Empire State Realty Trust, Inc.

Greetings and welcome to Empire State Realty Trust's third quarter 2021 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. It is now my pleasure to introduce Tom Keltner, Executive Vice President and General Counsel. Thank you. You may begin.

Good afternoon. Thank you for joining us today for Empire State Realty Trust's third quarter 2021 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 was posted in the investor 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, and proposed transactions and events. 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. 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 GAAP measures are included in the earnings release and supplemental package, each available on the company's website. Finally, as a special note, last night we filed an 8K to announce our conditional agreements for the purchase of two multifamily assets in Manhattan, totaling 625 residential units, for a total purchase price of $307 million. We consider it worthy of an 8K because this is the first acquisition by ESRT since our option properties in 2014. It is a new asset class within New York City, and our external growth has been a significant focus within the investment community. Our 8K disclosed the key elements of asset type, size, location, and price. Additional detail is not currently permitted under the seller's confidentiality requirements. After the acquisitions close, we will provide more detail. For now, we want to be clear that this is a voluntary filing for the reasons mentioned, and in the future, we would not expect to announce acquisitions absent special circumstances involving asset class, geography, or size. Now, I will turn the call over to Tony Malkin, Chairman, President, and Chief Executive Officer.

Thanks, Tom, and good afternoon to everyone. This is a super busy time for ESRT. I have a lot to discuss, so please bear with me. New York City's recovery is slowly and steadily underway. Schools reopened, trains and subways more crowded, and there is traffic. Apartment occupancies have increased, and rents are back to and beyond in many instances 2019 levels. Restaurants and entertainment attractions are open and busy. Try to get a reservation on a Wednesday through Saturday night or for Sunday brunch and be prepared for disappointment. Herald Square, Times Square, Soho, all busy again. Even the New York Times, which has for more than a year practiced an apparent editorial policy of bash New York City at every opportunity, published an article on Sunday titled, quote, to get ahead at work, lawyers find it actually helps nothing. to actually be at work. The article goes on to say, and I quote, amid the ranks of 20 and 30-somethings is a large and growing group of employees who, for reasons part careerist and part emotional, increasingly crave the office as well. Nearly two-thirds of millennials expressed concern about a lack of connection with colleagues more than any other age group, close quotes. Building utilization had a Delta variant dip and now has continued to pick up to around 30% for our Manhattan office portfolio and 51% for our greater New York office portfolio of comparable 2019 numbers. To be clear, our pandemic low was below 3%. People have begun to recognize that work community matters. Learning, teamwork, performance reviews, promotion are incredibly hard, if not impossible, for most to execute remotely. Socialization matters. In the absence of it, the concepts of, quote, hybrid, unquote, and, quote, flexibility, unquote, will carry different meaning for different companies. It is not one size fits all. I still believe the office industry in New York City will not move fully to our front foot. and the storyline and the press will not change until after the first quarter of 2022. As Tom Durrells will discuss, we see the return of activity on long-term leases as tenants contemplate their future space needs post-COVID. A sizable amount of our current activity is related to expansion of current tenants, excellent tenants. We continue to attract great companies who see us as long-term partners in their real estate needs and, with the rare exception, who want to grow with us. Our properties continue to benefit from the flight quality trends spoken of broadly in the market, and we see it in leasing activity underway and our results. ESRT is well positioned. Our assets are excellently located for commutation, modernized for the 21st century, industry leaders in energy efficiency and indoor environmental quality, and available at prices which range from the high 50s to the mid 70s per square foot based on current asking rents. We make modernized buildings, IEQ, and energy efficiency accessible to the thousands of tenants to whom these are driving factors and decisions and whose class A options and class B options largely fall short and therefore do not match our comprehensive suite of monitored and verified base building and tenant standards for energy efficiency, healthy buildings, and sustainability, even if they can afford or want to pay triple-digit rents for brand-new buildings. Our IEQ-certified pre-builds with full indoor environmental quality suite of MERV 13 filters, fresh ventilation, and active bipolar ionization lease very well. We also can accommodate full and multiple floor requirements. This price accessibility to energy efficient, healthy, sustainable spaces for a wide range of businesses, not just those that pay triple digit rents, is part of the flight to quality movement. Importantly, we attract and sign leases with tenants who are attracted to these qualities. We are happy to share ESRT's just-announced results in our second year of GRESB submission and scoring. ESRT achieved the highest possible GRESB five-star rating for the second consecutive year. Perhaps most importantly, our actual score was 94, a six-point increase from our first year of participation in 2020, and that is the second highest score within our peer group nationally. Additionally, we received a score of 96 and an A rating in the public disclosure assessment, which measures ESG disclosure activities for the second year in a row. Our industry leadership in energy efficiency, sustainability, and IEQ continue to set the industry standard while we show annual improvement. We look forward to our second annual sustainability report publication in spring 2022. Shifting to