Greetings, welcome to the Empire State Realty Trust fourth quarter and full year 2018 earnings conference call. At this time, all participants are in a listen-only mode. A brief 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 your host, Greg Bergey, Vice President of Investor Relations. Thank you, sir. You may begin.
Good morning. Thank you for joining us today for Empire State Realty Trust fourth quarter 2018 earnings conference call. In addition to the press release distributed last evening, a quarterly supplemental package with further detail on our results has 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 those 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 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. Welcome to our fourth quarter 2018 earnings conference call. At Empire State Realty Trust, we have de-risked embedded growth and generate market-leading cash leasing spreads from redevelopment of our office space. Our balance sheet liquidity and strength differentiate and position us for opportunity, and we have no exposure to the weak balance sheets of the new wave of shared office and enterprise space concepts. Our portfolio offers tenants a value price point between trophy class A and class B properties, which provides investors with both upside opportunity and downside protection. Our fully modernized portfolio is centrally located near mass transit, and we are an industry leader in sustainability and energy efficiency. During 2018, we leased over one million square feet. Today, Tom Durels will speak about the fourth quarter's approximately 247,000 square feet of leases, market demand for our properties, and our market-leading leasing spreads.
David Karp will address our financial performance, our balance sheet, and provide some perspective on 2019. Finally, Tony Malkin, our Chair and CEO, will provide some additional comments in conclusion. I'll now turn the call over to Tom Durels. Tom?
Thank you, John, and good morning. Our fourth quarter numbers reflect further progress on our four drivers of top-line de-risked and embedded growth over the next five years. The breakdown of these top-line revenue growth drivers, which as of December 31st, 2018, we estimate to be $112 million, can be found in our investor presentation available in the Investor section of our website. For reference, this compares to $537 million in trailing 12-month cash rental revenue and tenant reimbursements and $390 million in trailing 12-month cash NOI as of December 31st, 2018. In the fourth quarter, we signed 35 new and renewal leases totaling approximately 247,000 square feet. This included approximately 219,000 square feet in our Manhattan office properties, 23,000 square feet in our Greater New York metropolitan office properties, and 5,000 square feet in our retail portfolio.
Significant new office leases signed during the quarter include a 41,800 square foot lease for a full floor with hospital insurance company at 111 West 33rd Street, where an early recapture of a redeveloped floor yielded a termination payment by the prior tenant and a 9% positive cash rent spread. Also, a 20,700 square foot full floor expansion lease with Signature Bank at 1400 Broadway and a 14,300 square foot full floor expansion lease with Uber at 1400 Broadway. The expansion leases with Uber and Signature highlight our success in attracting and retaining tenants that have prospect for growth. Since 2013, we have had 163 tenant expansions totaling over 1.1 million square feet within our portfolio. In Manhattan alone in 2018, we signed 25 lease expansions for a total of approximately 245,000 square feet. We also amended our lease with our largest tenant, Global Brands Group.
In the process, we increased annual cash rent by approximately $4 million As of October 29th, 2018. As a reminder, we maintain updated disclosure on potential vacates and renewals for leases that expire. You can find the four quarters for 2019, a full-year disclosure for 2020. All of this can be found on page nine of our supplemental. This chart shows tenants to be relocated within our portfolio and vacates to be replaced by new tenants with whom leases have been signed. We have continued with our proven strategy to vacate and consolidate spaces, redevelop them, and re-lease those spaces at higher rents to better quality tenants.
Given the timing delay between the move-out of existing tenants and the commencement of replacement new leases, and a further delay between legal commencement and GAAP revenue recognition, our occupancy can vary quarter by quarter, and these timing lags impact our reported revenue. During the fourth 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 30%. Of course, leasing spreads always depend on the expiring fully escalated rents. In the near term, leasing spreads will benefit from the leased up of vacant, redeveloped office space, which had prior fully escalated rents of $52 per square foot, which is well below current market.
Our future leasing spreads will be influenced by rents on our future lease expirations, which we disclose on page 11 of our supplemental. We continue to see demand for our product, locations, and price points and feel confident in our offerings. We raised our rents in our Manhattan office buildings in 2018 and just implemented our first rent increases of 2019 for certain spaces. We have a healthy pipeline of leases in negotiation across the portfolio for both full floors and pre-builts. As a reminder, leasing volume may vary significantly by quarter given the timing of particular deals. 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 David Karp. David?
Hey, great work, Tom, and our entire property team. Good morning, everyone. For the fourth quarter, we reported core FFO of $87 million with $0.29 per diluted share. Cash NOI was $113 million, up approximately 15% from the prior year period. In our observatory operations, which are highlighted on page 16 of our supplemental, revenue for the fourth quarter of 2018 increased to $34.5 million, or 5% from the prior year period. Net operating income was $25.6 million, down slightly from the fourth quarter of 2017. In early November, we implemented a price increase of just over $1 on tickets sold through our retail channel. A combination of price increases, implementation of dynamic pricing, and a better mix of ticket types largely offset the year-over-year increase in expenses.
