Earnings Call Transcript - ESBA Q4 2021

Operator, Operator

Greetings, and welcome to the Empire State Realty Trust Fourth Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Tom Keltner, Executive Vice President and General Counsel. Thank you. You may begin.

Tom Keltner, Executive Vice President and General Counsel

Good afternoon. Thank you for joining us today for Empire State Realty Trust fourth quarter 2021 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 was posted in the Investors section of the company's website at esrtreit.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, expense and proposed transactions and events. 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. 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 Tony Malkin, our Chairman, President and Chief Executive Officer.

Tony Malkin, Chairman, President and CEO

Thanks, Tom, and good afternoon to everyone. 2022 is off to a very busy start for everyone here at ESRT. We have intense focus on the tasks at hand, maximizing the benefits of our balance sheet, and excitement for the next normal as we all continue to adapt to a world where we live with COVID as an endemic and have less and less disruption from COVID as a pandemic. May I remind everyone on the call what I have said for more than 18 months that we will see a constructive shift in the dialogue by the end of 1Q 2022 and we have seen progress towards that end. There's clear recognition that the world has changed since the onset of COVID nearly two years ago. The path towards the next normal is not a straight line and the trend is positive. More and more examples accumulate every day as companies recognize that work, unity matters. Learning teamwork, performance reviews, retention, promotion, and fostering a strong culture are incredibly hard, if not impossible, for most to execute entirely remotely. That said this is the next normal to which we will move out of return to the old normal. New York City's refocus of its priorities to be inclusive of the business community and the needs of its law-abiding citizens under the leadership of duly elected Mayor, Eric Adams, is refreshingly underway. Pools remain open, planes and subways are busier. There's traffic throughout the city. Hotel occupancy was up 21% year-over-year through November and hotel bookings for December were up 312% year-over-year. At the end of December, just prior to the Omicron spike, foot traffic in the Garment district rebounded to 86% of pre-COVID levels as 3.2 million people traversed the streets and sidewalks around our Manhattan office portfolio. ESRT is in pole position to capitalize on the recovery and the competitive positioning of our portfolio as a beneficiary of the flight to quality is obvious. As Tom Durels will discuss, we had a strong leasing quarter, and we continue to see the return of activity on long-term leases as tenants contemplate their future needs, post-COVID. Unlike past variants, discussions with tenants and leases underway for their long-term office needs continued. The deals are underway, and yet the seeds for the growth in our leased occupancy continue to sprout. We continue to attract great companies who see us as long-term partners in their real estate needs, who want to grow with us. Market commentators debate about the long-term outlook of Class A and Class B office buildings and their ability to attract tenants. This has been erroneously oversimplified. Our redevelopment work has placed our portfolio firmly in the sights of companies needing to implement their long-term return to office plans. Best-in-class office space and well-amenitized healthy indoor quality, energy-efficient buildings centrally located near mass transit, in which employees feel safe is critical in all price ranges. We offer office space with these important attributes at rents that are accessible to the broadest population of tenants, not just those who can afford or want to pay triple-digit rents for brand new buildings. Our properties benefit from the off-sited flight to quality trend in the market, and we see it in leasing activity concluded and underway. Shifting to our observatory operations, the U.S. reopened its border to fully vaccinated international tourists on November 8th, which contributed to the accelerated recapture rate that we achieved in November and December before impacts from the Omicron variant took hold. Our visits continue to improve along with our revenue per capita, and fourth quarter NOI of $10.7 million is up 67% from the previous quarter. Two-thirds of recent visitation has been driven primarily by domestically sourced retail on-site and website sales, but the balance has been driven by third-party vendor sales to international visitors. Omicron has been a speed bump in our hypothetical recovery rate for the first quarter. And the good news about that is that the first quarter, to date, is our historically slowest period, and we already see post-Omicron recovery. We continue to provide our visitors with unique, memorable, best-in-class experiences and look for ways to enhance that experience, which produces better Google and TripAdvisor reviews than any of our new competitors, OneWorld, The Edge, and The Summit. Our goal is to provide the best visit for our guests and to maximize revenue through our timed ticketing reservation system, through which we manage visits in peak periods for immersive museum-quality exhibits. We are out of a pure volume-for-volume's-sake business. The observatories health and safety enhancements, the top-of-the-line indoor environmental quality, including MERV 13 filters ventilation and active bipolar ionization have been successful for our visitors and team members. Fourth quarter attendance was at approximately 40% of 2019 comparable period attendance, a continued improvement from 2020 and the prior quarter and in line with our hypothetical illustration. We registered strong November and early December visitation. Attendance for the fourth quarter was slightly impacted by Omicron. In our latest Investor Presentation, we revised the pace of our hypothetical Observatory recapture ramp-up to account for the impact of Omicron. We remind everyone that the first quarter is historically the lightest quarter for the Observatory. A quick note on competition: We believe there's a large enough market for multiple attractions to do well. We remain the only authentic iconic attraction and have demonstrated repeatedly our ability to compete against other observatories. We are confident in our continued ability to do so. Turning to external growth, as previously announced in our business update in early January, at the end of December, we closed on the acquisition of 625 multifamily units across two Class A multifamily assets in Manhattan. This is a great transaction for our shareholders. I'm very happy with the execution from everyone involved across our company and with our new partner. Our investment team continues actively to underwrite new office retail and multifamily acquisition opportunities, where we think we can get an edge with our local knowledge, ability to spot special opportunities, and ability to solve others' problems with our flexible balance sheet. We continue to look at share buybacks and achieved a meaningful level during the fourth quarter at an attractive share price. Turning to sustainability, we are happy to share that ESRT was selected to receive a $5 million competitive grant in the first funding round of the Empire Building Challenge, a $50 million state initiative spearheaded by the New York State Energy Research and Development Authority to reduce greenhouse gas emissions by 85% by 2050. Additionally, ESRT was selected for the 2022 Bloomberg Gender Equity Index, an index that aims to track the performance of public companies committed to transparency in gender data reporting. Our leadership in energy efficiency, sustainability, healthy buildings, and indoor environmental quality continues to set the industry standard, while we show annual improvement and differentiate our attractiveness to expanding and new tenants. Thanks to our Senior Vice President and Director of Energy Sustainability & ESG, Dana Robbins Schneider. We look forward to our second Annual Sustainability Report publication in spring 2022. ESRT has a well-honed operational skillset, a flexible balance sheet, a disciplined track record of capital allocation, and an ESG leadership position that will deliver long-term shareholder value. The team works well and hard as we press forward. Now, I will turn it over to Tom Durels.

