Empire State Realty OP, L.P. Q3 FY2020 Earnings Call

Greetings and welcome to the Empire State Realty Trust Third Quarter 2020 Earnings Call. As a reminder, this conference is being recorded.

Good afternoon. Thank you for joining us today for Empire State Realty Trust's Third Quarter 2020 Earnings Conference Call. In addition to the press release distributed yesterday, a quarterly supplemental package with further detail on our results and our latest investor presentation were 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 including ongoing developments regarding the COVID-19 pandemic, 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. Certain of our disclosures today are added specifically in response to the SEC's direction on special additional disclosure due to the changes in our business prompted by the COVID-19 pandemic and are unique to this instruction. We do not expect to maintain the same level of disclosure when we resume normal business operations. 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.

Thanks, Tom, and good afternoon to everyone. ESRT continues to adjust on a daily basis to facilitate tenant reentry, collect rents, manage Observatory visits, assist local retail tenants' survival, and ensure ESRT employee safety. Our tenant presence in our buildings in our Greater New York Metro area has grown materially to 45% in our Westchester properties and 55% in our Connecticut properties. Our New York City buildings continue to see slow growth from a low base, with the lowest utilization by our largest tenants resulting in occupancy below 15%. Our Lower New York City physical occupancy impacts our retail tenants, which is where we have targeted our proactive work—a temporary shift to percentage rents to help these small businesses survive. Visits to the Empire State Building continue to incrementally grow from a very low base, with roughly two-thirds of our typical visitor traffic coming from overseas. Potential attendance is limited by reductions in capacity to maintain our stringent COVID-19 protocols and also by border controls against interstate and international tourist travel. The Empire State Building Observatory 86th-floor deck reopened on July 20, and the 102nd floor reopened on August 24. Despite the travel restrictions, we have seen steady weekly increases in visitors. Through October 25, attendance was nearly 6% of the 2019 comparable period attendance—an improvement, but below the 10% projection we hypothetically set forth earlier for traffic in October. We are fortunate to be well positioned to manage the challenges we face with our flexible balance sheet, continued success with collections, successfully implemented cost reduction measures, and new management team members. All of this works to our advantage as we look to utilize our balance sheet flexibility, with no current requirement to pay a dividend, and look at ways to deploy our capital to buy back our stock and pursue external growth. Our more than a decade of industry-leading focus on indoor environmental quality has positioned our buildings for our tenants to return safely to their offices and to compete for new tenants. ESRT is the first U.S. commercial portfolio to achieve the WELL Health-Safety Rating, an evidence-based third-party verified rating on all facility types focused on operational policies, maintenance protocols, emergency plans, and stakeholder education to address a post-COVID-19 environment now and broader health and safety-related issues into the future. This rating validates our work to provide tenants with healthy and safe environments. Additionally, our foresight and planning around energy efficiency means the company has no fines in 2024 under New York City's Local Law 97 to reduce greenhouse gases. While the macro environment remains challenged, and the outlook is uncertain, I feel confident that the work done to position ESRT for the long term to thrive and deliver shareholder value leaves us in an enviable position compared to others. To summarize, we have spent over $1 billion as part of our redevelopment work to modernize our properties for the 21st century, with a focus on energy efficiency and indoor environmental quality. We have consolidated previously demised smaller spaces and redeveloped them for new, larger, and better credit tenants on longer leases. We lead in the areas of energy efficiency, indoor environmental quality, and sustainability, which I will cover in more detail shortly. We maintain a flexible balance sheet to execute our strategy and take advantage of potential opportunities that may arise. We have undertaken a series of broad-based proactive cost cuts to address the current macro environment, and we continue to evaluate further actions. ESRT's leadership in redevelopment and our focus on energy efficiency and indoor environmental quality comprise our competitive edge. Our buildings and their unique combination of location, value, and leadership in sustainability and indoor environmental quality have never been more necessary and have never had a better competitive edge. In a post-COVID world, where health and safety are paramount, tenants are focused on providing their employees with a clear pathway to return to the office. To demonstrate our leadership position, we applied for and were awarded the WELL Health-Safety Rating, the most stringent third-party standard in the world to verify a safe and healthy workplace. ESRT is the first and only commercial portfolio in the United States to achieve this rating. This third-party rating is validation of the work that we've done over the past decade in steps we've implemented to improve indoor environmental quality in our portfolio. The $165 million redevelopment completed in December 2019 of the Empire State Building Observatory mitigates direct, indirect, and aerosol transmission of COVID-19 and other viruses through MERV 13 filtration, increased fresh air ventilation, and bipolar ionization air purification. Similar measures have been made to upgrade health, safety, and indoor environmental quality protocols throughout the entire ESRT portfolio. Our WELL rating is just one representation of the work