Empire State Realty Trust Inc

NYSE:ESRT

Earnings Call Analysis

Empire State Realty Trust Increases Leasing and Observes NOI Growth

Empire State Realty Trust reported a strong second quarter with 10 consecutive quarters of leasing growth and a 7.4% year-over-year increase in same-store property cash NOI. The Observatory segment saw a 6% NOI rise year-over-year. The company remains optimistic about reaching 87% to 89% commercial occupancy by year-end 2024. The 2024 FFO guidance remains between $0.90-$0.94 per share, with expected same-store cash NOI growth from 0% to 3%. Operating expenses and taxes are predicted to increase 6%-7% compared to the previous year's 6%-8% range. The company continues to benefit from strong leasing in its high-quality, energy-efficient properties.

Strong Leasing Momentum in Manhattan

In the second quarter of 2024, Empire State Realty Trust (ESRT) showcased impressive leasing activity with 272,000 square feet signed. This marks the tenth consecutive quarter of increasing lease percentage, now at 93.3%. The company experienced a 170 basis point rise year-over-year, reflecting a robust demand for their office spaces, especially in New York City's competitive market. This is a strong indication that ESRT’s strategy to modernize and enhance the energy efficiency of their buildings is resonating with tenants and attracting quality firms.

Revenue and Same-Store NOI Performance

ESRT reported core Funds From Operations (FFO) of $66 million ($0.24 per diluted share) for the second quarter. Notably, same-store cash net operating income (NOI) grew by 7.4% year-over-year, driven by higher rental revenues and offset by increased operating expenses. Excluding one-time revenue effects, adjusted same-store cash NOI still saw a healthy year-over-year increase of around 6%. This consistent revenue growth highlights ESRT’s ability to effectively manage its properties and capitalize on leasing activity.

Observatory Growth and Visitor Trends

The iconic Empire State Building's Observatory segment continues to thrive, generating a net operating income of $25 million in the second quarter, up 2% from last year. Despite a dip in visitor numbers compared to 2023, attributed mainly to a shift in the Easter holiday and lower international tourism, the Observatory remains a top-ranked destination. Year-to-date, its NOI is up approximately 6%, underlining its strong appeal and the potential for growth in cash flow as tourism rebounds.

Outlook for 2024 and Financial Guidance

Looking ahead, ESRT has reaffirmed its guidance for 2024 FFO to be in the range of $0.90 to $0.94 per diluted share. Same-store cash NOI growth for the commercial portfolio is expected to increase 0% to 3%, indicating a slight improvement from earlier forecasts. They anticipate commercial occupancy rates of 87% to 89% by year-end 2024. Key assumptions driving this outlook include lower-than-expected utility and payroll expenses, which are projected to boost overall margins.

Strategic Capital Recycling Initiatives

ESRT continues to enhance its portfolio through strategic capital recycling, having recently completed transactions involving $195 million in prime retail acquisitions in Williamsburg, Brooklyn. These assets provide further diversification with promising growth potential. The company's shift from non-core suburban assets to these high-quality New York City properties aligns with its strategy to concentrate on urban markets with better value creation prospects.

Strong Balance Sheet and Debt Management

With a total debt of $2.3 billion and an average interest rate of 4.27%, ESRT maintains a strong liquidity position and has no significant uncovered debt maturities until December 2026. Its leverage ratio stands at 5.1x net debt to EBITDA, which is the lowest among New York City-focused REITs. This financial strength gives ESRT the flexibility to pursue further growth opportunities while managing existing liabilities.

Commitment to Sustainability

Sustainability continues to be a core value for ESRT, as evidenced by recent accolades such as the 2024 International Earth Award. Their commitment to energy efficiency and environmentally friendly building practices not only attracts tenants but also contributes to lower operational costs, giving them a competitive edge in the market.

Earnings Call Transcript 2024-Q2

[Operator]

Greetings, and welcome to the Empire State Realty Trust's Second Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Heather Houston, Senior Vice President, Chief Counsel, Corporate and Secretary. Thank you. You may begin.

[Heather Lawson, executive]

Good afternoon. Thank you for joining us today for Empire State Realty Trust's second quarter 2024 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 esrtreit.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 expense, financial results and proposed transactions and events. As a reminder, forward-looking statements represent management's current estimates. They are subject to risks and uncertainties, which may cause actual results to differ from those discussed today. Empire State Realty Trust assumes no obligation to update any forward-looking statement in the future. We encourage listeners to review the more detailed discussions related to these forward-looking statements in the company's filings with the SEC.

During today's call, we will discuss certain non-GAAP financial measures, such as FFO, modified and core FFO, NOI, same-store property cash NOI, EBITDA and adjusted 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 and Chief Executive Officer.

[Anthony Malkin, executive]

Thanks, Heather. Good afternoon to everyone. Yesterday, we reported ESRT's strong second quarter and year-to-date results. We are happy to report continued strong leasing momentum, Observatory growth and capital recycling progress. So let's dive into our discussion of our results for 2Q and our outlook for the rest of 2024.

