Greetings, and welcome to the Empire State Realty Trust Third Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Katy Malonoski, Vice President of Investor Relations. Thank you. You may begin.

Good afternoon. Thank you for joining us today for Empire State Realty Trust's Third 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 statements in the future. We encourage listeners to review the more detailed discussions related to those forward-looking statements in the company's filings with the SEC. During today's call, we will discuss certain non-GAAP financial measures, such as FFO, modified and core FFO, NOI, same-store property cash NOI, EBITDA and adjusted EBITDA, which we believe are meaningful in evaluating the company's performance. The definitions and reconciliations of these measures to the most directly comparable GAAP measures are included in the earnings release and supplemental package, each available on the company's website. And now I will turn the call over to Tony Malkin, our Chairman, President and Chief Executive Officer.

Thanks, Katy, and good afternoon to everyone. We continue our efforts to educate the market that ESRT is a top-tier destination for tenants flight to quality today. We are not B properties. We are top of our tier and our accessible price range, and we continue to capture market share. We can think of no better way to inform than to continue to put points on the board. So we are pleased to report a third quarter of strong performance in 2023. We did not predict the weather, we built an arc for the storms that were certain to come. We positioned ESRT to perform in all cycles. We built a brand around modernized, amenitized, well-located, energy-efficient buildings with indoor environmental quality and a team of union and nonunion colleagues distinguished by service and collaborative work. And we report our earnings from a position to take advantage of the opportunities ahead while we perform in today's market. Your ESRT team is more focused than ever on points on the board. In the third quarter, FFO came in above expectations. We leased another quarter of 1 million square feet, that is 787,000 square feet year-to-date. We achieved another positive quarter of leasing spreads, double-digit positive leasing spreads that is 9 consecutive quarters of positive leasing spreads and our Observatory continues to perform. We completed a 100% recycle of sales proceeds from prior dispositions through 1031 transactions with no tax leakage. Our balance sheet remains best-in-class. ESRT is a New York City focused company, and we have 4 diverse drivers of value that complement each other well. Our office portfolio that is the top of our tier and targets the deepest market segment. Our Observatory that is the #1 ranked attraction in the United States according to TripAdvisor for the second consecutive…

Thanks, Tony, and good afternoon, everyone. We had another strong quarter with 248,000 square feet of total leasing at 10% positive mark-to-market rent spreads for our office and retail portfolio. This represents our seventh consecutive quarter in which we achieved positive absorption based on leased percentage for our commercial portfolio and our ninth straight quarter with positive mark-to-market lease spreads in our Manhattan office portfolio. We continue to attract new and renew existing tenants who look for high-quality product that is modernized, amenitized, well located near mass transit and neighborhood amenities and has best-in-class sustainability and indoor environmental quality at an accessible price point. We increased our Manhattan office leased percentage to 91.9% in the third quarter, which increased 30 basis points compared to last quarter, is up 250 basis points compared to a year ago and has increased 490 basis points since the end of 2021. In the third quarter, we signed 248,000 square feet of leases, which include a 235,000 square feet of leases in our Manhattan office properties. And in our retail portfolio, we signed a new lease with an exciting Sushi Restaurant at 1359 Broadway, which will be a great amenity for our office tenants in the Broadway portfolio, where we continue to bring in food and services to support the growing demand from office users. Notable leases signed in the third quarter include a 10-year 144,000 square foot lease with LinkedIn at the Empire State Building. LinkedIn acted upon its existing rights to relocate 119,000 square feet from tower floors to base floors and also expanded by 25,000 square feet, which brings LinkedIn's total lease square footage at the Empire State Building to 527,000 square feet. Our track record of tenant retention and expansions, including this most recent expansion by LinkedIn is the result of…