our observatory operations, as announced on October 15th, the U.S. will reopen its border to fully vaccinated international tourists effective November 8th. Early indications from our tour and travel partners who serve this market indicate an uptick in sales post this announcement. We are very happy that we have reached this point and look forward to a restoration of international visitors to the ESB observatory. Our visits continue to improve along with our revenue per caps. Observatory NOI was $6.4 million for the third quarter 2021, which is the second consecutive quarter of positive NOIs since the onset of the COVID-19 pandemic, and more than double the second quarter 2021 earnings contribution. The growth in NOI illustrates the progression from the closure period and to Q 2020 through the steady wrap-up over the past year visitation has been primarily driven by domestically sourced travel at this retail on-site and website sales customer satisfaction is at high levels driven by our time ticketing reservation system that enables us to manage volume and peak periods our immersive museum quality exhibits and and our focus on safety with top-of-the-line indoor environmental quality, including MERV 13 filters, ventilation, and active bipolar ionization. Visitors to New York City, both domestic and international, want to visit this iconic and authentic destination and are willing to pay for the distinctive experience we offer. Third quarter attendance was at approximately 24% of 2019 comparable attendance, a continued improvement. From 2020 and the prior quarter, we registered strong July and early August visitation. Attendance for the second half of the third quarter was impacted by a resurgent Delta variant and sustained U.S. border closure to international tourists. We have no new hypothetical admissions forecast. Our last was in our September 21st investor presentation update. Month to date through October 26th, Attendance was at 24% of 2019 comparable period attendance above our revised hypothetical October admissions forecast of 20%. Our hypothetical admissions forecast suggests that we can reach 60% of 2019 attendance levels by the end of 2021 and return to 100% by the end of 2022. Remember two points for your modeling. One, We believe we can maintain our current observatory operating cost structure up to approximately 60% of our 2019 attendance. We will continue to manage tightly expenses given the gradual pace of ramp up, including how we have tweaked our operating hours and staffing accordingly. Second point, with more international inbound tourists, we should see lower revenue caps, growth from our lower margin passes and online travel agent tourist visitors. A quick note on competition. The past program data we have received indicate we are the number one redeemed observatory by an increased margin over number two. Cannibalization of the second visit market is underway and will increase with the summits opening this past week. We believe there is a large enough market for multiple attractions to do well. We remain the only authentic, iconic attraction amongst all the observatories in New York City. We have demonstrated repeatedly over time our ability to compete when other observatories, including Top of the Rock, One World Trade Center, and The Edge, opened. We remain the only office building in the world to which you can address a letter from anywhere in the world with only Empire State Building and be certain of its delivery. We continue to operate competitively and nurture and invest in our iconic brand to command our leading position. We are confident in our continued ability to do so. We can't finish these discussions without a word on the recently announced purchase of the Edge by KKR. While we are not in a position to share inside information on this transaction, what we can share from publicly available information is very positive for ESRT and our jewel, the ESB Observatory. A smart, sophisticated, institutional buyer stepped up and bought ahead of the full recovery of tourism, a majority economic interest subject to a management agreement. There was debt in place on the edge at the time of the acquisition. The projections the summit shared in materials that have been disseminated broadly enough for us to see them predicted a lower visitor volume at lower per caps than ESB's historic attendance and current pricing. As to the edge, our analysis based on the number of elevators, loading time, and elevator speed indicate we have an hourly capacity roughly 50% greater. Our takeaway on this is that this sale coupled with a very strong level of financing proceeds attained by one Vanderbilt, also during the lull in tourist visits, show these are valuable assets which attract institutional interest and that these are price discovery transactions, not fully priced. We feel very encouraged that our higher capacity and our newly redeveloped authentic icon of New York City with record per cap revenues since we reopened by reservation only, should be valued at a significant premium to all these alternative transactions. We also feel very confident that our brand and our position remains unparalleled and stronger than it has ever been. Turning to external growth, as Tom Keltner noted, we filed an 8K regarding potential acquisitions. Additional detail is not currently permitted under the seller's confidentiality requirements. After the acquisitions close, we will provide more detail. The transaction is consistent with our previously stated focus on New York City office, retail, and multifamily assets. We like the multifamily asset class and have a long institutional history of experience in multifamily assets by our predecessor entities and via Malkin Holdings. remaining work to do before we close, and at that time, we will be prepared to provide more comment. In the interim, our investment team continues actively to underwrite new office, retail, and multifamily acquisition opportunities, and we remain well-positioned with our flexible balance sheet as we continue to seek ways to deploy our capital through disciplined external growth opportunities. ESRT has a well-honed operational skill set, flexible balance sheet, disciplined track record of capital allocation, and ESG leadership position, all to deliver long-term shareholder value. The team works well and hard as we press forward. Now, I will turn it over to Tom Durrells.