Greetings, welcome to the Empire State Realty Trust third quarter 2019 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. I would now like to turn the conference over to your host, Mr. Greg Faje, Director of Investor Relations for Empire State Realty Trust. Thank you. You may begin.
Good morning. Thank you for joining us today for Empire State Realty Trust third quarter 2019 earnings conference call. In addition to the press release distributed last evening, a quarterly supplemental package with further detail on our results and our latest investor presentation have been posted in the Investors section of the company's website at empirestaterealtytrust.com. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements as defined in applicable securities laws, including those related to market conditions, property operations, capital expenditures, income, and expense. As a reminder, forward-looking statements represent management's current estimates. They are subject to risks and uncertainties, which may cause actual results to differ from those discussed today. Empire State Realty Trust assumes no obligation to update any forward-looking statement in the future.
We encourage listeners to review the more detailed discussions relating to these forward-looking statements in the company's filings with the SEC. Finally, during today's call, we will discuss certain non-GAAP financial measures such as FFO, modified and core FFO, NOI, cash NOI, and EBITDA, which we believe are meaningful in evaluating the company's performance. The definitions and reconciliations of these measures to the most directly comparable GAAP measures are included in the company's earnings release and supplemental package, each available on the company's website. Now, I will turn the call over to John Kessler, President and Chief Operating Officer.
Good morning. Thank you, Greg. Welcome to our third quarter 2019 earnings conference call. At Empire State Realty Trust, we are a New York City-focused office and retail REIT with fully modernized assets, central locations, and easy access to mass transit. Our four drivers of growth deliver embedded upside and peer-leading cash leasing spreads. Our portfolio is well-positioned, priced between trophy Class A and Class B properties to outperform in any market. We have a fortress balance sheet with an undrawn line of credit and low leverage, and we are an industry leader in sustainability and energy efficiency. Today, Tom Durels will speak about the third quarter's approximately 389,000 square feet of leases, including our 189,000 square foot expansion lease with LinkedIn, market demand for our properties, and our market-leading leasing spreads. Greg Faje will review our financial performance and balance sheet.
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. During the quarter, our observatory opened its first set of galleries, the 2nd-floor interactive museum. On October 12th, we opened the 102nd floor observation deck. Visitor feedback has been positive, and the social media and press which accompanied the October 12th, 102nd-floor opening was extensive and very positive. Finally, since our last call, we welcomed Patricia Han to our board with her wealth of digital commerce and social media experience. Dana Robbins Schneider as Senior Vice President and Director of Energy and Sustainability. For more than a decade, Dana has led ESRT's energy efficiency work as an outside consultant, and we are fortunate to have her join us full time.
We have appointed Justine Urbaites, Senior Vice President and Senior Leasing Attorney, as our Director of ESG, a new role for us. Lastly, Suresh Rangarajan as our Senior Vice President and Chief Technology Officer to address the growth of importance of technology to our business. I will now turn the call over to Tom Durels. Tom?
Thanks, John. Good morning. In the third quarter, we made more progress on our four drivers of top-line embedded growth. The breakdown of these top-line revenue growth drivers, which as of September 30, 2019, over the next five years, we estimate to be $97 million, can be found on page seven of our investor presentation. For reference, this compares to $551 million in trailing 12-month cash rental revenue as of September 30, 2019. In the third quarter, we signed 25 new and renewal leases totaling approximately 389,000 sq ft. This included approximately 286,000 sq ft in our Manhattan office properties, 89,000 sq ft in our Greater New York metropolitan office properties, and 14,000 sq ft in our retail portfolio.
Significant new office and retail leases signed during the quarter include a 189,000 square foot expansion office lease at the Empire State Building with LinkedIn, that I will discuss in more detail shortly, and a 14,000 square foot new retail lease with First Republic Bank at One Grand Central Place. As a reminder, on page nine of our supplemental, we have updated our disclosure on potential vacates and renewals for leases that expire for the remainder of 2019, broken out 2020 by quarter, and introduced full year 2021. This chart shows tenants to be relocated within our portfolio and vacates to be replaced by new tenants with whom leases have been signed. Our expansion lease with LinkedIn at the Empire State Building involved early recapture of three floors totaling 159,000 square feet from Coty, and expansion of another 30,000 square feet.
Coty's move-out and the commencement dates for each of the four floors in LinkedIn's new lease will take place over time, and as detailed in our signed leases not commenced schedule on page six of our supplemental. Greg Faje will provide additional comments with regard to the financial impact. During the third quarter, rental rates on new and renewal leases across our entire portfolio were 23.9% higher on a cash basis compared to prior escalated rents. At our Manhattan office properties, we signed new leases at a positive cash rent spread of 32.6%. The leasing spreads achieved this quarter were higher than anticipated due to the early recapture of Coty's space at below-market rents and re-leased earlier than previously projected.
