Apr 27, 2017
Executives
Thomas Keltner - EVP and General Counsel John Kessler - President and COO Tom Durels - EVP and Director, Leasing and Operations David Karp - EVP and CFO Tony Malkin - Chairman and CEO
Analysts
Jamie Feldman - Bank of America Craig Mailman - KeyBanc John Guinee - Stifel Tom Lesnick - Capital One Securities John Kim - BMO Capital Markets
Operator
Greetings. And welcome to Empire State Realty Trust First Quarter 2017 Conference 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, Executive Vice President and General Counsel at Empire State Realty Trust. Please begin, sir.
Thomas Keltner
Good morning. Thank you for joining us today for Empire State Realty Trust’s first quarter 2017 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 Investors section of the Company’s website at empirestaterealtytrust.com. On today’s call, management’s prepared remarks and answers to your questions may contain forward-looking statements as defined in applicable securities laws, including those related to market conditions, property operations, income and expense.
As a reminder, forward-looking statements represent management’s current estimates. They are subject to risks and uncertainties which may cause actual results to differ from those discussed today.
Empire State Realty Trust assumes no obligation to update any forward-looking statement in the future. We encourage listeners to review the more detailed discussions related to these forward-looking statements in the Company’s filings with the SEC.
Finally, during today’s call, we will discuss certain non-GAAP financial measures such as FFO, modified and core FFO, NOI, and EBITDA, which we believe are meaningful in evaluating the Company’s performance. The definitions and reconciliations of these measures to the most directly comparable GAAP measures are included in the earnings release and supplemental package, each available on the Company’s website.
Now, I will turn the call over to John Kessler, President and Chief Operating Officer.
John Kessler
Good morning. We are delighted to welcome you to our first quarter 2017 earnings conference call.
Empire State Realty Trust is a pure-play Manhattan and Greater New York metro area office and retail portfolio that offers a unique opportunity to grow income as we continue to redevelop and lease our properties at market rents and bring occupancies to market levels. Since inception, we have delivered and we expect to continue to deliver our embedded de-risked growth.
During the first quarter, we continued to execute on our focused strategy and delivered strong results. We saw strong tenant demand for our value price point and well-located quality buildings as we signed approximately 201,000 square feet of leases during the quarter.
With ESRT’s trademark ingenuity and tenacity, we concluded our redevelopment of the retail space at 112 West 34th Street, when we signed Target for a 43,000 square-foot lease. In our March 2015 Investor Day, when I’d been with ESRT for just one month, we presented the significant opportunity we saw in the conversation of a basement, ground floor retail and second floor office into 89,000 square feet of retail.
Now, two years later with leases of Foot Locker, Sephora and Target, we have grown the revenue from these spaces from $2.2 million to $20.9 million. We continue to capture significant upside in rents, achieving average leasing spreads of 44% on all new and renewal leases across our entire portfolio and 22.4% on our new Manhattan office leases.
Our Observatory experienced very unfavorable weather conditions and felt the effect of the calendar shift of the Easter weekend to the second quarter of 2017, yet revenues only declined 1.4% year-over-year. We continue to introduce new visitor options and improve the overall experience.
In our broadcast operations, in the first quarter, we signed long-term lease and license renewals with two of our radio broadcasters, Spanish Broadcast Systems and New York Public Radio for a total of four radio stations at Empire State Building. In addition, ION Television notified us that they will not renew their lease and license and will vacate upon their lease expiration at the end of 2017.
We previously disclosed that we had successfully renewed lease and license agreements with Univision, MS, ABC and WPIX. We remain in ongoing negotiations with our other broadcast tenants.
I would remind you that neither the extension nor non-renewal of broadcast leases and licenses has or is expected to have a material impact on our financial results. We believe, we will continue to drive growth and unlock value as we redevelop and re-lease our space at attractive spreads.
We believe our portfolio and strategy can outperform regardless of market conditions. And with our highly liquid and low levered balance sheet, we are well-positioned for additional opportunities in 2017 and beyond.
Our prepared comments this morning will be very brief. Tom Durels our Executive Vice President and Director of Leasing and Operations will provide an update on our portfolio; and David Karp, our Executive Vice President and Chief Financial Officer will then review financial results in more detail and discuss our balance sheet.
After that, our team including our Chairman and CEO Tony Malkin are here to answer your questions. I will now turn the call over to Tom Durels.
Tom?
Tom Durels
Thanks, John. Good morning, everyone.
On today’s call, I will provide an update of our four key growth drivers and review our leasing activity in the first quarter, giving up overview of our current and future space availabilities and discuss the timing of new lease commencements. As you know from our Investor Day in March of 2015, we set forth our four key growth drivers from our existing portfolio.
At that time, we presented revenue growth of $90 million to $100 million from these four growth drivers over the following five to six years. Since January 2015, when we exclude the contribution to NOI growth from the Observatory and adjusted for the mid-2014 acquisitions of 1400 Broadway and 111 West 33rd Street, we have delivered $56 million in cash NOI growth.
