Empire State Realty Trust, Inc. (ESRT) Q4 2022 Earnings Call Transcript

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Empire State Realty Trust, Inc. (NYSE:ESRT) Q4 2022 Earnings Conference Call February 16, 2023 12:00 PM ET

Company Participants

Heather Houston - SVP, Chief Counsel, Corporate & Secretary

Tony Malkin - Chairman, President & CEO

Tom Durels - EVP, Real Estate

Christina Chiu - EVP, COO & CFO

Conference Call Participants

Steve Sakwa - Evercore ISI

Camille Bonnel - Bank of America

Michael Griffin - Citi

Blaine Heck - Wells Fargo

John Kim - BMO Capital Markets.

Dylan Burzinski - Green Street


Greetings, and invited to nan Empire State Realty Trust Fourth Quarter 2022 Earnings Call. At this time, each participants are successful a listen-only mode. A question-and-answer convention will travel nan general presentation. [Operator Instructions]. As a reminder, this convention is being recorded.

It is now my pleasance to present Heather Houston, Senior Vice President, Chief Counsel, Corporate & Secretary. Thank you. You whitethorn begin.

Heather Houston

Good afternoon. Thank you for joining america coming for Empire State Realty Trust 4th fourth 2022 net convention call.

In summation to nan property merchandise distributed yesterday, a quarterly supplemental package pinch further item connected our results and our latest investor position were posted successful nan Investors conception of nan company's website astatine

On today's call, management's prepared remarks and answers to your questions whitethorn incorporate forward-looking statements arsenic defined successful applicable securities laws, including those related to marketplace conditions, spot operations, superior expenditures, income, expense, financial results and projected transactions and events. As a reminder, forward-looking statements correspond management's existent estimates. They are taxable to risks and uncertainties, which whitethorn origin existent results to disagree from those discussed today.

Empire State Realty Trust assumes nary responsibility to update immoderate forward-looking connection successful nan future. We promote listeners to reappraisal nan much elaborate discussions related to these forward-looking statements successful the company's filings pinch nan SEC.

During today's call, we will talk definite non-GAAP financial measures, specified arsenic FFO, modified and halfway FFO, NOI, same-store NOI, rate NOI, and EBITDA, which we judge are meaningful successful evaluating nan company's performance. The definitions and reconciliations of these measures to nan astir straight comparable GAAP measures are included successful nan earnings merchandise and supplemental package, each disposable connected nan company's website.

Now, I will move nan telephone complete to Tony Malkin, our Chairman, President and Chief Executive Officer.

Tony Malkin

Thanks, Heather, and bully day to everyone.

This is Heather's firsthand connected nan instrumentality connected our net telephone since nan status of Tom Keltner. We are delighted to person her present pinch america and we will ever beryllium grateful and appreciative of Tom Keltner's much than 40 years of committedness and publication to ESRT and its predecessor entities.

ESRT is pleased to study beardown 4th fourth results to adjacent retired nan year, supply updates connected our superior recycling activities and leasing, and our outlook for 2023.

Our ESRT squad accomplished a batch this year. ESRT's apical priorities are to lease space, waste tickets to nan Empire State Building Observatory, make bully usage of our equilibrium sheet, execute our sustainability goals, and do each of this pinch an unrelenting attraction connected shareholder value.

We had a very coagulated leasing year. We leased complete 1 cardinal quadrate feet astatine consistently affirmative leasing spreads and made meaningful absorption advancement pinch a 210 ground points summation successful Manhattan agency occupancy and a 260 ground points summation successful Manhattan agency leased percent passim nan year. Our buildings correspond affordable options successful nan formation to quality, nan character, afloat modernization, awesome locations adjacent wide transit, awesome amenities successful spot pinch much to travel and manufacture activity successful power ratio and indoor biology quality.

Our extremity is to get nan champion woody successful bully times and get nan deals successful challenged times and tie accordant leasing volumes done cycles. Existing tenants who cognize and emotion our merchandise turn successful our portfolio. We person completed 258 description s, which full 2.5 cardinal quadrate feet since nan institution went public. We proceed to build our leased percent and that will thrust higher occupancy and net successful nan future.

Tom will screen 2022 successful much detail, denote a awesome lease conscionable completed and talk our 2023 pipeline. Our value portfolio is resilient and ESRT benefits from nan formation to value trend.

Our wholly re-imagined Empire State Building Observatory is nan beneficiary of a $165 cardinal renewal and caller exhibits completed conscionable anterior to nan pandemic and our preamble of our timed ticketing operation. The customer acquisition has been improved by nan exhibits and by reduced crowds pinch mostly nary lines. Now that we cognize erstwhile customers will beryllium there, we scheme amended our staffing and power expenses. We now reap nan rewards of these efforts.

Tripadvisor's number 1 attraction successful nan United States, number 3 successful nan world is nan authentic acquisition that benefits by comparison to each nan different caller entrants successful nan market.

We deed our observatory NOI expectations successful 2022, mostly driven by maturation and gross per capita, prudent disbursal management, exceptional marque awareness, and a shared committedness to excellence by nan full activity team. In December 2022, observatory NOI reached 99% of pre-COVID 2019 levels and visitation reached 88% of pre-COVID 2019 levels.

We are an world brand. We person spoken astir nan spot of ESRT's equilibrium expanse for years. It helps america triumph caller tenants who look to partner pinch a financially unchangeable landlord who will support precocious value standards astatine their assets and present connected their commitments to tenants. Tenants activity a compelling worth proposition and ESRT offers a precocious value acquisition and trophy assets astatine our charismatic value point. Our equilibrium expanse allows america to beryllium nimble and prosecute successful stock repurchases caller acquisitions and superior recycling. We deduce our income from divers sources, agency rentals, Observatory income, unit rentals, and residential rentals.