The expense increase was driven by a number of factors, with the single largest being higher technology costs for software consultants and maintenance agreements related to our new experience, partially offset by lower labor costs from the efficiencies we realized from the stages of the new observatory which have opened to date. The observatory hosted approximately 945,000 visitors in the fourth quarter 2018, a decrease of 4.6% compared to the fourth quarter 2017. For the fourth quarter, we estimate that bad weather days resulted in approximately 43,000 fewer visitors than in the prior year period, based upon an increase in the number of bad weather days. For the year ended December 31, 2018, observatory revenue was $131.2 million, a 3.2% increase compared to the prior year period.
Net operating income for the year was $98.5 million, up 1.7% from the prior year period. This strong performance was achieved despite the fact that the 102nd floor observation deck was closed in the first quarter of 2018 for the replacement of the original elevator machinery with a new higher speed glass elevator. Adjusting for first quarter 2018 revenue for the 102nd floor observation deck due to its closure for that period, which was $1.9 million in 2017, observatory revenue would have increased 4.8% in 2018 as compared with 2017. The observatory hosted approximately 3.81 million unique visitors during 2018, down 3.4% compared to 3.94 million in the prior year period.
As a reminder, we now report unique visitors and do not include sales of extra premium upgrades. For your models, remember that in 2019, the Easter holiday will fall entirely in the second quarter compared with 2018 when the holiday was split between the first and second quarters. Also, at year-end, we renewed our intercompany lease with the observatory taxable REIT subsidiary. We had created our first lease with the TRS at the time of the IPO. Under the terms of the new lease, the intercompany rent payment will be higher, reducing taxable income and lowering our income tax expense. We expect no material change in how the observatory operations are reflected in our overall performance due to this renewal.
Moving to our balance sheet, our low leverage, joint venture free and flexible balance sheet, including significant cash on hand, give us a competitive advantage to execute our plans and undergo external growth in any market environment. As of December 31, 2018, we had total debt outstanding of approximately $1.9 billion and no borrowing under our $1.1 billion unsecured line of credit. The debt has a weighted average interest rate of 3.84% and a weighted average term to maturity of 8.1 years. Our debt maturities are well-laddered, with only a single $250 million issue maturing before 2022. None of our outstanding debt has variable rates. As of December 31, 2018, our consolidated net debt to total market capitalization was 23.4% and consolidated net debt to EBITDA was 3.6 times. We have cash equivalents, and short-term investments of $605 million.
As we look ahead to 2019, let me provide some additional perspective on items that will impact full year results. First, we recorded $20.8 million in lease termination fee and other end-of-lease income in 2018, of which $18.7 million alone was recorded in the fourth quarter. As we reported on page 18 of our supplemental, from 2014 through 2017, we averaged $7.4 million in lease termination fee and end-of-lease income. Second, in accordance with new accounting standard guidance, non-contingent leasing costs can no longer be capitalized and will therefore be recorded as an expense. Going forward, this figure will be dependent upon leasing volume. For context, our capitalized leasing costs were approximately $4 million-$4.5 million per year over the past three years.
Third, regarding the observatory, as a reminder, we closed the 102nd floor observation deck in early January 2019 for a period as long as nine months as part of our larger observatory capital project. This could result in approximately $8 million of lost revenue for the period in which the 102nd floor is expected to be closed. Additional detail on historical 102nd floor revenue can be found on page 16 of the supplemental. We anticipate the run rate on observatory expenses to approximate the figure reported for the fourth quarter of 2018 due to higher HVAC, IT, and marketing expenses associated with the new experience. Fourth, the amended GBG lease will result in approximately $4 million in higher annual cash rent. Lastly, we have $32 million of annualized free rent, of which $21 million will be realized in 2019, with the majority of the balance in 2020.
Furthermore, we have $20 million of signed leases not commenced, of which we expect $3 million to be realized in 2019 revenue, with an additional $15 million in 2020 and an additional $2 million in 2021.
David, wait one second. Tony Malkin here. Just a few things I'd like to say. While I am not pleased with our stock price, I'm very pleased with ESRT's execution for Q4, all of 2018, and for the value we have created for stakeholders. We had a solid leasing quarter and once again, delivered market-leading cash leasing spreads. We had a lot of leasing to do in 2018, and we did it. ESRT continues to differentiate itself from our peers. We have, number one, embedded internal de-risked growth opportunity currently sized at $112 million and expected top-line expansion at current market rates from our four growth drivers over the next five years. Just to be clear, that compares to $97 million 12 months ago. Our five-year expectation for top-line growth, as embodied in our four drivers, has increased from $97 million at year-end 2017 to $112 million today.
