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Empire State Realty Trust, Inc. (NYSE:ESRT)

Q1 2014 Earnings Conference Call

May 7, 2014 8:30 AM ET

Executives

Brad Collins - The ICR Group

Anthony Malkin - Chairman, President and CEO

Thomas Durels - EVP, Chief of Property Operations and Leasing

David Karp - EVP and CFO

Analysts

Jordan Sadler - KeyBanc Capital Markets

Craig Mailman - KeyBanc Capital Markets

Brad Burke - Goldman Sachs

Jamie Feldman - Bank of America Merrill Lynch

John Guinee - Stifel Nicolaus

Operator

Greetings and welcome to the Empire State Realty Trust First Quarter 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Brad Collins with ICR. Thank you. You may begin.

Brad Collins

Good morning. We'd like to thank you for joining us today for Empire State Realty Trust's first quarter 2014 earnings conference call. In addition to the press release distributed last evening, we have posted a quarterly supplemental package with additional detail on the company's results in the Investor Relations section on the company's website at www.empirestaterealtytrust.com.

On today's call management's prepared remarks and answers to your questions may contain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are just matters that are subject to risk and uncertainties, that may cause actual results to differ from those discussed today.

Examples of forward-looking statements include those related to revenue, operating income, financial guidance as well as non-GAAP financial measures such as Funds From Operations, core FFO, same store results and EBITDA. We encourage listeners to review the more detailed discussions related to these forward-looking statements contained in the company's filings with the Securities & Exchange Commission. We also caution that prior period results that are referenced to any comments today may not necessarily be reflective of the results, had Empire State Realty Trust truly been a standalone entity during the period presented.

As a reminder forward-looking statements represent management's current estimates. Empire State Realty Trust assumes no obligation to update any forward-looking statements in the future.

Finally, during today's conference call we will discuss certain non-GAAP financial measures 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.

This morning's conference call is hosted by Empire State Realty Trust's Chairman, President and Chief Executive Officer Anthony Malkin; Chief of Property Operations and Leasing, Tom Durels; and Chief Financial Officer, David Karp. They will make some introductory comments, after which we will open up the call to your questions.

Now, I will turn the call over to Mr. Anthony Malkin. Anthony?

Anthony Malkin

Hello. I am Anthony Malkin, and I am delighted to welcome you to our first quarter 2014 earnings conference call. The run of show for today's call will include; I will give a brief review and overview, update of the company. Tom Durels, our Executive Vice President and Chief of Property Operations and Leasing, will give a brief review of our portfolio; and David Karp, our Chief Financial Officer, will review financial results and discuss our balance sheet.

Empire State Realty Trust is a pure play, New York City metro area real estate portfolio. We like our assets, and believe they are well positioned to generate long term value, creation and cash flow growth. We believe our portfolio continues to offer embedded growth and the unique opportunity to capture upside through our continued renovation and repositioning of our properties, bringing their occupancies to market, and leasing them at market rents.

Our results for the first quarter were fully consistent with our expectations for operations and financial performance. One point to highlight, is that the Empire State Building Observatory delivered record first quarter revenue. In spite of the shift of Easter from the first quarter of 2013 to the second quarter in 2014, higher zero visibility days in prior years and thousands of disrupted visits due to flight cancellations from very severe winter.

We overcame the decline in visitors, through higher admission pricing and a better mix of ticket sales. Our customer research tells us, tourist satisfaction with our attraction has improved, and that our visitors greatly enjoy our upgraded experience and our new handheld multimedia tour, which is included with the purchase of a ticket.

Our balance sheet remains the core strength, with one of the lowest leverage levels in the industry, which provides the capacity and flexibility to finance our capital programs, and support incremental opportunities that may arise.

In that regard, management continues to prepare its recommendation to our board, as to whether or not to purchase our option properties. We will comment further at the appropriate time, as the final decision on the option properties has been made. Under the terms of the options, the final decision, whether or not to make the acquisition, is due no later than July 18th. With closing no later than 105 days after our final decision.

