Empire State Realty OP, L.P. Q3 FY2025 Earnings Call

Greetings, and welcome to the Empire State Realty Trust Third Quarter 2025 Earnings Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce Heather Houston, Senior Vice President, Chief Counsel, Corporate and Secretary. Thank you. You may begin.

Good afternoon. Welcome to Empire State Realty Trust third quarter 2025 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 gsrtreit.com. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements as defined in applicable securities laws, including those related to market conditions, property operations, capital expenditures, income expense, financial results and proposed transactions and events. As a reminder, forward-looking statements represent management's current estimates. They are subject to risks and uncertainties, which may cause actual results to differ from those discussed today. Empire State Realty Trust assumes no obligation to update any forward-looking statement in the future. We encourage listeners to review the more detailed discussions related to these forward-looking statements in the company's filings with the SEC. During today's call, we will discuss certain non-GAAP financial measures, such as FFO, modified and core FFO, NOI, same-store property cash NOI, EBITDA and adjusted EBITDA, which we believe are meaningful in evaluating the company's performance. The definitions and reconciliations of these measures to the most directly comparable GAAP measures are included in the earnings release and supplemental package, each available on the company's website. Now I will turn the call over to Tony Malkin, our Chairman and Chief Executive Officer.

Thanks, Heather. Good afternoon, everyone. Yesterday, we reported ESRT's third quarter and year-to-date results. We delivered FFO above consensus and reaffirmed our 2025 guidance. Our highly leased portfolio has benefited from strong leasing executed over the last several years, and the third quarter was a slightly lighter quarter for office leasing. Subsequent to the third quarter close, we signed another 50,000 square feet of leases and we presently have approximately 150,000 square feet of leases in negotiation. We also delivered our 17th consecutive quarter of positive marks-to-market. We will discuss our healthy pipeline of leasing activity and completed leasing in October in this call. Observatory results were consistent with our guidance. ESRT is purpose-built for strength and agility across all cycles. Our long-term leases, high occupancy, diversified income streams and flexible balance sheet provide a solid foundation for consistent performance and strategic growth. In New York City, the office leasing market remains strong. Availability is low at top-tier buildings like ours and rents continue to rise. There is no new supply at our price point and many older buildings which are not like our portfolio, modernized, amenitized, well located, supported by sustainability leadership and a strong financial position, continue to be taken off the market for conversion to residential. We continue to outperform. Our focus right now is on our little over 500,000 square feet of availability in our Manhattan office portfolio. Some is held off the market for assembly of large contiguous blocks at several properties. We remain focused on our ability to drive occupancy and maximize lease economics. At the Observatory, revenue per capita continued to increase in the third quarter in the face of reduced budget traveler visitation. More than half of our visitation is domestic. Slide 16 of our latest investor presentation shows that the Observatory remains resilient. Our strong balance sheet gives ESRT the flexibility to act on opportunity, maintain our portfolio at the highest standards and create durable long-term value for our shareholders. We continue to be leaders in environmental stewardship and healthy building performance, focusing on business outcomes and partnering with our tenants to help them achieve their own sustainability goals. Earlier this month, ESRT achieved the highest possible GRESB 5-star rating for the sixth consecutive year. Hats off to the team for their continued leadership and excellence. Our entire organization remains laser-focused on the company's five priorities: lease space, sell tickets to the Observatory, manage our balance sheet, identify growth opportunities and achieve our sustainability goals. Last month, we announced that Tom Durels, my partner for more than 35 years and our Head of Real Estate, began to transition his role to two senior leaders at ESRT. We are deeply grateful to Tom and his impact on our company's success and culture. The strategy and post-IPO transformation into a modernized amenitized, sustainable portfolio are all indelible. We have an experienced and capable team to build on the strong foundation that Tom helped to establish. I will now turn the call over to Tom, who has a few remarks. Then Ryan, Steve and Christina will provide more detail on our progress and outlook for the balance of 2025. Tom?

