Empire State Realty Trust, Inc.

Greetings, and welcome to the Empire State Realty Trust third quarter 2020 earnings call. At this time, all participants are in a listen-only mode. A 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. I would now like to turn the conference over to your host, Mr. Anthony Malkin, Chairman and CEO. Please go ahead, sir.

Good afternoon. Thank you for joining us today for Empire State Realty Trust's third quarter 2020 earnings conference call. In addition to the press release distributed yesterday, the quarterly supplemental package with further detail on our results and our latest investor presentation were posted in the investor 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 a company's performance. The definitions and reconciliations of these measures to 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. ESRT continues to adjust on a daily basis to smooth tenant reentry, collect rents, manage observatory visits, assist survival of our local retail tenants, and ensure ESRT employee safety. Our tenant presence in our buildings in our greater New York metro area has grown materially to 45% in our Westchester properties and 55% in our Connecticut properties. Our New York City buildings continue to see slow growth off a low base, with the lowest utilization by our largest Our lower New York City physical occupancy impacts our retail tax, and that is where we have targeted our proactive work, a temporary shift to percentage rents in order to help these small businesses survive. Visits to the Empire State Building continue to grow off a very low base, with roughly two-thirds of our typical visitor traffic from overseas. Potential attendance is limited by reductions in capacity to maintain our stringent COVID-19 protocols and also by border controls against interstate and international tourist travel. The Empire State Building Observatory 86-floor deck reopened on July 20th, and the 102nd floor reopened on August 24th. Despite the travel restrictions, we have seen steady weekly increases in visitors. Through October 25th, attendance was at nearly 6% of 2019 comparable period attendance, an improvement but below the 10% projection hypothetically set forth earlier by us for traffic in October. We are fortunate to be well positioned to manage the challenges that we face with our flexible balance sheet, continued success with collections, successfully implemented cost reduction measures, and new management team members. All this works to our advantage as we look to utilize our balance sheet flexibility, no current requirement to pay a dividend, and look at ways to deploy our capital to buy back our stock and pursue external growth. Our more than a decade of industry-leading focus on indoor environmental quality has positioned our buildings for our tenants to return safely to their offices and to compete for new tenants. ESRT has the first U.S. commercial portfolio to achieve the Well Health Safety Rating, an evidence-based, third-party verified rating for all facility types focused on operational policies, maintenance protocols, emergency plans, and stakeholder education to address a post-COVID-19 environment now and broader health and safety-related issues into the future. This rating validates our work to provide tenants with healthy and safe environments. Additionally, our foresight and planning around energy efficiency means the company has no fines in 2024 under New York City's Local Law 97 to reduce greenhouse gases. While the macro environment remains challenged and the outlook is uncertain, I feel confident that work done to position ESRT for the long term to thrive and deliver shareholder value leaves us in an enviable position compared to others. To summarize, we have spent over $1 billion as part of our redevelopment work to modernize our properties for the 21st century. with a focus on energy efficiency and indoor environmental quality. We have consolidated previously-demised smaller spaces and redeveloped them for new, bigger, and better credit tenants on longer leases. We lead in the areas of energy efficiency, indoor environmental quality, and sustainability, which I will cover in more detail shortly. We maintain a flexible balance sheet to execute our strategy and take advantage of potential opportunities that may arise. We have undertaken a series of broad-based and proactive cost cuts to address the current macro environment, and we continue to evaluate further actions. ESRT's leadership and redevelopment and our focus on energy efficiency and indoor environmental quality comprise our competitive edge. Our buildings and their unique combination of location, value, and leadership in sustainability and indoor environmental quality could never have been more necessary. In a post-COVID world where health and safety are paramount, tenants are focused on the provision to their employees of a clear pathway to return to the office, To demonstrate our leadership position, we applied and were awarded the Well Health Safety Rating, the most stringent third-party standard in the world to verify a safe and healthy workplace. ESRT is the first and only commercial portfolio in the United States to achieve this rating. This third-party rating is a validation of the work that we have done for more than a steps that we have implemented to improve indoor environmental quality in our portfolio. The $165 million redevelopment completed in December 2019 of the Empire State Building Observatory mitigates direct, indirect, and aerosol transmission of COVID-19 and other viruses through MERV 13 filtration, increased fresh air ventilation, and bipolar ionization air purification. Similar measures have been made to upgrade health, safety, and indoor environmental quality protocols throughout the ESRG entire portfolio. Our well rating is just one representation of the work we are doing in ESG under the leadership of Dana Robbins Schneider, our Senior Vice President of Energy and Sustainability