Empire State Realty Trust Inc
NYSE:ESRT
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Empire State Realty Trust Inc
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Greetings, and welcome to the Empire State Realty Trust First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce Tom Keltner, Executive Vice President and General Counsel. Thank you. You may begin.
Good afternoon. Thank you for joining us today for Empire State Realty Trust's first quarter 2021 earnings conference call. In addition to the press release distributed yesterday, a quarterly supplemental package with further detail on our results and our latest investor presentation were posted in the Investors section of the Company's website at empirestaterealtytrust.com.
On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements as defined in applicable securities laws, including those related to market conditions, property operations, capital expenditures, income and expense. As a reminder, forward-looking statements represent management's current estimates. They are subject to risks and uncertainties including ongoing developments regarding the COVID-19 pandemic, 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. Certain of our disclosures today are added specifically in response to the SEC's direction on special additional disclosure due to the changes in our business prompted by the COVID-19 pandemic and are unique to this instruction. We do not expect to maintain the same level of disclosure when we resume normal business operations.
Finally, during today's call, we will discuss certain non-GAAP financial measures, such as FFO, modified and core FFO, NOI, cash NOI and EBITDA, which we believe are meaningful in evaluating the Company's performance. The definitions and reconciliations of these measures to the most directly comparable GAAP measures are included in the earnings release and supplemental package, each available on the Company's website.
Now, I will turn the call over to Tony Malkin, our Chairman, President and Chief Executive Officer.
Thanks, Tom, and good afternoon to everyone. We remain confident in the recovery of New York City, realistic with regard to where we are and through what we will have to go to get to that recovery, and well-positioned for the balance sheet that gives us a long runway and the ability to take advantage of growth opportunities. The U.S. vaccination rollout, stimulus spending and reduction in New York State pandemic linked restrictions, all speak to a much better spring than any period we have had since lock down in March 2020.
Daily, there are new announcements from arts, cultural, hotel, hospitality and entertainment venues, which all serve through remarkable and growing demand from New Yorkers to get out and enjoy their city. Rental apartment occupancy is up and apartment sales have increased. Schools are back in session. Airlines have announced rehirings and increased domestic flights. Even if the much discussed 100% of 2019 domestic schedules by summer does not occur, directionally this is good news.
Our number one international tourist source for the Empire State Building Observatory, the United Kingdom, is well advanced in their inoculation program. As dark as people would like to paint the picture, the near-term future is brighter than it has been for more than a year. As I have said for several quarters, I still believe that it will be the end of Q1 2022 before we see predominantly positive overall news stories on New York City, office utilization, retail sales, tourist visits, and quality-of-life issues.
We are well-positioned to bring back employees and tenants with confidence to our buildings, operate efficiently, and encourage Empire State Building Observatory visits. New York State has just announced the return in May of up to 75% of office capacity. Our tenant presence has grown slightly since last quarter and our building utilization stands now at approximately 13% in our New York City portfolio and 32% in our greater New York portfolio. Many tenants plan their return to the office around the widespread rollout of vaccinations with major tenants announcements of return to office beginning around July 4, and Labor Day.
Importantly, even the incredibly negatively biased reporting around the "death of the office" has now shifted to an acknowledgment of the challenges in equities and worries about divided workplaces between home and office work and the impossibilities posed by the thought of on boarding new employees and the future of businesses without an office. The awareness of the selective discriminatory impacts on minorities, women, youth and the service jobs of COVID, lockdown, school and childcare shutdowns, and the absence from the office, paint the roadmap to solutions driven by the reopening of our great city. All of this is good news to ESRT.
We are well positioned with our flexible balance sheet, our collection levels have been stable for several months and we have shifted our focus from successfully implemented cost reduction measures to a rethink of our processes and practices around new ways to reduce our costs permanently. August works to our advantage as we look to utilize our balance sheet flexibility and seek ways to deploy our capital through external growth opportunities.
We have done more work on that external growth in the last quarter than our entire prior period as a public company. Visitors to the Empire State building Observatory continue to grow off a very low base with no discounts offered and fantastic visitor feedback from our largely local visitorship to our traction that features top-of-the-line indoor and rental quality including MERV-13 filters, ventilation and active bipolar ionization.