This is net of the loss of income from the vacancies we create through our redevelopment and re-leasing program. As David Karp will discuss more in his comments, we are now including disclosure of the annual rent from leases that have commenced but are in their free rent period.
Once the free rent period is over, these leases will contribute to cash NOI, but until then, we will track them in signed leases, not commenced. Previously, we did not provide the future contribution to cash NOI from leases that have commenced that are still in their free rent period.
Our first quarter numbers reflect further progress on our four key growth drivers, which are one, upside from signed leases, not commenced of $4.5 million and the burn off of free rent of $35 million, which together total approximately $40 million of growth from this driver; two, lease-up of developed vacant office space of $40 million; three, the mark-to-market on our expiring Manhattan office leases of $21 million; and four, the mark-to-market and lease-up of available retail space of $9 million. Based on these updated numbers, we estimate these drivers will contribute approximately $110 million of growth, over the five to six years as of March 31, 2017, relative to our 12 months cash NOI of $362 million.
Remember, we calculate these numbers based on our view of the current market for starting rents without consideration for potential increases in future starting rents. And as we discuss every quarter, we expect that our occupancy will fluctuate from quarter-to-quarter as we vacate and consolidate spaces in order to redevelop and re-lease those spaces at higher rents to better tenants.
There is a timing lag between the move-outs of the existing tenants and when we complete our work before lease-up and when new leases commence. For prebuilts, overall downtime is generally 9 to 18 months following last date of occupancy by prior tenant to allow time for redevelopment and lease-up, there could be less or more depending on the space and our overall inventory.
And for fourth floors, overall downtime including time for redevelopment work and lease-up can be 10 to 24 months following last date of occupancy by prior tenant, again, depending on the space and our total inventory. As we execute our strategy, we unlock the embedded growth within our portfolio and drive significant increases in rental rates and future cash flows.
In the first quarter, we signed 27 new and renewal leases totaling approximately 201,000 square feet. This included approximately 85,000 square feet in our Manhattan office properties, 73,000 square feet in our Greater New York metropolitan properties and 43,000 square feet of retail.
Significant leases signed during the quarter include office leases with Mount Sinai for 26,000 square feet at 250 West 57th Street and which I’ll comment further in a moment; Partner Reinsurance for 56,700 square feet at First Stamford Place; and a retail lease with Target for 43,000 square feet at 112 West 34th Street. At quarter-end, our total portfolio was 88.8% occupied, which is up 70 basis points from the fourth quarter and including signed leases that have not yet commenced, the total portfolio leased percentage was down 70 basis points from the fourth quarter at 89.5% leased.
At our flagship property, the Empire State Building, we were up 100 basis points from the fourth quarter of 2016 to 91.5% occupied. Including our signed leases not yet commenced, our lease percentage was 91.7%, down 10 basis points from the last quarter.
As a result of our redevelopment strategy, we continue to capture healthy rental growth spreads which are in line with our regular investor and analysts meetings and investor deck updates. During the first quarter, rental rates on new and renewal leases across our entire portfolio were 44% higher on a cash basis compared to prior escalated rents; and at our Manhattan office properties, we signed new leases at rent spreads of 22.4%.
The lease spread for new Manhattan office leasing this quarter was lowered by the signing of the lease with Mount Sinai. Adjusting for this lease, our reported leasing spread would have been approximately 34%.
Now, let me explain. This was an early recapture on a space that had already been redeveloped and experienced a significant rent bump.
The prior long-term lease was approximately 50% of the way through its term and we secured a substantial termination payment by the prior tenant, avoided future downtime and secured a new lease with an immediate increase in base rent to an excellent quality credit tenant with a prospect for future expansion in the building. Whenever possible, we will take advantage of the opportunities to capture direct leases with better credit tenants at higher rents and secure lease cancelation payments from existing tenants who have physically vacated rather than settling for sublets which drive no value for shareholders.
Remember, leasing spreads will vary by quarter, depending on the prior fully escalated rents. Our average tenant installation cost for the quarter was $48.84 per square-foot for the total portfolio.
This number will also vary by quarter, depending upon the mix of spaces leased including white box, prebuilt, first generation and second generation space, and ratio of new versus renewal leases. Throughout our portfolio, as of March 31, 2017, we have 1,140,000 vacancy against which we have 78,000 square feet of signed leases not commenced for a net total of 1,062,000 square feet of un-leased space, which is comprised of Manhattan office vacancy of 860,000 square feet, retail vacancy of 39,000 square feet and Greater New York metropolitan vacancy of 163,000 square feet.
Of the 860,000 square of un-leased Manhattan office space, approximately 670,000 square feet is consolidated space and redeveloped that includes prebuilts and white box space. Approximately 78,000 square feet is being held off the market until it can be consolidated for future redevelopment.
And the balance of our vacant space is being planned for future redevelopment. We expect to vacate 287, 000 square feet in our Manhattan office portfolio by year-end with in-place fully escalated rents of only $47 per square-foot; we expect to re-lease this space at much higher rents.
