Greeting and welcome to the Empire State Realty Trust Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to introduce Heather Houston, Senior Vice President, Chief Counsel, Corporate and Secretary. Thank you. You may begin.

Good afternoon. Thank you for joining us today for Empire State Realty Trust second quarter 2023 earnings conference call. In addition to the press release distributed yesterday, a quarterly supplemental package with further detail on our results and our latest investor presentation were posted in the Investors section of the Company’s website at esrtreit.com. On today’s call, management’s prepared remarks and answers to your questions may contain forward-looking statements as defined in applicable securities laws, including those related to market conditions, property operations, capital expenditures, income, expense, financial results and proposed transactions and events. As a reminder, forward-looking statements represent management’s current estimates. They are subject to risks and uncertainties, which may cause actual results to differ from those discussed today. Empire State Realty Trust assumes no obligation to update any forward-looking statement in the future. We encourage listeners to review the more detailed discussions related to these forward-looking statements in the Company’s filings with the SEC. During today’s call, we will discuss certain non-GAAP financial measures, such as FFO, modified and core FFO, NOI, same-store property cash NOI, EBITDA and adjusted EBITDA, which we believe are meaningful in evaluating the Company’s performance. The definitions and reconciliations of these measures to the most directly comparable GAAP measures are included in the earnings release and the supplemental package, each available on the Company’s website. Now I will turn the call over to Tony Malkin, our Chairman, President and Chief Executive Officer.

Thanks Heather, and good afternoon to everyone. We are pleased to report another solid quarter and first half of the year. We put points on the board with strong leasing and Observatory performance. Our balance sheet positioning remains best-in-class. We have a positive outlook for the second half of 2023. Our focus on modernization, amenities, energy efficiency, indoor environmental quality, and an industry-leading balance sheet make us a destination in the flight to quality. ESRT is a New York City focused landlord with four diverse drivers of value. When you walk the busy streets of New York now it is clear how resilient this city really is and we are primed to take advantage of New York City’s continued recovery. People want to live here, people want to visit here, and people want to work here. This is a city that draws a regular migration of young, highly educated, hungry, and diverse talent to work in person and learn. New York is a top three city for return to office post-pandemic, according to Placer.ai, top companies offered talent a place to gather in person, to plan, mentor, learn, build, execute together, and move forward through uncertain times. And they want to be in office buildings like ours, which serve as talent attraction and retention tools. We leased more than 336,000 square feet in this quarter, and those leases were at double-digit positive leasing spreads. Our Manhattan leased office percentage is up to 91.6% and reflects an increase of 90 basis points sequentially and 330 basis points year-over-year. ESRT offers a trophy experience in pre-war assets. ESRT properties are fully modernized and amenitized. More than 95% of our office space has been stripped to the studs and redeveloped. Flight to quality is not as simple as new versus old. ESRT’s properties…

Thanks, Tony and good afternoon, everyone. We had another strong quarter with 336,000 square feet of total leasing at 10% positive mark-to-market rent spreads for our office and retail portfolio. Year-to-date, we’ve leased a total of 538,000 square feet. This represents our sixth consecutive quarter in which we achieved positive absorption based upon leased percentage for our office and retail portfolio and our eighth straight quarter with positive mark-to-market lease spreads in our Manhattan office portfolio. Our leasing results demonstrate that our fully modernized buildings located in Midtown with convenient access to mass transit, quality amenities, best-in-class sustainability and indoor environmental quality offered at an accessible price point continues to attract quality tenants. We increased our Manhattan office leased percentage to 91.6% in the second quarter, which increased 90 basis points compared to last quarter is up 330 basis points compared to a year ago and has increased to 460 basis points since the end of 2021. In the second quarter, we signed over 336,000 square feet of leases, which include 308,000 square feet in our Manhattan office properties where we achieved our highest rent levels to date in two of our properties. The average starting rent in all Manhattan office lease assigned was $64.48 per square foot with an average lease term of 7.9 years and seven months of free rent with a tenant improvement allowance of $64.58 per square foot. 18,000 square feet of lease signed in our greater New York Metropolitan office properties and 10,000 square feet in our retail portfolio where we continue to bring food, wellness and services to our campus properties to support the demand from growing office users. Notable lease assigned in the second quarter include a full floor 11 year lease for 27,000 square feet at the Empire State Building with Capco,…

