Greetings, and welcome to the Empire State Realty Trust Fourth Quarter 2023 Earnings Call. As a reminder, all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. 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's fourth 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 property cash NOI, EBITDA and adjusted 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 and Chief Executive Officer.

Thanks, Heather. It is great to have you back after your parental leave, and good afternoon to everyone. ESRT is pleased to report a strong fourth quarter to close out what was a very productive year for our top of tier portfolio. We have a modernized, amenitized energy efficient portfolio of properties in great locations, absolute commitment to put points on the board under any circumstance and a balance sheet that allows us to do so. Our team's focus and relentless effort once again delivered results. In the fourth quarter, FFO came in $0.05 above expectations, $0.015 from non-recurring items, the majority from recurring operations. Christina, our new President, will handle that in more depth in her comments. We delivered our eighth consecutive quarter of positive leased percentage absorption. We achieved our 10th consecutive quarter of positive mark-to-market lease spreads for Manhattan office, our observatory performance continues, and our balance sheet remains best-in-class. Our top of tier portfolio sees continued demand, and we leased nearly 1 million square feet. Lease-up progress over the last year increased our Manhattan office leased percentage to over 92% and increased leased absorption by 250 basis points. The Empire State Building is now just shy of 92% leased. That is an increase of 720 basis points over the last year. Within our Broadway campus, the leased rate at 1359 Broadway increased 730 basis points over the last year. Tom will discuss some of the quality tenant leases, which contribute to this progress. ESRT's commitment to service and tenant relationships, combined with our modernized, amenitized, energy-efficient portfolio of properties in great locations drives our consistent leasing volumes. Over 2.6 million square feet of tenant expansions in our portfolio since our IPO, quite significant relative to our entire portfolio that totals 9.3 million square feet today proves…

Thanks, Tony, and good afternoon, everyone. We had another strong year in 2023 and have the people and the properties to deliver strong results in 2024. During the full-year of 2023, we leased over 950,000 square feet in our commercial portfolio. In our Manhattan office portfolio, we leased 862,000 square feet which was our highest annual volume, since 2019. Our new lease spreads averaged 14% for the year, which exceeds the prior three year average. We achieved our highest new starting rents for office leases at the Empire State Building and 1 Grand Central Place. We signed major office leases with quality tenants, including Capco, greater New York Mutual Insurance Company, LinkedIn, Rising Ground, Starbucks, and STV, to name a few. And we welcomed new retail tenants like Ghirardelli, who will open their first ever New York store at the Empire State Building next to the Observatory entrance. The 34th Street Front now hosts the Starbucks Reserve, Chipotle, Ghirardelli, AT&T and has one more retail opportunity to lease and two new sushi restaurants, one at the base of 1359 Broadway and one in the Empire State Building, which will serve as great amenities to our office tenants. Our property team delivered a strong close to the year. And in the fourth quarter, we achieved positive mark-to-market lease spreads across our Manhattan office portfolio for the 10th consecutive quarter. It was our eighth consecutive quarter in which we achieved positive leased rate absorption for our commercial portfolio. We increased our Manhattan office lease percentage by 250 basis points compared to a year ago, and 20 basis points quarter-over-quarter to 92.1%, which reflects an increase of 510 basis points since the end of 2021. We leased 164,000 square feet in our commercial portfolio, including 135,000 square feet in our Manhattan office portfolio…

Thanks, Tom. For the fourth quarter of 2023, we reported core FFO of $68 million or $0.25 per diluted share, which increased 15% year-over-year. This was largely driven by strong same-store property cash NOI growth, strong performance from our Observatory business as well as higher interest income year-over-year. Results for the quarter included approximately $0.015 of nonrecurring items, mostly within other income. Same-store property cash NOI increased 11.3% year-over-year primarily driven by higher revenues from early cash rent commencement, free rent burn-off, higher tenant expense reimbursements and higher other income. These revenue items came in ahead of expectations embedded in our same-store property cash NOI guidance for the year. The higher revenues in the fourth quarter were partially offset by an increase in property operating expenses which we anticipated in our guidance, albeit the increase was less than what we expected due to a few successful tax appeals that resulted in refunds as well as some repair and maintenance cost savings relative to expectations. Overall, as mentioned, there were approximately $4 million or $0.015 of nonrecurring items that benefited same-store NOI in the fourth quarter. In the fourth quarter, the Observatory generated net operating income of $27 million, an increase of 13% year-over-year. Revenue per capita remains high and admissions continued to improve year-over-year. Observatory expense was $9.3 million in the fourth quarter. For the full-year 2023, the Observatory generated NOI of $94 million, and that exceeded the midpoint of our guidance for the year. For the full-year, we reported core FFO of $0.93 per diluted share. Within fourth quarter results, each of the building blocks, same-store revenues, same-store expenses, Observatory NOI that we provided in our full-year guidance table happen to skew to the favorable side, which contributed to the large beat relative to our 2023 FFO guidance. As…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first questions come from the line of John Kim with BMO Capital Markets. Please proceed with your questions.