And as a reminder, as of March 31, 2017, we have signed leases that have not yet commenced of free rent burn off which will add $39.5 million in cash NOI growth by the end of 2018. Within our Manhattan office portfolio, we currently have available 14 fourth floors totaling 339,000 square feet including three floors at 250 West 57th Street and five floors at 111 West 33rd Street.
At both of these buildings, we are underway with new building lobbies and entrances, elevators and storefronts. And we have two floors at the Empire State Building, two at 1400 Broadway and two tower floors at One Grand Central Place.
Turning to our retail business, the 43,000 square-foot lease we signed with Target during the quarter represents the successful redevelopment, full lease-up and nearly 89,000 square feet of multilevel retail space at 112 West 34th Street. The prior fully escalated annualized rent on the entire 89,000 square feet in April 2016 was $2.2 million and the entire space is now fully leased at Foot Locker, Sephora and Target at an annual base rent of $20.9 million and results in a mark-to-market lease spread of over 840%.
We feel very good about our leasing pipeline and I’m very confident in our team’s ability to execute and deliver on our four key growth drivers. Overall, we continue to see steady demand for our properties, which offer prospective tenants and attractive combination of location and amenities at a value price point.
We continue to lease up our vacant space and execute on our proven strategy to consolidate, vacate and deliver redeveloped space in order to lease to new, better credit tenants at higher rents, increase NOI and improve shareholder value. Now, I’m going to turn the call over to David Karp.
David?
David Karp
Thanks, Tom, and good morning, everyone. I’ll start with the review of our financial performance, discuss some new disclosers, revisit Tom’s discussion of our four drivers, and follow with an update on our Observatory operations and balance sheet.
For the first quarter, we reported core FFO of $61.3 million or $0.21 per diluted share. Cash NOI was $82.8 million, up 8.2% from the prior year period.
Certain other revenue and fees, and property operating expenses affected our first quarter FFO. We recorded $7.9 million in lease termination income we generated from two departing tenants, one at each of first Stamford Place and 250 West 57th Street where we have already re-leased the entire four floors to partner PartnerRe and Mount Sinai, respectively.
Straight line rent receivables associated with the terminated leases were reversed, and this reduced rental revenue by $1 million. We had a decrease in the year-over-year tenant expense reimbursements due to lower electric reimbursement and a decrease in our estimated build expense reimbursements driven by updated base years for new and renewal leases.
We incurred higher property operating expenses year-over-year, primarily due to $1.9 million for repair expenses related to the Empire State Building elevator shaft modernization that was accelerated during the first quarter to avoid disruption to the Observatory during the Easter holiday with the remaining balance coming from ordinary course repair and maintenance. Since January 1, 2015, we have delivered approximately $56 million in cash NOI growth from our office and retail leasing performance.
In addition, we have delivered approximately $15 million in NOI growth from our Observatory performance. Finally, we estimate our updated four key growth drivers will deliver approximately $110 million of revenue growth over the next five to six years relative to our trailing 12 months cash NOI of $362 million.
As Tom mentioned earlier, we’ve provided some additional disclosure on our signed leases not commenced to which we have added the impact of leases that have commenced but are in their free rent period. As of March 31, 2017, this adds $35 million to this driver.
The free rent associated with these leases will substantially burn off by the end of 2018. This additional data point which we will now provide on a quarterly basis, further supports the cash NOI growth potential we have.
And we hope this reporting will assist investors and analysts to model better their view of our future. Now, I will give you an explanation of a change in our revenue recognition practices.
As of January 1, 2017 for leases where the tenant constructs tenant improvements in which we share the funding obligation, we began to recognize rental revenue at the earlier cash rent commencement or completion of tenant improvements. Previously, we started rental revenue recognition when lease commenced.
This new accounting policy resulted in approximately $489,000 less revenue for the first quarter of 2017 compared to the practice in place for the prior year period. Generally, we anticipate that there may be a three to nine-month delay in the start of straight line rental revenue.
This change is consistent with the practice of our peers that have made similar changes over the past years. Turning to our Observatory operations.
The 2017 Observatory first quarter performance was adversely impacted by two factors: One, the calendar shift of the Easter weekend to second quarter in 2017 from the first quarter in 2016; and two, materially worst weather conditions. The Easter weekend shift happens from time-to-time and there is not much one can say about the weather.
In the face of these two events, our continued improved ticket mix resulted in a first quarter 2017 revenue decline of only 1.4% to $20.9 million and $21.2 million in the first quarter of 2016. The Observatory hosted approximately 636,000 visitors in the first quarter of 2017 compared to 719,000 visitors in the first quarter of 2016, a decrease of 11.5%.
In the first quarter of 2017, there were 22 bad weather days, highly concentrated in March, six of which fell on weekend days compared to eight bad weather days, two of which fell on weekend days in the first quarter of 2016. Keep in mind that we define a bad weather day as one in 8 which the top of the Empire State Building is obscured for more than 50% of the day.
This does not really fully describe the impact of one of the bad weather days. The snow and ice storm on March 14th, which resulted in the cancellation of thousands of flights into and out of New York City, the closing of public transport and two additional days of street mass transit and airport disruptions, effectively four days of impact.
