Greetings, and welcome to the Empire State Realty Trust Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Heather Houston, Senior Vice President, Deputy General Counsel and Corporate Secretary. Thank you. You may begin.

Good afternoon. Thank you for joining us today for Empire State Realty Trust third quarter 2022 earnings conference call. In addition to the press release distributed yesterday, a quarterly supplemental package with further detail on our results and our latest investor presentation were posted in the Investors section of the company's website at esrtreit.com. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements as defined in applicable securities laws, including those related to market conditions, property operations, capital expenditures, income, expense, financial results and proposed transactions and events. As a reminder, forward-looking statements represent management's current estimates. They are subject to risks and uncertainties which may cause actual results to differ from those discussed today. Empire State Realty Trust assumes no obligation to update any forward-looking statements 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. The COVID situation has normalized, and we will no longer include specific COVID disclosure unless warranted. During today's call, we will discuss certain non-GAAP financial measures, such as FFO, modified and core FFO, NOI, same-store NOI, cash NOI, and EBITDA, which we believe are meaningful in evaluating the company's performance. The definitions and reconciliations of these measures to the most directly comparable GAAP measures are included in the earnings release and supplemental package, each available on the company's website. Now I will turn the call over to Tony Malkin, our Chairman, President and Chief Executive Officer.

Thanks, Heather, and good afternoon to everyone. We are pleased to report strong third quarter results, updates on our capital recycling activities, and share the outlook for the balance of our year with you today. ESRT's focus is unchanged; lease space, sell tickets to the observatory, and enhance shareholder value through proactive portfolio management and capital allocation. ESRT remains well positioned with a modernized portfolio to take advantage of the flight to quality signed leases that will contribute to earnings and a strong and flexible balance sheet to take advantage of investment opportunities. There is no doubt about it. New York City is busy again, and we are a great way to benefit from New York City's upside with multiple revenue streams from office, tourism, residential, and retail. Some of you may have noted certain sell-side commentary that we exceeded expectations in some areas and fell below in others. That is the beauty of our revenue composition. We have four revenue streams. And therefore, if you want to bet on New York City, we are the best way to make a balanced investment. Our modernized buildings close to mass transit with great amenities and more to come, and our industry leadership in energy efficiency and indoor environmental quality help us to draw consistent leasing volumes, and the third quarter was no exception. We find some great independent validation of how the market values our portfolio in the video by our 250 West 57th Street tenant, COOKFOX Architects, and we have that on Page five in our updated investor presentation. In fact, there are several videos in our investor presentation, and they are all worth the time of anyone who wants to understand our company. The Empire State Building Observatory is TripAdvisor's number one attraction in the United States and number three in the world. In today's world, the customer rates the experiences and amplifies the brand. Our customers have made our iconic brand universally and internationally important and our visitors rate more highly than ever our best-in-class experience. Our strong and flexible balance sheet, with no floating rate debt exposure and a well-laddered maturity schedule with no debt maturity for the next two years, makes us very well positioned to allocate capital strategically. We continued our buyback activity during the third quarter and beyond. Our identification of cash accretive external growth with an eye to how we can recycle our portfolio for better cash performance and give ESRT its next legs of growth has been very successful. Christina will comment on our current balance sheet recycling. We built our business to create success in unstable markets, and we see an opportunity ahead. Tom Durels will cover our healthy leasing this quarter, which totaled 335,000 square feet with strong mark-to-market spreads on new leases signed in our Manhattan office portfolio. ESRT is a beneficiary of the flight to quality trend. Tenants focus on buildings with amenities, healthy building features, energy efficiency, low emissions, indoor environmental quality, and convenient access to mass transit. Tenants are attracted to our modernized buildings and their accessible price points, particularly in this environment. Existing tenants who know and love our product grow in our portfolio. The recent expansion of Universal Services of America follows expansions with iCapital and Burlington signed last quarter in Signature Bank prior to that. LinkedIn, our largest office tenant, has expanded many times within ESRT's portfolio and recently created a great video showcasing how their office space at the Empire State Building is an asset that helps them attract and retain talent. The link to that video can be found on Page six in our updated investor presentation. We continue to build our lease percentage, and that will drive higher occupancy and earnings in the future. Third quarter visitation to the Empire State Building Observatory totaled 687,000 visitors, and we continued to benefit from strong revenues per capita. A variety of factors, which include airport operation disruptions, war in Europe, and the continued shutdown of China slowed the pace of growth of international travel to the United States through the quarter. Third quarter recapture rate of 2019 levels was 66%. We have modified our hypothetical fourth quarter visitation recapture to remain at the third quarter's level. While it will take longer than we previously expected to reach full recovery of the observatory business back to pre-pandemic levels, we remain confident in the full recovery. We have effectively managed the business through market downturns before, as seen on Page 15 of our investor presentation. Our team continues to focus on effective expense management, made so much easier and more effective through our all-reservation ticketing and reservation system implemented during the COVID shutdown, delivery of our best-in-class experience, and the procurement of the best partnerships for our iconic brand. The Empire State Building Observatory has unmatched brand recognition and is the authentic must-do for a visitor to New York City. This was recognized by TripAdvisor, who declared the ESB Observatory as the number one attraction in the United States and number three in the world. We continue to underwrite new acquisition opportunities that are complementary to our New York City focused portfolio where risk-adjusted returns can be compelling and where we think we have an edge with our local knowledge, ability to spot unique opportunities, and ability to be nimble with our very well-positioned balance sheet. We also continue to review our portfolio to monetize assets in which we have added value and reinvest the proceeds into cash accretive acquisitions, which Christina will touch upon shortly. We are happy to report additional sustainability milestones achieved during the quarter. ESRT achieved carbon neutrality for our entire commercial portfolio in 2022. ESRT accomplished this through its industry leadership on in-building energy efficiency retrofit work, which has reduced operational emissions 54% at the Empire State Building and 43% portfolio-wide to date since 2009. Combined with renewable wind racks, that's renewable energy credits, to offset 100% of our electrical usage and preservation of close to 9,000 acres of biodiverse forest to offset 100% of ESRT's nonelectric fossil fuel usage. ESRT has made notable strides in emissions reductions due to the important building energy efficiency retro work that we have done over the last decade, coupled with ongoing tenant engagement and collaboration. ESRT is America's first commercial office REIT to join the United Nations Global Compact and commit to the Women's Empowerment Principles. And lastly, we announced just earlier this month that ESRT earned the highest possible GRAS 5-star rating and Green Star recognition for the third consecutive year with a score of 95. Additionally, ESRT received a score of 96, the highest in the U.S. diversified group, and an A rating in the public disclosure assessment, which measures ESG disclosure activities. We are extremely happy with these accomplishments and recognition within the ESG space this quarter, and we'll continue to build on these going forward. Now I will turn it over to Tom Durels.