As we move through 2014, we believe we have the portfolio, balance sheet and strategy to continue to drive growth and create meaningful valuation for our shareholders. I am really pleased with the work by our management team, in executing on our strategy, and delivering our decades of experience through many cycles in the ownership, operation, redevelopment and repositioning of office and retail properties in Manhattan and the Greater New York Metropolitan area.

Lastly and importantly, our interests are aligned with our shareholders. My family remains a major stakeholder, with the same objectives of value recognition and capital appreciation and the growth of our current account.

Now I'd like to turn the call over to Tom Durels. Tom?

Thomas Durels

Thank you, Tony. Good morning everyone. On this morning's call, I will review our leasing activity in the first quarter, update you on our transition to in-house management, discuss our progress at the Empire State building and comment briefly on conditions we see within the market.

Let me begin with a review of our first quarter leasing results, in which we signed 50 new and renewal leases, totaling 191,319 square feet of office and retail space. Nearly all of this activity took place within our office portfolio, with approximately 172,000 square feet in our Manhattan office properties.

On March 31, 2014, our portfolio was 87.2% occupied, an increase of 110 basis points from the start of the year. Including signed leases that have not yet commenced, our portfolio is 88.8% leased. Again, an increase of 110 basis points from the end of 2013. On a year-over-year basis, our portfolio occupancy is up 720 basis points, and our lease percentage is up 500 basis points.

We signed a number of significant leases during the first quarter. At the Empire State Building, we signed a 43,000 square foot expansion lease with LinkedIn, bringing their total commitment to nearly 159,000 square feet. LinkedIn has also taken an option on additional 31,000 square foot floor, which it can exercise by August 2014.

At One Grand Central Place, we executed a 70,000 square foot renewal and expansion lease with Johnson Controls, a global technology and industrials leader, and a 13,000 square foot new lease with 3i Debt Management, a leading international private equity investor, that will be relocating from the Seagram's building on Park Avenue. At First Stamford Place in our greater metro New York portfolio, we signed an 11,000 square foot lease with American Express.

We are also seeing strong demand for our pre-built office suites, for which we signed 19 leases for over 58,000 square feet during the quarter. And as previously stated, these pre-builts can be in the future, re-leased with a little additional capital cost over time. At one of our option properties, 112, West 34 Street, we signed a new 131,000 square foot lease with Macy's, the department store chain, with options for significant expansion.

These leases [indiscernible] in industrials, retailing, technology, financial services, and private equity, demonstrate the broad appeal of our properties to all industry types. We continue to see solid rental growth spreads, and during this first quarter, rental rates new and renewal leases across our entire portfolio, were 15.8% higher on a tax basis, compared to prior escalated ranks.

Our Manhattan Office portfolio, rental rates were 22.8% higher for the quarter, and our average cost for tenant improvements and leasing conditions for the first quarter on new end-renewal office leases were $68.11 per square foot.

Overall, these leasing results will produce strong cash flow growth in the coming years, and we believe, speaks to the health of the market, the success of our redevelopment strategy, and the talent of our leasing team.

During the first quarter, we also concluded our transition to in-house property management from third party agents. This transition further centralizes our organization, which we believe will result in greater control and operational and cost efficiencies.

Now let me move on to the Empire State Building, where we are creating the premier urban campus in New York City. A completely unique experience for tenants and their employees. New amenities currently under construction, to be delivered this summer, include a restaurant, with private executive dining and event space. Tenant-only conference center, and a 15,000 square foot tenant-only fitness center.

These new amenities will be combined with four other existing on-site dining options. They distributed antenna system by estimate [ph] to provide cell phone service throughout all floors of the building. Recent platinum certification by WiredNYC, and state-of-the-art infrastructure and building systems, all housed in an architectural masterpiece. We are creating a workplace experience unlike anywhere in New York City.

Currently, we are 83% occupied in Empire and including signed leases that have not yet commenced, our leased percentage is now 84.5%, up 220 basis points from the end of 2013. While the work to consolidate smaller spaces, to create more efficient larger blocks of spaces ongoing. We began the quarter with four available full tower floors. One of these four floors was leased during the quarter to LinkedIn, from my earlier remarks, and we now have other full floor leases in negotiation. As stated previously, we expect that by the end of 2014, we will vacate and demolish four additional full floors to be marketed for future lease-up.

