Empire State Realty Trust, Inc. (ESRT) CEO Anthony Malkin on Q1 2019 Results - Earnings Call Transcript

Empire State Realty Trust, Inc. (NYSE:ESRT) Q1 2019 Results Earnings Conference Call April 25, 2019 8:00 AM ET

Company Participants

Greg Faje - VP, IR

Anthony Malkin - Chairman & CEO

David Karp - Executive VP & CFO

John Kessler - President & COO

Thomas Durels - EVP of Real Estate

Conference Call Participants

Emmanuel Korchman - Citi

Craig Mailman - KeyBanc Capital Markets

Jason Green - Evercore ISI

John Guinee - Stifel

Jamie Feldman - Bank of America Merrill Lynch

Blaine Heck - Wells Fargo

John Kim - BMO Capital Markets

Michael Bilerman - Citi

Operator

Greetings, and welcome to the Empire State Realty Trust First Quarter 2019 Earnings Call. [Operator Instructions] And as a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Greg Faje, Director of Investor Relations for Empire State Realty Trust. Thank you. You may begin.

Greg Faje

Good morning. Thank you for joining us today for Empire State Realty Trust's First Quarter 2019 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 on the Investors section of the company's website at empirestaterealtytrust.com.

On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements as defined in applicable securities laws, including those related to market conditions, property operations, capital expenditures, income and expense. As a reminder, forward-looking statements represent management's current estimates. They are subject to risks and uncertainties, which may cause actual results to differ from those discussed today. Empire State Realty Trust assumes no obligation to update any forward-looking statement in the future.

We encourage listeners to review the more detailed discussions relating to those forward-looking statements in the company's filings with the SEC.

Finally, during today's call, we will discuss certain non-GAAP financial measures such as FFO, modified and core FFO, NOI, cash NOI and EBITDA, which we believe are meaningful in evaluating the company's performance. The definitions and reconciliations of those 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. Welcome to our first quarter 2019 earnings conference call. At Empire State Realty Trust, we have fully modernized assets, essential locations and easy access to mass transit.

Our four drivers of growth deliver embedded upside and peer-leading cash leasing spreads. Our portfolio is well positioned, priced between throughout the Class A and Class B properties to outperform in any market.

We have a fortress balance sheet with significant cash, undrawn line of credit and low leverage. And we are an industry leader in sustainability and energy efficiency.

Today, Tom Durels will speak about the first quarter's approximately 308,000 square feet of leases, market demand for our properties and our market-leading leasing spreads. Then, David Karp will address our financial performance and our balance sheet. And finally, Tony Malkin, our Chair and CEO will provide some additional comments in conclusion.

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

Thomas Durels

Thanks, John, and good morning, everyone. Our first quarter numbers reflect further progress on our four drivers of top line, derisked and embedded growth over the next 5 years.

The breakdown of these top line revenue growth drivers, which as of March 31, 2019, we estimate to be $107 million to be found on Page 7 of our investor presentation. For reference, this compares to $540 million in trailing 12 months cash rental revenue and $390 million in trailing 12 months cash NOI as of March 31, 2019.

In the first quarter, we signed 34 new and renewal leases, totaling approximately 308,000 square feet. This included approximately 285,000 square feet in our Manhattan office properties, 15,000 square feet in our Greater New York Metropolitan office properties and 8,000 square feet in our retail portfolio.

Significant new office leases signed during the quarter include a 119,000 square foot renewal lease at the Empire State Building, with the Federal Deposit Insurance Corporation, the FDIC, one of our largest 10 tenants.

A 25,000 square-foot full floor new leased with Abrams Artists Agency at the Empire State Building and a 23,000 square-foot expansion lease with Sisense at 1359 Broadway.

As a reminder, we maintained updated disclosure on potential vacates and renewals for leases that expire for the remaining three quarters of 2019 and full year 2020 on Page 9 of our supplemental. This chart shows tenants to be relocated within our portfolio and vacates to be replaced by new tenants with whom leases have been signed.

We have continued with our proven strategy to vacate and consolidate spaces, redevelop them and re-lease those spaces at higher rents to better quality tenants. Given the timing delay between the move out of existing tenants and the commencement of replacement new leases and a further delay between legal commencement and GAAP revenue recognition, our occupancy can vary quarter-by-quarter, and these timing lags impact our reported revenue.

During the first quarter, rental rates on new and renewal leases across our entire portfolio were 13.4% higher on a cash basis compared to prior cash escalated rents. And at our Manhattan office properties, we signed new leases at a positive cash rent spread of 21.1%.

Of course, leasing spreads always depend on the expiring fully escalated rents, and in the near term, cash leasing spreads will benefit from the lease-up of vacant redeveloped office space, which had prior cash fully escalated rents of $52 per square foot, which is well below current market. Our future cash leasing spreads will be influenced by rents on future lease expirations, which we disclosed on Page 11 of our supplemental.

We continue to see demand for our product, location and price points and feel very confident in our offerings. We have raised our weighted average asking rents in our Manhattan office buildings by over 4% on a year-over-year basis, following increases in our asking rents throughout 2018.

We have a healthy pipeline of leases and negotiation across the portfolio for both full floors and prebuilts.

And 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 the market for future lease-up.

Now I'll turn the call over to David Karp. David?