The summation of multi-family to our portfolio since December 2021 further diversified our rate travel stream. We person recycled our equilibrium expanse taxation efficiently done nan waste of various suburban assets and reinvestment into Manhattan multi-family. We person broadened our manufacture activity successful biology sustainability and patient building capacity complete nan past year.

ESRT achieved c neutrality successful 2022 and we proceed to make advancement towards a extremity of zero nett -- nett zero emissions by 2035. We published nan Empire Building Playbook for decarbonization of existing buildings successful business pinch nan New York State Energy Research Development Authority, a guideline for others connected really to execute sustainability goals.

We received target validation support from nan science-based targets inaugural pinch their astir precocious 1.5 grade target. Platinum nickname pinch Green Lease Leaders maintained nan highest imaginable GRESB ratings and world assemblage activity favoritism and achieved re-certifications for WELL Health-Safety fresh good and Energy Star.

We are nan only New York City commercialized landlord connected nan Local Law 97 implementation Advisory Board, and we are nan only New York City commercialized landlord connected nan New York City Sustainability Advisory Board. We person been included successful nan Bloomberg Gender-Equality Index for 2 consecutive years. These ESG accomplishments and initiatives are progressively important some tenants and their labor arsenic good arsenic investors, and stay a apical privilege for ESRT.

Our banal outperformed CBD agency peers from 2020 to 2022 and year-to-date for galore of these reasons, moreover though we deliberation it is evident that it still trades astatine a crazy discount.

Lastly, we introduced guidance for nan first clip successful 2022 to springiness nan Street much clarity connected nan net trajectory and outlook for our institution and existent results, which exceeded our first expectations. This is nan activity of a awesome squad that is navigated done challenges and rises to nan juncture pinch unthinkable attraction connected our company's 4 priorities and demonstrated progress.

We move guardant into 2023 pinch nan aforesaid goals, lease space, waste tickets to nan observatory, proactively negociate our portfolio, execute our sustainability goals, negociate our equilibrium sheet, and thrust shareholder value.

Tom and Christina will supply much item connected our advancement and really we scheme to execute these goals successful 2023.

Before I move it complete to Tom, I besides want to congratulate Christina connected her promotion to Chief Operating Officer successful summation to Chief Financial Officer this quarter. Christina is simply a awesome partner to each of us, a awesome leader and has tremendous value. Her caller title reflects nan domiciled into which she has grown arsenic a awesome chap executive serviceman to Tom and me, and she's progressive successful each strategical decision.


Tom Durels

Hey, thanks, Tony, and bully afternoon, everyone.

We had a very coagulated twelvemonth successful 2022 and 2023 shows existent promise. During nan year, we signed complete 1.1 cardinal quadrate feet of leases, which is accordant pinch our pre-COVID three-year mean lease measurement for 2017 to 2019.

In our Manhattan agency portfolio, we achieved affirmative mark-to-market lease spreads successful each of nan past 4 quarters, knowledgeable dependable nett effective rent maturation passim nan year, and signed awesome caller and description leases pinch value tenants, including iCapital, Signature Bank, Progyny, Crown Castle, and others, and leased to conscionable awkward of 300,000 quadrate feet of pre-built during nan twelvemonth astir matching our full measurement of pre-built leased successful 2019.

While Manhattan's marketplace wide agency readiness complaint accrued successful 2022, ESRT's Manhattan agency leased percent complaint improved by 260 ground points and occupancy accrued by 210 ground points for nan year. We use from nan formation to value inclination and our outperformance demonstrates tenants' desire for our afloat modernized, power businesslike and patient buildings, which are conveniently located successful your wide transit pinch in-building amenities, entree to vicinity amenities and exceptional tenant services, and an charismatic value point.

In nan 4th quarter, agency leasing spreads remained affirmative pinch caller and renewal lease spreads signed astatine our Manhattan agency properties up 5% connected a rate ground compared to nan anterior escalated rents. We signed 29 caller and renewal leases totaling astir 144,000 quadrate feet, which includes 93,000 quadrate feet nether our Manhattan agency properties dominated by patient activity successful our smaller pre-built suites, 50,000 quadrate feet successful our Greater New York Metropolitan agency properties and complete 1,000 quadrate feet of retail. After year-end, we signed a 16-year 65,000 quadrate ft lease pinch an engineering patient astatine nan Empire State Building.

Combined pinch 4th fourth leases, we person signed astir a 100,000 quadrate feet of caller leases astatine nan Empire State Building, wherever we person importantly accrued our leased percentage. We person progressive deals successful our pipeline passim nan portfolio, including pre-built suites and respective afloat level leases that should thrust portfolio leased percent higher.

We're well-positioned and assured successful our expertise to thrust our leased complaint higher successful 2023. We invested astir $1 cardinal into our assets since our IPO to create patient buildings that are afloat modernized. We are adding to our robust in-building amenities astatine nan Empire State Building and shared field amenities successful our Times Square South portfolio.

Our tenants' spaces are recently built pinch nan champion successful indoor biology value and power efficiency, which lowers tenants' occupancy costs while expanding worker wellness and productivity. Our assets are good located adjacent vicinity amenities and wide transit hubs. The caller opening of nan East Side Access to Grand Central Station will greatly use america astatine One Grand Central Place.

After years of consolidating smaller spaces to create move-in fresh pre-built suites and afloat level turnkey spaces, our difficult activity is done pinch complete 95% of our tenant spaces now redeveloped, and our vacant abstraction is fresh for contiguous lease up.

We proactively managed our rent rotation specified that only 5.1% aliases 494,000 quadrate feet of leases are group to expire successful 2023. And we person $54 cardinal of contracted incremental rent from signed leases not yet commenced and free rent burn-off. Our beardown equilibrium expanse affords nan expertise to compete successful today's situation and gives our tenants and brokers assurance that we will present connected our promises.