we're doing in ESG under the leadership of Dana Robbins Schneider, our Senior Vice President of Energy and Sustainability and Director of ESG. Earlier this year, we announced our intent to participate in the GRESB real estate assessment, and based on initial feedback, we feel quite confident that when the final results are available later in November, our accomplishments will be clear. With more than a decade of work in this area, Dana's leadership and the cooperation of our entire team of ESRT colleagues, I am confident that our decision to measure ourselves through several widely accepted metrics on sustainability will be rewarded with good results. Our focus is not just on our leadership in the preservation of the environment. We also have a major focus on the social aspects of ESRT's participation in our larger community. To that end, I would refer you to our new Slides 25 through 30 in our investor presentation. As Walter Gretzky advised his son Wayne, our focus is to 'skate to where the puck is going, not to where it has been.' Our investors should expect in the future to see increased communication of our ESG leadership actions and commitments. This is all part of ESRT's continued efforts to adapt to the evolving environment with the ability to flex and pivot, all while focusing on our goal to deliver long-term shareholder value. We continue to engage in share repurchase activity as our stocks are significantly discounted from public market pricing. In aggregate, we have purchased $133 million of our common stock at a weighted average price of $8.33 through October 27, 2020. At quarter end, we held $373 million in cash, which provides us with an operating runway amidst an uncertain macro environment. We also have our $1.1 billion line that remains undrawn at this time. We continue to evaluate opportunities to deploy capital for external growth focused on opportunities in which our balance sheet strength and our redevelopment expertise can be brought to bear. To date, we have not seen widespread distress as lenders have generally been accommodating to borrowers, and there have been few investment transaction data points. Our new investment team, led by Aaron Ratner, makes progress every day on our efforts to find value opportunities for our investors. That said, we are in a marathon, not a sprint, and we will deploy capital when an opportunity presents itself that will lead our growth in the next cycle. Switching gears, here's an update on the Observatory, now that we've been open for just over three months. Our focus on indoor environment quality, in which we have been leaders for more than a decade, has yielded air filtration through MERV 13 filters, an aggressive response to viruses with active bipolar ionization, and massive capacity to ventilate the Observatory, all as part of our redevelopment. When combined with comprehensive protocols and employee training, this allowed us permission to reopen on July 20, alongside other attractions in New York City. Observatory revenue for the third quarter 2020 was $4.4 million. That included $2 million of deferred revenue from unused tickets that we were able to recognize and earned income from tour and travel partners, as well as $1.2 million of a fixed license fee for the gift shop. Observatory expenses were $5.9 million in the third quarter of 2020. This represents a reduction from a $35 million annualized expense run rate pre-pandemic to a current $25 million annualized run rate for 2020, driven by reduced hours of operation and staffing. Month-to-date through October 25, attendance is nearly 6% of 2019 comparable period attendance, a gradual improvement but below the 10% projection for traffic in October. This is a slow rebuild that is strong compared to other similar attractions. Visitation is primarily retail and website-driven, which bolsters revenue per capita to its highest level in our history. The vast majority of website ticket sales are domestic and concentrated among the tri-state market. This is consistent with our anticipation that initially we will have a higher local visitor mix, followed by a ramp-up of regionally then nationally sourced travel, and then followed by the restoration of our typical visitor mix that is approximately two-thirds international, which will not be achieved until our anticipation of a broad resumption of international air travel sometime in 2022. No attraction in any city has a higher brand value and international recognition than the Empire State Building Observatory. Authentic and iconic. Lonely Planet's second annual bucket list just rated the Empire State Building the #1 attraction in New York City. We believe that when the pandemic passes, we will emerge stronger than ever as the enduring brand and icon of New York City and its resilience. As I've communicated previously, there are certain fixed stacking and operational costs regardless of volume levels, yet we continue to look for ways to optimize our cost base. We believe that we have ample bandwidth in our current cost structure to handle our anticipated ramp-up in admission volume through 60% of 2019 volumes. Finally, I would like to reinforce our optimism and enthusiasm for New York City. It is possible both to be realistic about where we are and to be confident in our future. The passage through COVID-19 has four phases: lockdown; secondly, pre-vaccine therapy treatment; thirdly, post-vaccine therapy treatment; and fourthly, cleanup and restart. This phase 4 is important. The day after Woodstock, Mr. Yasgur could not simply go and plow his fields and plant crops. He had to clean up the stage, speaker tower expenses, cables, bottles, cans, sleeping bags, and other human debris. Similarly, there will be work and investment required to restart our economy. I've mentioned for some time now that I think we will know our bottom in Q1 2022 and that growth recommences from that point. ESRT has the runway and continues to work to make the most of the environment in which we find ourselves from a balance sheet, capital allocation, expense, CapEx and organizational perspective. With that, I would like to turn the call over to Tom Durels. Thank you, Tom.