Our leasing spreads will vary from quarter to quarter as they are a factor of expired, fully escalated rental rates and new leases. On page 28 of our investor presentation, we estimate our future cash leasing spreads on the re-lease of future expiring Manhattan office leases will vary between 12%-23%, based on the assumption of current market rents without any increase. Our weighted average asking rents in our Manhattan office buildings have increased by over 4% on a trailing 12-month basis, and demand for our product, locations, and price points remains good. As we show on page 12 of our investor presentation, our trailing 12-month net effective rent growth on a year-over-year basis for new Manhattan office increased by 17.8%, driven in large part by the early termination of space subsequently leased to LinkedIn.
This is the fourth straight quarter in which we have experienced net effective rent growth in excess of 5%. We have a healthy pipeline of leases and negotiation across the portfolio for both full floors and pre-builts, and we remain focused on our strategy to vacate and redevelop space that we will bring to market for future lease up. Now I'll turn the call over to Greg Faje. Greg?
Thanks, Tom. For the third quarter, we reported core FFO of $72 million, or $0.24 per diluted share. Total same store cash NOI was $99 million, flat with the prior year period. Excluding lease termination fees and the observatory results, on which I will comment momentarily, same store property cash NOI was up 2%. Changes to the supplemental in response to helpful comments from investors and analysts include the addition on page five of a same store cash NOI calculation, as well as summary disclosure on our ground leases. We continue to review our supplemental and consider additional enhancements. On the new lease to LinkedIn, we have the following information to help you refine your models.
Coty vacates its space in 2Q 2020, as seen on page nine of the supplemental. We detail the expected commencement dates on both a GAAP and cash basis for each of LinkedIn's floors on page six of the supplemental. The downtime between the departure of Coty and the beginning of GAAP revenue recognition is partially offset by lease termination income that will be amortized over the remaining 10 years of Coty's lease. The net effect of the transaction is a reduction in GAAP revenue of $2.6 million in 2020. An increase in GAAP revenue of $3.4 million starting in 2021, with additional growth thereafter. Turning to the observatory. Page 16 of our supplemental highlights our observatory operations.
Revenue for the third quarter of 2019 decreased to $37.6 million, or a 6.6% decline from the prior year period, driven by $3 million of reduced revenue relating to the closure of the 102nd-floor observation deck, offset by improved pricing. Net operating income for the observatory was $28.5 million, 9.2% lower than the third quarter of 2018 due to the aforementioned revenue drivers and higher expenses relating to the observatory redevelopment. As John mentioned earlier, we opened the second and third phases and anticipate the new 80th floor, the final phase, to open at the end of November. If you exclude the third quarter 2018 102nd floor revenue increased 1.1% year-over-year, and NOI was up 0.6% over the same period.
As reported on page 16 of the supplemental, the observatory hosted approximately 1.04 million visitors in the third quarter of 2019, a decrease of 125,000 visitors compared to the third quarter of 2018. For the nine months ended September 30th, 2019, observatory revenue decreased to $91 million or 5.8% from the prior year period due to the similar mix of factors I just mentioned. Net operating income was $66 million, 9.4% lower than the prior period. Excluding the 102nd floor revenue in 2018, observatory revenue was roughly flat and NOI was down 1.2% over the same period. The Observatory hosted approximately 2.61 million visitors in the first nine months of 2019, down 8.7% compared to 2.86 million in the prior year period.
Moving to our balance sheet, as of September 30th, 2019, we had total debt outstanding of approximately $1.7 billion, no borrowing under our $1.1 billion unsecured line of credit. The debt has a weighted average interest rate of 4.03% and a weighted average term to maturity of 8.5 years. None of our outstanding debt has variable rates. We repaid our $250 million exchangeable bonds on August 15th, we plan to replenish the cash balance within the next two quarters with new financing. As of September 30th, 2019, our consolidated net debt to total market capitalization was 24.1%, our consolidated net debt to EBITDA was 3.8 times. We held cash equivalents, and short-term investments of $294 million. With that, I'd like to open the call for your questions. Operator?
Thank you. At this time, we'll be conducting a question and answer session. If you'd 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'd like to remove your question from the queue. For participants using it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Craig Mailman with KeyBanc Capital Markets. Please proceed with your question.
Hey, good morning, guys. Tom, maybe I start with you. You talked about a healthy pipeline of deals. Could you just give a little bit more color around where some of your bigger availabilities are on floors that have been already redeveloped, and maybe give us a sense of where you are in negotiations or kind of depth of demand for some of these spaces?
