Good afternoon. Thank you for joining us today for Empire State Realty Trust Third Quarter 2021 Earnings Conference Call. In addition to the press release distributed yesterday, a quarterly supplemental package with further detail on our results and our latest investor presentation was posted in the 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, and proposed transactions and events. As a reminder, forward-looking statements represent management's current estimates. They are subject to risks and uncertainties, including ongoing developments regarding the COVID-19 pandemic, which may cause actual results to differ from those discussed today. Empire State Realty Trust assumes no obligation to update any forward-looking statement in the future. We encourage listeners to review the more detailed discussions related to these forward-looking statements in the company's filings with the SEC. Certain of our disclosures today are added specifically in response to the SEC's direction on special additional disclosure due to the changes in our business prompted by the COVID-19 pandemic and are unique to this instruction. We do not expect to maintain the same level of disclosure when we resume normal business operations. During today's call, we will discuss certain non-GAAP financial measures, such as FFO, modified and core FFO, NOI, cash NOI, and EBITDA, which we believe are meaningful in evaluating the company's performance. The definitions and reconciliations of these measures to the most directly comparable GAAP measures are included in the earnings release and supplemental package, each available on the company's website. Finally, as a special note, last night, we filed an 8-K to announce our conditional agreements for the purchase of 2 multifamily assets in Manhattan, totaling 625 residential units for a total purchase price of $307 million. We consider it worthy of an 8-K because this is the first acquisition by ESRT since our option properties in 2014. It is a new asset class within New York City, and our external growth has been a significant focus within the investment community. Our 8-K disclosed the key elements of asset type, size, location, and price. Additional detail is not currently permitted under the seller's confidentiality requirements. After the acquisitions close, we will provide more detail. For now, we want to be clear that this is a voluntary filing for the reasons mentioned. And in the future, we would not expect to announce acquisitions, absent special circumstances involving asset class, geography, or size. Now, I will turn the call over to Tony Malkin, Chairman, President, and Chief Executive Officer.