Thanks, Tony, and thank you for those remarks, and good afternoon, everyone. I'd like to touch on our recent leadership succession update. We announced in mid-September that after more than 35 years, we began the transition of my role at ESRT to Ryan Kass as Chief Revenue Officer; and Jackie Renton as Chief Operating Officer, the new Co-Heads of Real Estate. I'm here in the room today as Ryan covers our leasing update, and I continue to work with Christina and Tony and assist Ryan and Jackie in our work to deliver strong results and long-term value for our shareholders. And with that, I will hand it off to Ryan to discuss our third quarter leasing results and outlook for the balance of the year. Ryan?

Thanks, Tom, and good afternoon, everyone. In the third quarter, we signed 88,000 square feet of new and renewal leases. Subsequent to quarter end, we signed approximately 50,000 square feet of additional leases and have approximately 150,000 square feet of leases in negotiation. We are excited to announce since quarter end, we signed three new leases within our North Sixth Street collection. Tourneau leased over 3,700 square feet to open a Rolex store at 86-90 North Sixth, an asset we purchased last quarter as a strategic redevelopment opportunity on one of New York City's most dynamic retail corridors. Our partnership with a global luxury brand like Rolex, prior to commencement of our redevelopment work, underscores both the quality and success of this location, which anchors Williamsburg as the premier destination for high-end retail and institutional investment. We also signed new leases with Tocovus and HOKA. Beyond that, we have one space left to lease on North Sixth Street, and that is adjacent to Rolex in our 86-90 redevelopment property, and we are confident in more good news when existing leases roll. Manhattan office occupancy increased 80 basis points sequentially to 90.3%, and we remain on track to achieve our year-end commercial occupancy guidance of 89% to 91%. As mentioned, we have 150,000 square feet of leases in negotiation. Tenant demand continues to be diversified, and we are in discussions with prospects from various industries such as finance, professional services, TAMI, consumer products, and others. New York City's office leasing market is the strongest it has been since 2019, which creates a favorable backdrop for us to execute. Our Manhattan office portfolio is over 93% leased, our 11th consecutive quarter above 90%, which is a testament to the strength of our leasing platform and strong execution over the last few years. We have slightly over 500,000 square feet of Manhattan office vacancy. As Tony mentioned, in a market with limited supply, we will create large contiguous blocks at several properties to accommodate demand. We remain focused on improved occupancy and rent growth as the market continues to strengthen. In today's bifurcated market of haves and have-nots, ESRT remains a clear have. Demand is concentrated among top quality, amenitized, transit-oriented buildings owned by financially strong landlords with proven operational performance. Our best-in-class portfolio has enabled us to push rents, reduce concessions, and extend lease terms. The third quarter marked our 17th consecutive quarter of positive mark-to-market lease spreads in our Manhattan office portfolio and underscores the consistent pricing power of our portfolio. We have $46 million in incremental cash revenue from signed leases not commenced and free rent burn-off as shown on Page 19 of our supplemental that reflects our leasing success. Lastly, our multifamily portfolio continues to deliver excellent performance with 99% occupancy and 9% year-over-year net rent growth. These results reflect strong market fundamentals and our focus on operational excellence. Thank you. I will now turn the call over to Steve. Steve?

Thanks, Ryan. For the third quarter of 2025, we reported core FFO of $0.23 per diluted share. Same-store property cash NOI, excluding lease termination fees, increased 1.1% year-over-year after adjustment for approximately $1.7 million of nonrecurring items recognized in the third quarter of 2024. Adjusted for these nonrecurring items, same-store cash revenue and operating expenses increased 1.3% and 1.5%, respectively, year-over-year. Operating expenses increased due to the timing of planned repair and maintenance work and higher real estate taxes and were partially offset by higher tenant reimbursement income. As we progress through the balance of 2025, we expect a strong fourth quarter from a year-over-year cash NOI growth perspective, due in large part to a real estate tax abatement we expect to recognize at the end of the year. In our Observatory business, we generated approximately $26.5 million of NOI in the third quarter. Observatory expenses totaled $9.5 million and revenue per capita increased 2.7% year-over-year. Core FAD increased to $40.4 million in the third quarter from $11.9 million in the second quarter. This mainly reflects a reduction in FAD FX spend from $52 million last quarter to $25 million this quarter. This is consistent with the commentary from our previous earnings call, where we conveyed our expectation for CapEx to trend lower in the second half of 2025. With that, I will now turn the call over to Christina. Christina?