Thanks, Tony, and good afternoon, everyone. We had another solid quarter, headlined by 335,000 square feet of total leasing volume across our commercial portfolio, which included strong mark-to-market spreads in our Manhattan office portfolio for new leases, steady tenant demand for our prebuilt spaces, and over 182,000 square feet of renewals. The facts show continued improvement from the environment we were in one year ago and that our fully modernized energy efficient and healthy buildings continue to be a destination for tenants' flight to quality. We offer newly built tenant spaces with the latest in indoor environmental quality technologies at a great price point with convenient access to mass transit and fantastic amenities to which we continue to add. In the third quarter, we signed 34 new and renewal leases totaling approximately 335,000 square feet at a weighted average lease term of approximately eight years, which includes 179,000 square feet in our Manhattan office properties, 115,000 square feet in our Greater New York Metropolitan office properties, and 41,000 square feet of retail. Notable leases signed this quarter include a 79,000 square foot renewal lease with Franklin Templeton at First Stamford Place, and with this most recent renewal and previously signed direct leases with former subtenants of Franklin Templeton, we have now re-leased all of Franklin Templeton's 138,000 square feet that was set to expire in September 2024. We also signed a 59,000 square foot direct lease with Alfred Dunner at 1333 Broadway that formerly occupied the space under a sublet from GBG and an expansion lease with Universal Services of America, who we located within our portfolio from one Grand Central Place to 5017 Seventh Avenue, where they more than doubled in size to 30,000 square feet and the previous original space at One Grand Central Place is already leased to another tenant. And a 28,000 square foot new lease with the New York City School Construction Authority at 1010 Third Avenue, which backfills the entirety of the space vacated this quarter by Ethan Allen. We also signed leases for 16 prebuilt office suites in Manhattan, and we've had good success leasing our prebuilt this year and are on pace to match our annual average prebuilt leased between 2017 and 2019. We saw a good improvement in leasing spreads this quarter. Blended lease spreads signed at our Manhattan office properties improved to a positive 10% on a cash basis compared to prior escalated rents driven by new leases up 23.6%. Leased percentage within our portfolio continued to increase in the third quarter. Consistent with our expectations, which we communicated during the last earnings call, the total commercial portfolio lease percentage was up 70 basis points quarter-over-quarter in the third quarter to 88.5%. The Manhattan office lease percentage increased 110 basis points quarter-over-quarter to 89.4% and has increased by 240 basis points year-to-date. We have now leased over 974,000 square feet year-to-date following another strong quarter, and we have only 68,000 square feet of renewal tenant vacates through the end of this year. We have active deals in our pipeline, and we'll continue to push forward to sign leases in negotiation that have the potential to drive portfolio leased percentage higher. Our focus continues to be on increasing our leased occupancy, which will translate to higher portfolio occupancy over time, and we maintain our projected 2022 year-end occupancy of 84% to 86%. Looking ahead to 2023, we have manageable upcoming lease expirations with only 5.5% or 540,000 square feet expiring in 2023, and we expect to vacate about 280,000 square feet to be vacated and 98,000 square feet of tenants who are undecided. That said, we feel confident in our ability to achieve positive absorption in 2023 despite current economic headwinds based on our proven ability to lease space through cycles. Additionally, we have $57 million of contracted incremental rent from signed leases not yet commenced and free rent burn off. As previously announced, we will expand our amenity offerings in 2023 across our Manhattan office portfolio to include a 10,000 square foot 400-person all hands presentation room, a basketball and pickleball court, a tenant lounge with bar service, and two golf simulators at the Empire State Building. And just announced this week, the new Starbucks Reserve spanning 23,000 square feet and three floors at the Empire State Building will open on November 16. The new reserve will be a one-of-a-kind destination with exclusive offerings, interactive experiences, curated food, and full-service cocktail menus. It is located in our Times Square south campus and will benefit from shared access to new amenities planned for 2023 that include a 300-person town hall presentation room and lounge at 1400 Broadway, a new rooftop lounge with private cabanas at 1333 Broadway, and we derive cost synergies from the proximity of our assets such that other buildings of similar size are unable to deliver comparable amenities. Despite the increased work from home flexibilities that companies have offered their employees over the last two years, very few of our tenants have decided to operate under a hoteling model, and our high-quality buildings offer a healthy workplace to attract and retain their employees. Additionally, New York City office-using employment has fully recovered, and it now exceeds pre-pandemic levels as close to 200,000 office-using jobs have been added since the second quarter of 2020. Same-store cash operating expenses and real estate taxes in the third quarter were $71.5 million, an increase of $7.1 million from second quarter levels and an $8.9 million increase from the third quarter of 2021 due to real estate taxes, utilities, labor, and repair and maintenance related to increased utilization. We continue to anticipate same-store operating expenses for the full year of 2022 will run about 7% below pre-pandemic levels due to a combination of earlier permanent cost-saving measures and gradual return to office throughout the year. Turning to our multifamily assets. Occupancy remained strong at 98.4%, and we continue to see strong mark-to-market increases and reduced concessions, which will validate our earlier investment decision. In summary, we had another solid leasing quarter with 335,000 square feet of total office and retail leases signed at strong and improved mark-to-market leasing spreads. We increased our Manhattan office lease percentage by 110 basis points quarter-over-quarter and 240 basis points year-to-date, and we're well positioned to increase our portfolio occupancy, and we continue to see strong fundamentals in our multifamily properties. Now I'll turn the call over to Christina.