Finally, let me provide some comments on the current state of the New York City office market, as it pertains to our Manhattan portfolio. New York City continues to see steady job creation, in the types of companies, which are leasing in our buildings. Midtown Manhattan remains a desired market for tenants looking for central location and convenient access to mass transportation.

The Broadway Corridor in Times Square South, continues its rapid transformation into a preferred corporate office neighborhood, with new street level restaurants and shops on the way.

Asking rents for office and retail space in Midtown Manhattan are rising, and we believe that our portfolio is well positioned to compete and take advantage of these improving market fundamentals.

In summary, we believe that the office market remains healthy. We are comfortable and confident with our competitive position. Our repositioning plans continue to progress as anticipated, and we remain focused on attracting and leasing to quality tenants, enhancing NOI growth, and creating long term value for our shareholders.

Now I'd like to turn the call over to David Karp, our Chief Financial Officer. David?

David Karp

Thanks Tom and good morning everyone. I will begin with a review of our first quarter results, followed by an update on our balance sheet, and after that, we will be happy to take your questions. Last night, we reported FFO of $41.3 million or $0.17 per diluted share for the first quarter 2014. Our results in the first quarter were consistent with our expectations, as we continued to execute on our stated operating and capital strategy.

Included in our results is the performance of the Empire State Building Observatory. We are pleased to report, that Observatory revenue for the first quarter grew 3.6% to $17.3 million, compared to the first quarter of 2013. This was due to higher admission pricing, and a more profitable mix of ticket sales, that we implemented during 2013.

The Observatory hosted approximately 64,000 visitors in the first quarter 2014, representing a 6.3% decrease from the same period in 2013. We believe the decrease in attendance at the Observatory was due to two factors; number one, the first quarter of 2014 had a greater number of days, impacted by severe weather, than we experienced in the first quarter last year. And two, this year, we have experienced a normal decrease in visitors to the Observatory during the last week of March, due to the fact that Easter this year, fell during the month of April.

Observatory expenses increased $1.5 million as anticipated in the first quarter of 2014, compared with the first quarter of 2013, led by three primary factors. Costs related to our new Audio Tour package; payroll costs resulting from union contract salary increases, and higher levels of staffing, in connection with our Ambassador Program and General Security, and advertising expenses.

As a result of these anticipated increases, Observatory net operating income was $10.3 million in the first quarter 2014, compared to $11.2 million last year. As we move into our seasonally strongest quarters for Observatory activity, we expect the performance of our revenue drivers, which consists of the number of visitors, pricing levels and ticket mix to support sustained or improved income and margins.

Next, I will turn to our balance sheet; as we have communicated, our balance sheet is low levered, with significant capacity, as we continue our capital investment program. At March 31, 2014, we had app $1.2 billion of total consolidated debt outstanding, with weighted average interest rate of 4.55%. Approximately $830.9 million of this outstanding debt is fixed rate, with a weighted average interest rate of 5.78%, and a weighted average term to maturity of 2.4 years. The remaining $372.7 million of debt is variable rate, with a weighted average interest rate of 1.81% and a weighted average term to maturity of four years.

At the end of the first quarter, our leverage, reflected by debt-to-market capitalization, was 24%, and we continue to maintain one of the lowest leverage balance sheets in our industry.

At March 31, 2014, the outstanding balance on the company's term loan and evolving credit facility was $325 million. Our credit facility has a total capacity, including the accordion feature of $1.25 billion.

In 2014, we have $196.5 million of debt maturing, which carries a weighted average interest rate of 5.48%. Given our stated intent to achieve an investment grade rating, we continue to explore alternatives to address our debt maturities, to maintain maximum flexibility and capacity within our balance sheet. In 2015, we had $90 million of debt maturing.

Finally, on February 21, 2014, our Board of Directors approved the quarterly dividend of $0.085 per share. This dividend was paid on March 31 to shareholders of record on March 14.

With that, I would like to open the call for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question today is coming from Craig Mailman of KeyBanc Capital Markets. Please proceed with your question.