While at the same time, our cash rental revenue increased by $15 million and our GAAP rental revenue increased by $9 million. Number two, we are committed to maintain our low levered, liquid, and flexible balance sheet to support substantial future growth potential relative to our size. This is who we are. This is what we do. We have not used our balance sheet to cash out selling investors, shrink the company, and reduce our potential for external growth. Three, we have no exposure to the new wave of co-working enterprise office providers. I have been very clear for years, and the world now recognizes that these companies seek to disrupt the relationships amongst tenants, landlords, and brokers with outsized risk from weak equity-dependent business models.
I maintain that landlords, investors, and lenders will regret the day they decreased the probability of their future cash flows with the leases they have made with these tenants. Most importantly, we have not had to lease to these players to fill our buildings. Four, our market position remains secure between trophy Class A and Class B properties with both upside opportunity and downside protection. Tenants like our locations, our buildings, our services, our amenities, and our quality. Five, we continue to be industry leaders in sustainability and energy efficiency. We have more work to do in 2019. We will continue to execute on our internal strategy, and we will complete the nearly four years of planning and execution on our Observatory redevelopment. It will be a pleasure to have the benefit of the most important new additions at work for us.
We are invigorated by the challenge and the opportunity ahead. We know we build value for our investors every day, and we are confident that the stock price will sort itself out. I guess now we can go to Q&A.
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 questions. Thank you. Our first question comes from the line of Craig Mailman with KeyBanc. Please proceed with your question.
Morning, guys. Just a few follows. David, the 2019 outlook is helpful. I guess just a couple follow-up questions on that without pushing you guys to give guidance. You kind of mentioned the $3 million of signed leases not commenced that are going to flow through in 2019. I'm just curious, though, if you could give some more clarity. As we think about kind of the $23.5 million of base cash rents that are going to contribute in 2019, can you give us a sense of kind of the quarterly flow through, or how we should think about the actual amount of that $23.5 million that's going to contribute in 2019?
Yeah, Craig, I guess the best thing we can do is if you look both within the supplemental and in the corporate presentation with respect to the signed leases not commenced, because if we're talking about flowing through on a GAAP basis, it'll be keyed off of the commencement dates. We do give expected commencement dates in that schedule, and that's probably the closest we can do, in terms of quarter by quarter scheduling for you.
No, I get that on the signed leases not commenced. Just on the There's almost $21 million of free rent burn off for commenced leases in the free rent period. How should we think about the trajectory or straight line throughout the year? I mean, how much of that $21 million is actually going to contribute in 2019 to AFFO?
The entire amount, the entire $20 million, does go in in 2019. That's not an annualized number. That's the amount that gets credited to the income statement in that year.
Okay, perfect. Then on the $250 million debt that's going to roll this year, kind of updated thoughts on whether you use cash to repay that or roll into something else?
I think, with respect to that, we feel pretty good about where we stand on the exchangeable. We have a lot of options available to us, including we can retire it with cash on hand, we could borrow under our $1.1 billion revolver on which nothing is currently drawn. We can refinance with another exchangeable, if that makes sense. We can refinance with a bank term loan. We can refinance with a private placement of unsecured debt, or we could potentially tap the public debt markets. The important thing is, we've got a lot of options. It's a small amount, and we feel very good about our options. In addition, remember, we did enter into a forward starting interest rate swap in the amount of $250 million, which we could apply to any refinancing we enter into in connection with that maturity.
Can you remind me where that swap locks you in at?
It's a seven-year on LIBOR at 2.958%.
Just the GAAP impact, that $250 million, your GAAP interest expense, I think is in the fours, even though the coupon is sub three. Is that-
That's correct.
The dilution, if you guys just do a term loan, is going to be pretty minimal from an FFO perspective.
That's correct.
Just one last one for me. Tony, I appreciate your views there on co-working and you guys not kind of putting them in your portfolio. Just as the industry is kind of evolving, how are you guys thinking about enhancements to the service offerings that you guys may offer to attract or kind of keep pace with the amenity base that other buildings are kind of implementing with bringing these co-working guys in? I mean, I know you guys do the pre-built program, but is there any thought process about kind of a higher level of service to compete from an amenity standpoint without bringing in an external provider, so it would be kind of ESRT managed? Is that on the table at all?
Look, we were the first landlord to do this in a significant way in Manhattan with the Empire State Building, which as you know, has now eight different dining options, tenants-only conference facility, 16,000-foot tenants-only fitness facility, really an urban campus within a building. With that in mind, we look at our entire portfolio from the perspective of amenities. Now, if we look at the retail at the base of our buildings, when we look at that Broadway area, the south of Times Square, north of the Macy's district, we find ourselves with all sorts of varieties of retail options at the bases of buildings. We look at lounges and other options within each building and develop them ourselves.
