Empire State Realty Trust, Inc. Q1 FY2020 Earnings Call

Greetings. Welcome to Empire State Realty Trust First Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Please note this conference is being recorded. At this time, I'll turn the conference over to Thomas Keltner, Executive Vice President and General Counsel. Mr. Keltner, you may now begin.

Good afternoon. Thank you for joining us today for Empire State Realty Trust's first 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 are 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. Now, I will turn the call over to Tony Malkin, Chairman and Chief Executive Officer.

Thanks, Tom, and good afternoon to everyone. Our thoughts are with all those affected by the pandemic, particularly our colleagues and their families who have experienced illness and loss. Our thanks go out to the frontline responders in New York City, the United States, and the world, and we honor them with the Empire State Building's heart. The heart of New York City beats for all of us. We recognize that the situation remains fluid and continues to evolve. We will share the facts that we have at this time to the best extent possible as we navigate this environment. In the week of February 24, we began the implementation of our crisis management plan. From the beginning, we looked at this as a marathon and not a sprint. All our actions have been driven by our theme: keep calm and carry on. Our perspectives and team preparedness derived from our experience with many cycles indicated our plans and governed our actions. Our observatory remained open until we were instructed to close by the authorities. Happily, none of our observatory personnel contracted the virus during this period. Our CapEx teams remained at work to fulfill our obligations under our assigned leases not commenced and our long-term capital plans until they too were instructed to cease work by authorities. Even today, essential work continues in our New York City portfolio as governed and limited by authorities. We had no interruption of construction in our Connecticut portfolio. Our buildings remained open, clean, and safe for our tenants' use, while we follow the guidelines from authorities. Our business continues as witnessed by the leasing activity and financing we completed towards the end of the quarter. Our leasing team has done an excellent job to advance the leases we still have underway and the new leases that certain prospects wish to continue. We have utilized a combination of work from home and small rotational crews at our buildings. Our transition team, led by President and COO John Kessler, has continued its timely and excellent work, with special callouts to Greg Faje in IR, John Hogg in FP&A, and our Treasurer and Acting CFO, Drew Prentice. We have maintained company spirit with extensive employee engagement activities from mid-day stretches to end-of-work trivia contests. From our ESRT quarantine playlists to end-of-week quarantines, our culture committee deserves special commendation for their excellent work. We have provided counseling and assistance to employees in need and tracked all incidents of confirmed and probable infections amongst our salaried and union colleagues. Special call-out to our Chief Talent Officer, Jackie Burns and her team, Vince Sultana, our Crisis Manager Coordinator, and Suresh Rangarajan, our Chief Technology Officer, and his team for flawless execution. Our Board and I have gratitude and appreciation for the hard work of all ESRT employees during this time. I would like to take a moment and pause, as we honor the memory of family of our team who have passed in this time of unprecedented challenge. For years I have said repeatedly that we would maintain the balance sheet to execute our strategy and provide for future growth. During that period, we have been criticized for too much cash on our balance sheet, too low leverage, failure to repurchase stock, and failure to buy at what we have repeatedly said we thought was a market top. We have avoided exposure to FADs like co-working and short-term leases. As of the quarter end, we held over $1 billion in cash on hand. Commenced in early March and through April 22, we purchased 8.5 million shares at a weighted average price of $9.37 per share, totaling $79.8 million in aggregate. We have taken advantage of volume when it was available and limited purchases during periods of lower volume through a combination of open window purchases and subsequently through an in-place 10B5-1 program. I said in the past that we do not wish to use stock repurchases to inflate our share price, and we do not feel we have impacted our stock price with our purchases. We believe shareholders will benefit long-term from our purchases. As we look forward, I'm pleased to announce that we have appointed a new EVP and CFO. Please watch for our press announcement and 8-K which will follow today's market close. We are also very close to the announcement of our next hire, a Chief Investment Officer, to build our external growth initiative to take advantage of our balance sheet and an environment that we feel will offer the opportunities upon which we have maintained the ability to act. While all of this presently closed the excellent, better-than-market performance of our observatory in the first two months of 2020 disclosed on page 19 of our investor presentation even without the annual bump of Lunar New Year from China, gives us great confidence for the future. There is only one Empire State Building. Its brand is better than ever. And we look forward to the future with this in mind. Finally, congratulations to our Director of ESG, Senior Vice President and Senior Leasing Counsel, Justine Urbaites; and Dana Robbins Schneider, Senior Vice President of Energy and Sustainability for the excellent work and the expanded actions disclosed in our proxy. I will now turn the call over to John Kessler. John?