Thanks, Tom, and good afternoon to everyone. This is a very busy time for ESRT, and I have a lot to discuss, so please bear with me. New York City's recovery is slowly and steadily underway. Schools have reopened, trains and subways are more crowded, and there is traffic. Apartment occupancies have increased, and rents are back to, and in many instances beyond, 2019 levels. Restaurants and entertainment attractions are open and busy. Try to get a reservation on a Wednesday through Saturday night or for Sunday brunch and be prepared for disappointment. Herald Square, Times Square, SoHo, all busy again. Even the New York Times, which for more than a year practiced an apparent editorial policy of disparaging New York City at every opportunity, published an article on Sunday titled "To get ahead at work, lawyers find it actually helps to be at work." The article goes on to say, and I quote, "Amid the ranks of 20 and 30 somethings is a large and growing group of employees who for reasons, part careerist and part emotional, increasingly crave the office as well. Nearly 2/3 of millennials expressed concern about a lack of connection with colleagues more than any other age group." Building utilization had a delta variant dip and now has continued to pick up to around 30% for our Manhattan office portfolio and 51% for our Greater New York office portfolio of comparable 2019 numbers. To be clear, our pandemic low was below 3%. People have begun to recognize that work community matters. Learning, teamwork, performance reviews, and promotions are incredibly hard, if not impossible, for us to execute remotely. Socialization matters. In the absence of it, the concepts of 'hybrid' and 'flexibility' will carry different meanings for different companies. It is not one size fits all. I still believe the office industry in New York City will not move fully to our front foot, and the storyline in the press will not change until after the first quarter of 2022. As Tom Durels will discuss, we see the return of activity on long-term leases as tenants contemplate their future space needs post COVID. A sizable amount of our current activity is related to the expansion of current tenants, excellent tenants. We continue to attract great companies who see us as long-term partners in their real estate needs, and with the rare exception who want to grow with us. Our properties continue to benefit from the flight to quality trends spoken broadly in the market, and we see it in leasing activity and our results. ESRT is well positioned. Our assets are excellently located for commutation, modernized for the 21st century, industry leaders in energy efficiency and indoor environmental quality, and available at prices which range from the high 50s to the mid-70s per square foot based on current asking rents. We make modernized buildings, indoor environmental quality and energy efficiency accessible to the thousands of tenants for whom these are driving factors in their decisions and whose Class A options and Class B options largely fall short and therefore do not match our comprehensive suite of monitored and verified base building and tenant standards for energy efficiency, healthy buildings, and sustainability, even if they can afford or want to pay triple-digit rents for brand-new buildings. Our IEQ-certified prebuilts with a full indoor environmental quality suite of MERV 13 filters, fresh ventilation, and active bipolar ionization lease very well. We also can accommodate full and multiple floor requirements. This price accessibility to energy-efficient, healthy, sustainable spaces for a wide range of businesses, not just those that pay triple-digit rents, is part of the flight to quality movement. Importantly, we attract and sign leases with tenants who are drawn to these qualities. We are happy to share ESRT's just-announced results in our second year of GRESB submission and scoring. ESRT achieved the highest possible GRESB 5-star rating for the second consecutive year. Perhaps most importantly, our actual score was 94, a 6-point increase from our first year of participation in 2020, and that is the second highest score within our peer group nationally. Additionally, we received a score of 96 and an A rating in the Public Disclosure Assessment, which measures ESG disclosure activities for the second year in a row. Our industry leadership in energy efficiency, sustainability, and indoor environmental quality continues to set the industry standard while we demonstrate annual improvement. We look forward to our second annual sustainability report publication in spring 2022. Shifting to our Observatory operations. As announced on October 15, the U.S. will reopen its border to fully vaccinated international tourists effective November 8. Early indications from our tour and travel partners, who serve this market, indicate an uptick in sales post this announcement. We are very happy that we have reached this point and look forward to a restoration of international visitors to the ESB Observatory. Our visits continue to improve, along with our revenue per caps. Observatory NOI was $6.4 million for the third quarter of 2021, which is the second consecutive quarter of positive NOI since the onset of the COVID-19 pandemic and more than double the second quarter of 2021 earnings contribution. The growth in NOI illustrates the progression from the closure period in 2Q 2020 through the steady ramp-up over the past year. Visitation has been primarily driven by domestically sourced travel at this retail, on-site and website sales. Customer satisfaction is at high levels, driven by our time ticketing reservation system that enables us to manage volume in peak periods. Our immersive museum quality exhibits and our focus on safety with top-of-the-line indoor environmental quality, including MERV 13 filters, ventilation, and active bipolar ionization. Visitors to New York City, both domestic and international, want to visit this iconic and authentic destination and are willing to pay for the distinctive experience we offer. Third quarter attendance was at approximately 24% of 2019 comparable attendance, a continued improvement from 2020 and the prior quarter. We registered strong July and early August visitation. Attendance for the second half of the third quarter was impacted by a resurgent delta variant and sustained U.S. border closure to international tourists. We have no new hypothetical admissions forecast. Our last was in our September 21 Investor Presentation update. Month-to-date through October 26, attendance was at 24% of 2019 comparable period attendance, above our revised hypothetical October admissions forecast of 20%. Our hypothetical admissions forecast suggests that we can reach 60% of 2019 attendance levels by the end of 2021 and return to 100% by the end of 2022. Remember two points for your modeling. One, we believe we can maintain our current Observatory operating cost structure up to approximately 60% of our 2019 attendance. We will continue to manage expenses tightly given the gradual pace of ramp-up, including how we have tweaked our operating hours and staffing accordingly. Second point, with more international inbound tourists, we should see lower revenue caps growth from our lower margin passes and online travel agent tourist visitors. A quick note on competition. The past program data we have received indicates we are the number one redeemed Observatory by an increased margin over number two. Cannibalization of the second visit market is underway and will increase with the summit opening this past week. We believe there is a large enough market for multiple attractions to do well. We remain the only authentic iconic attraction amongst all the observatories in New York City. We have demonstrated repeatedly over time our ability to compete with other observatories, including Top of The Rock, One World Trade Center, and the Edge opened. We remain the only office building in the world to which you can address a letter from anywhere in the world with only Empire State Building, and be certain of its delivery. We continue to operate competitively and nurture and invest in our iconic brand to command our leading position. We are confident in our continued ability to do so. We cannot finish these discussions without mentioning the recently announced purchase of the Edge by KKR. While we are not in a position to share inside information on this transaction, what we can share from publicly available information is very positive for ESRT and our jewel, the ESB Observatory. A smart, sophisticated institutional buyer stepped up and bought ahead of the full recovery of tourism, a majority economic interest subject to a management agreement. There was debt in place on the Edge at the time of the acquisition. The projections the Summit shared in materials that have been disseminated broadly enough for us to see them predicted a lower visitor volume at lower per caps than ESB's historic attendance and current pricing. As to the Edge, our analysis based on the number of elevators, loading time, and elevator speed indicates we have an hourly capacity roughly 50% greater. Our takeaway on this is that this sale, coupled with a very strong level of financing proceeds obtained by One Vanderbilt also during the low in tourist visits, shows these are valuable assets which attract institutional interest and that these are price discovery transactions, not fully priced. We feel very encouraged that our higher capacity and our newly redeveloped authentic icon of New York City, with record per cap revenues since we reopened by reservation only, should be valued at a significant premium to all these alternative transactions. We also feel very confident that our brand and position remain unparalleled and stronger than it has ever been. Turning to external growth. As Tom Keltner noted, we filed an 8-K regarding potential acquisitions. Additional detail is not currently committed under the sellers' confidentiality requirements. After the acquisitions closed, we will provide more detail. The transaction is consistent with our previously stated focus on New York City office, retail, and multifamily assets. We like the multifamily asset class and have a long institutional history of experience in multifamily assets through our predecessor entities and via Malkin Holdings. There is remaining work to do before we close, and at that time, we will be prepared to provide more comment. In the interim, our investment team continues actively to underwrite new office, retail, and multifamily acquisition opportunities, and we remain well positioned with our flexible balance sheet as we continue to seek ways to deploy our capital through disciplined external growth opportunities. ESRT has a well-honed operational skill set, flexible balance sheet, disciplined track record of capital allocation, and ESG leadership position, all to deliver long-term shareholder value. The team works well and hard as we press forward. Now, I will turn it over to Tom Durels.