Sure, Craig. First, I'd say that we feel really good about our pipeline of activity across our entire Manhattan office portfolio. We have leases or proposals in negotiation on both full and partial floors at 250 West 57th Street, 1333 Broadway, 1400 Broadway, and 501 7th Avenue. I'm really pleased about the steady demand that we're seeing, and we also have steady demand for our pre-builts where we have pre-builts at One Grand Central Place and Empire State Building from a variety of tenant types. We're seeing demand in various industry sectors, including TAMI, consumer products, financial, professional services, and others. I'm pleased with the third quarter results. Specifically, we are actively marketing full floors at 250 West 57th Street, 1400 Broadway, and 501 7th Avenue. We only have one floor available at Empire State Building and one floor available at 1333 Broadway.
Overall, coming off of a really strong quarter in the third quarter and feel good about the activity going into the fourth quarter.
That's helpful. The one thing that I think the LinkedIn lease demonstrated was just the embedded mark-to-market you guys still have in the, I don't know if you call them second-generation redeveloped space. As you guys look to the portfolio, is that more of an anomaly? I kind of calculated mid-30% mark-to-market on that. Is that something that you guys will start talking about a little bit more as an extension of kind of the embedded growth in the portfolio, even after the redevelopment program ends?
Well, thanks for pointing out that this was a great example of our ability to unlock embedded mark-to-market rent growth on previously redeveloped space within our portfolio. As we pointed out previously, we believe that our in-place fully escalated rents are on average below market. The LinkedIn lease and the Coty takeback was a great example of a long-term partnership with both tenants, and particularly with LinkedIn, with whom we've worked to accommodate their growth over more than eight expansions. We will always look for opportunities to accommodate growth from our existing tenants, as we've done successfully in the past, and we'll certainly look for opportunities in the future.
That's helpful. Just maybe for Tony, the Observatory, the visitation continues to be a little bit challenging. It's clearly being offset by better mix and ticket price increases here. As you guys look, is it solely kind of harder visa attainment for China? Are you seeing any trends across your primary visitor bases in different countries? I mean, is there anything you can share?
My understanding of the market, it is weak, and we are better off than most of the attractions to which we compare ourselves. Cross-ocean is the weakest sector. Those are longer stays, pay higher dollars. That's a sentiment move, we think. I think we'll let you look to the hospitality companies to find out what's going on in the U.S. generally and in the New York market specifically. There are headwinds, and the good news is, from our perspective, we think we'll compare well in any market to our competition, but the market overall remains challenging.
That's helpful. There's one last quick one on the debt deal you guys paid off the $250 million. Is the plan still to backfill that with new debt And if so, kind of timing and what could that look like from a rate perspective?
Hey, Craig. It's Greg here. We're continuing examining our options to replenish our cash balance within the next 2 quarters through new financing. We have a variety of options we're considering at the time. As we'd stated on the prior call, the cash coupon for the note that was repaid was 2.625%. On a GAAP basis, which incorporates the non-cash portion of the equity option and the amortization of the deferred financing cost, it was 3.9.3%. We have a swap at 2.958%. If you look at the current spreads of approximately 150 to 200 basis points, depending upon term length, an all-in coupon would be in that 4.5% to 5% range.
Great. Thank you.
Thank you. Our next question comes from the line of Jason Green with Evercore ISI. Please proceed with your question.
Good morning. Just a question on Observatory visitation. I know we can look back and say the 102nd floor contributed $3 million in 3Q 2018, have you been able to quantify, whether by survey or other means, how many visitors you lost in the quarter, specifically due to the 102nd floor being closed?
The answer is, we're not able to survey the people who don't come, but we do know that the 102 is the source of a transaction which is not only the additional premium associated with 102, but other premium attraction opportunities at the same time. Nothing since the opening of 102 has changed our view about this from an historic or current perspective. One could argue that there's a type of customer who is attracted specifically to that opportunity.
Okay. A question on Manhattan leasing. Obviously a strong quarter from a volume perspective, but given a significant amount of the 300,000 square feet with one tenant and the number of leases signed during the quarter was only 18 versus a quarterly average of around 30, does that represent any slowdown you're seeing in the leasing pipeline, or do you think absent the LinkedIn deal, the number of deals would've been higher?
We're not seeing any slowdown. We're really pleased with the quarterly results. As I commented previously, I'm delighted with the level of activity and the pipeline of deals that we have in negotiation currently. It was a great execution by our team this past quarter, I'm not seeing any slowdown in general. I'm really pleased with the activity that we're seeing right now going into the fourth quarter.
Okay, great. Thank you.
Thank you. Our next question comes from the line of Manny Korchman with Citigroup. Please proceed with your question.
Hey, it's Michael Bilerman here with Manny. Tony, I had a question for you on the buyback. Last quarter, you said there was absolutely a specific price at which you would act on buying the stock. My question is, should we assume then that the $13 was not that price, or were you working on something that would've used up a lot of your capacity?
