Empire State Realty Trust's (ESRT) CEO Tony Malkin on Q2 2016 Results - Earnings Call Transcript

| About: Empire State (ESRT)

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

Q2 2016 Earnings Conference Call

July 28, 2016, 08:30 ET

Executives

Tom Keltner - EVP, General Counsel, Secretary

John Kessler - President & COO

Tom Durels - EVP, Director of Leasing and Operations

David Karp - EVP & CFO

Tony Malkin - Chairman & CEO

Analysts

Craig Mailman - KeyBanc Capital Markets

Blaine Heck - Wells Fargo Securities

Jamie Feldman - Bank of America Merrill Lynch

John Guinee - Stifel Nicolaus

Alan Weiss - Goldman Sachs

John Kim - BMO Capital Markets

Tom Lesnick - Capital One Securities

Operator

Welcome to the Empire State Realty Trust Second Quarter 2016 Earnings Call. [Operator Instructions]. I would now like to turn the conference over to your host, Mr. Thomas Keltner, General Counsel at Empire State Realty Trust. Thank you, sir. You may begin.

Tom Keltner

Good morning. Thank you for joining us today for Empire State Realty Trust's Second Quarter 2016 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 Investor's 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 and applicable in securities laws including those related to market conditions, property operations, 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 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.

John Kessler

Good morning. We're delighted to welcome you to our second quarter 2016 earnings conference call. Empire State Realty Trust is a pure play Manhattan and Greater New York Metro area office and retail portfolio that offers a unique opportunity to grow income as we continue to redevelop and lease our properties at market rents and bring occupancies to market levels. Since inception, we have delivered and we expect to continue to deliver embedded diverse growth. During the second quarter, we continued to execute on our strategy and again delivered strong results.

Last night we reported core FFO of $0.24 per share. We continue to see strong tenant demand for our value price point and well-located quality buildings. During the quarter, we completed approximately 177,000 square feet of total leasing. We continue to capture significant upside in rents, achieving average leasing spreads of 58.1% on our new Manhattan office leases. And 39.4% on all new and renewal leases across our entire portfolio. Additionally, our Observatory continues to produce strong results and achieved a 4% year-over-year increase in revenue in the second quarter.

Turning to our broadcast operations, we recently announced that we signed a 16 year lease renewal with Emmis Communications for three radio stations. We remain in ongoing negotiations with our other broadcast tenants. I would remind you that neither the extensions nor non-renewal of broadcast leases has or is expected to have, a material impact on our financial results. Our low lever balance sheet remains very strong.

During the quarter, we increased the borrowing capacity on our unsecured revolving credit facility by $300 million, to a total of $1.1 billion, creating additional liquidity and enhancing our overall financial flexibility. Our prepared remarks this morning will be fairly brief. Tom Durels, our Executive Vice President and Director of Leasing and Operations, will provide an update on our portfolio. And David Karp, our Executive Vice President and Chief Financial Officer, will then review financial results in more detail and discuss our balance sheet.

After that, our team, including our Chairman and CEO, Tony Malkin, are here to answer your questions.

I'll now turn the call over to Tom Durels, Tom?

Tom Durels

Thanks, John and good morning everyone. On today's call, I will review our overall leasing activity in the second quarter, provide a summary of our current and future space availabilities and discuss the timing of new lease commencements. Our second quarter results reflect our continued progress on our four key growth drivers which are, one, upside from signed leases not commenced of $27 million. Two, the market-to-market on our expiring Manhattan office leases of $23 million.

Three, lease up of developed vacant office space of $40 million and four, the market-to-market and lease up of available retail space of $19 million. In total, we estimate these drivers will contribute approximately $109 million of NOI growth as of June 30th, 2016, relative to our trailing 12 months cash NOI of $339 million. In the second quarter, we signed 45 new and renewal leases totaling approximately 177,000 square feet. This included approximately 157,000 square feet in our Manhattan office properties and 19,000 in our Greater New York Metropolitan properties. I would like to mention two significant leases, one at the Empire State Building where we signed a 20,000 square foot lease with ZS Associates, a global sales and marketing consulting firm.

