Empire State Realty Trust (ESRT) Q4 2020 Earnings Call Transcript

Empire State Realty Trust (ESRT 1.72%)
Q4 2020 Earnings Call
Feb 18, 2021, 1:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Empire State Realty Trust fourth-quarter and full-year 2020 earnings call. [Operator instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Tom Keltner, general counsel. Thank you, you may begin.

Tom Keltner -- General Counsel

Good afternoon. Thank you for joining us today for Empire State Realty Trust's fourth-quarter 2020 earnings conference call. In addition to the press release distributed yesterday, a quarterly supplemental package with further detail on our results and our latest investor presentation were posted in the Investors section of the company's website at empirestaterealtytrust.com. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements as defined in applicable securities laws, including those related to market conditions, property operations, capital expenditures, income, and expense.

As a reminder, forward-looking statements represent management's current estimates. They are subject to risks and uncertainties, including ongoing developments regarding the COVID-19 pandemic, which may cause actual results to differ from those discussed today. Empire State Realty Trust assumes no obligation to update any forward-looking statement in the future. We encourage listeners to review the more detailed discussions related to these forward-looking statements in the company's filings with the SEC.

Certain of our disclosures today are added specifically in response to the SEC's direction on special additional disclosure due to the changes in our business prompted by the COVID-19 pandemic and are unique to this instruction. We do not expect to maintain the same level of disclosure when we resume normal business operations. Finally, during today's call, we will discuss certain non-GAAP financial measures, such as FFO, modified and core FFO, NOI, cash NOI and EBITDA, which we believe are meaningful in evaluating the company's performance. The definitions and reconciliations of these measures to the most directly comparable GAAP measures are included in the earnings release and supplemental package, each available on the company's website.

Now I will turn the call over to Tony Malkin, our chairman, president, and chief executive officer.

Tony Malkin -- Chairman, President, and Chief Executive Officer

Thanks, Tom, and good afternoon to everyone. We continue in 2021 to flex and pivot to facilitate employee and tenant reentry to our buildings with confidence in our indoor environmental quality measures. We collect rent, manage expenses, promote Empire State Building Observatory visits and support our smaller retail tenants. Our tenant presence remains relatively unchanged as many tenants plan their return to the office around the widespread rollout of vaccinations.

We reached just under 15% building utilization in our New York City properties and just under 40% building utilization in our Greater New York Metropolitan area properties prior to the presently abating virus surge. We are now at approximately 12% and 31%, respectively. Visits to the Empire State Building Observatory continue to grow off a very low base. That said, our visitation is higher than any other observatory, with no discount offered and fantastic visitor feedback from our largely local visitorship to our attraction that features MERV 13 filters, ventilation and active bi-polar ionization.

We are very fortunate to be well positioned to manage these changes with our flexible balance sheet, stabilized collection levels and successfully implemented cost-reduction measures. We had $527 million of cash on hand and no drawdown on our $1.1 billion line as of 12/31/20. All this works to our advantage as we look to utilize our balance sheet flexibility and seek ways to deploy our capital through the repurchase of our stock and we review external growth opportunities. In 4Q 2020, we further refreshed our board of directors with the addition of Grant Hill, that expands our board of directors to nine directors.

The additions of three new board members, Patricia Han, Paige Hood, and Grant Hill over the last two years has brought expertise in digital commerce, real estate investment and branding to our board. While the macroeconomic environment remains challenged in the near term, we believe in the long-term prospects for New York City and the office sector. Since the last quarterly earnings call, there have been several vaccines approved and distribution has begun. We have signed new leases and tenants with whom we speak, including our largest tenants with whom I speak personally, have expressed the desire to return to the office once there is widespread vaccine distribution.

Work from home is maintenance, not growth and competition, and we believe firmly that when people are in the room where it happens and miss the conversations and hallway validation when they click off the video conference, people will want to be in the office. Executive teams will encourage employees' return to the office to nurture their corporate cultures, stimulate collaboration and teamwork and provide mentor and development opportunities to junior staff and onboard new talent. We know that firsthand. We have been in the office since July, and we have accomplished an incredible amount through that time.

I believe that ESRT is well positioned to thrive and deliver long-term shareholder value. As I noted on our last earnings call, we were poised to announce the results of our first-time-ever participation in GRESB Real Estate Assessment, and we are quite pleased with the results. We earned a five-star rating and a Green Star recognition, a score of 88, which places us in the top 20% of all respondents, and an eight-rating on public disclosure. This third-party outcome validates our decade-plus of commitments and work in energy efficiency, sustainability, and indoor environmental quality.

ESRT received further recognition shortly afterwards with Fitwel certification across 6.7 million square feet, or 83% of our Manhattan portfolio. We were awarded Fitwel one and two-star ratings on six assets and named a Fitwel Champion. Combined with our WELL Health-Safety Rating for our entire portfolio, the first portfolio so rated in all of the Americas, we demonstrate that our buildings offer a unique combination of location, value and leadership in sustainability and indoor environmental quality. We believe this offers us a competitive edge in a tenant-driven marketplace that increasingly focuses on ESG.

We are pleased to announce that our portfolio is now 100% powered by renewable wind energy. This action builds upon our earlier success with the Empire State Building, which has been 100% renewable-powered for a decade. We will continue to communicate in the future about our ESG leadership, actions and commitments and look forward to publishing our first sustainability report this spring. Switching gears to capital allocation on our balance sheet.