Thank you and congratulations to Christina and Steve. I wanted to ask about Flagstar. I realize it's a little bit of a deja vu potentially, but how concerned are you with Flagstar's lease given NYCB stock price? And it looks like they gave a little bit of space at 1333 Broadway. Was that already known? Or was that foreshadowing more space they may give up?

Yes, John, the giveback of the small space of 1333 Broadway was anticipated. It had previously been leased in temporary space in connection with the larger expansion previously done to 1400 Broadway. Flagstar leases 313,000 square feet of 1400 Broadway. Their in-place fully escalated rent is about $58 a foot. This compares favorably low compared to, say, where the lease was just done with Burlington in the low 60s per square foot. Remember, Flagstar only represents about 3.4% of our total commercial portfolio rent and about 2.5% of our total annual revenue. Beyond that, I'd say that -- but 1400 Broadway is a fantastic building. It's 100% leased. It's fully modernized. We have a new tenant lounge, new town hall facility. The tenants have access to campus amenities. Burlington just expanded by 68,000 square feet. So whatever happens with Flagstar, we're confident that our leasing at 1400 Broadway will do very, very well.

Okay. And my second question is on opportunistic investments. It seems like there's a lot of opportunities that are attractive on the debt side. I was wondering if you could comment on that. And I know you've been buying -- repurchasing shares recently. I wanted to know if you would consider going the other route, raising capital, either your own stock or third-party capital and go on defense because you can make that argument that it would be accretive depending on the investments you make.

Sure. Thanks, John, Tony here. We believe the crisis created by capital dislocation, rising rates and heavy near-term market maturities will create a once-in-a-generation opportunity to buy a certain New York City office assets with great upside. We have unique intellectual property and a track record of success in the redevelopment of assets in the top of tier modernized, amenitized, energy-efficient buildings which are competitive and attractive to lease. We continue to look for these opportunities. And of course, we'll be prudent in our underwritings. We know the costs required to create prime assets. We'll be patient to find the right deals and the right partners. We always look. We'll let you know if we find anything. At the same time, we are omnivorous opportunivores. So we have acquired resi and we've acquired retail. We'll keep our eyes open for opportunities in any of the above. I don't know whether or not Christina or Tom wants to add anything to that response.

The only thing is to address John's other question on access to capital. And all I would say is as we've demonstrated, we evaluate actions and capital allocation decisions in the best interest of our stakeholders. So wouldn't red line any options, but really depends on the situation. I think too soon to roll either way what you do in offensive equity issuance. But we're certainly looking at opportunities, as Tony mentioned.

Great, thank you.

Thanks.

Thank you. Our next questions come from the line of Michael Griffin with Citi. Please proceed with your questions.

Great, thanks. Maybe going back to the guidance for a second. If you strip out the $0.015 of non-core in the quarter, you do about $0.235 for run rate for 2024. If you look at the other pieces, it looks like you had about a $0.015 benefit from the Observatory NOI increase, call it $0.01 benefit from occupancy. I was just curious, are there any other puts and takes on the guidance? How should we think about kind of getting to that midpoint?

I think on the guidance, as always, we point to our building blocks, and we try to provide a lot of transparency. And what you could see is same-store NOI, cash property NOI is roughly flattish. And we do pick up the midpoint does represent a pickup from where we ended 2023 for the Observatory. So that gets us to our initial guidance range with the revenue at modest growth, modest positive growth and same-store operating expenses at 6% to 8% up, and we'll continue to narrow as we have better visibility over the course of the year.

All right. That was helpful. And then just maybe going back to kind of capital allocation opportunities. You've kind of stressed in the past that the simple structure, no joint ventures out there. But it seems like there are opportunities, I reason that there's nothing off the table. If the right joint venture opportunity came up, would you entertain it? Or that's just not part of the long-term strategy?

