Oct 29, 2015
Operator
Greetings and welcome to the Empire State Realty Trust Third Quarter 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.
I would now like to turn the conference over to your host, Mr. Thomas Keltner, General Counsel at Empire State Realty Trust.
Thank you, sir. You may begin.
Thomas Keltner
Good morning. Thank you for joining us today for Empire State Realty Trust's third quarter 2015 earnings conference call.
In addition to the press release distributed last evening, a quarterly supplemental package with further detail on our results has been posted in the Investor's section of the company’s website at www.empirestaterealtytrust.com. On today's call, management’s prepared remarks and answers to your questions may contain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995.
Examples of forward-looking statements include those related to revenue, operating income and financial guidance as well as non-GAAP financial measures such as FFO, core FFO, modified FFO, same-store results and EBITDA. 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 contained in the Company's filings with the SEC. Finally, during today's call, we will discuss certain non-GAAP financial measures which we believe are meaningful in evaluating the company's performance.
The definitions and reconciliations of these measures to the most directly comparable GAAP measures are included in the earnings release and supplemental package, each available on the company’s website. This morning's call is hosted by Empire State Realty Trust's Chairman and Chief Executive Officer, Anthony Malkin; President and Chief Operating Officer, John Kessler; Director of Property Operations and Leasing, Thomas Durels; and Chief Financial Officer, David Karp.
They will make introductory comments, after which we will open the call to your questions. Now, I will turn the call over to Tony Malkin.
Anthony Malkin
Good morning. We are delighted to welcome you to our third quarter 2015 earnings conference call.
During the quarter, we continued to execute on our strategy and delivered strong results. Our prepared comments will be fairly brief.
John Kessler, our President and COO, will begin with an overview of overall results. Tom Durels, our Executive Vice President and Director of Leasing and Operations, will then provide an update on our portfolio.
And David Karp, our Executive Vice President and Chief Financial Officer, will next review financial results in more detail and discuss our balance sheet. After that, we will open up the call.
Now, I will turn the call over to John Kessler. John?
John Kessler
Thank you, Tony and good morning, everyone. Let me begin with a brief summary of our strategy, which remains unchanged from the days of our IPO roadshow.
Empire State Realty Trust is a pure play Manhattan and New York City metro area office and retail real estate portfolio. We believe our portfolio offers a unique opportunity to grow income through our continued redevelopment and leasing of our properties at market rents and through increasing occupancies to market levels.
Since inception, we have delivered and we expect to continue to deliver embedded de-risk growth as we execute our strategy. We continue to make good progress in our leasing and financial performance remain very strong.
Through the first three quarters of 2015, we have leased over 1 million square feet of space, well ahead of last year and observatory revenues have remained steady. On the investment front, through our market connections, we identified an off market acquisition and in the interim, did a purchase agreement.
The purchase agreement included a right for the seller to seek a higher purchase price from another buyer and exchange for the payment to us of a breakup fee. The seller obtained a materially highest sales price.
We stuck to our view of value and we were paid a $2.5 million breakage fee. We continue to work to identify attractive external investment opportunities.
We remain focused on off-market transactions, which fit well with our business. We have compelling embedded de-risk growth to deliver as we execute on our plan and have a clear view of value and are unwilling to overpay for assets.
We continue to believe in cycles and discipline. Next, an update of our broadcast business.
At the Empire State Building, we lease space and charge license fees to TV, radio and telecom tenants who broadcast their signals from the top of our maft. Our major TV broadcasting tenants include CBS, ABC, NBC, Fox, WPIX among others.
Our total license fee and space rental income before expense reimbursement is approximately 21 million annually or roughly 3% of our 2014 revenue, which totaled $635 million. Our TV and radio leases and licenses expire between 2016 and 2023 and we are engaged in active renewal negotiations.
The business of broadcasting, TV and radio signals over the year is in flux due to deteriorating industry fundamentals and the upcoming FCC spectrum auction and there is also a new competitor in the market at One World Trade Center. We have made preliminary renewal proposals, which would yield reduced revenues, higher operating expenses and/or higher capital expenditures.
If there is any material event, we will inform you. Our broadcast revenue is relatively small to begin with and naturally reduces as a proportion of our total revenue, as we grow significantly the rental revenues from the redevelopment and lease-up of our office and retail portfolio.
Finally, as part of our ongoing effort to enhance our balance sheet flexibility and lower our cost of capital, we closed on a new $265 million unsecured term loan in August. The new term loan has a seven-year term with variable interest for the first two years and fixed interest for the final five years.
We are pleased with our demonstrated ability to access the unsecured debt markets and lengthen our maturities and are grateful for the ongoing support of our lender group. David will provide more detail.
The structural themes here are the same themes about which we, as a management team, have spoken since our IPO. As we execute on our plans and deliver on our de-risk and embedded growth, we are very excited about the future here at ESRT.
I’ll now turn the call over to Tom Durels. Tom?
Thomas Durels
Thank you, John. Good morning, everyone.
On today's call, I will review our overall leasing activity, provide a summary of our current space availabilities that we are actively marketing and provide an outlook on space that we plan to vacate and redevelop in order to re-lease at higher rents. Our third quarter results continued to reflect the progress we are making to execute on our strategy and capture our four growth drivers, which are, upside from signed license not commenced, the mark-to-market on our expiring Manhattan office leases, lease-up of developed vacant office space and the mark-to-market and lease-up of vacant retail space.