Our balance sheet flexibility provides us with an operating runway amid an uncertain macro environment as well as the ability to engage in share buybacks at attractive discounted valuations and evaluate opportunities to deploy capital for external growth, focused on opportunities in which our balance sheet strength and redevelopment expertise can be brought to bear. To date, our investment team continues actively to underwrite value opportunities, and we are open-minded in the types of deals we will consider. That said, we're in a marathon, not a sprint. And we will prudently deploy capital when an opportunity presents itself.

Moving on, here's an update on the Observatory. Observatory revenue for the fourth-quarter 2020 was $5 million, and that included $1.3 million of deferred revenue from unused tickets and earned income from tour and travel partners, as well as a $1.5 million fixed license fee for the gift shop. Observatory expenses were $5.6 million in the fourth-quarter 2020, and we expect run rate expenses to be approximately $6 million to $7 million per quarter, depending upon the pace of visitor ramp-up. We also revised our hypothetical Observatory admissions shown on Page 15 of the investor presentation.

We have modeled a slower ramp-up in admissions in 2021, that in the near term reflects the high COVID case count, ongoing travel restrictions and slow vaccination progress to date. That said, we believe the greater number of approved vaccines and approved distribution rates will lead to increased travel demand in 2021. We still expect to reach 60% of 2019 attendance levels by the end of 2021 and return to 100% by the end of 2022. With roughly two-thirds of our typical visitor traffic from overseas, potential attendance is limited by travel restrictions for interstate and international tourist travel.

Despite these impediments, we have seen steady weekly increases in visitors. Year to date through February 14, attendance is at nearly 9% of 2019 comparable attendance. A gradual improvement and slightly above the 8% projection for traffic in February. This slow rebuild is better than other comparable attractions.

Visitation is primarily retail- and website-driven, which bolsters revenue per cap. Also, pricing actions we have taken, including increases during the peak sunset hours and on the 102nd floor observation deck tickets, have improved mix and revenue per cap. Visitors remain focused on health and safety, an area where we are well positioned with our focus on indoor environmental quality. Our redevelopment program led to the installation of MERV 13 filters, bi-polar ionization with AtmosAir and the ability to ventilate the Observatory, which provides visitors with peace of mind when they visit.

The vast majority of ticket sales are domestic and concentrated among the tristate market, with some sales from other large population states, such as Florida, Texas and California. And the online reviews speak for themselves. Our primarily hometown New York City visitors love it. This is consistent with our anticipation that, initially, we will have a higher local visitor mix, followed by a ramp-up of regionally then nationally sourced travel and then followed by a restoration of our typical visitor mix that is approximately two-thirds international, that will not be achieved until a broad resumption of international travel that we anticipate will occur sometime in 2022.

I have said that I think we will know our bottom in Q1 2022, and that growth recommences from that point. ESRT has the runway and continues to work to make the most of the environment in which we find ourselves, from a balance sheet, capital allocation, expense management, ESG and organization perspective. One more comment before I hand the call over to Tom Durels. I have been incredibly fortunate to be surrounded by EVPs, SVPs, VPs, other nonunion colleagues and union team members who run to the fire, not away from it.

We have risen to every challenge. We have improved and reworked and improved again, with more improvement under way as I speak. I have to give a special call-out to two relative newcomers: Dana Robbins Schneider, our SVP and director of Energy, Sustainability, and ESG; and Christina Chiu, our EVP and CFO. These two professionals have quickly earned my respect, gratitude and appreciation that typically takes years, if ever, to be earned from me.

I and your ESRT colleagues of longer tenure enjoy and benefit from our work with you. As for the rest of ESRT, we have had babies, caught COVID, protected our buildings from riots and looting, leased and pivoted and flexed so many times, that literally not one single day is the same as the one before. Our board has been supportive and questioning every step of the way, with more direct outreach to our large investors than ever before and genuine concern for our wellbeing and support for our mission. It has been a great reward to work with fantastic people on behalf of our stakeholders.

And I look forward to it for years to come. And now, ladies and gentlemen, Tom Durels.

Tom Durels -- Executive Vice President, Real Estate

Thanks, Tony, and good afternoon, everyone. In the fourth quarter, we signed 33 new and renewal leases, totaling approximately 413,000 square feet. That included approximately 358,000 square feet in our Manhattan office properties, 37,000 square feet in our Greater New York Metropolitan office properties and 18,000 square feet in our retail portfolio. Significant leases signed in the quarter were the previously disclosed 212,000 square-foot new office lease with Centric Brands for a space at the Empire State Building, which Centric had previously subleased from Global Brands Group; a 39,100 square-foot new office lease with ClearView Healthcare Partners at 111 West 33rd Street for a space that we recaptured from another tenant through early lease termination which involved payment of a termination fee that will largely offset leasing costs for the ClearView transaction, ClearView previously occupied a recently built 10,500 square-foot tower floor that is ready to be leased to a new tenant; a 32,500 square-foot new office lease with Transit Wireless at 1400 Broadway, Transit Wireless relocated from 1350 Broadway where it had previously occupied approximately 24,500 square feet; and a 19,400 square-foot new office lease with Dime Community Bank at One Grand Central Place where Dime had previously occupied approximately 3,600 square feet.