Tom Durels, Chief Operating Officer

Thanks, Tony, and good afternoon, everyone. In the fourth quarter, we signed 34 new and renewal leases totaling approximately 375,000 square feet. That included 294,000 square feet in our Manhattan office properties, 75,000 square feet in our Greater New York metropolitan office properties, and 6,000 square feet in our retail portfolio. The weighted average lease term of 11.2 years this past quarter reflects the success of our modernized, healthy transit-oriented portfolio and our tenants' long-term commitments. Major leases signed this quarter include a 168,000 square foot expansion lease with Signature Bank at 1400 Broadway. This is the second expansion by Signature Bank, who now leases 280,000 square feet across 10 full floors on a long-term lease. Signature's expansion includes one 159,000 square feet of space that was leased to other tenants, of which 131,000 square feet was terminated during the first quarter. As part of these partial terminations, we received lease termination fees totaling approximately $12 million, which will be recognized as rental revenue over the remaining term of the respective leases, which spans multiple years. The other 28,000 square feet will be relocated within our portfolio. A 17,000 square foot expansion lease with iCapital Network at One Grand Central Place, this is the third expansion by iCapital, who now leases 82,000 total square feet. A 51,000 square foot new direct lease with United Rentals, the world's largest equipment rental company for space that had previously been subleased at First Stamford Place in Connecticut, and a 15,000 square foot new lease with Clarins, a multinational cosmetic company at 1400 Broadway. We also signed leases for 17 prebuilt office spaces in Manhattan in the fourth quarter. Subsequent to the fourth quarter, we signed a 24,000 square foot full-floor lease with Crown Castle at 1359 Broadway. During the fourth quarter, rental rates on new leases assigned at our Manhattan office properties increased by 3.9% on a cash basis compared to the prior escalator rents. Positively, spreads on our four retail leases were 7.3%, and new and renewal leases across our entire portfolio increased by 1.9%. Our total portfolio occupancy was at 82.4%, down 110 basis points from the prior quarter, and leased percentage was 85.7%. Looking ahead into 2022 for Manhattan office, we anticipate our leased percentage will increase starting in first quarter 2022. We remain focused on driving our leased percentage and tenant retention to increase occupancy. Based on the timing of our partial terminations of existing tenant leases to accommodate the Signature expansion, we expect occupancy to decline slightly in first quarter 2022 and reach mid-80s by year end. Our office portfolio is fully modernized for the 21st Century and benefits from the recent flight to quality. More than ever, companies are focused on their employees' health, well-being, and productivity. We were first in energy efficiency, indoor environmental quality, and amenitization, which are front of mind for most tenants who must consider how the spaces they occupy factor into their ESG and CSR goals. Our industry leadership in these areas is widely recognized by the brokerage community, and our more than a decade of work in indoor environmental quality and sustainability positions us to provide real estate solutions to a wide range of prospective tenants who seek a healthy workplace environment. We offer newly built modern office space at accessible rents in central locations with convenient access to mass transit. We are at the forefront of future-proofed accessible offices in Manhattan. Building utilization experienced a dip amidst Omicron, followed by a sharp increase in the past two weeks, and currently stands at 30% for our Manhattan office portfolio and 52% for our Greater New York Metropolitan office portfolio. These data points indicate we see more and more companies announcing their return to office dates and anticipate a steady increase in utilization heading into spring. Property operating expenses in the fourth quarter were $35 million, a $3.5 million increase from the fourth quarter 2020 due to increased building utilization and the gradual return to normal operation. Our property management team has done a fantastic job to reduce operating expenses, with approximately $48 million saved in 2021 compared to 2019. Looking ahead to 2022, when building utilization increases, we will see a steady return to normalized operating expenses. However, we expect 2022 operating expenses will remain below our annual 2019 operating expenses. Since we announced our multifamily acquisition in October, we've seen improvement in fundamentals and mark-to-market increases compared to current in-place rents. Concession packages have been reduced, and tour volume continues to be strong. Occupancy has increased to 96.4%. We have initiated our plans for upgraded community spaces in common areas and intend to enhance further property performance and replicate our comprehensive approach to sustainability. In summary, we had a solid leasing quarter, with 375,000 square feet of total leases signed. Our centrally located, healthy, future-proofed portfolio with convenient access to mass transit is well-positioned, fully modernized, and has built tenant spaces ready for lease-up. We see strong fundamentals at our multifamily properties, and our industry leadership and experience in indoor environmental quality and sustainability enhance our ability to attract and retain office and multifamily tenants. Now let's turn the call over to Christina.