Good afternoon and thank you, Tony. In the first quarter, we had a healthy January and February across the business prior to the early disruption from the emerging pandemic. We saw steady leasing activity and a strong pipeline. And the observatory showed significant revenue growth post completion of our redevelopment at the end of last year. In the remainder of today's call, Tom Durels will speak about the first quarter leasing results and how we have responded to the COVID-19 impact on our business. Greg Faje will then review our financial performance and balance sheet. And Tony will then provide some additional details on our outlook for the Observatory. As always we are joined by Drew Prentice, our Chief Accounting Officer, Treasurer and acting CFO, and John Hogg, our Head of Financial Planning and Analysis who can also assist with questions. In March we completed our planned actions to bolster our already strong and flexible balance sheet. We are grateful for the excellent work by our team and our wonderful financing partners. In two financings, we raised $300 million in net incremental cash proceeds at attractive all-in blended costs of approximately 3.6% inclusive of the effect of swap agreements and with a weighted average maturity over eight years. In the first transaction, we raised $175 million in a private placement of 12 and 15-year unsecured notes to Prudential, MetLife, and AIG. In the second transaction, we proactively refinanced our existing $265 million unsecured term loan, which was due in 2022 with two new unsecured term loans, totaling $390 million which mature in 2025 and 2026 respectively. This term loan financing generated net incremental proceeds of $125 million. To ensure adequate liquidity not just for a very extended runway of operations but also to take advantage of new opportunities, we have drawn down $550 million under our $1.1 billion unsecured revolving credit facility. As of quarter end, we held over $1 billion in cash on our balance sheet and continue to have ample undrawn capacity under our credit facility. We will now assess potential longer-term options for financing to restore the full credit facility drawdown capacity. Finally, I would like to add my welcome to our new CFO and to say he's got great experience to lead our transition team as we have executed at a high level and not missed a beat during our nearly one year without a permanent CFO. I'll now turn the call over to Tom Durels. Tom?