Excluding the Centric lease, new and renewal leasing activity in our Manhattan office portfolio during the fourth quarter was approximately 146,000 square feet and reflects a solid quarter despite the COVID-19 pandemic. The new and expansion leases I mentioned with tenants in healthcare, technology and finance have made commitments to increase their employee counts and expand their offices here in New York City. During the third quarter, rental rates on new leases signed at our Manhattan office properties decreased by 6.4% on a cash basis compared to the prior escalated rents. This includes the Centric transaction, which had a leasing spread of negative 15% based on initial face rent but was approximately neutral on a cash flow basis, inclusive of all related transaction costs and lease termination fee.

New and renewal office leases across our entire portfolio were down 5.4% driven largely by leasing spreads from the Centric transaction. Retail spreads across our entire portfolio on the 18,000 square feet of leasing were down 43.3% on face rents. However, most of the leases that drove the markdown in rents were restructured leases with small retailers that contain a percentage rent component that is excluded from the calculation of rent spreads. We worked harder with our small retail tenants who do not have an online option or national or international presence and substantial balance sheet to see them through, and these negative spreads are the result of that effort.

We estimate net effective rents in our portfolio today versus the pre-COVID levels have declined 10% to 15% on a comparable space basis due mostly to increased free rent and TIs and a modest reduction in face rents. It is important to remember that every deal is unique and depends on the space condition, location, tenant credit and other factors. One such example is the ClearView transaction, in which we recapture space from a prior tenant from whom we received payment of a lease termination fee. Our total portfolio lease percentage is 88.7%, a decrease of 100 basis points from the prior quarter.

Occupancy of 85.9% was unchanged from the third quarter. Looking ahead into the first quarter of 2021, we recently announced a 30,000 square-foot -- 600 square-foot lease with a law firm at One Grand Central Place. And we have a good pipeline of discussions and activity from new and existing tenants in healthcare, industrials, professional services and consumer products. We have 393,600 square feet of signed leases not commenced as shown on Page 6 of our supplemental, and Page 10 provides an update on lease expirations in 2022.

We believe that tenants will increase their focus on and choose strong landlords that can help them fulfill their own company mandates for healthy buildings with energy efficiency and ESG. Our leadership in this area has been and will continue to be important to our success in attracting and retaining quality tenants. As Tony mentioned in his remarks, we are the industry leader in ESG performance as measured by GRESB, USGBC, Fitwel, WELL and the EPA. According to the Morgan Stanley report of February 2020, we have the lowest greenhouse gas per square foot of any publicly traded REIT with office buildings in New York City.

We were a leader in indoor environmental quality prior to COVID, and today, we continue the use of MERV 13 filters, bi-polar ionization, and increased ventilation. ESRT is the first commercial portfolio in the Americas to achieve the WELL Health-Safety Rating. We are awarded a GRESB Five-Star Rating and Green Star recognition. Our GRESB score of 88 places us in the top 28 -- 20% of respondents.

ESRT is a Fitwel Champion, and we achieved Fitwel certification on 83% of our Manhattan office properties. And 100% of ESRT's more than 10.1 million-square-foot portfolio is now powered by renewable wind energy. We have maintained our rent collection as shown in the table on Page 10 of our investor presentation. We collected 95% of fourth-quarter 2020 total billings, with 96% for office tenants and 87% for retail tenants.

These collection rates are before application of any security deposits and without any adjustment for deferral agreements. We reduced our property operating expenses in 2020 throughout our portfolio, achieving a reduction of $13 million in the fourth-quarter 2020 compared to the prior-year period and $39 million reduction year to date. We achieved these cost savings without reduction of services to our tenants and after the cost of implementing new health and safety protocols. While most of these cost reductions were driven by low tenant populations, our property management team has made certain permanent reductions in labor, cleaning, security and maintenance contracts.

Keep in mind that a portion of the reduction in operating expenses will be offset by a reduction in tenant expense recoveries. Looking ahead to 2021, we anticipate the first half of 2021 property operating expenses will approximate our current run rate based on current reduced building populations. With a greater increase in vaccination distribution and a return to the office, we would expect the utilization rate to increase in the second half of 2021. In summary, we have a good leasing -- we had a good leasing quarter that included expansions of existing tenants who have grown within our portfolio.

Our industry leadership and experience in the indoor environmental quality and sustainability will enhance our ability to attract and retain quality tenants. We reduced our 2020 property operating expenses by $39 million compared to the prior quarter. And our rent collections have stabilized. Now I'll turn the call over to Christina.

Christina?

Christina Chiu -- Executive Vice President and Chief Financial Officer

Thanks, Tom. For the fourth quarter, we reported core FFO of $47 million, or $0.17 per diluted share. This is inclusive of $0.01 per share of expense from a write-off of tenant receivables and a noncash reduction in straight-line rent balances. Other items, which impacted results, include a net $0.02 impact from lease termination income and a $0.01 impact from tax benefits.

Same-store property operations, if you exclude onetime lease termination fees and Observatory results from the respective period, yielded a 1.5% cash NOI increase from the fourth quarter of 2019. This increase was primarily driven by lower property operating expenses, partially offset by lower revenue from the prior-year period driven by previously communicated large known move-outs. More detail on the breakdown of our collections can be found on Page 10 of the investor presentation. Turning to our balance sheet.

As of December 31, 2020, the company had $1.6 billion of liquidity, which is comprised of $527 million of cash and $1.1 billion of undrawn capacity on our line of credit. We bolstered our liquidity and balance sheet flexibility with a $180 million mortgage loan on 250 West 57th Street that we closed on during the fourth quarter. This 10-year interest-only loan has a fixed rate of 2.83%. The company had total debt outstanding of approximately $2.2 billion on a gross basis and $1.6 million on a net basis.

