Greetings. Welcome to Empire State Realty Trust second quarter 2018 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. Thomas Keltner, general counsel at Empire State Realty Trust. Please proceed.
Good morning. Thank you for joining us today for Empire State Realty Trust second 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 relating 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 related 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 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 second quarter 2018 earnings conference call. At Empire State Realty Trust, our fully modernized portfolio is centrally located near mass transit. Our market position offers tenants a value price point between trophy class A and class B properties, which provides us with both upside opportunity and downside protection. We have a de-risked, embedded growth strategy and generate market-leading leasing spreads from redevelopment of our office space. We have the lowest levered balance sheet among office REITs, a significant cash position, and no outstanding borrowings against our line. We are an industry leader in sustainability and energy efficiency. Today, Tom Durels will speak about the second quarter's approximately 143,000 sq ft of leases, market demand for our properties, and our market-leading leasing spreads.
Our leasing results include LinkedIn's approximate 30,000 sq ft expansion at the Empire State Building, their sixth expansion since they joined us as a tenant in 2011. David Karp will address our financial performance and our balance sheet. After that, our team is here to answer your questions. I'll now turn the call over to Tom Durels. Tom.
Thanks, John, and good morning, everyone. Our second quarter numbers reflect further progress on our four drivers of top-line de-risked embedded growth over the next five to six years. The breakdown of our four revenue growth drivers, which as of June 30, 2018, we estimate to be $100 million, can be found on page nine of our investor presentation available in the Investor section of our website. For reference, this compares to $377 million in trailing 12 months Cash NOI and $536 million in trailing 12-month cash rental revenue and tenant reimbursements as of June 30, 2018. Just as a reminder, the $100 million is revenue growth and not all of this will flow through to NOI. In the second quarter, we signed 37 new and renewal leases totaling approximately 143,000 sq ft.
This included approximately 111,000 sq ft in our Manhattan office properties, 31,000 sq ft in our Greater New York Metropolitan office properties, and 1,000 sq ft of retail. Significant new office leases signed during the quarter include a 30,200 sq ft full floor expansion lease with LinkedIn at the Empire State Building. We have updated the disclosure on potential vacates and renewals for leases that expire by year-end 2019, which 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 tenants. As a reminder, the resulting occupancy can vary quarter by quarter.
There is a timing delay between the move-out of existing tenants and the commencement of the replacement new leases, and a further delay between legal commencement and GAAP revenue recognition. These timing lags impact our reported revenue. During the second quarter, rental rates on new and renewal leases across our entire portfolio were 17.9% higher on a cash basis compared to prior escalated rents. At our Manhattan office properties, we signed new leases at a positive rent spread of 26.5%. Of course, leasing spreads always depend on the expiring fully escalated rents, 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. Heading into the third quarter, we have a very healthy pipeline of leases and negotiation across the portfolio for both full floors and pre-builds.
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. I will turn the call over to David Karp . David?
Thanks, Tom. Good morning, everyone. For the second quarter, we reported Core FFO of $71 million, or $0.24 per diluted share. Cash NOI was $96.6 million, essentially flat with the prior year period. Starting this quarter, we reported interest income as a separate line item on our income statement on page 18 of our supplemental. Include short-term investments as a separate line item on our balance sheet on page 17. Turning to our observatory operations, which are highlighted on page 16 of our supplemental, revenue for the second quarter of 2018 increased to $35.2 million or 3.6% from the prior year period. NOI was $27.5 million, up 2.7% from the second quarter of 2017, despite the lower visitor count this year. A combination of previously announced price increases, implementation of Dynamic Pricing, and a better mix of ticket types drove the year-over-year improvement in NOI.
The observatory hosted approximately 1.08 million visitors in the second quarter of 2018, a decrease of 4.3% compared to the second quarter of 2017. This year, the Easter holiday was split between the first and second quarters, whereas in the prior year, the Easter holiday fell entirely within the second quarter. We estimate that this shift in the Easter holiday resulted in approximately 49,000 fewer visitors in the second quarter of 2018 as compared to the second quarter of 2017. For the second quarter, we estimate that fewer bad weather days resulted in approximately 19,000 more visitors than in the prior year period. For the six months ended June 30, 2018, observatory revenue was $56.5 million, a 2.8% increase compared to the prior year period. Net operating income for the first six months of 2018 was $41.4 million, up 2.4% 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. Excluding first quarter revenue from the 102nd-floor observation deck, which was $1.9 million in 2017, observatory revenue would have increased 6.4% for the six months ended June 30, 2018, as compared with the same period in 2017. The observatory hosted approximately 1.74 million visitors in the first half of 2018, down 1.4% compared to 1.76 million in the prior year period. Moving to our balance sheet, our low leverage, joint venture free, and flexible balance sheet, including significant cash on hand, remains a differentiating and competitive advantage for us in any market environment.