Thanks, John, and good afternoon. Today I will comment on our first quarter leasing results and then provide insights into our operations during the COVID-19 situation, including April rent collections, rent deferral requests, actions taken to reduce operating expenses and capital improvement costs, and preparations for when shelter and place orders are lifted. First a word about our properties and our staff. As Tony mentioned, all of our buildings have remained open during the current crisis to all our tenants who provide essential services as permitted by the authorities. We thank our dedicated building staff who make this possible. They are well prepared and trained, and we are incredibly grateful for their work and commitment to serve our tenants as we continue with day-to-day pivots and course corrections. In the first quarter, we signed 35 new and renewal leases totaling approximately 149,000 square feet. This included approximately 94,000 square feet in our Manhattan office properties, 24,000 square feet in our greater New York metropolitan office properties, and 32,000 square feet in our retail portfolio. The most significant new lease signed during the quarter was a 23,000 square foot new retail lease with Starbucks, who will occupy three levels including the recently vacated Northeast corner store at the Empire State Building. This unique concept will be a tremendous amenity providing an engaging experience and amenity for our office tenants and its Observatory visitors and a destination attraction allowing time for us to relocate our recently extended term with our move of an existing Chipotle store we expect Starbucks to be open in 2021. During the first quarter, rental rates on new and renewal leases across our entire portfolio were 3.4% higher on a cash basis compared to the prior cash escalated rents. And at our Manhattan office properties, we signed new leases at a positive cash rent spread of 19.4%. Except for lease transactions that were in negotiation prior to the city's order to shelter in place, lease prospect tours have stopped and new leasing activity has slowed to a trickle. While physical showings are prevented by order of the authorities, we remain fully engaged with the brokerage community with digital outreach and virtual space tours. We will continue to do these online social interactions after the shelter on place orders are lifted. Moving to rent collections, as shown on page 8 of the investor presentation as of April 20th, we collected 69% of our total April rent charges with 73% for office tenants and 46% for retail tenants. To the extent we apply the applicable portion of security deposits, which we hold as cash or letters of credit, we will have collected 87% of the total April rent charges with 93% for office tenants and 59% for retail tenants. Such applications are currently in process and will require impacted tenants to restore their full security deposits. We have received requests for rent deferral from 170 office and retail tenants that represent approximately 32% of our annual rental revenue. Three tenants represent approximately 8.8% of annualized rent and have agreed to deferral terms in documentation. Before any consideration to any tenant request for rent deferral, we require that tenants provide an explanation of the actions taken to mitigate the impacts of COVID-19 on their business, current financial statements, including recent monthly comparisons to prior year, proof that the tenant has applied for financial relief through the CARES Act, and verification that a claim under their insurance policy has been submitted. In the event that the federal government provides new supplement typical exclusions and limitations on business interruption insurance in response to the COVID-19 situation, we then assess each request on an individual basis. Deferral requests to date have generally been for no more than three months. Our smaller food and service type retailers have been hit particularly hard; they provide critical amenities and services to our office tenants. Our plan is to convert the remaining 2020 fixed rents to a percentage rent structure with a payback of the difference between current and percentage rent over a defined period. We want these service and food providers to reopen so that they are there to provide services when our office tenants reoccupy. Given the current disruption, it is logical to suspend temporarily an update of our four growth drivers. We continue to provide on page 6 of our supplemental the schedules of free rent burn-off and signed leases not commenced. For the timing of lease commencements, specifically, the GAAP revenue component, we assume a July 1st date for when the government-mandated suspension of non-essentials construction will be lifted. Our quarterly supplemental continues to provide the details on vacant space without an estimate of market rent. We have provided the historic mark-to-market for the office and retail space and will not speculate on taking rents given the absence of leasing activity. We have scaled back certain building operations in cleaning, security, lobby concierge, and recurring maintenance, which will reduce costs until buildings are repopulated. We estimate that these efforts will reduce operating expenses by approximately 25% from 2019 levels or approximately $40 million to $45 million on an annualized basis. A portion of the reduction in operating expenses will be offset by a reduction in tenant expense recoveries. Our operations team is hard at work to maintain plans for when work from home orders are lifted and our tenants reoccupy our buildings to ensure a safe, clean, and healthy work environment. These plans involve additional staffing, cleaning and maintenance, and changes to building operations for building access by tenants and their guests. All New York state capital and premium work, except for essential work as defined by the authorities, which includes safety-related and work demobilized previously started projects, has been stopped until such time that the government restrictions are lifted. The spend is significantly curtailed under the current restrictions. Work continues in Connecticut as permitted by the authorities. We have looked at every one of our leases or where we have an obligation to complete work. We have notified tenants where appropriate of the Force Majeure event, which will extend completion dates without penalty. Despite the challenge of the uncertain near-term environment, we continue to believe in the long-term demand for office space. Most of us have now experienced the inefficiencies of working from home and miss the connectivity and productivity that an office environment provides. That said, we believe the pandemic may cause some fundamental changes to how tenants use their office space in the future, including less densification and smarter open floor plans with appropriate spacing. We also believe current co-working build-outs are too dense and will be poorly positioned for tenant demand in the new paradigm. We believe in the resilience of New York City and the demand for employers and employees to be located here. New York City has recovered from past economic cycles and external shocks and come out stronger, more diversified, and more vibrant each time. For now, we continue to run our business and serve our tenants as allowed by the guidelines and instructions of the authorities and preserve value for our shareholders. And now, I will turn the call over to Greg Faje. Greg?