Jordan Sadler - KeyBanc Capital Markets

Good morning guys. Jordan Sadler on the line as well. Maybe, can we just get an update on attendance so far in April, at the Observatory? Has kind of the later Easter season been a boost, and also, have you guys been able to hold ticket prices more to a level that you guys had in 1Q?

Anthony Malkin

So let's be clear, Tony Malkin here, Craig. We are not reporting interim numbers on the Observatory. So I think I'd just tell you, we are perfectly happy with how things are going at the Observatory. And on the ticket pricing, we made a ticket price increase, and that increase is -- its done, it wasn't temporary [ph]. We don't do variable pricing. So we have been holding the ticket price increase this time, and our recent gradings, as I said in my comments, are very positive about the experience, in spite of the ticket price increase improve significantly over prior year's surveys.

Jordan Sadler - KeyBanc Capital Markets

Has there been any pushback on the ticket price increases, or is really the snow or weather and Easter really the driver behind the roll-down in attendance last quarter?

Anthony Malkin

There has been, in our view, zero pushback on ticket price increase, zero. I mean, we had to be clear, when you compare Easter weekend last year with the corresponding weekend this year, we saw a meaningful drop of attendants for that week and we look at that as the weekend before Easter, the week during and the weekend of Easter, which is typically where vacations fall for families taking trips.

The higher number of zero visibility days and historically experienced, that did impact the Observatory. And there were also a very historically high number of cancelled flights leaving [ph] from New York City, due to the severe weather, which also played a role.

So our statistics, we feel are entirely impacted by the factors that we stated, not having to do with the ticket price.

Craig Mailman - KeyBanc Capital Markets

Okay. That's helpful. And then Tom, I know you are talking about some full floor negotiations here at the Empire State Building. Just could you give us, may be some numbers around what kind of the pipeline looks like at this point for the Empire State Building, in terms of leasing?

Thomas Durels

Sure Craig. First I would say, that we are seeing activity across all industry types, and for -- at Empire State Building, specifically, everything from our pre-builds to our full floors. While we are not providing guidance on our future activity, I would say that, I like the activity we are seeing. I like the -- we are seeing good traffic and pleased with the results that we achieved in the first quarter, and I am pleased with the fact that we got some leases in negotiation across the board again, on full floors, as well as our pre-builds.

Jordan Sadler - KeyBanc Capital Markets

Hi, it's Jordan Sadler. I just wanted a quick question on -- in terms of where you're spending your time Tony? And I am curious, obviously, the leasing side, New York conditions seems very good, and you've got some opportunity in the existing portfolio, and I appreciate your comments on the option properties, and that decision not being made yet. But how much time are you spending, looking at the investment market and incremental opportunities beyond the existing portfolio at this point?

Anthony Malkin

Well to be clear, we have our own internal initiatives pertaining to investment. We clearly want to make our most intelligent position first, with regard to our option properties. What's available for sale in New York, which is visible to everybody -- is visible to everybody and that's an extremely competitive set right now. Those things, which we are doing, which are private, we are certainly going to keep them private. But we are always looking. We are always making considerations, and we are actively dialoging, both with people outside the company, with whom we might like to do transactions, and we are also actively dialoging inside with management, to see how we feel about where we should be spending our money, and when that couple of objectives in front of us, having to deal with redevelopment and execution of our existing portfolio. I think you should recognize that we consider that the main predictable driver in our growth and value, and in distributions for the foreseeable future.

Jordan Sadler - KeyBanc Capital Markets

Great. Thank you.

Operator

Thank you. Our next question is coming from Brad Burke of Goldman Sachs. Please proceed with your question.

Brad Burke - Goldman Sachs

Hey, good morning guys. Wanted to touch on the Observatory, and David, you had outlined some of the reasons for the expense increase, but just was hoping to get more detail, because the increase was pretty significant quarter-over-quarter. Is this something that we ought to be thinking about as a new kind of run-rate, or was there some choppiness or some seasonality or some weather related issues that were impacting the quarter?

David Karp

I think you touched on some good things there. And its important to understand that we had anticipated these costs increasing, due to the -- reduction of the Audio Tour, given payroll costs associated with our new Ambassador Program and other payroll costs; and lastly the increases in advertising that we undertook. These are recurring costs, and so you should expect them to continue and increase on a seasonally adjusted basis.