In the second quarter, we delivered once again on office leasing absorption and positive rent spreads. Here is the big leasing story for New York City office. Team ESRT put points on the board again with our 10th consecutive quarter of leased percentage growth. That's 10 quarters in a row and our 12th consecutive quarter of positive New York City mark-to-market lease spreads.

Positive lease absorption, positively lease spreads, New York City is strong and our modernized, amenitized energy-efficient properties with indoor environmental quality are in demand. Our Observatory performance continues very nicely and was named #1 destination attraction in the United States for the third consecutive year and #1 destination attraction in the world for the first time and TripAdvisor's Best of the Best.

We have contracted to expand the retail component of our NOI with additional retail on the prime North sixth submarket of the remarkable Williamsburg submarket of Brooklyn and we maintain a best-in-class balance sheet. In 2024, ESRT is on our front foot and we are eager to create additional value for our shareholders in the current real estate cycle. Year-to-date, we have leased 640,000 square feet, of which 270,000 square feet were leased in the second quarter.

Our Manhattan office portfolio and 170 basis points of positive lease absorption year-over-year and is now 93.3% leased. Our redevelopment work over the past decade has produced a unique top of tier product that tenants want to lease. Please see a new slide on Page 9 of our investor deck that features great before and after pictures.

ESRT's commitment to service and tenant relationships continue to drive strong tenant retention and expansion within our portfolio over time. Since our IPO, and this is a new number, that just continues to grow. We have seen 2.8 million square feet of new leases comprised of tenant expansions. Tenants appreciate that we have the lowest leverage of any New York City REIT, a strong liquidity position and have addressed all meaningful debt maturities until December 2026. Our balance sheet delivers leases.

Year-to-date, Observatory NOI is up 6% year-over-year, driven by continued improvement in revenue per cap and increase in visitation. Our NOI per cap towers above the competition. Our global brand awareness has no equal. And as noted, in June, the Empire State Building Observatory deck was named the #1 attraction in the world and TripAdvisor's 2024 Travelers Choice Awards, Best of the Best Things to Do and the #1 attraction in the United States for the third consecutive year. I promised our Observatory team, I would take a pie in the face if we achieve this great result and watch our social channels for that very occurrence soon. See Slide 17 of our investor presentation for more on the Observatory performance story.

Sustainability continues to be a cornerstone of ESRT's business philosophy, and we are the leader in environmental stewardship and healthy building performance. Just last week, the Empire State Building earned the Building and Owner's Management Association, BOMA, 2024 International Earth Award. That is a big deal, and we are so happy for the recognition of our team. Please read our 2023 Sustainability Report to see what leadership looks like. Our track record of successful sustainability partnerships with companies and their employees, attracts tenants and contributes to our leasing success. Tom, Christina and Steve will provide more detail on our progress and how we plan to accomplish these goals in the balance of 2024.

Now I'd like to hand it over to Tom.

[Thomas Durels, executive]

Thanks, Tony, and good afternoon, everyone. In the second quarter, our office and retail portfolio continued its steady trajectory of positive absorption. This was the 10th consecutive quarter in which our team increased our lease percentage. That's an increase of 690 basis points since the fourth quarter of 2021. Today, our Manhattan office portfolio stands at 93.3% leased, an increase of 60 basis points compared to last quarter and is up 170 basis points compared to a year ago. In the second quarter, our Manhattan office occupancy increased by 120 basis points year-over-year to 88.8%.

The second quarter was also our 12th straight quarter with positive mark-to-market lease spreads in our Manhattan office portfolio. New and renewal leases were signed with positive mark-to-market rent spreads of 2%. Leasing volumes continue to be strong with 272,000 square feet of total leasing in the second quarter, inclusive of 55,000 square feet of early renewals. This increases the total leases signed year-to-date to 642,000 square feet.

We have added new disclosure in our supplemental on Pages 11 to 12 to include early renewals, defined as leases that are renewed 2 or more years ahead of lease expiration. Nearly all the early renewals signed year-to-date were done in connection with expansions. While it has always been our practice to seek opportunity to extend the lease term of existing tenants, we did not previously include these numbers in our reported renewal statistics.

Notable office leases signed during the second quarter include an 11-year 41,000 square foot expansion lease with Pontera Solutions, who will relocate to the Empire State Building from the current 11,000 square foot space at 111 West 33rd Street, an 11-year 28,000 square foot new lease on the 2 highest office floors at the Empire State Building, with global management consulting firm, Kearney, and an 11-year 25,000 square foot new lease with the William Carter company at 1350 Broadway, an 11-year 12,000 square foot expansion lease at One Grand Central Place and we signed leases for 17 pre-built Office suites, a total 87,000 square feet.

At the Empire State Building and One Grand Central Place, we have increased asking rents in response to strong demand. Additionally, we have begun to reduce the amount of free rent offered in proposals on deals throughout the portfolio.

As shown on Page 10 of our supplemental we have $42 million in incremental cash revenue from signed leases not commenced and free rent burn off. And just this morning, we received a signed lease from a tech firm for a full floor of 24,000 square feet at 1350 Broadway. Our leasing results demonstrate that are fully modernized buildings located in Midtown with access to mass transit, quality amenities, strong balance sheet, great service, best in class, indoor environmental quality and sustainability and an acceptable price point continue to attract quality tenants.