In the third quarter, we signed 67 new and renewal leases totaling 338,000 square feet of office and retail space. Approximately 284,000 square feet took place in our Manhattan office properties, 51,000 square feet took place in our Greater New York metropolitan properties and 3,000 square feet took place in our retail portfolio.
As John mentioned, year-to-date, we have signed leases for over 1 million square feet. At September 30 of 2015, our total portfolio was 87.4% occupied and including signed leases that have not yet commenced, our portfolio was 90% leased.
Our portfolio occupancy was down 60 basis points from the second quarter and including signed leases not commenced, our occupancy percentage was unchanged. On a same-store basis, our portfolio occupancy was down 110 basis points year-over-year and including signed leases not commenced, our occupancy percentage is up 80 basis points year-over-year.
At our flagship property, the Empire State Building, at September 30, we were 83.7% occupied, down 130 basis points from the prior quarter, however including our signed leases not yet commenced, our leased percentage was 91.2%, an increase of 150 basis points from the previous quarter. At the start of the third quarter as previously announced, we signed an expansion lease with LinkedIn for 126,000 square feet over two floors, bringing their total square footage leased to 280,000 square feet.
This brings our total full floor leases signed year to date at the Empire State Building to six full floors. Empire State Building’s unique urban campus with its spectacular amenities, including six on-site dining and cuisine options, two Starbucks, including the first in-building tenant delivery unit in the world, New York City’s largest tenant only fitness center and tenant only conference center, continue to drive traffic and tours from brokers and prospective tenants and our existing tenants reap the benefits of enhanced employee productivity.
Throughout our portfolio, we continue to drive strong rental growth spreads and during the third quarter, rental rates on new and renewal leases across our portfolio were 34.5% higher on a cash basis compared to prior escalated rents. We again achieved strong spreads for our Manhattan office properties as we were able to sign new leases at spreads of 41%.
Our spreads on new and renewal retail leases were 94.6%. As we lease up our available inventory, we continued to consolidate, vacate and redevelop space in order to lease to better quality tenants at higher rents throughout our Manhattan portfolio.
As we have discussed, occupancy will fluctuate in the short-term as we take space offline in preparation for redevelopment and re-leasing. Now to that end, we vacated 510,000 square feet year-to-date in 2015 and we expect to vacate an additional approximate 220,000 square feet of space in our Manhattan portfolio by year-end.
This is intentional and consistent with our proven strategy to unlock the embedded growth and achieve our remarkable leasing spreads. Within our Manhattan office portfolio, we have approximately 1.93 million square feet of space left to redevelop and re-lease.
480,000 square feet of this space is at the Empire State Building and 1.45 million square feet is in the balance of our Manhattan office buildings. We are currently on track to redevelop approximately 590,000 square feet of space by year-end 2016.
In our Manhattan office portfolio, we currently have 870,000 square feet of unleased vacant space, of which 483,000 square feet is redeveloped space that includes prebuilts and white box full and partial floors ready for lease-up. Approximately, 85,000 square feet is being held off market, until it can be consolidated for future redevelopment.
And the balance of our vacant space is being planned for redevelopment. As of September 30, we had six full floors of 150,000 square feet throughout the portfolio that were vacant and available for lease-up.
And another three full floors of 75,000 square feet will be consolidated and delivered by year-end. In our retail portfolio, we have approximately 26,000 square feet of vacant ground floor retail availabilities at 250 West 57th Street, 1333 and 1359 Broadway and other locations and future retail space that will be consolidated and redevelop to create new lease up opportunities in 2016 that include approximately 38,000 square feet, including nearly 8000 square feet at street level at 112 West 34th Street, 5600 square feet of street level space at the 34th Street at the Empire State building and 5700 square feet of prime corner retail space at the Union Square.
Our entire real estate team in leasing, marketing, operations and construction continue to execute on a high-level as demonstrated by these excellent results. In summary, we believe the overall market is healthy and we continue to see steady activity in our submarkets with consistent demand for our well located, modernized office and retail properties.
We continue to lease up our vacant space and execute on our proven strategy to consolidate, vacate and deliver redeveloped space in order to lease to new, better credit tenants at higher rents and improve shareholder value. Now, I would like to turn the call over to David Karp.
David
David Karp
Thanks, Tom and good morning, everyone. I'll start with a review of our financial performance and follow with an update on our balance sheet.
For the third quarter, we reported core FFO of $70.6 million or $0.27 per diluted share. For the third quarter 2015, core FFO excluded the $2.5 million breakup fee, $2.3 million net of costs related to the purchase agreement, which John mentioned.
Modified FFO, which is defined as FFO plus adjustments for any above or below-market ground lease amortization was $72.9 million or $0.27 per fully diluted share for the third quarter 2015. For the nine months ended September 30, 2015, core FFO was $191.5 million or $0.72 per fully diluted share.
Modified FFO was $191.6 million or $0.72 per fully diluted share for the same period. One item of note on our income statement is that the tenant expense reimbursements increased from $18.6 million in the second quarter of 2015 to $23.1 million in the third quarter of 2015, primarily due to a seasonal increase in electric expense reimbursement of $3.1 million.
Turning to our observatory operations, year-to-date, the observatory hosted approximately 3.1 million visitors compared to 3.3 million visitors in the comparable period of the prior year. Observatory revenue was $84.5 million, a 1.4% increase from $83.4 million for the nine months ended September 30, 2014.