The company's total debt has a weighted average interest rate of 3.9% and a weighted average term to maturity of 8.2 years. Our net debt to total market capitalization was 37.2%, and net debt to adjusted EBITDA was 6.3 times. We have a well-laddered maturity schedule with no outstanding debt maturity until November 2024. Our revolving credit facility expires in August 2021 and has two six-month extension options.

During the fourth quarter, we also announced a continued suspension of our dividend for the first and second quarters of 2021. Concurrently, we also announced a new $500 million repurchase authorization for the period of January 1 through December 31, 2021. This replaces the $500 million repurchase authorization that ran through calendar year 2020. Under the 2020 authorization, the company repurchased approximately $144 million of its common stock at a weighted average price of $8.32.

In the fourth quarter and through February 16, 2021, the company repurchased $25.3 million of its common stock at a weighted average price of $7.32 per share. This brings the cumulative total, since the stock repurchase program began on March 5, 2020 through February 16, 2021, to $147.2 million at a weighted average price of $8.34 per share. We continue to manage tightly expenses across the company. We achieved our 2020 goal to reduce G&A expenses to $60 million, excluding onetime severance charges, which reflected an $8 million reduction from the prior run rate.

We preannounced that 2021 NEO annual equity compensation will be reduced by at least $3.9 million. Expense awareness and control is a major focus of mine, and I have benefited from cooperative work with my colleagues toward defense. And as Tom mentioned earlier, we reduced property operating expenses by $39 million in 2020 driven primarily by reduced building utilization. The company expects property operating expenses in the first half of 2021 will approximate our current run rate based on continued low building utilization relative to 2019 levels.

We believe these proactive measures are aligned with stakeholders and reflect our efforts to operate efficiently and maximize balance sheet flexibility and operating runway in uncertain times. We will continue to seek efficiencies and cost reduction opportunities in operating our business. Now for questions. As always, we kindly ask that each participant limit him or herself to one primary question and one follow-up and rejoin the queue if there are additional questions.

We will stay on the call as long as we have questions. Operator?

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first questions come from the line of Steve Sakwa with Evercore ISI. Please proceed with your questions.

Steve Sakwa -- Evercore ISI -- Analyst

Thanks, good afternoon. I don't know if Tony or Christina wants to take this on, kind of buybacks against maybe new investment opportunities. And first, what are you seeing in the market today? What does the pipeline look like of possible deals? And when you are evaluating purchases of buildings, how are you sort of weighing that against share buybacks? Is it simply kind of a yield differential? Is it IRR-driven? Can you give us a little bit of sense to how you're thinking about those two investment opportunities?

Tony Malkin -- Chairman, President, and Chief Executive Officer

Sure. Thanks, Steve. We weigh the deployment of our capital against all alternatives. And we want to generate shareholder value and maintain a balance sheet to provide us with flexibility and operating runway as far as actual focus of our acquisition that's on New York City office, retail and multifamily.

And we think that outside of prices on assets with long-term credit leases, to which investors in search of alternative yield are attracted, prices are very unsettled and trending down. We believe we're in the early stages of a potential reset and more opportunities will arise. And we balance all of this along with runway. We clearly feel that Q1 '22 is the bottom.

That said, we go up from there. It doesn't mean that suddenly things are back to normal. So our view is early stages. Aaron Ratner, our CIO, and his fully staffed team have begun to uncover more interesting situations, and we continue to weigh the deployment of our capital for new acquisitions against all of the options in this marathon that we are in.

Not a sprint, it's a marathon. So with that in mind, I would say that we've definitely done deep underwritings on a few, fewer than a handful of assets. We have tremendous catalog of opportunities out there, which we pursue right now, either directly and -- or through brokers. And I would like to say we're really encouraged by the fact that we have begun to see information come out from brokers, not in the form of polished books, but in the form of short one-pagers, two-pagers.

And that, to me, indicates something we've seen from periods before. As I've said before, when the books from the selling brokers get bad, it means that the information flow is not effective. There are cutbacks in the sales brokerage side because, frankly, their business model doesn't support the staffing. And that indicates opportunity has arisen, and that's what we see.

Steve Sakwa -- Evercore ISI -- Analyst

Great. Thanks. I guess as a follow-up, I didn't know if maybe Tom could talk a little bit about what you're seeing from the tenants. I know you've done a bunch of new deals in the fourth quarter.

And I guess, what I'm really trying to piece through here is space utilization, how tenants are planning space for tenants that moved within your portfolio or even new tenants in. How are they space-planning today? And how did that maybe compare to space they were coming out of?

Tom Durels -- Executive Vice President, Real Estate

Yeah, Steve, the biggest focus that we have seen has been and will continue to be on healthy workplace, healthy buildings and indoor environmental quality. This is the most asked-about topic by existing tenants and prospects. And as a reminder, we provide tenants with energy-efficient space and fully modernized, healthy buildings in which we are the industry leader in IEQ. And as you know, 95% of our Manhattan spaces has been redeveloped in compliance with our high-performance energy efficiency and IEQ standards.

