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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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.
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 were 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.
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, maximize 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 that I have said for nearly more than 18 months that we will see a constructive shift in the dialogue by the end of Q1 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 which build companies' recognition that work community 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, not a 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 newly elected Mayor Eric Adams is refreshingly underway. Schools remain open, trains and subways are busier, and 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 from 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. We continued 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. With deals underway, we have the seeds for the growth in our leased occupancy. 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 has been erroneously oversimplified. Our redevelopment work has placed our portfolio firmly in the sights of companies' needs to implement their long-term return to office plans. Best-in-class office space and well-amenitized, healthy indoor air 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 digits for brand-new buildings. Our properties benefit from the oft-cited 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 8, which contributed to the accelerated recapture rate that we achieved in November and December before impacts from the Omicron variant were felt. Our visits continue to improve along with our revenue per cap 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, with the balance driven by our 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 a unique, memorable, best-in-class experience, and we continue to look for ways to enhance that experience that produces better Google and Tripadvisor reviews than any of our new competitors, One World, The Edge, and the latest shiny penny, 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 our immersive museum-quality exhibits. We are out of the pure volume for volume's sake business. The observatory's 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 our team members.
Fourth quarter attendance 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 wrap-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 when other observatories opened. 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-Equality 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 IEQ continues to set the industry standard while we show annual improvement and differentiate our attractiveness to expanding and new tenants. Thanks to our SVP and Director of Energy, Sustainability, and ESG, Dana Robbins Schneider.
We look forward to our second annual sustainability report publication in spring 2022. ESRT has a well-honed operational skill set, flexible balance sheet, disciplined track record of capital allocation, and ESG leadership position that will deliver long-term shareholder value. Team works well and hard as we press forward. Now I will turn it over to Tom Durels.
Thanks, Tony, and good afternoon, everyone. In the fourth quarter, we signed 34 new and renewal leases totaling approximately 375,000 sq ft.
That included 294,000 sq ft in our Manhattan office properties, 75,000 sq ft in our Greater New York metropolitan office properties, and 6,000 sq ft 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 sq ft expansion lease with Signature Bank at 1400 Broadway. This is the second expansion by Signature Bank, who now leases 280,000 sq ft across 10 full floors on a long term lease. Signature's expansion includes 159,000 sq ft of space that was leased to other tenants, of which 131,000 sq ft 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 sq ft will be relocated within our portfolio. A 17,000 sq ft expansion lease with iCapital Network at One Grand Central Place. This is the third expansion by iCapital, who now leases 82,000 total sq ft. A 51,000 sq ft new direct lease with United Rentals, the world's largest equipment rental company for space that it previously subleased at First Stamford Place in Connecticut, and a 15,000 sq ft new lease with Clarins, the multinational cosmetic company at 1400 Broadway. We also signed leases for 17 pre-built office spaces in Manhattan in the fourth quarter.
Subsequent to the fourth quarter, we signed a 24,000 sq ft full floor lease with Crown Castle at 1359 Broadway. During the fourth quarter, rental rates on new leases signed at our Manhattan office properties increased by 3.9% on a cash basis compared to the prior escalated rents. Positive lease 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 82.4%, down 110 basis points from the prior quarter, and leased percentage was 85.7%. Looking ahead into 2022 for our 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 termination 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 broker community, and more than a decade of our 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. Each day that passes, we see more and more companies announce their return to office date 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 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 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 our 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 and 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 sq ft 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. Our industry leadership and experience in indoor environmental quality and sustainability enhances our ability to attract and retain office and multifamily tenants. Now I'd like to turn the call over to Christina. Christina.
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-$7 million per quarter until we reach 60% recapture rate and $8 million-$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 assets. 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 and 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 has under consideration 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 debt service on 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, a reflection of 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 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?
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for your question.
Our first question has come from the line of Steve Sakwa with Evercore, p lease proceed with your questions.
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 gonna get to the mid-80s% on an occupancy level by the end of 2022, and I was just hoping you could, you know, talk a little bit more about, you know, 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 kinda hit that? Am I thinking about that right? That, you know, 85% is the target up from 82.4%?