For the third quarter of 2015 compared with the third quarter of 2014, there was a 5.5% decline in attendance of the observatory. We believe this was primarily due to a decrease in international tourism and international tourism spend in New York City, which has been negatively impacted by weakness in the global economy.
For the third quarter, revenue was $37.5 million same as the third quarter of 2014. Observatory expenses increased 2.5% over the third quarter of 2014.
Observatory net operating income for the quarter decreased slightly by 0.5% year-over-year. Turning to our balance sheet, we maintain a low levered balance sheet and we focus on maintaining ample capacity and flexibility to fund our redevelopment program and to put us in a position to outperform over the long-term.
At September 30, 2015, we had total debt outstanding of approximately $1.6 billion. Approximately $1.3 million of this debt is fixed rate with a weighted average interest rate of 4.61% and a weighted average term to maturity of 5.5 years.
The remaining $285 million of debt is variable rate with a weighted average interest rate of 1.76% and a weighted average term to maturity of 6.7 years. At the end of the third quarter, our leverage ratio reflected by consolidated debt-to-market capitalization was 26% and our net debt to EBITDA was 5.0 times.
As part of our ongoing effort to proactively manage our balance sheet and position our company for growth, during the quarter, we closed on a new seven-year $265 million senior unsecured term loan facility. This facility is expandable by up to $100 million under certain circumstances.
Interest is calculated at the rate of LIBOR plus 1.6% at September 30, 2015. Pursuant to a forward interest rate swap agreement, the company effectively fixed LIBOR at 2.1485% for the $265 million of the term loan facility beginning August 2017 through maturity.
With this transaction, we have extended our debt maturities from 3.1 years at the initial public offering to 5.7 years less than two years later. Proceeds from this financing were used to reduce borrowings under our unsecured revolving credit facility.
Also in the quarter, we entered into forward interest rate swap agreements that provide us with a rate lock on the 10-year treasury rate at 2.505% for $200 million of expected 2017 mortgage refinancings. We are pleased with our continued access to the unsecured debt capital markets, which we believe is an endorsement of the quality of our portfolio and balance sheet.
And as always, we appreciate the support of our lender group as we grow our business and execute on our strategy. Finally, our unsecured revolving credit facility has a total capacity, including the accordion feature of $1.25 billion.
As of September 30, 2015, the outstanding balance on the company's revolver was $20 million. I'll now update you on our redemption requests.
As you may recall, for operating partnership units issued at the time of our IPO, our lock-up period expired on October 7, 2014 at which time orders of such operating partnership units could have their holdings redeemed for Class A shares, which are listed and traded on the New York Stock Exchange. As of September 30, we have had redemption request from operating partnership units and Class B common shares to Class A common shares totaling 19.8 million shares or approximately $337 million at the closing share price of $17.03 on September 30, 2015.
This represents a 24% increase in Class A shares since our IPO. On August 25, 2015, our Board of Directors approved a quarterly dividend of $0.085 per share.
This dividend was paid on September 30 to shareholders of record on September 15. With that I'd like to open up the call for your questions.
Operator?
Operator
[Operator Instructions] Our first question Blaine Heck with Wells Fargo Securities. Please proceed with your question.
Blaine Heck
Hey, good morning. I was hoping we could start on the observatory, for the past couple of quarters year-over-year NOI growth has been flat, but before that we're seeing 5% to 10% increases, I know you talked about trends in tourism affecting growth.
So I’m just trying to get a sense of how much of the slowdown is due to these trends and how much maybe due to competition and whether we should expect lower growth in this income stream going forward?
Anthony Malkin
Sure, Tony Malkin here. Thanks for that question.
Our market research tells us there has been at dip in tourist visits to New York City across all destination attraction, with many attractions seeing reductions of approximately 20%. Macy’s reported a drop in tourist visits and the drop in tourists spending [indiscernible] publicly reporting hotels, particularly better hotels and I know there are some reporting today weak Q3 and Q4 as not meeting expectations for a recovery.
We believe this is reflective of the weak global economic climate. There is particular weakness in Europe, Latin America, Australia, and certain Asian points of visit origination.
So we continue to feel good about our positioning in the market. We're focused on the demand drivers that we can control.
As far as the Observatory, we’ve never predicted that business. The only other thing that I might add is, this does point out that our comments since the road show, the Observatory is largely non-correlated with the fundamental real estate office and retail, which we operate, and the growth there in the office and retail is way more than making up for anything that's happening in the Observatory.
Blaine Heck
Okay, that’s helpful. And then I was hoping you guys can give a little bit more color on the deal that you pursued, but ultimately we are outbid.
I think the message has been that you guys were going to pursue off-market deals, but obviously against you guys were the only bidder for this property, so can you just talk a little bit more about that situation and maybe a little bit about other acquisitions you might be pursuing or submarkets you might be targeting?
John Kessler
Sure, this is John. In my prepared remarks, I commented that the transaction was off-market.
It did fit our business and our investment criteria, which we've outlined to you as office and retail properties in Manhattan, and were the preference for assets where we can create value through redevelopment. We did source it ourselves through our own connections and the purchase agreement did include right for the seller to seek a higher price from another buyer in exchange for a breakup fee, but the property wasn't formally marketed.
The seller obtained a higher sales price and we struck to our view of value and we were paid a $2.5 million fee. I think the message that we want to convey is that we have a clear view of value and we’re unwilling to overpay for assets and we also continue to believe in cycles and being disciplined.