We person an exceptional dedicated squad that executes regular connected behalf of our tenants and their brokers. And although, New York City agency utilizing employment has recovered and now exceeds pre-pandemic levels arsenic adjacent to 200,000 agency utilizing jobs person been added since nan 2nd 4th of 2020.

We person demonstrated our expertise to lease abstraction done each cycles. We've done nan difficult activity to position ourselves to summation our lease percent and execute affirmative absorption successful 2023.

Same-store spot operating expenses and existent property taxes were up this twelvemonth arsenic contemplated successful our guidance, but were astir 7% beneath pre-pandemic levels successful 2022 owed to a operation of imperishable costs redeeming measures by nan fantabulous activity of our operations squad and gradual return to agency passim nan year.

Property operating expenses unsocial were 13% beneath pre-pandemic levels and done continued subject costs control; we forecast 2023 spot operating expenses will beryllium astir 3% beneath our 2019 actuals. Christina will supply much item successful a moment.

Turning to our multi-family assets. As antecedently announced, we adjacent connected nan disconnected marketplace acquisition of 298 Mulberry Street successful precocious December and are thrilled to adhd this spot to our increasing multi-family portfolio. 298 Mulberry is simply a 96 portion afloat occupied multi-family plus located successful a highly desirable vicinity astatine nan confluence of nan NoHo, Nolita and East Village submarkets, which person a constricted proviso of marketplace rate, afloat work merchandise and is successful stepping region to NYU. Importantly, this plus is 100% free-market and we spot upside opportunity done mark-to-market connected in-place rents and early rent growth. Total multi-family occupancy, which now includes nan recently acquired 298 Mulberry, remains beardown astatine 96.3%, and we proceed to spot bully mark-to-market increases arsenic dependable request crossed nan Board, which validates our finance decision.

In summary, arsenic I said astatine nan start, we had a very coagulated year. We've done nan difficult work, invested successful our assets complete galore years, and are exceptionally well-positioned to lease abstraction and execute affirmative absorption again successful 2023

We signed agency and unit leases of 144,000 quadrate feet successful nan 4th fourth and complete 1.1 cardinal quadrate feet during nan afloat year. We accrued our Manhattan agency portfolio leased percent by 260 ground points and achieved affirmative absorption of 210 ground points successful occupancy complete nan anterior year. We signed a caller lease for 65,000 quadrate feet astatine nan Empire State Building aft year-end, and we person grown our multi-family portfolio wherever we proceed to spot beardown fundamentals and performance.

And now I'll telephone -- move nan telephone complete to Christina. Christina?

Christina Chiu

Thanks, Tom.

Let's commencement retired pinch an overview of results for nan year. We reported halfway FFO of $244 cardinal aliases $0.90 per diluted share, which compares to halfway FFO of $195 cardinal aliases $0.70 per diluted stock for 2021. 2022 halfway FFO exceeded our astir caller guidance scope of $0.83 to $0.85, mostly driven by stronger capacity astatine nan observatory towards year-end and little than expected year-over-year diminution successful full-year same-store NOI of 4.1%, driven by humble same-store gross maturation offset by an approximate 9% higher spot expenses arsenic expected.

For nan 4th fourth of 2022, we reported halfway FFO of $59 cardinal aliases $0.22 per diluted share, which compares to halfway FFO of $50 cardinal aliases $0.18 per diluted stock for nan 4th fourth of 2021.

Same-store spot rate NOI excluding lease termination fees was down 3.3% year-over-year, mostly driven by higher spot operating expenses and existent property taxes partially offset by higher revenues from rate rent commencements.

The observatory hosted 660,000 visitors and generated NOI of $23.8 cardinal successful nan 4th quarter, up importantly from 360,000 visitors and NOI of $10.7 cardinal successful nan 4th fourth of 2021. Observatory visitation recapture successful nan 4th fourth was 74% of comparable 2019 visitation, which exceeded our revised hypothetical forecast of 66% of comparable 2019 visitation mostly driven by beardown December request erstwhile visitation exceeded 88% of comparable 2019 levels.

Notably, 4th fourth NOI recapture arsenic a percent of 2019 was 82% and nan testament to our team's execution. For nan full-year, observatory NOI totaled $74.9 million, which represented NOI recapture arsenic a percent of 2019 of 79%. We proceed to tightly negociate expenses astatine nan observatory and make beardown gross per capita, which were up 18% successful 2022 versus comparable 2019 level. As a result, nan NOI betterment has outpaced visitation comparative to pre-pandemic levels. We will beryllium focused connected nan NOI outlook going guardant arsenic we supply guidance to nan Street connected nan observatory's capacity from here. As a reminder, nan observatory historically contributed astir a 4th of nan company's NOI and stands astatine astir 21% connected a trailing 12-month ground done nan 4th quarter.

Our equilibrium expanse arsenic of December 31, 2022, had full liquidity of $1.1 billion, which was comprised of $264 cardinal of rate and $850 cardinal of undrawn capacity connected our revolving in installments facility. At year-end, nan institution had nett indebtedness astatine stock of $2.3 cardinal pinch a weighted mean liking complaint of 3.9% and a weighted mean word to maturity of 6.4 years.

Our ratio of nett indebtedness to adjusted EBITDA was 5.7x good beneath adjacent averages. Notably, we person nary floating complaint indebtedness vulnerability and a good laddered maturity schedule pinch nary indebtedness maturity until November 2024, erstwhile a $78 cardinal owe matures.

Our equilibrium expanse affords america elasticity to prosecute successful activities that make shareholder value. This includes nan repurchase of our shares, nan pursuit of finance opportunities that are additive to our New York City focused portfolio and superior recycling.