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 our Manhattan office is 87% leased, and we do expect a higher leased percentage in the first quarter. Of course, the occupancy, as I said, we expect to decline slightly just 'cause of the timing of the move outs to accommodate the Signature deal. That Signature lease we would expect to commence by year end, so that will help drive our occupancy. You know, look, I'd say 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.
In Manhattan, our leased percentage occupancy was certainly the result of the 270 basis point decline for the Manhattan office portfolio by the GBG move out. We have 545,000 sq ft of signed leases not yet commenced. About 500,000 sq ft we expect will commence by year-end of 2022, but about 330,000 sq ft represent positive absorption. In other words, those signed leases not yet commenced, that 330,000 sq ft will go against a currently vacant space. Then we have modest rollover in 2022, with only about 576,000 sq ft, you know, if you look at page 10 of our supplement, there's how much has been covered by expected renewals and such.
That hopefully gives you good ideas of where we're headed. We expect steady improvement in leased percentage. Occupancy may be bumpy in the first, second quarter and then improve over the second half of 2022.
Okay, thanks. Just, I guess one question on the investment activity. Christina, I understand you guys are, you know, kind of casting a wide net, but maybe could you just talk about sort of what is sort of out there today? I guess, you know, how confident do you think you can scale the resi 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?
Sure. We continue to actively underwrite deals. The investment team is hard at work, and our focus area is New York City office, retail, and multifamily, consistent with what we have messaged in the past. We are 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 some deal complexity. It could involve recapitalization, 421-a, estate planning, tax issues, so a number of factors. What we've said on multifamily and scale is the intention is not for these to be orphan assets. You know, 625 units, it's 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. 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.
Great. Thank you.
I might add, Steve, Tony here, that the fact is, we look for creative ways where we can apply our capital, solve people's problems, sellers, existing owners, and we really shy away from actively marketed properties given the capital markets today.
Great. Thanks.
Thank you. Our next question has come from the line of a. Jamie Feldman with Bank of America, p lease proceed with your questions.
Great. Thank you. Good afternoon. I guess just going back to the percent leased comment. It looks like I'm looking at page four of the supplemental. It looks like you are at 85.7% to end the year, and then you're saying it'll dip and then get back to the mid-80s. Is that the right number to compare that to? I think this is total portfolio. Or did I just wanna make sure I'm following you correctly.
Well, I think you, Jamie, you're referring to a leased percentage as opposed to occupancy percentage. Our current portfolio is 85.7% leased, and our occupancy is 82.4%. That's the delta between those two figures represents leases that have signed but not yet commenced. My comment about occupancy in my prepared remarks has to do with we expect occupancy to hit the mid-80s by the end of the year. As I said before, look, our number one focus here is to lease up vacant space and tenant retention. That's gonna drive our occupancy going forward. We expect improved leased percentage in the first quarter of 2022.
As I mentioned earlier, a slight decline in occupancy simply to reflect the move out of space to allow for the Signature lease that will commence by year-end. That will also help drive our occupancy by year-end.
If I'd add
Okay. All right.
Jamie, just keep in mind, we are maybe a little different. When we see tenants do not utilize their space, we aggressively move to lease that space and get buyout money from those tenants. There are other transactions on which we work and other transactions we have done where we will move to create space for tenants, and that may involve momentary pops in our vacancy while we increase our leased percentage or maintain against future potential vacancy.
Okay. That's helpful. Sorry for my confusion. The $12 million termination fee, how will that flow through earnings over the next several quarters?
Jamie, 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. It will come through same-store cash NOI, but in a gradual pace.
Oh, four - five years. Okay.
Yeah. There won't be anything chunky. We were just trying to be transparent on the deal economics.
Okay. That's helpful.
People say we get the cash right away. It's just when we recognize it.
Right. Okay. One of the stats you provided in the press release was that I think 17 of your 24 Manhattan leases were pre-builts. I was just hoping to get some more color on that part of. You know, 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, you know, tenant interest in terms of term, rent, the kind of space they're looking for as we come out of the pandemic?
Yeah. We've seen the most activity on our pre-builts 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 where we have significant pre-built inventory at 1350 Broadway and at Empire State Building. As I said before, I think that the smaller tenants were able to leave the market, work from home during COVID, and then they were the quickest to return to the market. We're seeing a steady pace of activity on our pre-builts. The good news is we have about 270,000 sq ft of pre-built inventory that's been built.