David Karp

Thanks, Tom, and good morning, everyone. For the first quarter, we reported core FFO of $57 million or $0.19 per diluted share. Cash NOI was $80 million, down approximately 1% from the prior year period. Excluding the $2.8 million settlement with a former broadcast tenant in the prior year period, cash NOI was up 2%. In the first quarter of 2019, we adopted the new lease accounting standard, under which all rental income earned under tenant leases is reflected in one category. We now show rental revenue inclusive of tenant expense reimbursement.

On Page 18 of the supplemental, we have included a new schedule, breaking out base rent and build tenant expense reimbursement for the quarter and we'll show that going forward. Historical information for the prior 4 periods is also shown.

In our Observatory operations, which are highlighted on Page 16 of our supplemental, revenue for the first quarter of 2019 decreased to $20.6 million or 3.2% from the prior year period. Net operating income was $13 million, 6.6% lower in the first quarter of 2018 due to a combination of lower revenue resulting from the Easter holiday shift, which I'll explain in a moment, and previously noted higher expenses related to the Observatory redevelopment. To put this in perspective, the first quarter is our seasonally lightest quarter and this roughly $900,000 net operating income decline represents less than 1% of the trailing 12 months Observatory NOI.

In early April, we implemented a price increase in our wholesale channel and made a few revisions to our retail pricing strategy. We've moved to 2 pricing categories versus our prior 3 tiers and now display retail website prices net of tax.

As reported on Page 16 of the supplemental, the Observatory hosted approximately 601,000 visitors in the first quarter 2019, a decrease of 43,000 visitors compared to the first quarter 2018. Of this 43,000 decline, we estimate that approximately 24,000 is attributable to the shift in the Easter holiday, which fell entirely within the second quarter of this year, whereas in the prior year, the Easter holiday was split between the first and second quarters. In addition, we estimate that bad weather days resulted in approximately 10,000 fewer visitors than in the prior year period based upon when those bad weather days occurred within each period. That leaves 9,000 fewer visitors attributable to other factors.

Moving to our balance sheet. Our low leverage, joint venture free and flexible balance sheet, including significant cash on hand, give us a competitive advantage to execute our redevelopment plans and opportunities for external growth in any market environment.

As of March 31, 2019, 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 7.8 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 March 31, 2019, our consolidated net debt to total market capitalization was 21.6% and consolidated net debt-to-EBITDA was 3.6 times . And we have cash, cash equivalents and short-term investments of $593 million.

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

Question-and-Answer Session

Operator

Thank you [Operator Instructions] Our first question comes from the line of Emmanuel Korchman with Citi. Please proceed with your question.

Emmanuel Korchman

Hey. Good morning, everyone. Tom, maybe we can just start with what you're seeing more generally on the concessionary environment in New York. It's certainly been a big topic. But if you look at your renewal results especially, we're not seeing that. So could you just give us an update?

Thomas Durels

Sure, Manny. Actually, we've seen a good pace in net rent growth year-over-year as I pointed out in my earlier remarks. We've increased our asking rents by over 4% on a year-over-year weighted average basis for our entire Manhattan office portfolio and for certain spaces such as full floors at Empire State Building at 1400 Broadway, we've increased asking rents by as much as 7% to 10% on a year-over-year basis.

There have been many questions about net effective rent growths and what we saw in our portfolio is an increase in net effective rents for our New York City office of about 5.5% for new Manhattan office leasing on a year-over-year weighted average basis.

We're seeing concessions generally leveling off or at least the pace of concessions is -- of increases is slowed offset by increased rents. And yes, as you see in our supplemental, our average leasing cost per lease year for TI and commissions for all new and renewal Manhattan office leases decreased in the first quarter to about $8.33 per square foot on a weighted average basis compared to fourth quarter.

Emmanuel Korchman

Great. And then you guys mentioned 9,000 fewer visitors at the deck given other factors. Maybe when you guys dig into to your best thoughts on what those other factors were, could you share those?

Anthony Malkin

I'll take that, if I could, Manny. We look at this and say that, yes, there was the difficult weather and there was the shift in Easter. And then, overall, we continue to see a decline in our international. So when we look at this, we put this against the fact that over the trailing 12 months, our revenue per capita increased 7.9% versus last year. And we've raised our wholesale ticket prices most recently in April.

We've changed our pricing categories from 3 tiers to 2 tiers. We continue to innovate with new offerings to maximize our per cap. Overall, the new Observatory entrance has already increased the desirability of our 34th Street retail available lease. It's improved our Fifth Avenue Lobby and cleaned up our Fifth Avenue experience for tourists and obs users.

Like everything on the Observatory as far as we are concerned is working very well towards the completion of the second floor by the end of July and the new 80th floor and 102nd floors by the end of October and we just think that all of this will put us in the best place from an offensive perspective to maximize on what we are doing with regard to building visitorship, encouraging visitors to come during bad weather days and continuing to prove -- improve our per caps due to the new experience and new revenue-generating opportunities.

So we can look at all of these other factors. Primarily, we think it's still some slightly interrupted typical tourist trends. We can look at other attractions out there, the one that's easiest to track again as One World Trade Center because they post their attendance every month. And they are down tremendously and that's in the face of tremendous discounting. Again in the opposite direction, we're increasing our revenue per capita over the trailing 12 months by 7.9% versus last year.

Emmanuel Korchman

Thanks a lot.

Operator

Thank you. Our next question comes from the line of Craig Mailman with KeyBanc Capital Markets. Please proceed with your question.