As of June 30, 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 8.6 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 June 30, 2018, the company's consolidated net debt to total market capitalization was 19.7% and consolidated net debt to EBITDA was 3.6 times. We have cash equivalents, and short-term investments of $652 million. With that, I would like to open the call for your questions. Operator?
Thank you, sir. At this time, we will 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. Our first question today comes from Craig Mailman of KeyBanc. Please go ahead.
Hey, good morning, guys. Tom, maybe to start with you, just curious, you guys have been really successful since the IPO in kind of moving rent levels up at your redeveloped buildings. I'm just curious, if the overall markets you guys are in or sub-markets you're in become a little bit tougher from a market rent growth perspective, just curious how you guys view your ability to continue to push your price point higher given the money you've put in, and how you think maybe your assets stack up to kind of what the average that's in some of the market statistics.
Sure, Craig. We have seen some modest rent growth year-to-date and year-over-year. I think that as far as being able to drive rents, I'd say that the office market feels healthy. Our offerings and certainly our sub-markets are healthy. As we continue to see employment growth numbers continue to be positive and given the steady activity we see for our product, our locations, and price point, I think going forward, we can expect to see some modest rent growth. As we've always said, we provide a unique offering between Class A properties and traditional Class B. We offer a great value in modernized properties and great locations. As long as we continue to see good employment numbers, I think we'll be able to continue to see modest rent growth for offerings.
That's helpful. Could you guys just talk to, I think 2019 vacates were up about 100,000 sq ft. It looks like maybe that was mostly in the greater New York portfolio. Could you just talk to whether that's due to kind of visibility of a tenant move-out that you guys have found out about, or is that just updated thoughts given what's expiring?
Craig, it's due to the expected non-renewal of a 96,000 sq ft tenant. I'd comment that the space that that tenant occupies is old. They've been in there for more than 25 years. It's inefficient and needs to be rebuilt for today's workplace environment.
Okay. That's helpful. Just on the observatory, I mean, you guys had a good rebound in ticket price kind of mix and where it came in. Just curious on your thoughts as you guys kind of open the new entrance to the observatory and continue to fund the $150 million, what you guys view as your ability or appetite to kind of push through additional ticket price increases that could offset some volatility in visitors.
Hey there, Craig. Tony Malkin here. We very much look forward to the opening, which is just a few weeks away. We absolutely believe that this is offense for us, which is exciting. We look forward to that. The fact is, while we don't speculate on results when we get the report, we have been able to put together some per cap price increases and ticket mix improvements, and we think the new observatory presentation will help us do more in both areas, and in providing a reason to go to the Empire State Building even when the views are weather impacted. By the way, don't forget, it's not going just to drive the bottom line behind the observatory.
These changes are going to increase the desirability of our 34th Street retail opportunities, and the reduction of tourist volume in our Fifth Avenue lobby is going to help improve the environment for office tenants and their visitors. That helps us raise rents to make ESB, as we make ESB even more desirable to tenants. We absolutely think that this is a plus for us, and we're very excited to get this out.
Great. Thanks, guys.
The next question is from Jamie Feldman of Bank of America Merrill Lynch. Please go ahead.
Great. Thanks. Just following up on the 96,000 square foot move-out in the suburbs next year. Can you talk maybe about average rent or just what the earnings implications might be from that move? I assume it's a pretty low rent compared to the portfolio average.
As compared to the entire portfolio average, that 96,000 sq ft space is occupied by a tenant that is at rents that are roughly half our average rents that we're seeing in New York City. I think that's a good relevant question in the sense that it's equivalent to a tenant half that size in New York as it impacts our overall rent roll. As far as Yeah, go ahead.
No, I'm sorry. Go ahead.
Yeah, I'm good. Thanks.
Do you expect to take that property out of service for a full rehab, or is it just certain spaces?