ESRT offers top of tier product in our price bracket, and our portfolio offers what tenants want. You've heard us talk about the billion dollars spent to fully modernized and amenitized our portfolio, and please make sure to check out our new slide on Page 9 in the investor presentation with before and after pictures to help visualize just how meaningful our portfolio transformation has been.

It is because of this redevelopment work over the past decade carried out by our exceptional leaders, Ryan Cass in Leasing; Michael Prunty in Property Management, Dana Schneider in Sustainability and Pete Sjolund in Construction that we have top of tier assets today that attract leasing demand and win in the Flight to Quality. In addition to the previously mentioned 24,000 square foot lease that was signed today, we have a healthy pipeline of another 150,000 square feet of leases in negotiation of which 70,000 square feet of new deals and the balance our renewals. In our Manhattan office portfolio, we have modest lease expirations for the balance of 2024 with 190,000 square feet of known vacates and 12,000 square feet is undecided at this time.

Looking forward to 2025, we have only 162,000 square feet of known vacates and 114,000 square feet of tenants who are undecided. This is against the backdrop of an average 827,000 square feet of annual leasing for the past 3 years in our Manhattan office portfolio. Our multifamily portfolio with occupancy of 97.9% at quarter end, continues to perform exceptionally well and benefit from strong market fundamentals and recent property improvements.

In summary, in the second quarter, we signed over 272,000 square feet of commercial leases. We increased our Manhattan office lease percentage by 170 basis points from a year ago to 93.3%. We had our 10th consecutive quarter of increased lease percentage. Our Manhattan office occupancy increased by 120 basis points compared to last year to 88.8%. We have a healthy pipeline of activity, and we continue to have strong performance in our multifamily portfolio.

With that, thank you. I will now turn the call over to Christina.

[Christina Chiu, executive]

Thanks, Tom. We continue to make progress with our capital recycling initiatives. As disclosed in our earnings release, subsequent to quarter end, we entered into 2 agreements to acquire prime retail assets in Williamsburg, Brooklyn for $195 million in aggregate with anticipated closing dates in 3Q.

The first portfolio is for $103 million of assets located on North 6th Street between White and Barry Street. These assets span approximately 40,000 square feet across 5 retail storefronts that include high-quality tenants such as Nike and NoMad. These assets are 86% leased with near-term upside from signed leases that have not yet commenced in addition to vacancy lease-up. The in-place retailers have a weighted average lease term of 7.5 years and we estimate significant mark-to-market upside as leases roll.

The second portfolio is for $92 million of prime retail assets also on North 6th Street. Due to confidentiality requirements, more details on this additional portfolio will be disclosed upon closing. We are very pleased to increase our scale in this prime retail corridor of Williamsburg following our prior acquisition of a retail asset on North 6th Street in September 2023 that continues to benefit from increasing population density, strong household income and new multifamily and hospitality development recently completed and underway. We see the Williamsburg story to be a decade ahead of value creation.

Please see Slides 19 to 20 for more color on these transactions and the strength of this retail submarket. These all-cash acquisitions are consistent with our strategy over the past couple of years to recycle capital and balance sheet capacity from noncore suburban assets into strong New York City assets. As shown in a new Slide 10 in our investor deck, we have disposed of 5 noncore assets in Westchester and Connecticut since 2022 and recycled into nearly $650 million of high-quality, New York City multifamily and retail assets that have great growth prospects and less capital expenditure requirements over time.

As a result of this capital recycling, we have improved our sector diversification. Pro forma for the latest retail acquisition and the previously announced disposition of suburban office, our NOI composition is approximately 58% office, 12% retail, 5% multifamily and 25% Observatory. Importantly, we strategically executed on these capital recycling transactions while maintaining our peer-leading balance sheet strength and below average leverage. Going forward, we will continue to focus on investment opportunities with attractive upside potential in addition to distressed transactions that we expect to arise in the cycle.

In July, we executed an agreement to refinance the mortgage on our metro center properties that was due to mature in November 2024. Beginning November 2024, the new loan balance of $72 million will be interest-only at the same interest rate of 3.6% with a maturity of November 2029 inclusive of a 1-year extension option.

As previously mentioned, we intend to use a portion of the proceeds from our recent unsecured notes issuance to pay down the $100 million maturity in March 2025. As a result, we have no meaningful uncovered debt maturity to address until December 2026 when a $175 million term loan matured. At quarter end, the company had $2.3 billion of total debt outstanding with a weighted average interest rate of 4.27% and a weighted average term to maturity of 5.8 years pro forma for the recent metro center refinancing and the planned paydown of our March 2025 debt maturity.

We have strong liquidity, no floating rate debt exposure, a well-laddered debt maturity schedule and the lowest leverage among all New York City focused REITs at 5.1x net debt to EBITDA. Please note that we do expect leverage to tick up from this level once the Williamsburg acquisitions are closed and after we utilize cash from the recent unsecured notes offering to pay down maturing debt in March 2025. As we have said for many years, we are prepared to increase leverage to take advantage of value opportunities to grow our business. We view approximately 6x net debt to EBITDA as a more stabilized leverage level to think about going forward.