Thanks, Steve. I'll touch on the Observatory and our capital allocation strategy before we shift to Q&A. Our iconic Empire State Building Observatory remains a resilient asset and strong contributor to our bottom line cash flow. As Tony mentioned, performance has been consistent with our revised guidance. We continue to see steady domestic demand offset by reduced international visitation. We remain focused on the levers within our control to enhance the guest experience, broaden our marketing reach, and drive operational efficiency. Our unmatched brand position as the authentic New York City experience anchored by the world's most iconic building supports sustained long-term growth as global travel patterns normalize. Our well-positioned and flexible balance sheet remains one of our key strengths with ample liquidity, lower leverage versus sector peers at 5.6x net debt to EBITDA, a well-laddered maturity schedule, and no unaddressed maturities until the end of 2026. Subsequent to quarter end, we announced the issuance of $175 million of senior unsecured notes in a private placement at a rate of 5.47% that will fund in mid-December and mature in 2031. Proceeds will be used towards general corporate purposes, including potential new investments and repayment of debt. And as a reminder, all $250 million of our Williamsburg acquisitions since late 2023 were executed on an unlevered basis. From a capital allocation standpoint, we continue to actively underwrite new investment opportunities across New York City office, retail, and multifamily. The market has seen a pickup in transaction activity and investment opportunities, the return of institutional capital, and strong recognition of the strength of New York City underlying property fundamentals. We continue to pursue opportunities where our operating and repositioning expertise can create meaningful value, and our strong liquidity provides the flexibility to act decisively when conditions align. As we look ahead, our focus remains on driving sustainable cash flow to the bottom line through our high-quality New York City portfolio that is well diversified across sectors and sources of income that benefit from live, work, play and visit. Our operating expertise, flexible balance sheet, and high-quality assets continue to position us to capitalize on the strength of the Manhattan office market. Over the last several years, we have achieved more than 600 basis points of positive lease absorption across our Manhattan office portfolio. At the same time, we have tax efficiently recycled out of noncore suburban market and invested approximately $675 million into Manhattan multifamily and Williamsburg retail assets, to optimize cash flow growth over time through higher rent growth and lower CapEx requirements. We continue to evaluate additional recycling opportunities that are accretive to long-term cash flow and seek ways to operate more efficiently. We also continue to evaluate opportunistic share repurchases within our broader capital allocation framework. That concludes our prepared remarks. And with that, I'll turn the call back to the operator to begin Q&A.

I was just wondering if you could expand a little bit more on the capital uses side after you now placed a private placement in December. And just in terms of if there's any specific acquisition or potential transactions that you're looking at, maybe also comment on the general transaction market a little bit more, if there are kind of like pockets within New York that are more attractive than others? If you could talk about cap rates to the extent you can, that would be great. Or just kind of giving a little bit more color just on that bucket in general, that would be very helpful.

Sure. So as we've mentioned, we continue to actively underwrite deals in New York City, and that would span across office, retail as well as multifamily. So that remains the case, and we're really positioned with good liquidity so that we can move quickly when the right deal comes up. On top of that, we also have a couple of debt maturities early next year, which is why we referenced that within our remarks. You're asking about cap rates. I think the market has had some transactions that have provided some cap rate evidence, but the reality is not all deals are the same. And so you see some deals with sort of mid- to high single-digit cap rates, but they're very bespoke to the transaction. And then you have other deals that are more situational, and cap rates aren't as relevant of a metric. You really have to look at those on a per pound basis. So overall, we want to be well positioned as always to be able to transact, and we are actively looking.