And at One Grand Central Place, we signed a 21,800 square foot lease with National CineMedia, a theater advertising company. Following the close of the second quarter, we signed a two floor lease at the Empire State Building with JCDecaux, the worldwide leader in outdoor advertising, for 46,500 square feet on the entire 73rd and 74th floors. Now some of you have toured our recently installed marketing displays on the 73rd floor which will now be relocated to the 66th floor which is now available for lease up. We're pleased to have JCDecaux join our roster of exceptional global tenants, such as Coty, Global Brands Group, Skanska, LinkedIn, Expedia and others.

We believe the selection of the building for the new North American headquarters of another leading international company, once again, demonstrates the appeal of the Empire State Building. At quarter-end, our total portfolio was 86.6% occupied which is down 160 basis points from the first quarter. And including signed leases that have not yet commenced, portfolio occupancy was down 40 basis points from the first quarter at 89.4% leased. As we have been saying since IPO, we expected that our occupancy will fluctuate from quarter to quarter as we execute our strategy to vacate and consolidate spaces in order to unlock the embedded growth of redeveloping and re-leasing spaces at higher rents to better tenants.

Specifically during this quarter, the decrease in total occupancy is largely related to 111 West 33rd Street where we continue our work to consolidate full floors and where as expected, the 170,000 square foot office and retail lease to Foot Locker expired during the quarter. 134,000 square feet of this space has already been re-leased at significant market-to-market rent spreads to Foot Locker for 34,000 square feet of retail space that commenced in the second quarter to Macy's for 89,000 square feet of office space that commences in the third quarter and Sephora for 11,000 square feet of retail space that will also commence in the third quarter.

At our flagship property, the Empire State Building, we were down 50 basis points from the first quarter 2016 to 88.7% occupied. Including our signed leases not yet commenced, our leased percentage was 90.7%, no change from last quarter. And as we discuss every quarter, there was a timing lag between the move outs of existing tenants and when we complete our work and before new leases commence. As we consolidate and renovate space within our buildings, we will continue to unlock the embedded growth within our portfolio and drive significant increases in rental rates and future cash flows. As a result of our redevelopment strategy, we continue capture strong rental growth spreads.

During the second quarter, rental rates on new and renewal leases across our portfolio were 39.4% higher on a cash basis compared to prior escalated rents. And at our Manhattan office properties we signed new leases at rent spreads of 58.1%. In our total portfolio, as of June 30th, 2016, we have 1,347,000 square feet of vacancy against which we have 276,000 square feet of signed leases not yet commenced, for a net total of 1,070,000 square feet of unleased space. This 1,070,000 square feet unleased space is comprised of Manhattan office vacancy of 870,000 square feet, retail vacancy of 99,000 square feet and Greater New York Metropolitan office vacancy of 99,000 square feet.

Of the 870,000 square feet of unleased Manhattan office space, approximately 660,000 square feet is consolidated and redeveloped space that includes pre-builts and white boxed space. Approximately 57,000 square feet is being held off market until it can be consolidated for future redevelopment and the balance of our vacant space is being planned for redevelopment. We have 306,000 square feet of leased space that expires by year-end 2016 of which 258,000 square feet is in our Manhattan office portfolio for which the in-place, fully escalated rent is just $46.00 per square foot. Of this, we expect to vacate 149,000 square feet in our Manhattan office portfolio by year-end.

Again, as a reminder, as of June 30th, 2016, we have signed leases that have not yet commenced of 276,000 square feet, all of which are expected to commence by the end of 2016 and will add nearly $27 million in NOI growth. And, following the close of the second quarter, we signed JCDecaux for another 46,500 square feet, half of which is expected to commence by year-end. Returning to our office availabilities, we will have available by year-end 15 full floors, totally 389,000 square feet, throughout our Manhattan portfolio including two floors at the Empire State Building, three floors at 250 West 57th Street, where we're underway with a new building lobby, store fronts and elevator cabs. And five floors at 111 West 33rd Street, where we're also underway with a new lobby, with a new 33rd Street entrance and new elevator cabs.