And now I will turn the call over to Steve to discuss our results and outlook for the remainder of 2024. Steve?

[Stephen Horn, executive]

Thanks, Christina. For the second quarter of 2024, we reported core FFO of $66 million or $0.24 per diluted share. Same-store property cash NOI increased 7.4% year-over-year, primarily driven by higher revenues from cash rent commencement, which was partially offset by increases in property operating expenses, which we anticipated in our guidance, albeit the increase was less than initially guided partially due to lighter utility expenses than expected.

Note that the second quarter also included approximately $2 million of positive onetime revenue items. Excluding these nonrecurring items from the current period and prior year period, second quarter adjusted same-store cash NOI increased by approximately 6% year-over-year.

Moving to our Observatory business. We generated net operating income of $25 million in the second quarter, approximately 2% higher than the prior year period. Observatory expense was $8.9 million in the second quarter. Keep in mind that the shift of the Easter holiday into the first quarter of this year versus the second quarter of last year impacts comparability. Year-to-date, net operating income for the Observatory was $41 million, an increase of approximately 6% year-over-year. Revenue per capita remains high and year-to-date admissions continue to improve year-over-year.

Now on to our outlook for 2024. We continue to expect 2024 FFO to range between $0.90 and $0.94 per fully diluted share. Within this range, our key assumptions are as follows: Same-store cash net operating income for the commercial portfolio to range from 0% to 3% relative to 2023 levels. This represents a 100 basis point increase from our original expected range. The increase is largely driven by our expectation for property operating expenses and real estate taxes to come in towards the lower end of our previous range of a 6% to 8% increase over the prior year. We now expect an approximate 6% to 7% increase year-over-year.

The improvement is primarily due to lighter-than-expected utility and payroll expenses. Within this range, we continue to expect positive revenue growth, which assumes commercial occupancy of 87% to 89% by year-end 2024, driven by a strong pipeline of signed leases not yet commenced and manageable lease expirations in 2024. We continue to expect 2024 Observatory NOI to be approximately $94 million to $102 million, the average Observatory expenses of approximately $9 million per quarter. Our guidance range takes into account variability in our Observatory results due to tourism fluctuations and bad weather in any given quarter and the recent capital markets and transaction activity announced year-to-date.

Also included within our FFO guidance range, we expect a larger-than-usual increase in 2024 G&A to approximately $68 million for the full year to reflect the recent annual promotions and accelerated recognition of certain noncash stock-based compensation expense as a result of executives approaching retirement eligibility. While we do not provide our formal outlook for 2025 yet, we do believe it's important to share a few items that could impact next year. Those include: one, the full year run rate of higher G&A as just discussed; and 2, the 9-month impact of the higher interest rate on our recent unsecured notes issuance.

With that, I will now turn the call back to the operator for the Q&A session. Operator?

[Operator]

[Operator Instructions] Our first question comes from the line of Steve Sakwa with Evercore.

[Steve Sakwa, analyst]

Yes. I mean, maybe starting on the just the pipeline, Tom, and sort of the leasing activity that you're seeing. Just any additional thoughts and color that you can provide around kind of expansion opportunities and just kind of the discussions that you're having with tenants? And I noticed that you had that new disclosure about early renewals. Is that something that you're hearing and seeing more of today and tenants willing to come to you early, maybe sooner than they have to kind of lock in space today?

[Thomas Durels, executive]

I'll take the second part of your question first. Steve, we have always executed on early renewals. And certainly, we make that part of our discussion with existing tenants. Often, it comes in connection with an expansion of an existing tenant where we look to use that opportunity to extend their existing lease on the back of their current term. And so that's always been kind of part of our diet. And so we see that really more the case.

As far as pipeline, we've got -- look, as I mentioned before, we just received a signed lease for a full floor of 24,000 square feet of 1350 Broadway between that and the deal we signed with Carter's is going to bring that building into the mid-90% leased. We've got another, call it, 160,000 square feet of leases in negotiation, 150 of that is in Manhattan for our office portfolio. And look, we've been approached by a tenant at the Empire State Building for an expansion. We haven't yet issued paper on that, but they're talking to us about taking an additional full floor.

So what we're seeing more often is that more and more tenants have moved beyond this whole issue of work from home. They're committing to their space in New York City. They want desks for their employees. Their employees want to be in the office and you're seeing more and more of that decisiveness by tenants, and that's reflected in, look, the fantastic leasing results we've had to date and the good pipeline we're seeing now.

[Anthony Malkin, executive]

And the only thing I'd add to that, Steve, Tony Malkin here, is that people come to us, brokers come to us, we are on the list because -- I'm not just pushing our own book here, they come for the modernization, the amenitization, the energy efficiency, the IEQ, they look at that these are key attractives for their employees.

The brokers come to us because of our balance sheet, and they know that there's no issue of speaking with us and a lender that we can do the whole transaction ourselves and take care of everything based on our reputation. And the existing tenants are huge advocates for us. We see now a lot of new tenants come to us on the basis of recommendation of current tenants. So we are in a different zone. New York City, in general, is recovering, we are not recovering. We're forward.

