Greetings, and welcome to the Empire State Realty Trust First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] 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.

Good afternoon. Thank you for joining us today for Empire State Realty Trust first 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 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. Now, I will turn the call over to Tony Malkin, our Chairman, President and Chief Executive Officer.

Thanks, Heather, and good afternoon to everyone. What a great day it is and how pleased we are to report solid first quarter results to start the year to provide updates on strong leasing, balance sheet recycling and observatory results, and discuss our positive outlook for the rest of 2023. Our more than a decade's focus on modernization amenities, energy efficiency, indoor environmental quality and a strong balance sheet really puts us in a good place. We are in a great position with a differentiated balance sheet and multiple value drivers. We are able to act in and benefit from the current environment and in the first quarter of 2023, we did. We are New York City focused landlord with four diverse drivers of income: office, our observatory experience, retail and our growing multifamily portfolio, as shown on Slide 4 of our new investor presentation. We are primed to take advantage of New York City's recovery, resiliency and progress towards a new normal. According to the Department of Labor, New York City office use employment now exceeds pre-pandemic levels, and the narrative around in-office work has changed for the better. Yes, there is a cohort of employees cast adrift by the vanished troop bowls, pampering and compensation and retention, based on whether they return to the office or stay at home and complain. We focus more on the new narrative, about the importance for companies to gather in-person, to plan, mentor, learn, build and execute together and move forward towards and through uncertain times. This is a cycle. And it is a down cycle right now, one about which we spoke and for which we prepared for years, with a fortified balance sheet with low leverage. ESRT's modernized portfolio is well amenitized, leads in healthy buildings, energy efficiency and indoor…

Thanks, and good afternoon, everyone. I want to emphasize what Tony just said. We invested nearly a billion dollars into our assets to create fully modernized buildings, build new amenities and new tennis spaces with our leading IEQ and healthy building standards, which we deliver at a compelling price point. What we know from past cycles is that those buildings, which capital has not been invested, are the ones that inevitably suffer the most. And owners with great balance sheets make a difference to brokers and tenants. We've done the work, invested the capital, and had the balance sheet to put us in a position to compete and win deals. As a result, we have continued to increase our Manhattan office portfolio occupancy and lease percentages. Occupancy in our Manhattan office portfolio increased by 180 basis points over the last quarter and increased 390 basis points over the past 12 months. The least percentage in our Manhattan office portfolio increased by 110 basis points compared to last quarter and was up 210 basis points compared to a year ago. We delivered positive market to market spreads for the seventh quarter in a row, and most of the 202,000 square feet to of total leasing volume this quarter was for new leases in our Manhattan office portfolio, where we are now 90.7% leased. The narrative that only new development can compete and attract tenants is wrong, as demonstrated by our results, we are a destination in the flight to quality and tenants have decided that our differentiated product, central locations, near mass transit, fully modernized buildings, quality service in building and neighborhood amenities and value proposition is what they choose to lease. I encourage you to see page five of our latest investor presentation. In times like this, tenant and brokers…

Thanks, Tom. For the first quarter of 2023, we reported core FFO of $43 million or $0.16 per diluted share, which compares to core FFO of $49 million or $0.18 per diluted share for the first quarter of 2022. Notably, in the first quarter, we have decided to record a $0.024 reserve on the straight line rent receivable of our tenant Signature Bank that I will discuss in more detail. Same-store property cash NOI excluding lease termination fees declined 11.4% year-over-year, primarily due to low operating expenses in 1Q '22 amid lower building utilization, coupled with a number of one-time cash revenue items in 1Q '22. On the expense side, 1Q '22 expenses were still coming off of lower levels from the meaningful and proactive expenses cuts implemented by our team amid lower building utilization during the pandemic, which contributed to positive year-over-year same-store NOI growth throughout 2020 and into early 2021. The largest year-over-year operating expense increases in 1Q '23 or R&M and payroll and in particular cleaning, real estate taxes were also higher in 1Q '23, and this was partially offset by higher tenant reimbursement income. On the revenue side, as noted in our earnings call last year, 1Q '22 results included a number of one-time cash revenue items that aggregated approximately $3.3 million inclusive of lease modification payments received. Excluding these onetime items in 1Q '22, the same store property cash NOI decline would be 7%. The Observatory generated NOI of $14.3 million in the first quarter up significantly from NOI of $7 million in the first quarter of '22. Notably, first quarter NOI was 110% of 2019. Observatory expense was $7.9 million in the first quarter. The Observatory's NOI recovery has outpaced visitation. As a reminder, the observatory historically contributed roughly a quarter of the Company's…

Thank you. [Operator Instructions] Our first question is from Steve Sakwa with Evercore ISI. Please proceed with your question.