Christina Chiu, Chief Financial Officer

Thanks, Tom. For the fourth quarter, we reported core FFO of $49.8 million or $0.18 per diluted share. Same-store property cash NOI, if you exclude one-time lease termination fees and observatory results from the respective periods, was off 4.9% from the fourth quarter of 2020. This change was primarily due to a reduction in revenues with the termination of the lease with Global Brands Group in 3Q 2021 and decreased occupancy. Switching to Observatory results, Observatory NOI was $10.7 million for the fourth quarter of 2021, a 67% increase from the third quarter of 2021. Observatory revenue for the fourth quarter increased to $17.7 million from $12.8 million in the third quarter of 2021 as visitation continued to ramp up. Observatory expenses were $6.9 million in the fourth quarter of 2021 compared to $6.4 million in the third quarter of 2021. We continue to expect run rate expenses to be approximately $6 million to $7 million per quarter until we reach a 60% recapture rate and $8 million to $9 million per quarter thereafter. Turning to our balance sheet. As of December 31, 2021, the company had $1.3 billion of liquidity, which is comprised of $424 million of cash and $850 million of undrawn capacity on our revolving credit facility. Inclusive of our share of assumed debt from our recently announced acquisition, the company had net debt of $1.9 billion with a weighted average interest rate of 3.9% and a weighted average term to maturity of 7.5 years. We have a well-laddered maturity schedule with no outstanding debt maturity until November 2024. Our pro rata net debt to total market capitalization was 42.2%, and net debt to adjusted EBITDA was 6.5x, which includes the assumed debt from our multifamily acquisition before we receive credit for full-year EBITDA from the asset. In the fourth quarter and through February 14, 2022, the company repurchased $41.7 million of its common stock at a weighted average price of $9.46 per share. This brings the cumulative total to $195.5 million at a weighted average price of $8.61 per share, which represents approximately 7.6% of total shares outstanding as of March 5, 2020, the date our share buyback program began. Our balance sheet flexibility provides us with the ability to engage in the repurchase of our shares, as well as evaluate opportunities to deploy capital for external growth. The recently announced multifamily transaction is immediately accretive to FFO with an initial yield on cost of approximately 4% and expected to reach a mid-5% stabilized cap rate by 2025. This acquisition expands our New York City opportunity set for recovery and future growth beyond our existing well-positioned office and retail portfolio, as well as iconic Empire State Building Observatory business, to include multifamily, which benefits from very favorable current market trends. Our investment team continues actively to pursue and underwrite investment opportunities in New York City office, retail, and multifamily against the backdrop of record levels of private equity capital, wide availability of low-cost financing, and lack of distressed asset pricing. As we have emphasized, we will continue to exercise prudence in our capital allocation and focus on the creation of long-term shareholder value. The company is considering capital recycling and allocation initiatives, and in this, we take a hard look at all of our assets. As part of this review during the quarter, the company incurred an $8 million non-cash impairment charge on our property at 383 Main Avenue in Norwalk, Connecticut. We stopped servicing our $30 million mortgage as of November 1, 2021, and are in discussions to transfer property ownership back to the lender. We believe this action is in the best interest of our shareholders, and allows us to avoid significant CapEx costs to lease up the property, which was 46% occupied as of December 31, 2021, reflecting the challenging weak fundamentals of the Norwalk submarket. We would note that this action is specific to this property and the submarket, where ESRT does not own any other assets, and has no bearing on the balance of ESRT's Greater New York Metropolitan area portfolio. As we look ahead, we enter 2022 with a well-positioned and flexible balance sheet, a focus on disciplined capital allocation, and a continued commitment to ESG. We also look forward to benefiting from companies' return to office and recovery of New York City tourism. With that, I will now turn the call back to the operator for a Q&A session.