[Steve Sakwa, analyst]

And then second question, Christina, I know you can't provide maybe tons of detail on the retail transactions, but maybe on the bigger one, can you kind of provide anything about going in yields and maybe where you think that portfolio might stabilize a couple of years out? How do you think about the NOI growth on that portfolio over the next maybe 2, 3, 4 years?

[Christina Chiu, executive]

Sure. So we will definitely provide more details at closing, just given confidentiality agreements, we're not closed yet. We can't provide that much more at this time. What I can say as a reference point, which should be helpful, is our acquisition last year of prime retail in Williamsburg was just under a 6% for a stabilized asset with no near-term CapEx and strong upside over time. As we alluded to both in my remarks and in our investor deck for these acquisitions, these are prime retail assets with some near-term ramp-up from signed leases not yet commenced and vacancy lease-up, plus had characteristics of long-term upside that we believe will create a lot of value over time. So hopefully, that's helpful in the landscape.

[Anthony Malkin, executive]

I would add to that, Tony, again, the -- if you look at this, this won't repeat, SoHo meatpacking, but it's going to run with SoHo meatpacking. And we think there's a solid 10-year run of growth and what will happen here in this remarkable submarket. So we're really pleased to have been able to transact. And we're giving you more detail than we gave on the residential acquisitions. And hopefully, that is better for you guys.

[Operator]

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

[John Kim, analyst]

Just a follow-up on the retail acquisition. I was wondering if you could provide where you think market rents are for Williamsburg on that corridor and where you think it could go to? I mean if we're looking at CoStar data, it would suggest a cap rate -- initial cap rate around 2%, which seems pretty low. I don't know if that data is accurate, but I just wanted some color on market rents.

[Thomas Durels, executive]

Look, as Christina said, right, we're bound by confidentiality. In general, the location is fantastic. Two prime blocks on North 6th Street is where these properties are located. You can look at various market data out there, where deals are getting done well north of $300 a foot. And I think at this point, that's -- we'll have more to disclose after closing specific to our transaction.

[Anthony Malkin, executive]

Combined with the characteristics here that these are -- this property type is one with which we've had a lot of familiarity, particularly going into developing neighborhoods historically, 10 Union Square as a prime example of that. And the fact is that these will produce a heck of a lot of cash flow out of their NOI. And that's what attracts us to this asset category. And again, we see tremendous growth here in this market area.

[John Kim, analyst]

My second question is on the new disclosure you had on the early renewals. So it looks like because of the early renewal disclosure, your first quarter leasing activity picked up as you include the 122,000 square feet of early renewals. My question is, where did you disclose that before? Was that as the leases commenced, that number of event or are you just basically pulling forward that leasing activity or was it just not previously disclosed?

[Thomas Durels, executive]

John, yes, first of all, it was excluded from our reported leasing statistics on transactions, however, where it would appear is simply in the annual lease expirations. So as leases get pushed out, that would simply show up in the rollover schedule that appears in our supplemental. But we thought it was helpful to give the additional color on these early renewals, defined as lease extensions done where there's more than 2 years of remaining lease term left.

[John Kim, analyst]

I mean I'm just -- when I look at the first quarter, this disclosed this quarter and last quarter, activity picked up and then the lease spreads also moved a little bit. So again, I'm a little bit confused as to whether or not you're just pulling this up and previously, that was disclosed when those leases come in. But I'm happy to take the top line.

[Thomas Durels, executive]

Sure. I'm not sure. Yes, happy to spend more time with you afterwards. But I think the separate disclosure on the leasing on the early renewals is pretty really straightforward.

[Operator]

Our next question comes from the line of Michael Griffin with Citi.

[Michael Griffin, analyst]

Maybe just getting back to kind of the forward outlook and leasing pipeline. Tom, I think in your prepared remarks, you mentioned, I think free rent starting to stabilize and go down. But have you seen really a change on other concessions, whether it's tenant improvements or other things? And then can you give us a sense of kind of how net effective rents have been trending?

[Thomas Durels, executive]

So I'm glad you asked that question because I was expecting some questions on our leasing costs, which one may read into that, that they went up slightly this quarter. But on a year-to-date average, they're really very much in line with 2023. But if you look at our net effective rents over the last 3 years, 2.5 to 3 years, we're up about 10% from 2021 on an average for year-to-date. And so I think that's a pretty healthy indicator.

Look, we focus on net effective rent because it factors in all the lease economics, not just the leasing cost, but certainly the top line rent. The deals that we did with Kearney and Pontera, they're going to average over $80 a square foot during the term of our lease. And so generally, look, we're moving in the right direction, heartened by the fact that we're tightening up on our free rent offering. We still deliver turnkey build space. We have a lot of pre-book products that's already built in second generation, keeping our leasing costs down. And our full floor deals will deliver turnkey space for tenants because they look to us to design and build the space for them so that they can focus on their business and we execute on what we do best.

[Anthony Malkin, executive]

And I would add to that, where we do see movement right now is in our rents and our free rent. And you'll see the effects of that as we report in the future with greater definition, number #1. Number #2, what really helps distinguish us amongst other landlords is we have an integrated team of architecture, completely qualified construction team led by Pete Sjolund and the sustainability piece and our ability to turn key for people, high-performing spaces with indoor environmental quality is a huge attractive. So the fact that people of all tenants of all sizes, very few tenants who come to us build out their own space. It's an added feature and benefit to a transaction with ESRT.