I think as it relates to additional opportunities, we - while we're continuing to work on this regularly, we don't want to get distracted. We remain focused on a considerable internal growth that we have inherent in the redevelopment and release of our portfolio and we think this internal growth is a unique opportunity for us relative to our peers.
Blaine Heck
Okay, great. And then maybe one more, for Tom.
The lease rates stayed the same during the quarter, but the spread between the occupied and leased rate increased. So I was hoping you guys could give us an update to the potential NOI from signed leases not commenced, I think it was around $29.5 million last quarter.
Thomas Durels
Sure, first on the spread between leased percentage and occupancy, I think that that's a reflection of the execution of our strategy to vacate space, redevelop it and then re-lease it at higher rent. So while we continue to execute on that program, you will see a spread between leased percentage and physical occupancy.
Remember that for signed leases not commenced as of the end of the third quarter -
David Karp
Blaine, it’s David. As of the end of the third quarter, the signed leases not commenced would represent $29.9 million of that net annualized base rent, so - and again, we would add - you can say most of that to flow through in net operating income.
Thomas Durels
And some of the leases on that include the previously announced deals with Sephora, Foot Locker, LinkedIn, HNTB and some others.
Blaine Heck
Okay, great. Very helpful.
Thanks guys.
Operator
Thank you. Our next question comes from Jamie Feldman with Bank of America.
Please proceed with your question.
Jamie Feldman
Great. Thank you and good morning.
So can you talk about your 2016 expiration at this point? I mean, looking at the schedule, some of the larger - it looks like Foot Locker is still on here for April, I know you signed a new lease with them.
But maybe just talk us through your thoughts on the stickiness with some of those tenants.
Anthony Malkin
Sure. On the retail side, I think you hit upon one of the major leased roll overs at 112 West 34th Street on the office side.
For the balance of this year, we do intend to vacate approximately 220,000 square feet of the nearly 390,000 square feet of lease at rolling by year-end, that’s in order to execute on our program to unlock the embedded growth driver of mark-to-market rents through our redevelopment spaces. In 2016, I think that we will see some similar execution of that vacating space.
As we previously announced, we expect to redevelop nearly 590,000 square feet of space by the end of 2016 and that will involve intentionally vacating some of our Manhattan office space in order to execute on that program.
Jamie Feldman
Okay. But I guess, are there any large existing tenants that are non-moveouts at this point that we should be aware of?
Anthony Malkin
No, Jamie, keep in mind that as we discussed in the past, we have intentionally lined up lease expirations, particularly in the balance of ‘15 and 2016, and many of those lease expirations that comprise of smaller tenants that are occupying older unimproved spaces that we targeted for vacating and redevelopment. So I can’t speak to - aside from the one large lease roll over for Foot Locker, which we talked about in the past, I can’t really point to any other one single large tenant rollover that makes a significant impact to our overall plan.
Jamie Feldman
Okay, that’s helpful. And then focusing on the broadcasting NOI, we appreciate the color on the negotiations.
Are you able at this point to ballpark maybe what kind of percentage change you may see without compromising your negotiation?
John Kessler
Yeah, Jamie, this is John. As we said, we are in a process of discussion regarding renewals with our broadcasters and it is in negotiation, so at this point, we can’t really say anything beyond what I said in my prepared remarks where we did indicate that we think that the revenues - based on proposals that we made that the revenues with respect to this business could diminish and we may have some higher operating expenses and/or capital expenditures.
But at this point, I can’t give anything further.
Jamie Feldman
Okay. And then I guess the final question for David, with the unsecured debt ways looking ahead to 2016 not much maturing, so how - any capital plans for next year at this point?
David Karp
Capital in terms of refinancing.
Jamie Feldman
In terms of refinancing or just the ways, any kind of ways you want to do?
David Karp
You know, we are really pleased with the execution of the seven-year term loan that closed last quarter. As you know, since the IPO, we have been undertaking a deliberate plan for latter and extend our debt maturities and by closing on the seven-year term loan and paying down the revolver, we were able to extend the maturity to [ph] $265 million from just over three years to seven years.
In addition, by entering into the swap agreement, we were able to reduce our exposure to floating rate interest rates during the back five years alone. In fact, we’re also pleased with this transaction allowed us to expand and diversify our relationships with members of our bank group.
As we further transform and strengthen our balance sheet, we’ll continue to explore opportunistic possibilities to refinance the existing debt. Having said that and as you noted, we have no debt maturities in the remainder of 2015, grow throughout the entirety of 2016.
Our next maturing debt occurs in mid-2017 and as I noted, we have already taken steps to lock in treasury rates today in anticipation of refinancing net debt.
Jamie Feldman
Okay, that’s helpful. Thank you.
Operator
Thank you. Our next question comes from John Kim with BMO Capital Markets.
Please proceed with your question.
John Kim
Thank you. I had a follow-up question on the purchase agreement transaction.
With the location of this asset Midtown South and why do you think the buyer paid a materially higher price than you were going to pay?
John Kessler
Well, as I said before John - this is John, thanks for the question. What we are prepared to say at this point is that the investment fit our criteria and that is consistent with office and retail properties in Manhattan.
And I can’t speculate as to why other buyer paid more, but I think it certainly indicates that we had tied up an attractive investment at a good price and the market proved to determine a higher price.
Anthony Malkin
I might add to that John, Tony Malkin here. When we are doing things, which are off-market and we don’t want to add comment, it’s important for us to be able to continue to do things, which are off-market, that’s part of who we are, that’s part of our relationship.