Thanks, Tom. For the fourth quarter, we reported core FFO of $54 million or $0.18 per diluted share. Same-store property operations, if you exclude one-time lease termination fees and the observatory results for the respective periods drove a 4.8% increase in cash NOI. Turning to our Observatory operations, we started the year off on a strong basis following the conclusion of our Observatory redevelopment project in the fourth quarter of 2019. Revenue for the first two months of 2020 was up 13.2% compared to the first two months of 2019, reflecting previously announced pricing actions. Visitation was flat in this two-month time period compared to the prior year. This attendance and revenue growth occurred despite the absence of Chinese New Year activity in January and a pullback in demand in March from European countries where COVID-19 was ramping. In the first half of March, the Observatory saw lower visitor density. We followed the mandate of government authorities and closed the Observatory on March 16. Page 16 of our supplemental details our Observatory results. Revenue for the first quarter of 2020 declined to $19.5 million or 5% from the prior year period driven primarily by the aforementioned Observatory closure. Observatory net operating income decreased 12.3% to $11.4 million. The Observatory hosted approximately 422,000 visitors in the first quarter of 2020, a decrease of 29.8% compared to the first quarter of 2019, primarily attributable to the 15 days that the Observatory was closed in the quarter due to the COVID-19 pandemic. Now for a word about our strong and flexible balance sheet. We have looked at our near-term cash requirements as part of our stress testing analysis and believe we are in great shape leaving us with significant capital to deploy opportunistically as we see fit. As of March 31, 2020, the company had total debt outstanding of approximately $2.5 billion on a gross basis and $1.5 billion on a net basis. The company's total debt has a weighted average interest rate of 3.6% and a weighted average term to maturity of 7.2 years. Our consolidated net debt to total market capitalization was 35.5% and consolidated net debt-to-EBITDA was 4.4 times. We have no near-term maturities and a well-laddered maturity schedule. Our revolving credit facility expires in August 2021 and has two six-month extension options. Our next maturity is until November 2024. And last, we would highlight that we have no joint ventures, no WeWork or similar new generation shared office tenants, and no debt book. I would like to add my own welcome and congratulations to our new CFO. I look forward to working with her. Finally, thanks to John Kessler for his leadership of the transition team. Now, I will turn the call over to Tony to provide some additional thoughts on our Observatory business as we think about it on a go-forward basis. Tony?

Thanks, Greg. Before we go to Q&A a little more information about the observatory expenses and a view of how a reopening may look. On expenses, we have reduced our annualized expense run rate from $35 million in February to $14 million, a 60% reduction. There have been certain wind-down costs that have continued in April, and we will reach this run rate in May. Approximately two-thirds of the reduction is attributable to lower payroll costs as we furloughed staff and the balance is due to lower operational and other costs. We anticipate we will initially reopen on a reduced hours basis and most of these expenses will come back when we reopen. Our remaining costs related to payroll for our management and sales staff; certain fixed operating costs; skeleton custodial and security crew; and other contracted costs. With respect to our outlook for a reopening, our current base case for admissions wrap-up is outlined on page 20 of our investor presentation. It assumes 2019 monthly levels as the baseline visitation comparison reference point and that we will reopen on July 1st. We anticipate an opening of July 1 with admissions at 20% of the 2019 level, and we subsequently project that admissions will ramp up 40% for the August 2020 through March 2021 period. By Easter 2021, we expect admissions to be at 60% of the 2019 level. Admissions then ramp up to 75% by June 2021, followed by 90% in August 2021, and hold for the remainder of 2021. We anticipate return to full admissions by January 2022. These estimated visitation levels are entirely of our own derivation, and just happened to align with certain independent consulting work of which we are aware that was prepared for other market participants. We anticipate initially that we will have a higher local visitor mix, followed by a ramp-up of nationally sourced travel, and then followed by a restoration of our typical visitor mix that is approximately two-thirds international, which will not be achieved until the broad resumption of international air travel sometime in 2022. While the Observatory has been closed, we have remained relevant and active in the promotion of our brand through numerous social media initiatives. As known broadly and shown on pages 36 and 37 of the investor presentation, we are the heartbeat of New York City and have achieved significant growth and engagement metrics in our digital social presence. These results, along with the reported results from the first two months of 2020, give us confidence that we are well positioned for when the Observatory reopens due to the authenticity and iconic status of the Empire State Building. We believe when the dust clears we will emerge stronger than ever as the brand and icon of New York City. With that, I would like to open the call for your questions. To keep the call moving as always, we ask that each participant limit him or herself to one primary question and one follow-up, and rejoin the queue if you have an additional question. Operator?