Thanks, Tony, and good afternoon, everyone. In the third quarter, we signed 18 new and renewal leases totaling approximately 247,000 square feet. This included approximately 137,000 square feet in our Manhattan office properties; 105,000 square feet in our Greater New York metropolitan office properties; and 5,000 square feet in our retail portfolio. The most significant signed in the quarter was a 103,500 square foot new office lease with Li & Fung at the Empire State Building. Li & Fung replaced an existing Global Brands Group lease for the identical space with no change in rent, tenant concessions, or lease term. Additionally, a 63,200 square foot new office lease with Berkley Insurance at Metro Center backfilled the Thomson Reuters move-out from the second quarter. Subsequent to quarter-end, we signed a 212,000 square foot new office lease with Centric Brands at the Empire State Building for space that Centric had previously subleased from Global Brands Group. This transaction is a triple win. We retained a 212,000 square foot tenant who rejected their sublease in bankruptcy and was close to signing a lease at 237 Park Avenue, it reduced the burden on Global Brands Group, who would have had to take rent on space for which it has no need—all with minimal leasing costs. While the leasing spread was negative 15% based on initial face rent, this transaction was approximately neutral on a cash flow basis, inclusive of all related transaction costs and related lease termination fee. Excluding the Li & Fung and Centric leases, new leasing activity in our Manhattan office portfolio during the third quarter was reduced due to the impact of the COVID-19 pandemic, and we expect reduced leasing volumes in the fourth quarter. During the third quarter, rental rates on new leases signed at our Manhattan office properties increased by 6.9% on a cash basis compared to the prior escalated rents. The Li & Fung transaction, which replaced the existing GBG lease at identical terms, is included as a new lease within our reported leasing spreads. New and renewal office leases across our entire portfolio were down 5.1%, driven largely by leasing spreads in our Greater Metropolitan New York portfolio and the aforementioned Li & Fung transaction. Our total portfolio lease percentage is 89.7%, an increase of 10 basis points from the prior quarter. Occupancy increased sequentially by 30 basis points during the third quarter. As a reminder, we have 459,400 square feet of signed leases that have not commenced as shown on Page 6 of our supplemental. As Tony mentioned in his remarks, tenants are focused on providing their employees with a safe environment for returning to the office. To this end, we implemented new health and safety protocols earlier this year, on which we have received very favorable feedback from our tenants. We have more than a decade of focus on indoor environmental quality, MERV 13 filters were standard throughout our portfolio prior to COVID and we began using bipolar ionization pre-COVID, and ESRT is the first U.S. commercial portfolio to achieve a WELL Health-Safety Rating, which validates our work to provide tenants with healthy and safe environments. We have maintained our improved monthly rent collection as shown in the table on Page 10 of our investor presentation. We collected 94% of third quarter 2020 total billings, with 96% for office tenants and 84% for retail tenants. These collection rates are before the application of any security deposits and without any adjustment for deferral agreements. We have aggressively reduced our property operating expenses throughout our portfolio, achieving a reduction of $14 million in the third quarter of 2020 compared to the prior year period, and $26 million reduction year-to-date. We achieved these cost savings without reducing services to our tenants and after the cost of implementing new health and safety protocols. In summary, we signed significant leases that stabilize and diversify our rent roll. Our industry leadership and experience in indoor environmental quality, combined with implemented health and safety protocols, allows our tenants to return to the office with confidence that their employees will be safe. We reduced property operating expenses by $26 million year-to-date, and we have seen meaningful overall improvement in our rent collections.

