sit down and look at things as we do with -- believe it or not we do have an acquisition committee, even though we haven't done much. And would -- when we look at by what we're missing, we don't think anything squeaked past us. I would say we've definitely been passed by a broader margin than a narrower margin. And that really has a lot to do with that return we're getting and investment in our portfolio, the value we're creating for shareholders in doing so. And going back to the Yogi Bear comment, when we come to a fork in the road we'll take it. And we don't see that fork, we haven't seen that fork. There's nothing that we've seen where we look back and say, "Geez, we really missed a good one there." In fact, cap rates have gone up. And we think that it's been wise for us to do what we've done.

The next question is coming from the line of Craig Mailman with KeyBanc Capital Markets.

This is Laura Dickson sitting in for Craig. Just curious for the 2020 FDIC expiration, which bucket would that be in? Is that unknown or vacates?

We're currently reporting them as an assumed renewal. We are in negotiations with FDIC currently, and we feel positive about the discussions that we are having. Bear in mind that their lease of 122,000 square feet does not expire until 2020. So it's quite early.

Okay. And then...

And I would add to that, not only that but that their rent is extraordinarily below market at this time.

Would you be able to give an indication of how much below market they are?

Well, I'll just say that it's not a squeak below market, it's a broad margin.

Okay.

If I look -- it is -- well, it's captured on Page 12 of our investor presentation that shows our anticipated lease spreads for all future lease expirations.

Okay. Great. Yes, I'll look at that. And then regarding the new methodology for the Observatory visitors. Not sure if I missed this before, but is that -- has that been adjusted for prior periods as well? Or is that just in the current period or in 3Q '18?

Yes, Laura. It has been adjusted in prior periods.

And I would just add, Laura, clearly as you can see from our revenue per unique visitor, that the revenue model of the attraction is not as simple as stating a face price in number of visitors arriving at a revenue stream at which expense can be applied. If you look at our revenue per unique visitor, which can be found on Page 21 of our investor presentation, which has also been adjusted, you will see the percentage of face price, which we believe is the highest of the privately owned destination, attractions in New York City. Revenue is reduced by sales tax, free admits to certain classes of visitors and arrangements with different tour and travel partners. So again, it's not as simple as taking the face price and multiplying it by the number of visitors. That's a defective calculation. And also remember, we have consistently advanced our revenues really beyond and sometimes in contradiction to the visitor count performance, and that is our unique strategy and execution.

Yes. That's helpful. Last question is just regarding any early data points that may be you have from the new kiosks that are in the Observatory?

We're -- we would say it's premature to quantify any impact. At the same time, things are processing much more efficiently, certainly from the visitor experience. So we have very little experience. We have less than 1/3 of a quarter -- it's about 1/3 of a quarter of operation under the new entrance, and we're very pleased with what we're seeing.

What about in terms of, like, demographics and in terms of per visitors?

That goes back to other issues. When we look at the demographic of international cross-ocean visitors coming to New York City, we do see lower visitation, and we believe that has been impacted by the less positive perceptions of the United States due to Washington, D.C. rhetoric and the impact of government visa policy -- policies. We would say that while NYC & Company tours and forecasts are showing 2018 up, led by international visitors up 4.1%, and New York City hotels showing positive trends, we, along with other destination attraction operators and key tour and travel partners have not seen this increase, rather, we've seen the opposite. Recently, the NFL experience in the Grand Ole Opry [round and entertainment,]both in Time Square closed after extremely short periods of operation, less than 1 year from the NFL. We know that the Observatory at One World Trade Center, by its own numbers, experienced a 40% drop, September 2018 over December -- September 2018 over September 2017. And our performance has been nothing like that. So we do see an overall, I would say, questionable performance with a -- as far as cross-ocean transit for our visitors. But we're very confident. We're catching a bigger and bigger percentage of the visitors who do come to New York and who do come to destination attractions.

Our next question is coming from the line of John Kim with BMO Capital Markets.

On Page 6, your cash NOI contribution from signed lease [is not commenced] . Looking at the 2019 estimate, looks like it went down this quarter from what you had previously, $6 million from '18. But I was just wondering what happened with that?

So the change -- the calculation changes as leases move in and out of this category. And we flex the incremental cash over the prior trailing 12-month period which will change each quarter.

So in other words, leases commenced.

Yes, leases commencing, and they go into the -- if there's free rented, they'll go into this free rent burn off. And then as leases no longer have any free rent, they come out of that category. So there's -- this is a constantly moving 2 buckets, as leases commence and reach the end of their burn off of free rent.

So that $12 million delta that was supposed to commence in '19, got moved up to '18? Because it doesn't look like it was pushed out further.