I think that you'll see some exciting and interesting things from us that we've been working on for the last six or seven months, begin to be unveiled in 2019 around the pre-built program. It's something where we're candidly focused on rolling it out right now. It's already being done with tenants and with brokers. Since there are competitors who listen on the phone, I'd rather them have to do a little more legwork to figure out what we're doing. I think the most important note of all is with, as you mentioned, this expansion of activity. Number one, remember, an awful lot of this is being done by folks who are private equity owners who are looking to enhance buildings in order to lease them and sell them.
You talk to your different service providers, and they'll tell you that, meaning the people who are offering these services aside from just the folks who are leasing space at a spread-based business. Number one. Number two, we're leasing a lot at very high lease spreads, the highest cash lease spreads of any of our peers within our market or not. We don't need to do this stuff. I think that the key is what we're doing is very competitive. It's very successful. We led with this as a concept. We look at it on a daily basis, and there are some areas in which we're innovating right now, which we've been working on since well back in 2018 to roll out. There are things we've already rolled out to brokers and tenants, and there are new things which we'll be rolling out through the year.
Great. That's helpful. Thank you.
Our next question comes from the line of James Feldman with Bank of America Merrill Lynch. Please proceed with your question.
Great. Thank you. Good morning. I guess just starting out, the lease termination fees in the quarter, can you talk about the follow-through NOI? Is there a reduced level of NOI for the rest of 2019 from some of those terminations?
Yeah, Jimmy, a meaningful portion of the fourth quarter lease termination fees and the other end of lease income is attributable to former broadcast tenants, and thus has a minimal impact on office vacancy, building occupancy, and downtime. Based upon the way most of you seem to construct your models, of those tenants who terminated in Q4, the GAAP rent recognized by them in Q4 was approximately $1 million. That can give you a sense of how that would roll forward into 2019.
Just a million-dollar lower run rate for that NOI?
On a GAAP basis.
On GAAP basis. Okay. Then you talked about the Global Brands lease. Rent goes up by $4 million, how is that lease restructured? Is there any square footage impact? Just what were the moving pieces there?
Well, just a little background on that. On October 31st of 2018, Differential Brands Group, which recently was renamed as Centric Brands, announced that it had acquired a significant portion of GBG's North American licensing business. In connection with their request for an approval of a sublease to Centric Brands, we had the opportunity to modify the terms of the lease and to increase the rent and achieve other certain improvements in terms. We're somewhat restricted through non-disclosure in terms of what we can talk about. We can talk about the fact that we did increase the rent. On a cash basis, it's a $4 million increase per year. The impact during the quarter on a GAAP basis, was about $330,000.
I just think it's important to note, we're allowed, Jimmy , to tell you what we have to disclose for disclosure purposes. Other than that, color commentary, and things which are not required for disclosure purposes, we are not allowed to discuss.
Okay. I guess, can you say, are they giving back any space? Are they expanding?
No.
No.
It's the same space, it's just a higher rent?
Correct.
Okay. Is there a big TI spend?
No. None.
Okay. All right. Just thinking about some of the changes to the expiration and vacate summary, one of the things that stuck out to me was you now have about 80,000 square feet more in tenant vacates in 2019. Can you just talk I don't want to just focus on that one number, but can you talk about some of the moving pieces and what's in that line item?
Sure, Jimmy , this is Tom. The most significant change there, it relates to one tenant of 60,000 square feet. They are a non-profit entity named LISC. They currently pay a fully escalated rent of $33 per square foot. They occupy two full floors of 501 Seventh Avenue. The spaces are already consolidated.
The floor plates are remarkably efficient, excellent side core, great access, and steps to Penn Station. With an in-place fully escalated rent of $33 a square foot, this is a very meaningful opportunity for us to generate significant positive cash rent spread. That was the one change from last quarter to this quarter. We had previously had them listed as an unknown. They're now vacating. We look at this as a great money-making opportunity for us.
Okay. Is that space already redeveloped or no?
Yeah. We have it classified as redeveloped because it's already been consolidated and debated, the base building costs to go around will be significantly less than it had if it were a first-generation space. We're already marketing the space, again, I feel really good about having that space back.
Okay. What would you say the retention rate is for redeveloped spaces, what the leasing spreads look like for just the redeveloped spaces on renewal?
Well, we haven't really presented anything on retention rate for redeveloped space. Still, there's a lot of movement within our portfolio. We're not a stabilized portfolio. You see we're relocating tenants. We've had a lot of growth from tenants that have initially come in on pre-built, redeveloped space and then grown with us, such as you've seen this quarter with, say, tenants like Uber expanding with us. On leasing spreads, as I've commented previously, we're going to experience excellent leasing spreads given that the prior fully escalated rents on vacant redeveloped space is only $52 a square foot. The average in-place escalated rents on all of our office space, as shown on page 11 of the supplemental, is just under $56 a square foot, that's a significant discount to current market.
Of course, in the investor presentation, we show our anticipated leasing spreads on future Manhattan office lease expirations at anywhere from 14%-22%. That gives you a pretty good expectation on future spreads.
