Empire State Realty Trust, Inc. (ESRT) Q2 2026 Earnings Report, Transcript and Summary

Greetings, and welcome to the Empire State Realty Trust Second Quarter 2026 Earnings Call.[Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Susanne Lieu, SVP, Chief Counsel, Real Estate. Thank you. You may begin.

Good afternoon. Welcome to Empire State Realty Trust's Second Quarter 2026 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. During today's call, management's prepared remarks and responses to questions may include forward-looking statements within the meaning of applicable securities laws. These statements reflect management's current views and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially. 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 supplemental package, each available on the company's website. Now I will turn the call over to Tony Malkin, our Chairman and Chief Executive Officer.

Good afternoon, everyone. Yesterday, we reported ESRT's second quarter results. We delivered strong performance across the property portfolio, which represents approximately 80% of our NOI. Office leasing accelerated from the first quarter as we converted our pipeline into executed leases. Our retail portfolio is highly leased, and our multifamily properties delivered solid growth. We remain active on transactions. During the quarter, we completed the once-in-a-lifetime opportunity to acquire the land under 111 West 33rd Street and 1400 Broadway and executed on the sale of 250 West 57th Street, the proceeds from which we swapped into the prior purchase of 130 Mercer. Against excellent leasing in our property portfolio, the Empire State Building observation deck weighed on performance. In our press release, we gave an updated FFO range under an assumption there is no improvement to current visitation levels, and it utilizes $55 million of NOI for the observation deck for full year 2026. I'll spend a few minutes on our Observation Deck business, then get to our strong leasing. During our first quarter call, we called out softer visitation amidst today's geopolitical environment and K-shaped consumer economy and stated it was premature to alter guidance based upon performance in our seasonally lightest quarter. We did say we would reassess our outlook after six months of results. In our NAREIT meetings and updated presentation we shared that softer visitation persisted through the second quarter. The Empire State Building remains the world's most famous building and its brand is undiminished. Our iconic Empire State Building Observation Deck remains a world-class attraction with absolute top of sector customer reviews. The Empire State Building Observation Deck was ranked #1 as an attraction in the U.S. by Tripadvisor last year, and we had 326 billion global media impressions. We remain the international symbol of New York City. The path ahead is to convert our international brand to revenues amidst the following changes in the market. Historically, we have relied on international visitors. In the past, more than 60% of our visitors were international. Last week, in which we had our second highest visitor numbers of 2026, more than 60% of our visitors were domestic. While not as high a number for the year-to-date, the shift is definitely to a majority of domestic visitors. The pass program channel that has been a source of significant visitor traffic to us has experienced significant headwinds. Historically, these pass programs have been largely international and specifically with the international budget-conscious traveler. One pass program operator went out of business in 2025. From 2024 year-to-date to 2026 year-to-date, we have seen a 45% decline in pass program visitors. While all attractions have experienced reduced visitorship in 2026, our drop compared to the market in general is larger due to our prior dominance with pass programs and their international presence. And these, in fact, may be tailwinds in the future. The competitive environment with other observation decks and alternatives is also a factor. We began a total reevaluation of our Observatory business model and execution early in the first quarter in anticipation that market conditions may continue to work against our historic customer sourcing mix. With our team and logical partners, this is a fresh channel-by-channel approach. Part of that is the shift from traditional search engine to AI search. This is ongoing work, and we have adjusted our online presence to accommodate the impacts of this shift. Some of our actions have already produced positive results. Historically, our operational costs have been relatively fixed and made tremendous operating leverage with increased visitors and revenue. At the same time, we will reinvest to strengthen the business and monetize on the strong brand and operations over the long term. We remain confident in the long-term value of our iconic asset. Let me turn to our real estate business. The Manhattan office leasing market remains healthy for our top-of-tier product. Tenant demand remains broad-based and resilient. Availability of high-quality space remains constrained, and there is no new construction at our price point. These dynamics continue to support strong leasing fundamentals for our portfolio. Our commercial portfolio was 94.9% leased at quarter end, and we expect occupancy gains for the year. We achieved our 20th consecutive quarter of positive mark-to-market spreads within our Manhattan office portfolio, which reflects sustained demand for our best-in-class assets. Our portfolio remains well positioned to deliver strong operating results. Ryan will discuss our and his significant leasing accomplishments in the second quarter. ESRT has maintained a leadership position in sustainability for more than a decade. Our focus remains on measurable business outcomes that produce viable outcomes. Sustainability remains an important differentiator that attracts tenants and supports retention, renewals and expansions across our portfolio. Across the organization, we remain laser-focused on four priorities: lease space, optimize Observation Deck and Empire State Building brand cash flow, maintain our balance sheet and achieve our sustainability goals. These priorities guide every decision and we make and align directly with our objectives to drive long-term cash flow growth and value creation. Christina, Ryan and Steve will provide additional detail on our results and outlook. Christina?