We struck the transaction in particular way, so that the seller could feel good about doing business with us. We know the seller feels good about doing business with us.
We’re perfectly happy to take the net $2.3 million in. And we are very conscious that this is a long process built on relationships.
And doing off-market transactions is a delicate subject, so we want to protect the identity of the party with whom we were dealing and we want to make sure that others who might do business and we will treat things with care and confidentiality.
John Kim
So going forward on off-market transactions, I realize you mentioned that you don’t want to hope for pay for assets, but is a takeaway that the market has moved materially and you may be willing to change them of your underwriting assumptions?
Anthony Malkin
Well, I think our view is the market - the private market valuations for assets continues to be very strong and our message to all of you is that we are going to continue to do work on this also but we’re also going to remain very focused on our execution of our internal growth story which we think is very attractive in this environment.
John Kim
Okay, then on retail, can you provide some more commentary on the releasing you done this quarter with a 95% releasing spread and how we should read that into next year’s expiration retail, next year’s, I know you mentioned Foot Locker but there is a very modest rent per square foot that’s expiring next year.
Anthony Malkin
Right, first of all the leasing that we did this quarter is relatively small amount of under 3000 square feet, but one of those leases I think sent an important message in terms of the type of tenant that brought to the Broadway quadrant and Times Square South and the vastly transforming neighborhood and street front that is occurring there, first international brand coming to that part of the neighborhood. So I think it's a good message for us and the transformation underway there.
Previously, we have talked about the - one of our four embedded growth drivers being the mark-to-market and lease up of our vacant retail space. As we previously discussed, we see an opportunity on achieving mark-to-market rent spreads over - from now through 2019 as high as a 115% really depending upon the in-place expiring rent for any particular space and that’s applying just today's market rent without any growth rate going forward.
In 2016, I commented on the availability that we have coming up at Empire State building also from vacant space that we have at 250 West 57th Street, 1359 Broadway and some renting space at 1333 Broadway. So that's what we are focusing on in the near-term, also there is a corner space at Union Square, that I also mentioned.
So that’s what we're focused on between now and end of 2016.
John Kim
Some of those expiring leases sound like they’d be much higher than $53?
Anthony Malkin
I'm sorry?
John Kim
Some of those expiring leases next year sounds like they'd be - the market rent would be higher than $53, so just trying to get a sense of --?
Anthony Malkin
Yes, but keep in mind that in the total square footage that is expiring in 2016 includes approximately 85,000 square feet currently leased to and occupied by Foot Locker on three levels at 112 West 34th Street, the in-place fully escalated rent for that space is about $26 per square foot. So that comprises a significant amount of the retail space that is expiring next year.
As we’ve previously announced, we leased nearly 34,000 square feet of that through a renewal or part of the space to Foot Locker for over $6.2 million in annual rent and about 11,000 square feet of ground for space to Sephora for about - well over $10 million in annual rents and achieved very, very significant mark-to-market rent that were I think previously reported. So that really makes up the bulk of the 2016 rollover.
John Kim
Okay. And then a final one from me is your broadcast, it looks like it's about 2.1% of revenue.
Is it a commensurate amount of NOI as a percentage of total?
David Karp
John, the revenue number that we've commented on is roughly $21 million for base rent and license fees associated with the business and then we do receive some expense reimbursement as well. That equates to about 3% of our 2014 total revenue but we don't provide any further disclosure beyond that in terms of NOI.
John Kim
Okay, thank you.
Operator
Thank you. Our next question comes from Craig Mailman with KeyBanc.
Please proceed with your question.
Craig Mailman
Hi guys, I appreciate you being little closer to divest on the acquisition. I guess just curious if you'd be willing to provide may be what your underwriting returns look like for the building and what may be re-traded amount kind of would it brought that down to?
Anthony Malkin
So, Tony here. I guess look - I'm going to answer this question simply because I’ve spent the longest time dealing with private individuals in New York City on these transactions.
And we value our ability to operate below the radar. And I think that without any prediction of when we might have something else to say, over time you'll get a better sense of how we value our capital I think that it’s safe to say that we are very conscious of, I think David the number you said was 10%, 17% return on equity, return on interest, thank you, return on investment when we get to how we value what we do in our own portfolio.
And we wouldn't do anything which would materially dilute us at this time, we have no reason to. We’ve got a great balance sheet, super low leverage as we borrow to do our improvement we maintain or lower that leverage to total enterprise value.
And for us to deploy our capital we need to have a damn good reason, we thought we had a good reason, made a lot of sense to us even in today's market there were certain synergies which we thought made a lot of sense but we are going to chase transactions, we’re thrilled for people who are selling at higher prices. We're going to be around to help people who have other issues and other needs.
And therefore I think the thing I need to focus is the 10% to 17% return on investment that we’re getting in our internal portfolio when we look at doing a transaction; it's got to be an extremely good reason to deploy capital on today's market.
Craig Mailman
Okay that color is helpful. Then John on the broadcasting, it's kind of a wide range in terms of exploration here.
Can you give a sense of the amounts expiring, are there any spikes, is it more ratable. I guess I’m just trying to put I know it's only 3% of revenue in context and kind of when that's at risk?
John Kessler
I would appreciate the question as I think just remind you again that it is a relatively small part [Technical Difficulty] and those explorations are between 2016 and 2023 and we’re really in the middle of a negotiation right now with [Technical Difficulty].