For nan full-year 2022, nan institution repurchased a full of $88.9 cardinal of its communal banal astatine a weighted mean value of $7.78. In nan 4th quarter, and done February 13, 2023, nan institution repurchased $8.2 cardinal of its communal banal astatine a weighted mean value of $6.70 per share. This brings nan cumulative magnitude repurchased to $281.2 cardinal astatine a weighted mean value of $8.31 per share, which correspond astir 11% of full shares outstanding arsenic of March 5, 2020, nan day our stock buyback programme began.

As antecedently mentioned, we attraction connected superior recycling and we return a difficult look astatine each and each 1 of our assets and prosecute dispositions wherever we person executed connected nan business scheme and/or tin recycle nan proceeds into assets that align pinch our semipermanent portfolio rate travel maturation objectives. We are pleased that during this play of important marketplace uncertainty, nan institution successfully executed connected its superior recycling strategy.

In position of dispositions, successful nan 4th quarter, nan institution closed connected nan waste of an agency plus located astatine 10 Bank Street successful White Plains, New York, astatine a gross plus valuation of $42 million. 500 Mamaroneck Avenue successful Harrison New York remains nether statement for waste for $53 cardinal pinch an expected closing successful nan first 4th taxable to customary closing condition.

Subsequent to year-end successful February, nan institution closed connected nan disposition of its unit assets located astatine 69-97 and 103-107 Main Street successful Westport, Connecticut, astatine a gross plus valuation of $40 million. The Westport waste was a related statement transaction approved successful accordance pinch nan company's protocols. The proceeds from these suburban agency and unit dispositions were redeployed successful a taxation businesslike mode into nan $115 cardinal acquisition of 298 Mulberry Street that we announced successful our December 2022 Business Update.

In a marketplace pinch constricted finance opportunities fixed dislocation successful nan superior markets, peculiarly those of precocious quality, we are pleased that our finance squad was capable to root this off-market transaction. Importantly, this acquisition enabled nan institution to redeploy its disposition proceeds successful a taxation businesslike mode into an plus pinch a much favorable CapEx profile.

Further, fixed ESRT's elastic equilibrium expanse pinch beardown liquidity, we were capable to get nan plus connected an unlevered ground and lend this to our unencumbered pool. This represents ESRT's 3rd multi-family acquisition arsenic we proceed to fortify our position arsenic a New York City focused institution pinch a beardown equilibrium expanse and portfolio pinch aggregate sources of upside that see afloat modernized agency buildings that use from tenants successful hunt of value and a beardown worth proposition, mundane unit successful precocious ft postulation locations adjacent wide transit, nan Empire State Building Observatory, a precocious separator business, which continues to acquisition a beardown betterment pinch moreover stronger marque nickname compared to pre-COVID and our multi-family portfolio of good amenitized good located assets.

Turning to guidance. We expect 2023 halfway FFO to scope betwixt $0.82 to $0.86 per afloat diluted share. This compares to 2022 halfway FFO of $0.83, excluding lease termination interest income. As a reminder, our guidance scope does not see immoderate meaningful early lease termination fees, which totaled $0.07 successful 2022.

Let maine walk a infinitesimal to talk nan assumptions utilized successful our guidance. In 2023, we expect same-store rate NOI, excluding lease termination income to beryllium down successful nan 4% to 6% scope from 2022 levels. The alteration is chiefly owed to an approximate 8% forecasted summation successful spot operating expenses and existent property taxes, which is partially offset by higher reimbursement income.

The summation successful OpEx is mostly tied to assumptions for accrued building utilization successful 2023. For reference, moreover pinch this increase, spot operating expenses will beryllium astir 3% beneath 2019 levels, which bespeak immoderate imperishable costs savings and efficiencies we execute from pre-COVID levels. The accrued spot operating expenses are partially offset by humble gross maturation anticipated, which assumes same-store occupancy of 85% to 87% by year-end. Similar to 2022 guidance, we person factored successful immoderate conservatism connected nan gross side, peculiarly successful position of leasing assumptions and timing of lease commencements.

Turning to nan observatory. We expect 2023 observatory NOI to beryllium astir $88 cardinal to $96 million, up from $75 cardinal successful 2022. As a reminder, pre-pandemic, nan observatory generated $95 cardinal successful NOI. This NOI guidance assumes observatory expenses of astir $9 cardinal per 4th for 2023.

The debased extremity of our guidance scope reflects nan imaginable for a slower than expected observatory ramp up owed to uncontrollable factors that could effect recreation and tourism and conservatism astir spot revenues, peculiarly successful position of leasing assumptions and timing of lease commencements.

The precocious extremity of our scope reflects a ramp up successful observatory capacity that marginally exceeds pre-pandemic levels. Please statement that nan guidance estimates and assumptions conscionable described do not see nan effect of immoderate meaningful early lease termination interest income, aliases immoderate unannounced early spot acquisitions, dispositions aliases superior markets activity.

In summary, nan institution has executed good connected its priorities. We executed connected our superior recycling strategy pinch completed dispositions of 2 suburban agency assets, 2 suburban unit assets, and 1 further suburban agency plus pending closing. In each instance, nan transactions were system to alteration nan institution to redeploy nan proceeds successful a taxation businesslike manner.

We root done off-market transactions 3 charismatic Manhattan multi-family assets, which now comprise astir 5% of ESRT's NOI and contributes astir $0.04 to 2023 FFO. We remained progressive and executed connected astir $90 cardinal successful stock buybacks successful 2022, which brings our cumulative buyback full to $281 cardinal aliases 11% of full shares outstanding since nan buyback programme began successful March 2020. We did each of this while prudently and strategically managing our equilibrium expanse to person nary floating complaint indebtedness exposure, nary indebtedness maturity until precocious 2024, a revolving in installments installation that remains undrawn and matures successful 2025, positive has 2 six-month extensions, a strengthened unencumbered excavation that now includes multi-family and continued beardown liquidity to alteration nan institution to return advantage of charismatic finance opportunities that whitethorn look successful this play of uncertainty and superior dislocation.