Thanks, Tom. I'm pleased to provide comments on a solid quarter that emphasizes the competitive strength of our portfolio comprising quality office assets at accessible price points, the Empire State Building Observatory, the number one attraction in the United States, strong everyday retail assets with 95% national retail tenancy, and our well-located, amenity-rich multifamily assets. For the third quarter of 2022, we reported core FFO of $56.5 million or $0.21 per diluted share, which compares to core FFO of $55.3 million or $0.20 per diluted share for the third quarter of 2021. In line with our 2022 earnings outlook, same-store property cash NOI, excluding lease termination fees, was down 7.5% year-over-year, primarily due to the normalization of operating expenses amid higher building utilization as well as the impact from the occupancy loss of GBG in late 2021. For the third quarter of 2022, the Observatory hosted 687,000 visitors and generated NOI of $24.5 million, up significantly from 255,000 visitors and $6.4 million in the third quarter of 2021. We continue to generate strong revenues per capita, tightly manage expenses, and remain confident in the path back to pre-pandemic levels of performance. However, as Tony mentioned earlier, we expect this full recovery will take longer. As a reminder, the Observatory historically contributed roughly one-quarter of the company's NOI and stands at roughly 19% on a trailing 12-month basis through the third quarter. Turning to our balance sheet. As of September 30, 2022, the company had liquidity totaling $1.2 billion which is comprised of $387 million of cash and $850 million of undrawn capacity on our revolving credit facility. At quarter end, the company had net debt at share of $2.3 billion with a weighted average interest rate of 3.9% and a weighted average term to maturity of 6.7 years. Notably, we are well positioned in a rising rate environment with no floating rate debt exposure and a well-laddered maturity schedule with no debt maturities for the next two years. Our ratio of net debt-to-adjusted EBITDA was 5.6 times, well below peer averages. Our well-positioned balance sheet affords us flexibility to engage in activities that generate shareholder value. This includes the repurchase of our shares, the pursuit of investment opportunities that are additive to our New York City focused portfolio, and potential capital recycling. In the third quarter and through October 24, 2022, the company repurchased $20.1 million of its common stock at a weighted average price of $7 per share. This brings the cumulative amount repurchased to $275 million at a weighted average price of $8.36 per share, which represents approximately 11% of total shares outstanding as of March 5, 2020, to date, our share buyback program began. Subsequent to quarter end, we entered into an agreement to sell 500 Mamaroneck Avenue in Harrison, New York, and 10 Bank Street in White Plains, New York, at an aggregate gross asset valuation of $95 million. We expect to close in the first quarter of 2023, subject to customary closing conditions and redeploy the proceeds in a 1031 transaction. Turning to our guidance, we now expect 2022 core FFO to range between $0.83 and $0.85 per fully diluted share. Within this revised 2022 core FFO range, we now expect 2022 Observatory NOI to be approximately $67 million to $70 million compared to $74 million to $77 million. We continue to expect Observatory expenses of approximately $8 million to $9 million for the fourth quarter. We expect 2022 same-store cash net operating income, excluding lease termination income to be down in the 8% range from 2021 levels. We expect same-store occupancy to be between 84% and 86% by year-end, up from 82.4% at year-end 2021. Lastly, as a reminder, our G&A expense, 2021 reflected certain temporary cost savings and a mid-rising cost environment; we expect fourth quarter G&A to be similar to the third quarter. Please note that the guidance estimates and assumptions just described do not include the impact of any meaningful future lease termination fee income or any potential future property acquisitions, dispositions, or capital markets activity beyond October 24, 2022. As we look ahead, we advanced through the balance of 2022 with a well-positioned and flexible balance sheet, a focus on disciplined capital allocation, and continued commitment to ESG. We also look forward to benefiting from New York City's upside with multiple revenue streams from office, tourism, residential, and retail. And with that, I will now turn the call back to the operator for a Q&A session.