Operator
Ladies and gentlemen please stand by, we’re having technical difficulties. One moment ladies and gentlemen please stand by.
Your line is back in conference.
Anthony Malkin
We apologize for the technical difficulty and Craig did you hear that answer?
Operator
[Operator Instructions].
John Kessler
Could you pull back out to Craig and in the meantime, we could take the next question and ask if Craig would like to come back.
Operator
Craig, line is open, he can speak.
Craig Mailman
Oh hey, sorry John I didn't hear your question, it cut out, or your answer.
John Kessler
You were asking about sorry we cut out there for a minute, you are asking about?
Craig Mailman
I was just asking about the kind of the exploration schedule for the broadcast over the 2016, 2013 timing. Is it ratable or are there any chunks, I guess I realize it's only 3% but I'm just trying to get at when some of that revenue stream is most at risk and if it’s just going to be gradual then it seems like it’s something you guys may be able to deal with?
John Kessler
Right, so we've not disclosed this breakdown. And again I remind you that this business, the rent and license fee you can aggregate comprise only about 3% of our 2014 revenue, so you really got to keep this in perspective I think relative to the overall business.
And then, I think the other point is that we’re really in the middle of negotiations with many of the broadcasters than we are in a competitive situation and for those various reasons, we don’t want to disclose anything further in terms of detail we don’t think it's in our interest or shareholders.
Craig Mailman
And then, Tony may be you can just give us a little bit of color on this in terms of international tourism trends, I know it seems like the strong dollar and economic conditions are kind of weighing but from what you guys are seeing are you know from a mix issue, are these tourist spending less in terms of the ticket kind of packages that they could get, are you seeing any degradation there or is just sort of slower pace of visitors?
Anthony Malkin
Sure thanks. I won't apologize again, we’re still trying to figure out why this phone is on and the other phone and our connection with the conference call went out.
But with regard to the tourists, I think it's important to note that our overall revenue has been flat to slightly up for the year to date. And we have had reduced tourist, so tourists are actually spending more pricing mix has worked to our benefit.
We do know anecdotally both from information that's being released by public companies such as international and travel, retailer sales, hotels that there is a real impact and whether or not it's the dollar or its economic malaise or a collection of the two, we're not going to make comment on that. What I will say is that we do have this tremendous growth in retail and office leasing which is more than accommodating and I'm perfectly prepared for there to be a point in time and cycles to come where we're talking about how the observatory is doing better than our office on our retail, it’s just a mix.
What we do also see by the way of some anecdotal information from speaking to real estate brokers in the retail environment and Tom Durels maybe you could just add what we've heard from retail brokers about what's going on with retail sales in New York City.
Thomas Durels
Sure, there is some discussion that retail sales being flat in some cases declining that's having an impact particularly on some of the higher priced retail spaces particularly maybe on Upper Fifth Avenue but the good story for us is that our properties are in great retail corridors with high pedestrian counts and where retailers do business. So, we have activity on our space, I think reflected by the fact that we’re in strong locations where retailers continue to sell products.
John Kessler
This is John, I guess the benefit of being able to participate with brokers probably about 10 or 11 breakfast a year and we do them with retail brokers as well. And most recent retail breakfast with top brokers in New York which was attended by me and by Tom Durels, and Fred Posniak who does our retail leasing.
When we look at the market, I would suggest anybody who visits New York take a look at Broadway between 14th Street in south of Houston, take a look at Soho, take a look along certain places in Fifth Avenue, south of the super prime locations, you’re going to see a lot of vacant stores and the word on the street is that the landlords are asking for higher rents and the tenants are looking to take smaller stores and pay lower rents. And that's just a reflection of the reduction in retail sales and the performance of retailers in Manhattan.
And as has been said in the Macy's comments, they attribute significant component of that to international shoppers buying less and actually have reduced football from international shoppers, sorry to go on but you’re asking, so we thought we'd share.
Craig Mailman
Oh it’s okay, it's helpful and I guess it leaves us with my last question. The remaining space at 112 West 34th I guess there's been some fresh reports about potential tenants there.
Just kind of curious the demand you're seeing and kind of the type of tenant you're seeing whether it's more of a department store type or otherwise?
Anthony Malkin
First of all it's a super prime location directly opposite to Macy's flagship store and as a reminder our in-place average escalated rent there is $26 a square foot and we achieve incredibly remarkable mark-to-market leasing spreads between the Sephora and recast of the Foot Locker lease. The Foot Locker reports that this is their top performing store.
The footfall there is nearly 100 million pedestrian accounts passing through that area annually. And so this is a location where retailers want to be to sell their products.
This is not just a branding location. The types of tenants that we’ve seen, it’s really theirs.
We’ve leased just the ground floor that is super-high ramp per square foot or we believe the entire ground floor, obviously the ground floor was the entire lower level and maybe a lower blended rent per square foot, but still achieving an aggregate rent we think in excess of $6 million. So I think that it’s - we’ve seen a variety of retailers, it’s not really one particular type.
We were very fortunate in leasing to Sephora and Foot Locker prior to the existing lease expiration which is late spring 2016. There may be a good chance that we will wait for Sephora and the new Foot Locker stores to be built, the remaining space to be demised and wiped off before we really see the marketing of that take off.
Craig Mailman
Great. Thank you.
Operator
Thank you. Our next question comes from Brad Burke.
[Goldman Sachs] Please proceed with your question.