The money's 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 can come to our buildings and get access to, you know, our portfolio amenities and move right in, be up and running. I think that that's where we'll continue to see some steady activity.
Okay. It sounds like they're smaller tenants. Like, what's the average tenant size? Or maybe if you break your leasing volume, how much of that was pre-built in terms of square feet?
Well, generally, our pre-builts are anywhere from, say, 3,500 sq ft to 6,000 sq ft on average. The total pre-builts that we leased during this quarter were 17 units representing about 83,000 sq ft.
Okay. Do you see the size growing into more, you know, just I guess what I'm asking is just, you know, we keep hearing about tenants wanting more flexibility?
We have a re-
more enterprise-type leases.
First, we will always accommodate tenants' growth. In fact, our pre-built program has been a feeder to many of the tenants that have grown with us over time. Certainly, Workday is a good example, came into us on a pre-built and expanded to a full floor over time. Anaplan came to us on a pre-built at One Grand Central Place, eventually took a tower floor at 111 . We will always use, look to lease to quality tenants who have the opportunity and the potential to grow with us over time. In terms of flexibility, our 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. Pre-builts, generally the lease term could be around three to five years on average.
Okay. All right. Thank you very much.
Thank you. Our next questions come from the line of John Kim with BMO, proceed with your questions.
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, you know, given your discussions today.
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, indoor environmental quality, which we were an early leader you know, well before COVID, and with community access to mass transit and full suite of amenities, and that's what our portfolio provides. We are benefiting from a flight to quality, tenants looking for those attributes that have come to our portfolio, and we see that come up in discussions with our tenants on a regular basis.
Yeah, I would just add to Tom's comment, you know, the attributes on IEQ, centrally located near mass transit, 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. We think we're really filling a portion of the market that has demand. They want collaboration. They wanna bring their teams together, and they want the price point to be very accessible, so it fits into their business model. That's really what our comments relate to, which is flight to quality, accessible price point, and we think that we're solving businesses' problems.
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 IEQ, healthy buildings, energy efficiency have been the driver. Flight to quality does not necessarily mean the bright, shiny penny. Flight to quality means in your price point at what you wanna 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.
The results will be in higher occupancy in your portfolio, as you alluded to earlier?
Higher lease 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, I think you mentioned the Norwalk write-down or impairment was a one-off situation. Your suburban portfolio has been a consistent underperformer versus New York. I'm looking at occupancy that was at 95% back in 2016. Today, it's probably in the low 80s, excluding Norwalk. Do you think you'll need to make a significant amount of, or invest a significant amount of capital in these assets to get it back to where it was before? Thus, you know, have to make a decision whether or not you wanna do that?
Well, I'll make a quick comment, and I'll let Tom speak more on the capital. You know, 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. That's going to be the lens at which we look. Norwalk took a turn for the worse after the exit of GE, so that's very specific to the market. Tom, why don't you comment a little bit on the capital for the rest of that portfolio?
Yeah. We recently completed upgrades of common areas and amenities at all of our properties out there. We got a little bit of work left to do at Metro Center, but for the most part, our CapEx spend on common area upgrades and on amenities has been done. That includes a refresh of our fitness centers, dining, coffee lounge, conference centers, lobbies, and some outdoor space, so we're positioned very well. Remember, two of our assets, or three of our assets are located right next to mass transit and CBD locations.
Do you see a similar pickup in occupancy in your greater New York portfolio as you do in Manhattan?
Not as strong as Manhattan. You know, I would think that, look, we are focused on leasing our vacant space and tenant retention. United Rentals was a great example of retaining a really quality tenant. We have some other leases that we're in negotiation on now on some significant tenant retentions. You know, we're seeing good traffic out there, and it's still too early to call in terms of a strong rebound in that market. I'm pleased with the traffic we're seeing and the condition and the shape of our properties.
Great. Thank you.
Thank you. Our next question is coming from the line of Craig Mailman with KeyBanc, p lease proceed with your questions.