One more thing, we will be moving ESRT's headquarters to 111 West 33rd Street next month. Not only will our new office space enhance our company productivity, it will showcase a modern, efficient workplace that our leasing team can show to perspective tenants. In our retail portfolio, we're currently marketing at 112 West 34th Street, approximately 40,000 square feet, including nearly 8,000 square feet at street level and directly opposite Macy's flagship store, that will be white boxed and ready for showings after Labor Day. Now, we expect to show this space to retail brokers during the New York ICSC in December. But realistically, expect to see attention by retailers no sooner than early 2017 following the 2016 holiday selling season.

We also have 5,600 square feet of street level space fronting 34th Street located at the Empire State Building and 6,200 square feet of grade retail space at the 1359 Broadway where we're in discussion with an established restaurateur. We feel very good about our leasing pipeline. And I am very confident in our team's ability to execute and deliver on our four key growth drivers. Overall, we continue to see steady demand for our properties which offer perspective tenants an attractive combination of location and amenities at a value price point. We continue to lease up our vacant space and execute on our proven strategy to consolidate, vacate and deliver redeveloped space in order to lease to new, better credit tenants at higher rents, increased NOI and improved shareholder value.

Now I'd like to turn the call over to David Karp, David?

David Karp

Thanks, Tom and good morning everyone. I'll start with a review of our financial performance and follow with an update on our balance sheet. For the second quarter, we reported core FFO of $64.8 million or $0.24 per diluted share. Modified FFO which is defined as FFO plus adjustments for any above or below market ground lease amortization, was also $64.8 million or $0.24 per diluted share. Certain investments in growth and one unique expense item affected second quarter core FFO. First, we had $1.5 million of concentrated incremental legal costs attributable to our last IPO related litigation. We're in an arbitration with the 11 opt-outs from the class action litigation settlement from our formation transactions. Legal expense, related to this arbitration, is not part of our ongoing operations. Excluding this legal expense, our second quarter core FFO would be $0.25 per fully diluted share.

Second, as part of our maturation as a public company, we set in place to bring in house more services we had historically contracted out. We have invested in additional staffing in public relations, branding, marketing and legal which we plan to result in reductions in payments to outside suppliers of services. We're already experiencing savings from discontinued outside services and increased efficiencies and productivity.

Third, we incurred a previously disclosed increase in equity compensation expense. The increase in equity compensation expense was related to a full quarter's impact of equity compensation grants made in late February 2016 and the related additional layer of amortization expense. We went public in October 2013 and we're still in the ramp up adding layers of amortization of non-cash compensation expense associated with our equity incentive compensation. Once we conclude four years as a public company, this expense should stabilize.

Cash NOI was $89.5 million, up 5.4% from the prior year period. For the six months ended June 30th, 2016, core FFO was $122.9 million or $0.46 per fully diluted share. Modified FFO was $122.3 million or $0.46 per fully diluted share. Cash NOI was $166 million, up 8.8% from the prior year period.

Turning to our Observatory operations, revenue for the second quarter 2016 grew 4% to $31.8 million from $30.6 million in the second quarter 2015. The Observatory hosted approximately 1.12 million visitors in the second quarter 2016 compared to 1.17 million visitors in the second quarter 2015, a decrease of 3.5%. The shift of the Easter weekend to the first quarter of 2016 from the second quarter in 2015 was a major component of the jump in first quarter attendance and the source of the decline in second quarter attendance which was partially offset by an increase in general visitor traffic outside of the Easter holiday weekend.

The increase in revenue, in the face of a slight reduction in attendance, is the result of an improvement in our ticket mix. In the second quarter of 2016 there were two bad weather weekend days compared to five bad weather weekend days in the second quarter of 2015. We take into account the entire first half results of the Observatory when we measure our performance, as it accounts for the Easter weekend shift. For the six months ended June 30th, 2016, the Observatory hosted approximately 1.8 million visitors, up 3.1% compared to 1.7 million in the prior year period. And Observatory revenue was $53 million, up 8.6% compared to $48.8 million in the prior year period.

