Empire State Realty Trust, Inc.

Greetings and welcome to the Empire State Realty Trust second quarter 2020 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Thomas Keltner, Executive Vice President and General Counsel at Empire State Realty Trust. Thank you. You may begin.

Good afternoon. Thank you for joining us today for Empire State Realty Trust's second quarter 2020 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 presentations, were posted in the Investors section of the company's website at EmpireStateRealtyTrust.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, and expense. As a reminder, forward-looking statements represent management's current estimates They are subject to risks and uncertainties, including ongoing developments regarding the COVID-19 pandemic, 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. Certain of our disclosures today are added specifically in response to the SEC's direction on special additional disclosure due to the changes in our business prompted by the COVID-19 pandemic and are unique to this instruction. We do not expect to maintain the same level of disclosure when we resume normal business operations. Finally, during today's call, We will discuss certain non-GAAP financial measures, such as FFO, modified and core FFO, NOI, cash NOI, and EBITDA, which we believe are meaningful in evaluating the company's performance. The definitions and reconciliations of these measures, 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, Chairman, President, and Chief Executive Officer.

Thanks, Tom, and good afternoon to everyone. It takes a moment to grasp the magnitude of the dynamic situation we all have confronted and continue to confront since we last reported results. That we have adapted to the constant change, flexes, pivots, and challenges as a new normal that our efforts to respond have been effective, and that we are prepared to continue this way for an indeterminate period of time through the end of the pandemic are all testament to the team that is ESRT. We have made hard choices that have resulted in a great deal of change in our organization, reduction in force and cost, and positioned us on our front feet to preserve and create value for our shareholders. I'd like to take a moment to say thank you to my colleague, John Kessler, and to extend to him once again my best wishes and those of our board in his next endeavors. At the same time, a public welcome, thanks, and congratulations on a remarkable first three months to our new CFO, Christina Chiu, who has worked literally nonstop since her arrival and added a tremendous amount of value to ESRT and its stakeholders. We are all better from her contributions and will greatly benefit for years to come. Let me say clearly, I have a great deal of confidence in the future of New York City and the importance of office buildings to the teams and our current tenants and the tenants to come who will create the value that will lead our economy forward and that the legions of young, smart, motivated individuals who have been and are attracted to this great city will continue to come and make their mark in yet another reinvention of our American dream, a better, more compassionate, and inclusive American dream. ESRT is committed to continue to change, to be a part of that reinvention for the good of our city, its people, and the economy. That makes us the only capital of the world that is neither a capital of a state nor country. We can and we will. CSRT's leadership and innovation and redevelopment is our competitive edge. Our buildings and their unique combination of location, value, and leadership and sustainability of indoor environmental quality have never been more necessary and have never had a better competitive edge. ESRT as a company has also undergone tremendous change and has never been better positioned for the future. Here's a brief recap of what we have done, where we are, and a look at where we will go. Our plan at our IPO was to modernize our properties for the 21st century, consolidate old spaces, and redevelop them for new, bigger, better credit tenants on longer leases. We're going to lead in energy efficiency, indoor environmental quality, and sustainability. We would maintain a strong, flexible balance sheet to execute our strategy and take advantage of potential opportunities that may arise. Our redevelopment plan is largely completed. We only have leasing of our remaining redeveloped space and a small amount of space left to redevelopment. Our four-year redevelopment of the observatory was completed in December 2019. Two fantastic customer reviews and produced strong revenue growth in the first two months of 2020. We believe this long-life investment will yield the best results in the future once tourism returns to normal, and we are thrilled amid uncertainty and challenges to have reopened the observatory as of July 20th. We avoided external growth at market peak pricing. We only commence stock repurchases when our stock price drops steeply. steered away from co-working and other short-term fads that are visible for what they are in this new environment. We leased to tenants who filled the spaces they initially leased and then expanded by more than 1.7 million square feet to date. As of the end of the quarter, we held $873 million in cash on hand. We continued to engage in share repurchase activity at these depressed valuation levels. In the aggregate, we have purchased $119 million of our common stock at a weighted average price of $8.67 per share through July 28, 2020, through