Is the 14%-22%, is that on redeveloped space, or that's on-
That's on-
Pre-redeveloped or undeveloped?
That's on all of our future Manhattan office lease expirations over the next five years.
I guess what I'm trying to figure out is what's kind of a same-store rent growth number. I know you mentioned there's select spaces where you've been able to push rents. Maybe if you could just provide a little color on that, like what do you think kind of same-store rent growth looks like in the portfolio on a net effective basis?
Well, again, I haven't broken it out separately like that. I think you're trying to get into the difference between developed and undeveloped space, and so much of our leasing activity has been on first-generation redeveloped space. Again, on future spreads on re-leasing of spaces that are rolling over the next 5 years, again, the best thing I can point to you is the 14%-22% mark-to-market based upon today's current market rents.
I think another way, Jimmy and Tony, here in which to look at it is that we had, 12 months ago, $97 million of embedded de-risk growth from our internal drivers. Today, we look at that and say we've got $112 million of that same growth. A chunk of that represents taking the number out a year, so we're still projecting out the same distance. We're incorporating a new year. A big chunk of that is increase in rent, both from rents that have been received and the fact that we adjust our rent so that every time we report to you the potential upside, we report to you at the current market rents. I wouldn't say that we increased rents in an isolated fashion over 2018. We had some pretty across-the-board, meaningful rental rate increases in 2018.
You're saying that's on kind of an apples-to-apples basis without any development spend, or no, are you just saying across the board?
Across the board.
Okay. All right. Tony, final question for you, just going back to the flexible lease co-working story. I mean, we've seen SoftBank's capital flows into WeWork. Looks like they've slowed, CBRE's come out with a ton of platform. Now that we're a couple of years into this or several years into this, what do you think the landscape looks like from here, given it does seem like there's some changes, especially on the capital flows front?
I think that, look, these businesses exist on a third-party basis because they consume and are provided with equity. When they stop getting equity, they have to stop spending as much. When you look at companies like Hana or Convene or others who are looking to move into the, well, we'll do things as a consultant to the landlord. We'll do things as a service provider as opposed to entering into the commitment and spread business by taking down space. That's another way to whack at it. Look, I would not be surprised to see other major players other than just CBRE begin to offer this up. I think it's the bright, shiny penny. The fact is, if I thought it were a good business with which we should engage, we'd lease to them. I don't.
I think it's disruptive on the one hand, and on the other hand, I think that their models are weak. Their business models are weak. We're watching it. Again, we see no need. We've had no need. We've demonstrated terrific results without going into this category of tenant in our portfolio. I read the summaries of the consultants' reports on what they think about the future for shared office space and enterprise leasing models are. I think that it's unusual to go to some of these firms' economists for true economic advice. Anybody can put together a straight-line graph. I think under some of the statistics which have been batted about, even on the calls which you guys have hosted on this matter. That seven years from now, 135% of all office space will be handled by co-working and other enterprise office providers.
I just don't think that's going to happen. I think it's seen its bright spot, and I think that it's dimming. Not going away, but I don't see the big expansion. Either way, we don't have to expose ourselves and our stakeholders to it.
Okay. All right. Thank you.
Our next question comes from the line of John Guinee with Stifel. Please proceed with your question.
Oh, great. Thank you. David, looks to me like, just looking over the last four quarters, your cash marketable securities restricted cash is going down about $50 million a quarter or $200 million a year, which is 2.5%, 3% total enterprise value. When does that stop? When are you done with your Observatory spending, your base building spending, your re-leasing spending, so that that number turns positive?
Yeah. John, as you know, we don't provide guidance. What we try to do is provide you with enough of the pieces that you can put a model that could reasonably project when we'll get there. Having said that, as you know, we have spent a fair amount on the redevelopment program as well as on the Observatory capital project. When you look at just in this past quarter, the cash movement, we had cash from operations of about $92 million, CapEx of about $73 million, less than a million dollars of principal repayment, and then dividends of about $30 million, which resulted in the $13 million reduction in cash balances. As we said, we will be nearing the end of the Observatory capital program at the end of this year. We've given you some pretty good visibility on the CapEx spend for the redevelopment.
Without giving guidance, I think you can take a look at the next 12 to 18 months and start seeing, certainly on an operating basis, an inflection point.
We provided all that detail, we can walk you, anyone who wishes, through where the detail is located, if that would be helpful on a follow-up call.
Let me just ask it another way, Tony. The 605 that you discussed as of 4Q 2018, year-end 4Q 2018, what's that look like in 4Q 2019, all other things being equal?