Driven in part by a timed reservation ticketing, local and regional visits and limited utilization by our visitors of past programs and online travel agents, our per capita revenues have never been higher. People are prepared to pay for quality and welcome the opportunity to enjoy our destination attraction with confidence.
First quarter attendance was at nearly 9% of 2019 comparable attendance, a gradual improvement from 2020 levels and consistent with our hypothetical admissions forecast. Visitation is primarily domestic, retail and website driven which bolsters revenue per cap. Visitors remain very pleased with our focus on health and safety, an area where we excel with more than half a decade old focus on healthy buildings and indoor environmental quality.
We have no change to our hypothetical Observatory admissions shown on page 13 of the investor presentation. We have said in preceding quarters that we expect to hire local-visitor mix followed by a ramp up regionally, then nationally sourced travel and then followed by restoration of our typical visitor mix, that is approximately two thirds international, that will not be achieved into a broad resumption of international air travel that we anticipate will occur sometime in 2022.
Again, our number one international tourist source for the Empire State building Observatory, the United Kingdom is well advanced in their inoculation program compared to any other international nation.
Our hypothetical suggests that we can reach 60% of 2019 attendance levels by the end of 2021 and return to 100% by the end of 2022. Please remember these points for your modeling. We believe we can essentially maintain our current Observatory operating cost structure and achieve up to 60% of our 2019 attendance. With more distant and international inbound tourists we will see growth from lower margin passes and online travel agent tourists in the future as inbound tourism mixes with our current local and regional customers, and that will lower our per caps.
Our ESG leadership continues. I encourage all stakeholders to read our first ever annual sustainability report that highlights our leadership, accomplishments and certifications in this area. And that also can give you a clear understanding that we are well-positioned for where the puck will be in the future on issues of energy efficiency, healthy buildings and indoor environmental quality. Our sustainability report can be found @empirestaterealtytrust.com. Again, the full first annual sustainability report can be found @empirestaterealtytrust.com.
In January we announced that our portfolio is now 100% powered by renewable wind energy. This action builds on our earlier success with the Empire State Building which has been 100% renewable powered for a decade. In April we were awarded the ENERGY STAR Partner of the Year designation in recognition of our contributions and leadership in the fight against climate change. And I am pleased to say that we are currently 76% ENERGY STAR certified by the number of square feet in our portfolio.
That said, our first annual sustainability report covers many more issues, many more certifications, and many more facts, and I hope that you will view it online.
New developments as of just last week, we joined New York State and the New York State Energy Research Development Authority in a commitment to the Empire Building challenge, a $50 million state initiative to accelerate progress towards a reduction of 85% of greenhouse gas emissions statewide by 2050. Our prior work at the Empire State Building which we have extended throughout our entire portfolio over the past decade provided us with the knowledge of what is possible and a skill set on how to execute.
We believe these commitments to a carbon free future will offer us a competitive edge in a tenant driven marketplace that increasingly focuses on ESG and how their occupied space is going to help them achieve their corporate goals. As I have said, I am confident and I am a realist. We are still in a time of uncertainty and I have said and still believe we will not hit the bottom of the market until the end of the first quarter of 2022. Through the noise we hear the sound of real companies that now approach real space needs with clarity and vision of how they want to use offices for their teams to work and grow together.
We will have uncertainty in the press about return to the workplace, large amounts of sublease space on the market and challenges with leasing and the reestablishment of New York City as a great world capital it is. I believe ESRT is well-positioned in 2021 with our well priced and competitive product, operational prowess, flexible balance sheet, focus on prudent capital allocation and leadership in ESG. I believe that the ESRT is well-positioned to thrive and deliver long-term shareholder value.
And now folks, Tom Durels.
Thank you, Tony and good afternoon everyone. In the first quarter, we signed 26 new and renewal leases totaling approximately 172,000 square feet that included approximately 143,000 square feet in our Manhattan office properties, 28,000 square feet in our greater New York metropolitan office properties and a 1000 square feet in our retail portfolio.
Significant leases signed in the quarter were a 33,100 square foot expansion office lease with Burlington Stores at 1400 Broadway, will now occupy approximately 68,300 square feet. A 31,400 square foot new office lease with Zentalis Pharmaceuticals at 1359 Broadway that will occupy space to be vacated by Li & Fung later this year and a 30,600 square foot new office lease with a law firm at One Grand Central Place.