Thanks, Tom. For the third quarter of 2023, we reported core FFO of $66 million or $0.25 per diluted share, which is up 17% year-over-year, excluding lease termination fee income. Same-store property cash NOI, excluding lease termination fees, increased 8.8% year-over-year, primarily driven by cash rent commencement and increased tenant expense reimbursement. In the third quarter, the Observatory generated NOI of $28 million, an increase of 14% year-over-year. Revenue per capita remains high and admissions continue to improve. Observatory expense was $9.5 million in the third quarter. Year-to-date, the Observatory generated NOI of $67 million, which represents NOI recapture of 102% as compared to the same period in 2019. As of September 30, 2023, the company had total liquidity of $1.2 billion, which was comprised of $354 million of cash and $850 million of undrawn capacity on our revolving credit facility. At quarter end, the company had net debt of $2.2 billion with a weighted average interest rate of 3.9% and a weighted average term to maturity of 5.7 years. We have the lowest leverage among all New York City office REITs at 5.5x net debt to adjusted EBITDA. We have strong liquidity, no floating rate debt exposure and no meaningful debt maturity until early 2025. ESRT owns 100% of our commercial assets with no complex JV structures, and that allows for great opportunity and flexibility for future financing and capitalization. With this balance sheet flexibility, we have recycled capital, pursued investment opportunities that are additive to our New York City focused portfolio and repurchased our shares, and we'll continue to allocate capital to generate shareholder value. Our off-market acquisition of prime retail in Williamsburg during the third quarter completes the redeployment of our 1031 proceeds and is consistent with our strategy to recycle capital into high-quality, well-located high-foot traffic…

[Operator Instructions] Our first questions come from the line of Steve Sakwa with Evercore.

Maybe, Tom, starting on the leasing. If you could just maybe give us a little bit more specificity on kind of the current pipeline? And are you seeing more demand today in kind of the Penn Station maybe Garment area? Or are you seeing kind of more strength over in the Grand Central submarket.

Yes, Steve, we've got a good pipeline of activity. We've got activity and interest from tenants and that's both proposals and leases in negotiation at One Grand Central Place, where we're trading paper on prebuilts and full floor 250 West 57th Street, where we have a full floor that's been prebuilt. We have activity on that. Empire State Building, we're optimistic of getting another significant lease done there as well as some smaller prebuilts, and a 1400 Broadway, where we have some leases that are expiring next year as part of our known tenant vacates, we're already in active discussions for tenants to backfill that space. So it's really across the portfolio in terms of the pipeline, generally, I'd say, roughly somewhere around 200,000 square feet of leases in negotiation. Timing will dictate as to whether those leases get signed in the fourth quarter or first quarter, but we feel pretty good about our overall pipeline of activity. And it really continues to be from a broad variety of industry types that include technology, fire sector, not-for-profit, professional services and consumer goods. And so look, we're on a pretty good run here, right? We've had 7 consecutive quarters of positive lease percentage absorption in 9 quarters of positive mark-to-market lease spreads. So I think we're incredibly well positioned.

Good. Maybe, Christina, you had a good third quarter here at $0.25. I think the full year guidance implies kind of a $0.20 run rate for the fourth quarter at the midpoint. So can you maybe just walk us through what some of the, I guess, downward pointing arrows would be for the transition from Q3 to Q4?

Sure. So as I mentioned in my remarks, within 4Q, we expect the sequential decline driven by an increase in operating expenses. And some of that, in large part, is due to some major R&M projects that are underway. So this is just timing and where the expenses fall out. For the full year, though, we would note that OpEx change is as we guided, which is about an 8% increase. So that is consistent. And the other piece is the typical seasonality in the Observatory business. So if you look back, there traditionally has been some seasonality factor between 3Q and 4Q. And as we mentioned, we do factor in a little bit of uncertainty around tourism fluctuations and bad weather. So that would be the primary driver of that sequential decline.

Okay. And then just last question. I know you've got a mortgage coming due up in Stanford. I think it's kind of late in 2024. That asset is around 80% occupied. I'm just curious kind of the discussions with the lenders today, how you're thinking about that asset? And is that something that's kind of long term for the portfolio?

Yes. We continue to have active discussion with our lenders on that piece of property in mortgage as well as other maturities, and we'll keep the market apprised but we run the portfolio, and these are discussions that we always have and continue to discuss what makes the most sense with our lending partners.

Our next questions come from the line of Michael Griffin with Citi.

Great. Maybe just going to Tom on the leasing. I'm curious if you've noticed any time for space takers that they're delaying decision-making in terms of taking space. And then if you can provide some more color on concession packages, appreciate what you provided kind of in the prepared remarks, but your kind of expectations for that on a go-forward basis would be helpful.