As a reminder, we always look at the Observatory’s results on a holistic annual basis. Turning to our balance sheet.
Our strong joint venture free and flexible balance sheet including significant cash on hand remains a competitive advantage for us in any market environment. We especially [ph] refinanced our mortgage on 1542 3rd Avenue shortly after the quarter close.
We borrowed $30 million at a 4.29% stated fixed interest rate with a 10-year maturity, replacing an $18 million mortgage with a stated interest rate of 5.9%. Excess proceeds will be used for general corporate purposes.
We applied a portion of our $200 million forward starting interest rate swap to this loan, which add a 4 basis points to the effective interest rate. In connection with our overall hedging strategy for this loan and other anticipated borrowings in 2017 and due to timing differences, we recorded a $247,000 loss for a mark-to-market on a portion of the $200 million forward starting interest rate swap, which we had entered into to protect against anticipated borrowing costs.
At March 31, 2017, we had total debt outstanding of approximately $1.6 billion. Approximately $1.35 billion of this debt is fixed rate with weighted average interest rate of 4.54% and a weighted average term to maturity of 4.3 years.
The remaining $265 million of debt is variable rate with weighted average interest rate of 2.58% and a weighted average term to maturity of 5.2 years. At the end of the first quarter, we had no outstanding balance on our revolver and $532.4 million in cash and cash equivalents.
Our leverage ratio reflected by consolidated net debt to total market capitalization was 14.8% and our consolidated net debt to EBITDA was 3.2 times. I’ll now update you on our redemption requests.
For operating partnership units, our lockup period expired one year after issuance, which was October 7, 2014 for units issued in the IPO on July 15, 2015 for units issued on the acquisition of 112 West 34th Street and 1400 Broadway. Upon such expiration, holders of such operating partnership units could have their holdings redeemed for Class A shares, which are listed and traded on the NYSE.
As of March 31, 2017, we have had conversions from operating partnership units and Class B common shares to Class A common shares totaling 30 million shares or approximately $619 million at the closing share price of $20.64 on March 31, 2017. This represents a 36% increase in the number of Class A shares since our IPO.
Finally, our Board of Directors approved a quarterly dividend of $0.105 per share for the first quarter of 2017. This dividend was paid on March 31 to shareholders of record on March15.
With that, I would like to open up the call for questions. Operator?
Operator
Thank you. [Operator Instructions] The first question today comes from Jamie Feldman of Bank of America.
Please go ahead.
Jamie Feldman
Tom, I was hoping if you could just provide more color on the leasing market and what you’re seeing today, and may be the pipeline of tenants looking at space. And then, also, how you think the portfolio fits in versus some of the new supply we’re seeing come on line in your leasing discussions?
Tom Durels
Sure, Jamie. I got to say, I feel really good about our deal flow, really good about our pipeline, the activities that we are seeing.
And I would say that look -- hats off to our leasing team on the Target lease; they just actually crushed it with the re-lease of that 488,000 square feet at the base of 112 West 34th Street. The fact that we went from $2.2 million in aggregate rents to nearly $21 million in the current retail environment, I think we just killed it.
On the other side, I feel good about our pipeline, I feel good about the activity. We have leases in negotiation or advanced discussions on fourth floors at 111 West 33rd Street, Empire State Building, One Grand Central, 1400 Broadway and advance discussion on our multi floor deal 250 West 57th Street.
We have activity where we have available prebuilts, primarily at Empire State Building and at One Grand Central. So, overall, we feel good about where we sit, feel good about the activity that we are seeing.
And in terms of how our portfolio fits within -- compared to maybe the new development, I would say first of all, I’m really happy that we own the portfolio that we do. I’m particularly glad that we don’t own aged, 50-year old Class A property.
The location, the work that we’ve done with the redevelopment, how our properties show and the value price point, I think is all coming to our favor. As it relates to the new development, as I said in the past, we’re providing a great value, a choice for tenants that can choose to go anywhere, but they come to our portfolio, because they are getting great access to mass transit at a really good price point, newly built office space in buildings that have been fully redeveloped.
So, I like our competitive advantage of new development.
Jamie Feldman
Okay. And then, I guess to dig deeper on the leasing pipeline.
Is there any shift in the types of tenants looking at space or any trends you’ve seen maybe post-election in terms of demand for your portfolio?
Tom Durels
We’ve always liked the diversity of the tenants and the industry types that we attract and to whom we lease. In the first quarter, I can’t say that there was any significant change in that diversity.
We leased to tenants in professional services, healthcare, fire sector, technology, you name it. It was really again a wide range of industries and tenant types to whom we lease.
I can’t point to any significant case. But, I’ve always liked that about our portfolio.
We attract a wide range of tenant, industries and we’ll continue to see that going forward.
Operator
The next question is from Craig Mailman of KeyBanc. Please go ahead.
Craig Mailman
Hey, guys. Good morning.