Our mark-to-market results are always driven by the escalator rents of leases that have expired and in today’s market we will focus on retention of tenants and that may result in reduction of rents on a mark-to-market basis on renewals. That said, during the first quarter rental rates on new leases signed at our Manhattan office properties increased by a healthy 14.7% on a cash basis compared to the prior escalator rents. Spreads on renewal leases at our Manhattan office properties were down 11.6% on 32,000 square feet and ten deals.
New and renewal office leases across our entire portfolio were up 6.8%. We estimate net effective rents in our portfolio upstate versus pre-COVID levels have declined 10% to 15% on a comparable space basis. Net effective rent is a combination of base rent, pre-rent, length of lease term and tenant work, all of which vary by deal and depends on the space condition, location, tenant credit and other factors.
Our total portfolio n leased percentage is 88.7% unchanged from last quarter. Occupancy of 85% was down 90 basis points from the prior quarter due to anticipated tenant moveouts. And for the balance of 2021 we anticipate tenant moveouts of 300,000 square feet which will be offset by signed leases that we anticipate will commence before year-end of 305,000 square feet. Please refer to the tables on pages 6 and 10 in our supplemental.
We have seen a noticeable increase in tour volume during the past six weeks in our Manhattan office portfolio to about two thirds of pre-COVID levels. While the recent increase is a positive sign that some tenants are beginning to reengage, the lease transactions that come from this tours will likely appear in the second half of the year. Healthy buildings and indoor environmental quality remains front of mind for all -- for nearly all tenants and is the most asked about topic before and during space tours.
We reduced property operating expenses by $11 million in the first quarter of 2021 compared to the prior year period and a cumulative total of $50 million since the pandemic onset. We achieved these cost savings without reduction of services to our tenants and after the cost of implementing new health and safety protocols. As previously mentioned, most of the cost reductions were primarily driven by low building utilization. However, we continue to focus on ways in which we can change our processes and reduce expense beyond savings driven by lower occupancy.
Keep in mind that a portion of the reduction in operating expenses will be offset by a reduction in tenant expense recoveries from existing leases. And looking ahead to the second half of 2021 with a greater increase in vaccination distribution and a return to the office we expect a gradual increase in operating expense levels.
In summary, we had a good leasing quarter that included expansions of the existing tenants and the addition of new tenants to the portfolio. Our industry leadership and experience in indoor environmental quality and sustainability enhances our ability to attract and retain quality tenants and we continue to manage property operating expenses tightly with cumulative reduction of $50 million since the pandemic onset.
Now, I’ll turn the call over to Christina. Christina?
Thanks, Tom. For the first quarter we reported core FFO of $41 million or $0.15 per diluted share. Same-store property operations, if you exclude one-time lease termination fees and observatory results from the respective period, yielded a 3% cash NOI increase from the first quarter of 2020, this increase was primarily driven by lower property operating expenses partially offset by lower revenue as compared to the prior year period driven by receivable write offs and increased vacancy.
Our rent collections remain stable at 94% of first quarter 2021 total billings with 96% for office tenants and 86% for retail tenants. The company recorded a non-cash reduction of straight-line balances of $0.6 million and wrote off $0.5 million of tenant receivables assessed as uncollectible during the first quarter of 2021.
Switching to Observatory results, Observatory revenue for the first quarter of 2021 was $2.6 million and that included $0.1 million of deferred revenue from unused tickets and earned income from our tour and travel partners. Observatory expenses were $4.6 million in the first quarter of 2021, which is our seasonally lightest quarter, and we continue to expect run rate expenses to be approximately $6 million to $7 million per quarter for the balance of 2021 depending upon the pace of visitor ramp up.
Turning to our balance sheet, as of March 31, 2021 the company had $1.4 billion of liquidity which is comprised of $567 million of cash and $850 million of undrawn capacity on our new revolving credit facility entered into at the end of the quarter. The credit facility has an initial maturity of March 2025 and has two six-month extension options and a sustainability linked green pricing mechanism that reduces the barring [ph] spread if certain benchmarks are achieved each year.
