Empire State Realty Trust, Inc.

Greetings and welcome to the Empire State Realty Trust fourth quarter and full year 2020 earnings call. At this time, all participants are in a listen-only mode. The 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 Tom Keltner, General Counsel, Thank you. You may begin.

Good afternoon. Thank you for joining us today for Empire State Realty Trust's fourth 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 presentation 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 to the most directly comparable gap 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, President, and Chief Executive Officer.

Thanks, Tom, and good afternoon to everyone. We continue in 2021 to flex... and pivot to facilitate employee and tenant reentry to our buildings with confidence in our indoor environmental quality measures. We collect rents, manage expenses, promote Empire State building observatory visits, and support our smaller retail tenants. Our tenant presence remains relatively unchanged as many tenants plan their return to the office around the widespread rollout of vaccinations. We reached just under 15% building utilization in our New York City properties and just under 40% building utilization in our greater New York metropolitan area properties prior to the presently abating virus surge. We are now at approximately 12% and 31% respectively. Visits to the Empire State Building Observatory continue to grow off a very low base. That said, our visitation is higher than any other observatory with no discount offered and fantastic visitor feedback from our largely local visitorship to our attraction that features MERV 13 filters, ventilation, and active bipolar ionization. We are very fortunate to be well positioned to manage these changes with our flexible balance sheet, stabilized collection levels, and successfully implemented cost reduction measures. We had $527 million of cash on hand and no drawdown on our $1.1 billion line as of 12-31-20. All this works to our advantage as we look to utilize our balance sheet flexibility and seek ways to deploy our capital through the repurchase of our stock, and we review external growth opportunities. In 4Q-2020, we further refreshed our board of directors with the addition of Grant Hill. That expands our board of directors to nine directors. The additions of three new board members, Patricia Hahn, Paige Hood, and Grant Hill, over the last two years has brought expertise in digital commerce, real estate investment, and branding to our board. While the macroeconomic environment remains challenged in the near term, we believe in the long-term prospects for New York City and the office sector. Since the last quarterly earnings call, there have been several vaccines approved and distribution has begun. We assign new leases and tenants with whom we speak, including our largest tenants with whom I speak personally, have expressed the desire to return to the office once there is widespread vaccine distribution. Work from home is maintenance, not growth and competition. And we believe firmly that when people are in the room where it happens and miss the conversations and hallway validation when they click off the video conference, people will want to be in the office. Executive teams will encourage employees to return to the office to nurture their corporate cultures, stimulate collaboration and teamwork, and provide mentor and development opportunities to junior staff and onboard new talent. We know that firsthand. We have been in the office since July, and we have accomplished an incredible amount through that time. I believe that ESRP is well positioned to thrive and deliver long-term shareholder value. As I noted on our last earnings call, we were poised to announce the results of our first-time-ever participation in GRASD's real estate assessment. We are quite pleased with the results. We earned a five-star rating and a green star recognition, a score of 88, which places us in the top 20% of all respondents, and an A rating on public disclosure. This third-party outcome validates our decade-plus of commitment and work in energy efficiency, sustainability, and indoor environmental quality. ESRT received further recognition shortly afterwards with FitWell certification across 6.7 million square feet, or 83% of our Manhattan portfolio. We were awarded FitWell one and two star ratings on six assets and named a FitWell champion. Combined with our Well Health Safety rating for our entire portfolio, the first portfolio so rated in all of the Americas, we demonstrate that our buildings offer a unique combination of location, value, and leadership in sustainability and indoor environmental quality. We believe this offers us a competitive edge in a tenant-driven marketplace that increasingly focuses on ESG. We are pleased to announce that our portfolio is now 100% powered by renewable wind energy. This action builds upon our earlier success with the Empire State Building, which has been 100% renewable powered for a decade. We will continue to communicate in the future about our ESG leadership, actions and commitments, and look forward to publishing our first sustainability report this spring. Switching gears to capital allocation on our balance sheet, our balance sheet flexibility provides us with an operating runway amidst an uncertain macro environment as well as the ability to engage in share buybacks at attractive discounted valuations and evaluate opportunities to deploy capital for external growth focused on opportunities in which our balance sheet strength and redevelopment expertise can be brought to bear. To date, our investment team continues actively to underwrite value opportunities, and we are open-minded in the types of deals we will consider. That said, We're in a marathon, not a sprint, and we will prudently deploy capital when an opportunity presents itself. Moving on, here's an update on the observatory. Observatory revenue for the fourth quarter 2020 was $5 million. That included $1.3 million of deferred revenue from unused tickets and earned income from tour and travel partners, as well as a $1.5 million fixed license fee for the gift shop. Observatory expenses were $5.6 million in the fourth quarter 2020, and we expect run rate expenses to be approximately $6.6 to $7 million per quarter, depending upon the pace of visitor ramp up. We also revised our hypothetical observatory admissions shown on page 15 of the investor presentation. We have modeled a slower ramp up in admissions in 2021 than in the near term reflects the high COVID case count, ongoing travel restrictions, and slow vaccination progress to date. That said, we believe the greater number of approved vaccines and approved distribution rates will lead to increased travel demand in 2021. We still expect to reach 60% of 2019 attendance levels by the end of 2021, and returned to 100% by the end of 2022. With roughly two thirds of our typical visitor traffic from overseas, potential attendance is limited by travel restrictions for interstate and international tourist travel. Despite these impediments, we have seen steady weekly increases in visitors. Year to date through February 14, attendance is at nearly 9% of 2019 comparable attendance, a gradual improvement and slightly above the 8% projection for traffic in February. This slow rebuild is better than other comparable attractions. Visitation is primarily retail and website driven, which bolsters revenue per cap. Also, pricing actions we have taken, including increases during peak sunset hours and on the 102nd floor observation deck tickets, have improved mix and revenue per cap. Visitors remain focused on health and safety, an area where we are well positioned with our focus on indoor environmental quality. Our redevelopment program led to the installation of MERV 13 filters, bipolar ionization with AtmosAir, and the ability to ventilate the observatory, which provides visitors with peace of mind when they visit. The vast majority of ticket sales are domestic. and concentrated amongst the tri-state market with some sales from other large population states such as Florida, Texas, and California. And the online reviews speak for themselves. Our primarily hometown New York City visitors love it. 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 a broad resumption of international travel that we anticipate will occur sometime in 2022. I have said 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 balance sheet, capital allocation, expense management, ESG, and organization perspective. One more comment before I hand the call over to Tom Durrells. I have been incredibly fortunate to be surrounded by EVPs, SVPs, VPs, other non-union colleagues, and union team members who run to the fire, not away from it. We have risen to every challenge. We have improved and reworked and improved again, with more improvement underway as I speak. I have to give a special call out to two relative newcomers, Dana Robin Schneider, our SVP and Director of Energy, Sustainability, and ESG, and Christina Chu, our EVP and CFO. These two professionals have quickly earned my respect, gratitude, and appreciation that typically takes years, if ever, to be earned from me. I and your ESRT colleagues of longer tenure enjoy and benefit from our work with you. As for the rest of ESRT, we have had babies, caught COVID, protected our buildings from riots and looting, leased and pivoted and flexed so many times that literally not one single day is the same as the one before. Our board has been supportive and questioning every step of the way, with more direct outreach to our large investors than ever before and genuine concern for our well-being and support for our mission. It has been a great reward to work with fantastic people on behalf of our stakeholders, and I look forward to it for years to come. And now, ladies and gentlemen, Tom Durrells.