Thanks, Tom. For the third quarter, we reported core FFO of $35 million or $0.12 per diluted share. This is net of $0.02 per share of expense from a reserve against tenant receivables and noncash reduction in straight-line rent balances and excludes $3.2 million in one-time charges and expenses, which I will address later. Same-store property operations, if you exclude one-time lease termination fees and Observatory results from the respective period, yielded a 9.3% cash NOI increase from the third quarter of 2019. This increase was primarily driven by lower property operating expenses and free rent burn-off, partially offset by lower revenue. More detail on the breakdown of our collection can be found on Page 10 of the investor presentation. During the quarter, we recorded a number of unique one-time items that are added back to core FFO. Specifically, we recorded a $1.3 million impairment charge net of reimbursement related to the write-off of prior capitalized expenditures on the development project, an $800,000 one-time severance charge due to the elimination of position, and $1.2 million one-time accrued expense due to an estimated liability stemming from IPO-related arbitration. We also recorded a $5.8 million reduction in rental revenue or a $0.02 FFO impact in the third quarter, comprised of a $4.4 million reserve against tenant receivables and $1.4 million against the straight-line rent balance. The annualized impact of the reserve against tenant receivables equates to approximately 3.2% of our annualized rental revenue as of September 30, 2020. We reached this determination after a review of each tenant's arrear status, security deposit balance, and management's assessment of the path towards the resolution and viability of the tenant. Turning to our balance sheet. As of September 30, 2020, the company has $1.5 billion of liquidity, which is comprised of $373 million in cash and $1.1 billion of undrawn capacity on our line of credit. The company had total debt outstanding of approximately $2 billion on a gross basis and $1.6 billion on a net basis. The company's total debt has a weighted average interest rate of 4% and a weighted average term to maturity of 8.3 years. Our net debt to total market cap was 46.3% and net debt to adjusted EBITDA was 5.6x. We have a well-laddered maturity schedule, no debt maturities until November of 2024. Our revolving credit facility acquired in August 2021 has two six-month extension options. Amidst uncertainty about the credit market at the March 2020 onset of COVID-19 lockdown, we drew down $550 million on our revolving credit facility. Given increased confidence in the banking system's ability to fund line drawdown, on September 1, we decided to fully repay the revolver balance. This results in annualized interest expense savings of approximately $7.5 million at current interest rates. Concurrently, we announced our decision to suspend the third and fourth quarter 2020 dividend. We expect to have no taxable income in 2020, and therefore, no requirement to pay any dividends. The management team and the Board believe that payment of a dividend is currently not the highest and best use of our balance sheet, given continued uncertainty in the macro environment, benefits of maximizing our operating runway, and the significant discounted valuation of our stock. During the third quarter and through October 27, the company repurchased $18.4 million of its common stock at a weighted average price of $6.36 per share. On a year-to-date basis, the company repurchased a total of $132.9 million of its common stock at a weighted average price of $8.33 per share. As we noted last year, we undertook a series of proactive steps to reduce costs across the company. This includes our G&A expenses, property operating expenses, capital expenditures, and the cost of operating our Observatory business. We continue to anticipate 2020 G&A expenses of $60 million, excluding one-time severance charges, which reflects an $8 million reduction year-to-date. As mentioned last quarter, 2021 named Executive Officer Annual Equity Compensation will be reduced by $3.9 million. We currently expect 2021 G&A will total approximately $58 million. We continue to optimize our operating expenses across the company in a variety of areas. Year-to-date through September 30, the company reduced property operating expenses by $26 million compared to the prior year period, driven by reduced tenant utilization and the company's cost reduction initiatives. The company also expects $4 million of permanent cost reductions on an annualized basis from 2021 onwards. We anticipate that 2020 capital expenditures for building improvements compared to 2019 will be approximately $24 million lower as we focus on mandatory spending and work previously commenced. Observatory expenses are expected at an annualized run rate of $25 million, down $10 million from our pre-COVID annualized run rate of $35 million. We believe these proactive measures are aligned with stakeholders and reflect our efforts to preserve cash, operate efficiently, and maximize our bottom line in uncertain times. We will continue to seek efficiencies and cost reduction opportunities in operating our business. Before I open the call for your questions, I would like to say that I am now in my 6 months as the CFO. I'm excited to be a part of ESRT. I want to thank my colleagues and our Board for their assistance in my transition as well as their cooperation as I begin to effect my plans for the future. Additionally, I thank our investors and lenders for their candor and comments, from which I learn each day.