Brad Burke - Goldman Sachs

Okay. But if I heard you right, you are also expecting -- I think you said sustained or improved income in margins in the Observatory. So if I am thinking about, this being the new run rate for costs, I mean, that would imply a pretty meaningful uptick in revenue expectations as well, to get to kind of a flat to slightly up number? And then, is that being driven by expectations upon increased visitation, or is ticket pricing mostly the driver on that?

David Karp

Again, we don't provide specific guidance on our Observatory revenue. However, as we discussed in the past, the second and third quarters are typically the strongest in terms of attendance. We feel pretty good about the progress we have been making in growing revenue and as you recall, there are really three legs to the stool here, in terms of our revenue. One is, increasing admissions; two is increasing ticket prices; and three, is improving upon the mix between our direct sales and our indirect sales, and we feel good about the progress we have been making on all three legs.

Brad Burke - Goldman Sachs

Okay. And then I guess, sticking with the Empire State Building, obviously very good progress in the quarter on leasing. But I am trying to get a sense of how I should be thinking about occupancy trending over the year; because you still have some decent sized lease expirations for the rest of the year, and I assume that some of that is related to the space that you are purposely going to let expire for redevelopment. But at the same time, it also sounds like you have a decent pipeline of potential new leasing opportunities. So with all the moving parts, is it fair to think about the occupancy we are looking at now, is being a level that you will hold or improve on, or is there a reason to think that you might see some volatility in that number over the course of the year?

Thomas Durels

Sure, I'd say that -- this is Tom Durels. I would say that while we expect that over time, the occupancy at Empire State Building will increase. Don't forget that we continue to generate vacant spaces. We move tenants out, and execute on our program and strategy to consolidate smaller older suites into larger, more efficient availabilities, including full floors and pre-builts. That said, the rollover for Empire State Building in 2014 is relatively modest, just around 117,000 square feet for the balance of the year; and we will vacate some of that space intentionally, as we execute our consolidation strategy.

But as I said before, the market is healthy. We are seeing good activity. We are getting good traffic. I like the activity that we see, and its on all space types of pre-builts to enter full floors. And I would say that, this is before we brought online the amenities that I spoke about in my earlier remarks. So I am feeling very positive about where we are at, and I feel very good about our competitive position.

Brad Burke - Goldman Sachs

Okay. And maybe staying with the market then, obviously very good mark-to-markets in Manhattan office. I am trying to understand, how much of this should be attributed to putting tenants into space that was recently redeveloped and that was driving the strong mark-to-markets, so how much of it is just overall market strength, and then thinking about it for the rest of the year, I mean, is this a level that we should think about being sustainable, or were there some tier one kind of items in the quarter that was driving the strong number?

Thomas Durels

Sure. I would say that, certainly, that Empire State Building was a driver for our mark-to-market for the first quarter, and more specifically, the lengthened lease, achieved very good positive spreads. You're going to see variability from quarter-to-quarter on our leasing spreads. But I'd say, that the result that we achieved is derived from -- two parts. One, the general health of the market; and second, the success of our redevelopment program. So as we commented before, there remains that embedded growth opportunity within our portfolio, as we execute on our redevelopment strategy. But again, first quarter Empire State Building was a significant driver, and you are going to see variability from quarter-to-quarter.

Brad Burke - Goldman Sachs

Okay. I appreciate. Thank you guys.

Operator

Thank you. (Operator Instructions) Our next question is coming from Jamie Feldman of Bank of America Merrill Lynch. Please proceed with your question.

Jamie Feldman - Bank of America Merrill Lynch

Great. Thank you and good morning. So just to be clear, I think you'd said, you are going to have your four floors available now, and you expect to get four more by the end of the year. I think you'd said LinkedIn has its expansion rights for one, and then can you just -- I know you are not giving guidance, but just to clarify, what you guys did say in terms of, how many of those are currently in discussions?

Thomas Durels

Sure Jamie. We started the year with four floors available. We have leased one of those to LinkedIn. We will be delivering by the end of the year, four more full floors that we will bring to market. And those will then be available for lease-up. So as it stands right now, we are targeting seven full floors, three available now, and four available towards the later part of this year.