Thanks, Tom. Our focus is to put points on the board. For the second quarter of 2023, we reported core FFO of $69 million or $0.26 per diluted share, which is up 17% year-over-year, excluding lease termination fees. As previously announced in the second quarter of 2023, we reversed $5.8 million of the $6.4 million straight line reserve taken in the first quarter of 2023 as a result of the Flagstar lease assumption at 1400 Broadway. This had a positive $0.02 impact on our second quarter FFO result. Same-store property and cash NOI excluding lease termination fees increase 1.1% year-over-year, primarily driven by an increase in cash rental revenue and timing of tenant expense reimbursements, partially offset by increases in property operating expenses and real estate taxes. In the second quarter, the observatory generated NOI of $24.3 million, an increase of 26% year-over-year. This represents NOI recapture of 101% as compared to the same period in 2019. Observatory expense was $8.7 million in the second quarter. We have the balance sheet flexibility these uncertain times demand to generate shareholder value. As of June 30, 2023, the company had total liquidity of $1.2 billion, which was comprised of $315 million of cash and $850 million of undrawn capacity on a revolving credit facility. At quarter end, the company had net debt at share of $2.3 billion with a weighted average interest rate of 3.9% and a weighted average term to maturity of 5.9 years. Our ratio of net debt to adjusted EBITDA was well below peer averages of 5.8x. We have no floating rate debt exposure, a well laddered maturity schedule and no debt maturity until November 2024 when a $78 million mortgage matures. We can choose to recycle our balance sheet, pursue investment opportunities that are additive to our New…

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

Thanks. Good afternoon. Tom, I was wondering if you could just provide a little bit more color and detail around the pipeline. Maybe help size the pipeline for us where it is today versus say, three months to six months ago and the types of tenants that you’re seeing and maybe the size of tenants that you’re seeing today?

Sure, Steve. Well, first of all, our solid quarter demonstrates that there is tenant demand for our well located amenitized quality product and tenants have confidence in our ability to execute and deliver on our promises. That said, we’ve got a healthy pipeline. We’ve had some 20 or so leases in negotiation for about 200,000 square feet, mostly in our Manhattan office properties for both new renewal relocations and early extension deals and comprised of both pre-built and full floors. And then we have another 20 or so proposals that we’re trading paper on for really several 100,000 square feet. I’d say 14 of those deals range between 10,000 square feet to 70,000 square feet and then over a dozen proposals for pre-built that variety of sizes that add up to about a 100,000 square feet. So, overall a pretty good healthy pipeline. The tenant types that we’re seeing are consistent with this past quarter and prior quarters, which represent a variety of industries that include professional services, nonprofit, consumer products some tech and fire sector tenants. So good diverse mix of tenants. So overall, we feel pretty good about where we’re at in the quarter ahead.

Okay, thanks. Excuse me. And then on, just in the follow up, Christina, I guess on the share buyback, I don’t know if the activity level was muted, just that was sort of share price driven if you were looking at some other capital deployment opportunities, just I guess with the rise in the stock price, I guess how sensitive are you to kind of share buybacks, and I guess how do you sort of evaluate, when to say no, how to kind of lean into that or sort of lean out from the buyback?

Yes. So we continue to believe in buybacks and it’s a strategic part of our capital allocation that’s evident from the overall volume that we’ve done $280 [ph] million for it since we started. As we’ve always mentioned, the pace can vary from period to period for a number of factors, including fluctuations in share price. But beyond that, because it’s still at discounted levels, right? So beyond that, it’s also 10b5-1 periods and other factors. And as a final reminder, we do value buybacks, but we also look at operating runway and liquidity as well as the chance to evaluate and take advantage of opportunities that may arise in the marketplace. And we have been very active on capital recycling. So those are all of our priorities, buybacks are on the list. We’ve done it in volume, but certainly the pace could vary.