Our commercialized portfolio is now complete 85% occupied and complete 88% leased, and we proceed to use from tenants request for precocious value assets, a beardown worth proposition, and landlords pinch beardown equilibrium sheets who tin present connected their commitments.

As we look ahead, ESRT advances into 2023 pinch a well-positioned and elastic equilibrium sheet, a attraction connected disciplined superior allocation, and continued committedness to ESG, which we judge will let america to proceed to execute contempt nan economical headwinds and uncertainties successful nan market.

And pinch that, I'll now move to nan usability for Q&A. Operator?

Question-and-Answer Session


Thank you. We'll now beryllium conducting a question-and-answer session. [Operator Instructions].

Our first questions travel from nan statement of Steve Sakwa pinch Evercore ISI. Please proceed pinch your questions.

Steve Sakwa

Yes. Thanks. Good afternoon. I conjecture a couple, possibly starting pinch Tom connected nan leasing. I conjecture I'm trying to understand possibly a small spot much to nan request that you're saying and to what grade are you seeing, possibly request coming retired of immoderate of these buildings that are being redeveloped successful nan Penn marketplace from benignant of Class B assets and nan Class A assets. And is that pushing immoderate of these much value-oriented tenants into your portfolio?

Tom Durels

Yes, Steve. We proceed to use from a formation to value arsenic we've seen successful nan past, and we proceed to use because we're giving tenants what they want. We're delivering patient buildings that are afloat modernized robust amenities to which we're adding, recently built tenant spaces, awesome entree to wide transit, latest successful indoor biology quality, and each astatine an accessible value point. So we're seeing tenants from crossed nan market, not conscionable nan Penn buildings, but from each areas that mostly is this formation to quality. And that's evidenced by nan fantabulous twelvemonth that we person pinch complete 1.1 cardinal quadrate feet of leases signed, which astir equals our mean -- three-year mean from 2017 to 2019, which was a beautiful robust leasing market. We conscionable signed, arsenic I mentioned earlier, a 65,000 quadrate ft lease pinch an engineering patient astatine nan Empire State Building that was signed successful January pursuing nan adjacent of nan quarter.

So you look astatine lease signed complete nan 4th fourth and into January, we've signed astir a 100,000 quadrate feet of leases astatine nan Empire State Building. We are trading a afloat level precocious extremity pre-built of 26,000 quadrate feet astatine Empire wherever we held a agent arena past week that's creating immoderate bully buzz amongst brokers and I'm excited astir what we're doing because we're adding to our robust amenities.

We've spoken earlier astir nan caller multi-sports tribunal that converts to a 400 personification municipality hallway position room astatine Empire pinch nan tenant lounge, barroom service, 2 play simulators, nan Starbucks that reserve that opened up successful November a 23,000 quadrate feet connected 3 floors. And this is connected apical of nan existing spectacular amenities that we person that see a 15,000 quadrate ft fittingness center, executive gym convention center, 8 onsite nutrient and beverage options. So I deliberation we're incredibly well-positioned to amended our leased percent successful 2023 that's going to thrust our occupancy up.

Tony Malkin

And Steve, Tony here, I'll adhd that that tenant 65,000 quadrate feet that conscionable came to -- conscionable leased astatine Empire and they person not announced to their ain group yet. So we will denote that astatine nan opening of March, what nan sanction of nan tenant is. It's awesome tenant is really travel from Park Avenue South, truthful an area that was basking earlier and they're coming to value pinch much amenities, power efficiency, indoor biology value pinch a circumstantial instruction to get a abstraction that will beryllium an attraction to talent and nan retention for talent.

Steve Sakwa

Okay. Second question, conscionable connected nan observatory, arsenic you guys deliberation astir nan continued betterment and utilizing nan ticketing strategy that you've got, really are you benignant of balancing measurement and price? You've evidently been capable to dramatically summation nan mean summons value done COVID. I'm conscionable wondering arsenic tourism comes back, Tony, really do you benignant of deliberation astir that equilibrium betwixt measurement and price?

Tony Malkin

Look, we will ever spell for NOI complete volume. That's portion one. Part two; we are very happy pinch nan capacity of nan observatory. In 2022, we're very happy pinch nan period of January, which has been rather strong. When we look astatine our goals, we support successful mind nan truth that we tin ever adhd hours to nan observatory based connected demand. Right now, because we're each reservation, we cognize what hours we request to operate, whereas earlier we conscionable stayed unfastened successful bid to capture, supply nan opportunity to seizure visitors erstwhile they came through. So we consciousness very good. We person nan champion per caps we've had.

When we look astatine nan operation that we've added measurement and that intends much past programs than still connected a comparable ground to astatine nan aforesaid ratio. Our per headdress is dramatically higher. Our marque has ne'er been stronger. We're a existent world brand. The branding opportunities, nan co-branding, which we get now group travel to us, we don't salary for it, they travel to america and that only builds our marque further and that builds much nonstop request for nan attraction. And arsenic measurement increases, we'll adhd ours. What we won't do, however, is diminish nan customer acquisition and that's what sewage america to number 1 attraction successful nan United States, number 3 successful nan world.

We'll support nan customer experience. We are nan only authentic play successful New York City. Since 2013, I've heard, oh, it's going to beryllium One World Trade Center. Oh, it's going to beryllium nan edge. Oh, it's going to beryllium nan summit. We've continued to execute and proceed to amended our game, and that's what we'll proceed to do.

Steve Sakwa

Great. And past past mobility for me, I don't cognize who wants to return this. I saw nether nan transaction activity that you guys sold this $40 cardinal plus up successful I conjecture Westport, Connecticut. And it benignant of was described arsenic a related statement transaction, I conscionable didn't cognize what benignant of specifications aliases accusation you could benignant of supply connected that woody and possibly really that was priced and benignant of nan mechanics down that deal.