Sure. I believe your first question was the timing of tenants in terms of deciding on their leasing. And it really is tenant by tenant. It will range from very quick decisions and particularly for those that want built space that were our prebuilt suites and even full floor prebuilts will attract those tenants. We're working on a deal right now. We're actually a tenant is has a pretty quick time line of whether they want to get into the space. And then it's others that can enter the market as much as 18 months or more before their lease, current lease expires and they'll be shopping the market for an extended period of time. So I can't say there's a trend as much as it just really runs a wide gamut depending upon the particular tenants' needs and what's going on with their business as well as the space type that they're pursuing. And your next question was on leasing costs. Well, I made the comments earlier in my prepared remarks about what drove our leasing costs this quarter, we're really not seeing a significant change in the market. Generally, most of the leasing we do involves a fully prebuilt space that's been built on spec, for which we already have a significant amount of built inventory, and we've already incurred that cost, to turnkey installations. And that's generally what we continue to see in the marketplace, and that was what we experienced on both the LinkedIn and the Starbucks transactions, which has been consistent with the market over the last -- and consistent with the leasing we've done over the last several years.

Great. And then just on the retail acquisition, Williamsburg, should we read into this as these kind of acquisitions appear more attractive relative to other asset types? And is there anything you can kind of quantify in terms of cap rate or kind of IRR basis, that would be helpful.

Griffin, we were very happy to be able to complete 100% recycling of the sales proceeds from prior sales. And it's really a matter of just, as I've said before, we're omnivorous opportunivores. We go for where we think there is the best combination of value and growth potential when we do either acquire or recycle capital. And I think what you should read into it is that given the nature of a 1031 exchange, which operates in a compressed time frame, you have to operate on the best execute on the best opportunities presented to at that time. At the right price, the right basis, we'll definitely do office. We know how to build out, renovate, modernize, amenitize with energy efficiency and indoor environmental quality assets in the right locations with the right size floor plate to perform. We've demonstrated that. The fact is that we have to operate in the compressed time frame, and that's what presented its best opportunity when we had to make that acquisition.

Our next questions come from the line of John Kim with BMO Capital Markets.

I had a follow-up on the LinkedIn decision to move from the tower floors to the base floors. Can you comment on the new rent that they leased versus what they've vacated? And also what the mark-to-market is of the vacated space?

Yes, John, I don't want to get into the specific details of the lease transaction. But I would just generally say we've been signing leases in the 70s per square foot. And last quarter, we signed leasing the tower floor in the 80s. And so the deals that we signed this quarter were fairly consistent with what we've been seeing over the last couple of quarters. Does that answer your question?

We move to the base floor, is that because of the floor plate size or...

Yes. Well, it's contiguous with other space that they occupy. So they're moving out of 3 tower floors, which are highly desirable and marketable. They will move to base floors and expand by 25,000 square feet, puts them contiguous to other space that they have as well as close to some built-out amenity space with foot hall on the third floor. It was part of a prior agreement that we had in connection with the earlier lease that was signed. And as a reminder, we did not spend or provide the TI allowance on those 3 tower floors that they're vacating and we'll be contributing that allowance money to the base floors that they will build out. But they have -- they are in occupancy currently of those tower floors. We have an opportunity to market those in advance of them moving out in 2026. So all in all, it's a really favorable deal works very well for LinkedIn and it works very well for us as well. And it's the type of thing that we do to accommodate tenants that have expanded and grown within our portfolio.

At the Empire State Building with Starbucks moving in, was that a consolidation of existing space within New York or an expansion in the...

It is a -- yes, it is a relocation of their New York City offices of their only New York City offices from the Penn District to Empire State Building.

Okay. And then Christina, you mentioned R&M expenses dragging down fourth quarter earnings. Any further color you could provide on that? And also on the Observatory, it looks like you're guiding to a 12% reduction quarter-on-quarter in the Observatory versus a 3% quarter reduction last year. Is there anything you're seeing as far as leads or website traffic that would lead you to think that there'd be a bigger seasonality impact this year?

For the Observatory, a lot of that is seasonality. So that we'll continue to provide more information as that goes along. And for the major R&M, nothing in particular to call out. We have regularly planned projects, and it happens to just the timing if it comes into 4Q or if it leads into 2024. So not much notable on either items. These are both routine.

The seasonality impact last year was pretty minimal, though, 3%.