Craig Mailman

Good morning, guys. Tony, just to clarify, I think you just said end of October for opening up the 80th floor and 102nd. Is -- so the elevator work on the 102nd floor is -- could it be a little bit more than 9 months that you guys expected?

Anthony Malkin

No, we're still expecting the 9 months -- whatever that 9-month period is, certainly by the end of October, I said that was for 80 and 102. So I think 9 months is still our target for 102; 80 is going to be perhaps a little longer. And the elevator work, if you recall, was done last year.

This is not elevator work. This is completely transforming the experience on 102. We've put in a glass elevator on the 86th to 102nd floor. We didn't do that just so people could look through the walls of the glass elevator at the walls of the shaft.

There's major changes taking place on 102, which is underway at this time. That work should get done as we addressed in our earlier predictions. That was just mooping it together with the work on 80.

David Karp

Craig, it's David. Just for your modeling purposes, again, I would still go with an impact to revenue in connection with the closure 102 in 2019 of just slightly over $8 million.

Craig Mailman

Okay. That's helpful. And then on the FDIC lease, good job getting that done. It looks like you're in kind of right around 6.8% mark-to-market. Do you think that's indicative of some of these earlier vintage mark-to-market on spaces that have already been redeveloped?

Have you guys gone back and kind of tried to do space by space to see where that mark-to-market could go even after the redevelopment work is kind of done to see what mark-to-market you guys could keep posting on a normalized basis?

Thomas Durels

Craig, first of all, the FDIC lease had very low concessions, and we are very happy with the outcome. They are one of our 10 largest tenants and -- so we're thrilled to keep them for 119,000 square feet at the Empire State Building.

Our mark-to-market is going to depend on, obviously, the prior escalator rents on redeveloped vacant Manhattan office space, our higher escalator rents were about $52 a square foot.

So you can do the math if we end up doing leases in the low to mid-$60s. It's going to be a -- represent a healthy mark-to-market and on future leases rolling. Our Manhattan office portfolio in-place rents are about $57 a square foot and generally, we're asking rents in the low $60s to -- all the way up to $86 square foot, depending on space and the floor.

So that's going to represent future mark-to-market. And then there is, obviously, in our supplemental, we do provide future tenant -- future mark-to-market in the supplemental.

Craig Mailman

That's helpful. And then could you just remind us when does that Uber lease at 1400 expire? And I know it may be early, but there's obviously reports they're looking for 250,000 to 300,000 square feet. Any indications from the tenant whether they'd want to keep that space? Or if they kind of consolidate out of it?

Thomas Durels

Well, they have just done 50,000 square feet with us at 1400 Broadway. I would just say that we've got an excellent relationship with them. We have an opportunity to create space at 1400 Broadway, which has seen tremendous activity. We have the opportunity to create additional full floors there.

Going forward, this year alone, we were slated to consolidate about 64,000 square feet in two full floors. And we have additional floors that we can create. We've been very creative in accommodating growth for our existing tenants. And that -- I think that's all I'm going to say on that.

Craig Mailman

Okay. And then maybe just one last one for Tony. There's been some stuff coming out of the Blasio administration about carbon emissions and other things related to green initiatives, which I know you've been a big pioneer in.

You guys look at your buildings, some of the stuff that they're talking about on the carbon side, do you guys feel like the work that you've done would kind of put you in compliance with that? Or would there be potentially more capital put into the buildings to kind of come into compliance?

Anthony Malkin

This is a challenging piece of legislation into which I was active and sought to give constructive input, some of which was incorporated. The rules associated with the legislation like laws in Congress, a lot of those rules are going to follow the actual passage of the legislation.

Our view is to look at how we can most constructively address the opportunities to do better, and certainly, to maintain our leadership position in our energy efficiency, which is significant.

I will say two things: one, this does highlight how the industry's focus on greenwashing like LEED and GRESB, as I have said repeatedly, has been wrong. The proof is in how much people have spent on LEED and how little it does anything to mitigate their exposure to expense under this new legislation.

Two, no, our buildings will not meet the requirements at present of this legislation. We are a moving target and continuing to roll out energy-saving measures in tenant spaces as they are built. That's what tenants are required to do under our leases and continue to roll out innovations.

But this, which is being spoken about, is radical. It's absolutely radical. And we're in the best position of any landlord. And at the same time, future is uncertain. The rules will have to be made, and again, anybody who's been spending millions of dollars on LEED and GRESB is wasting their money.

Craig Mailman

Great. Thank you very much.

Operator

Thank you. Our next question comes from the line of Jason Green with Evercore ISI. Please proceed with your question.

Jason Green

Good morning. Just curious as far as Observatory expense is coming down versus the higher HVAC and IT spend that you experienced in Q4. Was there any material change there or was it just a seasonal decline?

David Karp

Jason, it's David. On a quarter-over-quarter decrease, what accounted for that was we had lower marketing expenses this past quarter and some lower IT expenses, and those are primarily timing related. So we do expect to incur some of those expenses in the coming quarters.

We also saw lower security and credit card fees in the quarter. And this is attributable to the seasonality. Lower revenue translates to lower credit card fees, which is part of the expenses.

So when we take a look at the run rate for the Observatory over the coming year, we would still anticipate that what we experienced in the fourth quarter would be a good estimate for that run rate. I will say that a lot of the technology is new. We're still getting our arms around it.