Yes. So I think part of that goes, John, to the change in the -- what we're presenting. As I noted in my prepared remarks, we changed the presentation on Page 6 of the sign -- of the free rent burn off signed leases. There was some confusion in that. People were looking at that and not understanding how it impacts the actual cash contribution in each year. So we modified that to show just how much cash is added in that year in connection with those leases, as opposed to being the annualized amount in each year. So in other words you look at it, if you look at that schedule and you started at base of 0, what you're seeing in each year is the amount of cash above the base year that gets added as a result of the burn off of free rent and then you see the signed leases not commenced -- commencing.

Okay. A follow up on Steve's question, on the buyback. You sold your stock at a high price. You have an opportunity to buy it back at much lower price. It seems like a very straightforward trade, but I'm just wondering how committed are you to fully utilize your buyback program?

As I said before, we are announcing the authorization of $500 million through 2019. And beyond that, there really isn't a whole lot we want to discuss on the topic.

We -- John, we haven't really changed our view on the subject at all. Again, the change is merely new information we received as to best practice from outside counsel as part of our regular review. And this is merely an extension of an existing authorization we've had for some time.

Got it. Okay. Tony, I know you -- in the past you've spoken about WeWork and you're reluctance to use them in your portfolio. I'm not really asking you to repeat those comments. But now that they are the largest tenant in the city, maybe a little bit harder to ignore, and they are growing pretty vociferously. Has your stance softened at all, even if it's just for certain assets within your portfolio?

No. We have found that we have, through the good work of Tom Durels, Ryan Cass and their teams, been able to lease directly to excellent tenants on long-term leases with a direct relationship with the tenant. And that's always our preference. I think that focusing in on WeWork perhaps understates the -- what's going on when you've got WeWork, Industrious, Serendipity, Knotel, Convene. The New York City market, the shared office environment is without question, and has for some time been the single largest tenant. And we just don't understand why landlords don't pay attention to what is motivating people to go to these different user of space, who then turn around and relet it to others. We think that it's important for landlords to recognize that in New York City alone landlords have probably invested over 3/4 of $1 billion in shared office space providers in the form of tenant installation free rent commissions. And I think it's just a very easy things for people to do, and we don't see a reason to do it. We do see a reason to pay attention to seeing how we can speed the lease process, reduce the complication of our lease form, look at services that can be provided to our tenants along the lines of some of the HR compliance and health care and IT services, the sense of community which can be built. And these are the places in which we're investing time and money so that we are in a position to satisfy some of those desires of not just the decision-makers but the actual worker populations of those tenants and make sure that we retain a direct relationship to our tenants. And in general, I think you're going to see more, not fewer, new options coming out with regard to shared space offerings. Tishman Speyer has its own offering now. [WPIX] is working on a form of its own offering right now. And candidly, I think that we've been able to get the industry, in general, to begin to ask the question, why are we enabling this disruptor? Why are we investing in this disruptor? And I think that from our perspective, there's absolutely no reason to rent them. We've got great lease spreads, very good execution on -- with high volume of incoming. And the quality of our buildings and the quality of our tenants and the quality of our cash flows, I think, augment our fantastic balance sheet and put us in a position to do much better than others who have rented to these shared space providers.

Our final question is coming from the line of Jamie Feldman with Bank of America Merrill Lynch.

Two questions actually. I think, Tony, you had commented in a response to an earlier question that you think cap rates have moved up? Can you talk about the magnitude of that move in your view?

Sure. I think we have seen 2 things occurred. Number one -- 3 things really. Number one, some of the very big shifters of capital into this market have gone away. There are a few who are there to take their place. But when it comes to really big transactions, there are fewer people who're capable of doing those really big transactions. And certainly, most of those, from a private equity perspective, aren't interested in an office in New York. I think, as far as the number, anywhere from 50 to 80 basis points in increase in cap rate, though, I would also say that the quality of the offerings have changed somewhat as well, as capital's move to the sidelines. I think certain people are reluctant to put properties on the market. We certainly saw the withdrawal of 237 Park after it was put on the market and then pulled off. There are other properties that have been out there testing the waters and they've been pulled back.

Okay. And you think 50 to 80 basis points you think is across the market? Or is it -- or which -- what [quality] are you talking about specifically?

Well, I think I'd break it into office and retail, which are the only things at which we look right now. And I think that with regard to office, you've certainly seen that increase and it's with regard to everything that's out there, though, again, we haven't seen anything which is truly trophy come on the market when you think about some of the properties which have exchanged hands and which are currently on the market. None of them is -- could be validated I think as a true trophy asset. They'd all be sort of A not AAA. And in retail, I think, frankly, the cap rates are very difficult to be able to digest because the rental streams are very much in flux. But I think we're going to see opportunities presenting themselves there, rental rates and retail are definitely down. There is a market clearing price for rent. I think you're going to see in the fourth quarter and in the first 2 quarters of '19, some leases get done, which would be called "breaking rent" from prior market expectations. And I think you'll see cap rates against [in place] income going up perhaps by even more on the retail side, as I think there's been a real diminution of value there.