As I mentioned before, that space has been occupied by a tenant for more than 25 years. It's old. It needs to be completely redeveloped. Yes, we will take it offline and redevelop it, and then re-lease it.
Is it the full building, though?
No.
Okay. Sticking with the schedule, it looks like maybe some of your, I might be wrong here, but I think some of your tenant vacates got pushed back to the third quarter. There's just some moving pieces from your 2Q actual versus your 2Q projected last quarter, and then even the third quarter now versus the third quarter in the last supplemental. Can you just talk us through the moving pieces of both tenant vacates and intentional vacates?
Jamie, as it relates to the tenant vacates, most of this increase in the third quarter is due to the rollover of some month-to-month leases and some short-term extensions. You'll see a new line was added on page nine of the supplemental for short-term renewals and holdover tenants. We've also added a footnote with regard to month-to-month tenants. That accounts for the bulk of that change.
Okay. As you think about your, you guys always give the statistics on how much space you have that's developed, ready to lease. Can you just talk about the leasing pipeline for that space? Are you seeing, and how maybe it's changed over the last year or so, are you seeing more larger tenants, smaller tenants? Just to kind of frame what might be ahead the next 12 months or so.
Jamie, I feel good about our portfolio and our pipelines of deals under discussion. As I mentioned in my opening remarks, we have a solid pipeline of activity for our Manhattan office space for both full floors and pre-built suites. We have a variety of offerings, and we have solid activity and a solid pipeline currently. We continue to see demand for our product, our locations, and our price points, and it ranges in both our pre-builts and our full floors of a variety of sizes.
Okay. I guess just final question from me on the Observatory. I mean, given all the kind of global noise out there, can you give us some color on the types of visitors you're seeing? Are you seeing more domestic? Are you seeing more international? Any trends on just kind of visitors to New York and visitors to the Observatory specifically?
Well, I will tell you that, Tony here, Jamie. I will tell you that from our perspective, when we look at the impact on the strong international market connection that we have, Bill, I think we see two things occurring. One is that there is no question that the U.S. image and how we're viewed internationally is less positive than it was. At the same time, NYC & Company is reporting increased cross-border traveling to the United States. Look, while we historically have seen no relationship between foreign currency movements and Observatory revenue, in today's world, we are seeing a slight decrease in all attractions across New York City of cross-border visitors. Our sales efforts under our new sales leader have begun to take effect, however. I think our goal is to get more of the cross-border visitors, particularly long haul, than we have historically.
They pay the higher prices. We think we're already beginning to see the benefits of those efforts in our ticket mix and our ticket pricing. Beyond that, candidly, we have a strategy where the Empire State Building Observatory is going to succeed regardless of overall trends. At the moment, I would say that we still have the majority of our visitors are from overseas. We see that continuing going forward.
Okay. All right. Thank you.
The next question is from Robert Simone of Evercore ISI. Please go ahead.
Hey, guys. Thanks. Just a quick question, a follow-up to Jamie's question earlier. The 96,000 square foot move-out, that's going to occur in 4Q next year, correct? Which means obviously the earnings impact flows in primarily to 2020, is that correct?
That's correct. That lease expires in November of 2019.
Got it. You said it's roughly half the New York City average on the rent side?
That's correct.
Okay. Just two quick follow-ups, if there's time. It looks like the unknown bucket on your leasing was down by about 126,000 square feet, and the vacates bucket between intentional and stated was up by about 105. Call it like a net 20,000 square feet that's out there. Is it safe to assume that that was space that was leased in this quarter or pulled forward, or is that kind of moving around elsewhere in that break? I'm just trying to understand how that moves.
Well, I'm not sure which periods you're comparing.
Just 2019. I'm sorry.
Again, the big change there was moving the 96,000 square foot tenant in our Greater New York Metropolitan Office portfolio from an unknown to a tenant vacate. The others are just updated forecast as we currently see it. I think the big change was that one tenant change in Connecticut.
Yeah, I get that. If I compare the 2019 number this quarter to what you guys reported in 2019, before 2019 last quarter. It seems like about 20,000 or so square feet, if I just look at those vacate buckets plus the unknown. It looks like there was a reduction by about 20,000 square feet. Does that mean that was already leased, or as a portion of the 140,000 square feet of what leasing you did this quarter? Am I thinking about that the wrong way? That's really the question.