Turning to our balance sheet, our low levered balance sheet remains a strong competitive advantage for us in any market environment. We're focused on increasing financial flexibility and capacity, lengthening our maturities and lowering our cost of capital. During the quarter, we increased our borrowing capacity by $300 million under the accordion feature of our unsecured revolving credit facility. We now have a total committed borrowing capacity of $1.1 billion and have the ability to further increase our capacity through an additional exercise of the accordion feature to $1.25 billion.

We're very happy to take the opportunity to augment our liquidity and further improve our financial flexibility. At June 30, 2016, there was a $40 million outstanding balance on our revolver. At June 30, 2016, we had total debt outstanding of approximately $1.7 billion. Approximately $1.4 billion of this debt is fixed rate, with a weighted average interest rate of 4.55% and a weighted average term to maturity of five years. The remaining $305 million of debt is variable rate with a weighted average interest rate of 2.01% and a weighted average term to maturity of 5.7 years.

At the end of the second quarter, our leverage ratio reflected by consolidated debt to market capitalization was 24% and our net debt to EBITDA was five times. I'll now update you on our redemption requests. For operating partnership units, our lockup period expired one year after issuance which was October 7, 2014, for units issued in the IPO and July 15, 2015 for units issued on the acquisition of 112 West 34th Street and 1400 Broadway. Upon such expiration, holders of such operating partnership units could have their holdings redeemed for Class A shares which are listed and traded on the NYSE.

As of June 30, 2016, we have had conversion requests from operating partnership units and Class B common shares to Class A common shares totaling 25.7 million shares or approximately $488 million at the closing share price of $18.99 on June 30, 2016. This represents a 31% increase in the number of Class A shares since our IPO.

Finally, our Board of Directors approved a quarterly dividend of $0.105 per share for the second quarter of 2016 which represented an increase of 24% over the prior dividend rate. This dividend was paid on June 30 to shareholders of record on June 15.

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

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from the line of Craig Mailman with KeyBanc Capital Markets. Please proceed with your question.

Craig Mailman

Maybe just on the JCDecaux lease, can we get a little bit more color on what asking rents were for the 73rd and 74th floor? Maybe what that translates to in the market-to-market and just any kind of color there on demand for that space, were there other interested parties looking at that? Is that potentially going to translate into some good activity on the other two floors you guys have available?

Tom Durels

First, we're delighted that JCDecaux, who is an international leader in their business, chose the Empire State Building and they're joining a stable of other great international leaders. We're averaging north of $70.00 a square foot for this space. We were asking in the low 70s, so we're really delighted with the outcome and the results. JCDecaux has taken the entire 73rd floor as well as the entire 74th floor. We had just recently installed marketing displays on the 73rd floor and we're now in the process of relocating those displays to another full floor on 66.

And at this point, we only have one full floor available and another one that is being consolidated and will be available by year-end. So, based upon that, I think we're very optimistic about where we sit and the activity that we're seeing.

Craig Mailman

You talked a lot about the availabilities you have, can you just talk in general about what you guys are seeing in the leasing pipelines requirements out there? Just color on your sub-markets.

Tom Durels

First, we leased 432,000 square feet year-to-date, as you know. We think we had a very good second quarter with over 176,000 square feet of leasing completed. 110,000 square feet of that was new leasing. All at excellent, excellent market-to-market with 58% market-to-market spreads on new Manhattan office leasing. We're seeing solid demand for our specific property type, our locations and our unique product. We continue to believe we offer a fantastic value and the JCDecaux taking two full floors on the 73rd and 74th floors is just an example of that. So, we're seeing leasing momentum continuing based upon our showings and leases in negotiation. And it's across the portfolio including our full floors as well as pre-builts.