I guess as you think about New York and the mayoral election, it seems like some of the policies are largely aspirational or require state legislative support to pass. But are you concerned about any tenants that may be more directly exposed to changes in rent or anything like that?

So first of all, as I've said so many times, we are incredibly fortunate to be in New York City. New York City is the best market in the United States, and that makes it one of the best, if not the best markets in the world. Number two, we very clearly operate on the basis, as I've mentioned before, we do policy, not politics. So whoever shows up, whatever administration arrives, that's the one with which we deal, and that's where we try to contribute both to policy and do our best to work from a business perspective. We're always concerned about all developments. At the same time, New York City has and continues to be a magnet for job-seeking college graduates, the folks who want to come and make their careers and live in a vibrant environment. And by the way, those are an awful lot of today's voters. So they are the employees. The employers are here because they want those employees, and we are very positive on the future of New York City. Outside of that, it's all speculation. There are certain checks and balances, as you said, and we'll see what comes.

We believe our share price is very appealing, offering a great entry point for those interested in our well-positioned, well-leased portfolio with strong operating fundamentals. As a company, we definitely take this into account. We've executed $300 million in share buybacks over the years, which is clearly a part of our strategic capital allocation. We're also exploring opportunities and aim to find the right deals while maintaining liquidity and capacity for that, all while balancing it with share buybacks. Both options are definitely viable. With our flexible balance sheet, we have the capacity to pursue both strategies.

Great. And Tom, all the best in the future. Thanks for your help over the years. We've seen a recent uptick in layoff headlines for some companies with Amazon probably being the largest and most recent. So within that context, can you comment on whether you've seen any change in trends with respect to expansion versus construction of space at expiration? And more broadly, just how you guys are thinking about the potential rising trend of layoffs as it relates to demand for office space as we head into '26 and '27.

First of all, I want to emphasize that Tom is here not just today, but also for upcoming announcements in the months ahead. You will have the chance to see him, as we interact with him daily. Additionally, it is crucial to highlight that since our IPO in 2013, we have expanded over 3.1 million square feet for existing tenants in our portfolio. We are currently engaged in discussions with existing tenants who are looking to expand, indicating strong growth. Furthermore, we are a key player in the office market, providing significant opportunities with ESRT, and we maintain a top position in our price category. From our viewpoint, there is no indication of contraction. The quality of our portfolio attracts clients, many of whom have shifted from traditional glass and steel buildings. Importantly, we continue to see expansion within our portfolio from existing tenants. As we look ahead, while there may be various reasons why some companies might hesitate to expand or take on additional space, we do not observe any of these concerns affecting us at the moment. Regarding Amazon, while they have announced layoffs, our sources indicate that New York City remains the top choice for many Amazon employees.

Yes. We don't have an additional update on Metro. As we've mentioned, we can be flexible on that front. We are looking to sell that asset. But if it doesn't work out, we also have attractive in-place debt and can continue. There is still tenant demand in that space, and that was really a capital allocation decision for us. As it relates to other capital recycling, as I mentioned, we are definitely open to that. And it's as you stated, if we've added value and it's a quality asset, there could be buyers that are interested in a strong market like New York City, and it may make sense for us to dispose of those assets so we can redeploy proceeds into assets where we can add more value, and that would span New York City office, retail and multifamily. So it's extremely consistent with what we've communicated to you. And now with more activity in the market, it does feel like a better time as compared to 18, 24 months ago, where financing wasn't as readily available, weren't as many deals, institutional capital had some question marks. So as we get into a more vibrant market, it does feel like that's a logical consideration, and we'll keep the market updated.

Tony, you mentioned that your guys' portfolio caters to the largest subset of demand in New York. Can you kind of just talk about any trends you're discerning? Are you seeing more activity amongst some of the larger tenants out there in the market? Are there certain industries that are outpacing? I know, obviously, tech leasing has been subdued lately, but are you seeing any sort of green shoots on that front as it relates to demand within that industry?