We do have discussions ongoing with respective tenants, for some full floors, and look forward to giving you updates on our next quarterly call.

Anthony Malkin

Anthony Malkin here. Please you keep in mind, that we are trying to keep you guys current. So I think the KeyBanc notes of last night, we already announced most of the leasing, which we have disclosed in our comments, and I think it would be reasonable to assume, that we will continue to make periodic inter-quarter announcements of the actual leases out there done.

Jamie Feldman - Bank of America Merrill Lynch

Okay. And then, in terms of the seven floors available, can you talk about what floors they are on? Are they low in the building, are they higher in the building?

Thomas Durels

Generally, they are all in the towers. Our lowest floors, the 29th floor and the floors above that. We do have a block available on the 58th floor of about 104,000 square feet. But generally these, aside from the 29th floor, these floors are app 26,000 square foot in size. So again, we are seeing good activity, we are getting good showings, its in advance of the new amenities coming online this summer. Feel very good about where we are at, and the [indiscernible] that we are seeing.

Jamie Feldman - Bank of America Merrill Lynch

Okay. And then, can you talk about your ability to push rents, I mean where are your estimates today, versus may be a year ago, and given the strength we are seeing in the market?

Thomas Durels

Yeah sure. We have raised our asking prices across the portfolio twice, since the start of the year, depending on the space, [indiscernible] on the building, anywhere from 5% to 12%, that's basis to the start of the year. So we have -- the market is trending positive, and the good news is, its broad based. Its at all of our properties. Its for all of our space types, again for the -- everything from the smaller suites to the larger blocks. There is not one particular part of the market, at least within our submarket and our properties that's softer. Everything is looking very healthy and trending positive. And I think those two price adjustments since the start of the year, reflects that.

Jamie Feldman - Bank of America Merrill Lynch

Okay. And then what were your price adjustments last year?

Thomas Durels

You mean during the course of the year, or year-over-year? We have raised our prices a bit throughout 2013, but the most telling stat is that percentage range that I gave you from year-end 2013 to where we are today.

Jamie Feldman - Bank of America Merrill Lynch

So do you really see a material pickup inside of our -- this year, year-to-date, okay.

Thomas Durels

Yup.

Jamie Feldman - Bank of America Merrill Lynch

And then finally, how should we think about the type of demand you are seeing for the Empire State Building versus your buildings on Broadway or even One Grand Central Place?

Thomas Durels

As I remarked earlier, we are seeing a broad based demand at all of our properties. What's surprising is, One Grand Central Place, where if you looked maybe 18 months ago, it was much slower than it is today. Its very healthy, and we are seeing good traffic; and as soon as we make space available through pre-builts or consolidations [indiscernible] activity. And just like the other properties, we have raised rents at One Grand Central Place.

The Broadway corridor is doing very well. That whole submarket has been transformed. There is good momentum in that submarket. We were the leader in that area, and we are -- again, we have raised prices on our pre-books there. We really have no large availability in the Broadway corridor, and generally we are building pre-builts and they are moving fairly quickly.

Anthony Malkin

Jamie, Tony Malkin here. Please remember, when David and I did the road show, we made the comment, we made it at other times. We feel that there are two things that have impacted and will continue to impact our pricing. And we made the comment back in September, and it has held true, and I think it holds true today.

One of the overall market, unavoidably, our performance moves with the market. But the other is the fact that we are delivering redeveloped properties to the market. So we are continuing to bring our properties overall, to their potential. And that potential continues to improve.

So when you look at the overall market, that's fine. I might hazard a warning to folks, not necessarily to look at what we are doing, and assuming that that's fully representative of the markets, because our portfolio coming to its full potential -- not there, but coming to its full potential, is building momentum within the community, and every deal we do, is better than the last. Not just by rent, but also by the quality of broker and the quality of tenant coming to it. So I just think that's something to consider, as you look at our performance, and as we make our comments, some of the comments are market related, some of them are really portfolio-specific.

Jamie Feldman - Bank of America Merrill Lynch

So where would you put -- if you guys are raising rents 5% to 12% year-to-date, where do you think the submarket -- and where do you think submarket rents have increased?