And we, as I commented earlier, we're very optimistic based upon the work that we're doing with the new lobbies, entrances and elevator cabs above 250 and 111 West 33rd Street where we have, where we're consolidating full floors and marketing those.

Craig Mailman

Your spreads have been really good the past couple quarters. I'm just curious about what you guys are seeing on the construction side of things and whether the better market-to-markets are leading into better return on capital versus the 9% to 22% you guys have talked about in the past or if construction costs are kind of eating into that upside?

Tom Durels

Our spreads are a function of the expiring, fully escalated rents compared to our new starting rents, when we sign new leases. As I commented previously, we have about 258,000 square feet of Manhattan office space expiring in the balance of 2016 with fully escalated rents on a re-measured basis of under $46.00 a square foot.

With our asking rents generally in the high 50s to low 70s per square foot, we're hoping to achieve superior rent spreads. And that is a driver of one of our, key growth drivers over the next five years where regardless of rent growth, we expect to be able to deliver superior rent spreads going forward.

David Karp

In response to your question about the return on investment, we still take a look at what our total costs are, including base building, leasing costs and tenant improvements. And on the basis of those costs and on the basis of the rent spreads we're achieving, we still are comfortable demonstrating returns on investment between 7% and 23%.

Operator

Our next question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.

Blaine Heck

Maybe just a follow up for Tom. There's been obviously some concern about leasing velocity and rent growths slowing for some of the higher price point space in Manhattan. But given your comments, it doesn't seem like you've seen any of that filtered down into your properties. So, can you talk about whether you have any expectation for market rent growth or maybe asking rent growth going forward?

Tom Durels

First, Blaine, we continue to see really good demand, as I commented previously. And second, we continue to deliver great rent spreads as commented a moment ago. We've seen and have raised our rents, in a number of our properties including 111 West 33rd Street, 250 West 57th Street, 1350 Broadway where we're seeing very good activity on our pre-builts.

So, I think we're unique. And we're going to continue to adjust our rents in line with market. And I think because of the fact that we offer and provide really good value, I think we're in a very unique position. So, we, I think, are different than others at the top end of the market. And a lot of that stems from the value proposition that we offer.

Blaine Heck

Just on the Observatory results, I guess just more broadly, in prior quarters you guys have talked about some difficulty in the Observatory business given decreases in international tourism. And it seems as though the strong dollar and some of the global economic distress would continue to act as a headwind. But what do you guys think it's been that's enabled you guys to continue to increase NOI kind of besides better weather quarter-to quarter?

Tony Malkin

Just a reminder, the Observatory revenue for the second quarter grew 4%. For the six months, we had 1.843 million visitors versus 1.787, an increase of 3.1%. And total increase in revenue of 8.6%. In our experience in the second quarter, if we had just excluded the Easter swing, we had increased traffic. So, I think what is occurring is we have tremendous international presence, we have tremendous brand.

As an example, in China we're very pleased in our business with China and our travel partners there. We have a real presence there. For instance, when we offered our online audience to vote on the color of the Empire State Building for our 85th birthday, we had almost as many votes from China as we did from the rest of the world combined.

We look at competition from One World Trade Center which has been lower than expectations. Many of you may have read the May New York Times article. We're at the center of it all. We're, in many instances, the tourist's first stop to view New York City. If you look at One World Trade Center, they've got a nice view of Brooklyn, New York Harbor, Staten Island, Jersey City and Hoboken. And one aspect of the view to uptown.

So, when we look at our drivers and what we're doing, we're continuing to build brand. We've been resilient through foreign currency movements, economic cycles, new competition. We look at our overall perspectives and say in spite of the tourist trends we've seen in New York which is, frankly, an increased number of visitors but shorter stays and spending less money, we're grabbing a share of that visitor's visit to New York City. And frankly, we consider this just a continued component of our strategy of brand building and awareness of what we offer at the Empire State Building. And of course, the final piece is our ticket mix, our revenue mix. We continue to refine that and make very good progress.

