Empire State Realty Trust, Inc. (NYSE:ESRT) Q3 2023 Earnings Call Transcript

Empire State Realty Trust, Inc. (NYSE:ESRT) Q3 2023 Earnings Call Transcript October 26, 2023

Operator: 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.

Katy Malonoski: 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.

An exterior view of an upscale building in a busy urban area, showcasing the company’s real estate investments.

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.

Anthony Malkin: 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.

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Q&A Session

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 year. Our high foot traffic everyday retail that serves as a great amenity to our office tenants and a growing multifamily platform. We continue to deliver consistent leasing volumes. We leased 0.25 million square feet in the third quarter. Tenants choose ESRT’s constructive partnership on energy efficiency and indoor environmental quality where we add value to their installation and occupancy, with our top-tier modernized assets, our amenities, our locations and the certainty delivered by our great balance sheet. Those relationships have driven more than 2.6 million square feet of tenant expansion in our portfolio since IPO.

Put this in perspective, our entire portfolio today totals just over 9.3 million square feet. We are happy to announce that in the third quarter, we grew our partnership with Starbucks with a new full office floor lease at the Empire State Building. Starbucks has grown from our original retail store in the lobby of a building we no longer own in the early 1990s all the way to the remarkable 23,000 square feet, 3-level Starbucks Reserve that opened in late 2022 to this new full floor office lease. Tom Durels will discuss another expansion, this one with LinkedIn, which brings their total footprint in the Empire State Building to over 0.5 million square feet. And our partnership with LinkedIn started with a few thousand square feet in 2010. As of quarter end, our Manhattan office portfolio is nearly 92% leased and this reflects an increase of 250 basis points over the past 12 months.

Our leasing success meets the performance of newly built Class A office properties and proves we are a destination for the market’s flight to quality. ESRT’s successes are built upon the investments we have already made. We are future-ready, and we service the deepest segment of tenant demand in the New York City office market at our accessible price points. Our balance sheet makes a big difference to tenants in today’s environment. We have always said that our goal is to get the best deals in good times, get the deals in challenged times and draw consistent leasing volumes through cycles. We know what we have to do, and we are absolutely focused. The Observatory continues to perform well. Year-to-date, Observatory NOI exceeded comparable 2019 levels by 2% with 71% of the admissions relative to 2019 levels.

Candidly, we could have done without 4 consecutive rainy weekends in September, and we look forward to this weekend where the sun is met to shine. That said, we continue to manage expenses, drive top line growth and provide visitors with unmatched customer experience. The Empire State Building Observatory is the authentic New York City experience, and is the number one ranked attraction in the United States by TripAdvisor for the second year in a row. Our Observatory cash flows are reliable as demonstrated on Slide 14 of our investor presentation. ESRT’s balance sheet is the strongest amongst all New York City office REITs. And the capital structure is simple. There’s no doubt that our balance sheet is a competitive advantage. Tenants look to partner with a financially stable landlord who will maintain high-quality standards at their assets.

We can allocate capital as we think best, be it capital recycling, new acquisitions or share repurchases. Just in the last 20 months or so, we have purchased nearly $0.5 billion in property, primarily funded by dispositions of suburban assets and diversified into residential to build out our New York City focused portfolio. Long time participants in this call know this is against years of criticism for the fact that we bought nothing during the frothing decade that led to the current credit crunch. ESRT has been the quantitative sustainability leader for more than a decade and sustainability is integrated within every decision we make. Our industry leadership and sustainability and healthy building performance matters more and more each year to tenants, lenders and shareholders.

And this is a cornerstone when we say we are future ready. There can be only one #1. ESRT’s overall GRESB score ranked first, #1, amongst all 115 listed companies in the Americas as well as the first and the most competitive peer group within the United States. We achieved the highest possible GRESB 5 Star Rating for the fourth consecutive year. The Empire State Building was just awarded the 2023 BOMA New York Earth Building of the Year Award and the BOMA Grand Pinnacle award, tremendous accomplishments for our entire company. Our databased sustainability work delivers economic returns and provides us with a competitive advantage over our peers. ESRT priorities are unchanged: lease space sell tickets to the Observatory, manage the balance sheet and achieve our sustainability goals.