Thanks, Tony, and good afternoon, everyone. In the third quarter, we signed 34 new and renewal leases totaling approximately 268,000 square feet, which included 212,000 square feet in our Manhattan office properties, 52,000 square feet in our Greater New York Metropolitan office properties, and 4,000 square feet in our retail portfolio. Major leases signed this quarter include a 29,000 square foot expansion lease with iCapital Network at One Grand Central Place. This is the second expansion by iCapital, which now occupies 65,000 total square feet. A 30,000 square foot new lease with Argo Group Insurance at 501 7th Avenue; and a 29,000 square foot new lease with Playfly Sports, a leading sports marketing and media company at 1333 Broadway. We also signed leases for 15 prebuilt office spaces in Manhattan this quarter. Our fully modernized 21st Century portfolio benefits from the flight to quality that many speak and write about today. We have been first in energy efficiency and amenitization. We have been leaders in healthy buildings and indoor environmental quality, being the first portfolio in the Americas to be certified by the WELL Health and Safety standard. These are the qualities that remain front of mind for most tenants who must consider how the space they occupy factors into their ESG and CSR goals. Tenants are focused on their employees' return to the office. Our industry leadership in these areas is widely recognized by the brokerage community, and our more than a decade of work in indoor environmental quality and sustainability positions us to provide real estate solutions to a wide range of prospective tenants who seek a healthy workplace environment. Our focus on quantitative measures for energy efficiency, sustainability, and indoor environmental quality really sets us apart. Another quantitative measure in which we distinguish ourselves is our pricing. Our range of rents for our great locations with convenient access to mass transit really stands out because to get the benefits of what we offer, tenants' alternatives are basically all at much higher prices. We are at the forefront of the future proof of affordable offices in Manhattan, and in this, we truly stand out. Tour volume in the third quarter of 2021 for our Manhattan office portfolio increased by approximately 64% compared to the third quarter of 2020. We have seen an improvement in retention rates for our prebuilts relative to 2020 levels and are close to 2019 levels. Fortunately, we have 289,000 square feet of prebuilt suites in our Manhattan portfolio that are built and ready for immediate lease-up. We are also in active discussions with high-quality tenants in finance, healthcare, TAMI, and professional services for full floor new renewal and expansion leases. During the third quarter, rental rates on new and renewal leases signed at our Manhattan office properties increased by 1% on a cash basis compared to the prior escalated rents. And new and renewal leases across our entire office portfolio were flat. As previously communicated, GBG filed for Chapter 11 bankruptcy protection for its North American operations on July 29, 2021. Subsequently, GBG filed to reject their leases at 1333 Broadway for 162,000 square feet and at the Empire State Building for 191,000 square feet; and both lease rejections were approved by the bankruptcy court during the third quarter of 2021. Christina will cover the financial implications shortly, but I wanted to share some leasing perspective. We have automatic or exercised our interment rights on 3 subtenants that leased 133,000 square feet at 1333 Broadway. We are actively marketing the 220,000 square feet balance of GBG's former space, most of which is located at the Empire State Building. The large floor plates previously occupied by GBG at the Empire State Building were highly desirable pre-COVID, remain so today, and we feel confident in our ability to release the space. Our total portfolio lease percentage is 86.5%, down 170 basis points from last quarter, and occupancy of 83.5% was down 170 basis points from the prior quarter, primarily driven by the GBG lease rejection, partially offset by recent lease commencements. For the balance of 2021, we anticipate tenant move-outs of 122,000 square feet, which will be offset by signed leases that we anticipate will commence before year-end of 61,000 square feet. Overall, we have over 355,000 square feet of signed leases not yet commenced, most of which is due to commence by the end of 2023. Please refer to the tables on Pages 6 and 10 in our supplemental. In summary, we had a solid leasing quarter with 268,000 square feet of total leases signed. Our centrally located portfolio with convenient access to mass transit is well positioned, fully modernized, and has built tenant spaces ready for lease-up. Our industry leadership and experience in indoor environmental quality and sustainability enhances our ability to attract and retain quality tenants. Now I'll turn the call over to Christina.

Thanks, Tom. For the third quarter, we reported core FFO of $55 million or $0.20 per diluted share. Same-store property operations, if you exclude one-time lease termination fees and Observatory results from the respective period, yielded a 5.7% cash NOI decrease from the third quarter of 2020. This decrease was primarily driven by a reduction in revenues due to decreased occupancy, 3Q '21 revenue from Global Brands Group treated partially as rental revenue and partially as lease termination income and write-offs taken over the 1-year period. Our rent collections totaled 95% of third quarter '21 total billings, consistent with recent quarters. Switching to Observatory results. Observatory revenue for the third quarter of 2021 was $12.8 million. Observatory expenses were $6.4 million in the third quarter of 2021, and we continue to expect run rate expenses to be approximately $6 million to $7 million for the fourth quarter of '21, depending upon the pace of the visitor ramp-up. As Tom noted, GBG rejected both leases at 1333 Broadway and at the Empire State Building, which had the following impact on our results: a $1.6 million noncash write-off in 3Q of the straight-line rent receivable balance related to GBG's lease at 1333 Broadway, as we had previously announced on last quarter's call. We drew down in full the balance of GBG's $17 million letter of credit, which was applied as follows: $5.2 million was applied against GBG's straight-line rent receivable balance related to their lease at the Empire State Building; and $1.7 million was recognized as GAAP rental revenue for the partial period in 3Q when the lease remained in place; and $10.1 million was recognized as lease termination income. Turning to our balance sheet. As of September 30, 2021, the company had $1.4 billion of liquidity, which is comprised of $582 million of cash and $850 million of undrawn capacity on our revolving credit facility. The company had total debt outstanding of approximately $2.2 billion on a gross basis and $1.6 billion on a net basis as of September 30, 2021. The company's total debt has a weighted average interest rate of 3.9% and a weighted average term to maturity of 7.4 years. We have a well-laddered maturity schedule with no outstanding debt maturity until November 2024. Our net debt to total market capitalization was 34.7%, and net debt to adjusted EBITDA was 5.6x. In the third quarter and through October 26, 2021, the company repurchased $6.5 million of its common stock at a weighted average price of $10.41 per share. This brings the cumulative total to date since the stock repurchase program began on March 5, 2020, to $153.8 million at a weighted average price of $8.41 per share. Our balance sheet flexibility provides us with the ability to evaluate opportunities to deploy capital for external growth, as well as engage in the repurchase of our shares. Our investment team continues to actively underwrite investment opportunities against the backdrop of record levels of private equity capital, wide availability of low-cost financing, and lack of distressed asset pricing. As we have emphasized, we will continue to exercise prudence in our capital allocation and focus on the creation of long-term shareholder value. I will now turn the call back to the operator for a Q&A session.