Thanks, Tony. I'll provide some comments on our recent transaction activity, including the sale of 250 West 57th Street and the acquisition of land beneath Two Broadway campus properties. Our capital allocation strategy is focused on value creation and long-term cash flow per share, even when at times, individual transactions are not immediately accretive to earnings. Our second quarter activity reflects that disciplined approach. During the quarter, we completed the sale of 250 West 57th Street for $275 million, which includes the buyer's assumption of $180 million of mortgage debt. The disposition effectively recycled capital into our prior acquisition of 130 Mercer Street in SOHO executed in December 2025 without the recognition of a taxable gain. Also in the second quarter, we executed on the unique opportunity to acquire the land beneath 111 West 33rd Street and 1400 Broadway for an aggregate $110 million or approximately $65 per square foot. The acquired ground leases carried below-market annual rent of $1.4 million, which applies a sub-2% cap rate. If we include below-market rent amortization, the implied cap rate is just under 7%, which better illustrates what the cap rate would be on rents that are closer to market. While this transaction reduces our FFO, it creates a permanent and material increase in the value of our real estate given the substantial difference in valuations and exit cap rates for owned real estate versus leasehold assets. Shifting to our balance sheet. Subsequent to quarter end, we announced a new $245 million unsecured delayed draw term loan that matures in 2032. Proceeds are expected to be drawn in January 2027 and used to repay existing debt, including our line of credit. We remain disciplined in our proactive approach to balance sheet management. We maintain ample liquidity, a well-laddered debt maturity schedule and have no unaddressed debt maturities until January 2028. We maintain a well-positioned and flexible balance sheet and predominantly unencumbered portfolio that provides substantial optionality. At the end of the second quarter, our leverage was approximately 6.6x net debt to trailing 12-month adjusted EBITDA. Against the backdrop of a healthy transaction market, we continue to underwrite opportunities across New York City office, retail and multifamily, evaluate strategic capital recycling opportunities that enhance long-term cash flow and assess opportunistic share repurchases. In each instance, our evaluation is guided by whether the transaction creates long-term value per share. New York City's enduring strength is rooted in its property fundamentals and ESRT owns high-quality New York City real estate aligned with the city's live, work, play and visit demand drivers. We continue to look for ways to further enhance the quality of our portfolio and grow cash flow through disciplined value-driven capital allocation. With that, I'll turn the call to Ryan to review our leasing activity.

Thanks, Christina, and good afternoon, everyone. In the second quarter, leasing performance was strong. Volume was high as we signed 382,000 square feet, which includes over 250,000 square feet of new leases, our highest level since the fourth quarter of 2021. Our lease percentage increased to 94.9%, up from 93.8% in the first quarter on a comparable basis, excluding 250 West 57th Street from both periods. This demonstrates strong tenant demand for our top-of-tier portfolio, and we remain confident in our year-end occupancy guidance of 90% to 92%. In the second quarter, we achieved mark-to-market spreads of 17.8% in Manhattan office, our 20th consecutive quarter of positive spreads, which underscores our sustained pricing power. Tenants continue to make long-term commitments to us as highlighted by our average lease duration on new leases of 12 years, which includes United Talent Agency's 16-year office lease at the Empire State Building. United Talent Agency's 101,000 square foot lease across four full floors addresses our largest expiration this year of approximately 70,000 square feet, where the existing tenant is expected to vacate in October. Other notable leases signed during the quarter include a 29,000 square foot new office lease with Infinium Wall Systems for the Duplex Penthouse at 1359 Broadway, a 26,000 square foot new office lease with Instacart at 111 West 33rd Street. The building is now 100% leased as of July. A 12,000 square foot full floor new office lease with Landmark Management at One Grand Central Place, which set a record average rent of $89 for new transaction in the building and also a 59,000 square foot renewal office lease with Alfred Dunner at 1333 Broadway. At just under 95% leased, we have less space available to lease. We remain focused on the execution and the creation of opportunities within our portfolio. At the Empire State Building, we have one full floor available, and we will look to continue to increase rents. At One Grand Central Place, we just launched our base block space to the market, an 80,000 square foot duplex with a private terrace that overlooks the Vanderbilt Plaza. We expect to see strong tenant demand given its unique attributes, in-building access to Grand Central Terminal and the lack of supply for competitive large contiguous space in the market today. At 130 Mercer, our capital improvement program is underway, and we are in active discussions for the remaining two full floors left to lease. Our pipeline of leases in negotiation remains healthy at 200,000 square feet. In today's bifurcated office market of have and have-nots, ESRT remains firmly in the have category. Demand continues to concentrate in high-quality, modernized, amenitized, transit-oriented buildings owned by well-capitalized landlords with proven operating platforms. Our best-in-class portfolio enables us to capture this demand as reflected in our strong results. New York City's leasing market remains strong and provides a favorable backdrop for execution with demand broad-based across finance, professional services, TAMI and consumer products. Lastly, our multifamily portfolio continues to perform well. Net rents increased 8%, and our portfolio is almost 98% occupied. Thank you. I'll now turn the call over to Steve. Steve?