David, just a clarification. It seems like between the change in revenue recognition methodology and the accelerated kind of spend on the elevators at the Empire State Building, it seems like that was almost a penny of cost with three quarters of that kind of pulled forward from other parts of the year.
Is that a fairway to look at it?
David Karp
Yes. Craig, the elevator shaft repair work, which we accelerated into Q1 to avoid any disruption at the Observatory was approximately $2.5 million.
And then, with respect to the revenue recognition, that impacted our top line revenue by roughly $500,000.
Craig Mailman
Okay. So, was the full penny in that $2.5 million was just slated for either 2Q or beyond, so that margins should get a little bit better in the coming quarters?
David Karp
Yes. On the elevator shaft repair work, we still have some remaining work to do there, considerably smaller amount, less than a third of that $2.5 million.
And again, we’ll probably concentrate that in Q1 of 2018, again to avoid any disruptions.
Craig Mailman
That’s helpful. And then, Tom, nice update [ph] on the Target leased on.
I’m just curious and looking at the kind of the mark-to-market there, relative to Sephora, it looks like maybe the ground floor came in roughly at 40% plus discount. And I know two years ago and you had the ground below grade space to lease here.
I’m just curious, as you guys were kind of moving between tenants and kind of the decision here to go with Target, which maybe the credit deserved to discount rent versus maybe some other tenants?
Tom Durels
I don’t view it as a discount rent. Yes.
Craig, I don’t view it as a discount rent. The total aggregate rent that we achieved which is nearly $21 million is absolutely consistent with our prior expectations.
As you go back to some of the earlier calls, I was even targeting -- forecasting between 18 to $20 million. So, we did a fantastic job in the execution here; delighted to have Target.
I think you are trying to compare different spaces, right? Sephora has the largest ground floor presence and the most -- the greatest amount of frontage on 34 Street.
They have the most valuable space. Foot Locker is different to Target.
They have the entire second floor space, as you know. And then, Target as you know took that lower level space and ground floor.
So, again, the outcome is consistent and even outperformed some of our earlier expectations, but certainly within the range that we thought we would achieve.
Craig Mailman
That’s helpful clarification there. And then, just lastly, the acquisition market, you guys are still sitting on 500 plus million of cash.
Curious what you guys are seeing in the market, and maybe just update us again on what areas of the city you guys would be interested in, and if there is any parts that are less interesting to you versus more interesting, maybe just some updated thoughts.
John Kessler
For starters, just to remind you that for the next couple of years, we don’t -- our business doesn’t need to make acquisitions to grow our NOI, given the significant embedded growth that we have. From our comments earlier from David and Tom, we’ve got a $110 million in NOI growth coming on top of the in place NOI.
In terms of the market environment that we see, certainly we think it continues to be very competitive and the results that we saw at 245 Park are an example of that. In terms of markets that we like, I think we continue to like the markets that we are in.
Tony Malkin
I would just add. It’s Tony here.
It’s Thursday morning, right? It is Thursday morning, isn’t it?
It seems like everybody had three weeks this week. And by Thursday morning, I’ve already had in-person on the phone or over email four conversations with four different parties, with regard to M&A activities on which we are working; none of those is the high probability at this juncture, but they all represent things that we think make sense.
They are all big picture at longer term; every single one of them makes absolute sense in our view for the other party. But people have different motivations and different thoughts.
So, while we have this built-in growth, and come on guys, $110 million of additional drivers, this is in our sweet spot, based on today’s markets. In addition to that, we’re working very hard but we’re being super disciplined.
And we’re not going to do things which aren’t in the best interest of shareholders, just for the sake of showing growth.
Operator
[Operator Instructions] Our next question comes from John Guinee of Stifel. Please go ahead.
John Guinee
Three quick questions. First, looks like Manhattan office numbers are very, very pleasant but the Greater New York office portfolio re-leasing is 11% cash rent roll down despite a $69 re-leasing package.
Is that typical of suburban or Greater New York office leasing?
Tom Durels
John, first of all, I’d say that I’m very pleased with the execution on the lease to PartnerRe, similar to the Mount Sinai lease. We seize an opportunity to recapture space from an existing tenant, physically vacated space was going to hook for rent, secure termination payment, re-lease space to a new credit tenant for long-term, avoid downtime and lease to a tenant that’s prospect for growth.
So, we’re really going to take advantage of the situation like that. Second, we have very little rollover in the coming year, only about 46,000 that’s rolling in the coming year.
We did have some modest rollout during the first quarter, so our lease percentage is now 91.3% leased but with only 46,000 square feet rolling in the coming year and activity in the pipeline, I feel very good about where we’re at. The TI concessions are going to vary, depends on the condition of the space, we have some smaller builts, second gen prebuilts, some are first gen prebuilts and we have -- and some of the larger lease are going to command the higher TI concession packages, all depends on the overall geo-economics, the rents, length of term, free rent and every rent.
So, I can’t say that there is one typical concession package that fits all; it varies by particular space and particular geo-economics.
Tony Malkin
John, I would also like to say that, we do know that your name is Guinee
John Guinee
Okay. Thank you.