Yes, great. Thanks. Look, I understand the Signature Bank is a very fluid situation and hard to kind of pinpoint. My understanding is that the Flagstar was acquired by NYCB, and they have got a suburban footprint and headquarters. I guess I'm just trying to really understand the operational aspect of what takes place in New York and how to think about, maybe what pieces of that 300,000 feet could stay and how much might be duplicative with what NYCB has maybe out in the suburbs?

I will just tell you that our view is pretty straightforward. We know the build out that there that they have there and they have underway, and we're really just going to let them tell their story. It's not up for us to speculate. We feel actually pretty good about it. At the same time, it was prudent for us to take the mark that we did and that's why we did what we did and we look forward to be able to update based on their decisions when they have the opportunity to tell us their final outcome.

Steve, I would just add that -- look, as I mentioned before, they occupy really desirable five base floors of 1,400 Broadway and six tower floors. All the floors are consolidated. Most of them have been recently built. 1,400 Broadway is fully modernized. We're adding to the amenities there. And as I said, they're current on their rent, and beyond that, I think that we've given the dates before.

Just to make sure I heard you correctly. So they have kind of a decision May 15, and if they not to, I guess accept the lease, then it goes to July and then that July is kind of the drop dead date with the FDIC. Is that -- am I reading that or hearing that correctly?

Yes, Steve, there's two operative dates that Tom outlined. So the first is flag stars and the second is FDIC. So you have that correct. And we await to response and are very much prepared either way.

And then I guess second question, just in terms of the investment landscape, obviously, things have changed a lot in the last, I don't know, 30 to 45 days. So either Tony, Tom or the rest of the team, how are you sort of thinking about new incremental investments? And have you changed your investment hurdle for where or how you would deploy capital? Meaning are you -- I guess forcing yourself to get a higher IRR in today's environment given where the stock trades as an, as an alternative?

I think that what we are doing right now is what we have done when we do go into a 10 31 situation, we operate in really compressed timeframes and we have to put that money to work, identify within 45 days, execute within 180. And that's a slightly different drill. And it's really based on, we look at side by side cash flows and we look to recycle the balance sheet in that situation and go to where we can go cash flow accretion and growth. When it comes to deploy new capital, where we have no real time bind, that's a different story and we continue to look frankly, we're in the best position out of all the cycles in which I and Tom and I have worked together for 30 years plus on this. We're the best position for any cycle we've ever had. And we've got a very clear view of our balance sheet and how we can put it to work. And we've got very good conversations about how to look at other sources of capital in order to be able to execute deals when we see them. So right now, we're super pleased the way the team is executed on these 10 31 s and as we go forward and we look to the future, we'll react as price discovery and that more, more decisions driven by lenders occur.

And Steve, just as we've discussed, we're fortunate to have a balance sheet that's positioned where we can do all of those things and we're not forced to pick one or the other. The shares are attractive, buybacks are a strategic part, and we will continue -- we will continue to recycle the balance sheet in a way that aligns with our long-term objectives and we maintain the capacity to be opportunistic. So we feel very fortunate we have all those options and the team is very active and engaged in pursuing all those opportunities.

Okay. And just one last one for Tom. Just in terms of the pipeline, industries that are maybe most active that you're sort of talking to in your portfolio today would be what?

It's a diversified set of industries, Steve. It's anywhere from professional services, non-profit, consumer brands, some far, some tech, but those first three I mentioned are probably the dominant activity. And of course, like we just signed a non-profit and then Skanska at Empire State Building that gives you -- we've always attracted a wide diverse set of industry types. Let's just be clear, we cater to the deepest pool of office space users in New York City with tremendously priced very competitive property offerings, amenities, modernization, energy efficiency, indoor environmental quality, and brokers and tenants really differentiate now based on sponsorship and based on where they know commissions will be paid, tenant installations will be funded, and they'll be able to enjoy quiet enjoyment with the landlord with whom they signed their deals in the first place.