Thanks, Ryan. For the second quarter of 2026, we reported core FFO of $0.21 per diluted share. Same-store property cash NOI, excluding lease termination fees, increased 3.3% year-over-year. The improvement is primarily attributed to the receipt of approximately $4 million related to prior period real estate tax abatements. Adjusted for nonrecurring items, same-store property cash NOI was off 3.2%. This primarily reflects increases in free rent and operating expenses, partially offset by higher tenant reimbursement income. Our Observation Deck generated approximately $12.4 million of NOI during the second quarter as compared to $24.1 million in the prior year period, with revenue of $24.2 million and expenses of $11.8 million. Visitation was lower by approximately 28.5% year-over-year. Revenue per capita increased by approximately 1.6% year-over-year after the exclusion of gift shop license fees. Turning to funds available for distribution. Core FAD for the second quarter was approximately $16.2 million, up from $11.9 million in the prior year period. This improvement reflects FAD CapEx savings of approximately $14 million year-over-year due in part to reduced capital requirements for our recycled portfolio and is also attributable to the significant lease-up we executed since the fourth quarter of 2021. Together, this helped drive our commercial portfolio lease percentage to 94.9%. As a reminder, that leasing velocity was accompanied by elevated levels of FAD CapEx in 2024 and early 2025. Lastly, our 2026 core FFO range is now $0.75 to $0.79. Given the uncertain operating environment and limited visibility into near-term performance trends for the observation deck, we utilized $55 million of NOI, a level that assumes no improvement to current visitation levels and expenses similar to the first half of this year. This represents a change to core FFO of $0.13 relative to our prior guidance, which is partially mitigated by lower income taxes, higher noncash rent and real estate tax abatements. For our commercial portfolio, we assume year-end occupancy of 90% to 92%, which is unchanged from our prior guidance. Our assumption for same-store property cash NOI growth of negative 1.5% to positive 2% is unchanged and continues to include a 270 basis point impact from temporary downtime associated with the FDIC expiration, which has been released. We expect G&A to decline to approximately $17 million per quarter in the second half of 2026, which is consistent with our prior guidance of a 5% to 10% reduction in run rate G&A by the end of this year. This concludes our prepared remarks. I'll now turn the call back to the operator to begin the Q&A session.

Thank you. We'll now begin the question-and-answer session. [Operator Instructions] Our first questions come from the line of John Kim with BMO Capital Markets.

On the Observatory, I just wanted to ask if you could separate what do you think the changes have been aside from international tourists, if there's anything in terms of ticket pricing or competition in the market or bad weather or any other items that resulted in what you achieved in the second quarter?

Sorry about that. We were on mute. I think the biggest -- John, the biggest change has been the mix of international to domestic or more importantly, the doing of the bargain international traveler and the really tremendous decline in our patch program partners. I think there are other things around the edges. In general, attractions in New York have seen declines. We declined more than others. We think that's primarily because of our exposure to these two sectors. We believe that both we have work to do and a lot of new learnings and things we've already put in place. Some of this has to do with how we appear online to the customer and how our different online travel agents present us. But in general, I think the biggest item is the change in the budget traveler path to New York and the past programs. So that said, we build our business, we build it back, and we're very confident in that. It just will take time. It's work to get done.