Okay. So from your comments it sounds like maybe we are getting closer to a point where -- not to put words in your mouth, but maybe you'd be more interested as a buyer. You've been sitting on capital for a while. Is that a safe way to look or a good way to look at it? I mean what kind of move in cap rates do you want to see before you get more active?

Well, certainly, we'd love to see a drastic move in cap rates. But I don't know that's going to happen. And I there's -- and I don't want to -- joking aside, I don't want you to think for a moment that we haven't been very eager to be buyers or growers of our business. But I would say that we're keeping our eyes closely on the changes in the office occupancy which we think are coming down the pike and may be beginning 2020 but certainly 2021, 2022, 2023, as properties vacate and tenants rollover to the west side and to other new locations to which they're moving. We are very focused on what else we might find coming down the pike as far as things which will influence outcomes, billions and billions in dollars that have gone in private equity into New York City over the last 12 months, supporting many businesses which occupy space which don't make money. How many of those are in WeWork? How many of those are in Midtown South? I don't know. But I would say, Jamie, that we absolutely are -- we're watching extremely carefully and we continue very active efforts on our part. We just haven't seen anything that's felt anything near as good as what we can do with our capital internally. And additionally, we really feel that, that balance sheet [is it] , and it gives us such flexibility, we want to use it when it's really going to be a reward to our investors.

Okay. Would you be interested in getting into more of the big tower businesses or you're strictly looking at assets that are complementary or similar to what you own now? In terms of age...

Could you explain me the big tower business?

Well, if you -- I'm sorry, that's a very good point. You have a very big tower. No, I mean, more of like Sixth Avenue, Park Avenue, more kind of traditional mid-town north of 42nd Street, large towers.

We have looked at a number of different situations including at least one other public company on the basis that we thought we could reinvest in those assets and really turn them around. We think that the people who're taking the time and the effort and the money to do that today are being very well rewarded by new leasing. And we find that very attractive. The toughy is how do I look at my shareholders, which includes looking at myself in the mirror, and our Qatari partners, investors and anyone off the street and say, okay, we're going to invest in something which is a turn around and we'll get to a 5% stabilized cash on cash. [And] let's say, 3 to 4 years when we're averaging 8% return on investment and what we put into our portfolio today. I mean, we're still harvesting that growth, which, as we said from the beginning, would produce uneven bottom line results. Nonetheless, the trend is, we think, absolutely flattening out that sine wave, is very positive, and we feel very comfortable about our prospects there. Why should we be investing today when we are investing and growing the business in our own portfolio? So believe me, this has been a subject of intense discussion for us, certainly in the last 12 to 18 months. I think I've referred to myself recently as a rat in a box, constantly going to the corners looking for something new. But we continue to work hard and we want to do it for our investors in a smart way, and being a very large investor myself, I've got a pretty high test for what that means.

Okay. I appreciate it. And then David, just a quick question on -- it looks like -- can you just talk about the lease termination fees in the quarter? Looks like they had picked up first and last quarter, and what drove that?

Yes, I think, in each quarter those are going to be lumpy. We take advantage of opportunities when we can to take back underutilized space, and seek a termination fee in connection with that take back. And this quarter, we just continued to proceed along those lines.

We view this as a part of very active management. As I think you'll understand, Jamie, we don't like spaces to be sublet in our buildings. We like to have direct relationships with our tenants. And we believe we offer our tenants through our aggressive management of underutilized space, opportunities to get a better economic results by paying a smaller price in the beginning and getting out of their direct obligation. And that's much better for them than leaving it on their balance sheet and losing the money over time. And it's better for us to have tenants who occupy, pay rent and have a prospect to renew and extend with us.

Okay. So I guess I was just wondering if there is sign of an uptick of any tenant failures or tenant downsizing. It sounds like it's more driven by you than them?

No. Jamie, this is Tom. The situation that led to lease termination payments this quarter were all moneymaking opportunities for us. Just as Tony explained, in those situations we took back space from existing tenants. We released those spaces to new tenants at higher rents for longer term, and extracted a termination payment from the prior tenants.

We have reached the end of our question-and-answer session, so I'd like to pass the floor back over to Mr. Malkin for any additional concluding comments.

We had a busy leasing quarter, and our momentum continues in the fourth quarter. Excellent leasing results, great spreads. Our team is executing at a high level. We thank you very much for your time and your questions. I'm sorry, no one visited us yesterday, you would have seen a very good Halloween parade through our office. Our CFO, David Karp, dressed as Grumpy; John Kessler as Clark Kent; and I won't even tell you what I was dressed as, but I got out of it by the time I had to go to a lunch. We look forward to reporting our fourth quarter results in the New Year, and until then all the best.

Ladies and gentlemen, this concludes today's conference. We thank you for your participation, and you may disconnect your lines at this time.