I think the only takeaway you can take from that, Manny, is just that we haven't disclosed any purchases since I made that statement and through to today.
It's Bilerman. You said there was a price, and your price went down to 13 and had a VWAP of 14 in the quarter. Are we to assume then that that was not the price that you were referring to, or was there something you were working on that would've tied up the capacity so that if maybe $13 or $14 was the price? I'm just trying to understand in the context of your comment from last quarter in regards to share buyback.
Again, we haven't, Michael, bought any stock. It would've been disclosed if we did, and I think that that's just the only answer we have right now.
I know you didn't buy any stock, but I'm referencing your comment that there was a price to which you were willing to act. I just want to ensure that the $13.14, which it hit in August and September, was not that price, or you would've acted. It's arguably something lower, or there was something else you were working on that would've tied up the capacity that would've been better. That's the context, Tony, that I'm trying to understand better. Maybe $13 was the price and you were in blackout or you had other things. That's where I'm just trying to piece it together relative to your specific comment that there was a price to which you would act. It wasn't time-weighted. You said there was a price, that's what I'm trying to understand.
Hey, Michael. I think that's really asked and answered. We're happy to answer any other question. We've got four other folks on the call. We did get comments from the last call that people want us to move on from this discussion for other folks on the call. If you don't mind, happy to talk about this further with you and Manny at another point, but maybe we could move on to any other question you have about our leasing results, our spreads, our mark to market, or else we might move on to Jamie Feldman.
Why don't we talk about the LinkedIn, Coty? There's a mention of a lease term fee being amortized. Can you just talk through the economics of that? Is that in the spreads numbers that you're showing in terms of the GAAP rents?
Hey, Michael, it's Greg here. The lease termination payment that we received is going to be amortized over the remaining 10 years of Coty's lease, so that will be rolled into rental revenue over the next 10 years.
No, specifically on the lease spread disclosure that you show for the leasing activity during the quarter, of which I believe the LinkedIn-Coty deal is in there, are you amortizing that in terms of in the new lease or in the old lease in capturing the spread, i.e., is the spread higher because you're amortizing the higher lease term fee into the numbers?
No, the answer is no. The leasing spreads and the impact of a LinkedIn transaction is captured in our overall leasing spread disclosure for the third quarter. The amortization of any termination payment is not captured in leasing spreads.
It's an apples to apples, and then the lease term fee is on top of that?
Correct.
Okay. Thank you.
You bet.
Thank you. Our next question comes from the line of Jamie Feldman with Bank of America Merrill Lynch. Please proceed with your question.
Thank you. Have you seen any noticeable change in the leasing market since WeWork has pulled its IPO?
No. Jamie, this is Tom. As I've commented twice now, we're seeing steady activity across our entire portfolio from a variety of tenant types. I think that this third quarter results is a great example and reflects that level of demand and activity. We're seeing employment growth from a broad base of different tenants. The answer simply is no. No change in activity, no change in momentum related to WeWork.
I guess what I'm asking is, have you seen an improvement in demand, like tenants who otherwise would have gone that route, maybe thinking more about going direct?
Hi, Jamie. Tony here. You've got to remember, we didn't do anything with WeWork. From our perspective, we always have been attracting tenants who were interested in being in buildings without them present. It really hasn't changed our business.
Okay. That's helpful. We've seen an acceleration in your New York City office peers doing asset sales. Can you talk about your thoughts on that, whether it's suburban or your Manhattan assets?
Yeah. Good morning, Jamie. It's John here. As we've said before, we continue to focus on wanting to grow the business rather than shrink it. Whether that's the greater New York metro assets or New York assets, our focus is not on selling, but trying to grow the business.
Okay. You mentioned you added same store NOI to your supplemental this quarter. I assume that reflected a more optimistic outlook going forward. If you look at prior quarters, you had some negatives in there. Based on your kind of known move-ins, move-outs, do you have any thoughts on how that number should trend over the next year or so?
Hey, Jamie, it's Greg here. Yeah, we have added that disclosure to help make it easier for the street to compare us to the peer set. At this point, we're not providing forward guidance. I would just leave the results to speak for themselves. We're pleased with the number we showed during the third quarter.
Okay. At the beginning of the call, you had mentioned several new hires and promotions. Can you talk about what that does to the organization and if there's any change in kind of what you guys are focusing on? Also an update on the timing of the CFO search.
Sure. With regard to the new appointments, Tony here, Jamie, we're just really happy with what we are doing here. I'll call it, if you will, ESRT 2.0. We're thrilled with Patricia. She offers tremendous exposure for us to an area which is very important, not just to our observatory activities, but to the ongoing development of the real estate business. Dana's worked with us very closely for more than a decade. She was the lead on the original Empire State Building energy efficiency work, which we then rolled out through the portfolio. It's really very simple. Having her in-house gets her undivided focus, particularly as we move on towards the challenges of Local Law 97 and city council amendment 1253-A. We're going to call that sort of the ESB energy efficiency retrofit work 2.0, which needs to be taken a look at.