Our first question is from Steve Sakwa with Evercore ISI.

A couple of questions. Tony, I guess, I know you can't speak specifically about the 2 apartment acquisitions that you announced in the 8-K. But can you maybe talk philosophically about the apartment business and how you plan to grow it, and how you plan to manage it over time? What percentage investors should maybe expect this to be of the overall portfolio?

Thanks, Steve, for your question. The transaction is consistent with our previously stated focus on New York City office, retail, and multifamily. Please remember, we have a long history of experience in multifamily assets with our predecessor entities and our Malkin Holdings, where we have a few thousand apartments outside of our REIT, outside of the New York area. We really think we have an opportunity to add value through another asset class. We like the prospects for our capital in these 2 transactions. I think for the asset allocation piece, I'd like to hand it over to Christina. Before I do, I would just add, we do think that with our true desire to grow the portfolio right now and with the fact that office performance is where it is, has the costs that it does, this is something which is more attractive to us at this time. And Christina, maybe you could go into that a little bit.

Sure. Steve, as we've discussed in the past, we view everything in balance. I think a key question the investment community must have is about share buybacks and the implied cap rate at which we trade. On that, we would say we recognize that our share price is discounted. It's a very attractive opportunity to buy back our portfolio. And for that reason, buybacks are on the table, as we've communicated and as demonstrated through some of the buyback activity that we've had in the quarter. That being said, that's only one toggle as we've mentioned, right? There's also acquisitions that can help drive long-term shareholder value, cash flow growth, and contribute to the portfolio in a strategic manner going forward. And of course, we also balance that with operating runway and balance sheet flexibility. So we can see as the market evolves where we can tap into more opportunities.

I'll just add that, look, we look forward to when we have the opportunity to share the further details here and think that people understand how it fits with our local sharpshooter really, as I've said so many times, working through very complicated transactions to create value. It is very consistent with all of that.

Yes. Tony, I can appreciate that. But I think, look, the investment community wants to understand, are you planning to build out an internal platform? I know the press release said that the person you're buying these from will continue to manage the assets and keep a 10% stake, so they've got some skin in the game. But how do you add value to something that you're not managing day one? And does that imply that you're going to keep it third-party managed, or that you'll build an apartment platform inside of ESRT?

Thanks. Sure. Look, we feel, again, when it's disclosed, people understand this is a proven performer who's done very well working with institutional and other meaningful investors, and we appreciate the relationship that we can build with this particular party. It fits in very well with our goals. So I would say that we look at this as an opportunity to expand, number one. Number two, we like the residential business on a relative basis, and on an actual basis, we think that with the specter of inflation, it also fits very nicely. But the specter of inflation is not what drove us here. It's the unique attributes of this transaction, the partnership into which we will enter, the fact that we do like this as a use of our capital, we think it provides as we will disclose, it will compare favorably to alternatives. Let's just put it that way. We like the opportunity relative to what else we might do. And while I wouldn't put it past us at some point to have an internal platform, I would say that the partner we have here is an excellent proven partner, and that will become obvious as we're able to disclose. And we may even have an opportunity to build within that relationship as well.

Okay. Thanks. I guess just maybe moving on to leasing. I know the GBG situation was kind of fluid in the third quarter, and it probably didn't exactly play out the way you had hoped. But when you look at where your occupancy sits today at 83.5%, I know you're higher leased. The portfolio has lost about 600 basis points of occupancy since the end of the third quarter of 2019, so in about 2 years. Can you maybe just talk about the steps to rebuild that occupancy? When do you see it bottoming? And how quickly can you get it back to kind of the high 80s?

Sure, Steve. This is Tom. We had a really strong leasing quarter and a healthy pipeline of activity heading into the fourth quarter. We're currently benefiting from a flight to quality, as tenants are focused on the advantages our portfolio offers, such as modernized buildings for the 21st Century, new energy-efficient spaces, healthy buildings, and good indoor environmental quality. Convenient access to mass transit for commuting is also crucial for tenants today, along with the amenities available both in our buildings and in the neighborhoods. Our value proposition stands out within our rent range, as alternatives for tenants are generally priced significantly higher. So again, we've had a solid leasing quarter with good activity as we move into the fourth quarter. I also anticipate improved mark-to-market rents compared to the third quarter. We have interest from full-floor tenants and prebuilts across a mix of sectors including financial services, tech, healthcare, and professional services, both for new leases and renewals. Our pipeline includes substantial expansion deals from existing tenants. Tour activity has increased by 64% compared to the third quarter of 2020. Regarding occupancy and lease percentages, I expect a higher year-end lease percentage due to our current healthy pipeline. We currently have 355,000 square feet of signed leases awaiting commencement, with 61,000 square feet expected to start by year-end. The 130 basis point decline in occupancy and lease percentage this quarter was mainly due to the termination of the GBG lease. The positive news is that we collected $17 million in security deposits, which will help cover the costs of re-leasing the former space at the Empire State Building, previously occupied by GBG, which had large full floors that have historically leased well. The Empire State Building is fully modernized for today’s needs, offering a comprehensive range of amenities that tenants demand. We are actively managing the GBG situation and have reduced our exposure to 220,000 square feet through various actions, and we plan to lease our way out by leveraging our offerings of energy efficiency, indoor environmental quality, and healthy buildings in a market that is eager for these features at accessible prices.