Thomas Durels

It varies by building and owner. I would say that, I won't hazard that, to say where the others are moving at in rents; but I would say that, overall, I speak to my peers in the industry, there is a general trend towards raising rents, raising asking prices across the board.

Jamie Feldman - Bank of America Merrill Lynch

Okay. All right. That's very helpful. Thank you.

Operator

Thank you. Our next question is coming from John Guinee of Stifel. Please proceed with your question.

John Guinee - Stifel Nicolaus

Great. Well Tony, nice start. Congratulations. Just a few cleanup questions. If I look at, and this is idle curiosity, your average lease executed about $49, $50. Where do you think the ballpark operating expense stop is on those leases?

David Karp

Its going to vary building-by-building John. As we have talked about in the past, there is going to be a meaningful difference between, say the Empire State Building and then properties, obviously in the Greater New York Metropolitan area.

John Guinee - Stifel Nicolaus

I am talking about Manhattan, I am sorry. 46 leases, 173,000 square feet, $49.42. So what's the current OpEx on the Empire State Building and what's a good average OpEx on the other assets in the portfolio? I'd say, if you included the Empire State Building in the New York portfolio, we are probably around $22, $23, all-in, taxes and insurance?

David Karp

Well keep in mind, we have commented on the operating expenses at the Empire State Building previously, and that embedded in those expenses, are some expenses that are Observatory related. So it skews those numbers slightly.

John Guinee - Stifel Nicolaus

Okay, good. Then just going to the next page, page six. You have kind of a 420,000 square feet of retail in the Manhattan office properties, and it looks like, its greater than just the first floor of those properties. What you think, just rough numbers of the 420,000 square feet, how much is the first floor versus concourse versus second or third floor?

David Karp

You know John, I don't have the number off the top of my head, but its --

Thomas Durels

We have very little available retail space. There are the two significant pieces that we have are one, at 1359 Broadway of about 16,000 square feet and about half of that is on grade [ph] the other half is lower level and mezzanine. And 250 West 57th Street, we have about 10,000 square feet, about 7,000 of that is on-grade, the balance on the lower level.

Those really are two most significant spaces that are available right now. We have got some space on 33rd Street at Empire State building, those are all on-grade. So I think that should give you some pretty good perspective on it.

John Guinee - Stifel Nicolaus

Good and then the -- we were on a call yesterday with a Manhattan operator. They had a signage income, and I think they were signs about the size of a football field. Do you have any signage income in your NOI or your gross revenues, and do you have signage creation opportunities within your portfolio?

Thomas Durels

Very little. Honestly, very little. It is governed by zoning. There are limits as to what signage one wants to put up on a building. Its very modest. I mean, we do things like -- when we have vacant space, we have gotten some window signage income. But it’s a very small amount. We have a size of building at 501 Seventh Avenue, where we see some income of replacing a sign there, at various times in the past.

John Guinee - Stifel Nicolaus

Okay, great. Thank you very much.

Operator

Thank you. Our next question is coming from Craig Mailman of KeyBanc Capital Markets. Please proceed with your question.

Craig Mailman - KeyBanc Capital Markets

Hey guys. Just a few quick follow-ups here. On the existing or the remaining role for the balance of the year, how should we think about the mark-to-market, kind of vis-à-vis the markets that you guys had this quarter. Should it be similar, or is it going to be a little bit of variability, depending on mix?

Thomas Durels

As commented before, we are not giving forward-looking guidance.

Anthony Malkin

So, we are not giving forward-looking guidance on that.

David Karp

What we are trying to do is, we are trying to give you guys some insight and perspective in our portfolio operations and any change in our present policy, with respect to formal guidance, will be in the future.

Craig Mailman - KeyBanc Capital Markets

Okay. Great, thank you. Then David, just on the balance sheet, you said that you guys were thinking about some alternatives for the debt maturities as we go through the year, kind of given your desire to be investment grade rate. Are you talking more about term loans, private placement for debt, kind of what you're thinking on the debt maturities at this point?