Blaine Heck

And then just a last one for David, Corporate and Observatory CapEx made up a pretty large number in the SAD reconciliation this quarter. Can you talk about what exactly that line item refers to and whether we should expect similar levels going forward?

David Karp

That was predominantly the cost of building out our new corporate headquarters at 111 West 33rd Street. And as Tom mentioned, the move will take place next month. We view this move of our headquarters to 111 West 33rd Street is a real opportunity as we're going to be freeing up some prime tower floors here at One Grand Central Place.

Now we also expect significant organizational benefits from bringing most of our team together in one place and benefit from re-renting that space that we vacate. We will incur, in the next quarter, some additional cost to complete that build-out, but that's what it relates to.

Operator

Our next question comes from the line of Jamie Feldman with Bank of America Merrill Lynch. Please proceed with your question.

Jamie Feldman

I guess sticking with the Observatory, do you have an idea of foreign versus domestic visitation in the second quarter or even year-to-date?

Tony Malkin

We do survey, Jamie, twice a year. We capture certain credit card data. In general, our Observatory visitor is predominantly, as I think we've mentioned before, younger, 18-35. And predominately international. I will say that with the shorter stays in New York City, NYC and Company, the official tourist bureau, is seeing more domestic in travel into New York City. We have not yet concluded our polling for this cycle to see what we're seeing. And we do that in the peak summer months. So, we'll know that soon enough. But at present, we don't see major shifts. We just see general growth in all categories.

Jamie Feldman

And then can you provide some more detail on kind of timing and how leasing is going for 111, 112 West 34th, 33rd Street project?

Tom Durels

First of all, as I mentioned, we're underway with a lobby renovation at 111 West 33rd Street. We currently have about 359,000 square feet of vacant space. About 252,000 square feet is unleased. Bear in mind that we released a good portion of the Foot Locker space that expired. We vacated about 210,000 square feet in the second quarter, about 170,000 square feet of that was due to the expiration of the Foot Locker space alone which 134,000 square feet has been leased to Macy's, Foot Locker and Sephora.

We have our largest block of contiguous available space on five full floors of approximately 198,000 square feet. All of that will be fully consolidated and available by year-end. And then we have the 40,000 square feet of retail availability, 8,000 square feet of which I mentioned is on grade. We're seeing good activity. We're optimistic about, we're excited about moving our offices there. The offices show great. They're going to be a showcase that we can show to other perspective tenants and we feel very good. We have activity and I look forward to giving an update soon in future quarters.

Jamie Feldman

Are you seeing more larger users or do you think you'll break up that space?

Tom Durels

I think that the five full floors will lease to more than one tenant. We will lease those as full floors. We've intentionally consolidated those floors. They're very efficient side core floor plates. When you come visit our offices, you'll see the efficiency of our layout. It's really fantastic. And I think that that's why the building and the floor plates will appeal to perspective tenants.

Broadly, we're seeing activity throughout the portfolio on full floors as well as pre-builts. And it's consistent with our overall strategy to diversify our product type at all ends of the market.

Jamie Feldman

And then you talked about the $27 million of incremental NOI. Is the JCDecaux lease in that number? I think you said it was part this year, part next year.

Tom Durels

JCDecaux is an addition. So, as of June 30th of this year, we have 276,000 square feet of signed leases not yet commenced that will add $27 million in NOI growth. Following June 30th, we signed JCDecaux for another 47,000 square feet. So, that will add more than $3 million in growth. Half of JCDecaux's lease will commence this year and the balance after the end of the year.

Jamie Feldman

And then just finally, anything new on broadcasting and those negotiations?

John Kessler

We were, as you saw last week, we were pleased to report that Emmis renewed three radio stations with us for a 16 year extension. And total revenue from Emmis was $1.7 million in 2015, any additional revenue from them going forward will be $1.26 million with some escalations. We continue to be focused on renewing our other broadcasters and we'll keep you apprised on our progress. But Emmis is really the material new news.