Tony doesn't want to answer, I'm going to answer it. I think, again, it's dependent upon a number of assumptions. What do we decide to do with the exchangeable? As I mentioned, one of the alternatives is to use cash to pay that down. We may or we may not. It's going to be a function of performance on the Observatory. It's going to be a function of our pacing of redevelopment. Although we've given you, within the investor deck, our best guess as to the amount of space we will redevelop over this period. Things do change as we're either able to accelerate because we're able to get space back earlier, or it may slow down because we don't get the same consolidation opportunities that we expected at the beginning of the year. There are a number of variables that are going to play into this.
I really can't sit here today and tell you what the cash balance is going to look like at the end of this year.
Okay. The second question. The vast majority of the lease term fee was associated with broadcast tenants, which I think you said was about a $4 million annual run rate decrease going forward as you took the lease term fee in the fourth quarter. Can that space be leased again? Is there any demand for that space?
Well, yeah. First, I want to clarify. When you say it's a run rate on that one, on the termination, not exactly correct. Remember, our objective and our philosophical approach to lease termination is to avoid downtime when possible. We want to secure a rent bump where possible and rent to quality tenants. What we've actually done is achieve that. If you look throughout the year at a number of the lease terminations. For example, the Uber lease was a result of an early termination of another tenant. We were able to reduce the downtime or eliminate the downtime.
In a number of these cases, particularly as it relates to the office space and the office terminations, there is an opportunity to release that space, and in many cases, that space, and when you look at the greater New York metropolitan area portfolio, a number of those deals were done with tenants in hand. When we're focusing on the broadcast piece, which is a little bit of a different animal, I'm going to turn to Tom and give his perspectives on that.
Yeah, John. I think I've commented on this before
The most significant space that we recaptured from broadcast tenants, fortunately, is at the top of the stack at Empire State Building. We are in the process of consolidating and demolishing and white boxing a full floor of about 23,000 sq ft. We have an asking rent north of $80 a sq ft. It's the highest office full floor in the building, so I'm excited about having that space back. Then we also recaptured space from broadcasters on the 79th floor that later this year will be constructing some pre-built units of about 10,000 sq ft. That, I think, responds to your question about the opportunity to convert broadcast space for office.
Okay. We didn't understand that fully. Thank you. The last question is going back to the Global Brands Group lease, a $4 million increase, cash NOI, no TI spend, no space give back. 2 questions if you're able to answer it. Did the lease term shorten? And what's the GAAP NOI change?
Lease terms did not shorten.
Yeah, lease terms did not shorten, the GAAP change is going to be just over $0.01 a share.
Got you. Thank you.
Our next question comes from the line of Jason Green with Evercore. Please proceed with your question.
Good morning. I was wondering if you could talk a little more about the specific expense increases at the Observatory and whether or not these are one-time increases in nature or if it's going to increase the run rate expense moving forward.
Yeah. Right now, we anticipate that the run rate on expenses to approximate what we experienced in the fourth quarter of 2018, which represents an increase over the 2017 expenses due to a number of factors, which were: One, we have higher HVAC costs due to new technology that has to be maintained at a constant temperature and humidity level. Two, we have higher IT expenses, mostly maintenance and consulting, which is associated with the new ticket kiosks and entrance hardware and software. Two, we have higher marketing expenses. This anticipation is based upon early experience with this technology, and as new systems and technology are stabilized, we'll have a better sense of the run rate as the year progresses.
Okay. Then just curious on share buybacks. I appreciate the color on the balance sheet, but given the stock earlier this year was trading at a five-year low and you have a $500 million in authorization currently, I guess, broadly speaking, what has to happen for you guys to feel comfortable to start buying back shares?
That's an interesting question. What needs to happen to make us feel comfortable? Well, we'll be comfortable doing anything which we think is in the long-term interest of stakeholders. Our objective is to take a look at all the factors that go into making those decisions and do that in close consultation with our board. We're getting an 8% ROI, along with other CapEx project that we do on our reinvestment, our Manhattan redevelopment program. Our view is we're nine and a half years into an economic cycle. We're getting these internal results. We're increasing our internal growth from our four drivers of growth as we continue to raise rents through the market, both as it exists, but also the position of our properties within the markets. We attract better and better tenants. We're a better and better alternative for better and better tenants.
Fundamentally, we believe there's a value in having significant cash on hand with sizable liquidity and low leverage that we will be able to deploy at an appropriate time. We have all the tools to allocate capital prudently, to create value for shareholders. If I were to sit here and tell you today we're never going to repurchase stock, that would be a rash thing to say. I can tell you right now, our focus is on growing the business. If we had repurchased stock when people started pressuring us to repurchase stock, we would have lost a lot of money right now. I would add one last thing, that historically, when you talk about this and you look at things from a historical perspective, stock repurchases don't do a hell of a lot of good over the long term. It just doesn't.
Maybe a short-term piece. We're not looking to take the company private, we're not looking to reduce our float, we are looking to use our balance sheet to grow the business. In the meantime, we're not suffering because we're getting terrific results from the excellent work by the team on building stakeholder value through our redevelopment and our releasing.