Regarding space design specifically, there's an awful lot of discussion on the topic about which every landlord is asked. However, this is a tenant-driven phenomenon and that -- and most tenants are focused on a post-vaccine world. We've seen some slightly less dense furniture layouts, but we've really not seen heavily dense bench seating and though we did not see this pre-COVID, as many of our tenants were focused on employee productivity. Except in our prebuilt spaces, tenants are the ones who decide on how spaces will be configured and their furniture layouts, but we haven't seen any radical changes sought by either our existing tenants, by new tenants to whom we've leased or by the tenants with whom we're in negotiation with now.

Steve Sakwa -- Evercore ISI -- Analyst

OK, thank you.

Operator

Thank you. Our next question is coming from the line of Manny Korchman with Citi. Please proceed with your questions.

Manny Korchman -- Citi -- Analyst

Hey, everyone. Maybe sticking to buybacks for a second. Christina or Tony, how do you think about buybacks from the perspective of increasing leverage? You did a sort of cash-out refi in the quarter, and then you've done more buybacks since then. Obviously, leverage goes up in those types of transactions.

And I think you've been hesitant to sell assets. So how do we put that all together?

Tony Malkin -- Chairman, President, and Chief Executive Officer

I'll take a first crack at that, Manny, and let Christina add in. I think, over time, our track record on the management of our balance sheet suggests that we are prudent in our decision-making. If you recall, we issued shares at an opportune time, exercised discipline on our acquisition underwritings and avoided asset purchases at the end of a bull market, and we borrowed well. And we endured a lot of criticism while we waited to repurchase our stock.

Our actual decision on how we deploy capital is an active discussion with our Board. To maintain our focus on value generation for shareholders, we believe we really need a flexible balance sheet to provide us with operating runway. So we look at the length of what we think we will go through in this downturn. We feel very comfortable that we are well positioned there.

We look at how the business develops. We have to pay careful attention to the Observatory. And we really look at what will be the most accretive benefit to the shareholders, not just from a cash perspective, but also over the longer term, how we distribute our G&A, how we look at different trends that we can tap into. Runway is the single most important thing, however, when we put all these things into the mix.

And will we lever up if we see an opportunity that is, we think, accretive and delivers value over time? Absolutely. We're prepared to do that. We have low leverage. And of course, as we do better and our stock does better, our leverage goes down as our Observatory kicks back in.

Our coverage of our debt that we do have has improved. Christina, I don't know if there's anything you would like to add to that?

Christina Chiu -- Executive Vice President and Chief Financial Officer

Just one additional point, Manny, which is, I think we've discussed in the past, it's really about a company's ability to replenish liquidity as they move along with their various capital allocation decisions. It's not a specific target. So you had mentioned our recent financing. That didn't come out of need, it came out of being opportunistic.

We saw 2.8%, 10 years interest-only without adding a ton of debt to the portfolio, without weakening our unencumbered asset pool that supports our unencumbered debt. We think that that's really compelling. So it really ties to Tony's comments on maximizing operating runway, having balance sheet flexibility. And the dividend suspension decision ties into that.

We have the cash, but we are thinking about all stakeholders, what is in their best interest in an uncertain environment. And when a company has a unique option where it does not need to pay a dividend, we saw that as a chance to make a prudent capital allocation decision. So we'll continue to demonstrate that as we make these decisions and hopefully drive the point home.

Manny Korchman -- Citi -- Analyst

Thanks for that. And, Tony, in the past, in conversations like these, you've talked about your relationships and your family's relationships and finding potential opportunities from generational owners of New York City real estate. Have their views on maybe the city generally or their appetite or attitude toward sales change more recently?

Tony Malkin -- Chairman, President, and Chief Executive Officer

Manny asked a great question, and it's funny because what we advocated early on was that the opportunity -- advocated to these families early on was that the opportunity to work with us would prepare them for disruptions like this. You see a bunch of people who are very disrupted at this point. There are a lot of assets which are challenged, and families have begun to recognize that they've got capital needs and distributions or even capital calls are required. So I think the answer to that question is -- I know the answer to that question as far as we can see is family meetings are taking place right now.

And at the moment, it's -- a lot of the conversation is, wow, this is a difficult world in which we live, we will make it through. And on the other hand, some of the conversations on certain assets, some of the ones with which we're looking specifically are, are we all really going to fund a $150 million, $200 million capital call, and the answer to that, by the way, is no. So we think that this -- people who talked to us earlier would have been smarter if they had acted. And right now, we look at them in the till of opportunity, along with all the other ones, just weighing them against everything else.

We still -- just so we're clear, if we issue stock and we -- or units, and we may do that, we would do it on a basis that we have to value our portfolio and the target portfolio equally. And we would issue units' or shares' relative value, not that people could look for us and get our discounted currency the same as they could get cash from somebody else because we wouldn't do that. It doesn't make any sense.

Manny Korchman -- Citi -- Analyst

Thanks for that. [Inaudible], Tony.

Operator

Thank you. Our next question is coming from the line of Jamie Feldman with Bank of America. Please proceed with your questions.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Thank you. Tony, you've said a couple of times that you -- you expect to know the bottom in 1Q '22. I'm just curious, what does that look like. Is that office occupancy? Is that net effective rents? It sounds like the Observatory would actually be better by then.

Just trying to understand what you're -- what you're implying.

Tony Malkin -- Chairman, President, and Chief Executive Officer

So the bottom for me, Jamie, is when the distribution of vaccines and vaccinations are broad, wide and in place. And we've already seen in Israel and in the United Kingdom, where they're way out ahead on their vaccination. We've seen the numbers really drop tremendously as far as infections. And that bottom therefore, to me, is based on when people feel, OK, we now know that it may be endemic, maybe we can get an annual shot.