There are new systems and as these systems stabilize, we'll probably have a better sense of how this run rate may change going forward, and as we learn, we'll let you know. The waiver savings that we realized from the reduction in the cashiers is really being offset by these higher technology costs.

Jason Green

Okay. And just curious on the methodology regarding bad weather days and the impact to visitors. I mean given you had the same number of bad weather days this year versus last year, and I understand there are some timing impacts, but based on the fact that you are recognizing a trend of less international visitation, how do you get comfortable that those 10,000 are truly missing because of bad weather days and not even worse visitation from international travelers or other?

David Karp

Well, firstly, the methodology takes into consideration the day of the week when the bad weather occurs. Bad weather on a Wednesday is different than bad weather on a Saturday. And it also takes into consideration the number of consecutive days of bad weather.

So in one period, you may have those 15 bad weather days spread out over a longer period, whereas, in another year, it could be concentrated and you could have 2, 3 bad weather days in a row. Once you've lost those visitors, you don't get them back. It also has a function that relates to the number of whether it's in a peak period or a non-peak period. So there's a lot that goes into it.

And remember, this is just an estimate based upon trends that we are seeing throughout the quarter and basically, interpolating that into what it means with regard to bad weather day. So I think it's a good estimate. It's not perfect, but it takes into consideration a lot of factors. So we feel pretty comfortable with that estimate.

Jason Green

Okay. Thank you/

Operator

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

John Guinee

Great. Thank you. David, it looks like your burn rate over the last 12 months has been about $25 million on cash. If you just look at your balances from March 31 to -- March 31, so $100 million and you've still got more Observatory Manhattan office -- suburban office. When do you get to cash flow positive? And assuming everything else stays equal, when do you stop having your cash out exceeding your other expenses?

David Karp

Well, John, that's a good question. Sounds a lot like a question regarding guidance, which we don't provide. But if you just take a look at this past quarter, our cash from operations was roughly $78 million. We transferred $50 million from our short-term investments into our operating cash.

To offset that, we had $61 million of CapEx. We had roughly $1 million of principal repayments and then we had our dividends of $32 million. So overall, you can see our cash position went up by $34 million. Again, overall, you have to take into consideration that $50 million of that came from short-term investments. So we did use a little bit of cash this quarter.

I think if you look historically and do that same analysis on a quarter-by-quarter basis, you'll see that, that spend rate is starting to come down. And certainly, by the end of the year, we should be getting to a position where we're closer to a net generator of cash as opposed to a net user of cash.

John Guinee

Okay. And then, Tony, big picture, what do you think is worse for New York? Is it the far-left political environment or is that the Trump effect globally on tourism and immigration and that sort of thing?

Anthony Malkin

Well, a friend of mine once said the lesser of two evils is still evil. I'd like to look at job creation. And job creation remained strong. There is a wide ability in New York City to absorb a lot of political perspectives. And there is wide ability in the world to overcome the impressions and impacts of one individual. And we've seen that in the way cities have recovered from terror attacks. So we think the New York City is recovering from the Trump presidency as well, as far as tourists from international destinations goes.

Overall, again, focusing on job creation, it's good. Space absorption is good. I think that there is a greater potential impacts from the need of -- ultimately, we work to start to operate as a ordinary company rather than just as a company that's able to spend money to grow than either of the two factors that you've commented on. And even that I think we can absorb.

John Guinee

And then last. I think a lot of people have been asking a lot of questions on the Observatory. But I think between The Rock and One World and Empire, there's maybe about 10 million capacity, about 10 million people annually. And those three observatories are running at maybe 80% or 90% capacity. You can correct me if I'm wrong on that. And it looks like the Edge and One Vanderbilt have about 4 million capacity each. Do you have a sense for how that's going to play out?

Anthony Malkin

Well, I think that we've done the math before and David has said in the past based on his calculations that if you look at our true capacity, you're probably operating around 50%. Of course, that takes into account all hours of the day, which we operate and maximum utilization in each hour. That being said -- look, I think that the world is about authenticity, values and Instagram when it comes to these destination attraction visits.

And I think that we win on authenticity. We win on connection to values, and our entire effort is already geared to -- that's -- and our redo of the Observatory is already geared to accelerating and improving what is already the #1 Instagram attraction in New York City.

And that -- so when we look at all of this, look, you've got 3 Burj Khalifas that are going to be online. One World, 30 Hudson, One Vanderbilt. I really look at where the people want to go rather than the fact that this has certain amount of capacity and it's all going to even itself out based on the number of people who go in allocation of visitors.

John Guinee

Great. Thank you.

Operator

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

Jamie Feldman

Thank you. Tony, I want to go back to your comments on the green legislation. So my understanding is there is a 2024 benchmark and then there is a 2029. Can you talk -- are you saying even in 2024, you feel like Empire's portfolio is not in -- won't be in compliance with? And if not, I mean, what's the plan? And what's the cost to get there?

Anthony Malkin

So again, as I said, just like laws in Congress, there's still a rulemaking to be made here. And there are still some definitions that need to be codified by the advisory board that's to be set up over the next 2 years. And the fact is that look at this the same way we talk about how we look at our competitive position from a leasing perspective.