Thank you. Our next question is from John Kim with BMO Capital Markets. Please proceed with your question.

Just on that Flagstar space, was wondering if you can give any color on how utilized it was physically? And what the mark-to-market is of their space versus where it leased today?

Well, they're in place fully escalated rent is about $58 a square foot. So, I put that maybe just below market, and as I said, they have11 floors of 1400 Broadway, both base floors and tower floors all are very desirable, all have been fully consolidated. We've turned over all of the space to signature pre-Flagstar, except for one floor of about 24,000 square feet. And they're in in use of the space.

And Tom, I don't know if you mentioned the pipeline that you have today as far as where it is today versus last quarter and also on that Skanska space that you signed yesterday. Did that represent an expansion or same amount of space or contraction?

Skanska will occupy about the same footprint that they have now. They're relocating and taking a full floor in the building that was occupied by one of our last I'll call it legacy tenants, will achieve about a 60% plus mark-to-market spread on the lease of that space. And so it's a ladder movement as far as our pipeline. I feel good about it. We've got activity, quite a bit of pre-built activity, a few full floors. I mean, this is in addition to the -- again, the two leases that we just signed this week that exceeds 50,000 square feet in total. And I feel good about the pipeline. It's -- we have three full floor pre-built that's seen a lot of activity and interest. Got a lot of showings there for a full floor that's built at Empire State Building, 1 at 1350 Broadway, and 1 at 250 West 57th Street. So, and as I mentioned before, it's we're getting activity from professional services, non-profits, consumer products, a variety of industry types. And as Tony said, look tenants are -- they are looking for landlords that can deliver. They're looking for modernized buildings, newly built office space, healthy buildings that are modernized, energy efficient space, amenities, they want convenient access to mass transit, they want central location, they want access to neighborhood amenities. We deliver all of this at an attractive price point and that's why we attract the wide variety of tenants that we do as well as tenants from a variety of submarkets.

Okay. My final question is on multifamily. When you look at acquisition opportunities today, where is pricing in your markets? And if there is any difference between Manhattan, Brooklyn, Jersey City, Long Island City, some of the other submarkets outside of Manhattan?

I think, if the best thing to do would be to consult that John, we are guessing to -- sorry. My glasses aren't and I've got a cold. The best thing it would be to consult with the brokerage community on this. Everything we've done is off market. We haven't done anything that's broadly market. And so we haven't been involved in any of those processes, and if you really want that kind of an overview, there are probably better people to go to than to us.

Thank you. Our next question is from Michael Griffin with Citi. Please proceed with your question.

Great. Thanks. Toni, I'm not a hockey fan, but I appreciated the pop category in your opening remarks. Maybe next quarter, we do something around football. But I just want to touch on the leasing and oxide side for a bit. It looks like those numbers came up sequentially. Maybe that's for Durels, how should we think about a cadence of that sort of throughout the year? I think you talked about the 200,000 square feet of leasing in the quarter. A new deal signed, I think Toni said yesterday. Is there any kind of color around how that will trend for the rest of the year would be great?

Well, as I've stated before, we have modest move outs in 2023 in our Manhattan portfolio. We have only about 176,000 square feet of known move outs. In the total portfolio, it's about 223,000 square feet of move outs. And so it's I think, spread somewhat evenly throughout the quarter. Look, we just came off about 390 basis points positive absorption in occupancy year-over-year, and 180 basis points increase in lease percentage in our Manhattan portfolio. And look, we are -- combined with our modest move outs for the year and the leasing that we are doing, I think you are going to see a pretty smooth cadence for the balance of the year.

Got you. Thanks for that, Tom. And maybe just turning to capital allocation, I think one of the earlier questions is maybe around buybacks, potential acquisitions. I mean, I think with the distressed we might be seeing in the market coming due to go on the private side, maybe it might make a sense to public reach that leverage their balance sheets to be opportunistic. I know you are omnivorous, I think I got that wrong. But any one property type maybe pick out or take advantage, could it be office, apartments? Any color on that would be helpful.