Brad Burke
I had another follow-up on the acquisition breakup, I was just hoping if you could remind us how you're thinking right now about the magnitude and the timing of any incremental acquisition activity? And second part of the question, with the leverage below 30% how we ought to think about your financing any incremental acquisitions.
John Kessler
So, Brad, it’s John again. As we think about external acquisitions we are, as I said before, we don't want to get distracted.
We remain very focused on the internal growth story that we’ve been talking about and these great returns that we're getting on redevelopment of our portfolio. And it’s a really unique opportunity for us.
But I think with respect to external growth, we are going to continue to be very deliberate and if we want to do anything we are going to focus on relationship-driven situations. And I think beyond that there is not a lot further there.
David Karp
Just one other thing, Brad, with respect to your question about how we look to finance it. One of the benefits of doing the term financing was it allowed us to pay down our revolver and give us even more dry powder as we look at potential acquisitions.
We don't have any expectation at this point of having to issue equity in connection with an acquisition. So again the game plan is to look to the dry power that have and utilize that going forward.
Brad Burke
And if you were to make an acquisition, would you be comparable taking the balance sheet where it’s at right now and pushing it a little bit further in order to get that done? What sort of level would you be comfortable going to?
David Karp
I think when we said consistently in the past is, part of our strategy on the balance sheet is that we want to be prepared for opportunities that come our way even in the form of acquisitions now or if we see a turn in the cycle and there are broader opportunities, we are prepared to take advantage of it. And if that means on a temporary basis bringing our leverage up, then we are prepared to that.
We have a longer term strategy of restoring that dry powder and not liquidity, so balance sheet is the next opportunity.
Anthony Malkin
But I think it is important, Brad, to note, Tony here, is to finish up on an answer to this, there have been lot of questions in this regard. While we are active in looking at off-market situations, we are not participating in any broadly marketed transaction right now, just a reminder to anybody who hasn’t heard me say that before or heard us say that before.
We do believe that there is a time in which private equity values are very high and we think that the best use of what's happening in the markets today on the hand-to-hand transactions that are being done by private or by public acquirers today is to consider what that means to the value of our portfolio. That being said, our focus is on what we said from the beginning, delivering this tremendous de-risk embedded growth which has a significant way to go and on which we're executing very well.
And we don’t have a need to put out capital today. We see no need to grow for growth sake, but we're looking to drive shareholder value and to stay disciplined.
Brad Burke
Okay, I appreciate that. And for, Tom, I was hoping that you could help us think about the trajectory of occupancy, it’s down just over 1% since last year, but as you know that you've increased the number of leases that need to commence, but you also have a lot of expirations remaining in 2016.
So just how we ought to be thinking about occupancy trajectory with all those puts and takes?
Thomas Durels
Yeah, Brad, it’s the same theme that I’ve discussed in the past. I've tried to give some visibility through the balance of this year during which we intend to vacate approximately 220,000 square feet.
That’s on top of the over 0.5 million square feet that we vacated year-to-date. This is in connection with our execution of our strategy to consolidate and redevelop spaces so that we can unlock the mark-to-market and achieve the tremendous leasing spreads that we have.
Going into 2016 we and through the year end we expect to redevelop nearly 590,000 square feet of space, that’s comprised of the space that we are vacating, the final quarter some in 2016 plus some of our vacant space. We are incredibly busy, we remain very active.
The good news is that as really quickly as we redevelop, we are leasing it. We’ve proven that in the past that as we redevelop space, we lease it up.
We have a good inventory of developed space now, but I commented on earlier during my prepared remarks about pre-builds and full and partial floor wipe off space. And I think you can anticipate that going into 2016 we will continue to execute on that and have somewhat similar experience, but the occupancy will fluctuate and will be bumpy and there will continue to be a spread between our leased percentage and physical occupancy.
I think the number to keep an eye on is our leased percentage, right, which is the benchmark of how well we are doing.
Brad Burke
Okay. And maybe staying with the leasing, if I look over the last five quarters, you’ve signed almost 1.4 million square feet of leases.
The average spread on that is almost 70% and just looking at that algebra, that say that you would eventually translate into an almost 10% increase to your average rent per square foot. So I was just trying to get a sense of how much of that recent leasing activity over the past five quarters is already reflected in your current results and how much should we think about as being on the way, but not yet reflected in the third quarter?
Thomas Durels
Well, I think the - we’ve commented previously on the signed leases.
David Karp -
I think that’s the - Brad, that’s the key. As we mentioned there is 29 million in signed leases, not commenced.
So that is something that you are not going to see in the current members and which will be reflected in future quarters.
Brad Burke
But you had also called out that a lot of the retail, you made a lot of progress on the retail lease expiration for 2016 and I assume that that's not reflected in that almost $30 million of signed leases not commenced, but there is still some pretty significant bump associated with those when they actually do expire, is that right?
Anthony Malkin
Included within the signed leases and occupancy that Dave just commented on of the Sephora and the renewal of Foot Locker for a portion of space, those will have lease commencement in 2016, so that is part of the signed leases and occupancy.
Brad Burke
Got it. Okay, thank you.
Operator
Thank you. Our next question comes from the line of John Guinee.
[Stifel Nicolaus] Please proceed with your questions.
John Guinee
Great. Three questions and since it is 9:30 you can answer them very, very quickly.
First ground lease, you have three buildings that you are a ground lessee, what's the chances of acquiring the underlying land in any of those three buildings in the near term?