The company had total debt outstanding of approximately $2.2 billion on a gross basis and $1.6 billion on a net basis at March 31, 2021. The company’s total debt has a weighted average interest rate of 3.9% and a weighted average term to maturity of 7.9 years. We have a well laddered maturity schedule with no outstanding debt maturity until November 2024. Our net debt to total market capitalization was 32.6% and net debt through adjusted EBITDA was 6.5 times.
Year-to-date through April 27, 2021, the company repurchased $3.5 million of common stock at an average price of $9.22 per share. This brings the cumulative total since the stock repurchase program began on March 5, 2020 through April 27, 2021 to $147.2 million at an average price of $8.34 per share. Our balance sheet flexibility provides us with an operating runway to engage selectively in share buybacks and evaluate opportunities to deploy capital for external growth. Our investment team continues to underwrite office, retail, and multifamily opportunities actively. As we have emphasized, we will prudently deploy capital when an opportunity presents itself.
Looking ahead, there are a few items to touch upon for your modeling consideration. We reduced property operating expenses by roughly $11 million in the first quarter of 2021 on a year-over-year basis driven primarily by reduced building utilization. The company expects property operating expenses in the second quarter of 2021 will approximate our current levels based on continued low building utilization relative to 2019 levels. Also, the company expects annual G&A to be approximately $58 million.
And now we will turn it over to the operator for Q&A.
Thank you. [Operator Instructions] The first question comes from Steve Sakwa at Evercore ISI.
Thanks. Good afternoon. I was hoping that maybe Tom could speak a little bit more about the demand and I guess specifically just sort of thinking about how tenants are looking at density as they are looking for new space? And for the deals that you said you got an increase in activity, are those for just kind of re-loads? Are they new deals, are the expansions downsizing, just a little color would be helpful?
One moment please.
[Technical Difficulty] to about two-thirds of our pre-COVID pace for space tours. Of course any of these showings that lead to proposal will likely occur in the second half of the year, but it's a really good sign that tenants have re-engaged in the market. IEQ, Indoor Environmental Quality and Healthy Buildings remains the primary focus by most tenants and it's often a gating issue before tours are scheduled and it's certainly the most frequently asked about topic during tours. And of course we encourage everybody to look at our, in our goals, sustainability report on our website.
I'd say about half the proposals are new activity that we see right now are -- represent tenants that are growing and the other half are lateral moves. But if you look at this quarter, we're pleased with the expansion lease we did with Burlington and the new leases with Zentalis and Belkin. These represent growth by tenants who are committed to long-term leases in the middle of the pandemic.
On space, -- on spaces we haven't really seen any change or significant change in what tenants are designing. This is an awful -- there's an awful lot of talk -- discussion on the topic, but I'd say we've seen some slightly less dense furniture layouts although pre-COVID many of our tenants were focused on employee productivity and really rarely occupied space to their maximum density. We've seen some increase in phone rooms, breakout rooms, some additional offices being added, but that does not mean that there's a conversion to all built offices.
So, overall we had a really good quarter. 172,000 square feet of leases are done. And I think that we're seeing a mix of tenants in legal, tech, financial services, government, media, so it's a good mix of tenants that we are seeing.
Okay, thanks. I guess second question, I guess Tony in your comments as well as in the press release you sort of talked about a real step-up in your activity levels looking at transactions. And I also noticed the share buyback volume was rather de minimis this quarter. I don't know if those two were tied together, but could you maybe speak a little bit more about the types of deals that you're seeing, if it's more distressed or just the fact that the markets are getting better and the debt markets are open that more product is coming to market?
Sure. Thanks Steve. Our team is busy, that means our new team and our seasoned players like Tom Durels and his property team and John Hogg and his FP&A team. And that we're looking at a broad variety of situations. Our focus remains New York City, office retail, and multi-family. We are in conversation with families, many of whom were not so interested in talking about transactions four or five years ago who are more interested now. We have seen widely marketed transactions. We've seen off market transactions, M&A, we spent time on it all.
At the same time I want to make sure that we're not distracted by this bright shiny penny topic, if you will. When we have something we will let you know and we will give our rationale. As far as the source and motivation of the transactions that we see, I would say quite similar to the leasing, things just have begun to move. There's a little bit less of shall we say the squirrel that's hunkered down in the middle of the road not knowing to which way to go.