Yes. So we have been very clear. Our opportunity set continues to be New York City, office, retail and multifamily, and we look for opportunity. Because the biggest issue is, there is not a ton for sale. There is a lot of behind the doors, workouts and processes going on. So we are still watching things reveal itself and unfold and the team is very active in evaluating any potential opportunities and we are interested into stress. It just has to make sense for the portfolio. On your comment on leveraging balance sheet. So, we are fortunate we have the capacity to do so, which was our point lower leverage versus peers, have a net debt-to-EBITDA at 5.7 and has some ability to trend down just from continued recovery and observatory business. And we have the ability to JV if we wanted. So there are a lot levers that are available to us, should we choose to go down that path without putting ourselves in an unhealthy or stressed situation.

And then maybe just one on the financing side of things. Do you have a sense maybe for buildings that aren't necessarily that trophy product, if there is financing that has to get done, do you think this is feasible -- large? Or we might see it more in kind of a one-off context? Every office building is unique so to say.

Yes, every office building is unique. I think every relationship is unique as well. So as the data points unfold, keep an eye out for sponsorship and the type of debt that they're obtaining, right? You may not be able to get long term. Maybe you get something shorter term or they're guarantees. So I think it really runs the gamut. The short answer is probably there's money out there for sure, and people are looking for these higher rates of return on debt, but they will be selective in their opportunity.

Thank you. Our next question is from Blaine Heck with Wells Fargo. Please proceed with your question.

Tony, you touched on this a little bit already in the call, but there's obviously been a lot of discussion around debt maturities in the office sector and the wave of maturities we're facing over the next few years. So just really wanted to get your view on how this all plays out. Do you expect a significant amount of forest or distress transactions to emerge or not? And what's that mean for asset pricing in the office sector? And again, potential opportunities for you guys to invest?

So, it's interesting. Look, first of all, we're very early. There are a few major forces out there. We've got fiscal contraction to correct unparalleled peace, time, fiscal and monetary stimulus. That goes against an ordinary credit cycle. The business cycle there is secular over building and there is selective obsolescence. Look at all these buildings out of which we work, and these tech tenants will be rolling out those. A lot of the places where those leased, those are non-functional buildings in the first place. So when we look at this along with post COVID adaption and adjustment, gosh, there's so many things out there, they're moving around. That said, I think the biggest impact, we think the biggest impact is low negative interest rates and greater availability of credit enhanced returns and allow a lot of people to borrow a lot of money. My grandfather always said, low interest rate environments, borrow as little as you need. High interest rate environments, borrow as much as you can afford. And I think a lot of people borrowed as much as they could afford in a low interest rate environment, and they're over their skis, and the market doesn't have a really good clearing mechanism. And certainly, the feds and the regulators are not speaking to each other. The treasury and the regulators are not speaking each other. It was just down at the real estate round table at the board meeting a couple of days ago, early this week. And this is the topic that the -- it's quite amazing. Washington DC Treasury and the Fed, they're not even in the office, they just were instructed to develop plans to return to the office. So from our view, we are very happy with what we've got as far as our balance sheet. Very happy with our recycling, and we really do expect to see problems and we expect to benefit from them. And in the meantime, we think it's early days, we've got low levels of debt. It's all fixed rate, long, average term of debt outstanding. So from our perspective, we're well positioned to execute and we'll focus on the opportunities that we see when we see them arise. I think realistically though, we're talking about an interesting time over the next 6 to 18 months.

Great. Very helpful color there. Switching gears to leasing tenant improvement costs and leasing costs per square foot rose to one of the highest levels we've seen since the pandemic began. Can you just talk about whether mix this quarter had anything to do with that, or whether you expect those costs to continue to rise this year? And also, whether you're seeing any noticeable trends in free rent?

Yes. By not -- you got this quarter, you got to look at the fact that 90% of our leasing was for new leases and we signed long-term leases with STV and claims conference. And those leasing costs are advertised over the long term. As far as trend look the lease cost in our Manhattan portfolio was about just under $11 square foot, which is in line with the past four-year range that goes anywhere from $8 to $14 per square per square foot. So we really look at our leasing costs as the function of the overall net effect of rent. And it's, we're pretty much in line with the past four years.

Thank you. Now our next question is from Camille Bonnel with Bank of America.

Just to follow up on the previous question around tenant improvement costs. So for the remaining 430,000 square feet expiring this year, do you expect to continue to offer similar packages to get these deals signed?