Everybody has been asking most recently down at the Citi Conference, is 2019 the year in which net rent growth returns to New York City office? As Tom Durels pointed out, we've had that rent growth for quite some time. We've said repeatedly. When we look at our position against the market, in general, we think we'll outperform any market situation on the basis of our product and our price position, our assets and our service.

I should probably say our service first, but that's the order in which it was said. So we get to this particular piece of legislation. All I know is that it's going to cost us less. All I know is that we've got a head start on everybody. All I know is that we've been focusing on the right thing first, which is energy, efficiency, energy consumption and that we've deployed it not only through our buildings but also in our tenant spaces.

And additionally, I know that the folks who've been focusing on LEED and GRESB and who tout how well they're doing on the basis of LEED and how well they're doing on the basis of GRESB.

I said repeatedly, we eschew these standards because they're all soft targets, they don't move the needle. And this particular piece of legislation, I think, you should anticipate it's going to be copied around the United States. So it's not just New York City, I think you should expect that cities everywhere are going to take this on. And from our perspective, we'll follow the rulemaking.

We absolutely have been spending a lot of time on this looking what the potential costs are and -- but more importantly, it's one of the potential measures we can take and how can that continue to improve our competitive position.

Jamie Feldman

Okay. I guess it's interesting to me because I've spoken to some of your peers who have said at least for the 2024, they feel like they're on a glide path to be in compliance. I mean there'll be some additional spending, but it's no different than what they've been doing. Are you saying for even 2024, you don't think that you would be there? I think that 2029 is very different. I mean...

Anthony Malkin

And my comment is anybody who thinks that he or she is on a glide path to accomplishment on the basis of 2024 is making an awful lot of assumptions because the rules haven't been fully laid out yet.

So from my perspective, I'd rather participate in the process with -- with the advisory board, rather watch that careful, and I'd rather speak from a perspective of knowledge rather than assumption.

So it is very possible that we could be in complete compliance. At the same time, till everything's done and there are studies out there still at work, can't make that comment.

Jamie Feldman

Okay. And then, I mean, very recently, we've seen QIA make a big investment in New York City retail with Vornado. I'm just curious any thoughts, I know you've a -- they've a big investment in you guys. But just bigger picture, are you seeing an uptick in interest from foreign capital looking at the market? And just any thoughts on any changes there?

John Kessler

Jamie, it's John. We certainly saw what QIA did with Vornado. We think they have a great partner there. And our analysis is that Vornado raised capital, which they're going to use towards reinvestment in Penn Plaza and that's certainly good for us. As we look at opportunities in the market, we continue to find that the best use of our capital is redevelopment of our own portfolio and that we got very substantial internal growth over the next 5 years, $107 million of top line including $50-plus million contractual.

If you look at pricing of assets, which I think is driven to your question about foreign -- in part about foreign capital, the frequent numbers show more than $300 billion -- $330 billion of dry powder, and certainly, people like QIA and other sovereigns are incremental to that.

And so there is -- continues to be tremendous capital, I think, dedicated in looking for additional investment in the city, and that continues to hold up pricing. Chrysler is an example of that where we were certainly impressed by the price and also the fact that they're able to finance their investment. And we continue to want to focus on growing the business, but we're going to continue to be careful and prudent.

Anthony Malkin

No, and there's a lot of capital out there, Jamie. Talk to Darcy Stacom. Talk to Adam Spies and Doug Harmon. They're going to be able to tell you who is out there, but there is a lot of capital and a lot of it is cross-bordering and isn't even tracked by frequent.

Jamie Feldman

Okay. Do you think we'll see a pickup in actual if that capital getting put to work though? I mean, obviously, with QIA we did.

Anthony Malkin

It's a -- you know, we don't pull the trigger on it. All I can tell you is that we continue to work very hard on off-market situations where we can deploy our skills, where we can deploy our balance sheet in a unique way and where we can take advantage of the use our operating partnership units.

And I wouldn't like to be a person in private equity right now deploying the capital, knowing, by the way, that, that $330 billion is for more than just office in New York City.

Nonetheless, it's all going to get spent before. People aren't going to give money back. So I think we should, in general, be looking at price support throughout all sectors in real estate for some time.

Jamie Feldman

Okay. And then finally, Tom, I think in response to an earlier question, you said -- on the concession side, I think you said they are about flat and then I think you said, well, actually, I think the growth -- the pace of growth is slowing. So can you just clarify, which one of those? And if it's the pace of growth, kind of, what is the growth rate that you're seeing in concession?

Thomas Durels

Well, for -- our average leasing cost per lease year for TIs and commissions for all new and renewal Manhattan office leases decreased in the first quarter to $8.33 per square foot on a weighted average basis compared to the fourth quarter. And generally speaking, I would say that we've seen a leveling off.

Certainly, that means that lease, at the very minimum, the pace of concession increase is just slow, and we're seeing and have experienced an increase in net effective rents. We -- for our New York City office -- for our new Manhattan office leasing, our net effective rents grew about 5.5% on a year-over-year weighted average basis.

Jamie Feldman

Okay. Thank you.

Operator

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

Blaine Heck

Good morning. So just to follow up on the pricing discussion. I think, Tony talked about a 50 to 80 basis point expansion in cap rates a couple of quarters ago. So I guess has that changed at all in your mind given the amount of capital that's come back to the market? And is it at least kicking the tires, or is there still a bit of a gap from where we saw the priciest deals this cycle?