If you're referring to the total portfolio and a change of about 20,000 sq ft, it could be comprised of a number of small changes. I can't point to one single thing. Again, this 2019 period is simply our updated forecast.
Okay. Understood. Then just lastly from me, David, on the short-term investments. I guess, A, it looks like your interest income as you restated it or broke it out, excuse me, started to tick up in Q1. A, what did you guys invest in to the extent that you talked about it? B, did that kind of start in Q1? C, what was the intention there? Was it kind of like just an opportunity to enhance yield as you re-lease the portfolio? Just trying to understand that a little bit more.
Yeah, Rob. We placed $400 million in a series of time deposits with laddered tenors to nine months, we did this with some leading national and regional banks. We did this in mid-June, we believe this is a prudent way to retain access to our cash balances while taking advantage of rising rates. You'll see that it had an impact in Q2 a little bit. It will have a larger impact as we go into Q3.
Great. Thanks. Appreciate it, guys.
The next question is from John Guinee of Stifel. Please go ahead.
Great. John Guinee here. Thanks. A couple questions. First, David, looks like your cash plus restricted cash plus notes is around $700 million now. It was $750 in the end of the first quarter. You look at your spend for base building renovations, both the CBD and in the suburbs, your re-leasing costs and the Observatory costs. When do you turn cash flow positive and in what quarter, and what do you expect your total cash balance to be when you turn cash flow positive, assuming no acquisitions or dispositions?
Yeah. Just, John, in summary, the change in the cash balance quarter-over-quarter, the biggest was the move of that $400 million into short-term investments. Of the remaining difference, the decline was principally due to the CapEx and the leasing costs, which were about $55 million. Quarterly dividends, which was $32 million. This was all offset by operating cash flow, which was positive of $41 million. As we look forward, while we don't provide guidance, we feel that we're no longer a net user of cash into 2019. I can't give you a specific quarter.
What do you think your right now you have $650 of cash plus short-term investments and $50 of restricted cash. What do you think your balance is at that time?
Again, if you go back, the reason we put that cash on the balance sheet was specifically for a purpose, that was position ourselves well for investment opportunity. Our goal is to retain that liquidity and that cash on the balance sheet. As we use cash for other items, such as capital expenditures, we will be considering how much of that cash we want to continue to retain for future investment and how much of it we will allocate to funding our capital expenditures. I can't give you a specific answer right now.
Okay. You do a great job, your scheduled initial free rent burn-off, your leases signed not commenced on page six or seven, I guess page six. On page four, you basically have a pretty much of a flat % lease and a flat % occupied. Do you guys have an economic occupancy number you could provide? Because it's awfully difficult to try to go through all of the ins and outs and an economic occupancy number quarter-over-quarter would give people a sense of the upside from here. Do you have that economic occupancy number handy?
We don't have it handy right now. It's something you often see more with some of the apartment REITs and companies like that. We haven't typically seen it with many of the office companies. We can certainly take a look at it. We have looked at it in the past and felt that it was not really necessary appropriate in the context of what we report. Happy to revisit that, and if you have some thoughts on it offline, I'd be happy to talk to you about it.
Okay. The last couple quick questions is Manhattan Office Property expiring leases on page 11. Looks like you average about $54 in 2019 and 2020. Very different than the sub $50 expirations over the last year or two. Do you still think you can get the very healthy mark-to-markets that you've been getting, 26%, I think, this last quarter? The other question, I guess that's for Tom. The other question, is there a strike price on the exchangeable notes due in 2019?
John, this is Tom. First on the rent spreads, they will always depend on the expiring fully escalated rents, as you pointed out. I would highlight the fact that the prior fully escalated rent on our vacant, developed Manhattan office space was $48.39 per square foot. Given that that represents our most significant leasing opportunity and that our asking rents are, for our spaces, range in the high 50s to low 70s per square foot. For the near future, we expect to achieve superior rent spreads.
Okay.
With respect to your question on the exchangeable bond, the exchangeable matures in August of 2019. The current strike price is roughly $19.35, I believe. It's $19 and change.
Okay. Out of the money right now.
Correct.
Okay. Thank you.
The next question comes from Blaine Heck of Wells Fargo. Please go ahead.