[Michael Griffin, analyst]

And then just on sort of distressed opportunities that you're seeing out in the market. I mean, it seems like the Williamsburg acquisition might have been more stabilized, maybe not as much hair on that. But for other things that you're seeing out there, I mean, are we seeing the distress more in one property type? Is it office that is providing maybe more attractive returns or do you still see opportunities within retail and multifamily in order to benefit from some of the distress out there?

[Anthony Malkin, executive]

So I would tell you that in multifamily, because of the GSEs, the Freddie, Fannie and the popularity there, the real issue there is that if you have a low interest rate, your equity is significantly hit or could evaporate due to a refi. But we don't really qualify that as distressed because we see a lot of attention there. We did do a very good purchase at 298 Mulberry. I don't think that anybody thought that was distressed. We just got in there and we found ways to create a lot of value. We do see opportunities developing in that area based on property handovers. We see a lot of attention from buyers.

With regard to the retail, we purchased -- you're correct. We look at that and say, we think we paid a fair price to a willing seller. And just over time, with our duration, we see a great opportunity for synergy what we've already bought, and we really understand feet on the ground how to work on that. We do see the biggest distress in office. There's no question. And a lot of the office distress out there, it's all a matter of basis. And we've got to get to the right basis where we can attract capital to partner with us to acquire property.

And we really think that the pricing needs to be able to deliver a 3x multiple of invested capital over a 7- to 10-year time frame in order to attract capital partner with our balance sheet to do those transactions. We do not see either the property types by location floor type. We've seen one office property on which we bid, and JPMorgan Chase has contracted to acquire it because it's next to their new headquarters. And outside of that, we're bidding our time. We're waiting for the right pricing.

With that in mind, I think on the overall perspective, debt to focus on the number of transactions and dollar volume of transactions are tremendously down and remain tremendously down. We do see more properties coming to the market. And the other area where I think we might see distress coming in the future also, though it's a submarket is this medical research biotech purpose-built lab space where there's just not as much demand. Now there's been a lot of product put out there. But I don't think that's something we will pursue. Tom or Christina, anything you want to add to that color on the market?

[Christina Chiu, executive]

I'm sorry, please proceed with your question. Mr. Griffin?

[Michael Griffin, analyst]

Yes, I just finished my questions.

[Operator]

Our next question comes from the line from Blaine Heck with Wells Fargo.

[Blaine Heck, analyst]

Just following up on the acquisitions. Can you talk a little bit more about how the transactions were sourced? Were they off-market or marketed deals? And also whether you think the NOI mix that Christina went over is optimal for your portfolio? Or should we expect the non-office exposure to kind of continue to grow?

[Anthony Malkin, executive]

So there's a universal shaking our heads of no around the table. We really don't want to comment on the sourcing. We'll just say that we work hard on this stuff, and we want to respect our partners on the other side of this transaction. So we really don't have anything to say there.

And as far as the mix, look, we remain -- as we've said over time, we're omnivorous opportunivores. And we really -- we like how our NOI mix is -- it will develop. We think that this initial acquisition has a starting point, but then we'll have greater value over time. There's a component of our NOI mix. And in the meantime, though, we've got other things, which are also developing very well as far as NOI on the resi and on the office side.

So I do think a thing that is of interest to us is when we come to NOI and FFO, what's really hitting the bottom line in the form of cash. And we've mentioned this in the prior earnings call, and that's really our focus. Everything we do, lease space, sell tickets, deliver on our sustainability objectives, manage the balance sheet, flow cash to the bottom line so that we have greater flexibility as we go forward. And so we really will remain opportunistic. We've got a lot of areas where we can deploy capital with confidence when we see the right opportunity.

[Blaine Heck, analyst]

And just following up on that, I guess, how did you guys weigh this purchase of retail assets versus investing more in your own stock through repurchases at potentially higher returns at this point?

[Anthony Malkin, executive]

We definitely look at this as something with duration will deliver a very high return to us relative to where we think a purchase of our stock, we think it will greatly help our stock as we go forward. And we just think there's tremendous upside if you have duration here. And so we do have duration, and we can live through a couple of lease cycles on this. I don't know, Christina, Tom, Christina, comment?

[Christina Chiu, executive]

I would just say we have buybacks on the agenda. We've done it in size. It remains a strategic part of capital allocation. And as we mentioned earlier, a unique opportunity to create scale on a very prime retail corridor in a great location, high foot traffic, proximity to Manhattan, great demographics. We've mentioned this market also has more opportunity for retail, more opportunity for residential, create long-term upside over time and in an asset class that has a different CapEx profile versus office. So for a lot of reasons, and this made a lot of sense. So fortunately, we have a great balance sheet. Nothing is off the table. We'll evaluate everything, but this was a really unique and great opportunity for the company.

[Blaine Heck, analyst]

And then it seems as though you're -- as the optimism around the return to office or tech companies have been building layoffs has come through and some of the companies are mandating more in-person office time, Tom, great to hear about the lease this morning, and you guys have additional tech exposure in your portfolio. So can you just talk about expectations with respect to leasing activity amongst tech tenants and whether you're seeing kind of any shift in their preference to be in New York versus the more traditional footprint on the West Coast?