Justine is a real talent for us, absolutely terrific, wanted to make a difference culturally. ESG being a focus of, I think, not just investors, but of intelligent companies. It's not just for her to work on the proxy, it's also really her work within the company, which is really going to be a plus. Suresh is just a whole quantum leap forward. Again, we're taking on challenges from a technology perspective, everything from building systems with regard to energy efficiency, to how we handle our online presence and communication and construction of community, which we referred to before in our prior calls, as well as the fact that how we do our leasing and how we handle just day-to-day activities logically has to change to become more efficient.
In general, I think you can talk about ESRT version 2.0 as we come through the first phase of the redevelopment of our portfolio. It was appropriately questioned, what about the markups that we have from the second phase of things that were done earlier on. That's true. That's additional internal growth. Really looking at the go forward from our perspective, and wouldn't be surprised to see more developments as that goes forward. On the CFO side, we have interviews underway. The transition team, led by John Kessler, has things well in hand. We are not going to rush this. We're going to find the right person. We'll look to communicate the outcome when we have one. In the meantime, though, I'd really like to, on behalf of John and the rest of the team, hats off to Drew, Greg, and John Hogg, who've really done a terrific job.
The auditor's very happy with the work done on this quarter. We're very happy to see how they're in a position to demonstrate their capabilities after several years of guidance by David. We're quite comfortable where we are right now, and we're in no panic, no rush. We're looking for someone who's going to be very meaningful to the business.
Okay. Thank you. That's helpful. As you think about kind of excuse me, 2.0 or how you built out the platform, do you think this makes you more attractive as an acquirer of assets for some of these other platforms or families you've been talking about for so many years? Is there a strategic advantage that would help these companies if they were to sell to you?
I think that our coming out of our redevelopment phase is helpful for all our investors, and the results that we'll be able to show will be helpful for everybody to understand the value that's been created by the work that we've gone through and the more than $1 billion we've put in to the portfolio in form of improvements and tenant installations, commissions, since we first sold our shares to our friends in Qatar, and since we raised additional debt in the business. We raised a lot of money, we spent a lot of money, and we look forward to sharing the results.
Okay, thanks. Finally, just one housekeeping question. You guys talked about a $5 million uptick in expenses in the back half of the year, for some of the work at the Empire State Building. Is that in the third quarter numbers, or is that going to be more of a fourth quarter hit?
Jamie, this is Greg. We spent approximately half of that number in the third quarter as we sought to maximize the seasonally favorable weather.
Okay. All right. Thank you.
Thank you. Our next question comes from the line of John Guinee with Stifel. Please proceed with your question.
Great. Thank you. A comment, not question. When Tony and Mr. Bilerman, when you guys have that conversation, just please publish the transcript for all of us. That's one. The second, I'm looking at page 15 from last quarter. I'm looking at page 15 from this quarter, and I see a lease opportunity inventory of vacant space, and it went from 998,000 square feet to 1,000,073. When I look at page 12, I see you've got a big 130,000 square foot move out this quarter for the greater New York. I kind of thought that that part on page 15 was supposed to go down, was supposed to decrease versus increase. Do you guys have any sense for how that leasing opportunity moves in 2020?
John, this is Tom. I'd point out a few things. Number one, the increase in vacates in our greater New York metropolitan office portfolio is largely derived from the move-out of one tenant of approximately 96,000 sq ft in our Norwalk property, as we've been communicating for several quarters now. That was anticipated. We are actively marketing that space, but we really won't have an opportunity to completely prepare that space for showing until the tenant moves out at the very end of this year. In our Manhattan office portfolio, where we have greater opportunity to create rental revenue growth, we have 472,000 sq ft of redeveloped Manhattan office space. About 40% of that is pre-built. About 60% is our consolidated full and partial floors. Of course, against our total vacancy in the whole portfolio, we have 228,000 sq ft of signed leases not yet commenced.
We're actively marketing the redeveloped space. We have a proven ability to lease up our redeveloped space. A lot of the spaces that we have vacated are coming off of prior below-market rents. In fact, the prior fully escalated rents on our vacant Manhattan redeveloped space was $51 a sq ft, and it represents a great opportunity for us to create rental revenue growth and shareholder value.
Yeah. Let me ask it again. This time next year, will this number still be in the $1 million-$1.1 million range, or will it decrease?