Thomas Durels

It's pretty interesting about how do you figure out the cap rate on the Chrysler Building. In general, I think that two things: One, you've probably seen the adjustment and it's stayed, but that's being supported by the capital; and two, the better prices are -- back to the better prices going to assets that are not stabilized. If there is more room in people's pocketbooks for assets that have turnover and vacancy where they can underwrite a dream than something which is fully locked in and baked.

Blaine Heck

Okay. That's helpful. And this is probably for David. I know you guys have plenty of liquidity at this point between your cash and line of credit. But I guess I'm curious what you think your investment capacity is.

If a really large deal or a series of deals is to come up and you're going to put out kind of the maximum amount while still being comfortable with your leverage stats, how much capacity do you guys have for kind of a deal like that?

David Karp

Well, if you take a look at where we are right now in terms of our leverage, we've a 21% net debt to total enterprise value, which gives us a fair amount of room to bring that up in connection with the transaction. We have liquidity in place with the cash on the balance sheet. We have the revolver, the $1.1 billion revolver on which nothing has been drawn.

So we have sources of liquidity and we have capacity to bring that up. Certainly, if we're 21%, even potentially doubling that to 40% would not put us in an uncomfortable position.

Now having said that, we enjoy our position of low average. We think it serves us well in any market environment. So if we were to bring our leverage up to something in that neighborhood, we would look to a path to restore that to a more comfortable level where we're currently operating over the longer term.

Thomas Durels

I'd add, don't forget, there is a ton of potential joint venture capital out there, as we've disclosed QIA has a right of first refusal on any JV that we might like to do. I think it's really a matter of when we see opportunity.

What would we be comfortable doing and the answer to that is, we'd be comfortable taking it. And we would justify in that action that we take what the balance sheet looks like on the basis of the value of the opportunity that we see.

Blaine Heck

All right, okay. Thank you.

Operator

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

John Kim

Morning, Thank you. Looking at your free rent burnoff for the remainder of this year, the $14 million last quarter. There was $23 million for the years. You got $9 million that you used during the quarter. And I'm just wondering where that $9 million went.

Because when you look at the cash NOI ex-Observatory on Page 5 of your supplemental, it looks like it was down almost $21 million and $19 million of that was the termination fee. But I'm still trying to reconcile where that $9 million free rent burnoff went this quarter?

David Karp

Yes. So, John, during the quarter, we had leases representing about $12 million of annual rent and their free rent period and begin paying the cash rent. So what this does is it increases the cash rent in subsequent quarters by roughly $3 million per quarter or $9 million for the period from April of 2019 to December of 2019. So as -- again, as it starts paying the rent, it comes out of that and doesn't all fall within the one quarter. It gets spread out over the remaining year.

John Kim

Okay. So that -- for some reason, I thought that, that was not in anyone's number?

David Karp

Well, it's -- again, it's the remaining -- we do this on an annual basis. So we say, for 2019, how much of that free rent will be recognized in year 2019? And in that instance, $12 million will be recognized in 2019.

John Kim

Okay. So there is a significant amount of newly developed space that's going to come to the market over the next couple of years in Herald Square, whether it's Vornado at Penn or potentially now Macy's moving forward with its office development.

I'm wondering how do you think that impacts not only the market but your ability to attract tenants. And what that does as far as capital spend on your assets?

Thomas Durels

Well, I think, first of all, we are uniquely positioned, as we said before, between typical Class B office and new development. We're attractively priced and offer a great value with great access to mass transit and convenient central locations. So I think we occupy a unique space in the marketplace.

All of our properties have been modernized. We've invested heavily as you know. We've redeveloped over 7.3 million square feet of tenant spaces, renovated all the common areas and building systems and infrastructure. And -- so I think we're very well positioned.

Look, we delivered great results. We've got a great pipeline of activity for office space in Manhattan for both full floors and prebuilts. We're seeing activity from a wide variety of tenants including TAMI, FIRE, consumer product, nonprofit, gold manufacturing, professional services, you name it.

We're building a quality, diversified rent roll and I don't see the level of interest being diminished by new development. In fact, it's said that new development enhances our neighborhoods and it's all good for us and so I think we're very, very well positioned for the future.

John Kim

Tom, can you just remind us the developed vacant space that you have of 530,000 square feet? Is that all available to be leased today? Or is that -- some of that meant to be aggregated?

Thomas Durels

About 450,000 square feet is redeveloped and vacant and ready for lease-up. Roughly half of that is prebuilt and the other half are white box floor and partial floors. The balance of that space we'll bring to market over the course of this year and early next year, some of which is waiting for rollover of some adjacent space.

John Kim

Thank you.

Operator

Thank you. Our next question is a follow-up from the line of Emmanuel Korchman with Citi. Please proceed with your question.

Michael Bilerman

It's Michael Bilerman with Manny. Tony, using your knowledge rather than assumptions quote. Can you share with us maybe the year-to-date visitors through this weekend, which sort of captures Easter both last year and this year to sort of see what the trends would be?

Anthony Malkin

No, Manny, we will do that at the end of the second quarter. I'm sorry, Michael, we'll do that at the end of the second quarter. We don't give interim updates. But we're happy with what we're seeing.

Michael Bilerman

I know you don't give them and that's why I asked because we've made -- you've made some assumptions based on what it is. And I figured talking about the current trends would be more important than talking about hypothetical assumptions.