Thanks. Good morning. John or Tony, just to touch on or get back to the investment picture, you've got all this cash, some of which will go to redevelopment, but there are a few significant properties on the market and a few that have recently traded. Can you give any color on whether you guys are pursuing anything right now, and whether there are specific opportunities for kind of challenged assets, as Tony has said, still on the table today?
Good morning, Blaine. It's John. Hey, look, we continue to look at and pursue opportunities that are in the market that we think would make a good use of our balance sheet. We continue to be disciplined in terms of our decision-making and deployment of that cash. We do think our balance sheet gives us a lot of flexibility and is a tool that we can use to deploy in the right situation. So far, certainly we're following what's happening in the market, and we're looking hard at certain things, that we believe that continues to be the best opportunity for us is the investment in our portfolio, which you've seen us continue to do. We think we're certainly well positioned should there be an opportunity that's attractive.
I might add to John's comment that we've got very good ideas of things to do. We've done a lot of work. We just haven't been able to bring anything to fruition at this point. We're working hard. We're looking to be sensible. Pricing remains high. While there are pundits who have soured on New York City office, pricing of opportunities would indicate that the writers of articles who are decrying the value of New York City or reducing the value of New York City office, do not see things the way the writers of checks do. We're in a position where we want to stay disciplined.
Okay, that's fair. Tom, a couple quick ones for you. Are there any chunky leases, other chunky leases within the 128,000 sq ft of unknown leases in 2019 that could move that number around as we look forward? Or will any changes likely be smaller in the future?
Really the largest lease that we have expiring in 2019 is in the 30,000 sq ft range. The rest are, we've got a tower floor at One Grand Central Place, 12,000 sq ft. It's a mixed bag. We got a lot of small to mid-size tenants, nothing significantly chunky.
CapEx seemed to be up quite a bit in the quarter, and the lease term on executed leases was down. Was that just a mix issue, or are there maybe any underlying trends there that we should think about?
Well, as I've commented in the past, our reported cost for TI and leasing commissions are going to vary by quarter depending upon the length of term, the space type, including white box, pre-built, first-gen or second-gen space, and the ratio of new and renewal leases. During this quarter, about three quarters of our Manhattan office leasing was for new leases, which typically a higher leasing cost than renewals. We did have a more first-gen pre-built leasing as a percentage of our overall leasing this quarter. As you point out, our first quarter leasing costs in Manhattan actually decreased from the prior quarter. It's going to vary based upon those things I just mentioned.
Okay, thanks guys.
I'm sorry, Blaine, I want to clarify. Actually, our largest tenant that expires next year in Manhattan is a 60,000-square-foot tenant. The next is like it's in the 30s, and the rest are smaller than that.
Is that 60,000 still in the unknown bucket?
Yes.
Thanks.
Our final question will come from John Kim at BMO. Please go ahead.
Thank you. Good morning. On your intentional vacates, can you provide some color on how long it takes to typically aggregate the space and redevelop it and have it ready for leasing?
Typically, our overall downtime can range from 9-24 months. It really depends upon whether we're going to convert that space into a pre-built or full floor. We've been successful leasing some floors in advance of tenants vacating. Given the overall construction duration, marketing time, and lease-up, it can range anywhere from 9-24 months.
When the tenant vacates, is that available for lease immediately, or does that take some time as well?
Well, we begin marketing many of our spaces in advance of tenants' leases expiring. However, truly from a marketing standpoint, it's much better showing, particularly for pre-builts when they're built and ready for show, though we've been successful leasing pre-builts while they're under construction. Similarly, for full floors, we like to get our full floors in a white box condition for a better showing. As I said, we start the market process in advance of existing tenants' lease expirations.
On your inventory of current vacant space, you have 498,000 of redeveloped Manhattan office space. Can you tell us how much of that is available for lease today versus what you're holding on for to aggregate that space?
Out of our total current inventory of vacant space of about 1,177,000 square feet, approximately 498,000 square feet is redeveloped Manhattan office space. All of that is currently available, and we are marketing it. As I said in my opening remarks, we have a good pipeline of activity for both our pre-builts and our full floors. Of our redeveloped Manhattan office space, approximately half is pre-built and half are consolidated full or partial floors. There is a breakdown of our inventory of vacant space on page 17 in the investor presentation that's available on our website.