a combination of open window purchases and an in-place 10B51 program. We believe current shareholders will benefit long-term from our purchases. We finalized a series of management changes during the quarter as we, in close consultation with our board, rolled out thoughtful plans for ESRT version 2.0. We laid out our plans to the board in late 2018. As we can see, it was time for us to move from our plans at IPO into logical new areas of focus for ESRT with both new personnel and perspectives. Let me briefly review some of the key new hires and appointments. we made over this period. Suresh Rangarajan as our new Senior Vice President and Chief Technology Officer. Dana Robin Snyder, our new Senior Vice President and Director of Energy and Sustainability. Christina Chu as Executive Vice President and Chief Financial Officer. Aaron Ratner as Senior Vice President and Chief Investment Officer. And an internal appointment of a Director of ESG. Importantly, Aaron has hired two of the three additional team members we agreed during our discussions with him would position us to generate and evaluate opportunities and deploy capital for external growth focused on opportunities in which our balance sheet strength, buy and hold philosophy, and redevelopment expertise can be brought to bear. We are in a marathon, not a sprint. We will deploy capital when an opportunity that will lead our growth in the next cycle to present itself. We anticipate opportunities will arise during the next three to four years in which we, as omnivorous opportunivores, will focus our potential to expand to create long-term shareholder value. Our team has risen to all the challenges that have arisen from the COVID-19 pandemic as we pivot and flex our way through. We have gone from a shelter-in-place environment to a return to the office and our Connecticut properties first, then to a phased implementation process in New York with the gradual return of our office and retail tenants. Our assets are well positioned for changing tenant demands on indoor environmental quality with the work we have done as part of our redevelopment efforts. We have met and will meet each challenge with our best organized plans and successful execution born out of our experience with many different cycles. strong balance sheet in hand, we have also undertaken a rigorous review of our cost structure. My experience through six crises in this business has led us to move prudently and swiftly to reduce operating costs, DNA, CapEx, and headcount. As disclosed in our earnings release and on page 14 of the investor presentation, in our first round of rationalization, we have undertaken cuts to reduce our 2020 general and administrative expenses by 12% to $60 million. Property operating expenses and building improvements, capital expenditures have also been reduced, and Tom Durrell and Christina Chu will go into more detail. Let me provide some highlights. We have implemented broad-based corporate property-level base salary reductions through year-end, respective August 1st, starting at the top, with my 33% reduction, followed by Tom Durrell's 25% reduction and scaling down from there. This is in addition to the salary reduction to $1 that I took in the second quarter. Furthermore, we announced that upcoming 2021 NEO annual equity compensation will be reduced by $3.9 million, which consists of $2.7 million for me and $1.2 million for Tom Durrell. We have made permanent headcount reductions as well as instituted departmental budget cuts. This is in addition to COVID-19 related cost savings. We reduced property operating expenses by $10 million in the second quarter and expect further to reduce expenses by $12 million in the second half of 2020. We expect additional savings from a combination of staffing reductions and operational improvements. Furthermore, we reduced building improvement capital expenditures planned for 2020 by $24 million relative to 2019 levels. These broad-based cost cuts are a start of our efforts to address the current environment, preserve the balance sheet, and position ESRT in the long term to thrive and deliver shareholder value. I say start, as we are not done. It will take additional measures to reduce costs further after we digest what we have put in place so far. We will see the bright, shiny penny of work from home taunt us further in the post-COVID environment. We share the belief that the vast majority of businesses that work from home diminishes productivity, team building, and culture. Companies that show up and build personal relationships and develop new products and services will always win. That said, we see the pandemic business environment in four phases. First, lockdown. Second, post-lockdown, pre-vaccine or cure. Third, post-vaccine or cure. Fourth, cleanup and situation assessment. We are not naive about the current environment. There is no doubt that we will see economic challenges from higher unemployment levels and business failures. We expect the current environment to continue to evolve, but we feel well-prepared and ready to flex and pivot to handle whatever challenge lies ahead. That said, New York City is the greatest global economic and cultural capital, and one to which people will return for work, to live in, and to visit. New York City has come back time and time again from shocks, recessions, and tough environments, stronger each time. We'll have an opportunity to touch on these themes more in Q&A. And for now, I would like to turn the call over to my colleague and friend of three decades, Tom Durrell. Tom?