Thank you. Our next questions come from the line of Michael Griffin with Citi. Please proceed with your questions.

Great, thanks. Maybe to follow up on that, on that leasing question first. I’m curious if you’ve noticed if more tenants are quicker about making decisions when it comes to leasing. I mean, it seems like the positive commentary we’ve heard about more tenants coming into the market. Is there less uncertainty around them taking space than there was over the last few quarters?

I’d say that what we’re seeing is, tenants that are more committed to making a decision, a lot fewer tire kickers out there. And that’s [indiscernible] by really our conversion rates from what we see strong conversion from two to actual deals. So, as I look at all of those prospects that we’re speaking with right now, we feel very good about, they are committed to landing somewhere. And so it’s good for the overall marketing and good for us.

Great. Thanks. And then just on capital allocation priorities, you touched on the various food groups, the multifamily, the office, the share buybacks. I’m just curious with some distress we’ve seen in the office market recently; could there be an opportunity out there to potentially acquire an asset and maybe reposition it consistent with your current strategy?

So Griff, Tony here. Thanks. As I tell our younger colleagues, we really view this as 1989 to 1992 for the real estate industry. Bottom line, when you raise interest rates to levels which are more historical and you’ve gone through a period where people have borrowed as much as they could afford at low interest rates. You’re going to have a more than a few borrowers heads go through the windshield. And the benefit to us in our current position is that we have an opportunity both because of our execution at a high level and because of our balance sheet to take advantage of this. And we do believe that there are opportunities we know very clearly and we understand very clearly at what we rent, what our costs are to rent. More importantly though, we understand what it costs to modernize, amenitize, make energy efficient and execute on an indoor environmental quality the type of asset that we operate and that we can deliver at an attractive price. So we have our bogey, we know the locations where we want to be, we know the floor plates we want, we know the types of tenants who are interested and we are definitely interested at the right price in office.

Great. That’s it for me. Thanks for the time.

Thank you. Our next questions come from the line of Camille Bonnel with Bank of America. Please proceed with your questions.

Christina, you spoke about a number of factors impacting the positive same-store NOI growth for the quarter. Just wondering if you could provide a bit more context behind the moving pieces and trying to get a sense of whether one or another may have played a bigger factor here?

Sure. So the key drivers are higher cash rental revenue. And as a reminder, we have long put out a schedule sign lease not commence and free rents. And as the free rent burns off, that does contribute to our same-store cash NOI that was a primary and large factor. The second item as we called out was the timing of tenant reimbursements of some work. So over the course of the year that would be a net wash pretty much however between quarters that could lead to a little more bumpiness in the same-store results. So that was another contributor. But free rent I think is something to look out for, which is why we continue to provide the disclosure of how much contractual rental revenues on the come.

And another core factor in your same-store guidance is that expectation of higher operating expense from tenants utilizing your buildings more. Could you just talk to how that’s been tracking against your projections for the year?

Sure. We continued to trend up in operating expense. But as I mentioned in our remarks, it was really due to the team doing a fantastic job, being very proactive and reducing expenses amidst low building utilization levels. So what we’re seeing now is a normalization which we called out beginning last year and continues into this year. That said, even with this increase, we’ve also mentioned we expect property operating expenses to still be about 5% below 2019 levels due to some permanent expense savings. So what we’re seeing is sort of a normalization, and that will continue through the end of the year consistent with our same-store NOI guidance range.

Thank you.

Thank you.

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

Okay, thanks. Good afternoon. Just wanted to dig into occupancy guidance a little bit more as you guys are at the upper end of the range. And I think you’ve got about 325,000 square feet of signed leases that haven’t commenced, but the guidance range for occupancy implies a decrease in the second half. I know you lay out some of the known vacates on page 10, but given the leasing pipeline, I’m still a little surprised occupancy guidance wasn’t increased. Can you give us some more color on that and whether it’s just the timing issue or anything else?