Thank you. We’ll now be conducting the question-and-answer session. Thank you. And our first question is coming from the line of Craig Mailman with KeyBanc Capital Markets. Please proceed with your question.

Hey, guys. So Tony, I appreciate the commentary here particularly surrounding the balance sheet and kind of how you guys have been deliberately conservative there and now potentially you have the ability to unleash it. So I'm just curious on two things. Number one, what's the incremental appetite for buybacks here? Then just number two, with the hiring of a CIO, I mean, are you guys expecting to see a real ramp in opportunities coming on the other side of this?

Yes, thanks Craig. First of all, the buyback is a decision made from time-to-time. We have unused capacity in our Board authorization. In all cases, our effort is to buy at a time when we can avoid impact on our stock price. And that means, candidly, we can take advantage of really significant volumes. It's harder when they're center trading. Outside of that, I would say that we look at how we deploy our capital in the way that's going to create the greatest benefit over time and really don't want to add any more other comment with regards to the buyback. With regard to our plan for external growth, we do have a candidate that will shortly be announced, number one. Number two, just some color. The candidate is from a private equity background. We expect to build out a team. And we do think that this situation will create a significant change in the economy and in the valuation and availability of assets. And we view this as a really a 12-month to 36-month opportunity set. And I’ve always said we’ve always said we’d come to a fork then we’ll take it. We think this is a fork in the road. And therefore it’s time for us to move to this different footing.

That's helpful. And then just as a follow-up, would you guys be interested in if there's any dislocations in buying debt positions? Are you solely focused on kind of equity positions?

We'll look at equity, joint ventures, we'll look at participations, we'll look at fee positions. We will look at ground lease positions. We will look at senior preferred equity. We'll look at mezzanine debt. We will be omnivorous opportunists. That is what we were in the past before our IPO. That is what we will be going forward.

Our next question comes from the line of Jason Green with Evercore. Proceed with your question.

Thanks. On office collection coming in at 72% so far for the month of April are you able to elaborate on the tenants that are driving this figure lower, whether it's their average size or general common characteristics?

Hey, Jason. This is Tom. What we've seen is that as of April 20, there are roughly 170 office tenants and retail tenants representing about 32% of our annualized rental revenue have requested rent deferrals. We've seen tenants make deferral request tenants of all sizes, public companies, private companies, and companies in various industries. Clearly, there are certain industries that have been more severely and directly impacted by COVID-19, particularly, those with direct ties to retail, hospitality, travel, and then even some of the advertising, consulting, and legal firms that support those businesses. I will say that we have seen opportunistic requests by both office and retail tenants with good balance sheets and credit, and we're surprised by those requests and we will pursue aggressively collection of rent. These tenants are obligated to pay their rent. But overall the tone out there by tenants is to conserve cash, lengthen the runway of cash spent through the downturn, and some of this approach has showed up in tenant's attitude towards rent payment. We'll work with some tenants on deferrals, we will reject certain deferral requests, and we will pursue all collections across the board. What we saw in April is not an indication of the future. And at this point, we certainly can't make any prediction about May and the months ahead.

Got it. And then just on the capital allocation side, I mean how should we think about $1 billion of capital you have for some of these collection issues that you guys are experiencing? Can you opportunistically utilize capital in this environment? Or do you need to see collections back to a normal level before doing so?

It's Tony here. We have conducted thorough stress testing of our company model, analyzing our expenses in detail. We have simulated a wide range of scenarios concerning our run rate and runway length. This has been reviewed piece by piece with our finance committee and will soon be presented to our Board. We believe we have two key advantages: first, we have $1 billion in cash, which we can increase to $1.5 billion through our line. Regarding the financial aspect, we will move forward with restructuring our borrowings against that line to create an opportunity for restoration. Second, we possess one of the strongest balance sheets among our peers, potentially excluding companies in liquidation in the overall office sector. We are capable of committing new capital and have confidently continued our share buyback. We are optimistic that this period represents an essential opportunity for us to excel, and we look forward to the prospects ahead.

The next question comes from the line of Manny Korchman with Citi. Proceed with your question.