Your first question comes from Craig Mailman with KeyBanc Capital Markets.

Just kind of curious here, traditionally, your portfolio has been sort of the value product in your markets, priced below kind of traditional midtown office and then not really competitive with new supply, but clearly, sublease availability is rising in core midtown markets and rents are expected to fall here. Can you guys just give a sense of how you're thinking about—kind of how your product is positioned today in that environment, your ability to kind of hold rents here? And whether you've seen any changes in tenant profile that are in kind of the leasing pipeline?

Craig, this is Tom. First, I would remind you of the attractive value proposition that we make. We're priced—have always traditionally been priced below Class A and deliver a better product than Class B. We're incredibly well-located, essentially located mass transit. And I'd remind you that we've invested over $1 billion within our portfolio to modernize our entire portfolio and have redeveloped 94% of all of our space. So we're delivering modernized product, great location, and at a price point that is still incredibly affordable. As far as trends, it's really early to say. There's a limited amount of leasing activity. Certainly, we're operating on lower volumes than this time last year. And so I'd be hesitant to say where the trend is exactly. We have probably given more on concessions than on discounts on face rents. But if you look at our average net effective rent, it decreased by about only 3% compared to the second quarter. And that's, I think, reflective of relatively low leasing costs. We are seeing tenants preserve capital. We are trying to preserve capital, but of course, we have space that's been redeveloped, and that helps in that regard. As far as the sublease market, look, there's been an increase in sublease availability in the overall market. We saw some increase within our own portfolio this quarter, but much of that was anticipated. And some of that already appeared on spaces we expect to get back in 2021, reflected on Page 9. So it really wasn't a surprise or a result of COVID per se.

Okay. That's helpful. And then just quickly on the Observatory, Tony, it was helpful for you to run through the buckets of where the income came from. Just as we move into the fourth quarter and next year, how much of those kind of deferred ticket sales do you guys kind of have to come through and give a boost relative to if actual attendance stays at these kind of trough levels here?

Yes. So unused tickets are always part of the business. There are always numbers in some fashion. What's unique this period is the buildup because we didn't take them in during the period where it was closed, expecting that ticket had potential to be used. So the $2 million represents a higher than usual number. We say you can expect a couple hundred thousand per quarter in the next several quarters, keeping in mind tickets have a one-year expiration period. So by the time we lap second quarter next year, that number would deplete. And one additional point, we've now also moved to time ticketing, which sort of expires on the spot, so we don't have the typical issue.

Our next question comes from the line of Manny Korchman with Citi.

Tony or Christina, if we can just talk about the buybacks for a moment. How do you sort of figure out the pace and timing of those? You've done $133 million to date, but a lower volume here in this quarter when the stock was under pressure. So just as you look at other opportunities, as you look at your own liquidity, how do you think about how much you should be buying each quarter?