Anthony Malkin

I got you. We're -- we -- first of all, as you know from our prior comments, we always look at things on a trailing 12 months because things like the shift of Easter and Passover during this period of time, Passover to a lesser extent and Easter to a much greater extent do create distortions. But again, we'll give that report at the end of the next quarter.

Michael Bilerman

I'm sure, you have not so available on the 86th floor for people. So in terms of the pricing, you said you went down to 2 tiers versus 3. So I guess the headline prices $36 and $69 today just for the regular price. Where -- just remind us, where the 3 tiers were before, and sort of what was the take-up of 3 tiers versus what you're seeing the take-up between the 2 tiers today?

Anthony Malkin

So those different tiers, Michael, are actually what's at the gate. So that doesn't refer to premium offerings. That refers to the price to get into the attraction. So what we did is, we had before what we called our regular -- our peak and our premium. We didn't disclose those to the outside world.

What it was it's just certain days when you showed up or you bought your ticket or a ticket for entry was redeemed through one of our tour and travel partners. It was at a higher number. What we looked at after doing a lot of the study with some outside help was that it's really a different program that we want to pursue as we look at things overall.

We look at our -- what we call our value and our regular periods. It's just a different way of phrasing it, so to speak, number one. Number two, our alternative products, we just began offering a $500 per person all-access pass. The all-access pass gives the visiting group access to our green room, our new green room where celebrities come and visit back of the building things that people don't get to see, personalized treatments throughout, special -- other special benefits all featured on the website.

We have our AM/PM ticket. We have our Express ticket. We have meal with a view at 2 of our restaurants at the building. We have Sunrise Experience. So those are all the ones where people can opt in for something special. And so what we find is that we're really focused on looking at our revenue mix and how this stuff works. We're really focused on reducing our discounts. We are really focused on enhancing the consumer experience.

And by enhancing our consumer experience, we will also, therefore, we feel be justified in a higher price, so the consumer experience is not just the new attraction that we're putting together, but it's also putting limitations on the number of bodies on the deck at any time so that we increase the square feet per person, so we get a higher-quality experience there.

What we find is that we're really focused on the revenue side. And we are less focused on volume. And we figured that the volume will be a derivation of the best mix of revenue but our focus is on the revenue.

So when we look at all of these different things together, the movement from 3 tiers to 2 tiers was just a component of an overall pricing strategy, one we've been developing over really the last 48 months and perfecting as it goes along, and it's been delivering quarter after quarter after quarter of per cap growth.

Michael Bilerman

Just maybe one for Durels. So on the FDIC lease, can you just talk about sort of the term? You're only going out to 2024. Was there any desire maybe given the interplay between the rent and term that you could lock -- could have locked them in for longer, and I guess why did they go that shorter term?

Thomas Durels

Well, I'd say, first of all FDIC is happy with our space, but they were limited to a 5-year term. So we were happy to renew them on the terms that we did. As I pointed out earlier, the lease concessions were very modest and we're happy with the outcome.

Anthony Malkin

I'd point out also that those floors are extraordinarily desirable. And it was a very tough decision for us to renew versus redevelop and make them available. But we have a good visibility towards demand for these floors. We thought long and hard about it and concluded that under the present situation that we have the need to redevelop that space and bring it to market.

We felt that we prefer to do that and it would flow for us as far as generating the best benefits 5 years out versus immediately. We're happy with the term. To go longer, we think with a sacrificed upside is our next pick on the deal.

Michael Bilerman

Last question for you, Tony. Just in terms of using the underleveraged balance sheet and the capital that you have, how has your thinking potentially changed on stock buyback, given where the stock price is? The liquidity that you have tied to what potential acquisition opportunities are out there in terms of buying into your portfolio, the portfolio that you know best and assets that you know best and just making a capital allocation decision rather than trying to get the stock price up, but buying in a discount to your portfolio when it trades at a meaningful discount, especially given your view on the Observatory and where you think that's going to go.

Anthony Malkin

So I really -- I appreciate that question because it's an answer that I'd really like to give. We really -- we appreciate that the public market seems out of whack with the private market. We still look to grow our business rather than to shrink it through buybacks of our stock or asset sales.

And we continue to focus primarily on nonmarketed situations and growing our business. We do not see our liquid and low-leveraged balance sheet with availability on our line as a drag-on performance but as optionality for the future. We are actively interested in off-market opportunities. Whether or not they will come to pass. That -- one that I've been working on for 3.5 years and one that I've working on for 5 years.

There's every reason that they should proceed. But again, they are off-market. They are not cash on the barrel and involves a different set of motivations and considerations for the parties with whom we've been speaking.

And we just continue to focus on what are we going to do with that balance sheet to help fix the issues and stabilize the issues of portfolios we might bring in rather than shrink the company by buying back stock or selling off assets and buying back stock.

Michael Bilerman

Okay. Thank you.

Operator

Thank you. Our next question is a follow-up from the line of John Guinee with Stifel. Please proceed with your question.

John Guinee

Great. Thank you. Tony, two other quick questions for you. About a year ago, you were fairly negative on street retail. How has your opinion changed? Do you think Manhattan or some of the markets have hit bottom on retail rents and occupancy?

And then the next question is, I understand the legislation needs to be followed by the rules in terms of the green bill. But is this green bill situation, $10 a foot in base building capital needed to be spent, or is it a situation where buildings just can't physically comply with the expected legislation?