Let’s throw one thing in there. Tony here, Steve, which is that don't forget that a lot of that vacancy that was created after Q4 2019 was intentional by us in order to fulfill obligations for tenants for whom we already have signed leases. So it does show up right now. However, we had to take back space to prep it and gut it in order for tenants who signed leases to move in. So I realize that the stats are what they are, and we appreciate that. It was part of what’s necessary in order for us to bring new tenants into the portfolio at much higher rates.

Our next question is from Craig Mailman with KeyBanc Capital Markets.

Just to follow up on the acquisition. And again, I know you can't talk too much, but maybe higher level or just academically, given where your stock is trading at a discount to NAV and traditionally where multifamily is kind of traded. Could you just give us a sense of the type of returns you're targeting, kind of the upside you can see in these assets that justify putting the capital to work today? As you point out, rents have already kind of rebounded to pre-COVID levels in certain parts of the city. So just kind of walk us through maybe just higher level, how you think about return for this asset class vis-a-vis your cost of capital?

Thanks, Craig. I’ll address this, and then Christina may have some thoughts to add. We continuously evaluate and assess a range of market and off-market deals as well as family-sourced opportunities. Our team, a blend of experienced and newer members, is enthusiastic, focused, and forward-thinking. They have identified numerous potential activities for us to pursue regarding acquisition analysis and underwriting. We are absolutely confident that this specific transaction surpasses any other option we have encountered in the past year. This may reflect our perspective on the future, which might not be immediately clear. We believe that once we are able to share more details, it will become more apparent. I feel frustrated that we had to issue this 8-K, which was recommended for reasons mentioned by Tom Keltner. I would have preferred to communicate more directly and clearly. Our motivation stems from the partner we are working with, our assessment of available alternatives, and our aspiration to expand the company. Additionally, we did buy back stock, which we believe was a valuable investment. We reached a stage where we had possibly too much information that allowed us to continue buying back stock during the last quarter. With this disclosure, that situation has changed. In summary, I’ll pass it to Christina, and anyone with additional questions is welcome to ask. Christina, would you like to add anything?

Yes. I would just add, as Tony mentioned, right, we do believe in buybacks. We've emphasized that. So that is on the table. Just to point out the obvious, there's no distress in the market, even if we were to stick within the office asset class, office is not trading at the implied cap rates that the stocks are at, right? So we look to drive value over time. Some of the assets that we look for in deals are upside to the going-in price and how it adds strategic value to ESRT, right? ESRT is already a New York City local sharpshooter with diversified ways to drive value. That includes our value price point within office with a full suite of very attractive features, our everyday retail, our Observatory that benefits from tourism. Now we can add multifamily to that, which does have a different CapEx profile, has different drivers for tenant demand and some inflation linkage that differs. We look at all of these factors and rest assured, what we seek is to drive value over time, and we look to contribute to shareholder value.

Right. I guess what I'm trying to get is actual numbers. I mean, you guys passed on acquisition a bunch of years ago when NYRT was selling because you said the return was sort of a 5% yield, and that was unacceptable. What kind of yield are you guys underwriting to on potential apartment acquisitions with the stock trading on my numbers north of an 8 cap? I'm just trying to get a sense of where you guys are actually underwriting to that gives you comfort and optimism that this is the right time to put capital out.

Look, I think we probably said all we can. I would just reiterate one thing, Craig. As a matter of fact, I know we've said all we can with regard to the specific transaction. That's absolute. And with regard to things in general, I'd say we're conscious of where the stock trades, and we're conscious of the numbers you've specified. We think this compares over time in a way that is logical for our goal to grow the company externally and produce a great result for our shareholders, of which I expect to benefit significantly myself from our extensive holdings. The only thing I can say is I really look forward to the opportunity to be more specific, and for us to do anything further here really goes well beyond what we're allowed to do.

What's the time frame you think when you guys can close this and tell us more?

Well, we certainly hope it's done in the fourth quarter.

Our next question is from Jamie Feldman with Bank of America.

I appreciate the color on the Edge and your thoughts on that transaction. Can you talk about any appetite you may have to either sell or monetize a piece of your Observatory?