Operator, Operator

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Steve Sakwa with Evercore. Please proceed with your question.

Steve Sakwa, Analyst

Thanks, good afternoon. I guess maybe first one for Tom on the leasing. I was intrigued by your comment; I think you said you were going to get to the mid-80s on an occupancy level by the end of 2022. And I was just hoping you could talk a little bit more about the signed lease not commenced offset by the rollovers and the known vacates that you have, and I guess how much sort of speculative leasing do you need to do in order to kind of hit that? Am I thinking about that right? Is 85% the target up from 82.4%?

Tom Durels, Chief Operating Officer

Well certainly, Steve, first of all, we’re focused on our leased percentage right and retention of existing tenants which will drive our future occupancy. We are right now at 87% leased in our Manhattan office and we do expect a higher leased percentage in the first quarter. But of course, the occupancy, as I said, we expect to decline slightly just because of the timing of the move-outs to accommodate the Signature deal. But that Signature lease, we would expect it to commence by year-end, so that will help drive our occupancy. Look, I feel that we've got a good pipeline of overall activity leading into the first quarter; we just signed a new full-floor lease with Crown Castle at 1359 Broadway. But in Manhattan, the leased percentage in occupancy was certainly impacted by the 270 basis points decline for the Manhattan office portfolio due to the GBG move-out. We have 545,000 square feet of signed leases not yet commenced, and about 500,000 square feet we expect will commence by year-end of 2022. But about 330,000 square feet represent positive absorption. In other words, outdoor signed leases not yet commenced that 330,000 square feet will go against currently vacant space. And then we have modest rollover in 2022 with only about 576,000 square feet, for which if you look at Page 10 of our supplement, how much has been covered by expected renewals and such. So that gives a good idea as to where we're headed. But we expect steady improvement in leased percentage and occupancy maybe over the first and second quarters and then improved over the second half of 2022.

Steve Sakwa, Analyst

Okay, thanks. And just I guess one question on the investment activity, Christina. I understand you guys are kind of casting a wide net, but maybe could you just talk about sort of what is sort of out there today? And I guess how confident do you think you can scale the residential part of the platform over the next couple of years given sort of how low cap rates are and how quickly the Manhattan market has recovered?

Christina Chiu, Chief Financial Officer

Sure. Yes, so we continue to actively underwrite deals. The investment team is hard at work, and our focused area is New York City office, retail, and multifamily consistent with what we have messaged in the past. We're pleased with this transaction, and hopefully what this demonstrates is, we are looking for opportunities where we can add value, where we are utilizing our balance sheet to help solve an issue. That can involve real complexity; it could involve recapitalization, 421a, estate planning tax issues, there are a number of factors. What we've said on multifamily and scale is the intention is not for these to be orphaned assets. 625 units is a good start. We'd like to do more; the fundamentals are great. However, we won't force anything. We will look for the right opportunities to come along where it makes sense. And we recognize that there's a lot of capital that is interested in this sector, but it will be driven by our ability to generate shareholder value over time.

Tony Malkin, Chairman, President and CEO

Great. I might add, Steve. Tony here. The fact is, we look for creative ways where we can apply our capital to solve people's problems, sellers, existing owners. We really need to shy away from actively marketed properties given the current state of the capital markets.

Operator, Operator

Thank you. Our next question comes from the line of Jamie Feldman with Bank of America. Please proceed with your question.

Jamie Feldman, Analyst

Thank you. Good afternoon. I want to revisit the percent lease comment. It appears you ended the year at 85.7%, and then mentioned it will dip before returning to the mid-80s. Is that the correct number for comparison? I believe this refers to the total portfolio. I just want to ensure I'm understanding you correctly.

Tom Durels, Chief Operating Officer

Yes. I believe you're talking about the leased percentage rather than the occupancy percentage. Currently, our portfolio is 85.7% leased, while occupancy stands at 82.4%. The difference between these two figures reflects leases that have been signed but have not yet started. When I mentioned occupancy in my previous comments, I meant that we anticipate it reaching the mid-80s by the end of the year. However, our main focus is to increase leasing activity and tenant retention, which will enhance our occupancy moving forward. We expect to see an improvement in the leased percentage in the first quarter of 2022. Additionally, the slight decline in occupancy is due to the move-out of space to accommodate the Signature lease that will begin by the year’s end, which should also boost our occupancy by that time.

Jamie Feldman, Analyst

Okay, right.

Tony Malkin, Chairman, President and CEO

And I'd add, Jamie, just keep in mind, we are maybe a little different. We aggressively move to lease space that tenants do not utilize and seek buyout money from those tenants. We also work on other transactions where we create space for tenants, which may result in temporary increases in vacancy while we enhance our leased percentage or prepare for potential future vacancies.

Jamie Feldman, Analyst

Okay. That's helpful. Sorry for my confusion. So, and your $12 million termination fee, how will that flow through earnings over the next several quarters?