Our first questions come from Camille Bonnel with Bank of America.

Hi, starting with your guidance, expectations for Observatory NOI were lowered from the original projections. Our guidance midpoint was up by $0.01. Just doing the quick math here, what's driving the sustained guidance? Can you highlight any drivers to core performance that keeps you comfortable with this level for the remainder of the year?

Sure. Thanks, Camille. So just a quick point. I know analysts tend to look at midpoint. So technically, it went up. But from our vantage, it wasn't really raising the midpoint. We started with a $0.05 range. And as we get down to on the latter part of the year, we were able to narrow in the range from $0.05 to $0.03. And the previous wide range had room for other downside from uncertainties in the market, including leasing starts, higher OpEx, and slower-than-expected recovery in the Observatory. So now with that revised observatory range and better visibility on the balance of the year, we're able to keep the same high end and reduce a little bit of that downside room and narrow the range to $0.83 to $0.85, which inherently brings the midpoint up by $0.01.

And Camille, I'd just point out, this is our inaugural year of guidance. Some people may have forgotten that. And so, we're quite pleased how this went for our first year after having run a shadow guidance program last year. So, we're happy with our FP&A, and we're happy with how the team has come through.

Can you provide an update on your current views regarding capital allocation, considering the limited access to bank financing, even though Empire State has no imminent debt obligations? How are you managing investment prospects, such as development or acquisitions?

Camille, you're cutting in and out. Could you please repeat that question or maybe we could move you to the back of the queue and you could dial back in on a line that's more constant?

Hi. Is this clear?

We got a bunch to give another shot.

Can you please update us with your latest thoughts on capital allocation with the backdrop of limited access to Bank Financing even though you don't have any debt coming due? I'm just wondering how you are balancing investment opportunities such as deployment or acquisitions versus share repurchases?