Sure. Thank you so much for that question because it’s something I think we’d really like to communicate. When we think about the Empire State Building, we fought, as people or students of history might remember, a very long multi-decade battle to unite the fee and collapse the master and operating leases, so we have one asset. We fought a very long and hard battle to get rid of an attraction which have been leased in the Empire State Building during the time of its management by Helmsley-Spear. Long before anybody, I think, in this call likely most of you paid any attention to it, it did a tremendous detriment to the value of the asset to have somebody else inside. That said, there’s probably a way in which that could be done better over time. Our view is that if, when, ESB is sold, we want the market to determine the highest price and whether or not to break it up. If we ever decide to sell a part of the Empire State Building, our view is, to be clear, Jamie, we’d sell a slice of the Napoleon, not a layer. We would look carefully, should we ever want to raise capital from ESB at a partial sale of the total gem, and not split it up into different pieces, which proved over time in the past to create opportunities for litigation and diminution of brand. Frankly, it was, in our view, a great coup to put it all together, and we’re not interested during our ownership period to break up the pieces.

Okay. So I guess, just to be clear, are you considering a potential sale of part of the entire building, if not just the Observatory?

Yes, to clarify, we currently have no active plans to market any part of our existing portfolio. We're very clear on this point. Additionally, our focus is on the Observatory, which is a strong business with high margins and cash flows that do not rely on ongoing capital expenditures. It also has immediate inflation adjustments, allowing us to modify rents daily without commissions, free rent, tenant installation, or base building work, especially following our recent redevelopment. All additional revenue contributes directly to our profits. Regarding the Observatory, I want to emphasize that our observations indicate institutional investment is clearly recognizing its value and investing capital in similar attractions in New York City, despite the lack of a strong operational history. We believe this will enhance the perceived value by both potential buyers and sellers compared to recent valuations placed on the Observatory.

Okay. Shifting to the prebuilt business, WeWork is now public and has a stronger balance sheet. I’m wondering if you’re experiencing any changes in the types of leases you’re signing, such as rent, lease duration, or breaks in the prebuilt business. How is the shorter lease duration business affected by the changes in the flexible office competitive landscape?

Sure, Jamie, this is Tom. To point out that we signed 15 prebuilts during the quarter, and it’s always been an active part of our program. As you know, our prebuilt program goes back quite a few years. What is relatively new, and maybe you’ve picked this up on prior calls, is that we offer ESRT suites, which are our full turnkey suites and gives tenants the option to have us provide a fully furnished, fully wired space, and even provide move coordination; so that all the tenant has to do is really pick up from the current location and plug in their laptop at their new location and can be up and running. So we have seen quite a bit of uptake on that, maybe as much as 1/3 of the prebuilt. Prebuilts have been taking us up on those turnkey suites. And then, of course, our IEQ suites, which are MERV 13 filters, active bipolar ionization, increased fresh air, low VOC products for healthy air, is also part of our prebuilt offering, and that’s attracting a lot of tenants. So that is one change, and we view it as another part of our overall offering. Not all tenants opt for it, but it gives us another alternative to give our prospective tenants.

Yes. And as far as lease term, we’re very clear we are signing lease terms pretty much the same as we have signed at length of leases we've had before, right, Tom?

Yes. On prebuilts, generally a 5-year term. It can range from anywhere 3 to 7. When we go less than 5, we’re going to look at, okay, is this a tenant that’s a prospect for growth? Do we like to get the tenant in the portfolio? But generally, on average, we’re doing 5-year term deals on prebuilts.

And full floors, multi-floors?

On full floors, the lease terms typically range from 7 to 15 years, with an average of about 10 years. We have not observed any significant changes in the length of lease terms. Currently, we are in negotiations with several expansion tenants, which could extend the terms of their existing leases. This is encouraging as it indicates that tenants are making long-term commitments to their office space in New York City.

Okay. Are you seeing a pickup in demand from some smaller tenants at all? Or no, it’s pretty much the same as it’s been?

Yes. So last quarter, the bulk of our activity by way of showings, tours, and lease activity were in the smaller suites. This quarter, we actually had a good mix of full floors and prebuilt tenants. I’d say the majority of our tours by showing numbers are with the smaller suites, but we have seen also that pick up in full floor activity. I think the small tenants were the first to be able to go home. They were quite nimble during COVID, but they were also the first to return to the market. I think that we’ll see this followed up by the multi-floor tenants.

Okay. And did I hear you correctly that you said your IEQ suites have kind of the upgraded filters? And then does that imply the other suites don’t? I’m just - you basically have a suite package that has the full upgrade and one that doesn’t? Did I hear that right?

It’s a full offering that includes active bipolar ionization which we provide on all of our new leasing as well as within our indoor environmental quality suites. Our entire portfolio, prior to COVID, was equipped with MERV 13 filters and continues to maintain that standard today.

But in answer to your question, the suites we’re leasing today, we lease with indoor environmental quality. To your specific question, Jamie, that is not an alternative. It’s what we do.

Okay, that makes more sense. Can you discuss the current credit watch list? I understand GBG was a unique situation, but how would you assess the risk of any similar tenants?

Jamie, we have no comment on others. As we’ve discussed, GBG, we proactively managed over time, and nothing to speak of for the other tenants.

Our next question is from Manny Korchman with Citi.

It's Michael Bilerman here with Manny. Maybe Tony, we can start just on the Observatory, and obviously, you referenced the KKR deal at the Edge and talked about the financing that was able to get on One Vanderbilt. Going back in history, the management team had guided the Street without a lot of comparables, just sort of gated entertainment type of businesses as a multiple for how, if you ever had sold an interest in the Observatory or sold it, how it should be valued. I guess can you give us a little bit more color today, now that you've seen how the debt markets are pricing a building with an Observatory? How KKR stepped into the Edge? How we should sort of put some goalposts around the value of the Observatory?