We're actually in a process in which people have begun to make moves, come out of their shells, recognize things they have to do, recognize things they would like to do. So, I think it's all kinds of different motivations. And I think we will begin over the next few months to see price discovery come out on different assets as more deals are announced and we'll see more folks come to grips with, are they in a good position with a good run way or do they need help.
And maybe just as one follow-up there Tony, does the potential for cap gains tax or the elimination of 1031s, kind of accelerate some of that activity or you don't think either of those have a kind of a big driving factor and transaction volume?
Look, I think it's highly conjectural at this point. We don't see anything that really evidence is there. I think the only thing about which we feel reasonably confident with regard to the tax situation is that the Biden Administration would like taxes to go higher, that there is a dialectic in Congress and that the democratic majority in the House is not large and therefore in order to get any package passed, there is a contingent, a growing contingent of members of the House of Representatives who have said they will not approve anything without a removal of the cap on state and local tax deduction. And well we think it's hard to predict the outcome of any potential decision, any decision that lessens the burden on high income earners in our region is very positive.
Great, thanks. That's it from me.
Thank you. Our next questions come from the line of Manny Korchman with Citi. Please proceed with your questions.
Hey Tony, you've spoken about this 1Q 2020 to date a couple times now. You called the bottom, but I guess what does the path to the bottom look like? Is that going to be an increase in vacancy or sublease space? Is that going to be rent dipping? Is that going to be tenants leaving the market? Others have maybe been sort of more on the path of, we are seeing the bottom, which is activities are or at least you know leasing activities are, but tours are up, but you're saying that we have to wait a year to see sort of when the bottom hits. So, what does the path to that look like?
I think that what we see right now Manny and thank you for the question, awesome. Uneven starting points of data, I wouldn't say that it lays the foundation at this point for a -- this is where we are. What we've seen in prior periods is far more -- space gets put on the sublet market that has ever sublet. Far more space is discussed to be shared than is ever shared. We also see at a time like this where things are not necessarily restarted entirely.
Lot of folks will try to generate business with big incentives, big breaks in rent. Brokers will go out with initial proposals which are radically low. And I think that we don't -- in the intervening period upcoming expect to see a lot of what really sets the base. We'll see some halting commencement and we'll get price discovery, we'll get real demand discovery.
So, I think a lot of people don't know what's going on until they come back to the office. I would say that a big component, sorry if this goes off of your question, but I think it's something which needs to be addressed for everybody. With regard to this whole future of work, is that the conversation has really turned. The conversation has turned about the return to office on the basis that the world has started to reopen.
I think companies now recognize the difficulties with regard to culture, team, competition, posed not just by work from home but from the proposed hybrid or the discussed hybrid future. It's in the New York Times, Wall Street Journal, Economist, New York Post, the problems caused by this theoretical hybrid future. So, I think we understand there are lots of motivations, exhaustion, disconnection, peer to take a day off, you just want to be in the office. There are a lot of things which are occurring which build back into clarity on what people's uses will be and I think Manny that that will build on that base, the foundation as we move forward.
So, I think that's where the puck will be and I really don't think we have a clear vision of that where we don't get any more bad news until the end of the first quarter of '22. Directionally things have greatly improved and I think we'll continue to see them improved. I think that a lot of reporters will have to learn how to write something which is a negative.
Great, thanks Tony. Maybe you sort of touched on this a little bit in Steve's -- in response to Steve's question, but when you say your teams are busy as its ever been, over the last three months compared to the entire history of the company. Is that just looking under more rocks? Is that you've had more imbalance or more receptivity to increase or offers you've made? Is that the net is now just wider? Sort of what are the levers you hope to bring in so much more activity or volume or work?
I would say it's three things. The first answer is E, all of the above. So, in every Avenue and I go -- there are multiple families who have come back to us to discuss issues that they've got that need resolution. They won't all lead to transactions, but people are assessing their situation more actively, people assess their situations more actively.
Number two, I do believe that -- we have spent a fair amount of very productive time working with our Board and our Finance Committee so that we get a good process in place. And the final piece is, we've got a full team now and we're underwriting and analyzing a lot of different situations, looking at all the different structures we can put together to make us competitive, and when we weigh it against our allocation of capital and how we use it. So, hopefully that's helpful to you, but it's really coming from all angles and it's the fact that we're getting back into an expansion mode where candidly we haven't been as a public company and we're quite pleased with that.