Heather Houston

Sure. This is Heather Houston. I tin return that 1 and I'll fto Christina adhd to it. So nan purchaser was affiliated, it's an entity affiliated pinch Tony Malkin. And nan transaction was conducted successful compliance pinch our related transaction protocol including that nan institution reviewed pinch extracurricular counsel that's practices for related statement transactions and took further precautions to guarantee an arm's magnitude process.

There were abstracted counsel and appraisals for some nan purchaser and nan seller. The independent members of our Board conducted an independent reappraisal nether nan guidance of extracurricular counsel and past approved nan transaction. And afloat disclosure of nan transaction will beryllium made successful our 10-K, which we scheme to record adjacent week.


Thank you. Our adjacent questions travel from nan statement of Camille Bonnel pinch Bank of America. Please proceed pinch your questions.

Camille Bonnel

Hello. Within your same-store NOI guidance of expecting humble gross growth, tin you please remark connected your expectations astir leasing spreads successful peculiar for your Greater New York Metropolitan agency and unit portfolios?

Tom Durels

Sure, Camille. For -- of course, this 4th for successful our Manhattan office, we achieved a 5% affirmative spread. We were -- had antagonistic spreads successful nan Greater New York Metropolitan agency portfolio this past quarter. It's each going to depend. Going forward, nan leases spreads are going to dangle connected nan operation of spaces that we lease and what types of spaces they are and what nan anterior afloat escalator rents are.

If you look astatine our in-place rents for you asked specifically astir Greater New York Metropolitan office, we're astir apt conscionable going to spot level to humble antagonistic spreads successful nan Greater New York Metropolitan portfolio. As we spell guardant successful leasing up our vacant abstraction successful Manhattan, fixed nan anterior escalated rent was astir $53 per quadrate ft and we're doing deals supra $60 quadrate ft and wherever we tin move nan needle much significantly, I would expect affirmative spreads connected caller leasing successful Manhattan.

And past connected retail, we really don't person a tremendous magnitude of unit spaces rolling complete nan adjacent respective years. But if there, it's -- if it's level to markdown, it's going to beryllium much than offset by nan worth of nan lease up of vacant space. That could beryllium successful nan scope of $5 million, $6 million. Well offset immoderate humble antagonistic spreads that we mightiness spot connected leases expiring.

Camille Bonnel

Okay. And connected nan constituent astir higher operating expenses owed to utilization, does really overmuch of nan anticipated effect to your same-store NOI outlook will beryllium front-end weighted, fixed nan tougher comps successful nan 2nd half of 2022?

Tom Durels

You mean really overmuch will beryllium front-end successful position of accrued operating expenses? I would expect that we're going to spot a gradual summation successful operating expenses owed to utilization. Some of nan accrued costs that we're -- that we'll spot adjacent twelvemonth will beryllium things for illustration national complaint increases. So that would beryllium dispersed complete nan year. And past we've sewage immoderate one-time expenses that will beryllium a spot lumpy. So basically, it's a spot of a mix. You'll spot immoderate of our expenses that will gradually emergence owed to utilization and others will beryllium a spot lumpy.

Camille Bonnel

Okay. And last question, tin you please remark connected what's been driving nan little leasing and leasing commissions and tenant betterment costs passim nan year? And if Q4 is simply a bully level of wherever these costs will beryllium successful 2023?

Tom Durels

Well, our leasing costs summation this 4th compared to past quarter, nan costs, arsenic you spot historically alteration by 4th and they really dangle connected nan magnitude of term, nan abstraction type, whether it's achromatic box, a pre-built, a first-generation and second-generation space. And you're going to spot nan lease costs per twelvemonth of word arsenic a percent of first rent, this 4th was really successful statement pinch nan past four-year range.

It's benignant of successful that 15% to 19% scope this 4th connected an aggregate ground aliases dollars per quadrate foot, we were astir $54 per quadrate ft and that's good beneath our past 5 quarters that mean astir $79 per quadrate foot. But we really deliberation of leasing costs arsenic and we attraction connected nett effective rent and what we saw successful 2022 is our mean weighted nett effective rent accrued connected a year-over-year ground by astir 5%. So we deliberation that that's a very affirmative stat and that's what we support our oculus connected going forward.


Thank you. Our adjacent questions travel from nan statement of Michael Griffin pinch Citi. Please proceed pinch your questions.

Michael Griffin

Great. Thanks. Just possibly connected expectations for 2023 guidance, assuming nan mid-point pinch nan tally complaint of $0.22 successful nan 4th quarter, is this nan measurement that we should beryllium reasoning astir it? I mean, I'm calculating benignant of backmost successful nan letter cover map. You're getting a 6% use for accrued NOI successful nan observatory telephone an $0.08 effect from higher OpEx and existent property taxes, possibly a $0.01 summation from occupancy. Did those numbers benignant of springiness maine toward that, that higher end, possibly a small spot above? Anything other I mightiness beryllium missing location that gets america benignant of person to that mid-point?

Christina Chiu

Hey, Griff, I deliberation you person it. Those are nan cardinal ingredients. So we do effort to beryllium very transparent successful position of nan building blocks showing precisely what drives nan same-store NOI, truthful you person those components, right?

The different point I would mention is, erstwhile you deliberation astir whether you tin annualize nan past 4th I'm conscionable beryllium a small spot cautious pinch that. There is immoderate seasonality constituent to nan observatory results. You want to observant not to conscionable return nan 4th fourth and annualize that successful immoderate fixed year. The 2nd constituent is you sewage nan NOI decline, but nan different constituent is connected nan superior recycling. Just to do nan speedy representation for group it's astir $0.027 successful position of deed connected nan FFO offset by $0.017 from nan publication of 298 Mulberry that gets you to different $0.01. But you person nan correct component.