And due to the relative size of this business, still approximately $30 million in total revenue, neither the extension nor the renewal of these leases is expected to have a material impact on our results.

Operator

Our next question comes from the line of John Guinee with Stifel. Please proceed with your question.

John Guinee

I was looking at the first half of 2015 versus first half 2016 operating expenses and real estate taxes. And I noticed that the OpEx has come down by about $4 million from $80 million to $76 million, while the property taxes have gone up about $1 million from $46 million to $47 million. Any sense for what you'd expect going forward. The magnitude of property tax increases as lease up occurs, etcetera. And whether you have any more OpEx savings embedded in your operations?

Tom Durels

I would say across the portfolio, we're striving to tighten up efficiencies and that translates into lower operating expenses. As we execute and complete our development work, redevelopment of our properties, we expect to see a trend of lower operating expenses because as we execute work it does cause us to incur additional operating expense such as cleaning and security and additional engineering labor. Real estate taxes, obviously, are a function of our reported income with the City of New York. David, do you want to answer that?

David Karp

Simply as the income of the buildings improves, obviously the tax assessments will follow. While we're diligent in our reviews and challenges of real estate tax assessments, we can expect that as the value of the properties continues to increase, it'll be reflected in some movement in real estate taxes.

John Guinee

Any sense on the magnitude down for operating expenses hopefully and up for taxes over the next few years?

Tom Durels

No, we really haven't provided that type of projection. I would simply reiterate, we're hard at work tightening up efficiencies across the board.

Tony Malkin

I might just add one thing, please keep in mind that as we aggregate these floors and we reduce the number of tenants and we go to full floor tenancies, we get much greater efficiencies and reductions in costs of operations, cleaning, the amount of space which is landlords versus which is the tenants, is decreasing.

This is all stuff that we spoke about as we were, do you recall when we did our teach-in before the road show, one of the issues was our operating expenses were higher. We said we expected them to come down as we reduced the number of tenants. And that's just all part of what we're executing.

Operator

Our next question comes from the line of Brad Burke with Goldman Sachs. Please proceed with your question.

Alan Weiss

This is Alan Weiss speaking. Obviously you had a nice change in ticket pricing during 2Q. I was hoping you could elaborate on what is driving that and whether this is expected going forward?

Tony Malkin

Let's be clear. We haven't had a ticket price increase other than our tour and travel in April of 2016. And therefore what we're seeing is an improvement in the actual mix. We've introduced some new VIP experiences. But the biggest changes, we're selling far more tickets at our ticket office. With the closing of Skyride and their ability with hawkers to sell tickets at a discount on the street front, we have captured virtually all of those tickets at our retail pricing at the ticket office. And in general, yes we do have the additional mark up in tour and travel.

As we've said before, we're not a price leader. We maintain our position within the market. And as we continue to survey our options going forth and make decisions, we'll keep people apprised.

Alan Weiss

Your April disclosure listed $8.6 million of corporate and Observatory CapEx. I was wondering what that relates to.

David Karp

As we mentioned earlier, the $8 million was related to the built outs of our new corporate headquarters at 111 West 33rd Street.

Alan Weiss

On G&A, you've been allowing for the $1.5 million increase in legal costs. It seems like more of a meaningful uptick. What would be driving that?

David Karp

As we mentioned, in addition to the $1.5 million of concentrated incremental legal costs attributable to the last of the IPO related litigation, we had costs associated with bringing in house more services that had historically been contracted out. We've invested additional staffing in public relations, in branding, marketing and legal which we plan to result in reductions in payments to outside suppliers of services.

In addition, we incurred a previously disclosed increase in equity compensation expense. The increase in equity compensation expense was related to a full quarter's impact of equity compensation grants made in late February of 2016. And the related additional layer of amortization expense.

Remember, we went public in October of 2013 and we're still in the ramp up phase adding layers of amortization of non-cash compensation expense associated with our equity incentive compensation. But once we conclude four years as a public company, this expense should stabilize.

Alan Weiss

So, what do you think is a more of a reasonable run rate for G&A expenses?