Hey, it's Michael Bilerman. Manny is on the phone with me. Tony, I wanted to discuss the decision to hire a CIO. During the IPO process, you've mentioned your relationships and those of your family with other families and investment opportunities several times on these calls. Currently, your top five executives are earning nearly $30 million, and total G&A is nearing $65 million. You still serve as CEO, with Kessler as President and Durels overseeing operations. Hiring a CFO seems to add another layer to an already sizable management team that already has many relationships in relation to your enterprise, which is about $6.5 billion to $7 billion in gross assets. Can you explain how you envision this evolving in terms of roles and responsibilities within the management team?

I think it will be clear what our actions will be towards your thinking and your question in the months ahead.

Are you realigning your existing management team, or are you reducing the base salaries or compensation of the current team to accommodate more people? What does that mean?

As I said, I think it will be clear what we're doing in the months ahead.

What you're doing on the management team? Or are you doing in the external growth front? I'm just trying to figure out what question your answer?

Mike, your question wasn't about external growth. Your question was about the term used was bloat and we will be clear on our actions in the months ahead.

Okay. Thank you.

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

Thank you. I would like to ask for a deeper explanation regarding the 32% of tenants who did not pay their April rent compared to the 8% who may receive deferrals. What can we understand about this group? Does it include any tenants from your top 20? Additionally, how do we differentiate between the opportunistic cases and those that will be seriously evaluated?

Jamie, it's Tom. I just have to repeat some of the comments I made before, but as I said, we've seen requests for deferral from tenants of all sizes, public companies, private companies, and in various industries. And certainly, those tenants with direct ties to retail, hospitality, and travel have been more severely impacted. But then as you work down the tenant list, some of those appropriate firms that have tied to those businesses such as in consulting and legal have also been impacted and they've made requests. We're going through a very methodical approach. We are not granting blanket deferrals across the board. There's not one formula that fits all. In fact, it's just the opposite. We have established SOP. We take very clear deliberate steps with our tenants. We seek information from them that we've outlined in our investor deck. And those requests range from updated financials seeking verification that the tenant has applied for financial support under the CARES Act. We want to understand the impact to their businesses. And then actions taken to reduce costs. And then of course, we're looking at the existing lease and the condition of the space and things like that. We are also looking at opportunities to extend term or do early renewals where we think there's an economic benefit and it makes sense for us. But for those tenants that have taken an opportunistic approach to seek a deferral or not pay the rent, we will aggressively pursue collection of the rent. Because candidly we're surprised by some of those requests. So there are tenants with good balance sheets that have the ability to pay the rent we will pursue them.

Okay. Can you say how much of that 32% is comprised of that last group you were talking about?

No. We haven't provided a greater breakdown than what I've already provided. As we did report that, we have agreed to three deferrals that represent about 8.8% of the rental revenue. But again, as we move through this in a very methodical approach, certainly we will give further updates.

Okay. And then that's helpful. And then thinking about just when people start to go back to work, two questions. One is, can you talk about what tenants are requesting, what type of changes tenants might be requesting immediately to their workspaces and kind of building flow or anything like that? And then also to the extent there needed to be upgrades to air quality and ventilation. Do you think your portfolio would take a lot of CapEx to your portfolio to be able to meet those standards? Or the renovations you've done already are at the highest end?

Yes. I think it's a really good question, Jamie. And I will say it first we will follow the guidelines laid out by the government authorities and any new guidelines that they come out with. But as I commented in my opening remarks, our operations team is incredibly hard at working in the development of plans for when our tenants return to work. Those protocols which will be guided by the authorities but augmented by our own considerations may include things like temperature checks, through thermal scans, requirement of face masks before entering the building, hand sanitizing before entry to our buildings, that's going to apply to tenants, building employees, visitors, vendors, contractors, delivery personnel. We'll look at staggering and restricting certain deliveries. We request food delivery and pickups by tenants outside the building lobbies. We will certainly increase our frequency of cleanings and high-touch point areas, require social distancing in lobbies, stagger occupancy of elevators. And then we will also use a reservation system to limit the number of persons allowed into our gyms and other amenity spaces. There may be some added costs and staffing costs associated with these. But I view most of the changes being operational in nature along the lines of what I just mentioned and many of our tenants have requested the things that I just stated and we give our tenants updates on regular town hall meetings. As far as air filtration systems, we already meet or exceed ASHRAE 62.1 standards for ventilation and we expect to use MERV 13 filters which are high-performance filters for all our fan systems. And we already perform annual indoor air quality testing in all our properties and we'll look to see if we want to increase the frequency of those air testings.