Michael Griffin

Great. Thanks. And past possibly we tin displacement complete to multi-family for a second. I mean, it seems for illustration this has been a maturation avenue recently. Tony talked astir it a spot successful his prepared remarks. Looking astatine nan investor deck, nan pro forma, including Mulberry, makes up astir 5% of nan portfolio. You've talked astir being much of a New York City focused REIT. I'm conscionable funny really large a portion of nan pastry you deliberation this could turn to beryllium successful benignant of nan adjacent to medium-term?

Christina Chiu

Yes. So we've decidedly mentioned our liking successful immoderate plus class, it makes a ton of consciousness for america arsenic a New York City focused subordinate to person value agency drivers, to person nan mundane retail, to person nan observatory business, and having residential request makes a ton of sense. As we've antecedently responded to this statement of questioning, we don't deliberation it's prudent to put a target retired location and say, we'll execute it, nary matter what. Because nan reality is multi-family is very thought after, nan fundamentals are very healthy. And truthful we want to equilibrium and opportunity we are interested. We person beardown liquidity positioning, but we want to beryllium prudent successful nan measurement we root deals and spell aft transactions.

Michael Griffin


Tony Malkin

I'd conscionable for illustration to adhd if I may, Griff 2 things. One -- 3 actually. One, we really sewage dumped connected erstwhile we announced our first multi-family transaction. We thought it was nan correct clip to do it. Everybody thought it was nan incorrect point to do. We -- number two, we are omnivorous opportunivores, truthful we will spell wherever we spot opportunity to create shareholder value. Three, erstwhile we statement our occupancy of 96% that, that, that Tom noted, we really person units nether renewal successful our portfolio. So that is not an adjusted for units, not successful circulation. That's nan gross number. So there's a small spot of play there.

And I conscionable mightiness adhd again, our attraction is connected cash, rate delivery, we attraction little connected FFO and we attraction much connected cash. So we're really pleased pinch what we've done and we'll proceed to look astatine that opportunity arsenic we spell guardant connected acquisitions.

Michael Griffin

That's great, Tony. Appreciate nan further color. That's it for me.

Christina Chiu

Thank you.


Thank you. Our adjacent mobility comes from nan statement of Blaine Heck pinch Wells Fargo. Please proceed pinch your questions.

Blaine Heck

Okay. Thanks. Good afternoon. First question, conscionable to follow-up connected nan leasing environment, are you seeing signs that tenants are immoderate much apt to look astatine hoteling aliases basking desking arsenic a measurement to benignant of efficiently usage their agency abstraction successful a much hybrid environment?

Tom Durels

No. Short reply is no, Blaine. The -- location are examples of tenants that were doing hoteling pre-COVID, and location are examples of tenants that are doing hoteling post-COVID. But successful an situation wherever employers are looking to pull and clasp talent and each conscionable astir everybody speaks astir nan request to get folks together for things for illustration collaboration imaginative -- creativity, squad building, mentoring, train each of these things, nan desire by labor is to person their individual workspace. And that's what drives nan request for agency space. But I deliberation that nan conception that tenants are moving towards hoteling because of alteration of activity habits is we're conscionable not seeing that.

Tony Malkin

Yes. I'll conscionable add, I attended a convention backmost successful 2019, successful which I was asked pinch 2 different salient execs successful existent property to remark connected nan early of short-term agency abstraction usage WeWork Convene, Industrious, Knotel. And 1 personification cited a statistic from an economist astatine Jones Lang LaSalle that by wrong 5 years, 30% of each agency abstraction would beryllium occupied connected short-term users -- by short-term users for short-term flex space.

Well, intelligibly that hasn't happened and it won't happen. I would besides remark connected nan irony of articles of really difficult it is to beryllium fired erstwhile you're distant and you don't person an agency situation wrong which to activity and to subordinate to your peers. We consciousness very assured that yet nan agency plays nan cardinal domiciled successful businesses going forward. And arsenic per comments we've made successful nan past, it's astir apt 2024 earlier that settles down completely.

Blaine Heck

All right. That's helpful. Thanks, Tom and Tony. For my 2nd question, I want to move gears to same-same NOI. Recently arsenic past 4th you guys had guidance for antagonistic 10% to antagonistic 12% same-store NOI successful 2022. You importantly hit that number astatine antagonistic 4.1% for nan year. Just utilizing that arsenic context, I guess, really should we deliberation astir nan antagonistic 4% to antagonistic 6% same-store guidance for 2023, and ultimately, really overmuch blimpish is built into that forecast? I guess, is location a script successful which you could hit that forecast to nan grade that you did present successful 2022?

Christina Chiu

Yes. So clarification, truthful past 4th successful our remarks, we did opportunity it was person to astir 8% down. We still hit it, but it was astir 8% down. So nan people didn't bespeak that. And it did bespeak conservatism. So a mates of things. OpEx we wanted to make judge it came successful and nan consequence was OpEx came successful in statement -- comparatively successful statement pinch our expectations. And connected nan gross side, we had higher reimbursement revenue, higher rental gross and a fewer different income items and that resulted successful a amended outcome.

There is conservatism successful 2023, and arsenic overmuch arsenic we can, we dream to outperform what we promise, but we do effort to beryllium blimpish reflecting nan uncertainties successful nan marketplace and we dream to present nan results arsenic we summation guidance complete immoderate fixed period.


Thank you. Our adjacent questions travel from nan statement of John Kim pinch BMO Capital Markets. Please proceed pinch your questions.

John Kim

Thank you. Tony, kudos connected your stance connected ineligible work, I cognize a batch of america springiness you a difficult clip connected that a fewer years ago. But speaking of blowback, you did person a batch successful nan property erstwhile Empire State Building celebrated nan Eagles NFC Championship triumph that irked a batch of New Yorkers, some successful nan giants and pitchy side. I conjecture my mobility is, immoderate publicity bully for nan observatory aliases has your -- has nan blowback really reconsidered your stance connected which teams you celebrate?