However, we can now plan going forward. So to me, it's a time when people stop on the pivot and flex every single day and say, all right, this day looks a little bit like the day before or the day before that, and we can anticipate tomorrow is the same. What decisions do we want to make. And I think a big component of that, Jamie, is the degree to -- from the leasing market.

While we have done long-term leases, there are a lot of folks who have focused on users who have focused on short-term renewals while they reevaluate what goes on. And I think that we've seen that behavior in 2021 -- or we will see it in 2021. We definitely saw it in 2020. I think that will also taper off by Q1 '22.

I think people will begin to plan longer-term, which means, by the way, that the normal roles which you'll see in '22, '23, '24, people who have roles coming in '22 and have kicked the can down the road, they will already have done that by Q1 of '22. So people will now begin to plan for '23, '24, '25, '26, along with all the other short-term renewals. And that, to me, will set the stage for a resumption of leasing, probably with a vigor, real vigor, but I think in '23, '24, '25. And then the last thing I would say is that with a bottom due to the wide distribution and uptake of the vaccine, not only will people return to offices, but when they return to offices, those commercial districts, which have had retail so badly impacted, the retail will know where it is and have a certainty and ability to open.

Good news about the U.K., from a tourism perspective, as the U.K., at least in the Empire State Building, is our No. 1 source of overseas visitors. So as the U.K. vaccination gets way out ahead of everybody else, I think with vaccinations, you'll see more normalization of travel.

So New York has a hospitality center -- New York City is a hospitality center. Again, Q1 '22, I think those are positive, certainly from an internal United States travel perspective. And we'll begin to see glimpses from international, so I would say, across the water. So that's what I think about when I say Q1 '22 bottom.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

OK. That's really helpful. So I guess just to add to that, I mean, do you think -- as you look at your lease expirations for the year, I mean, I think percent leased declined about 100 basis points in the quarter. I mean do you think that's what kind of continues until then? Or when you look at the expiration schedule today, it's actually conversations are picking up, maybe you're seeing a better renewal percentage.

How do we think about just where percent leased or occupancy could go?

Tom Durels -- Executive Vice President, Real Estate

Yeah, Jamie, this is Tom. Let me jump in here, if I could. As you know, we're about just under 89% leased in 2021. As you see in the supplemental, we have about 311,000 square feet of known tenant vacates and then only about 78,000 square feet of tenants that remain undecided.

Now we do have 393,000 square feet of signed leases not yet commenced, so that equals about 3.9% of our total portfolio square footage, again as shown on Page 6 of the supplemental. And approximately 278,000 square feet of those leases should legally commence by year-end. GAAP commencement will follow, again as shown on Page 6 in the supplemental. So look out in 2022, only 5.5% of our portfolio leases expire.

And then 2023, it's about 7%. We -- so I've commented earlier that we have a pipeline of new expansion and extension and renewal activity. To the extent that we can sign those this year, that will add to our leased percentage. And then the good news is, as a reminder, 95% of our Manhattan space is redeveloped, and we have 258,000 square feet of prebuilt space ready for lease-up and for immediate tenant move-ins.

So that's how we think about our occupancy trend in the next year.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

So I guess, that if you add it all up, you're saying it still bleeds a little bit. Is that the right way to think about it?

Tom Durels -- Executive Vice President, Real Estate

Well, again, if you do -- if you do the math, with 311,000 square feet of known vacates against 278,000 square feet of leases that should commence by year-end, it's not a lot of leasing to achieve positive leased percentage by year-end.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

OK. All right, great. Thanks for walking through that.

Operator

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

Blaine Heck -- Wells Fargo Securities -- Analyst

Great, thanks. Good afternoon. Maybe for Christina. I just wanted to ask about the Observatory performance and its relation to the dividend.

Is there a level of attendance or revenue maybe relative to 2019 levels that would necessitate a dividend reinstatement for you guys? Or is there a better way we should think about the kind of the trigger point for that dividend coming back?

Christina Chiu -- Executive Vice President and Chief Financial Officer

Yeah. So the dividend decision was tied to taxable income, as I mentioned. One driver, you are correct to note, is the Observatory business. When it's performing the way it had, it generated intercompany rent paid to the REIT and that triggers taxable income.

However, there are other sources that also play into the taxable income, such as net operating losses, repairs deductions that we get to take. Recall, we spent over $1 billion on the portfolio since the IPO. We've had depreciation. We've had repairs deductions.

So all of that comes into play in terms of what you can deduct against taxable income. So Observatory is a driver, but it's not the only driver. There are other factors in there. And we have not communicated any specific linkage to attendance.

So we'll continue to monitor as per -- as per what we've communicated in terms of hypothetical ramp-up and the expense run rate, but that's all we can say right now.

Blaine Heck -- Wells Fargo Securities -- Analyst

All right. That's helpful color. And then I think this was brought up on the last quarter's call, but I wanted to see if there was any update or anticipated update to the Observatory gift shop lease structure given the extended kind of time frame for a recovery there.

Christina Chiu -- Executive Vice President and Chief Financial Officer

Yes. So the Observatory gift shop, actually, we just renegotiated. So they are -- as disclosed in the supplemental, they currently pay $6 million a year. We actually restructured the agreement so that they have some rent relief during this period, where there's low visitor volume.