Yes, sure. So, you're correct in noting that we have no debt coming due for the next two years. Additionally, we're fortunate. We have no floating rate debt exposure. So that places us in a very good position that coupled with a high cash balance and an undrawn credit facility. And so, with that, we focus on ways to enhance shareholder value. So, share buybacks continue to be a strategic part of how we think about capital allocation. If the market does not recognize the value that we bring within our portfolio and how we operate the business, it is a good opportunity to buy back our shares. Additionally, we have been very clear. We are focused on opportunities in the market that are the right deals and that make sense, and we continue to be active on that front. And the last piece is capital recycling. So, we have the balance sheet that affords us flexibility. All of our commercial assets are 100% owned. That affords us additional flexibility. And if we see that there are certain assets where we've added value, completed the business plan and can monetize and redeploy into other opportunities that make sense and generate good cash flow growth going forward for the company, we will certainly take advantage. You're right in that the debt markets are really tricky, and I think not having to access forcefully is an advantage that we have. But clearly, we're all looking for that. The last thing that I'll mention, and I think we've noted this before, but maybe if it's relevant, is that we do have a net operating loss balance that we disclosed in our 10-K, right? As of that date, it ran in the mid-70s million. And I mentioned that because currently, our dividend runs at about one-third of our previous levels. And we've always said we'll monitor the dividend level. We actively discuss that between management and the Board, and we'll find the right point in time to bring that back up. And clearly, we're entering into peak uncertain market periods. And so, I mentioned the NOLs because our job is not to hold back the dividend. But as we determine the pace of ramp-up and other alternative uses of that capital, including share buybacks, we can definitely use some of the NOLs effectively monetize on that and allocate the cash instead towards share buybacks. So, everything is on the table, everything is with an eye towards generating and maximizing shareholder value.

Okay. I appreciate that color. And finally, we've been hearing from other landlords this week that demand from occupiers will be weaker in 2023. You had a solid quarter of leasing activity, and I know you mentioned absorption will remain positive. But are you expecting the rate of leasing for your portfolio to slow?

We had a very strong quarter with 335,000 square feet leased, following three solid quarters before that. We have a promising pipeline of activity as we approach the fourth quarter, and regardless of whether our current negotiations close in the fourth or first quarter, we are attracting interest from a diverse range of industries including financial services, professional services, health care, technology, and legal sectors. We are benefiting from a trend towards higher-quality spaces since tenants are looking for what our portfolio offers. We stand out from our competitors by providing modernized, healthy buildings equipped with the latest technologies, energy-efficient tenant spaces, excellent access to public transportation, and appealing amenities at a reasonable price. It's important to note that we have invested $1 billion to upgrade our properties, enhancing common areas and building systems. Additionally, we have redeveloped 95% of our tenant spaces to create modern, efficient office environments that meet current tenant demands. As tenants evaluate their options, I believe we are in a strong position to excel. While we haven’t provided guidance for 2023 yet, I feel confident about our portfolio and what we have to offer right now.

Our next questions come from the line of Blaine Heck with Wells Fargo. Please proceed with your question.

So now that we've moved past Labor Day, I'm curious what you guys are seeing in terms of tenant base usage or your estimate of utilization and also days in the office per week at your office properties?

I think there are a few aspects to consider. The statistic I find most informative is not related to castle systems, as we don’t have that data for our entire portfolio, and much of it is inaccurate. While that data provides daily in-and-out figures, it doesn’t reflect how many times individuals are actually in the office during the week. What I prefer to analyze is the utilization of the Empire State Building fitness center, which is exclusive to our tenants. I can share that we are nearing two-thirds of the memberships being restored compared to 2019, and we can monitor our utilization closely. We believe that the commonly cited statistics do not accurately represent the current situation and recognize that work dynamics have evolved. Moreover, our tenants understand that they don’t want a situation where individuals are wandering around like they’re in an airport lounge, asking if they can take a seat or if a space is available. This experience is particularly evident among our tenants who have either leased new spaces or expanded existing ones. Another significant factor for us is that we are in a flight to quality phase. We offer excellent amenities, both currently available and forthcoming, along with healthy, energy-efficient environments in prime locations at accessible price points. All of this points towards our tenants needing to occupy space and lease with us. I'll turn it over to Tom to see if he has any additional comments.

Look, definitely, the way tenants work has changed, but you can see the vibrancy of New York City, walk around the streets, look at the activity in general. And we're not seeing a diminishing demand for tenants because of the change in the way they use our space. Constantly, I ask our leasing folks what are tenants saying, why are they leasing the space. And they fundamentally they still want a place to work, a place for their employees together to collaborate and to work together regardless of the daily utilization that everybody is so fixated on. Look, the real measuring stick is the 335,000 square feet of leasing that we just posted this quarter.

Very helpful commentary. And then switching gears here a little bit. There seems to be a healthy debate emerging here around asset values and cap rates in this increasing interest rate environment. And since there aren't many transactions to point to, Tony, I wanted to get your take on how you think asset values and cap rates may have moved this year given the increase in cost of debt and low availability. And maybe you can touch on both office and multifamily.