I love that question. Thank you for asking it. What we did in the past and what we still have in our investor presentation was we tried to grab what could be used. Don't forget, the most of the revenue that comes to the Observatory is rent. If somebody else were to operate the Observatory as an outside party, they would pay us rent. We disclosed what the margins are. It's clearly a tremendously profitable business.

Well, it's intercompany rent, right? I mean obviously, the operator that's going to buy is going to negotiate a new lease with you to earn profitability on the business, right? Obviously, you're losing money because of COVID. So I'm not...

No, no, hold on. We're not using any money because of COVID. The Observatory has been profitable 2 quarters in a row, with increased profitability in the most recent quarter, number one. Number two, the point that I would make is it's what's the value of the piece above the rent?

Yes.

What we believe is that the market has indicated we don't necessarily need to aim for such a high multiple. In fact, people are viewing these businesses as much more stable. We think that if you want to focus on that profitability point, it likely deserves a higher multiple than what we have assigned in the past. That's our perspective. We consider these early transactions in a capital-rich environment, as there is movement of capital in this area due to perceived value. However, we believe these are not actual values; rather, this is pricing discovery.

I'm trying to understand if the recent transactions support the valuation of the Observatory at over $1.5 billion, or if they indicate that the value might actually be lower.

We aim to connect our thoughts regarding our capacity, as well as our per capita earnings, authenticity, and brand, to the outcomes of our recent renovations. We believe there is significant potential for increased business and higher earnings per capita, which justifies a premium valuation.

Shifting to multifamily, if we reflect on the IPO in 2013 while in the old boardroom, multifamily was not a topic of discussion but was part of the predecessor along with your private holdings and Malkin Holdings. Can you provide more details about who remains involved in that entity and what multifamily assets existed in the predecessor? How long ago was that? Additionally, is it just you from Malkin Holdings who has insight into the thousands of multifamily units you mentioned owning? I'm trying to grasp the relationships and the overall structure.

It's publicly known that we have service agreements for supervised properties, including multifamily units, for which we provide asset management services. Tom Durels played a significant role in this, and our team encompasses property maintenance, insurance, and legal experts. Our past experience includes projects like the construction of the Corinthian and the Alexandria, as well as the redevelopment of the Grand Palais into the Mondrian at 54th and Second. Ultimately, the Alexandria transitioned to rental, and we navigated various workouts related to that. We have experience with thousands of units in New York City, likely close to 2,000, as well as properties outside the city, and this knowledge spans our entire portfolio. Our asset management function for multifamily properties is active within ESRT.

Okay. In terms of the future scope for multifamily opportunities, is your focus strictly on Manhattan, or are you also considering areas in the Tri-state region, such as Jersey City or some northern suburbs? How should we understand your considerations in this regard?

Yes. I'd say our focus is New York City and within that, probably down to 2 boroughs.

Boroughs. So Manhattan and what? Are we going to Long Island, or are we going to Queens?

Well, Long Island is not part of Manhattan as far as I know, but we might consider Brooklyn or Queens. However, Manhattan is our primary focus right now, and we have consistently stated that our acquisition efforts are centered on New York City office, retail, and multifamily assets.

Okay. Is this transaction completely without any related parties? Is it entirely a third-party deal, or is there a related party involved, either from your side, the family, or someone in the company?

There are multiple parties involved, and none of them is related.

Okay. And then how should we think about going forward, given the fact that you have multifamily outside of the company? Are those potential now acquisition targets? I know at the time of the IPO, the option properties were only the office assets. So how should we think about that going forward?

Yes. None of our other assets, which were not included in the IPO on the residential side, are located in Manhattan or the Greater New York metro area. They still remain outside of these areas. I do not anticipate any involvement from the Malkin family in the residential segment of ESRT.

Okay. Last question on multifamily. I assume you're observing how the stock has responded and how investors are feeling about this move. I understand you’ve mentioned considering this for a while. It’s difficult to assess, right? How much of this is simply a lack of details, like you’re acquiring these properties for $500,000 each, but what are they? Where are they located? What are the current rents? What’s the cap rate you’re entering at? I’m just trying to understand the various factors compared to the reaction of, oh my goodness, they just spent $300 million likely at a time when their stock is trading at a significant discount. I acknowledge that you are actively purchasing, but $11 million does not equate to putting $310 million to work. I’m just trying to gauge your internal perspective on how the market is responding.

I think the market is just observing the information, and I think that we've got a week before we can take any action on buying our stock.

Our next question is from John Kim with BMO Capital Markets.

Notwithstanding today’s share price reaction, how much multifamily exposure do you need for it to impact Empire State valuation? I mean, these 2 assets are about 6% of enterprise value, so it’s not that meaningful yet.

John, so look, we’ll look at deals on a deal-by-deal basis, right? They have to make sense. It can’t be driven by strictly what percentage of the pie chart we want it to be. Obviously, we hope for this not to be an orphan asset and contribute strategically for the reasons that I mentioned. Just to touch on your comment as well as the previous question, the share price reaction, we recognize we have not given a lot of information. But we’re simply trying to be transparent as much as possible and felt we should put that out there, but recognize there could be some frustration. Understand the comment on the cap rate differential. We’ve mentioned buybacks are definitely on the table. We can buy back at a discounted valuation of our own portfolio. We know the risk for it. We will do that. The last comment I would say is it’s not new news that the market generally has criticized diversified components of REIT portfolios. It’s not as well understood; people prefer pure play. But the point that we would make is we’re already diversified, and we think that this provides another way for us to be even better positioned for a New York City recovery. Again, office, value price point offering a lot to tenants, and we traffic in a different price point versus the other public peers. Number two, the retail is everyday retail, we benefit from that high traffic, and number three, the Observatory is low CapEx, high-margin, attractive business that we see smart, sophisticated capital entering. We’re really pleased with that, and if we can have multifamily in the portfolio that has different CapEx profiles, demand drivers, and can further add to the portfolio, we look forward to the opportunity to do that. However, we need the deal to speak for themselves to add value to the portfolio so we can generate value.