Anthony Malkin
Hi, John, it’s Tony. Very long term leases, we dialog from time-to-time with the owners.
The bottom line is in today's world they’ve got a last view of their position. These are all set rents.
They are extraordinarily low for a very long time. The primary decision makers involving these will not be alive, absent from remarkable active medical technology by the time they even get into their last years.
So we look at this and say, we will continue to maintain open dialogs, but at the same time there's no motivation for us to do anything now.
John Guinee
Got it. Okay, then real quickly, if I'm adding up signed leases not commenced, mark-to-market, leased up development, developed space, lease up vacant space, my recollection is that's close to $100 million.
Correct me if I'm wrong David. And then if I add up I look at the Observatory at $83 million and the Broadcast at $21 million, that’s plus or minus $104 million.
If I take the maximum downside on the Observatory and the Broadcast combined what percentage of that is relative to sort of in the bag $100 million of mark-to-market et cetera?
Anthony Malkin
Are you saying if we shut down the Observatory and the Broadcast, would we -
John Guinee
I am just saying when you look your real downside, is it 10% of the $100 million, is it 20%, what’s the maximum downside of these two.
David Karp
Really, John, it’s going to be an assumption, what assumptions you want to make in terms of a downside. What we’ve said is over the next say five year horizon, we see that $100 million of incremental NOI as an additive to current base.
Our cash NOI over the past 12 months was approximately $320 million. I can’t tell you what to guess in terms of a downside, that’s really up to you, but that’s the base off of which it will work.
Anthony Malkin
But we can remind people, John, is that the One World Trade Center fixed payment starting lease commitment from the Legends Group of $65 million and that had with it what was publicly stated objective of spending $75 million in CapEx which we think went higher and then of course at the starting rent of $65 million it goes up from there. So that’s -
John Guinee
Okay, then my quickly important question is what time is your Halloween Light Show, is it Friday and Saturday or just Saturday night?
Anthony Malkin
It is Saturday night, it is at 6:45, and it is at 10 PM and you can listen to it at Z100.
John Guinee
Great. Thanks.
Operator
Thank you. Our next question comes from the line Tom Lesnick with Capital One.
Please proceed with your question. This will be our last question.
Tom Lesnick
Hey, guys, good morning. I just, given kind of the concerns about valuations in the VC space and maybe a softening IPO market, are you guys seeing any read through in terms of tenant demand from that kind of given the kind TAMI kind of exposure to Midtown South?
Anthony Malkin
So, from our perspective, I can only tell you that we only had three core technology tenants. We’ve got eBay, we’ve got LinkedIn, we’ve got Shutterstock.
We don’t do leasing to startups. You can see the comments I made in that regard on Bloomberg TV, I guess the day before yesterday outside of that.
Tom, you want to make any market commentary?
Thomas Durels
Well, I would say, to Tony comments, only 3.9% of our total portfolio is leased to that tenant, but as Tony just mentioned, we leased [indiscernible] So these are good quality tenants to whom we are leasing in the media and advertising space. As you we have IPG, a media journal, again very good tenants and embedded within our culture is focus on tenant credit quality.
We employ a full time credit analyst. Her writes up and reports go to often both the Tony, John Kessler, Dave Karp and myself.
We all look at those and review those and so we are very conscious about when we are doing leasing and it’s very much in the forefront of our folks on our leasing team. We do have a diverse kind of profile and what we are seeing right now is that the location of our property, the convenience, the monetized redeveloped properties in the new space that we are delivery is still attracting a wide variety of tenants that include financial services, international engineering firms, consumer products and retail transportation.
So I think the good - the thing here is the good diversified rent rate is what we are creating made up of good quality tenants.
Tom Lesnick
Got it. Thank you.
And then I know it’s a relatively small portion of your business by comparison, but spreads looked about flat for this quarter. Just wondering what’s your prognosis for kind of those underlying assets and how should we expect rents to trend going forward.
Thomas Durels
So first of all the [indiscernible] properties represent a fairly small amount of our total NOI. We have only about 96,000 square feet of total vacant space, only about 20,000 square feet of rolling through the end of this year.
We’ve got a very good tenant mix there with high quality tenants or properties that are fully improved and fully amenitized. Three of them are located right at mass transportation hubs.
Two of them being located at the second-busiest Metro-North Station, second only to Grand Central. I think they do contribute helpfully to our bottom line and they produce cash.
And so going forward I think that we think we are in a pretty stable situation.
Tom Lesnick
Okay, and then my last one is just on the operating margin of the Observatory business. I know it’s down very slightly year-over-year, I am just wondering what’s really driving that.
Is higher payroll cost of something else?
David Karp
Yeah, recognize the year-over-year the operating expenses for the Observatory were up marginally and the revenue was relatively flat. It’s a number of things that’s mostly on payroll.
There were some additional non-payroll related cost [indiscernible] but nothing significant to point out.
Tom Lesnick
Great. Thanks.
Anthony Malkin
I think that that’s– really sorry about the technical interruption. We would like to thank you for joining us.
We look forward to seeing many of you at our upcoming Empire State Run-Up that we will host. We know we have three analysts and the analyst will be running up to building.
We always welcome more. We look forward to updating you on our full results when we report next year and of course any material or meaningful leasing we will report as we do it.
So thank you all very much and have a great rest of the earnings season.
Operator
Thank you. This does conclude today’s teleconference.
You may disconnect your lines at this time and have a great day.