It's interesting to note that if Christina and I seem a bit slower this morning, it's because we arrived late last night from Dallas, where we attended the Urban Land Institute event and had discussions with various contacts and council members. One observation is that the main focus of new acquisitions currently seems to be 1031 exchanges, which aligns with our strategy as it's a logical approach. Sellers are actively engaging in 1031 exchanges. Additionally, it's important not to just look at headline cap rates but to consider the underwriting approach. Cap rates can be assessed in different ways beyond just the initial entry point. One method involves predicting interest rates during your investment hold period. While we're not at the peak yet, some members of the Fed have suggested further rate increases in the upcoming meetings. Another angle is that there may be properties that aren’t managed effectively or have insufficient capital. You could acquire such assets at cap rates ranging from 3.5% to 4.5%, with the potential to enhance their performance over time. There's a noticeable variance in what buyers are willing to pay, and while we understand that transactions are declining, we see examples like Boston Properties' recent partial purchase that illustrate the market dynamics. Overall, it seems a bit early to declare any significant trends other than a modest increase of around 50 to 75 basis points in cap rates for transactions not involving 1031 exchanges.

Very helpful. And if I could just do one follow-up to that, Tony. You talked about before about your interest in kind of complicated transactions. And based on some kind of broker conversations we're having, it sounds like there might be some distressed opportunities that come about on the office side. Is that something you guys would be interested in? Or is your focus more on growing the multifamily portfolio?

I've said this before, omnivorous opportunivores. And it really comes down to not just FFO accretion, but cash accretion. And it comes down to how we can structure things. Most of what we have on our plate right now, really, the only things in which we're active right now are either failed transactions from quite some time ago or transactions that have not even hit the market. So I think that office will be interesting to us when it reaches a point of traction; we haven't seen anything to date that reaches that point.

Our next questions come from the line of Steve Sakwa with Evercore. Please proceed with your questions.

I guess I was hoping you guys could talk a little bit about the widening spread between the percent leased and the percent occupied. It's up from about 300 basis points to kind of 430 basis points, and it's nice to certainly see the percent leased moving up. I'm just curious kind of when you start to expect that gap to close, and I guess, how tight can that gap actually get?

Steve, this is Tom. Yes. Certainly, keep an eye on our lease percentage that will drive our occupancy as signed leases commence later this year and into 2023. We're confident in our stated goal of 84%, 86% portfolio occupancy by year-end. I think it will be more towards the middle or high end of that range, depending on when certain leases commence this year. In the fourth quarter, we only have about 68,000 square feet of tenant move-outs, offset by roughly a quarter million square feet of leases that are signed that should commence in the fourth quarter or first quarter of '23. So depending on when those leases commence, and they will commence, we will see positive absorption and increased occupancy in the near term of well over 100 basis points. And then in 2023, we only have about 5.5% of our portfolio leases expiring. We're about 539,000 square feet, and we've identified about 280,000 square feet of known move-outs, but that's offset by another 179,000 square feet or so of leases that should commence in 2023 plus any additional leasing that we do. So given the signed leases that are due to commence in the near term and in 2023, a very modest lease rollover in tenant move-outs, we're well positioned to move our occupancy up, which obviously trails our lease percentage.

Great. In the press release, you mentioned that you would be looking to reinvest the proceeds from the two suburban sales. I'm curious if this is a firm decision to purchase something, or if it's necessary for tax purposes. Does the net operating loss provide any offset, and would share repurchases be a more advantageous use of that capital?

So thanks, Steve. So I think 1031 is part of the business plan. As you mentioned, we do have the NOL, so that's additional optionality. And we also have cash on the balance sheet, so that always provides us an avenue to do share repurchases. And without any real need to forcefully pay down debt, we can allocate capital in that fashion towards buybacks. So all of those are options for us. But I think 1031 is an appealing one because that allows us to monetize the NOLs in other ways to generate shareholder value. That continues to be the interest. And in terms of what categories as we've mentioned, we focus on New York City; it's office, multifamily, and retail. And we have interest in multifamily in the right assets that complement the portfolio.

Great. I guess last question, Tony, on the Observatory. I realize international travel sort of stalled out a little bit with the strengthening U.S. dollar. I guess does that give you any sort of pause for concern just around the ramp into '23? And I guess, do you need strong international tourism to kind of get back to the prior peak levels?