Yes, Blaine. This is Tom. Look, we remain confident that we’ll achieve our guidance of 85% to 87% for the portfolio and about a 100 basis points higher for New York City office. That said, we might trend towards the mid to higher part of that. The – if you look at our expirations, we only have about 319,000 square feet of leases that expire through the balance of this year. And about 191,000 square feet of uncovered vacates that are known. This would be partially offset by over 140,000 square feet of leases on vacant space. That should commence by year end, plus any additional leasing that we do that commences this year. So it’s really timing of tenant vacates and when those new leases commence.

Okay, great. That’s really helpful Tom. And then sticking with you or Tony wants to jump in. We’re hearing that some landlords are less willing to spend on TIs based on their higher cost of capital. So I guess how does that play out with respect to free rent increasing or even lower face rental rates? And how do you think you all can differentiate yourselves with a great balance sheet to compete with tenants or for tenants in this environment?

Well, first you look our TI – average TI cost decreased this quarter from last quarter. And it’s only slightly above our five-year average of about $62 per square foot. And of course, if you look at the lease metrics, our lease cost per year of term is in line with our five-year average and is actually below this quarter from the trailing 12-month average. That said, we have invested heavily into our tenant spaces. We have a lot of pre-built space that we’ve previously incurred the cost, and of course then our balance sheet allows us to compete for – really for any deal. And that’s how we look at it.

Yes. And we haven’t enlarged our free rent and frankly, look, tenants and brokers, sorry, Tony here, tenants and brokers look very carefully at landlord sponsorship quality. And there are not a lot of shortsighted people out there. We began to talk about this with brokers about 12 months ago, 18 months ago, and now it’s on the tip of every broker’s tongue. Will they get paid? Will their tenants TIs be funded? Will the tenants have prolonged quiet enjoyment of their spaces with a quality landlord? And all of that [indiscernible] benefit.

Very helpful. Thanks guys.

Thank you. Our next questions come from the line of Dylan Burzinski with Green Street. Please proceed with your questions.

Hi guys. Thanks for taking the question. Just curious, obviously, there’s been a large scale return to all this announcements across various sectors. Are you seeing anything with regards to changes to how tenants are thinking about building out their space as a result?

Not really in terms of how they design their space. Some of the programming of space that begin to develop even pre COVID is still relevant today. I think that we see is tenants run, every tenant has their own – developing their own approach and policies to their work from office. But generally the themes remain the same and it’s constant throughout, which is tenants and companies recognize the importance of people being together for collaboration and training and creativity and really the importance of having an office to run their business effectively.

Yes, and I guess the only thing that I would say Dylan that stands out is these castle numbers are all screwy. Midtown Manhattan is probably the number one recovery in office in the United States. New York City is a fantastic market. Our business is strong. People are on the streets. We had to dodge people yesterday as we headed over to look at some new corridors [ph] at the Empire State Building around 530, 545 as people were, we basically were salmon swimming upstream going across 33rd street. The observatory is packed. We’ve extended hours as anyone can see from our online ticket sales for our reservations. So yes, we feel quite good about where we are and with regard to the use of space

And then just one on cash releasing spreads, year-to-date results are significantly better than call it the last three years through the pandemic. Just curious, on a go forward basis, I mean, do we expect this momentum to continue on that front? And I realize in any given quarter, it’s going to depend on the lease, on which leases are rolling, where you’re signing leases, but just curious over a longer term time horizon. I mean, is low single digits fair?

Well, it will always depend on the mix of spaces that are leased. But for our Manhattan office leases, I expect positive spreads in the near term. Since the prior fully escalated rent on our vacant, Manhattan office space that we’re marketing is about $56 per square foot. And that compares to our starting rent for our recent Manhattan office leases around $66 a square foot. So I feel good about our ability to post positive spreads in the near term.

Thanks for the time.