Thanks, Manny. As I mentioned, we believe we have a long path ahead going through different phases. And in consultation with our Board, we continue to exercise patience as it pertains to evaluating all of our options. What we really do is look at the opportunity to utilize each dollar at a time when there is competition. We didn't do the dividend because we felt we had an asset on our balance sheet, with no requirement to pay a dividend. So we decided to take advantage of that as a good capital allocation decision. We will similarly look at repurchase opportunities as a capital allocation decision each time we look at our balance sheet and capital available, and what else we might do. So the Board and management continue to review our priorities. And we just don't see a really quick snap back in the economy for New York City in our business conditions. That's part of the reason for our pace.

And then just on the Observatory rents, is there any risk that that gift shop rent would get cut for any reason? And understand it's contractual, but at the same time, obviously, that's a tenant that's under a lot of income pressure right now.

We have to talk to all of our tenants all the time about the prospects that they have with their business. We've offered opportunities for tenants to have rent deferrals, maintenance changes, and we may end up in a discussion with that particular shop operator. I would not anticipate we end up with a period of no rent, but it's possible that the month-to-month rent could be adjusted.

So the $1.2 million, if I'm not mistaken, that was as contractual or was that already adjusted?

Pre-adjustment.

That was contractual. And we'll update as and when they develop.

Next question comes from the line of Steve Sakwa with Evercore ISI.

Great. Christina, I know you took another large round of charges this quarter. It seems that about 3% of the 5% of uncollectibles is now accounted for effectively in cash. How do you view the remaining couple of percent that hasn’t been collected or addressed? What kind of resolution do you anticipate regarding rent?

Yes. We will continue to evaluate. In some instances, as we show on Page 10, we do have a security deposit that covers those amounts, and we will be in continued discussions with the tenants to see if we can collect. So I think that with 3% or 3.2% of the 5%, we've addressed most of it. As mentioned, our key criteria is, again, the arrear status, security deposit balance, how those discussions are going, and whether it's a viable business. And as mentioned in our earlier remarks, for those that are food vendors and really need some support in terms of percentage rent to get through a period where the buildings are experiencing low utilization, we will focus our energy on that and get to a win-win situation, knowing that even if you have a replacement tenant, they'd be in the same situation. We feel pretty good about where we're going, but we will continue this discipline of being very transparent and writing off anything that we deem uncollectible.

Okay. And then maybe just kind of circling back on the buyback and the leverage. I think—I don't remember if it was Tony or you, Christina, that said you're 5.6x net debt to EBITDA. Just remind us kind of what are your targets or sort of what is the upper bound that you would take that number to as you think about buybacks and new investments?

Yes. So we think of that a little bit differently. It's not a specific target that we're trying to avoid or try to limit ourselves to. It's really about the availability of capital. So to the extent, if we need to replenish liquidity that you put out, we might have a different view. What we are seeing today is that the market is definitely moving into more of a have and have not environment. Capital is available, but it's becoming a little more selective, favoring certain sectors, favoring specific profiles, building assets with lease term or not. So we're aware of all those factors, and we'll be extremely prudent and patient in how we deploy capital. I think the buyback activity reflects that, which is when we announced our decision to suspend the dividend for Q3 and Q4, we made it very clear. We're acutely aware of how attractive our discounted share prices is on the agenda, and the opportunity to buy back our portfolio at these per square foot or implied valuation is extremely compelling. Having said that, it is a very uncertain environment, right? So you mentioned several theses. And even after that, we need a return. So having operating runway is extremely important. We do not want to be in a position where we're forced to sell assets when it doesn't make sense. So taking all those elements into consideration, we will continue with the buyback activity, but it will be at a prudent and measured pace.

Okay. Great. And then last question. You guys mentioned the utilization differences between the suburbs and New York City. I'm just curious if Tom is seeing a real pickup in suburban office demand, either from existing New York tenants, some sort of hub-and-spoke or potentially complete moves out of the city to the suburbs?