Thanks Tony.
Thank you. Our next questions comes from the line of Blaine Heck with Wells Fargo.
Please proceed with your question.
Great. Thanks, good afternoon. Just a follow-up on that Tony and I know you don't want to focus too much on transactions until you get something done. But you know Christina, both mentioned that you're looking at office, retail and multifamily opportunities. You know number one, are there more opportunities than anyone property type than another? And then number two, I guess you guys have experience as a company in office and retail, but multifamily would be a different product. I guess, how do you think about your ability to compete in that space? How do your skills at office and retail translate to acquiring and operating multifamily? Is it just more of a matter of some of the product you're looking at has a multifamily component or you are actually looking at true multifamily?
So, I think I'm going to just focus on the last part of your question because the first part I think is pretty much straight forward in my prior response. The multifamily piece, we've done a lot of multifamily historically and outside of the REIT, my family still owns thousands of apartment properties, not in the New York area, that's part one. They weren't included in the REIT because they weren't in the tri-state region, number one.
Number two, we've developed multifamily for sale in New York City before, the Corinthian, the Alexandria. We have turned around assets before, anyone who remembers it was known as the Grand Palais and became the Mondrian, we were the team that made that redo of that failed condo. We’ve done New York City multifamily before, and so, and members of our team who were involved in that and underwriting on that, the property side, the FP&A side, they’re still here. So we believe we’ve got good experience in that area and we find it interesting as potential additional wheel on our tricycle.
Okay, that’s helpful. And then just shifting to kind of the balance sheets, you guys obviously have an enviable liquidity position, but leverage has been creeping up a little bit over the past several quarters. Christina, can you just talk a little bit about where you guys are comfortable on a debt to EBITDA basis, I think you’re at 6.5 times now on an net basis, are you running into any constraints on the share repurchase or potential investment side or not quite yet?
Yes, not feeling constraint, we are happy with our liquidity position right, that’s over a $550 million of cash and $850 on our new line which has been- now has the maturity in 2025. So we feel good about that. In addition, we have no debt due until 2024 in November. So we feel very good about the flexibility that we have.
In terms of net debt to EBITDA I think I have answered this question before which is, we don’t really look to the exact map level, it’s really about how you are able to access further liquidity. So, the company has always had a relatively conservative stance on the balance sheet. We will continue to manage that responsibly, but the increase in net debt to EBITDA is largely driven by observatory revenues coming down and in this quarter we’re now capturing the full impact of COVID right, between 2Q, 3Q and 4Q of 2020 and we are seeing an ramp up, we’re managing expenses really well. So we feel very comfortable at these levels, not constrained, but we will continue to manage the balance sheet prudently.
I’d just like to add to Christina’s comment, the comment we’ve made before and people may forget, I know you folks are on this call, a lot of different calls of which to keep track over today and over the quarters. But, yes we are prepared to take out leverage up and we're also prepared at the right time to issue more equity. We're also prepared to recognize that there is a virtuous cycle in which we may find ourselves when we commence growth.
And we’re also cognizant of the fact that we have bought a lot of stock back at a price which is below where we currently trade and at some point we could reissue that stock at a higher price and both make a gain on behalf of our investors and increase our liquidity. So we really feel that we have all of the arrows in the quiver that we might like to have we feel a very good spot and very well positioned at this point.
If there were one thought that I think we would want to communicate here is, we feel very well positioned right now, we feel comfortable, we’re working very hard, it’s not a place where we’d like to be, we feel very well positioned for the future.
Very helpful, thank you all.
Thank you. Our next questions come from the line of Craig Mailman with Keybanc Capital Markets. Please proceed with your question.
Thanks everyone. Maybe, I’ll circle it back to Tom and your commentary on the leasing front, obviously the pickup in tours is a good kind of future indicator here, but I’m just kind of curious, you guys, your portfolio is always kind of served as a little bit of a value relative to traditional midtown or newer midtown office buildings and typically in these situations you see a little bit of a trade-off of space among tenants, I was just kind of curious, number one has your - kind of the demo of the tenants kind of shifted at all versus what you have seen in the past, and you know, do you think, because we are hearing from everyone that tours are increasing, these- how much of an overlap do you think you guys are having relative to the portfolios or maybe the- in that pool of tenants isn’t necessarily increasing it’s just you’re seeing, everyone is seeing the same ones over and over again?