I understand that you might expect me to agree with the idea that things have stalled, but I disagree. We are aware of our traffic sources, and while some of our international sources are nearly at full capacity, others are not. In the third quarter, we noticed a decrease in the normal seasonal uptick in domestic travel alongside an increase in international travel, which helped balance things out. Honestly, it's puzzling to see such varied rates of return visits from neighboring countries. We’ve also noticed a greater presence of foreign languages and accents at the Observatory. Our initial thought is that potential visitors are hesitant due to the alarming stories about airports, lost luggage, and negative travel experiences, leading them to delay their trips until things settle down. Moving forward, it's crucial to highlight that we believe we are the top destination. Based on public data, during the period that SL Green reported, the Summit had 1.1 million visitors while we welcomed 1.7 million. This period aligns with what I've referred to as the right shiny penny moment. We are pleased with our performance, and even as visitor numbers rise, our reservation system is operating exceptionally well, leading to reduced crowds and a significantly improved experience for our guests. Visitors appreciate this, and our offerings are of the highest quality, allowing them more time to enjoy without long waits. Consequently, our gift shop sales per visitor are rising and nearing previous levels, and our set menus at restaurants are also benefiting. Moreover, we are excited about the upcoming opening of a remarkable 23,000 square foot, three-level Starbucks Reserve, which will attract both Starbucks enthusiasts and tourists in New York. We feel optimistic about our situation. However, as we approach 2023, we will reevaluate our forecasts and provide guidance, especially regarding expected Observatory performance.

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

Great. Thanks. Maybe we can go back to the leasing side. Durels, I'm curious, are there things that tenants are asking for now that they may not have been earlier in the year? And have they been quicker or slower to make decisions recently? Any color around that would be great.

In response to your second question, I’d like to note that while our tour volume is below the peaks of 2018 and 2019, our rate of converting tours to deals has increased significantly. This indicates that the business leaders and decision-makers engaging in tours are serious about making transactions, which is an important insight. Regarding tenant preferences, we continue to focus on offerings that we’ve been enhancing since before COVID. We’ve redeveloped 95% of our portfolio, emphasizing healthy building technologies, energy efficiency, and access to mass transit. We're also enhancing our amenities, which tenants are increasingly prioritizing. We are confident that we are providing the right mix of amenities, including plans for a new multipurpose space with a 400-person capacity for presentations, a tenant lounge with bar service, and golf simulators. Additionally, we have eight on-site food and beverage options, including a 23,000-square-foot Starbucks, and amenities like a rooftop at 1333 Broadway and an expanded lounge and town hall at Rumino Broadway. These are the features tenants desire, and we are located in great neighborhoods with excellent local amenities to complement what we offer in our buildings. We believe we are delivering an attractive package of amenities and modern office spaces that meet tenant needs.

Great. And then just maybe going back on the guidance part. It looks like the change implies a deceleration into the fourth quarter. I guess, is this a function of expense timing? Or could there be something more there? And then kind of looking to run rate through to 2023, understanding you haven't given 2023 guidance. I guess, how should we think about this? Is this a good kind of starting point for that? Any color around that would be great.

Sure. So in 4Q, we already mentioned the slower recovery of the Observatory for the backdrop and the reasons that Tony already mentioned, so that's reflected in there. And we're still not through the end of the year. So as I mentioned, the factors that are considered variable, what else on the Observatory, what else on operating expenses, and maybe some variation in leases going into commencement. So that's pretty much it, and we're really transparent on each of the drivers. It's been pretty consistent with the rest of our earnings guidance. We have not given guidance yet for '23. But I think one comment we have made is regarding operating expenses. This was a year where the increase in operating expenses compared to the prior year accentuated because our team did a phenomenal job of proactively lowering expenses when we were able to during very low levels of building utilization. The drawback of that is on the way up, it creates a tough comparison year. So we're seeing that in this year that's now back to normalization based on what you saw in 3Q and what's expected in 4Q. So we should have a more normal path, and assuming that's not the main drag on NOI, it gets us to a better trajectory. So that's all I'll say on next year, but that's one item that we've mentioned.

Maybe just going back to the asset sales. I believe those have been on the market since at least earlier this year. And I'm just curious, how much has pricing changed, if at all, when you first put those assets on the market to the final sale price?

Yes. Dan, thanks for the question. So those were on the market since then. And like any process, you go through back and forth. Ten Bank actually has assumable debt. The other 1 has no debt on it, and there are various factors. So without getting into too many specifics, we're still in the deal. You have these conversations, and you work through all the points. And for us, as we've mentioned, we're not for sellers. So it's got to be a fair, reasonable price that makes it through, and our eye is on execution and how we redeploy the assets into new ones that make sense for the portfolio and the future cash flow growth for the company.