John, we're working every day to lease up all of our vacant space. We got a proven ability. We've had great success in the past. We've been leasing over 1 million square feet for three years consecutive. The pace of vacates is starting to slow. We provide the detail of that on page nine in our supplemental in great detail. I would also point out that we have redeveloped 7.4 million square feet in our Manhattan office portfolio and only have about 570,000 square feet of undeveloped space remaining within the whole portfolio as
As we get spaces back on second-gen basis, those spaces that have been previously redeveloped will make it easier for us to release those spaces, and will also have the impact of lowering our average leasing costs, as reflected in our reported really strong net effective rent growth this past quarter, showed on page 12 of our investor presentation. We reported 17.8% growth in net effective rent on a year-over-year basis for our Manhattan office portfolio. I'll just say that we've done a lot of hard work. We're in a really good position. We're confident in our ability to lease up our vacant space.
Great. Thank you.
Thank you. Our next question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.
Thanks. Good morning. Tom, you guys still have some room to increase occupancy in the suburban portfolio. Can you just talk about the leasing environment out there and whether you're seeing any change in demand or conversations with tenants out there recently?
Sure, Blaine. I would point out, first of all, we are 89% leased. We signed 89,000 sq ft of leases during the third quarter. We renewed two significant tenants, one of about 26,000 sq ft at First Stamford Place, and the other of about 23,000 sq ft at Metro Center. We did do 150,000 sq ft in 2018 of total leasing. We're 97% leased at 10 Bank Street. We are underway, as previously announced, with an upgrade of our common areas and amenities, including improvements to gyms, dining, coffee lounges, lobbies, and conference centers. The early feedback from brokers and tenants alike has been very favorable. We are not yet done with that work, but I'm very pleased with the feedback that we've gotten thus far. We're really well-positioned.
As I commented previously, we've just begun marketing the 96,000 square feet that is expected to be vacated in our North property at the end of this year. We really won't have a good opportunity to show that space until it's white boxed at the end of the first quarter of next year. Overall, we've seen some rent growth in our White Plains property. In Stamford, it's early. The market's been generally flat, but it's early in response to the improvements that we are making on our properties. I feel good about our comparative position there. We are located right next to mass transit in downtown Stamford, and I feel confident that we'll be able to lease up our vacant space as we move forward.
On the CapEx side out there, are you seeing any trends both from a tenant improvement standpoint and free rent standpoint?
No, I think it's been relatively stable in terms of the TI and free rent concessions. I'd say that it's been relatively flat, both on rental rates in downtown Stamford and on the concession packages that we're seeing.
Okay, that's helpful. One last one from me, Tony or John. Just to expand on the investment picture, can you give us any color on whether you guys are pursuing any acquisitions right now? Whether there are specific opportunities for challenged assets or unique situations that are still on the table today, and maybe what size of check you guys would be able and willing to write for the right opportunity?
Hey, Blaine, it's John. We're definitely continuing to follow the market very closely. I think the headline is that there's a lot of equity and debt capital out there that's available, and it's resulting in low returns for investment opportunities. As it relates to distress, again, I think in part driven by how strong the debt markets are, we haven't really seen any meaningful distress situations to date. It's pretty easy for owners to refinance. I guess as it relates to size of check, I think what I would say there is just as you know, we have a low-levered balance sheet. We have meaningful liquidity, and I think we have significant capacity for investment should we see something attractive. I don't think we box ourselves in on a particular size.
Got it. Thanks, guys.
Thank you. Our next question comes from the line of Daniel Ismail with Green Street Advisors. Please proceed with your question.
Great. Thank you. Just maybe one for Tony. Just any update to the greenhouse gas laws passed earlier this year in New York, and any update in terms of Empire State's tracking to those regulations?
Sure. Thanks. We have no exposure in the 2024 thresholds as the rules are presently defined. The rules associated with this legislation, some of them still have to be written, and can have a significant impact on how achievable the 2030 thresholds are for all landlords. Don't forget, there are 2030 thresholds, 2035 thresholds, and they continue to go and get more difficult from there. An example is the coefficients that are assigned to various energy sources can have a material impact on the calculations. We're in a very good position to address these challenges with the appointment of Dana Robbins Schneider as Senior Vice President of Sustainability and Energy, and we are proactively at work on what it looks like. From our experience with our first effort here, it's really very simple.
We look at all the solutions, all the combinations, and put together a cost curve comparing investment to return against what fines might be levied and see what the crossover points are. I will say that
I think the vast majority of folks in Manhattan, by number of people, not necessarily by owners of the square feet they own, are completely numb to what's going on and not focused on it at all, and have no starting point. I'd also add that the city council bill requires an advisory council of eight members appointed by the council and by the mayor's office, and the Department of Buildings to do this rulemaking. The bill was passed in April of 2019, and that advisory council has not even been formed yet.
When you guys are out there underwriting new acquisition opportunities, how much of a factor does this play into that underwriting, and does this limit the potential investable universe for you guys?