Great. Thanks.
Our next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your question.
Thank you. First question may be for Tom. Looking at your Greater New York portfolio and your leasing run rate over the last few quarters versus what you have expiring this year, looks like you could have an additional 4% vacancy in the portfolio by year-end. Is there anything to suggest this will not be the case?
John, the most significant anticipated vacate is a tenant in Norwalk of 97,000 sq ft that we've commented on in the past, clearly that will have an impact. We've reported on this in the past. The space that they occupy is, again, is 97,000 sq ft. It's old, it's inefficient, and it needs to be completely rebuilt for today's workplace and environment. They've been in there for some 20 years plus. That is the one standout that's going to impact us in the greater New York Metropolitan portfolio. We're already actively marketing that space. That said, I'm very pleased with some of the leasing we did this quarter, most significantly at Metro Center, where we leased space to Zimmer Biomet, which is a great, fantastic tenant. We've seen good traction for our small units at 10 Bank Street.
As you know, as I've commented in the past, we're well into our redevelopment program there. We project to spend about $40 million starting last year through 2020. It's only about $21 a sq ft overall, it's going to give us an opportunity to refresh lobbies, gyms, dining, conference facilities, corridors and the baths, that's going to help boost our leasing activity.
Are there any assets in your suburban portfolio that are on your list to potentially sell rather than pay the sky dollars and ride through near-term vacancy?
Hey, John. John Kessler here. I think the key point is that our goal, we really want to grow the company, not shrink it. We've got plenty of capital and strength on our balance sheet, as we've been discussing. We don't have the need to sell any assets in order to generate capital for our corporate purposes. Don't really see a reason there. In addition, we have three of the properties, as I think everyone knows, are subject to tax protection, and their sale would result in meaningful indemnification payments, which we don't think make sense. Certainly, we have more flexibility in the other two, but we don't have anything to say regarding those at this point.
Okay. At the Observatory, even if you adjust for bad weather days this quarter, the visitors were down year-over-year, and this is despite the new entrance that you put in. I'm wondering, I know cash is more important than visitors, but were you disappointed or concerned that traffic wasn't improved given your investment in the asset?
Well, look, it's a great question, and it highlights some things about which we've been speaking for some time. The U.S. brand for cross-ocean and long-term visitors is suffering significantly, along with the brand of the United States. While NYC & Company statistics, which tracks everyone coming into New York City, regardless if New York City is the final destination or not, doesn't really give a true picture. You're seeing fewer long-term stays from high-paying cross-ocean visitors, number 1. Number 2, you can take a look at what's happened with other attractions, which we've cited before. The NFL Experience, the Grand Ole Opry, both in Times Square, closed after less than one year of operations. The Nat Geo exhibit, which was put in there, is doing terribly.
There's another very small attraction, which had a sort of a miniature world of New York City that was featured there, gone out of business. There is this issue of attendance in general. We know from tracking the admit numbers that are shown in the One World Trade entry, which we go down and count them every month. They're not available for November and December because they use the screen for a holiday-themed display. They're down 40% by our calculations in January 2018 over January. Excuse me, January 2019 over January 2018. When we look at, we have other market information on other attractions. We are outperforming the market significantly. Our per caps, absolutely, on an actual and on a rate of change, are tremendously outperforming what's going on in the market in general. The market, in general, is driving traffic through greater discounting.
China, the inbound visitors from China who visit by bus tours have been focused on One World Trade, because what One World Trade does is they sell at a very big discount to these tour operators, a ticket that has a higher face price on it even than what their ordinary charge is. Those tour operators actually then turn around and sell on the bus to their visitors a higher priced ticket, and they pocket the difference. Those are not our targets.
What we are after and what we're growing very well is the FIT, the independent traveler, who is buying the package or the ticket to visit with us actually in China. We pretty much offset our loss of bus traffic by direct in-China purchases coming to the Empire State Building. We've changed an awful lot. We absolutely would have to say it's
Is it that we're doing this investment for defensive purposes? Well, every piece of good defense is offense. All offense takes pressure off the defense. We've demonstrated we can deliver per cap price increases and ticket mix improvements. We feel really good about what we're doing, and we're really looking forward to having the growth out there from the full exhibit.
That's interesting. Thank you. Tony, while I have you, what are your views on the Chrysler Building? Could this be an asset that's a serious consideration for your company?
Yeah. Hey, John, it's John here again. We've looked at the Chrysler Building, and we're under a strict NDA, so we can't make any other comment beyond that.
Okay. Thank you.
Our next question comes from the line of Daniel Ismail with Green Street Advisors. Please proceed with your question.
Great. Thanks, guys. Good morning. Just a quick one on the retail portfolio. Can you discuss the activity on leasing up the rest of the vacancy, particularly in light of repositioning the Observatory entrance?