Post these 2 assets, you’ll have about $460 million of cash on hand. This quarter, your leverage improved at least on a net debt-to-EBITDA basis with the Observatory earnings coming up. As that continues to improve, are you going to be more proactively using cash? Or are you going to be funding acquisitions through the sale of non-core assets, including maybe suburban office?

We’ve mentioned nothing is off the table in terms of sales. We’re really pleased to have this liquidity. The net debt-to-EBITDA ratio does improve as operating results continue to improve, as we’ve mentioned. It’s not because we’ve levered up. So we’ll continue to focus on having that balance sheet flexibility. If we can borrow attractively, we’ll use that as part of funding. But we’re very fortunate to also have the cash that also allows us to do buybacks along the way.

We’re very fortunate to be able to say exactly what you just said, as the Observatory comes back, wow, our net debt to enterprise value just drops back to where it was and gives us a much better perspective from which to work.

Tony, you mentioned in your prepared remarks not being able to share inside information on the Edge. Did you participate in the investment process at all, either for informational purposes or as a serious investment?

Look, it’s our requirement as the leading destination attraction of its kind in New York City to know what’s going on. Suffice to say if I had stuff I felt I could share, I would; I don’t. Therefore, we go back to publicly available information. There was information circulated as the Edge went up for financing. There is information we can deduce. We definitely have people out there to survey and check and follow everything that goes on with everybody else’s operations, and I can only leave it at that.

And just to double-check, the sale was just an investment as a passive investor, right? The operations were not considered as part of the sale?

We’re in no position to make the comments other than what we’ve made. There’s disclosure up there by other parties and our own insights. We’re very careful to say what we can say, and we’ve said what we can say on that.

And our final question is from Blaine Heck with Wells Fargo.

Tony, more of a big picture question on the office side. Can you give us your thoughts around how you expect the leasing decision process and the timetable to play out for large tenants as they return? I guess I'm wondering, once tenants physically return to the office to whatever extent they will, how long do you think it will take them to determine how work from home and more flexible work schedules are going to impact what their ultimate space requirements are going to be? Obviously, they can't act on that typically until their lease expires in most cases. But I'm more interested in that first assessment and planning and decision process. How long do you think that could take?

Blaine, first of all, thank you so much for hanging on the line here and thank you so much for that question, which I think is one that's been missed and is spot on. I can tell you from behaviors we've seen with our existing portfolio of tenants that there are those who have acted with absolute clarity and focus and there are those who are confused. The ones that have acted with the most clarity and focus, candidly, are the best businesses. They do not hesitate. They know exactly what they will do. We get to see the redevelopment plans and the new installation plans of some large tenants for whom we've signed leases and some of those leases for which we created vacancy in order to bring people in. What we succeeded in doing is we were able to see, wow, look at the reduction in benching, the increase in convening areas. The very common and popular theme here is we will make the office a place which is so attractive that people will want to be here to be more successful in convening, number one. This is the first year, full year in which we've got people looking at reviews and compensation and performance with salaries, promotions, and change of personnel that have been completely out of the office for a lot of people. Those who are in the office are doing very well, showing a lot of confidence and clarity. Those bigger businesses, candidly, whose growth is so strong and their business is so great, they will plow ahead and have great clarity of what they need and the way they want to get things done. They understand their culture, and they get it. There’s no hesitation, and we’ve seen a bunch of those people take spaces. The last thing I would say is we are a go-to for flight to quality. Flight to quality is a huge factor for us. When we look at a tenant who signs with us, sometimes they'll take a second space from what they've got. We see big growth within our portfolio, which is in our investor deck. Over 2 million square feet of expansion since we went public in October of 2013, and we will add to that number handily in the fourth quarter. When we look at these things, all I would say is the areas that have the least clarity are finance, legal, and accounting. I think that's because they are overwhelmed and impacted by the combined fiscal and monetary stimuli. They're floating at the gills with too much work to do. That will change. This is not that the snake has changed. There's a rat and a snake, and it's this floating caused by the massive fiscal and monetary stimulus. I think those people, when they realize in order to compete for business, they're going to have to show up, they will. We’ve got no other questions. So what I’ll do is if I can just say, please remember that forward-looking statements on plans to ramp up the Observatory and return to business are discussion purposes only and to help you with your models. They are not guidance nor are they guarantees. Many thanks to our great team who have done so, and I have every confidence we’ll continue to do a great job on behalf of all stakeholders. A big thank you to Greg Faje, our IR lead, as he heads off to his next position out of the real estate industry for all his hard work and contributions. Thank you, Greg. We look forward to the chance to meet with many of you at non-deal roadshows and property tours in the months ahead and to share our fourth quarter results in February. Until then, stay safe, get your booster if you qualify, and thank you for your interest. Of course, onward and upward.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.