Okay. Turning to 111 West 33rd Street, I hate to just point at one asset, but it's been under leased for the past several quarters, meaning it's 70% or less leased. I know you signed Nespresso there recently, but is there something about that asset that makes it challenging to get a lease up?
It reflects our program to vacate, consolidate, and redevelop space. We've renovated the lobby. We're almost done with all of the elevator cabs. The building shows fantastic. The floors that we have redeveloped show great. We are currently marketing six full floors that are relatively new inventory, and they range in size, and we have a good pipeline of activity currently. That comes on the heels of some very successful leasing that we have done, including the Nespresso deal that you just mentioned.
Turning to the observatory, I think Tony mentioned that the investments will give you the ability to increase the number of visitors. I wanted to ask about the magnitude of that increase and to clarify, is that additional visitors to the observatory or to the building itself?
Oh, gosh. Well, everything that we talk about reflects an increase in visitors to the observatory. That's absolute job one. Number two, I think people have asked the question, some a little differently, do we think that we're going to be able to change the capacity of the observatory through our work? I think that I'd emphasize, we want to use more of the capacity we have right now, that we're not in this work increasing capacity. We do want to make the time that visitors spend in the observatory more entertaining, more pleasant, more enjoyable, number one. Number two, as I mentioned, provide a reason for people to come even when the weather's not good. That's our job, that's our task, that's what we set out to do. We really like what we see.
As our plans come to fruition, people will be able to see things for the first time in a few weeks themselves.
I may have missed this, do you plan to announce additional details on your investment later this year or at some point in the future?
We plan to open the new observatory entrance within the next few weeks. We are right now burning in the electronics and the technology, which is a period of time that we need to go through to make sure everything works. When you see it and come and visit, you'll see it's revolutionary in the approach. It builds on the iconic relationship that people have with the building in a sense that no new tower can have. The fact of the matter is that what we're doing there is going to be absolutely unique unto itself and everything geared around making it more efficient, more pleasant, more profitable.
Sorry, just one more. Are you going to be able to attract more visitors even on bad weather days as part of this investment?
We certainly hope so. That's the plan.
Looking forward to it. Thank you.
The final question is a follow-up from John Guinee of Stifel. Please go ahead.
Great. You've been talking a lot about this 96,000 square foot lease in Norwalk, I guess it is. Guys, question is, it looks like your in-place rents are in the low 30s in that building. Is this a rent up or roll down despite all the CapEx we're going to have to put in the space?
Well, first, John, this is Tom. We have not identified which building or that space is expiring. It's in our Greater New York Metropolitan office portfolio. I would merely point to page 35 of our investor presentation that shows you the mark-to-market for our Greater New York Metropolitan office portfolio. That 96,000 square foot space is captured within that page 35 of the presentation.
I don't have that open. I'm just looking at page 10. I've got your building in Norwalk has about a $32 rent. Harrison's got about a $29 rent. I'm assuming it's one of those two buildings. It's not a big deal. I mean.
it's a de minimis portion of your NOI. I'm just curious if there's any potential to roll rents up on a deal like that. If you look at your friends at SL Green who have the same sort of mix, it's a hamster wheel type asset.
If you look at 2019 on page 35 of investment presentation, it represents a modest markdown in rent. As far as our CapEx spend, we're doing that throughout the portfolio out there.
Got you. Okay. Thanks a lot.
You bet.
I would now like to turn the call back over to Mr. Malkin for closing remarks.
Thank you very much, and thank you all for attending today's call. I'd like to compliment our team. Our goal has been to get these calls shorter with more direct cites of our enhanced supplemental and investment presentation. I'm delighted to say that our prepared remarks today totaled a whopping 11 minutes. If we drop out general counsel Tom Keltner's broad disclaimers and comments, and mine here, we're down to fewer than nine. In addition to our lease spread metrics, we lead our peers in earnings call efficiency. In all seriousness, I'm very happy with our portfolio's value proposition and team's execution. We're very, very busy on lots of fronts. Doesn't necessarily show up in every quarter, but we are very busy.
The Observatory, we look forward to opening phase 1 of the upgraded experience in the third quarter, and we look forward to hosting an event there for investors late in September. It looks fantastic as we're about to open, and it is only phase 1. We thank you very much for your time and questions. We look forward to reporting third quarter results in just three months. Until then, all the best.
This concludes today's conference. You may now disconnect your lines. Thank you for your participation.