Yes. It's consistent with the market, but of course not all of this square footage that's expiring this year will vacate, as I've mentioned before only about 220,000 square feet is what we expect to vacate. And of course, we benefit on the significant investment we've made into tennis spaces in the past, particularly with our pre-built and what's coming back is a mix of some pre-built space, some built space, some space that we will have to rebuild. So, it really depends space by space. And as I said before, our leasing costs have generally been within that range of $8 to $14 per square feet each year. And that's been the range over the last four or five years.

Okay. And I think you mentioned in your observatory guidance that the second half of the year does factor in a slowdown from the momentum we've seen in first quarter. More broadly, just given the seasonality and sensitivity to the consumer side and some of your income streams, are you baking in any recessionary risk into the low end of your guidance?

I'm sorry, Camille, to clarify, we did not mention that on observatory and actually back half of the year, you get more favorable factors in terms of seasonality. So our guidance holds, as we've mentioned, trending back to pre-pandemic levels. In terms of whether our guidance has other assumptions, we do incorporate buffers for the fact that timing can fluctuate some of our leasing assumptions. But that also is offset by sign leases not commence that are scheduled to come in and are contractual. On operating expenses, we do factor in inflationary factors, so there's elements of what's going on in the market that don't require sort of a full-on downside assessment.

Yes, I want to be very clear. We are -- we're very happy with the observatory. We're very happy with its performance. We're very happy with its recovery. We're very happy with our revenue per visitor. So, if anyone who might have heard us say, something about we're not sure in seasonality again, that investor presentation, there's a slide in there that points out during wars, recessions, new competition we've always performed, and we continue to do so and we will.

Thank you. Our next question is from Dylan Burzinski with Green Street. Please proceed with your question.

Just curious on the capital recycling front, if you guys have anything in the market today? And if so, what are some of the types of buyers that you're seeing out in the market?

So, I can only comment on what we have already transacted on. As I mentioned, we take a hard look at everything. So we keep our options open. In terms of the buyers for the other two, they were more local based in nature, had others within their buyer group were interested in the entry cap rate and the potential financing that they could obtain to possibly get to positive financing spreads. And that was really the nature of the buyer. So there is demand out there. I think the biggest question mark in the marketplace today, even for non-core suburban assets, what have you, is the ability to line up financing because that's not just up to the buyer. It's up to the banks cooperating and the data that we are in within the capital markets.

That's helpful. Thank you. And then just going back to the Observatory, obviously, a good first quarter, guidance is unchanged for the year. But curious how the first quarter results compared to sort of your internal underwriting and where we are trending throughout April so far?

Let me clear that, we have -- not that we give guidance to the Observatory. It's obviously in our guidance. I will just tell you that, it's vibrant. It is active. We see a return of international visitors, which continues to grow. People are extremely happy. The reviews we get online are extremely positive. The transition that we did to the all reserved program during COVID is a huge success. And really we are very pleased with not only the Observatory, also, with how we perform compared to the other attractions which are out there. So beside the Observatory, we feel good about where it's come in compared to our history, and just while we don't break it out, let's say, we are quite pleased with the evolution that it made during the quarter made us quite happy.

Yes. And as we progress through the year, because we provide the range $88 million to $96 million, we will provide commentary if things are off track. So you should assume it's in line if we are reaffirming guidance and expenses are on track.

Thank you. There are no further questions at this time. I'd like to hand the floor back over to Tony Malkin, Chairman, President and CEO for some closing remarks.

Thanks so much everybody. Great work team. ESRT is a great way to play New York City. Our portfolio is stronger and more diversified than it was a year ago. We are well-positioned to perform and build on our well-diversified income stream. Our strong and flexible balance sheet empowers us to take advantage of investment opportunities. We are future ready to drive value for our stakeholders and we see opportunity ahead. Remember, I encourage everyone to read through our latest investor presentation and our new Sustainability Report. They both include many great improvements and videos, including some great tenant testimonials that speak to the flight to quality that our portfolio offers. Many thanks to our great team, we are working incredibly hard and I have confidence we will continue to do a great job on behalf of our stakeholders' special call out to Christina on her third anniversary from Tom and Me and the entire team. And special words to our entire team and all of you out there, who like us have a lot of children in your office today. Take your daughters and sons to workday is on right now and we hope our future leaders have enjoyed their first earnings call. So thank you for your participation on today's call. We look forward to the chance to meet with many of it non-deal road shows, conferences, and property tours in the month ahead, till then, thank you for your interest and onward and upward.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.