Anthony Malkin

Well, I'll answer the first question and then the second. With regard to -- I'm sorry, the second one first. With regard to the green bill, to me it really comes down to -- I -- we don't want to give forward-looking comments and quite frankly, what I don't want to do is to cause any reaction to the folks who are going to be making the rules. So I want to be deferential and respectful to them, right? And I think that's the most important piece.

As far as cost per square foot, every time we sign a lease, we improve our energy consumption profile, as we recycle old space and the new space is built up more efficiently. Every time we make any capital upgrade of any kind of any building system, it has a different impact.

So I want to be careful on that particular subject. There are a lot of forces at play. There are a lot of things still to be said. I would think it's unwise for me to express an opinion not based on fact and to think that this is an easy target to reach. Do me a favor and repeat your first question.

John Guinee

Oh, just retail. About a year ago, you...

Anthony Malkin

Right, right, retail. Sorry about that. Yes, I was with dinner -- at dinner the other night with someone who's the head of a company that owns a lot of street retail, and he made a simple comment. He said that over the last 10 years street retail pricing in peak popular areas of Manhattan doubled and then fell by half. And they're pretty much where they were 10 years ago.

At the same time, over that 10-year period, the number of retailers out there has shrunk. And you can talk about Casper or Bonobos or Warby Parker or whatever you like, they're not moving the needle.

So in our view, we still look at street retail as if you're fortunate to have a good credit tenant that wants to sign for a longer-term lease, you're going to invest more for TI and CapEx and you're going to get less rent. That's a fact.

John Guinee

Okay, good. Thank you very much. Have a good day.

Operator

Thank you. Ladies and gentlemen, our final question this morning comes from the line of Craig Mailman with KeyBanc Capital Markets. Please proceed with your question.

Craig Mailman

Hey, guys. Just two quick ones. Just one is a follow-up on earlier question about the burnoff of the free rent there. So it sounds like 2Q and beyond should have about $3 million from what burned off from that schedule this quarter.

As we think about the remaining $12-plus million that's in there, I know you guys don't give guidance, but is it -- I guess some sense of timing of when that kind of hit? Is it more back-end weighted in each of the quarters? I'm just trying to get a sense of trajectory there.

David Karp

Yes, Craig. You're correct, it is $3 million. And then if you look at the remaining amount, you can get a sense if you look in our corporate presentation on Page 10. It gives you expected based cash commencement dates and you'll see that a lot of this is going to be more back-end loaded over the year.

Craig Mailman

Okay. All right. And just the way we should think about the $12.6 million that's in there. That's actually a much higher gross amount but only a fraction that comes in during the year.

David Karp

I am not sure I follow when you say to gross amount that comes in.

Craig Mailman

The $9 million that's burning off this year is actually $12 million of leases...

David Karp

Well, because $3 million of that was realized in the first quarter roughly.

Craig Mailman

Great. I guess to go back to John's question and where did that $3 million go? Was it just offset by space coming offline? Or did you recognize a full $3 million in the first quarter? Or is it sort of timing wise something less than $12 million, I mean, $3 million, sorry?

David Karp

Yes, it's a little bit less. I mean it was partially -- it wasn't for the entire -- you don't have the entire $3 million in the first quarter because those commencement dates weren't on January 1. They would occur throughout the quarter, so it wasn't the full $3 million.

Craig Mailman

Okay. All right. And then just lastly, any updated plans of what you're going to do with the convert?

David Karp

We're going to pay it off. How we do that we're still evaluating our options, which as we've noted are many. We have the ability to do with cash on the balance sheet. We have the ability to draw on the revolver. There is the potential for doing a term loan, bank term loan.

There is a potential for doing a private placement. We could consider a public bond issuance. So a lot of options available to us. As you'll recall, we did, as a precaution and to provide us with greater optionality, enter into a forward-starting interest rate swap. So we have lots of financing options on that.

Craig Mailman

Relative to the coupon, where do you think pricing is today for debt that could replace it?

David Karp

Well, remember, there's two things to look at when you look at the cost of that exchange. One is the cash coupon that we pay, which is 2.625% and then there is what the GAAP interest accrual is, which takes into consideration the noncash portion of the equity option as well as the amortization of deferred finance costs.

And when you take that into consideration, and this is all laid out in our 10-K, you'll see that the GAAP accrual rate is just under 4%, 3.93%. In comparison, if we were to do -- let's say if we were to do a term loan, 7-year term loan, bank term loan, just assume it's spread somewhere around 150 basis points. We have the swap, which is 2.958%, so roughly 3%. We'd be all in and around 4.5%.

So on a cash basis, that would increase our interest cost by just under 2%. And so that's roughly $4.7 million on the $250 million notional. On a GAAP basis, however, the incremental interest expense would be about 0.6%, which would be roughly $1.5 million per year on a notional.

Craig Mailman

Great. Thanks, guys.

Operator

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Malkin for any final comments.

Anthony Malkin

So I'll keep it short. Our goal was to produce a very, very short call. We had 11 minutes of our time talking and we are thrilled by the active Q&A. We really are, but we are sorry for going so long. So we thank you very much for your time and questions.

We look forward to a chance to meet with you all in the months ahead at several property tours, events and Nareit on the calendar for the spring and summer. We look forward to repeating our second quarter results, including our Observatory attendance in July and until then, everybody, all the best.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.