Hey, everyone. Tony, maybe just for you know, in the past, you've always said, you know, when you guys do buy something, it's gonna have something maybe with a little bit of hair on it, where you guys can bring in expertise, said it again today, to solve problems. I mean, other than money, what problem did you solve at the apartments and kinda where's the extra juice that you should get for bringing your expertise to this? It seemed like a pretty fair price for the assets.
Craig, you're absolutely completely wrong on the pricing on the asset as far as residential is concerned. We're happy to provide you with comps in the market, number one. Number two, we solved a problem of an existing partnership with an entity who wished to stay, an institution who wished to leave. Number three, it was incredibly complex and involved things that frankly, we were in a unique position to be able to accomplish from a tax perspective, a structure perspective. If you think that the numbers that were quoted as far as the result is indicative of what is available and broadly marketed, recently concluded transactions in the market, we can better educate you.
No.
I would add one more comment on that, which is, if you look a little bit at the timeline for when this deal closed and when we first announced we were going to do it was in a time in New York City where the fundamentals were not as clearly strongly improving. This demonstrates, you know, we were able to see long-term into, and had confidence in New York City, we know the sub-market, and we were able to step in at a time to solve the issues, whatever the issues are for a seller. We were able to move quickly and utilize our balance sheet and got very comfortable. As a result, we're able to go in in the low 4s cap rate with stabilization expected in the mid-5s.
That is nowhere near where comps are trading in the market, as Tony mentioned.
Right. I guess, bigger picture, right? You guys passed on 1400 Broadway 'cause it would stabilize in the fives, and you didn't think that was attractive. This stabilizes in the fives and your cost of capital is probably 200-300 basis points wider than it was at the time of that potential acquisition. I'm just trying to get a sense of, you know, reconciling the relative attractiveness of the cost of capital with the going in and stabilized yield.
Greg, I think that it would be.
Versus-
Probably helpful for your particular line of questioning for us to follow up with you and educate you better on the difference in the assets, in the rent rolls, in the exposures 1400 had, which were very significant to vacancy. I think that you've got just a lot of mixed information here, and we can probably spend some time with you and help you out.
Sure. That's fair. Maybe we'll do that after the call. Just quickly.
Yeah. Craig, 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, you know, attractive, discounted valuation, where we bought back over 7.5% of our total shares outstanding. 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.
Yeah. No, 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 'cause you said you couldn't find anything with a yield that was appropriate. You ended up buying something at a similar yield to what you could have bought several years ago, and you missed out on accretion and over that time period. That's my only point.
I really think we should move on to the next question, and we can have a little time for a tutorial with you on and follow up.
Sure. Can I ask a separate question?
Sure.
I was just gonna ask, you guys have a couple, you know, Duane Reade and street retail. I'm just kinda curious with all the headlines about store closures 'cause of shoplifting and other, you know, issues of that sort. I mean, how have your particular tenants been weathering this? Is there any concerns that, you know, any of your locations were having any kind of problems, or if you guys, your tenants been able to kinda sidestep this issue in your locations?
They're doing quite well. You know, we're 91% leased. That says something about our portfolio. Our tenants are open. They're doing business. If you walk into Wolfgang's Steakhouse, that restaurant in the Broadway Quarter 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 F&B, to get through COVID, converting some of their base rent to percentage rent. They come 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. Our tenants are doing really well.
Tenants down here at 112 West 34th Street, Target, Foot Locker, Sephora, you walk in their stores, their business is bustling.
Great. Thank you.
Thank you. Our next question comes from the line of Manny Korchman with Citi, p lease proceed with your questions.
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. I wonder 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 back 7.5% of your base. I know you have $400 million of cash on the balance sheet.
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 chew up all this capacity and your stock still trades at a 10x, 10% implied cost of equity capital? I mean, how aggressive are you gonna wanna be to use all this capacity when your main source of capital raise is your common equity?
Yeah. I'd say for New York City office REITs, the main source of capital raised would not be common equity, given discounted valuations. From that lens, it's very helpful to have a flexible balance sheet. 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 wanna deploy our capital between capital requirements for leasing up the asset, upkeep, keeping it competitive, buying back our shares, and also external opportunities. 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 JVs should we choose.
Our lower than average levels of leverage allows us to tap into the debt market, not to be overly aggressive on leverage, but it is another source of capital as we navigate. We feel we have good optionality and hence our comments on balance sheet flexibility. We won't take it for granted and understand your point. You know, 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.