Yes. Steve, we've seen some new post-COVID activity from tenants coming out of New York City looking to open up a satellite office and a couple of potential relocations, but it's—I wouldn't call it a major trend. We signed three leases with New York City-based tenants to date, that totals just under 10,000 square feet, returning papers with other tenants that represent a little under 40,000 square feet. A couple of those—couple of tenants we may relocate from one of our New York City properties to one of our Connecticut properties. But I think the square footage that I just gave you puts it into context. Of course, we're in a great position to take advantage of any tenant seeking to relocate or have a second office outside New York City because of our reputation, our relationship with the New York City brokers, and then our great access to mass transit.

Your next question comes from the line of Blaine Heck with Wells Fargo.

So Tony, it was good to see a little bit of an increase in revenue and activity at the Observatory this quarter. But as you point out, you're still running below your original projection. I guess I'm wondering if there's enough of a difference there to change those expectations and forecast at this point. Or maybe do you think it's just a little delayed here in the beginning, and you still got a chance to kind of catch up to some of those projections in future quarters?

Well, first of all, I appreciate the question. We are confident that travel will return, and we are confident in the future of New York City. We also believe that we will not be out of the disruptions from COVID-19 until we see free travel in and out of New York City from states and countries. Just this week, we have had reinforced the reality that we are not there now. So the way we look at this is, number one, we do see steady growth. We are basically selling New York to New Yorkers right now. Our hypothetical growth targets remain as represented on Page 18 of our updated investor presentations. We believe that the social media reviews that we have received since we reopened, which are five-star focuses on cleanliness, safety, and the enjoyability of it, are encouraging more and more people to visit. We're very comfortable with the way we are outperforming compared to any attraction that is comparable to us. That said, we'll take another look as we head into November through December, and recognize that these are very low periods for us at this time of any particular year, and if we think we need to take another look at the hypothetical layout we provided, we will. Just want to make sure that you and everyone understand that when we gave the original hypothetical outlook, we were driven by the guidance from the SEC to address the potential impact of COVID-19 on our business. We felt it was really important to provide investors with the view that we thought the pandemic would have a long-term impact—one we thought investors did not have at the time. I think that what we've found is that the pandemic has had an even bigger impact than the larger impact we thought of when we first did this. We will try to update this hypothetical from time to time. I think the best thing to do is to track flights in and out of New York City—it's places from which people can visit—which will drive our business higher. And that's good data. That's what we look at.

Yes. Great. That's helpful commentary. And then second question, just on the Li & Fung lease at the Empire State Building that replaced some of the Global Brands space. I believe Li & Fung is in space at 1359 Broadway as well. And it looks like that lease expires in phases starting at about a year. So I guess, does this lease at the Empire State Building have any implications for the space that will be coming up and expiring at 1359?

Sure. The Li & Fung space at 1359 that, as you mentioned, expires in 2021 and then other tranches expire out in 2023 and '27. We do anticipate we'll take some of that space back at 1359 in late 2021, a little over 55,000 square feet, and that's captured on Page 9 of our supplement. We've always anticipated that. And—but overall, it's a net positive for us, and it locks Li & Fung into a much longer-term lease for approximately eight years at the Empire State Building for the 103,000 square feet that they took there.

Your next question comes from the line of Jamie Feldman with Bank of America Merrill Lynch.

I guess, Tony, I appreciate all your comments on the WELL rating. Did you have to make any additional investments in the portfolio to hit those numbers, or were we already on track to get there?

Happily. Actually, Jamie, we were already there. And it's just—if you've read our previous reports, I felt it was important for us not to cater to other people's metrics. We've decided to submit ourselves to outside review, and the WELL rating was just validation of how far ahead we were of everybody else when it comes to indoor environmental quality and providing safe and healthy workspaces for people. So we made no other changes.

Okay. Interesting. And then just thinking through the schedule of your largest unknown tenant vacates through next year, can you provide some color on the true move-out risk or maybe the size of some of those leases so we have some idea of where the risk—the occupancy risk might be or maybe won't be?

Jamie, if you refer to in Manhattan on the unknown, most of those—all of those leases are below 10,000 square feet, and then out in the Greater New York Metropolitan office portfolio in 2021, we have two tenants that are a little over 20,000 square feet each. The rest are relatively small. And then the balance that you see on the schedule are either already classified as known renewals, relocations, or vacates. So not a whole lot of unknowns at this point, only about 80,000 square feet in Manhattan and 62,000 square feet in the Greater New York portfolio.