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

Hi, good afternoon. This is Regan Sweeney on the line with John. Just wanted to follow up on those cash spreads. Was that concentrated in one lease or asset, or is that kind of spread out across all of your leases in Manhattan, the positive 35.6%.

Well, this quarter, we had 10.1% positive spreads for our entire office and retail portfolio. And then just under 15% for our Manhattan office space for both new and renewal office leases. And that’s our eighth straight quarter with positive spreads for our Manhattan office portfolio.

I think it’s really important to make the, that no one should leave this call without a real understanding of the single most important message here. We have outperformed our peers. We got proven leasing results with an increase in lease rate of 330 bps over second, in the second quarter year-over-year. We’ve got increased occupancy, 360 bps second quarter year-over-year. This whole narrative that only the AAA brand new stuff will lease, we’ve said that’s wrong for several quarters. It just look at the points on the board. And I think that’s really, the key issue here. And we get quality tenants who are prepared to pay rents, which are good for us and a great and attractive value for them, and are modernized and monetized energy efficient buildings with indoor environmental quality. So, I think that’s the biggest, most important thing. I think that, I don’t know if that addresses your question. Regan, if you have other questions you might like.

Yes, I appreciate the color. Thank you. And then just shifting to the observatory, what percentage of these visitors are international versus domestic, and has there been any sign of the pickup in international tourism or demand?

So look, the headline on the observatory clearly is that we are the number one attraction in the United States according to Tripadvisor for the second year in a row. And that is a terrific indication of what people think of our value proposition, the quality of our experience and, the experience they have when they’re with us, number one. Number two, international is definitely not back to where it was, and yet we still deliver in excess of 2019 NOI. And as I said, we’ve, because we’re all reservations and we want to maintain that quality experience, we only allow a certain number of people in park at a time. And because of that, we’ve added hours. We’re going 9:00 a.m. to 1:00 a.m. right now at the observatory. So we’ve got good demand. Look, international travel is extremely positive. It’s mostly Americans going back and forth across the ocean right now. Nonetheless, it’s a tailwind for us as we go forward and as that tourism visit normalizes.

Thank you very much. I appreciate it. And congrats on the quarter.

Thank you.

Thank you. There are no further questions at this time. With that, I’ll turn the call back over to Tony Malkin, Chairman, President, and CEO for closing remarks.

Thank you very much, everybody. A few final notes. First and foremost, a call of gratitude and appreciation for points on the board by the entire ESR Team. Everyone is executed at a high level from Christina and her team to Tom and the property team, Jean-Yves Ghazi, and the entire observatory team, Jean-Yves, Dan Rogoski and I have promised the entire observatory team that we will take pies in our faces if we win the Tripadvisor Award three years in a row. Tom Durels, Ryan Kass, Mike Prunty, Dana Schneider, and Pete Sjolund have made and delivered on promises for our building’s modernization, energy efficiency, indoor environmental quality, and amenities and tenants just lease it up. Christina Chiu, John Hogg, Steve Horn, are the engine behind our reporting, financial planning and analysis, and fantastic work with our capital partners. Christina has also been a tremendous partner to me and her added title of COO, and Abi Rickards and her team successfully spread the word. Special callout to the Empire State Building Observatory besties, and their new rookie board member Grant Hill, and of course, Emma Pire. All of you can follow us and what we do on Instagram, LinkedIn, and TikTok. Second on transitions, we salute Bill Regan, who’s done a fantastic job as SVP Financial reporting. Thank you, Bill for your decade of contributions. Finally, we welcome Christina Van Tassell and Hannah Yang to our board, I encourage everyone to read through our latest investor presentation, as it includes many great improvements including tenant testimonials that speak to the flight to quality from which our portfolio benefits and also our sustainability report shows you the future here now, science-based targets and numbers, not fluffernutter. Thank you all for your participation in today’s call. We look forward to the chance to meet with many of you at non-deal roadshows, conferences, and property tours in the months ahead. Until then, thank you for your interest, onward and upward.

Thank you. This does conclude today’s teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.