I just wanted to add from the
If I could just add.
Go ahead, Tony.
I-I was just-
Sorry.
That in addition, we have the benefit of terrific balance sheet and on that balance sheet, our assets. We will also have the opportunity to recycle capital through our portfolio. We also make decisions, and that's what came down to with MerrittView and Norwalk. We said, "Look, we have a major multi-million-dollar commitment on this asset going forward in a market that's poor. Better for us to put that capital elsewhere," and we decided to walk from the property.
As you think about the portfolio and maybe tapping into it either in a joint venture or in a sale process, you know, over the years, you've been reluctant to sell anything down at the Empire State Building, which obviously is a significant amount of your value. You obviously, Tony, your family has the tax protection agreements in some of the assets north of the city. You obviously have a number of assets on ground leases and, you know, your assets are different from where the market is clearing today in the sense that, you know, it's the high trophy assets, high credit leases that are finding the most appetite from institutional investors.
Really, what do you have that you could open yourself up to liquidate to start narrowing this gap between what you perceive value to be and the stock being in a single-digit range?
I think there are three factors here. One is to take things that have been made sure through our work over time and move to things where we see growth over time. Two is 1031 exchanges are very useful in this regard, and there's all sorts of structuring that we can and will do around that, using that structure, which avoids the issue of tax basis and tax protection. Three, I think there's a myopic and problematic view of what's happened and happening in transactions today.
I think that we'd be happy to share some time with you guys, as well as we will do with Craig, just to highlight that there are a tremendous number of deals that have cleared the market that are not the bright, shiny pennies, which get reported in the press and evidently have made its way to the analyst community. I mean, the fact that Hudson Commons went well leased, brand new, of course, to Peloton and Lyft, we didn't participate in that. We don't believe in Peloton as a long-term credit. We didn't believe in Lyft as a long-term credit. There are many other deals that have occurred in many different property types in Manhattan and in the boroughs where we would be interested.
I think that the market is way more active than you're making it out to be on every asset quality.
Yeah.
Assets of quality and not quantity of every type.
My question, Tony, was more going to, you know, your own portfolio and some of the restrictions over time that you've talked about, you know, talking about not wanting to sell anything in the Empire State Building, some of the ground lease assets, things like that. Maybe just stepping back, I mean, your stock's trading at a 10x multiple, right? Which is the lowest in the urban office space. I guess, can you communicate a little bit more clearly what the company is going to do to try to lift its stock price? I don't think doing a 1031 and exchanging assets is really what the market is looking for from an active perspective.
I think that's where some of these questions are coming from, just given where the stock is and how it hasn't reacted to your multifamily purchase. If anything, it's gone further down, because of that. That's where I'm struggling of really trying to understand management's view of things and where the investors appear to be.
Look, first of all, I think we can go through the charts and find at least one other office REIT that's trading at a worse multiple than ours. Number one. Number two, I do believe that there is a fundamental reality that we need to build value over time, and that the investor community within REITs really looks at today and tomorrow and not that far down the road. We've seen that occur in any number of different situations with other REITs as well. Our goal over time is candidly to do the work that will build value when people are interested in investing in New York City-based office REITs, primarily office REITs, and in New York City. That's really our focus point.
We do believe that a move from stabilized, well redeveloped, will into growth makes sense, and we haven't seen what can happen in assets like ours because there really aren't other assets like ours, fully modernized, high IEQ energy efficiency. They haven't come on the market. If we do put those on the market, we anticipate that we'll get a good reaction to them. All that said, we have just demonstrated before the ability to raise additional capital, and we also have the ability, on our balance sheet to borrow for additional capital. We feel pretty comfortable in an uncomfortable time in the market in general.
Yeah. Look, you have tapped that, right? I remember the QIA, but QIA invested at $21... I think it was $21 or $22. You know, that doesn't set up the next person who wants to invest in stock if that's that, but you took advantage of the market at that time. Just the second topic I want to address is you mentioned we're out of the volume business, I think is what you said, on the observation deck, and I respect and I remember, you know, you and I did our special tour of all the unique things that you've been able to develop in that experience. At the end of the day, isn't the goal to get as many bodies profitably through there as possible?