Second, on your retail lease with Target 43,000 square feet just under a $100 a square foot, is that a net lease or is there a gross component to that? And then, second, what was the concession package TI, leasing commission, moving costs, et cetera on that deal?
Tom Durels
It’s a gross lease. There are rent bumps, increases in base rent over the length of the term.
So, what you’re calling $100 square foot is a starting rent; it will increase over the length of the long-term. We also have real estate tax escalation pass-throughs over a base year.
With regards to concessions, without divulging the specifics for confidentiality reasons, I would say that we’ve always said that retail concession typically range somewhere between the 47% total concessions as a percentage of aggregate rent over term. This was in the kind of 4% to 5% range between free rents and TI, so relatively low concession relative to the base rent.
John Guinee
Okay. Is this a 20-year lease?
Tom Durels
Yes.
John Guinee
Okay. So basic…
Tom Durels
Just under 21 years. Sorry, John.
Just under 21.
John Guinee
So, if we take $100 times 21 years times 5%, you get the concession package?
Tom Durels
Well, you’ve got to add in the bumped over term, which we haven’t quoted, but there are bumps in base rent over term.
John Guinee
Okay. And then, the last question.
Looking at the Manhattan office lease, 85,000 square feet, up 21%, up about $10 gross; if you’ve factored in the reset on the OpEx, maybe David Karp, and you look at the previous OpEx costs versus the new reset, what sort of increase would you be getting on a net rent basis? Any idea; do you guys have that number off the top of your head?
David Karp
John, we don’t, but we’re happy to take a look at it and I can get back to you offline with the response.
Operator
The next question comes from Tom Lesnick of Capital One Securities. Please go ahead.
Tom Lesnick
Hi, guys. Thanks for taking my questions.
I guess first, it looks like there was a marketed asset in Stamford in the last two months. I know you guys can’t talk about that one specifically, but big picture.
Do you guys have any interest in expanding the portfolio beyond Manhattan; how are you guys thinking about the Greater New York region overall right now?
John Kessler
Well, I think as Tom just went through, our assets there continue to be steady; we like what we own. We think about the expansion of our business.
That’s not a market that we are focused on growth.
Tony Malkin
Just adding to John’s thoughts. We are very clear on what we said when we went public and with our -- we’ve been consistent throughout.
We really view ourselves in this market -- we are primarily a New York City, Manhattan based business proposition. It is not to say that if other things came along with it or if there were something which were strategically compelling, we wouldn’t really reconsider.
But strategically compelling to us is not a small term; it’s really -- it’s big, it’s important. We are fortunate to be where we are.
I often joke that if my family had settled in Cleveland instead of New York City, we would not be on the phone with you right now. So, we are good where we are.
And I think that it’s very difficult to consider going out of its territory where we have expertise and there are so many opportunities and complicated ownership situations to which we can add benefit through our balance sheet and our ability to figure complicated things out. There is a lot of opportunity here.
Not ruling something out if it came along with the package but it’s hard for us to consider. We’re going to go do something which opens up a West Coast based -- exclusively with a West Coast based company; it’s kind of hard to envision that from where we are.
Tom Lesnick
No. I certainly appreciate that.
And as to my second question, I understand obviously that Easter fell in second quarter this year and that there were one fewer days overall in 1Q 2017 versus 2016. But as you look at where bad weather fell in holidays, it does appear that both MLK and President’s Day in 2016 experienced some bad weather.
So, just wondering big picture, how you guys attribute sensitivity to each of the holidays with respect to visitors…
Tony Malkin
Okay, let’s be clear. A couple of things; I appreciate the question; it’s going to give me an opportunity to say a number of things on the Observatory, which I wanted to say.
David mentioned we always look at things holistically over a 12-month period; that’s for sure. Number two, President’s Day, MLK Day, these are not school holidays.
Easter typically tracks for the United States and in countries which have a major Christian population, a one week holiday. So, we look at the Easter Sunday and we bracket that on either side with two weeks of business.
So, to be clear, the reality of our existence in March was pretty terrible. There is nothing we could do about it.
When you can’t see the top of the building, you can’t see the top of the building. On the snow storm on the 14th, they shut down the day before by around noon in New York City, 2’o clock for offices; flights were canceled starting on the 24 hours priors to that.
I was one of two people in the office on the 14th. It was kind of nice because there was absolutely nobody on the streets because all transportation was either shut down or had been disclosed that it was about to be shut down.
And then, three days after that weather experience, traffic was still screwed up on the New York City streets, specifically Manhattan as frontend loaders and dump trucks were being used to dig out frozen piles of snow that had been pushed through the side, everything froze. The weather stayed cold.
This was a massive disruption. So, when we look at this, I would just look at the weather -- and we had one of these, we have these from to time-to-time, we had them in January.
The good news is, hey, without Easter, first quarter is not a big quarter for us. That’s why we compressed so much of the shaft work in the Empire State Building elevators in that period, because it’s the least disruptive time in which to do it.