So this is Ryan here. One of the advantages that Tony spoke about in our portfolio is diversification; we appeal to everybody. So we have a lot of interest from a lot of different sectors. It does range from TAMI, consumer products, fire, professional services. Our job is to assist our tenants with employee recruitment and retention. What we're seeing is a lot of the conversations right now are driven by tenants looking to upgrade into better quality spaces and also expand their offering.

Gosh. Well, if you look at what we've accomplished over the last five years, we have very much seen rent spikes across our portfolio. As an example, the active negotiations underway at Empire State include rents over long terms in the mid-90s for the lives of those leases and going into the 90s at One Grand Central Place. From our perspective, we're very much in that environment. We still think it is a very healthy environment. When it comes to the future, we do, at this point, still anticipate increased rents due to shortage of available space. When you talk about our competitive set, I think it's really important to note, the buildings which are being taken out of circulation, the important thing to us is that limits our competitive set. Those buildings, which will not be reinvested in, will not be modernized, will not be amenitized, will not be made energy efficient for office tenants means that we are the best house on our block for sure. It also means we're the most affordable house on the best block. So number one, from our competitive set, many of which are being taken out of circulation, but we're top of tier. Number two, we do pull from other buildings where either because they may be glass and steel, but they are not modernized and amenitized with energy efficiency and sustainability in great locations or just the rent is too high, they come to us, and we're a bargain even at our increased rents. Ryan, anything else you want to add there?

No, I think you summed it up really well.

I just wanted to dive into the pipeline of 150,000 square feet. Is that really all office? Or is there also a retail component in that? And then just can you give the breakdown between the different property types if available?

So that's a healthy mix of both office and retail as well as a mix of new and renewal. So right now, what we're focused on, as Tony spoke about earlier, is the creation of the large blocks of space. We're 93.1% leased. We have the 150,000 square feet of leases in negotiation. Roughly 20% of our Manhattan office vacancy right now is strategically held off market in connection with the assemblage of those large blocks. And that's really in response to market demand, and we believe it's going to provide better long-term economic results.

I would like to add to Ryan's comment that we don't have much retail to lease. The majority of that 150,000 square feet is office space, and it spans our portfolio with varying price ranges.

We're very excited about the developments in Williamsburg. This week, we finalized three transactions. Tourneau will be featuring Rolex at the redevelopment at 86-90, along with Tocovus and HOKA. We are left with one vacancy. We have leased the temporary Hermès space, which will be vacated next year, and we have been increasing rents while seeing a growing demand from tenants in the area.

Yes. Of course, the great news for us on that Hermès moves to its permanent new flagship store, and we've already got that backfilled.

I'm not familiar with the specific bullet that was mentioned, but we continue to see good fundamentals. Happy to take it offline and go through any of the items that you want to. But overall, fundamentals remain quite strong.

Yes. Just to give a bit more detail there. Year-over-year, Ryan already mentioned the net effective rent growth of 9.3%. But we have two other factors that play into the success there year-over-year. We had 180 basis points of occupancy pickup, which contributed to about 25% of that rent revenue growth. Additionally, we had a number of units that we held offline that we disclosed as part of a potential 421A program, and those have now all been re-leased. And so that contributed to about another 15% of that pickup. So really firing on all cylinders on the residential side.

There are no further questions at this time. I would now like to hand the call back over to Anthony Malkin for closing comments.

So thanks so much. Thanks, everybody. At ESRT, we are steadfast in our focus on five strategic priorities: lease space, grow Observatory revenue, maintain a strong and flexible balance sheet, pursue disciplined growth, and advance our sustainability leadership. Each of these pillars supports our mission to create lasting value for our shareholders. With our differentiated portfolio, strong financial position, and proven track record of execution, we are well positioned to capitalize on opportunities as they arise and to continue to deliver results with focus, discipline, and consistency in the quarters ahead. Thanks, everyone, for your participation in today's call, and we look forward to the chance to meet with many of you at non-deal roadshows, conferences, and property tours in the months ahead. onward and upward.

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