I mean, as a gated admission, I would always wanna have as many volume as possible. Can you just sort of reconcile that for us a little bit?
I think when you read the transcript of the earnings, you'll hear from my comments what I said, we're out of the volume for volume sake business. We don't drive volume with pricing. We have a unique asset. We like the fact that the observatory business in general has been really dubbed united, if you will, as an institutional asset. We've seen this through the KKR partial acquisition of The Edge and the Summit's assist in the high loan proceeds for One Vanderbilt. We do believe that we will continue in our highest revenue per visitors that we've had, we will continue to provide a better experience. We rate on Google, tripadvisor much higher than The Edge, the Summit, and One World, all these new competitors.
Don't forget, we also have the ability to do much higher volume, just because the way we're built, the way we're structured, we have much higher volume at a much higher quality experience than those buildings can, those observatories can, just 'cause the way they were built, designed, and what the infrastructure is that is dedicated to them. That said, the key thing for us is we will not just do volume for volume's sake. Our volume has increased significantly. We like what we're seeing in the snapback from Omicron even today, even this week, and we feel good about that business, and we feel good about it at our higher pricing.
Most important-
Beautiful day to be up there today.
Most importantly, what we don't want to do is to 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, and ours are excellent and better than anybody else's of those new competitors.
Okay. Thanks for your time, Tony.
Thank you. Our next question has come from the line of Blaine Heck with Wells Fargo, p lease proceed with your questions.
Great. Thanks. Just one for me here in the interest of time. Tom, I know this is looking out into 2023, and there's a lot on your plate between now and then, but you guys included your expectations for new leases, renewals, vacates, and unknown for 2023 in the supplemental on page 10. It seems like there's a larger proportion of leases in that unknown bucket in 2023 than has been the case in previous years, which is certainly to be expected given the current environment. Just wanted to ask if there are any, you know, major leases in that bucket that could swing occupancy progression one way or another in 2023.
Well, Blaine, as you've seen in the past, as time goes on, those unknowns move into other categories. That will be the case as we approach 2023, and we'll have clarity on those unknowns. 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 tenants whose leases expire are at 1333. That represented about 100,000 sq ft 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.
Great. That's helpful. Thanks.
Thank you. Our next question has come from the line of Daniel Ismail with Green Street, p lease proceed with your questions.
Great. Thank you. Maybe just a quick question for Tom. You mentioned concession packages being reduced. Are you able to quantify that change, maybe relative to pre-COVID levels?
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 TIs and commissions this quarter was $9.25 a sq ft, which is really right in line with our lease costs over the past three years. Certainly helped by the length of lease term, which represents tenants' long-term commitment to their space and to New York City. Our concession packages have been trending, you know, again, right in line with our average lease cost per lease year over the last few years.
Got it. Thank you. Maybe just turning to sustainability quickly. Tony, you've been active on the Local Law 97 implementation board, and I'm curious what you're hearing from the new administration thoughts on sustainability related laws in New York City.
Look, the Mayor Adams administration has made a brilliant move to bring Rit Aggarwal back. Rit was the original director of the Mayor's Office of Sustainability under Mike Bloomberg. Number one. Number two, we have had very constructive engagement. I have had one-on-one constructive engagement with Mayor Adams and with Rit prior to and after his actual taking office and prior to and after Rit's actual appointment. I think that the difficulty is I have a confidentiality agreement that I signed as a member of the mayor's advisory board. I would say that the engagement with the mayor's office, the new mayor's office is very constructive.
Understood. Well, I appreciate it. Thank you.
Thank you. There are no further questions at this time. I'd like to turn the call back over to Anthony Malkin, Chairman, President, and Chief Executive Officer, for closing remarks.
Thank you very much, everybody. Great work by the team. Confidence that we continue to focus on moving the lease percentage and bringing back visitors to the observatory and reinvesting in a constructive and accretive fashion. We look forward to the chance to meet with many of you at non-deal roadshows, conferences, and property tours in the months ahead, and to share our fourth quarter results in April. Actually, excuse me, with our first quarter results. Until then, thank you very much for your interest, and onward and upward.
Thank you. That does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Have a great day.