I think that it's important to look at it in the following way. Right now, in order to make an acquisition, our view off of the underwritings that we do, and we continue to underwrite new assets for acquisition, our view is that you have to suspend disbelief in order to put your money to work. You have to continue that the market growth and demand continues unabated. You have to imagine that rents continue to go up. You have to project no downturn, and you have to project no costs for the greenhouse gas coefficient bill and fines. When you put all that together, you have to assume an interest rate which remains the same as it is today.
Finally, and perhaps most importantly, when you look at all of that, you have to be prepared to look at an unlevered IRR in the 5.5%-6.5% range. I think this is just a component of what we're doing here in the market when we look at how we're underwriting and the prices which people are paying when they do conclude transactions.
That's helpful. Thanks. Just one maybe cleaner question for Greg. The Local Law 11 work, how much of that, if any, is passed through to tenants?
Part of it does get passed through to tenants, but there is a lag on the timing.
Okay, great. Thanks, guys.
Thank you. Our next question comes from line of John Kim with BMO Capital Markets. Please proceed with your question.
Thank you. You discussed Coty downsizing and transitioning space to LinkedIn, which is a favorable outcome. Can you also discuss why Coty decided to downsize to begin with? Longer term, where are they going to go as far as square footage? Are they going to lease from you guys?
Sure. This is Tom. First of all, Coty will vacate part of their space, and they'll vacate 159,000 sq ft in 2020 in connection with the LinkedIn transaction. Coty will remain in occupancy of approximately 155,000 sq ft, as shown in our supplemental, and with a lease expiration of 2030. They got an in-place average rent of $56 a sq ft. Beyond that, not really prepared to make any further comments.
Is there a risk that the 155,000 sq ft can be reduced going forward?
Well, currently, they remain in occupancy on that 155,000 square feet with a lease expiration of 2030 and an in-place fully escalated rent of $56 a square foot, which is well below market.
Okay. They're using the space, and before they weren't completely utilizing all the space they were leasing.
Well, look, I commented on it previously, that we accommodated the needs of both LinkedIn and Coty in this transaction. It was a great execution and great result for our shareholders, and I'm really pleased with the outcome. It's a great deal.
Okay. On the same-store expense growth, that was up 9% year-over-year. I think you discussed on last call that was an R&M expense. I just wanted to clarify that that was one-time occurring in the second half of the year, not recurring looking to 2020?
Correct. That's work relating to Local Law 11 and top-of-the-tower work.
Is the same-store metric something you'll be providing guidance going forward?
I think management and the board continues to review guidance on a regular basis, and if we elect to do so, we'll provide guidance at a future date. We're going to provide this metric for analysts' use and consumption going forward.
Okay. A follow-up on the additional hires that you've made. It sounds like a lot of new positions within the company. What is the G&A impact going to be?
I think it's important to note that Dana Schneider was already doing a lot of work for us, just working for somebody else. That actually works out well for us. Patricia Han obviously is a new add on the board. Justine Urbaites was already here at the company. Suresh is an additional cost, perhaps to be offset by other changes underway in that department. He's a real talent, and he was a different cost for us.
Great. Thank you.
Thank you. Our final question this morning comes from the line of Jamie Feldman with Bank of America Merrill Lynch. Please proceed with your question.
Great. Thank you. Just as we think about the unknowns for next year and the tenant vacates, can you just talk about the larger pieces of those, or if there are any kind of chunky ones?
Sure, Jamie, this is Tom. In Manhattan in 2020, we have about 183,000 square feet of what we call unknowns, but the larger tenant is comprised of a full-floor tenant at 4.5 at 501 Seventh Avenue, with an in-place fully escalated rent of $38 a square foot. We see a great mark-to-market opportunity there, whether they renew or whether they vacate. Also at 1400 Broadway, similarly, we have a full-floor tenant with about 32,000 square feet, paying $44 per square foot. Again, well below market and a great mark-to-market opportunity for us. In 2021, we have similarly tenants ranging from 14,000 to 37,000 square feet, paying rents of anywhere from $53 to $57 a square foot, all well below market. Many of these floors are already consolidated. For example, we have a tower floor at One Grand Central Place that we get back.
Those are easily marketed. I'm happy to be getting that space back. On the known tenant vacates, a number of these spaces that we've talked about in the past are also paying well below market. In 2020, for example, we get a tower floor back from a tenant that's paying $39 per square foot. Generally, everything over at the Empire State Building is well above $70 a square foot. Again, represents a great mark-to-market opportunity for us. Another tower floor at One Grand Central Place, well below market. Out of all of the unknowns and tenant vacates, I think we're in a really good position to create rental revenue growth as we re-lease those spaces.
Okay, that's helpful. If you look at your top 20 list, Coty was number three. I guess that'll shrink, but are there any other tenants? You have a decent amount of retailers on there. Are there any other tenants that have come to you and are contemplating downsizing?