Okay. Is the air quality you're referring to standard across much of New York City, or have you upgraded that aspect through your renovations?

We exceed the industry norm; MERV 13 filters are high-performance filters.

And that's in all of your buildings?

Yes, except for where we have a handful of legacy systems, but for the vast majority of systems out there they are currently using MERV 13 filters.

All right. Thank you. This is helpful.

You bet.

Our next question is from the line of John Guinee with Stifel. Please proceed with your question.

Great. Thank you, very much. Nicely done guys. Question just looking and doing a back of the envelope so I might have this wrong, but it looks like your cash balance went up by $775 million this quarter, but your debt outstanding went up by $843 million. So, that's a $68 million gap. How much of that went to share repurchases in the quarter? And how much of it was just cash bleed?

Hey John, it's Greg Faje here. The vast majority, we gave you some details there in the share repurchases it was $80 million. The vast majority of it did occur during the quarter, but there's some remaining CapEx that's also detailed in the supplemental.

So how much of the $80 million was spent in 3Q and how much was spent in 4Q?

I'm sorry you're talking about third quarter or second quarter?

I think you want to give me a...

Yes. I think once...

I'm sorry what...

1Q, 2Q John. Don't you?

Yes. I'm sorry.

We're not going to break up.

We're not going to break out the share repurchase. We're just giving you a year-to-date total there. I'm happy to talk about the CapEx off-line and to give a little more color.

Okay. And then the share count went down. You...

It's safe to say John agrees with Greg's earlier comment that the neutral component was a significant factor in the first quarter, and it also had a notable impact in the second quarter.

Why would you not give this answer? Is it something that you have not seen...

We'll talk about it John over the past few weeks. We did not.

I think it's a good question John. Thanks for raising it. I would first direct you to Page 15 of our investor presentation where I discussed historical net effective rent growth. Specifically for this quarter, our lease costs for office space in Manhattan were about $14.62 per square foot per year, which is higher than our trend over the last four to five quarters. This increase was primarily due to a greater percentage of our leasing consisting of first-generation pre-builds. In fact, approximately two-thirds of our leasing activity in Manhattan was for first-generation new pre-builds. The positive aspect is that, as we've observed in previous quarters, depending on the leasing volume and the mix of spaces, we've noticed that when those first-generation pre-builds transition to second-generation, we incur significantly lower leasing costs. So, we expect to see that reflected in later quarters. Concerning retail, we experienced higher leasing costs associated with the Starbucks lease that has been reported in the press. We believe this is a unique deal and the value it adds to the building is significant. Additionally, we had some relocation expenses linked to Chipotle, which was necessary for the installation of the Starbucks location, as well as the FedEx relocation at Union Square to consolidate the corner. Overall, this quarter was unique due to the higher percentage of first-generation pre-builds and these particular retail leases.

Great, thank you.

John just a quick follow-up. I want to get back to you on the share repurchase activity. It was a $61 million in the first quarter.

John, we're not trying to be cute here. We're all in different locations. So let me take a moment to go forward. You know us well enough to know we're not cute. We're not that attractive.

Thank you.

The next question is from the line of Daniel Ismail with Green Street Advisors.

Great, thank you. I understand it's still a bit early, but can you maybe share any insights on the conversations you're having with both new and renewal tenants on rental rates and tenant concessions?