Appreciate that. And in the guidance, there's no assumed improvement in visitation levels. But I was wondering what you saw in June and July, if you could share that. I mean just looking at the Times Square traffic data, it did look like it improved in June, whereas earlier in the year, it was negative. So I'm wondering if you saw any pickup in visitors recently.

We really don't have much more to add. I did mention that our last week was our second highest week in the year as far as traffic, number one. And number two, interestingly, we saw no bump from the World Cup. In fact, I think the World Cup was a distraction, had a lot of people on the streets, but not a lot of people who were there for anything about the World Cup. And I also want to be very careful. This is not guidance that we provided. We've provided parameters within which we believe we can give you on the basis that business continues the way it has been through the end of the year. That's how we come up with that $55 million of NOI. It's a framework. We don't want to hold ourselves to that because we just don't have a lot of confidence in what we see right now.

Okay. If I could just squeeze one in on the office side. The leasing spreads were positive. It's been that way for a while. Occupancy is up. Yet this cash same-store NOI was negative if you exclude the onetime items. So I'm wondering when that -- the free rent burn off or other items, when that starts to not impact your same-store growth and we see the impact of the positive leasing in the same-store results.

Yes, you start to see some of that flow through. I mean at the Williamsburg portfolio, we had our free rent at H&M burn off during the quarter for costs. So that goes. And then on the office side, we continue to see any of our increases in operating expenses like utility costs that materially offset by the increase in tenant reimbursement income. So that continues to go through. But remember, we had a drag on office from the FDIC downtime about 230 basis points. And so LinkedIn comes to occupancy this year for that space and begins cash flowing in early next year.

And the team did a great job, the construction team of delivering occupancy of that space to LinkedIn this month. Our next questions come from the line of Manus Ebbecke with Evercore ISI.

A quick follow-up in the beginning on the Observatory business. You talked about how you maybe want to look into AI and revaluating the business a little bit to like help improve it. I was just wondering if you could expand a little bit on your thoughts on how you could maybe like help and improve that business a little bit and what's just kind of on your mind there?

Like we'll provide updates as our work progresses. We're very focused on our marketing efforts, not just our messaging, but our execution to align with the changing landscape between search engine optimization, which is really at this point, you might as well put that away. It's all AI right now. And so that's a big bit of work where it's a new skill set and we have good work underway to adapt to the new and very fluid landscape. Aside from that, we've got a fantastic brand and how we move that brand towards revenue and convert customers, that's our focus. More than that, really nothing to add other than what we've said.

Got you. Okay. I appreciate that. And maybe a quick follow-up, if I can, on just capital allocation. Just wondering your appetite for additional either disposition or share repurchases, if there's any appetite for that. Just curious if you could help us maybe think through a little bit what's on your mind.

Yes. We've long said, we look at share repurchases as a strategic part of capital allocation. That said, it won't be the only primary factor that we look at, and we do look at continued capital recycling within the portfolio. As we've executed on the business plan and there are opportunities where we can generate and add more value and generate good cash flow growth going forward, it's something that we would consider. So it continues to be each of those items that you've mentioned within our capital allocation.

And I would just add, it is public knowledge that 1359 Broadway is on the market now, and we'll see how we do with that transaction.

Our next questions come from the line of Seth Bergey with Citi.

I guess just another one on the Observatory. You mentioned that historically, international travel was around 60% focused on kind of the low budget international traveler through the pass programs. And more recently, you saw that was kind of 60% domestic. Is that kind of just a function of the shrinking international? And just kind of any thoughts on kind of what the pricing differences are and the mix shift from the customers.

Right. So I want to be clear on a couple of things. First of all, we are definitely an aspirational brand. So it's a budget-conscious traveler primarily from Europe was the primary customer for these pass programs. And that's where we have seen the biggest drop and where the pass programs themselves. Our position within the past programs and as an attraction has not changed. They've just sold many, many, many fewer passes. That's part one. Part two, there is a reality that European inbound budget traveler is greatly reduced. There's a war, there are energy issues. Europe has a series of issues themselves as itself. So, from our perspective, though, we are happy to see our work on and growth into our domestic, and we have other sales channels, which are available, and it's up to us to execute on them.

