Empire State Realty Trust, Inc. (NYSE:ESRT) Q4 2023 Earnings Call Transcript

Empire State Realty Trust, Inc. (NYSE:ESRT) Q4 2023 Earnings Call Transcript February 21, 2024

Empire State Realty Trust, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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

Heather Houston: Good afternoon. Thank you for joining us today for Empire State Realty Trust’s fourth 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 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.

Tony Malkin: Thanks, Heather. It is great to have you back after your parental leave, and good afternoon to everyone. ESRT is pleased to report a strong fourth quarter to close out what was a very productive year for our top of tier portfolio. We have a modernized, amenitized energy efficient portfolio of properties in great locations, absolute commitment to put points on the board under any circumstance and a balance sheet that allows us to do so. Our team’s focus and relentless effort once again delivered results. In the fourth quarter, FFO came in $0.05 above expectations, $0.015 from non-recurring items, the majority from recurring operations. Christina, our new President, will handle that in more depth in her comments. We delivered our eighth consecutive quarter of positive leased percentage absorption.

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Q&A Session

We achieved our 10th consecutive quarter of positive mark-to-market lease spreads for Manhattan office, our observatory performance continues, and our balance sheet remains best-in-class. Our top of tier portfolio sees continued demand, and we leased nearly 1 million square feet. Lease-up progress over the last year increased our Manhattan office leased percentage to over 92% and increased leased absorption by 250 basis points. The Empire State Building is now just shy of 92% leased. That is an increase of 720 basis points over the last year. Within our Broadway campus, the leased rate at 1359 Broadway increased 730 basis points over the last year. Tom will discuss some of the quality tenant leases, which contribute to this progress. ESRT’s commitment to service and tenant relationships, combined with our modernized, amenitized, energy-efficient portfolio of properties in great locations drives our consistent leasing volumes.

Over 2.6 million square feet of tenant expansions in our portfolio since our IPO, quite significant relative to our entire portfolio that totals 9.3 million square feet today proves the value of our market proposition. I would like to share some words from recently signed tenants as to why they chose ESRT’s buildings. All of the following are quotes. “Industry-leading facilities and client services. Iconic. Prime location. Blend of heritage and contemporary design. Top-tier amenities. Forefront of sustainability. Astute partner. Commuter-friendly. Energy efficient. Bolsters teamwork and innovation.” That is the end of the quotes from tenants. You can see more tenant testimonials on Slides 11 and 12, of our investor presentation. The right offices and the right buildings at the right prices and the right locations with the right landlord, are critical components of company culture and employee collaboration, recruitment and retention.

ESRT’s leasing successes are built upon the $1 billion we invested and portfolio upgrades to consolidate floor plates and gut renovate our buildings so that our assets are fully modernized, leaders in energy efficiency, competitive and attractive to lease. We maintain a best-in-class balance sheet, and that makes a big difference to tenants and brokers in today’s environment. And we service the deepest segment of the tenant demand of the New York City office market at our accessible price points. 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 remain absolutely focused. And we believe with the right capital partners with whom we can share our balance sheet and expertise, the current debt issues create opportunities for us to grow that success amongst select additional office buildings.

The Observatory continues to perform. 2023 saw the Observatory NOI return back to pre-COVID levels. And that was just with 20 — excuse me, just with 73% of the admissions relative to 2019. For years, we have put in the hard work to build exceptional brand awareness of our iconic, authentic brand. In 2023, the Empire State Building had over 388 billion global media impressions and generated globally nearly $800 million in advertising value equivalency. The Empire State Building Observatory is the authentic New York experience and was ranked the number one attraction in the United States by TripAdvisor for the second year in a row. Our Observatory’s cash flows are reliable through all economic cycles, new competition and a pandemic, as shown on Slide 13 of our investor presentation.

We now focus on year-over-year NOI growth. 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 to achieve return for our investors, be it capital recycling, new acquisitions or share repurchases. ESRT has been the quantitative sustainability leader for more than a decade, and sustainability is integrated into every decision we make from property to FP&A and reporting. Our industry leadership and sustainability and healthy building performance matters more and more each year to tenants who come to us based upon our reputation for successful partnerships with companies and their employees and sustainability. This quarter, we were pleased to be recognized as one of Newsweek’s most responsible companies.

And on the governance front, we were awarded Governance Intelligence’s 2023 Corporate Governance Award for Best Small Cap proxy statement and nominee for best shareholder engagement. ESRT’s 2024 priorities remain unchanged. Lease space, sell tickets to the Observatory, manage the balance sheet, and achieve our sustainability goals. These actions together enhance shareholder value. We are in a position to take advantage of opportunities created through market disruptions and capital dislocation. We believe in New York City, and we have four diverse ways to play it, an office portfolio that is the top of our tier and targets the deepest market segment. Our observatory, that is the number one ranked attraction in the United States. Our high foot traffic everyday street retail, and a growing multi-family platform.

Tom and Christina will provide more detail on our progress and how we plan to accomplish these goals in 2024. Before I hand things over to Tom, a big congratulations to Christina for her just announced promotion to President; and Steve Horn, to EVP, CFO and Chief Accounting Officer. In Christina’s nearly four years with ESRT, she has grown with experience, led with strength, contributed materially to the sector-leading successes of ESRT, and has been a great partner. Her well-deserved promotion recognizes her capabilities, responsibilities and value-add to ESRT and reflects our success in the attraction, development, and promotion of talent for our present and future opportunities. I will let Christina comment more directly on Steve. And I assure you that I have no plan to depart ESRT, and Tom Durels is as committed as ever.

Now on to Tom.