Christina Chiu, Chief Financial Officer

Jamie, so as Tom mentioned, because these are partial lease terminations, the way it will be recognized is through rental revenue over the span, the remaining term of those tenants' leases, which is about four or five years. So it will come through same-store cash NOI, but at a gradual pace.

Jamie Feldman, Analyst

So four to five years, okay.

Christina Chiu, Chief Financial Officer

Yes. So it won't be anything chunky. We were just trying to be transparent on the deal economics.

Jamie Feldman, Analyst

Okay. That's helpful.

Tony Malkin, Chairman, President and CEO

Needless to say, we get the cash right away. It's just when we recognize it.

Jamie Feldman, Analyst

Right. Okay. And then one of the stats you provided in the press release was that I think 17 of your 24 Manhattan leases were pre-builts, and I was just hoping to get some more color on that part. I know that's an active part of your business, but maybe talk more about the types of tenants that are going into those. Or is there any read-through in terms of what that's saying about tenant interest in terms of term, rent, the kind of space they're looking for as we come out of the pandemic?

Tom Durels, Chief Operating Officer

Yes. We've seen the most activity on our prebuilt is at One Grand Central Place due to its proximity to Grand Central. We're seeing interest from a variety of tenants, really in all sectors: healthcare, finance, professional services, legal. It really runs the gamut. We also have activity at where we have significant prebuilt inventory at 1350 Broadway and at Empire State Building. As I said before, I think that the smaller tenants were able to lead the market, work-from-home during COVID, and then they were the quickest to return to the market. So we're seeing a steady pace of activity on our pre-builts. The good news is we have about 270,000 square feet of prebuilt inventory that has been built. The money has been previously spent, and those units are ready to go and ready for lease-up. That, combined with our full amenitization of our portfolio, really hits home with these smaller users. They come through our buildings and get access to our portfolio amenities and move right in to be up and running. So I think that's where we'll continue to see some steady activity.

Jamie Feldman, Analyst

Okay. So it sounds like they're smaller tenants. Like what's the average tenant size? Or maybe if you break up your leasing volume, how much of that was pre-built in terms of square feet?

Tom Durels, Chief Operating Officer

Well, generally, our pre-builts are anywhere from, say, 3,500 square feet to 6,000 square feet on average. The total pre-builts that we leased during this quarter were 17 units representing about 83,000 square feet.

Jamie Feldman, Analyst

Do you see the size increasing? I guess what I'm asking is whether we keep hearing about tenants wanting more flexibility and more enterprise-type leases.

Tom Durels, Chief Operating Officer

First of all, we will always accommodate tenants' growth. And in fact, our pre-book program has been a feeder to many of the tenants that have grown with us over time. Certainly, Workday is a good example; they came to us on a prebuilt and expanded to a full-floor over time. Anaplan came to us on a prebuilt One Grand Central Place, eventually took a tower floor at 111. So we will always look to lease to quality tenants who have the opportunity and the potential to grow with us over time. But in terms of flexibility of lease term, we really haven't seen any significant changes. As mentioned in my opening remarks, we had an 11.2-year weighted average lease term this quarter, and we're seeing tenants commit to long-term leases on pre-builts. Generally, the lease term could be around three to five years on average.

Operator, Operator

Thank you. Our next questions come from the line of John Kim with BMO. Please proceed with your question.

John Kim, Analyst

Thank you. Good afternoon. You guys talked a lot about flight to quality in your portfolio and taking advantage of that trend. A lot of the trophy buildings in the market are being signed with rents exceeding 2019 levels, and I was wondering if you see that potential in your portfolio given your discussions today.

Tom Durels, Chief Operating Officer

Well, we're definitely seeing a flight to quality. Today, tenants are more focused than ever on modernized buildings and modernized tenant spaces; healthy buildings and indoor environmental quality, which we were an early leader in well before COVID; and giving access to mass transit and a full suite of amenities. And that's what our portfolio provides. So we are benefiting from a flight to quality tenants looking for those attributes that have come to our portfolio, and we see that reflected in discussions with our tenants on a regular basis.

Christina Chiu, Chief Financial Officer

Yes. And I would just add to Tom's comments. The attributes of indoor environmental quality being centrally located, near mass transit, and buildings that are fully modernized, these are all really important talent attraction and retention tools. But the vast majority of companies in the city can't afford triple-digit rents, and so we think we're really filling a portion of the market that has demand. They want collaboration. They want to bring their teams together, and they want the price point to be very accessible so it fits into their business models. So that's really what our comments relate to, which is flight to quality at an accessible price point, and we think that we're solving businesses' problems.

Tony Malkin, Chairman, President and CEO

I would just add. When you look at the flight to quality and who goes where, Signature Bank is a phenomenal credit, it's a phenomenal company, and they have come to us. Crown Castle is a phenomenal credit and a phenomenal company. They have come to us. We can go through any number of different leases we have done where our indoor environmental quality, healthy buildings, energy efficiency have been the driving factors. Flight to quality does not necessarily mean the bright, shiny penny. Flight to quality means in your price point, at what you want to do, what's the option for which you are differentiated in your decision making. We believe we are absolutely in the catcher's position for this.