Seasonality last year. But last year, we were still in the midst of ramping up. When you look overall in past years, there is a drop between 3Q and 4Q overall. I'm happy to go over that more when we have our call later.

Our next questions come from the line of Camille Bonnel with Bank of America.

Can you talk to the renewal activity your teams are executing on? It seems like quite a step-up compared to the recent years. How far in advance are tenants coming to you?

Sure. We proactively speak to all of our tenants on a regular basis, and we certainly ramp up those conversations starting 24 months out before lease expiration. And generally, what we find is that the smaller tenants, 10,000 square feet and really postponed their decision making until the year of their lease expiration and some don't even get to until about 6 months prior to their expiration. And that's why you see the -- as we update Page 14 in our supplemental, you'll continue to see a certain amount of tenancy that remains in an unknown category until those tends to get closer to those expiration dates. Generally, we've been averaging around a little over 60% on renewal rate when you factor in early renewals. And I think that, look, it's as a reflection of the fact that we've completed our redevelopment work. We've spent $1 billion to redevelop our portfolio. We've scraped and redeveloped 95% of our tenant spaces. We've added -- we've built amenities that we're adding to our amenities, and we're definitely benefiting from a flight to quality as we deliver the best product and location in our price tier. And so I think that's leading to better renewal rates and tenant retention overall.

And you've definitely had a strong build of occupancy over the past few quarters, and I appreciate your comments on a lease percent outlook. But on the occupancy side, do you think you can also continue to maintain or grow that further from here?

Well, occupancy has increased 460 basis points since the end of 2021. So again, it's an increase of 460 basis points since the end of 2021. We've had 7 consecutive quarters of positive leased percentage absorption. Look, we're confident we'll achieve our guidance that we've provided for the year-end, and we're very well positioned for 2024. We feel really good about our ability to increase occupancy next year based upon a modest amount of known move-outs. And look, as on, we have about 207,000 square feet of known vacates in 2024, and that's against the backdrop of roughly 250,000 square feet of leases on vacant space that should commence by next year. And generally, we're averaging over 600,000 square feet of new leasing per year. So I think we're well positioned to improve both leased percentage and occupancy percentage next year.

Appreciate the clarification there. And finally, just your comments around looking at office as potential investments. Can you expand a bit more on the opportunity you look at? Would it be more value-add or potentially looking at assets to further improve the quality of your overall portfolio?

Tony here, our skill set is redevelopment. And our unique intellectual property, our IP advantage is we actually don't have to do this conceptually. We know the costs, and we know the demand, and we know the time it takes because we've done it throughout our entire portfolio. At the same time, we'll always react opportunistically to things which develop. What I would say at this point is there have been very little market clearing in the office environment. And if we had seen opportunity that was better than what we chose to invest in proceeds from our sales, we would have acted. We didn't. And as soon as we see opportunity, we'll let you know.

Our next questions come from the line of Blaine Heck with Wells Fargo.

Just want to follow up on that last question. Just hoping you could talk a little bit more about your appetite for additional new investments. And I guess what level of returns you might be targeting given the increase in rates. And again, how you're kind of weighing those returns versus continued reinvestment in your own stock through repurchases. I guess just where do those returns need to be on property acquisition to make them compelling relative to repurchases?

Yes. So look, the returns sought and required have obviously gone up because cost of capital has gone up because traditional lenders have created a void and that has led to higher debt cost of capital in this period to make any deals work. So I think take that as a given across the board. As we look at the landscape, as Tony mentioned, we believe there will be distressed opportunities, and it all comes from buying in at the right basis so that we can do our work, which does require capital and understanding the rental price points, which will allow us to get leasing velocity, the way we have in our own portfolio. And that's the way the returns pencil out. So clearly, it's higher than before. But in the absence of actual investment transactions in the market don't want to get ahead and quote what the returns are. Everyone knows that the bar is higher and is higher for us as well. As for share buybacks, we do think it's a very attractive opportunity. Even currently, when we look at our implied price per square foot, implied cap rate, even if there's a question mark on private market valuations, these are very attractive values, especially considering we've already spent the CapEx. So when you buy into ESRT stock, our implied value per square foot is CapEx already spent, right? And that makes it a tremendous value. That said, when we think about share buybacks, it's not just about the value opportunity. That is a huge component. It's also about continued operating runway for the company, continued access to capital. And we all know we're in a peak period of capital dislocation. So we need to be prudent about how much we do at a given time. And clearly, we've done a lot in size.