And Easter is not the same as we experienced for MLK or President’s; you really have to think about Easters almost like -- it’s bigger than Thanksgiving; it’s almost like a Christmas to New Year’s holiday period. That’s big business for us.
Tom Lesnick
Got it. That’s really interesting.
And I certainly appreciate the color. Thanks, guys.
Operator
Our final question will come from John Kim at BMO Capital Markets. Please go ahead.
John Kim
Tony, on the M&A discussions that you had this week, were these conversations based with USD [ph] acquirer and also are you sensing that bigger picture M&A activity will pick up this year?
Tony Malkin
Well, I think there is -- first of all, to your -- the second part of your question first. There is no question that with the discounts, which most REITs are trading to NAV and we know what we think our NAV is but it’s always interesting to see the Street establishes insights NAVs based on other underwritings.
In general, selling shares to buy stuff at market is not a thrilling proposition I think for anybody. So, I think M&A is something which there is a lot conversation today in general; that’s thematic.
Number one. Number two, in our activities, I’ll be very blunt.
I was look at it from a perspective that I personally, my family generally has a huge stake in this business. And at the same time, I’m an investor.
I’ve always been an investor. You guys may know, I started out in a private equity business.
I don’t think that -- we’re not here to perpetuate our position the top of corporate structure. We’re here to deliver the best results for shareholders.
But for me to give up control of our balance sheet, it has got to be with somebody and whom I or a management and whom I personally selfishly as a shareholder have a tremendous degree of confidence because I’m going to be living with those results for a significant period of time, at least if I’m fortunate. But I would say that the discussions out there for this particular week have all been more in the spirit of partnership rather than in the spirit of sale or in the spirit of acquisition, on the spirit of partnership.
John Kim
Is it fair to say that you’d be comfortable operating as either public or private entity given the industry?
Tony Malkin
I’m comfortable about the predictability of future cash flows and the opportunity that compounds value in the most tax efficient fashion possible. That’s what gives me comfort.
So, if your comment is would you sell for cash, the number one comment in my mind there is what is the most effective pre and post tax result we can deliver for shareholders and I’d say that specifically; our responsibility first and for most is to shareholders. We do have a lot of operating partnership to unit holders.
We’re very clear on what our responsibilities are to them but our focus is specifically on what is best for shareholders; that’s our requirement; that’s our mandate; that’s our focus.
John Kim
Okay, great. Thanks.
Earlier this year, the New York City -- tourism arm in particular, the international visitors into New York would decrease this year due to Trump’s travel ban. I’m wondering if you’re seeing that at the Observatory.
Tony Malkin
First of all, I think it’s too early to say. Again, I would just tell you that absent March, we were having a wonderful time at the New York City as number one iconic attraction, the Empire State Building.
So, I think it’s too early to say. I do believe that you can’t separate the politics from the situation.
New York City has been labeled a Sanctuary City, self labeled a Sanctuary City. The NYC & Company is a department for a lack of a better word of the New York City government, it’s run by Mayor de Blasio.
Mayor de Blasio has -- his administration have a view about the politics in DC. I can’t imagine that view does not have something to say on the matter of the ban, travel ban.
But it’s very clear that we absolutely have a concern about the publicly reported incidence, for instance Canadian school trips changing their destination to other locations than the United States, countries that have more diverse populations, more accessible immigrating than the United States, which allow people with other passports to live within their borders more freely, having a concern about how those people might come to the United States or not based on their concern of if something were to happen, would they be deported from the United States to Somalia, instead of back to the United Kingdom. But all that being said, we do take some comfort in the fact that aside from the PR bruise that the U.S.
takes in the public opinion, we do have this issue of not too many people from the countries in question, our visitors to the Empire State Building Observatory, So that may impact numbers overall. Our customer base but that doesn’t really rate.
John Kim
Okay. And then, a final question perhaps for David.
The mortgage at the Empire State Building expires about a year from now and I’m wondering what your plans as far as refinancing, particularly in light of the reason refinancing JM Building?
David Karp
John, there is no mortgage on the Empire State Building.
John Kim
Okay.
David Karp
You referenced another property?
John Kim
Probably, I’ll take it offline. Thank you.
David Karp
Okay.
Operator
We will take a follow-up from Craig Mailman of KeyBanc as our final question. Please go ahead.
Craig Mailman
Hey, Tony, just to follow up on the M&A discussion here. You guys sold a big chuck of the Company to QIA last year at 21 bucks.
At that time, it sounded like it was more strategic partnership and maybe the $21 wasn’t a reflection of where you thought your NAV was trading. But just given kind of the upside that you guys have over the next five years on NOI basis, just kind of your thoughts on maybe what you guys view NAV vis-à-vis kind of the decision to maybe be opened to some type of partnership with another public or private equity firm here and kind of how you view that the opportunity set for your existing shareholders versus what you will need from the partner side in terms of upside and quality and all of the things that you guys hold near and dear?
Tony Malkin
Well, I would just say that with $1.6 billion of readily accessible capital, we feel that we’ve got a level of comfort as to the ability to act on anything really out of things that might be interesting to us. Number one.