Sure, so I would point to the fact that Zentalis and Burlington were gross, right? And committed to long-term leases and so we are seeing growth in the market, probably half of our proposals that are active right now represent tenants that are growing, both Zentalis and Belkin, the law firm that moved to One Grand Central Place, those were trade-ups, means they moved up to our property from what I’d call inferior property and so what did they see? They saw what we offer which is well located property next to a mass transit in fully redeveloped, modernized buildings with our tenant spaces that will be built in compliance with our state-of-the-art industry-leading standards for healthy buildings, IEQ and energy efficiency, including active bipolarization, MERV-13 and ASHRAE's 62.1 standards.
So, the - -that was an example, those are examples of tenants trading up in the markets to come to our properties and so we believe we still offer a great value propositions for the reasons I just stated. We’re at an affordable price point, we’re well located near mass transit and we offer fully modernized buildings and newly built tennis space and of course 95% of our portfolio has been redeveloped and we have some 270,000 square feet of people space that is built and ready to go. And what’s interesting is, we’ve seen a healthy pick-up in activity and interest while proposing the tours for our prebuilt suits which in the fourth quarter it was fairly slow in terms of the level of proposals we were exchanging. We’ve seen a big pick-up this quarter. Now, I would caution lot of that activity will translate into activity in the second half of the year.
Great, thanks for the color. And then maybe this is for Tom or Christina, but you guys, the $11 million reduction in OpEx in the first quarter is strong and I know you guys, a lot of that is due to lower utilization, but as we think about going forward, how much of that $11 million is kind of permanent and as people come back can you guys materially improve the NOI margins at kind of a stabilized point versus maybe historic levels?
So, first I’d say that echoing what Tony or Tom had said, he made in his opening remarks that we are actively looking at ways to improve our operational efficiency, so that we can lock in permanent savings. The reductions made to date represent aggressively managing our expenses. Certainly the bulk of it was due to reduced physical occupancies related to the COVID-19, but we have completed our redevelopment work which allows us to reduce permanently certain expenses and certainly keep a cap on the growth and expenses we get into next year. So we do expect to lock in a portion of those. We haven’t given a specific number, but I think that was -- our best mark will be 2019 which are the last year of four building utilization and I think that we’re going to see some improvement off of those numbers.
Great, thanks guys.
Thank you. Our next questions come from the line of Jamie Feldman with the Bank of America Merrill Lynch. Please proceed with your questions.
Great, thank you, good afternoon. I was hoping you could talk a little bit about the smallest tenant leasing activity versus larger? You were able to keep your percent lease flat which is impressive. Looks like you had a couple of buildings that had occupancy dip a little bit, just curious if there’s any kind of read throughs for small tenants versus larger tenants based on what you’re seeing?
Sure, so, Jamie the increase or the increase in [indiscernible] and decrease in occupancy that you noted from the prior quarter was really due to known moveouts which we had communicated last quarter. The most significant was the termination of full floor tenants for 40,000 square feet which we have already released to ClearView which we announced last quarter, whose lease will commence by the end of this year.
The most important thing is that our forecast of 300,000 square feet of tenant vacates in 2021 has not changed significantly from prior forecasts and we have 305,000 square feet of signed leases that we expect will commence by year end. So, I think from an occupancy standpoint, we’re in a very good shape. On the small tenant activity as I just mentioned, we’ve seen a big pickup in activity in level of interest both on tours and proposals being exchanged for our small suites that are fully built to comply with art, standards for IEQ and sustainability. We offer turnkey suites that means before our price increase will offer the suite fully furnished, fully wired and provide move coordination. Comparing to where we were last quarter, I'd say we were probably about three quarters or 80% of our pre-COVID level, which represents a big increase from last quarter.
Okay, thank you. And then you had said giving net effect there was down about 10% to 15%, can you break that out by face rents, and concessions, and free rent and TIs?
Well first, I would say that our -- every deal is unique and really depends on the space, condition, the location, the tenant credit and other factors. For example, the Burlington expansions, the Zentalis and Belkin leases were all turnkey deals with leases that ranged from eleven to sixteen years. Generally there's been more negotiation around concessions, but one of those deals, we gave maybe a rent discount of $2 to $3 per square foot compared to pre-COVID levels combined with three to four months of additional rent and a few dollars more in TI. Whereas the others, we held rent flat and gave more on concession.