David Karp

The nice thing is, that we do have the flexibility, given the strength of our balance sheet. We continue to improve upon this strength by creating more alternatives. Obviously, one of them is -- as we stated in the past, is our goal to become an investment grade rated entity, so that we can avail ourselves at the unsecured bond market. But we are looking at everything right now. We are looking secured, we are looking at unsecured bank debt. We have really got a hole menu in front of us, and as we consider options, the fortunate thing for us, is that there was near term maturities this year. Whatever metric you look at, whether you look at interest coverage, loan-to-value, debt yields, they are all incredibly low levered. So we feel very comfortable with our ability to address those.

Craig Mailman - KeyBanc Capital Markets

Okay. Do you seek any cash out proceeds? I know some of those are pretty low leveraged here. Some of the assets that are encumbered?

David Karp

Again, we haven't -- having not determined what form of financing we are going to take. I don't want to give any advise as to what we might be doing, in terms of announce.

Craig Mailman - KeyBanc Capital Markets

Okay, that's fair. Then just one last quick one. I know the option properties, you guys are still deciding what to do with it. But as we think how you guys are going to finance that. I think -- if you guys decide to buy them. I think the Helmsley State is the only partner that can take all cash, kind of with the rest of it. You anticipate primarily being OP units, kind of what would be the thinking there?

David Karp

Well, if we were to proceed with those, one or both of those investments, you are correct. The only cash requirements will be to day the Helmsleys, and some non-accredited investors within the ownership group. The balance of the consideration will come in a combination of either assumption of existing debt, and the offering of OP units, in class A stock.

Craig Mailman - KeyBanc Capital Markets

Great. Thank you.

Operator

Thank you. Our final question today will be coming from Brad Burke of Goldman Sachs. Please proceed with your follow-up question.

Brad Burke - Goldman Sachs

Hey guys, appreciate the follow-up. So just again, to touch on the debt maturities and realize that you're looking at a bunch of different things. But I would imagine that, regardless of what -- that you still have or are going to be able to reduce the rate on those. And to your prior comment, probably be able to take out some cash, that's what you decided to do. But in terms of the timing, is this something that we ought to be thinking about you waiting to come to a conclusion on the option properties, before you figure out what you want to do with the maturities, or are these completely separate decisions?

David Karp

I think they are by and large separate decisions. But understanding, when we take a look at the balance sheet, we have got to look at it on an entire basis and see -- under the scenario, if we were to adopt that, what would our balance sheet -- if we were to, I am sorry, acquire those properties, what our balance sheet would look like. So it does play into our analysis, but I don't think they are directly linked.

Thomas Durels

I think its important about the way we look at things is really very simple. We have an extraordinarily low level of leverage. We are giving serious thought to anything we would do, which would change our level of leverage. And we go back to the first statement. We have an extraordinarily low level of leverage.

Brad Burke - Goldman Sachs

Okay. I understand what you're saying. Then the last one, just a quick modeling one; construction revenue and expense -- I mean, there was a big increase there, I also realized that it largely nets out. But that said, the increase in NOI quarter-over-quarter was almost $1 million. So I don't know if there was something specific driving that, and if we ought to be thinking about this as, you know, run rate for the rest of the year?

David Karp

I would hesitate to say, look at it as a run rate. I think as we said in the past, that business does have cyclicality to it. Its lumpiness in terms of contracts, and so you can expect, as you look forward to see that in the performance of that sector. But at the end of the day, it represents, from an NOI basis, a very small percentage of the total portfolio of operations.

Brad Burke - Goldman Sachs

Okay. I appreciate. That's all for me. Thank you guys.

Operator

Thank you. At this time, I would like to turn the floor back over to Mr. Malkin for any additional or closing comment.

Anthony Malkin

I just like to say, first of all thank you for everyone and your attendance. We appreciate the interest in the company. Number two, I am really pleased with how our team is working. I can't emphasize that enough. We are executing at a very high level, in the meantime, let's face it, we only went public in October of 2013, and really pleased with how we are executing, while also transition to public company operation.

So we look forward to being in touch with you over time, going forward. I know we have got a road show, visit us. [indiscernible] been planned for next week to talk to folks, and we appreciate your interest. Thank you very much.

Operator

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.

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Source: Empire State Realty's (ESRT) Anthony Malkin on Q1 2014 Results - Earnings Conference Call
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