And basically, it's a percentage rent agreement where we've reduced the fixed portion by about half, and then it ramps up as the attendance comes back. So it's pretty much a win-win situation, as you can imagine, for a gift shop operator that relies on an attraction visitor level.

Tony Malkin -- Chairman, President, and Chief Executive Officer

And I would like to make the point that we also extended the lease -- the license agreement with them at the same time, so we --

Christina Chiu -- Executive Vice President and Chief Financial Officer

That also extended the lease term.

Tony Malkin -- Chairman, President, and Chief Executive Officer

So we lock that in for longer.

Blaine Heck -- Wells Fargo Securities -- Analyst

OK. Thank you, guys.

Operator

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

John Kim -- BMO Capital Markets -- Analyst

Thank you. Tony, you mentioned on the investment side that you're looking at multifamily, and I just wanted to see if you could elaborate on that. But you also said that as far as investing capital, this is a marathon and not a sprint. With office sentiment pretty much at its all-time low, but the economy looking to reopen this year, do you see this as a tight window where you can make opportunistic investments?

Tony Malkin -- Chairman, President, and Chief Executive Officer

So, the first comment, I'll make is that as far as multifamily, we are primarily focused on situations in which we can get involved, in which there are properties which can go to -- properties which are either 100% or a significant majority market rate rental. That's part one. Part two, we do have a focus, even with multifamily, where we can have an impact on what occurs there through our ability to manage them effectively, aggressively, actively through a downturn. And number three, I would say that the real focus is on -- to the extent we can get our hands on busted condos, either declared effective or not declared effective.

So that's part one. We've had success with that in New York City in the past downturns. And so we would look at that again. As to your second piece, I think that there is a -- that there are a couple of factors which are interesting here.

You have the 10-year, is creeping up. It's not by a big number, but it's up by a percentage. Appraisals are -- I don't know if they're creeping, but appraised values have declined for certain assets. The amounts which lenders are prepared to lend with regard to office are, I would say, reduced.

So when you look at these different factors, these are factors which will continue, I think, and they're not going to ameliorate just with the bottoming in, in Q1 '22. So we think the window opens actually as people realize that -- it opens further as people realize I have a problem in hand and as to how they're going to redo their debt. They have a problem in hand as to the fundamental performance of their assets. The net effective rents that people can get are down.

It's very expensive. You need a lot of cash right now and over the next 12 to 24 months to lease office space in New York City as a landlord. And so I think that these factors, it's like a light switch, they don't turn off. I think that they could cause continued challenges, which create the opportunity that we see.

So I don't think it's a short window. I think it's a bigger window. And we actually -- one of the things we've done is we have taken steps internally to say, OK, what's the right strategy for us. We have a certain amount of cash on our balance sheet, which is a lot relative to our company size.

We have a certain amount of cash available on our line, which is a lot relative to our company size. That said, even if we deploy all of that, how many deals can we actually do? So we look at this from a perspective of we make -- we're looking at how we actually lever our capital, not just with debt, but perhaps with other people's capital. So that should let you know we think the opportunity is larger. And I'll tell you that it's public knowledge.

It's been announced a couple of REITs have reduced the folks they have on their investment side. I don't know anyone's eliminated them entirely. We've created a four-person team that commenced back in the second quarter of 2020, that team building. So we look at it as very much on our front foot, and we've got a longer-term view on it on the opportunity set.

John Kim -- BMO Capital Markets -- Analyst

OK. And my second question is on the Observatory. You mentioned more of a local mix, which makes sense. I'm wondering if there's anything that you have done or can do to attract the local customers, whether on a marketing basis or from a pricing standpoint, even if it's temporary.

What we've seen from multifamily landlords is occupancy is picking up. People are coming back to the city at a reduced rate. But I think a lot of people in New York are still looking for something to do. A lot of -- until recently, restaurants weren't open indoor.

So is there anything that you could do to educate, I guess, customers that haven't been to the Empire State Building recently and don't know of your recent investments, that it's a viable option?

Tony Malkin -- Chairman, President, and Chief Executive Officer

So, it's funny. Earlier today, at a meeting with our Observatory marketing team, internal team, and just so you know, that group includes PR, marketing, branding, social, digital. And we're extremely active in these areas. We've created -- and you can look at our investor -- updated investor deck.

We've created an increase within the United States advertising value equivalency through our -- the actions we have taken. Our brand is extremely strong. And it's, to a significant degree, it's also word of mouth. So you've seen a steady increase.

When we reopened the Observatory, we were in the twos and three percentage points of year prior activity. Now we're close to 9% in the first two months to date of 2021. And the fact is that includes a February in which we've had two weeks of -- impacted severely by blizzards. So we are -- we -- the one thing we really don't think we need to do is to do pricing promotion.

The edge gave all first responders, through 2020, free admission. And when that expired, their numbers just dropped like a stone. So One World Trade Center is open two days a week. Rockefeller Center, our numbers are significantly outperforming theirs.

So when we look at this performance from our side, I can only just tell you that the team on the Observatory has done an amazing job, an amazing job of cost containment, an amazing job of flex and pivot on staffing. And the visitors love the experience. So we're using user-generated content to push it, and we're active on social and digital to get this out in the local community. And we're doing a lot of brand building to make sure that when we measure advertising value equivalency, that's about where we get ourselves placed out there.