John Kim, Analyst

And the results will be in higher occupancy in your portfolio as you alluded to earlier?

Tony Malkin, Chairman, President and CEO

Higher leased percentage, which will lead to higher occupancy. And we also know that we are renting at higher prices with better credits on longer lease terms than buildings of similar vintage to ours.

Christina Chiu, Chief Financial Officer

You mentioned that the Norwalk write-down or impairment was a unique case, but your suburban portfolio has consistently underperformed compared to New York. Back in 2016, occupancy was at 95%, and now it is probably in the low 80s, not considering Norwalk. Do you anticipate needing to invest a significant amount of capital in these assets to bring them back to previous levels? This raises the question of whether you want to make that investment. Yes. Well, I'll make a comment, and I'll let Tom speak more on the capital. But on our point on Greater New York Metro, we are taking a hard look across all our assets, which is where is the best place to invest our capital, whether it's on CapEx, whether it's on share buybacks, and whether it's on external opportunities. And that's going to be the lens at which we look, and Norwalk took a turn for the worse after the exit of GE. So that's very specific to that market. And Tom, why don't you comment a little bit on the capital for the rest of that portfolio?

Tom Durels, Chief Operating Officer

We recently finished upgrading the common areas and amenities across all of our properties. There is still some work to do at Metro Center, but overall, our capital expenditures for these upgrades have largely been completed. This includes updates to our fitness centers, dining areas, coffee lounges, conference centers, lobbies, and some outdoor spaces. We are in a strong position, especially since two or three of our properties are located close to mass transit and central business district locations.

John Kim, Analyst

So do you see a similar pickup in occupancy in your Greater New York portfolio as you do in Manhattan?

Tom Durels, Chief Operating Officer

Not as strong as Manhattan. We are focused on leasing our vacant space and retaining tenants. United Rentals is a great example of keeping a quality tenant. We are currently negotiating other leases related to significant tenant retention. We're observing good traffic, and while it's still too early to determine a strong rebound in that market, I'm pleased with the traffic and the condition and presentation of our properties.

Operator, Operator

Thank you. Our next question comes from the line of Craig Mailman with KeyBanc. Please proceed with your question.

Craig Mailman, Analyst

Hey, everyone. Tony, maybe just for you. In the past, you've always said when you guys do buy something, it's going to have something maybe a little bit of hair on it, where you guys can bring your expertise, setting again today to solve problems. I mean other than money, what problem did you solve at the apartments? And kind of where is the extra juice that you should get for bringing your expertise to this? It seemed like a pretty fair price for the assets.

Tony Malkin, Chairman, President and CEO

Craig, you're completely mistaken about the pricing of the residential asset, and I'm glad to provide you with market comparisons. Additionally, we addressed an issue involving a partnership with a person who wanted to act like an institution that preferred to exit the relationship. Furthermore, the situation was highly complex and included aspects that we were uniquely equipped to handle from both a tax and structural viewpoint. If you believe the quoted figures reflect the results of more broadly marketed recent transactions, we can certainly help clarify that for you.

Christina Chiu, Chief Financial Officer

Yes, I would like to add one more comment regarding the timing of this deal. When we first announced our intentions, the fundamentals in New York City were not showing strong improvement. This reflects our ability to see the long-term potential and our confidence in the market. We understand the submarket well and were able to address the seller's challenges efficiently. We acted quickly, using our financial resources, and became very confident in our position. Consequently, we secured the deal at a low 4 cap rate, anticipating stabilization in the mid-5s, which is significantly lower than the trading rates of comparable properties in the market, as Tony pointed out.

Craig Mailman, Analyst

I understand that you're looking at the bigger picture. You chose not to pursue the property at 1440 Broadway to stabilize in the mid-5s, which you didn't find appealing. Now, this opportunity stabilizes in the mid-5s, but your cost of capital is likely 200 to 300 basis points higher than it was during that potential acquisition. I'm trying to understand how the relative attractiveness of the cost of capital compares to the expected stabilized yield.

Tony Malkin, Chairman, President and CEO

I believe it would be helpful for us to follow up with you and provide a clearer understanding of the differences in the assets within the rent rolls, particularly regarding the significant vacancies associated with 1440. It seems there is a lot of mixed information, and we can take some time to assist you.

Craig Mailman, Analyst

Sure. That's fair. Maybe we'll do that after the call.

Christina Chiu, Chief Financial Officer

On that point, on cost of capital, I know what you're getting at, which is our shares are discounted. And hopefully, you and the market can appreciate while we are looking for ways to add value through external growth, and in particular, through more unique situations. At the same time, we are also engaged in the buyback of our shares, which does speak to attractive, discounted valuation where we bought back over 7.5% of our total shares outstanding. So to us, it's not exclusive. We're not rushing into one or the other. We're looking for multiple ways to drive value on behalf of our shareholders.