I would simply say this, that we're always looking for an opportunity to enhance shareholder value and create rental revenue growth. The LinkedIn-Coty transaction was a terrific execution by our team. It's a great deal, and it's a great result for our shareholders. We're always going to look for opportunities. I think as was pointed out nicely, that we do have embedded growth within our existing rent roll and much of the space, the vast majority of our space, has been redeveloped. It's come from years of hard work and investment into our portfolio, and look, we look forward to reaping the rewards of our hard work in the years ahead.
Direct answer to your question there, Jamie, we have no retailer who's asked to downsize.
Okay, that's helpful. All right, thank you.
Thank you. Our final question will come from the line of John Guinee with Stifel. Please proceed with your question.
Great. Hey, Tony and Greg. Greg, you had mentioned that you're going to lever up a little bit to increase your cash balance. Tony, I think you very articulately discussed suspending disbelief and how aggressive one would have to underwrite a deal to make the numbers work, which leads me to believe that there's probably a 10% or a 20% bid-ask gap in your mind. Why would you guys lever up if the market is still so distant from your underwriting for acquisition opportunities?
John, Tony here. We see people, a number of folks, and we've seen this happen in prior cycles when things turned, stuck in a box, and unable to execute and take advantage of opportunity. We think that not being stuck in a box, not having to juggle assets in order to generate cash, in order to recycle it or to pay for commitments that we've got underway. It's not just leverage, but it's liquidity. It's all about flexibility. That's from where we're coming, and that's where we stay focused.
Great. Thank you.
Thank you. Ladies and gentlemen, as our final question will come from Manny Korchmann with Citigroup. Please proceed with your question.
It's like the third final of the finals. Question, just going back to the LinkedIn and Coty thing. I guess, is there any sort of free rent period that you're providing on the new lease to LinkedIn? If so, how long? What sort of TIs are associated in terms of capital were you providing? Thirdly, the spreads that are on page seven, what would those spreads have been, the 31% excluding this deal?
Let me take those one at a time, if I could. Regarding the concessions, LinkedIn received a market-rate TI concession package. For confidentiality reasons, I won't go into the exact specifics, but generally, we've spoken to market TI concessions being in the range of $90 to $100 per square foot. Free rent, generally, it can be in the range of a year on a full-floor deal. That said, we do have staggered commencement dates for LinkedIn. That is captured on page six of our supplemental for each of the four floors in LinkedIn's new lease. I would suggest you look at page six carefully. Regarding mark-to-market, the impact of the LinkedIn transaction is captured in our overall leasing spread disclosure for the third quarter. While we haven't broken out the mark-to-market leasing spread on LinkedIn specifically
I think one can conclude based upon the prior escalated rents for Coty, what the mark-to-market was. We achieved very healthy mark-to-market leasing spreads on the balance of our leasing for this quarter.
In the lease term fee, just in aggregate, how much of that fee helps to offset the TI package you're giving to LinkedIn?
It helps. I think Greg's given the financial impact in total for the LinkedIn and Coty transaction. Beyond that, I think we provided already all the detail that we're prepared to give.
I'm just trying to think about it over a 10-year basis. If Coty had stayed in place, you're now doing this deal on an IRR net cash flow basis. How much incremental net cash are you generating by doing it? I know you're solving both tenants, LinkedIn's desire to increase their space and Coty's desire to downsize, which is good relationship management. I'm just trying to understand the 10-year economics. If Coty didn't decide and their business was doing great, they wouldn't have decided to downsize, and LinkedIn could have grown in other spaces in the building. That's where I'm just trying to understand the dynamics from a complete financial package. We get all these little pieces, the lease spreads in one, TIs in another.
I'm just trying to put it all together and really understand it on a 10-year stack basis, how much incremental cash NOI you're effectively generating for the capital you're putting in.
If you take a look at it in our disclosure, you'll see that it goes well beyond a 10-year horizon, number one, and it is extremely positive.
Okay.
If I may, I'm just going to move right into some closing remarks. I want to thank everybody for the vigorous opportunity to dialogue. It's really appreciated, truly. When we look at our strong leasing spreads, great leasing, net effect of rent growth, and the opening of the third phase of our reimagined observatory, all very positive for ESRT. Hard work, really good results, and a lot of thanks to the team. Again, just what I've already said, great transition work led by John Kessler on the CFO responsibilities, and to the members of the team who have done that work. Thank you very much. Thrilled about the additions we have as we move towards to ESRT version 2.0. Thank you all very much for your time and your questions. Super helpful.
Look forward to our chances to meet with all of you in the months ahead as we have NDRs, property tours scheduled for the remainder of the year. Always welcome one-on-ones with investors. We look forward to reporting our fourth quarter results in February. Until then, everybody, all the best.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.