Yes. I would just add that the pricing came in where we thought the pricing would come in on the basis of where we launched the sales. And there you go.

Got it. I understand everyone is focused on achieving carbon neutrality. I'm curious about Local Law 97, as the Mayor's office issued some new guidance recently. Tony, since we are nearing the law's implementation, how do you view its overall application regarding office spaces? It seems there are some new technical changes that might be unfair to office owners. How do you see the implementation of this new law, and how is Empire State adapting to these changes?

We have no fines in 2024 and have plans in place to navigate successfully through 2030. I'm part of the advisory implementation board for Local Law 97. As the only commercial landowner involved, I believe the information presented has been fair and straightforward. When comparing performance attainable in residential versus office spaces, each presents its own set of challenges and opportunities, particularly in retail and logistics. We've built a strong partnership with our tenants, thanks to the work led by Dana Schneider in energy sustainability and ESG. Our targets are science-based. Many companies have previously set softer targets, but Local Law 97 focuses on data and actual performance, which aligns with the potential new reporting requirements from the SEC. Additionally, there's an ongoing lawsuit against Local Law 97 that we are not involved in, so implementation remains to be seen. We believe it’s beneficial for us to be an asset rather than a liability for our tenants, particularly as the companies with stronger credit quality take on more responsibility for disclosing their carbon footprint, which impacts their scores. Our approach centers on how we can best compete for tenants and benefit ESRT. Everything we do is linked to our expenses, including life cycle cost analysis. The investment we make leads to better results, attracting quality tenants with longer leases and better rents. Our accessible price points, coupled with a focus on indoor environmental quality and healthy buildings, give us a competitive edge, building on practices we've implemented since 2009. Local Law 97 fits into this ongoing process.

Yes. I would just add one more point, which is our journey to carbon neutrality is very much about what we do within our operations. So as there's more focus on this, it's not enough to just use racks and offset; you really need to engage with the tenants that Tony mentioned, being helpful to the tenant, but it's also bringing them along in the journey on what they can do, and that's how all landlords will ultimately achieve it, and the fact that we're ahead even with these tweaks in the law makes us much better positioned.

Our next questions come from the line of John Kim with BMO. Please proceed with your question.

Thank you. I realize it's only two assets, but I was wondering if you could provide any more color on how your multifamily portfolio has done. I know you mentioned 90% occupancy, but the organic growth, any additional commentary on same-store revenue or NOI and how that's performed relative to your expectation?

No, John, they've done well. I think that's the best color we can say. We are ahead of where we thought we would be when we acquired them and underwrote them. And we love our partner, the Fetter organization. And we think that the success we have had with them and the work we do makes us quite appealing for others who might like to recap, and we've done well as we thought we would. And we're happy that people can look at the wisdom of what we did, although that people were not thrilled when we acquired them originally.

Given the success of your multifamily investments and the economies of scale, are you inclined to build scale in multifamily? Or do you anticipate, I don't know, big or dislocations in the market? And I know you're not seeing signs of distress today, but I'm just wondering, given your balance sheet, given that you had previously talked about opportunities like this. I'm wondering if potentially you look at other asset types for the use of proceeds?

Well, we already said that we're not really looking at office right now, so that kind of narrows down the food groups.

Yes. And John, we've spoken on this. We have interest in multifamily. We've made it clear, but it's not just about that we will get to scale at all costs. We're going to wait for the very healthy asset class, so probably not likely to see a ton of distress. So we'll look for situations, and our team is hard at work on that.

And Tony, you mentioned you retained your top position for the Observatory. Are you surprised at all by the success of Summit in the edge? I mean you've outpaced summit, but it's not open 70's a week yet. And I was wondering if that played at all apart in your reduced outlook for the third story.

So we didn't outpace some. We crush them. It's not out of pace. Let's look at the numbers that I just cited, number one. Number two, our Rev per capita are awesome. Number three, we know the performance of the edge, and we'll just say that their bright shiny penny moment has passed, and we anticipate the bright shiny penny moment of the summit will pass. We are number one. We are the international icon. Our brand is fantastic on every continent in the world.

What was the visitor count on the edge?

Just read the disclosure. I think we're running to the end of the call. So unless we have many other calls, I think we probably want to wrap up and let people go. And you can also listen to what we said earlier in the call. So look, please remember that forward-looking statements, including guidance, are meant to be helpful with forward modeling, but are not guarantees. Many thanks to our great team who have read incredibly hard, and I have every confidence we'll continue to do a great job on behalf of stakeholders. We look forward to the chance to meet with many of you at non-deal roadshows, conferences, and property tours in the months ahead. Until then, thanks for your interest. Onward effort, everybody.

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