That's very helpful, Christina. And then probably for Tom, I guess, can you talk a little bit more about demand for your prebuilt suites. Clearly, some of the largest operators of co-working and flexible space are having trouble and Tony has been vocal about leasing to them in the past. But are you guys seeing this as an opportunity to expand that offering? And how has that demand kind of trended for that type of kind of turnkey space?

Well, we've always had consistent demand and good leasing activity for our prebuilt suites. Fortunately for us, we have about a little over 200,000 square feet of vacant prebuilts, which where we've already incurred the costs and don't have to incur that cost on a go forward, basically lease those spaces and they're ready to go, ready for immediate move in. The -- really, I can't say that we see a big trend of movement from tenants that come out of co-working type spaces into our prebuilts. I think that generally, those that want their own office space, their own separate environment have opted to lease with someone like us in built space. And a lot of those prebuilt tenants that we lease to have gone on to grow within our portfolio to subsequently lease full floors with us. And look, a lot of those tenants also want the direct relationship with the landlord and don't really want to be in, call it, a shared or co-working environment. But we signed 14 leases for prebuilts this quarter. It's pretty consistent with our pace over the last couple of years.

And just not to overstate the obvious, if there were a great deal of demand within those co-working spaces, those companies would not go out of business. So it's a question of what those tenants have been, what those users have been and are they suitable for us in the first place.

Our next questions come from the line of Dylan Burzinski with Green Street.

Just sort of going back to capital allocation, and I appreciate the comments on how you guys evaluate underwriting new acquisition opportunities versus repurchasing your stock. But I guess just when you guys are underwriting new acquisitions, just from a property type perspective, are you guys acquiring a larger rate of return when you guys are underwriting office opportunities? Or I guess just can you give us a sense for how you guys think about that internally when evaluating opportunities across property types?

Yes. So our interest continues to be, as we've mentioned, New York City office, retail and multifamily. The return requirements have gone up across the board, and we've discussed a bit on how we underwrite and think about office. And it's hugely predicated on basis and making sure we get high-quality space that we can do our work on. Within our interest in multifamily, I think we do have a recognition that, that asset class is being valued differently, even access to financing is different. So that will come into consideration as we look at it. That asset class has access to agency financing, you are able to buy down on the rate and that cost of debt capital will impact the returns that buyers will expect. And it's also a very healthy asset class with high occupancy levels and continued rental strength. So we have to keep that in mind as we look at opportunities. That said, we'll still look at individual opportunities that come along and make sure that, that asset is additive to our portfolio, and there is upside to our entire portfolio and shareholder base.

Appreciate that commentary. And then I guess just one on occupancy. I think you ended the quarter at 87% occupancy. You didn't change guidance, so you guys are ending the quarter at the high end. Just curious sort of the moving pieces here as you look towards Q4.

Yes. Well, first, we're confident that we'll achieve our guidance that's 85%, 87% for the portfolio and about 100 basis points higher for Manhattan office. As I stated earlier, we do expect about 136,000 square feet of tenants to vacate in the fourth quarter, and that will be partially offset by sign lease that commenced in the fourth quarter and anything new that we signed that will also commence in the fourth quarter. In 2024, as I commented, I feel really good about our ability to increase both occupancy and leased percentage based upon the modest amount of known move-outs. We've proactively managed our rent roll. We have built space. We have modernized buildings where we have robust amenities. We're adding to those amenities that open up next year. So I think we're very well positioned to improve upon our performance and our percentages for next year.

Thank you. We will now turn the call back over to Tony Malkin, Chairman, President and CEO, for closing remarks.

Thank you very much, everybody. A few final notes. This month, we celebrated ESRT's first decade as a public company listed on the New York Stock Exchange. Since our IPO on October 2013, we really have not followed the crowd as we have made and executed our plans to be the New York City focused REIT with 4 diverse verticals; office, the iconic Empire State Building Observatory, retail and multifamily and a best-in-class balance sheet. Our leadership and sustainability in our carbon-neutral commercial real estate portfolio continues to put points on the board with leasing and the development of practices to inform policy. The biggest call-out goes to our dedicated employees, directors, tenants, stakeholders and partners who drive our success and position ESRT for future growth. 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 in 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.