Sure Dan. This is Tom. As I mentioned in my opening remarks, new leasing activity is largely frozen at this time; at least physical lease tours have stopped. But we have seen some leases that were in negotiation before the shelter and place orders have continued. Some of those leases and term sheets remain in negotiations. Some have been placed temporarily on hold, and we expect that they will resume once the shelter in place orders are lifted, and some deals have died. So we're seeing a bit of a mixed bag out there from the carryover of the activity we had in the first beginning of the first quarter. But as far as new leasing activity, it's pretty much frozen at the current time until lease tours can resume and the shelter and place orders are lifted. We are in discussion with a number of tenants on renewals. We signed a good-sized renewal lease out in the Greater New York metropolitan portfolio and have some other renewal activity underway right now.

Can you share any details on the rental rates or the level of concessions for those cases?

Without transactions to rely on, we really don't have comparable data to work with, and it's difficult for us to make any predictions. As highlighted in our investor presentation, we've excluded the market rates typically displayed in our mark-to-market slides. Given the current situation and the lack of leasing comps, we prefer not to speculate on the direction of asking rents.

Okay, if I could ask one more question, is there anything specific about the Empire State portfolio that might influence how it is affected by these types of branch collections? Or, phrased differently, is this situation similar across the city regarding rent collections in offline modes?

Well, I think our portfolio is a pretty good reflection of the broader market and economy because we have a very, very diversified portfolio and a diversified rent roll. And we have seen these requests come in from a variety of tenants. So as I mentioned earlier, there are those industries that are clearly more directly and severely impacted. What we do like about our portfolio and our rent roll is that it is diversified. We are multi-tenanted, and we think that at least it gives us some protection going forward. We're not too heavily weighted in one single industry. But beyond the remarks that I made earlier, we can't really give any further insight.

Thank you.

You bet.

Thank you. The next question is from the line of Blaine Heck with Wells Fargo. Please proceed with your question.

Great, thanks. Good afternoon. Just following up on Dan's first question, Tom. You guys have done a good job of capturing some of the additional demand from tech tenants that has come to the city this cycle. And I think before the coronavirus hits there was an expectation for a substantial amount of leasing to be done by some of the large tech players that were growing their footprint in Manhattan. Can you comment at all on what you're seeing from those guys and tech tenants in general? Are they going ahead with leasing? Is that leasing on hold? Or is there any chance of them just backing away from those expansion plans?

Well, I would prefer that you refer those questions to those other landlords that you may be talking about that are in negotiation or having a negotiation on some large tech deals. But I would say overall, we have certainly seen an increase in the tech demand in the city. And as you know within our portfolio, we have a good collection of really high-quality tech tenants that includes Microsoft and the LinkedIn division of Microsoft, Expedia, Shutterstock, Workday, ServiceNow, Anaplan. These are all really, really solid tenants. And they had been growing with us pre-shutdown. And I'm happy that they're in our portfolio and look for more growth going forward. But as far as those active lease negotiations, yes, of course, we hear things, but I really would not want to comment on those others activities.

Okay. That's fair and helpful response. And then just real quickly as a follow-up, sorry, if I missed this, but can you talk about the terms of deferral that you guys have agreed to thus far? I think you mentioned on average you're referring for three months. How long are you giving them to pay back that deferred rent? Or is that also kind of on a case-by-case basis?

Yes. Blaine, first, just remember we're not necessarily approving every deferral request. We will reject many deferral requests. On average, the requests have come in for a three-month deferral or less. And as a reminder, we will only consider a deferral, not an abatement. Generally, we're looking for a payback within 12 months or less. And then separately, opportunistically if there's an opportunity to recast the lease or do a blend and extend or do an early renewal where it makes economic sense and the tenant has a good business, then we'll certainly look at those opportunities. But generally, the payback is 12 months or less and a three-month deferral or less.

Okay. We're going to move to the speed round here, because we realize people are going to want to get to the SL Green call. So that's one more call. We have some closing comments to make. One more question. Let's keep it quick.

And the next question is from John Kim with BMO Capital Markets.

Thank you. Can you provide any more color on why you decided to draw down the line at this time without a use of proceeds? Did you fear any like counterparty risk on capital?

We're concerned of what occurred in prior crisis. So with our Board, we decided to flex our lines.

On the investment team and CIO hires, are you contemplating providing any capital to your tenants or making any investments outside real estate?

No.

If I can squeeze in one more, the 170 deferral requests, are any of those related to May?

No. No, no. Let's go to BMO, please.

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