Number two, we absolutely view our relationship with our new largest Class A shareholder as fundamental. We maintain that relationship; we have open dialogue with them on a regular basis; and we still remain very pleased having them as a key shareholder.
And as for the last piece, I really don’t know how to react other than to say that. Our view was that in the world of raising capital for flexibility, we did not want to shrink our balance sheet; we wanted to grow our balance sheet.
And selling out a piece of a property on a joint-venture basis to me was moving us into the land of smaller REITs that simply I think at the hard time justify being independent companies. And clearly from our perspective, we are motivated keeping in mind that we’ve got a $110 million of additional growth that we think we’ve laid out pretty clear in our four drivers.
So, we will obviously think we are a much bigger company than for which people give us credit. But the bottom line is as far as our ability to grow and where we see the value, it’s all about the long term.
Said before, our good decisions, our decisions that look in 10 years, seven years, five years, four years, I’m not so concerned about quarters one, two, three or four after we make a decision.
Operator
I will now turn the call back over to Mr. Malkin for closing comments.
Tony Malkin
Do we have one another -- I think we have one more follow-up from Jaime Feldman.
Operator
Oh, yes, sir. He just came in the queue.
Mr. Feldman from Bank of America, please go ahead.
Jamie Feldman
Thank you. I apologize if I missed it.
But, can you talk about just your thoughts on the health of street retail and your 34th Street Broadway corridor.
Tony Malkin
From who do you want to hear? You’ve got a large group of people in this room who would be happy to comment on that.
Tom, go ahead.
Tom Durels
Jamie, this is Tom. Again, I can’t be more pleased than with the execution on the leasing of 88,000 square feet on 34th Street bringing the aggregate prior in-place rent in April a year-ago from $2.2 million to nearly $21 million, achieving 840% mark-to-market in the current retail environment.
We’ve leased up all of our Broadway frontage in Time Square South, leased up all of our 57th Street retail. And what remains is some side street space to lease which candidly will bring in likely food to provide service and amenities to our office tenants and a newly available space at the base of Empire State Building and it’s early in the marketing of that.
So, I feel very good about what we’ve accomplished to-date, the amount of leasing that we’ve done, and it feels like we’re in a really, really good position. And I have absolute confidence in the ability of our team to execute.
But let’s talk to the larger issue, Jamie. There is no secret here.
Anybody who says that retail is not materially challenged is either deeply, deeply in need of psychotherapy or needs to get out from under a rock. There is a fundamental reality that I think possibly driven to some degree by landlords that are forcing retailers to look at different ways to do business, smaller stores, reduce the number of stores because they can’t make money at these rents.
They are under pressure. We’re fortunate, on 34th Street, there is a reason that Sephora Foot Locker and Target are leased with us because that’s a high traffic location.
Those people are leasing their rents that allow them to make money. Those are going to be successful stories.
You’re not going to read a story like the one about Lauren and Polo. We’re one of those stores that go close in 18 months, Sephora is thrilled there, Food Locker’s thrilled, Target is going to be thrilled there.
They’re going to do tremendous business; Sephora and Foot Locker already are.
John Kessler
This is Foot Locker’s historically -- this has been Foot Locker’s number one performing store and Sephora expects this would be their top performing store in the U.S. So, this is a great location.
Tony Malkin
So, you look around at the rest of where our retailers, same story. But in general retailer is retrenching and a lot of it is -- I’ll leave you with one last thought.
When you look at what’s happening in class A trophy office buildings right now, the old ones are losing tenants to the new ones and they are both counted as occupied. That artificially inflates the occupancy and the actual performance of the Class A trophy office environment in New York City.
Same thing with regard to retail. There are a lot of retailers right now who are serving prison sentences.
They can wait for those leases to be over, so they can get out of them. And there is going to be a meaningful development just on Harold Square, not involving Macy’s, which already know about because of our knowledge of the marketplace, which will further highlight how much things are changing in New York City.
And I would just tell you that we consider a great success on 34th Street, but we also consider it’s going to be a great success for our retail partners and the long-term viability of these locations that we’ve got. We’re happy about them.
Jamie Feldman
And then if you do start to see real pricing weakness in retail, would you be interested in value investing [Multiple Speakers] your business.
Tony Malkin
100%.
Jamie Feldman
Which corridors would you be interested in?
Tony Malkin
The ones where we see the best value over the long-term. Sorry.
I think we’ve probably kept everybody a really longtime. Jamie, do you have any further follow-up?
I don’t think we’d give any more specificity on that particular question.
Jamie Feldman
No. I’m all set.
Thanks.
Tony Malkin
Thank you all very much for joining us. John and I, we’re really happy with the team’s performance.
I can’t say how happy we’re with what we see in our ongoing solid business fundamentals. We’re glad we are fully modernized with the 21st century portfolio and our locations and at our price points.
And we look forward to finishing up Q2 and reporting to you all in three months. Thank you all very much for joining us.
Operator
This concludes today’s conference. You may disconnect your lines at this time.
Thank you for your participation.