[Thomas Durels, executive]

Well, I'll give you 2 examples. The lease that we just signed at 1350 Broadway for a full floor of 24,000 square feet, that's a tech firm, and that represents growth by the expansion by them. The other trend that I mentioned that's looking to expand at Empire State Building during COVID, they had given a -- shed some space elsewhere outside of our building. Now looking back and saying, gee, we want our employees in the office and they want to be in the office, and they all deserve to have desk and they want to have desks. And so they're looking at an expansion with us by a fairly significant amount, more than doubling their size. So these are 2 very good examples of what we're seeing in the tech space.

And look, as you know, our role is very diversified. We're not focused on one single industry. We attract tenants from all industry and the examples I gave. And the commentary I just gave about that potential expansion tenant at Empire State Building, we're hearing that more and more from other tenants there. The far or the indecisiveness around the work from home, they move beyond that. They make clear plans, definitive plans to place their office and have their employees in the office in New York City.

[Anthony Malkin, executive]

And I'll add 2 things. I want to be careful on this use of the term tech firm. Both of these companies of which Tom just spoke are highly profitable. They are not start-ups. They've got very good business models. And so we do, as you know, a real underwriting of these businesses and their viability before we sign a tenant. Our largest tenant LinkedIn, started as a single floor at the Empire State Building. That was a time when everyone thought they were just another tech startup, and we did the research. We said, no, no, this is a real business. It was a real business growth prospects. So let's be careful. We have not changed our underwriting standards on bit.

Number #2, New York City is absolutely positively the preferred destination for new tech jobs. It's because that's where the employees, the colleagues, the team members want to be. That is a statistic. New York City is alive. It is vigorous. I was in San Francisco on Tuesday and Thursday -- Tuesday and Wednesday, excuse me, of last week. There is simply no comparison between the 2 markets. New York City is topping and the energy is tremendously attractive, not just to recent college grads, but also to people who want to move and locate where there is going to be activity and that's going to be live. As our lead director says, it's where people want to create their lives, meet their future life partners and enjoy life.

And the last thing that I'll say is with regard to this is we see a tremendous interest in us by virtue of tenants' responses to their employees and colleagues attendance in the office in our buildings. And the tenant who looks to expand at the Empire State Building, they have looked to shed other office spaces. At the same time, they saw the #1 location for employee in-office participation out of their locations with the Empire State Building. And they said, okay, we want more space there because that's where people show up.

So I think that just to round it out, I want to make sure from a balance sheet perspective to understand we're not taking additional risk, New York City is definitely the desired location, and our portfolio, particularly as attractive on the basis of existing tenants experiences with our own employees and colleagues.

[Operator]

Our next question comes from the line of Camille Bonnel with Bank of America.

[Jing Xian Tan, analyst]

Tom, I wanted to follow up on your comments around leasing costs being lower because of the strategy you've implemented this year. So looking forward, as you work through leasing these turnkey spaces, I wanted to get a better sense of what's going on in the general market, given their reports that tenant improvements are increasing in Manhattan. Are you seeing these trends too in the portion of the market that you operate in? Or is this less of a concern because there's enough demand to continue implementing that turnkey solution?

[Thomas Durels, executive]

Camille, I would say this. As I mentioned earlier, our average net effective rent has increased by 10% over the past 3 years, and that factors in the top line gross rents as well as the leasing costs. And that's the number to really keep an eye on. As I mentioned earlier, we're -- and as Tony mentioned, we're moving our rents. We're tightening up on free rent and that's having an impact on improving our net effective rents.

We benefit from having built space throughout our portfolio. As I mentioned earlier, we have an inventory of second-generation prebuilt space that is less expensive to turn it back into service for a new tenant, and that helps lower our TI costs having previously already invested the capital in those spaces. And then generally, nothing has changed over the last 5 or 6 years in terms of what we deliver to tenants by way of full turnkey service. It's always been part of our offering. We deliver prebuilt space ready for move-in, and we deliver turnkey spaces when we're talked to a tenant for technically a large full floor space for a long term. We would just cut in design and build that space for that tenant.

So what we're offering on TI has been pretty consistent. We're benefiting from, again, having invested capital previously. But all in all, our net effective rent has improved 10% over the past 3 years. So hopefully, that gives better perspective and answer to your question.

[Jing Xian Tan, analyst]

And shifting to your Observatory business, it continues to show good growth. So what do you attribute to the lower visitor count versus last year despite having less bad weather days?

[Anthony Malkin, executive]

Tony here. First of all, we did have a shift of Easter into the first quarter of this year and that always produces a shift. So -- and last year's comp, Easter was in the second quarter, number #1. Number #2, we're managing the demand in order to maximize the benefit to the visitor. And we do see that we have from time to time, we cap our attendance. But the biggest shift is from Easter. That's the first piece.