Great. And then just maybe on capital allocation. How are you thinking about just strategically, would you like to grow the traditional office assets, retail, multifamily to kind of effectively shrink the contribution from the Observatory? Or how are you thinking about that positioning longer term?

Let's be really clear. I'm going to let Christina talk about what we look to do and increase our emphasis on assets in our property portfolio, which have the prospects for cash flow generation growth in the future. We do view the Observatory as a key component to our business on which we need to work. And again, as I noted, we think that a lot of things which are headwinds now may well turn to tailwinds in the future. Christina, maybe you want to talk about our recycling on the balance sheet and both what we've done and what we've accomplished and what's ahead.

Yes. I think we look at New York City office, retail, multifamily, that's reflected in the over $1 billion of transactions that we completed, which includes Williamsburg retail, New York City multifamily assets, both of which are performing very well as the Scholastic headquarters building at 130 Mercer. So we have appetite in all three of those components. Regarding the Observatory, it is a strong. Business with great margins. It is going through a period impacted by international budget-conscious travelers and the items that Tony has mentioned. We have a long-term view on health of the business and quality of the portfolio and a few periods of weakness doesn't deter that. And we're not saying we're going out and acquiring more Observatories. So that's not the point in the asset allocation, but we will definitely try to grow that contribution to our business along with shifting our portfolio to better quality, better cash flow growth over time with that objective in mind.

I would just point out that the land acquisitions.

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

So, just with respect to the Observatory, can you just expand and clarify on whether the past program weakness is just a direct result of the weakness in international tourism or are those differentiated at all? I guess you mentioned one operator going out of business, but I guess I'm not understanding weather and how that has a direct impact on your overall visitation. So any color there would be appreciated.

Yes, they're somewhat intertwined. So, to start, right, our business has international customers, it has domestic, and there are different channels from which sales are generated. One channel is the pass program channel where they aggregate attractions. Empire State Building Observatory deck has traditionally been a leader in that rank very well, has dominated in the space. It also happens to be that because of what it is, the pass programs, they catered largely to international and largely to budget-conscious travelers. And because we have dominance, we have more exposure. So when you think about size of the pie, if that was a component of our business and that is experiencing more weakness for intertwined factors, then that is the area where we see more of the challenge, which is why we provided that level of commentary. As we think about it overall, it's a strong brand, strong experience, Tripadvisor #1, has a lot of great attributes, and we will look to both have recovering those international and budget-conscious commentary areas be tailwinds as well as expand the opportunity set for how we can generate cash flows, and we'll have more to report as we go through that. But that was the backdrop on the comments.

Okay, that's helpful. And then I'm not sure if Tony is on, but for him or Ryan, I was hoping to get your thoughts on AI demand in the market. Do you feel like you guys are well positioned to benefit from new leasing from AI tenants in any particular buildings in your portfolio? And kind of on the flip side, do you think there's any susceptibility to displacement of office using workers driven by AI in any segments of the New York office market or your portfolio kind of as we look forward?

Thanks, Blaine. So a few questions within that. So I'll start there. Just with sort of the impact, it has not impacted our portfolio. Our tenants are continuing to make long-term commitments. And the majority of the transactions that we're currently working on are expansions. Obviously, the stats are out there, the number of AI tenants that are in the market and deals completed year-to-date exceed 2025. So, more demand, they're taking supply off the table. So it gives us an opportunity to push our rents. And what are we focused on? We're focused on getting the right tenant in that we know is going to be there long term with a high likelihood for expansion over time. So continue to pick the right tenants and grow with them.

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

Most of mine have been asked already. But I guess just one thinking longer term. It feels like the public market doesn't necessarily give you guys the credit for the Observatory and the cash flow profile to the upside. Obviously, when you have cut the guidance as a result of just weakness in the portfolio, it seems to impact the stock price. So, I guess just longer term, I'm not saying you guys are thinking about this today, but once the recovery ultimately happens within the business, could this or would this ever be an asset that you guys decide to monetize over time? Or is that sort of out of the realm of possibilities right now as you guys do the portfolio?

Yes, that's still early in the game. I appreciate the thought and the question. But our view right now is to focus on the fix of the business -- that's what we're after. That's what we're about. S,o, from our perspective, we're just going to get the business fixed and we go on from there.

Thank you. We've reached the end of our question-and-answer session. And I would now like to close the call out. We appreciate your participation. You may disconnect your lines at this time.