Griff, Tony here. Absolutely we'll entertain the right structure the right structure, the right capital at the right price. And if it's more logical to incorporate the use of third-party capital, we will.

Great, that's it for me. Thanks for the time.

Thank you. Our next questions come from the line of Camille Bonnel with Bank of America. Please proceed with your questions.

Congrats everyone on a solid quarter and to Christina and Steve on your promotion. Last quarter, you had around 200,000 square feet of leases in negotiation. And looking at the activity you've done to date, it looks like you were able to get those all over the line. So following up on earlier comments, Tom, could you quantify your leasing pipeline and what's currently under contract?

Sure. Well, look, first of all, Camille, we're off to a great start in the first quarter with approximately 125,000 square feet of new leases signed between the Burlington and Sol de Janeiro leases. We're constantly adding to our pipeline. But where we sit right now is we have roughly about, call it, about 190,000 square feet of additional leases out in various stages of negotiation or final term sheets. Most of that is in our Manhattan office properties, around 160,000 square feet. So that's our current pipeline in addition to the Burlington and Sol leases that we just signed. In addition to that, we have probably a few 100,000 square feet of active proposals in various stages of negotiation. Now not all of those will transition into leases, but it gives you an indication that we have a good healthy pipeline of activity. And this -- in the backdrop of very modest lease expirations and very little exposure to tenant move-outs in 2024. So I think we're incredibly well positioned to improve our leased percentage in 2024.

Appreciate the color there. Just shifting to your liquidity position is very strong, and your earnings outlook has some good momentum. I was wondering how you're balancing various capital allocation decisions with the potential to increase the dividend. Do you expect to grow this at some point in the near term? Or do you need to see more visibility in operations first?

So on the dividend, what we've mentioned is it will track the business. However, we've also mentioned that we do have a net operating loss carryforward in the balance of approximately $100 million in an environment where capital markets conditions are uncertain, increased cost of capital, it does seem prudent if we have the ability to monetize on that and utilize the cash to return capital in other ways, whether it be share buybacks or pursue opportunities, that's something that we should consider. So our current dividend level allows us to continue to pay a dividend very comfortably. We'll continue to monitor the business, we'll monetize on our NOL, and we'll see what the conditions are and when it makes sense to raise the dividend.

Thank you.

Thank you. Our next questions come from the line of Jay Poskitt with Evercore ISI. Please proceed with your questions.

Hi, thanks for taking my questions. I was wondering if you could just help bridge the gap between the total office and retail portfolio forecast, which you show on Page 14 of the supplemental and the just 170 basis point uptick in occupancy that guidance implies. I assume a lot of this has to do with the signed leases not yet commenced. But I just wanted to put those two buckets together.

Sure. I think we'd given an awful lot of detail on that Page 14, but I think that more simply, if you go back to my earlier comments about the fact that we only have about 183,000 square feet of known vacates that are not -- they're not covered. The balance of our leases expiring in 2024 have been covered by expected renewals, relocations or new leasing. And then only about 75,000 square feet of undecided tenants. Were you looking for -- does that answer your question? Or did you have something else on office and retail?

I guess, just to that point, of the roughly 400,000 square feet of the signed leases not yet commenced, would you say that the majority of that will commence in '24? Or is that kind of over the next two years when that will commence?

We give detail on the commencement of those leases on Page 10 of the supplemental. You can see the quarter by which -- by when signed leases not yet commenced are expected to commence and contribute to cash NOI.

Okay. Thank you. And then just on the debt maturity front, I know you have a mortgage coming due at the end of the year and then a little over $315 million coming due in early '25. So just any color on what the plans are for that would be great.

We continue to discuss with our lending partners. I don't have an update to provide now. But as always, we have productive discussions, and we'll provide an update to the market as soon as it's available.

Great. Thanks. That's all for me.

Thank you. [Operator Instructions] Okay. With that, we have reached the end of our question-and-answer session. I would now like to turn the floor back over to Tony Malkin, Chairman and CEO for closing remarks.

Thanks very much. ESRT is the pure-play New York City REIT, and we are well positioned to perform and build on our well-diversified income stream. We are confident in the company's ability to execute on our goals and drive further growth for shareholders in 2024. Many thanks to our great team who work incredibly hard, and I have every confidence we'll continue to do a great job on behalf of stakeholders. Thank you all for your participation in today's call. We look forward to the chance to meet with many of you at non-deal roadshows, conferences and property tours in the months ahead. Until then, thank you for your interest onward and upward.

Thank you. That does concludes today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.