I will say there's one other piece, and that is that there's unquestionably a much lower international traveler presence in New York City this summer. Full stop. You can get it from the airlines, even the New York City official Travel Bureau, well grudgingly acknowledge this. When we -- when you look at established venues from the 9/11 Museum on across New York Statute of Liberty, you name it, everyone has recognized and commented on this. And so what we see is big domestic demand, which comes with domestic travel pieces. The international demand is not as robust. It is still gathering back strength.

And yet what I would draw attention to is we continue to grow the top line, we've continued to grow the bottom line and our NOI per cap continues to tower above any other competitor. So we feel very good about where we are and about what we're doing with our business there.

[Jing Xian Tan, analyst]

And just finally, despite perceptions on how they define quality, your leasing teams continue to define a norm. So I'm curious to get your views on where you see structural vacancy for your office portfolio. Do you expect to be able to grow your lease percent much further above the 92%, 93% levels today?

[Thomas Durels, executive]

Camille, we're really well positioned based on all the work that we've done. For the balance of the year, we have about 190,000 square feet of tenant vacates and the space that we're getting back are full floors that are consolidated. They're very marketable. Some come with outdoor terrace space. So we're confident that we will be able to lease those spaces. And so that's a modest amount of lease expirations and tenant vacates and offset by the leasing activity in the pipeline that I mentioned earlier.

And then 2025, because again, we've done a great job of proactively managing our rent roll, we only have about 162,000 square feet of vacates and 113,000 square feet of undecided. And that's, again, that's against the backdrop of over 820,000 square feet of leasing that we typically have done in the past 3 years in Manhattan office portfolio. So it may fluctuate quarter-to-quarter, but you see the trend that we've been on for the last 2.5 years. We're well positioned going from now and into 2025 to continue to make progress on our lease percentage. And as our lease percentage declines, our occupancy percentage will follow.

[Anthony Malkin, executive]

And I'll add. There'll always be variations. But when you look at our forward numbers, as Tom described, we do manage and early renewals are a part of this as we -- as tenants expand, we renew and extend their existing leases. So we're super active on these activities and recognize something else, we don't wait for tenants leases to expire to be active. So we do a lot of leasing of tenants who say I've got excess space. So before they ever get to the point where they want to vacate, we work with them to lease their space while they're still in occupancy directly to a new tenant. So a lot of work in this regard and a lot of opportunity for us. We're just very, very happy with how the market receives our product and where we go with this.

[Operator]

Our next question comes from the line of Dylan Burzinski with Green Street.

[Dylan Burzinski, analyst]

Just wanted to touch on the reaffirmation of 2024 FFO guidance. I mean you guys are doing this acquisition that's expected to close in 3Q. You guys raised same-property cash NOI growth guidance. So just curious sort of on the decision on deciding to reaffirm guidance given some of those positive characteristics that I just mentioned. I mean what are some of the offsets to that? I know you guys mentioned G&A possibly being higher. So sort of just curious, anything else that we might be missing?

[Stephen Horn, executive]

Sure. This is Steve here. So yes, our $0.04 FFO guidance range is meant to capture a variety of scenarios. And some of those live within the Observatory, we have tourism fluctuations on bad weather days to deal with. And our revenue there -- NOI, sorry, is split typically 40% in the first half of the year, 60% in the second half of the year. So even though we're halfway through the year, the Observatory performance there a little bit outsized impact in the second half of the year.

As far as the transactions and capital markets activity, if you recall in the first quarter's call, we did note that with the new term loan and the facility, by their buyout and the FSP sale had about $0.01 dilutive impact on FFO. And there was also about $0.035 -- sorry, $300 million of onetime items that benefit revenues within the first half of the year that we don't expect to recur in the second. So with all that in mind, we still feel good about our guidance not changing, and sticking to that $0.90 to $0.94 share. As far as G&A, we already had that modeled in our FFO guidance for the year, just calling it out as a benefit for models for '25.

[Operator]

We will now turn the call back to Tony Malkin, Chairman and CEO for some closing remarks.

[Anthony Malkin, executive]

Okay. As we move forward, ESRT's priorities are to lease space, sell tickets to the observatory, manage the balance sheet and achieve our sustainability goals. These actions together enhance shareholder value. We are pure-play New York City, more so now that we have honed our portfolio, 4 diverse ways to play it. Our office portfolio, top of tier in the deepest market segment, our #1 ranked Observatory, a growing everyday street retail and a multifamily platform.

We are a future-ready portfolio, and opportunity-ready balance sheet. We have options today. We're in a position to take advantage of opportunities created through market disruptions and capital dislocation. We're confident in our team's ability to execute on our goals and drive further growth for our shareholders.

I want to thank the team on the call today and who -- people who work every single day, incredibly hard. We have confidence in you, and we'll continue to do a great job on behalf of our shareholders.

I want to take a moment and do a special call out to Board member Grant Hill, the entire company and the Board. Our support of our fellow Board member, Grant Hill, who's Managing Director of the United States men's basketball team in the Paris Summer Olympics. Grant, we wish you all the best, will be cheering for you.

Finally, I'd like to thank everybody for the participation in today's call. We look forward for the chance to meet with many of you at non-deal road shows. We'll be going to Europe in the fall, conferences, property tours in the months ahead. Until then, thank you very much for your interest in onward and upward.

[Operator]

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