I just might add to Tom's comment. When we look at what we've got as far as rollover and unknown outcomes, we look at all of this stuff with the context that we are in as much contact as we possibly can be with our tenants about their needs, their uses, and their return to the office. I think the lease that we did with Centric, combined with Global Brands Group, is a huge triple win for us. The fact that we were able to take that space, where they were aggressively out in the market through their restructuring team and had an active lease underway to go to another building. We were able to preserve them at the Empire State Building on a direct basis, deliver that to us on a long-term lease, and also relieve the burden on our direct tenant, Global Brands Group, of the need to cover space that it otherwise would have on its balance sheet obligations when its subtenant moved out. So we'll work hard with all of our expirations, including the ones that the market throws at us, and I think we'll be very successful in that.

Okay. And then what about the category of known move-outs? I mean how chunky are those?

In Manhattan, in 2021, as I mentioned earlier, we are getting back a little over 65,000 square feet from Li & Fung at the end of 2021. And that's really our largest vacate next year. And then we've got some tower floors at the Empire State Building and One Grand Central, happy to get those back because they're consolidated in their tower floors. And so I anticipate that they'll be in good demand. That's really the largest known vacate next year.

Your final question comes from the line of Frank Lee with BMO Capital Markets.

First question I have on the Observatory. Have you implemented any new marketing or any changes in pricing strategies that you think will help drive traffic?

Look, first of all, we are currently outperforming all of our comps, and we have our highest forecast in our history. We have not adjusted our pricing nor do we intend to. We did slightly raise the pricing that is paid during our subset period, which is our peak period for visitor traffic, as it always has been. So that was always planned for when we reopened, and that's not represented any reduction. It's not created any reduction in our attendance during our peak period. And as far as what drives people to us, no, we haven't done any discounting. We know we are capturing the biggest component of the market as far as people going into destination attractions. The Edge is giving away free tickets to first responders. That's been a major source of their traffic. One World Trade is not open yet. They're talking about opening on weekends only. We have good insight into our performance in comparison to Top of the Rock. So we really see no reason to discount. We think we will get the visitors who want to come for a clean, safe, and uncrowded experience. And we really—out of all of our TripAdvisor comments since we reopened, we've had two negative comments about price and a slew of incredibly positive comments about the quality of the experience, safety, and cleanliness.

Okay. And then on the direct lease with Centric, are you able to quantify the termination fee associated with the transaction? And should we expect this to be recorded in the fourth quarter?

I'll simply say what I had commented earlier, that the transaction is neutral to slightly positive over the lease term on a cash flow basis. Beyond that, I really am not in a position to share more detail on that. But as Tony mentioned earlier, I think it's a fantastic outcome for the company.

And then on your question on booking, it will be booked over the remaining term of the lease. So nothing chunky.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Mr. Anthony Malkin for closing remarks.

So, look, thank you, everybody. Thank you very much for participating in the call today. We will continue to improve our disclosures in both financial and ESG. We continue to make strides in both, and we're happy about that. Please remember that forward-looking statements on plans to wrap up the Observatory return to business are for discussion purposes only to help you with your models. They are not guidance nor are they guarantees. We feel good, well positioned with our portfolio, our leadership in energy efficiencies, sustainability, and indoor environmental quality, combined with their flexible balance sheet and proactive cost reduction actions, really, we think, represent not only long-term planning, but our ability to pivot and flex and meet the challenges of these difficult times. I'd like to just say one thank you to our Board, who have been active in direct conversations with our major investors, and also thank our investors for their frank conversations with our Board members. We feel that open dialogue and communication has great value, especially in today's world. So we look forward to the chance to meet many of you virtually, either through roadshows or conferences in the months ahead. We're doing meetings here in our office, which has ventilation with MERV 13 filters and active bipolar ionizations. So as Steve and Michael will tell you, it's a safe place to come, a safe place to visit. And until then, we report in February for the full year.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.