Sure. This is Tom. We only have two significant vacancies in Manhattan, which both are unique. You mentioned the one in Empire State Building and the other's at One Grand Central Place. We do have activity on that space at One Grand Central Place. In Empire State Building, we're still early in the process, and we continue to have discussions with a variety of tenants. As I've said in the past, this is an incredibly unique offering. There's incredible foot traffic at this location. The space has great frontage on 34th Street. We opened our new 34th Street observatory entrance, which brings additional shoppers past these stores. I would simply say that we're working on some very interesting concepts and look forward to reporting.
Okay. Just another quick one. On construction costs, I think most of your peers have seen construction costs rise the last few years in the low single digits. I'm wondering if you guys have seen something similar and your expectations for 2019 construction cost increases.
We're expecting the same thing that our peers are. I think if you follow any of the major indexes out there, you'll see that construction costs in New York are generally in the low to mid single digits, say, in the 4%-5% range per year, and have been over the last couple of years. We're impacted equally like all others. That said, we pay very close attention to our lease economics. As we reported, we are achieving an 8% cash on cash return on invested capital when we redevelop and re-lease our space, and that is in light of those changes in construction costs.
Okay, great. Thank you.
Thank you. Due to time constraints, our final question will come from the line of Manny Korchman with Citi. Please proceed with your question.
Hey, it's Michael Silverman here with Manny. Tony, question for you. Back in summer of 2016, QIA bought 10% of the company at $21. They invested $620 million. Part of that was clearly for external growth, which hasn't materialized given pure conservatism on the marketplace. Can you talk about that relationship today, given the stock's 30% below that value? I got to assume that other investments that QIA has made in hard assets and hard real estate probably is locked down 30%. You can talk a little bit about the relationship and how it's going to go forward?
First of all, we're in regular touch with QIA, so I think the relationship is very good. The fact of the matter is, I'm not going to comment on their overall portfolio. We see and speak with them on a regular basis. They're a shareholder. They have additional rights for a period of time should we do anything which requires a JV. They have top-up rights, which they have filed as necessary when they do a top-up. Other than that, I don't know what you're looking for. There's not a lot of drama there. We're in regular touch, and I think things are good.
I'm just thinking about when you went through the whole share buyback, about just taking out selling pressure from others. You issued the equity at $21. Is there an opportunity to buy back QIA's stake at a price meaningfully below where the value of the real estate is? If that's not part on the table, is there something else that can be done to leverage that capital? I got to assume status quo is not ideal in this situation.
Well, I don't understand what you mean by not ideal. As I said, they bought shares. They are under no restrictions. They can sell shares whenever they like. They haven't sold shares, they bought shares, and we're in regular touch with them, and they know what we've been saying over the same period of time that everybody else does. You're suggesting we should go to them and offer to buy back their stake with their own money? I'd give the same answer I'd give to anything else. We want to grow the company, not shrink it. We want to use that balance sheet. We consider it super valuable. For the purposes of expanding the business. We are showing terrific internal growth with great top-line growth.
We feel really good about our execution, and we feel really good, as David said, that people can look and see where we're going to be no longer consuming cash but producing cash. Hey, I'm all for a higher dividend as and when it's justified.
Is there anything on the external growth front that's closer to putting capital out?
Absolutely. Closer than what? There's stuff we've been working on for a long period of time. Market's the market, and we've been focusing for quite some time on off-market activities.
Do you have like contracts out or, I mean, how close is close?
Well, let's see if I can answer that with any more detail.
David, you sit as far away on the table, I'm about to kick you.
David's actually, you can't see, he's sitting on my shoulder, threatening me with a mace. No, there's no further detail we're going to give on this. Let's be really clear. We feel pressure only to perform. 2018 was a terrific year of achievement for the company with great leasing, great spreads. We got another year ahead of us. We like very much the activity, as Tom Durels also said, that we're seeing on the leasing front. This thing is built for the long term. We focus on tenant credit. We take advantage of opportunities to improve the bottom line when we can. As far as external growth, no one would like it more than I would. I don't think anybody is more frustrated than I am, we're playing the long game here.
Well, you can be buying stock. I guess that's the other option. Management purchases, if you believe it's so cheap rather than the company buying it.
Terrific. Actually, I think right now I can't buy stock, can I, Tom? I'm in blackout period, aren't I? Yeah. I can't buy stock. No.
Well, when you come out, you can, I guess.
No, I appreciate the thought here. At the same time, but we've given the answer.
All right. Thank you.
Anyhow, we thank you all very much for your time and questions. We look forward to meet with you all in the months ahead, many of you in just a few days at the Citi CEO REIT conference, where I talk to you more about the outstanding work we have done and will do. Finally, I understand we will see a few investors and analysts at this year's Empire State Building run-up. Don't forget, as an added inducement, David and John will be in the bar to buy you drinks when you're done. We look forward to seeing you out there. Other than that, all the best. We're just going to stay here and keep working.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.