So CBS this morning just covered our Valentine's Day weddings. We had a manyfold increase over prior-year coverage on that advertising value equivalency. And that's an idea of what we're doing on the marketing side.

John Kim -- BMO Capital Markets -- Analyst

Got it. OK. Thank you.

Operator

Thank you. Our next question is coming from the line of Daniel Ismail of Green Street. Please proceed with your questions.

Daniel Ismail -- Green Street Advisors -- Analyst

Great, thank you. Tony, you mentioned the cost of retenanting office space. And clearly, over the past few years, you spent a lot of time and capital modernizing your portfolio with a focus on ESG. Is it your sense that some of these older or lower-quality buildings in New York, potentially facing and pending vacancies, no longer remain office buildings? I know there's been some chatter of office-to-residential conversions.

So I just wanted to get your sense on that and if that's something Empire State would be interested in.

Tony Malkin -- Chairman, President, and Chief Executive Officer

I think I'll let Tom Durels take a crack at that, if I may.

Tom Durels -- Executive Vice President, Real Estate

Yes, sure. In terms of the overall -- generally, conversion of office buildings to residential, I think, it's pretty early. We've seen that in, certainly, in prior cycles, but we haven't seen a lot yet. We would certainly look at that.

A lot would depend on the floor plate and the configuration to see if it's appropriate for conversion at a price point that makes sense in light of where the current market is.

Tony Malkin -- Chairman, President, and Chief Executive Officer

And I think as far as -- when we look at these from an acquisition and investment perspective, absolutely. However, you've got to recognize, if an office owner takes a building and converts it to residential, that is complete abdication and it's a write-off for that owner. I mean unless they have extraordinarily low basis, this is a major reinvestment. To put in risers, shafts, for electric, for waste, for hot and cold water for all the new bathrooms and stuff that will be put in, we're talking a huge investment.

So those properties really need to be a wipeout.

Daniel Ismail -- Green Street Advisors -- Analyst

And then is it your sense that, potentially, we could be facing just higher structural vacancy or a higher amount of obsolete office buildings in Manhattan as, say, tenants focus more on ESG and some of those older buildings just simply can't compete with the higher-quality offerings?

Tom Durels -- Executive Vice President, Real Estate

Well, I certainly think that -- yes, absolutely. I will just say that, certainly, they will be facing significant redevelopment cost to bring them up to standards with what tenants are seeking for indoor environmental quality, sustainability, energy efficiency, and compliance with Local Law 97. Unfortunately, as I've commented before, we redeveloped 95% of our space in Manhattan. We face no fine for 2024 for Local Law 97.

And we're a leader in this area.

Daniel Ismail -- Green Street Advisors -- Analyst

And then one more, if I may. Are you able to provide -- I know rents are tricky these days but are you able to provide a portfoliowide estimate of where in-place rents sit relative to market today?

Tom Durels -- Executive Vice President, Real Estate

Well, for our Manhattan office portfolio, I think the real question is where are net effective rents, and we would say the net effective rents in our portfolio today versus pre-COVID levels have declined, maybe 10% to 15% on a comparable space basis due mostly to increased free rent and TIs and some modest reduction in face rents. But it's important to remember that every deal is unique and depends on the space, the condition, the location, the tenant credit, and a bunch of other factors. For example, the ClearView deal that I mentioned earlier is -- was close to our pre-COVID rent for a full turnkey space, but we gave several months of additional free rent compared to pre-COVID levels to encourage the tenant to lease an entire floor rather than a partial, which saved us on corridor and demising costs. And then the deal involved a recapture of a fully built tower floor.

In addition, of course, we were seeing meaningful termination fee in connection with that deal from a prior tenant, whereas the deal -- we did a deal with -- by comparison, an 8,000 square-foot lease at Empire State Building with Nordic-based Swedbank, who has great credit, and we gave very little TI. The free rent matched our pre-COVID level concession, but the starting rent was maybe 15% below where we would have leased to that tenant pre-COVID. So we're seeing a range. Overall, we think it's about 10% to 15% reduction in net effective rent comparable to pre-COVID.

Daniel Ismail -- Green Street Advisors -- Analyst

Great. That's helpful. Thanks, everyone.

Operator

Thank you. There are no further questions at this time. I would like to turn the call back over to Tony Malkin for any closing comments.

Tony Malkin -- Chairman, President, and Chief Executive Officer

Look, thank you all for your attendance. We continue to improve our financial and ESG disclosures and hope you find them useful. Take a look at our new investor report, which is online. Please remember that forward-looking statements on plans to ramp up the Observatory and return to business are for discussion purposes only and to help you with your models.

They are not guidance nor are they guarantees. We look forward to the chance to meet with many of you virtually at the upcoming Citi CEO Conference and through roadshows in the months ahead and to share our first-quarter results in April. Until then, stay safe. Thank you for your interest, and onward and upward.

Operator

[Operator signoff]

Duration: 62 minutes

Call participants:

Tom Keltner -- General Counsel

Tony Malkin -- Chairman, President, and Chief Executive Officer

Tom Durels -- Executive Vice President, Real Estate

Christina Chiu -- Executive Vice President and Chief Financial Officer

Steve Sakwa -- Evercore ISI -- Analyst

Manny Korchman -- Citi -- Analyst

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Blaine Heck -- Wells Fargo Securities -- Analyst

John Kim -- BMO Capital Markets -- Analyst

Daniel Ismail -- Green Street Advisors -- Analyst

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