Craig Mailman, Analyst

And, Christina, it's not necessarily that. I guess the point I'm trying to make is you guys sat on cash for about five years because you said you couldn't find anything with a yield that was appropriate. Then you ended up buying something at a similar yield to what you could have bought several years ago, and it was down on accretion and over that time period. That's my only point.

Tony Malkin, Chairman, President and CEO

I really think we should move on to the next question, and we can have a little time for a tutorial with you and follow-up.

Craig Mailman, Analyst

Sure. I was going to ask about your Duane Reade locations and street retail. With all the news about store closures due to shoplifting and related issues, I’m curious how your tenants are managing. Are there any concerns about problems at your locations, or have your tenants managed to avoid these issues?

Tom Durels, Chief Operating Officer

They're doing quite well. We're 91% leased. That says something about our portfolio. Our tenants are open. They're doing business. If you walk into Wolfgang's restaurant in the Broadway corner at 1359 Broadway on a typical weekday night, that restaurant is packed. As you know, we assisted some of our smaller local retailers, particularly in food and beverage, to get through COVID, converting some of their base rent to percentage rent. They came out of that nicely. We're glad we did it. They provide an important and valuable service and amenity to our office tenants. I'm glad we did it. And so our tenants are doing really well. Tenants down here at 112 West 34th Street, Target, Foot Locker, Sephora, you walk in their stores there, their business is bustling.

Operator, Operator

Thank you. Our next questions come from the line of Manny Korchman with Citi. Please proceed with your question.

Michael Bilerman, Analyst

Hey, good afternoon. It's Michael Bilerman here with Manny. Christina and Tony, it was helpful just to understand sort of capital allocation and using different uses for that capital that you have on the balance sheet, whether it's share buybacks or these acquisitions. But I'm wondering if you can just step back, and obviously, you referenced the fact that the shares are not trading at a level that you like, which is why you're buying 7.5% of your base back. And I know you have $400 million of cash on the balance sheet. But I guess what happens as you spend all this capacity on the next retail or multifamily or office deal or buying back another $100 million or $200 million of stock? What happens when you true-up all this capacity and your stock still trades at a 10x, 10% implied cost of equity capital? I mean how aggressive are you going to want to be to use all this capacity when your main source of capital raise is your common equity?

Christina Chiu, Chief Financial Officer

Yes. So I'd say for New York City office REIT, the main source of capital raise would not be common equity, given discounted valuations. And from that lens, it's very helpful to have a flexible balance sheet. And your point is well taken, right? At some point, you keep spending. And that's why we mentioned we are actively focused on capital recycling and capital allocation initiatives, taking a hard look at the portfolio, seeing where we want to deploy our capital between capital requirements for leasing up the asset, upkeep, keeping it competitive, buying back our shares and also external opportunities. And remember that our assets, except for the latest multifamily transaction, we own 100% of our assets, and that does afford us the ability to pursue joint ventures should we choose on lower than average levels of leverage, which allows us to tap into that market without being overly aggressive on leverage. So we feel we have good optionality, and hence, our comments on balance sheet flexibility. So we won't take it for granted and understand your point. You can't just keep going on that and the cash runs out, but we feel we're navigating patiently and prudently through this market and engaging on all those fronts.

Michael Bilerman, Analyst

I'd just add from the discussion, go ahead, Tony.

Tony Malkin, Chairman, President and CEO

I would just add that we have a strong balance sheet which includes our assets. We also have the opportunity to redeploy capital through our portfolio and we make strategic decisions, such as with Merit View and Norwalk. We recognized that we had a significant multimillion-dollar commitment on this asset in a challenging market, so we felt it was better to allocate that capital elsewhere, and ultimately we chose to walk away from the property.

Michael Bilerman, Analyst

As you consider the portfolio and possibly exploring a joint venture or a sale, you have been hesitant to sell any part of the Empire State Building, which represents a significant portion of your value. Tony, your family has a tax protection agreement concerning some assets north of the city. You also own several properties on ground leases, and your assets differ from where the market currently stands in that they include high-profile assets and high-credit leases that are most attractive to institutional investors. So, what options do you have that would allow you to begin liquidating assets to help close the gap between your perceived value and the stock's single-digit range?

Tony Malkin, Chairman, President and CEO

I believe there are three key points to consider. First, we should leverage what we've built over time and focus on areas where we see growth potential. Second, 1031 exchanges are particularly advantageous in this context, allowing us to structure transactions in a way that mitigates tax basis and protects against tax liabilities. Lastly, I think there is an overly narrow and misleading perspective on current transaction activities. We would be glad to share insights with you and Craig to illustrate this point. There are numerous transactions that have successfully closed which may not be the eye-catching deals highlighted in the media and have likely reached the analyst community. For instance, while Hudson Commons got leased to Peloton and Lyft, we chose not to participate as we do not view Peloton or Lyft as viable long-term credits. There are several other transactions across various property types in Manhattan and surrounding areas that interest us. Overall, I believe the market is much more active than it seems, encompassing a wide range of asset quality.