and Director of ESG. Earlier this year, we announced our intent to participate in the GRES Real Estate Assessment, and based on initial feedback, we feel quite confident that when the final results are available later in November, our accomplishments will be clear. With more than a decade of work in this area, Dana's leadership and the cooperation of our entire team of ESRT colleagues I am confident that our decision to measure ourselves through several widely accepted metrics on sustainability will be rewarded with good results. Our focus is not just on our leadership and preservation of the environment. We also have a major focus on the social aspects of ESRT's participation in our larger community. To that end, I would refer you to our new slide, through 30 in our investor presentation. As Walter Gretzky advised his son Wayne, our focus is to, quote, skate to where the puck is going, not to where it has been, unquote. Our investors should expect in the future to see increased communication of our ESG leadership, actions, and commitments. This is all part of ESRP's continued efforts to adapt to the involving environment with the ability to flex and pivot, all the while with a focus on our goal to deliver long-term shareholder value. We continued to engage in share repurchase activity at our stock's significantly discounted public market pricing. In aggregate, we have purchased $133 million of our common stock at a weighted average price of $8.33 through October 27, 2020. At quarter end, we held $373 million in cash, which provides us with an operating runway amidst an uncertain macro environment. We also have our $1.1 billion line that is undrawn at this time. We continue to evaluate opportunities to deploy capital for external growth focused on opportunities in which our balance sheet strength and our redevelopment expertise can be brought to bear. To date, we have not seen widespread distress as lenders have generally been accommodated to borrowers and there have been few investment transaction data points. Our new investment team, led by Aaron Rassner, makes progress every day on our efforts to find value opportunities for our investors. That said, we are a marathon, not a sprint, and we will deploy capital when an opportunity presents itself that will lead our growth in the next cycle. Switching gears, here's an update on the observatory now that we've been open for just over three months. Our focus on indoor environmental quality, in which we've been leaders for more than a decade, yielded air filtration from MERV 13 filters, an aggressive response to viruses with active bipolar ionization, and a massive capacity to ventilate the observatory, all as part of our redevelopment. When combined with comprehensive protocols and employee training, this allowed us permission to reopen on July 20th and of other attractions in New York City. Observatory revenue for the third quarter, 2020, was $4.4 million. That included the following components. $2 million of deferred revenue from unused tickets that we were able to recognize and earned income from tour and travel partners, as well as $1.2 million of fixed license fee for the gift shop. Observatory expenses were $5.9 million in the third quarter of 2020. This represents a reduction from a $35 million annualized expense run rate pre-pandemic to a current $25 million annualized run rate for 2020 driven by reduced hours of operations and staffing. Month-to-date through October 25th, Attendance is at nearly 6% of 2019 comparable period attendance, a gradual improvement but below the 10% projection for traffic in October. This is a slow-going bill that is strong next to other comparable attractions. Visitation is primarily retail and website-driven, which bolsters revenue per cap to its highest level in our history. amongst the tri-state market. This is consistent with our anticipation that initially we will have a higher local visitor mix, followed by a ramp-up of regionally then nationally sourced travel, and then followed by a restoration of our typical visitor mix that is approximately two-thirds international that will not be achieved until our anticipation of a broad resumption of international air travel sometime in 2022. No attraction in any city has a higher brand value and international recognition than the Empire State Building Observatory. Authentic and iconic. Lonely Planet's second annual bucket list just rated the Empire State Building the number one attraction in New York City. We believe that when the pandemic passes, we will emerge stronger than ever, as the enduring brand and icon of New York City and its resilience. As I've communicated previously, there are certain fixed staffing and operational costs, regardless of volume levels. Yet we continue to look for ways to optimize our cost base. We believe that we have ample bandwidth in our current cost structure to handle our anticipated wrap-up and admission volume Finally, I would like to reinforce our optimism and enthusiasm for New York City. It is possible both to be a realist about where we are and to be confident in our future. The passage through COVID-19 has four phases. Lockdown, number two, pre-vaccine therapy treatment, number three, post-vaccine therapy treatment, and number four, cleanup and restart. This phase four is important. The day after Woodstock, Mr. Gasker could not simply go and plow his fields and plant crops. He had to clean up the stage, speaker towers, fences, cables, bottles, cans, sleeping bags, and other human debris. Similarly, there will be work and investment required to restart our economy. I've said for some time now that I think we will know our bottom in Q1 2022. and that growth recommences from that point. ESRT has the runway and continues to work to make the most of the environment in which we find ourselves from the balance sheet, capital allocation, expense, CapEx, and organizational perspective. With that, I would like to turn the call over to Tom Durrells.