David Karp

I think what we can say is that we don't give guidance, but when you take a look at the next quarter, it would be reasonable to expect our G&A to be somewhere between what we reported in Q1 and what we reported in Q2.

Operator

Our next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your question.

John Kim

The increased capacity of your credit facility, given you have such a small current balance on it, is this a sign that you're more closely pulling a trigger on acquisitions?

John Kessler

We like a strong balance sheet and the credit facility upsize just further strengthens our balance sheet. We believe that low leverage and significant liquidity are going to position us well, continue to position us well for any situation.

With respect to acquisitions, we continue to be focused on off-market opportunities that will provide shareholders a long term value. And our low leverage balance sheet and liquidity give the flexibility to take advantage of opportunities when we see them.

John Kim

Has market conditions or the move in the 10-year changed your underwriting criteria at all?

John Kessler

We continue to, when we look at external opportunities, we're very mindful of the fact that we have approximately more than $100 million in growth, embedded growth, relative to our $339 million in trailing 12 months end of life. This is what Tom commented on earlier. And then we're getting returns, as David mentioned, of 7% to 23% on our redevelopment spend. So, I think as we look at any external activity we're going to compare it relative to those returns.

John Kim

For Tom, you discussed asking rents at the Empire State Building. Can you provide the same figure for One Grand Central and 1400 Broadway?

Tom Durels

At One Grand Central Place our asking rent, depending on the floor and the space configuration, whether it's a full tower floor or a pre-built at say mid-rise versus lower level and depending on the location of the floor plates is going to vary quite widely at One Grand Central Place. Anywhere from generally the high 50s, we expect to be asking $70.00 a square foot for the tower floors that we will be vacating. So, that kind of gives you the spectrum of asking rents at One Grand Central.

At 1400 Broadway, we really currently only have two full floors. One is a smaller floor plate and a pre-built and we're asking in the mid-60s per square foot as we're on the other full floor. That should give you kind of a good idea of where we're at on rents at both those properties.

John Kim

And then just to clarify, this mid-70s that you're asking at the Empire State Building, that was for higher floors?

Tom Durels

We were asking in the low 70s per square foot for the 73rd and 74th floors that we leased to JCDecaux who, I will say generally the rent that we settled on is north of $70.00 a square foot on average. I really can't provide more specifics on that deal due to confidentiality.

John Kim

Finally, I'm sorry if I missed this, you had lower expenses in the Observatory this period. And I thought you were actually going to allocate more expenses. Can you just elaborate on what this was?

David Karp

On a quarter-over quarter basis, we had lower PR costs. And then on a year-over-year basis, we had lower personnel costs resulting from the termination of the Skyride tenancy and the replacement of the audio tour with a mobile app.

John Kim

And the allocation of all the PR costs going into the Observatory, that has already occurred?

David Karp

Correct.

Operator

Our final question comes from the line of Tom Lesnick with Capital One Securities. Please proceed with your question.

Tom Lesnick

I only have one. Most of them have already been answered. But just curious on the Observatory attendance. I know you touched on Easter already. But to what degree do hotter than expected summers impact the attendance to the Observatory? Are there any summers in memory or extended heat waves or etcetera brought down attendance?

Tony Malkin

Aside from making people more happy to be at the cooler altitude of our 86th floor outdoor Observatory, we've really not been able to track anything. Someday, we haven't even looked at that.

Operator

There are no further questions at this time. I would like to turn the call back over to Mr. Anthony Malkin for any closing comments.

Tony Malkin

We'd like to thank everybody for attending this morning. I am incredibly pleased with how we're executing. We're doing exactly what we said. I think that people sometimes lose track of the fact that we do vacate space in order to clean it up and re-lease it to better tenants on longer terms, larger spaces, that's what we're seeing a little bit from this past quarter. But the great news is terrific spreads. Great team execution. We really appreciate you spending your time with us and we look forward to speaking with you all in the months to come and if not, we'll see you on the next quarterly call.

Operator

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

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