Michael Bilerman, Analyst

You mentioned that you've tapped into that, right? I recall the QIA, which invested at around $21 or $22. That doesn't encourage the next group of investors to buy the stock, but you took advantage of the market at that time. The second topic I want to discuss is your statement about being out of the volume business, which I respect, and I remember our special tour highlighting the unique developments in that experience. However, isn't the main objective to profitably bring in as many people as possible? As a gated admission, I would always want to maximize volumes. Can you clarify that for us a bit?

Tony Malkin, Chairman, President and CEO

I want to clarify that we have moved beyond the approach of pursuing volume for its own sake. We do not drive volume through pricing adjustments. We possess a distinctive asset, and we are pleased to see the Observatory business recognized as a strong institutional asset, evident from KKR's partial acquisition of The Edge and the significant loan proceeds for One Vanderbilt. We anticipate continued improvement in our highest revenue per visitor metrics and focus on enhancing the overall experience. Our ratings on Google and TripAdvisor surpass those of The Edge, The Summit, and OneWorld, our competitors. Additionally, our unique infrastructure allows us to achieve higher volume while providing a superior quality experience than those observatories. Nonetheless, we will not prioritize volume at the expense of quality. Our volume has grown notably, and we are encouraged by the rebound we've seen since the Omicron period and feel confident in our business and pricing strategy.

Michael Bilerman, Analyst

Beautiful day to be up there today.

Tony Malkin, Chairman, President and CEO

Most importantly, what we don't want to do is have people eight deep, seven deep during sunset at the Empire State Building, which drives high volume at that particular time and delivers people a lousy experience and bad reviews online. The reviews online are what ultimately inform customers and clients. Ours are excellent and better than anybody else's of those new competitors.

Operator, Operator

Thank you. Our next questions come from the line of Blaine Heck with Wells Fargo. Please proceed with your questions.

Blaine Heck, Analyst

Thanks. Just one for me here in the interest of time. Tom, I know this is looking out into 2023; there's a lot on your plate between now and then. But you guys included your expectations for new leases and renewals, vacates, and unknown for 2023 in the supplemental on Page 10. And it seems like there's a larger proportion of leases in that unknown bucket in 2023 than it's been the case in previous years, which is certainly to be expected given the current environment. But just wanted to ask if there are any major leases in that bucket that could swing occupancy progression one way or another in 2023.

Tom Durels, Chief Operating Officer

Well, Blaine, as you've seen in the past, as time goes on, those unknowns move into other categories. And that will be the case as we approach 2023, and we'll have clarity on those unknowns, and we’ll only move into another category when we have strong conviction as to exactly what's going to happen. That said, we are already in discussion with tenants whose leases expire between now and the end of 2023. The largest tenancies whose leases expire are at 1333 that represented about 100,000 square feet of tenants that were former subtenants of GBG. They're now going to direct lease with us, and we're already in discussion with them about their future plans.

Operator, Operator

Thank you. Our next questions come from the line of Daniel Ismail with Green Street. Please proceed with your questions.

Daniel Ismail, Analyst

Great. Thank you. Maybe just a quick question for Tom. You mentioned the concession packages being reduced. Are you able to quantify that change maybe relative to pre-COVID levels?

Tom Durels, Chief Operating Officer

I would say that our net effective rents have trended positive over the last four quarters, still a bit below pre-COVID levels. That said, our average lease cost per lease year for tenant improvements and commissions this quarter was $9.25 a square foot, which is really right in line with our lease costs over the past three years and certainly helped by the length of lease term, which represents tenants' long-term commitment to their space and to New York City. So our concession packages have been trending, again, right in line with our average lease cost per lease year over the last few years.

Daniel Ismail, Analyst

Thank you. Turning to sustainability, Tony, I know you've been involved with the Local Law 97 implementation board, and I'm interested in what insights you have regarding the new administration's views on sustainability-related laws in New York City.

Tony Malkin, Chairman, President and CEO

The Mayor Adams administration has made a smart decision by bringing Rit Aggarwala back. Rit was the original Director of the Mayor's office of sustainability under Mike Bloomberg. Additionally, I have had productive discussions with both Mayor Adams and Rit, both before and after they took office and after Rit’s appointment. However, I am limited by a confidentiality agreement I signed with the Mayor's advisory board. Overall, my interactions with the new Mayor's office have been very positive.

Operator, Operator

Thank you. There are no further questions at this time. I would like to turn the call back over to Anthony Malkin, Chairman, President, and CEO for closing remarks.

Tony Malkin, Chairman, President and CEO

Thank you very much, everyone. Great job by the team. We are confident in our ongoing efforts to increase the lease percentage and attract more visitors to the Observatory while reinvesting in a positive and beneficial way. We look forward to meeting many of you at non-deal roadshows, conferences, and property tours in the coming months, and to sharing our first quarter results in April. Until then, thank you for your interest, and let's keep moving forward.

Operator, Operator

Thank you. That does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Have a great day.