So, it's really a mixed bag and it depends on the individual deal and the negotiation. I would point out that our average lease cost per lease year for this quarter for TIs and commissions was about just under $9.5 per square foot, which is right in line with our leasing costs for all of 2019 and of course we had a weighted average lease term this quarter of 10 years and that compares favorably with the last two to three quarters.
Okay, thank you. And then I guess, I know you've talked a lot about the investment activity, but just to be clear, are you -- would you consider assets outside of New York City or NED [ph] level transactions if they did have assets outside of New York City?
We are -- and thanks to that Jamie. We are -- I'm never as opportune with words. I have used that word before. Our focus is Manhattan and the greater New York metropolitan area. In order to grow the business we need to look at all types of transactions, I would just say that.
Okay, is there, it's funny because I was going to use the same word but I didn’t want to take it out of your mouth, you've been using that for a long time. I mean is there a regional limit? I mean, would you look at national stuff or west of the Mississippi River or not necessarily [indiscernible]?
Gosh. I mean, I didn't know that the world existed west of the Hudson River, is there something else out there? No, I think we were -- joking aside. You know it -- the last thing we want to do is generate speculation. I think as prudent [indiscernible] to our stakeholders, and as prudent investors, we really need to look at all things which are -- that could be logical, and how we allocate our capital, we look forward to have something to talk about other than speculation and we will be much more talkative as and when we do.
Okay, thanks for that. And then and just some thoughts on the suburbs, that portfolio looks like it's been relatively flattish on the percent occupied side. I think you had a little bit of it at 10 Bank Street. Just any -- would you say there's been any pick up or it's been pretty flat?
Well Jamie, remember we have a 63,000 square feet with Berkeley Insurance that will commence later this year and that comes on the heels of a fairly large earlier moveout by a tenant at Metro Center. So, that will help our occupancy numbers. We have seen a pickup in tours like in Manhattan and that pickup since the start of the year brings us to tour volume today at about just at about pre-COVID levels, which I think is a positive sign. Still I think that that's going to translate into activity in the second half of the year. So, it is a bit early on that.
Downtown White Plains, I think is generally performing good. Downtown CBD Stamford is where we see a good amount of tour activity. Up in Norwalk, I'd say it's slower, but we are exchanging proposals with some fairly large tenants, because we have a large block of about 80,000 to 90,000 square feet at our MerrittView property. And so, we'll see at that translates into real activity later in the year.
Okay. I mean, is there anything in behavior during the pandemic that would make you want to grow transit oriented to Bourbon [indiscernible]?
We like our portfolio, yes we like our portfolio, we think we're very well located near the mass trans that we did recently complete upgrade of all of our common areas including, gyms, dining, coffee lounge, [indiscernible], lobbies and outdoor areas which we got a little bit more work to do at Metro Center, but [indiscernible] really well and I think we're focused on leasing up our vacant space there.
Yes and I would put it this way. I think it is improvement to note what you didn’t ask is, have we seen a big flow of tenants in that tour group out of New York City, and the answer is no, we havent.
A handful.
Yes, a handful and some leases done, smaller leases under 10,000 square feet which we're reported.
Right.
Okay, all right thanks for all the color.
Thank you. As a reminder, oh sorry. [Operator Instructions]
There being no further questions, we're going to we will finish up here. We have one, we have no further questions, so what we will do is we will go to one last comment and then get you all to 1 o'clock. I do again, I want to complement our great team without them, ESRT is nothing, number one. Number two, please do review our sustainability report. Don’t do it today but do it when you've got a moment. It really will show you what's more than the 100% of renewable wind energy, what is more than healthy buildings. You get to see where the puck will be when you read our first annual sustainability report.
And finally, we want to make sure that you understand that our forward-looking statements, our plans around but the observatory and we turn to business for discussion purposes only to help you with your models. They are not guidance nor are they guarantees. We look forward to a chance to meet with you many at the upcoming Mary [ph] Conference Virtual, and we look forward to seeing your all return to office, return to here. We're healthy, we're vaccinated and we're in a very safe place to come and visit. So say hello, look for [indiscernible] person, thanks so much.
Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.