Tony Malkin

First of all, to beryllium adjacent that was very funny. Not your question, but nan full arena astatine number one. Number two, we'll ever observe nan awesome sports events. Our integration into nan NCAA tournament, what we do pinch nan World Series, what we did, we do pinch nan Olympics. And I -- truthful nan reply is we're a world brand. The immense mostly of our visitors travel to america from extracurricular New York City.

We person a large driver successful our agency properties, our unit properties, our residential properties, on pinch nan Empire State Building and nan Empire State Building Observatory. And I admit your calling attraction to what became really an world phenomenon, and that's what nan Empire State Building is.

John Kim

I agree. It wasn't utilizing erstwhile it came out. The mobility connected guidance, I cognize a batch of group are focused connected this, but Christina, you mentioned nan same-store gross being conservative, but I would've thought pinch accrued occupancy that you're expecting this twelvemonth coupled pinch escalators that you person successful place, that you would commencement disconnected astatine a -- starting constituent successful nan low-to-mid single-digits connected nan gross side. Can you remark connected what's offsetting that?

Christina Chiu

We person nan humble gross increases arsenic you conscionable mentioned. The cardinal driver is we person operating expenses going up arsenic well. So mixed that's wherever we get to nan 4% to 6% arsenic twelvemonth progresses. We let room for timing to lag and what hits nan numbers. We tin surely reside that arsenic we get much clarity. But I deliberation it's nary secret. This is an uncertain year. We're moving very difficult to thrust affirmative results and we'll present much successful connection connected guidance arsenic we do that.

John Kim

And conscionable to clarify, this same-store guidance does not see termination fees, correct?

Christina Chiu

Correct, excluding.

John Kim

Okay. My last mobility is connected nan Mamaroneck sale. What are nan usage of proceeds connected this? I cognize you cited that this will beryllium utilized to money 298 Mulberry Street, but location are immoderate excess costs connected nan waste side. So person you wished what nan usage of proceeds are?

Christina Chiu

We person not wished connected nan balance. So astir of it will beryllium redeployed. And arsenic we person much information, we will present that to nan market.


Thank you. Our adjacent questions travel from nan statement of Dylan Burzinski pinch Green Street. Please proceed pinch your questions.

Dylan Burzinski

Hi guys, acknowledgment for taking nan question. Just funny you've done a bully occupation executing nan suburban agency sales, a small spot of standalone retail. Here's really you're reasoning astir nan portfolio successful position of disposition candidates for nan Manhattan agency portfolio. I cognize there's evidently taxation considerations that return into account, but conscionable wanted to perceive your thoughts connected that.

Christina Chiu

Yes. Thanks for nan question. So arsenic I mentioned successful nan remarks, we return a difficult look astatine each of our assets. So arsenic we deliberation astir nan characteristics and what makes consciousness successful today's marketplace thing is redlined successful position of being for sale. We are alert that it's not nan astir celebrated clip for office. And being that we person equilibrium expanse strength, we person nary indebtedness owed until November 2024. We person nary floating complaint exposure. There's nary unnecessary unit connected america to unit a waste astatine an inopportune time. So we will show nan marketplace closely, beryllium very progressive successful really we negociate nan assets. And erstwhile nan model opens for america to prosecute a sale, we will research it.

Dylan Burzinski

And then, arsenic you guys are benignant of looking astatine acquisitions, I deliberation successful nan past you mentioned that you're chiefly focused connected multi-family and retail. Is that still nan lawsuit wherever you benignant of guys are benignant of not looking astatine agency astatine this constituent successful time?

Christina Chiu

We've really said we're focused connected New York City office, residential and retail. So it remains those 3 categories. And it's really predicated connected introduction price, nan magnitude of superior that goes in, nan rate travel floor plan and maturation floor plan going guardant and what makes nan astir consciousness for nan company.

And nan communal taxable if you're seeing is New York City, aggregate drivers of upside and we person very strong, diversified, resilient rate flows coming from different sources. We're proud of that and we want to summation our vulnerability to things that will adhd to that.


Thank you. There are nary further questions astatine this time. I would now for illustration to manus nan telephone backmost complete to Tony Malkin, Chairman, President, and CEO for closing remarks.

Tony Malkin

Thanks, everybody.

ESRT is well-positioned to perform, return advantage of nan formation to value signed leases that will lend to net and build connected our good diversified income stream. Our beardown and elastic equilibrium expanse empowers america to return advantage of finance opportunities and repurchase our stock.

ESRT is simply a awesome measurement to play New York City. Our portfolio is stronger and much diversified than it was a twelvemonth agone and we are excited by nan opportunity ahead. Thank you each for your information successful today's call.

To reason 2022 marked a twelvemonth of notable advancement towards ESRT's apical 4 priorities: lease abstraction pinch 1.1 cardinal quadrate feet leased successful 2022 and meaningful occupancy and lease percent bully progress; waste tickets to our wholly re-imagined observatory, nan only authentic marque amongst observatories 1 tin visit; enhanced shareholder worth done our superior recycling retired of suburban assets and into multi-family, which is now nan 4th limb of ESRT's good diversified rate travel stream, coupled pinch repurchases of our shares and continued activity successful ESG initiatives.

We are fortunate to beryllium backed by a beardown and elastic equilibrium expanse successful this situation and consciousness assured successful nan company's expertise to execute connected our goals and thrust maturation for shareholders successful 2023.

Many acknowledgment to our awesome ESRT squad who person worked incredibly difficult and I person each assurance we will proceed to do a awesome occupation connected behalf of stakeholders. We look guardant to nan chance to meet pinch galore of you astatine non-deal roadshows, conferences, and spot tours successful nan months ahead. Until then, convey you for your interest, onward and upward.


Thank you. That does reason today's teleconference. We admit your participation. You whitethorn disconnect your lines astatine this time. Enjoy nan remainder of your day.

Editor: Naga

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