Greetings, and welcome to Empire State Realty Trust's Second Quarter 2021 Earnings Call. I would now like to turn the conference over to your host, Greg Faje, Director of Investor Relations. Please go ahead.

Good afternoon. I'm going to turn the call over to Tom Keltner, our General Counsel and Secretary, to read the prepared remarks.

Good afternoon. Thank you for joining us today for Empire State Realty Trust Second 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 were posted in the Investors section of the company's website at esrtreit.com.

Thanks, Tom. Good afternoon to everyone or good morning if you're on the West Coast. We continue to see signs of New York City's recovery and an ability, at least for the vaccinated, to move past the pandemic and begin our lives with the fact that COVID is here and likely to stay here for many years. The reduction in COVID-related restrictions, a greater number of company announcements about return to office—with fall being the most popular date—and increased property tours, proposals and conversions to deals all point to the return to business. I still believe that the office industry in New York City will not fully move to our front foot, and the storyline in the press will not change until after the first quarter of 2022. The data show increased apartment leasing and sales. New York City schools have committed to in-person learning in the fall. Cultural institutions are open or have announced their reopening, and demand continues to grow for dining and nightlife options.

Thanks, Tony, and good afternoon, everyone. In the second quarter, we signed 35 new and renewal leases totaling approximately 191,000 square feet that included approximately 153,000 square feet in our Manhattan office properties, 27,000 square feet in our Greater New York Metropolitan office properties, and 11,000 square feet in our retail portfolio.

Thanks, Tom. For the second quarter, we've reported core FFO of $49 million or $0.18 per diluted share. Same-store property operations, if you exclude one-time lease termination fees and Observatory results from the respective period, yielded a 6% cash NOI decrease from the second quarter of 2020. This decrease was primarily driven by a reduction in revenues due to write-offs taken over the period. Our rent collections totaled 95% of second quarter 2021 billings, with 95% for office tenants and 91% for retail tenants. There were no write-offs of straight-line balances or receivables in the second quarter of 2021. Switching to Observatory results, Observatory revenue for the second quarter of 2021 was $8.4 million. Observatory expenses were $5.3 million in the second quarter of 2021, and we continue to expect run rate expenses to be approximately $6 million to $7 million per quarter for the balance of 2021, depending upon the pace of visitor ramp-up. Turning to our balance sheet, as of June 30, 2021, the company had $1.4 billion of liquidity, which is comprised of $541 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 June 30, 2021. The company's total debt has a weighted average interest rate of 3.9% and a weighted average term to maturity of 7.7 years. We have a well-laddered maturity schedule with no outstanding debt maturity until November 2024. Our net debt to total market capitalization was 31.4%, and net debt to adjusted EBITDA was 6.2x. From January 1, 2021 to date, the company repurchased $3.5 million of its common stock at a weighted average price of $9.22 per share. This brings the cumulative total since the stock repurchase program began on March 5, 2020, to $147.2 million at a weighted average price of $8.34 per share. In the second quarter, the company announced the reinstatement of its quarterly dividend at a rate of $0.035 per share, which equates to an annualized rate of $0.14 per share. The Board and management's confidence in the recovery of New York City, the improvement to date in the company's results, and the company's liquidity position and strengthening balance sheet resulted in the dividend reinstatement one quarter earlier than previously announced. 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. This morning, GBG North America filed for Chapter 11 bankruptcy. Our filings identify GBG as a top 10 tenant with 353,000 square feet currently leased. We want to give you background on this and unpack this number as well as provide an update. GBG was spun out of Li & Fung, U.S. and at one point as of June 30, 2020, leased 669,000 square feet of space. Over time, we have proactively, in partnership with GBG, reduced our mutual exposure through several actions. In 3Q '20, we recaptured 103,000 square feet from GBG and leased direct to Li & Fung. In 4Q '20, we recaptured 212,000 square feet from GBG, which had previously been subleased to Centric and signed a direct lease with Centric. Centric itself had filed for bankruptcy and came out of bankruptcy with a new balance sheet that is materially backed by Blackstone, amongst others. Of GBG's current 353,000 square feet under lease, 162,000 square feet of space at 1333 Broadway has been sublet for several years. The sublet at 1333 Broadway pays a higher rent than GBG's base rent. And as per the terms of those sublets, that rent will now be paid directly to ESRT. We have had discussions to convert these subtenants to direct leases. The space that is uncovered by sublet, our net exposure that remains is 191,000 square feet. That net exposure represents 2% of total ESRT portfolio annualized rent. We collected GBG rent and recently drew down in full the balance of GBG's $17 million letter of credit to give us unconditional ownership of those funds. They are not part of the bankrupted state and will be applied against amounts due to us. Related to GBG, as of June 30, we have a $1.6 million straight-line rent receivable balance, which given this morning's filing, we no longer believe is probable of collection and expect to take in as a noncash write-off in the third quarter. We have always had and continue to appreciate a positive relationship with GBG and have an ongoing constructive dialogue. In fact, we received a courtesy call immediately upon this morning's filing. This is a Chapter 11 filing, and we expect that we will be in touch with GBG about their ongoing state need. I'd like to hand the call over to Tom and Tony for any comments they would like to make about the space in which we currently have exposed to GBG.

Hey, Christina, this is Tom. I'd like to add that we are well positioned at the Empire State Building with this space should GBG reject any or all of their space in the restructure. GBG's large floor plates at Empire State Building were highly desirable pre-COVID, and we believe they remain so today. So we're well positioned to relet the space should we need to do so as the situation evolves. For example, when LinkedIn, the largest tenant in our portfolio and at Empire State Building, who currently occupies 419,000 square feet, is committed to take occupancy of additional 83,000 square feet, which is leased for commencement in 2022 for a total of 501,000 square feet, when they expanded at Empire State, a good chunk of that space was on these larger lower, very desirable floors.

So with that, I think we're happy to open it up to any questions anyone may have on this or any other topic. Operator, if you'd like to open the line for questions.

Our first question today is from Craig Mailman of KeyBanc Capital Markets.

This is Arty on with Craig. Just some additional color on GBG. Can you give us any numbers behind that sublease space at 1330 Broadway and kind of where the numbers are in terms of what you're collecting from GBG and what they're paying?

Sure. Thanks for the question. So the rents that GBG incurs is in the mid-50s and the subtenants are sort of in the high $50 to $60 range.

Okay. Got it. And you guys have not reserved anything for that tenant previously, correct? The only thing would be what you mentioned of the straight-line write-off going forward? And then anything else on top of the $17 million, right?

Correct. It's the $1.6 million, which we expect to take in as a noncash write-off in 3Q.

Got it. And then switching over to the leasing pipeline. In the second quarter, it included mostly smaller tenants, obviously. Do you have any medium-sized or larger requirements in the pipeline now? And can you just provide some color on the breakdown of the pipeline in terms of requirement sizes?

The answer is yes. We do have activity at leases in negotiation and proposals being exchanged for full-floor tenants that are generally under 30,000 square feet. Definitely, the most active segment of the market right now that we see is in the smaller prebuilt suites, but we're encouraged by the fact that the number of proposals that we're exchanging and leases in negotiation for both new and expansion tenants for full floors will result in some additional lease-up of full floors in the latter part of this year. We're seeing activity from tenants in professional services, tech, and healthy financial services. I can't give you a more specific breakdown than that, but we do have activity in that range. Look, I think we had a really solid quarter with 191,000 square feet of total leasing with a weighted average lease term of 8.3 years; we are hosting regular broker events; we've had broker outings, the brokers that we speak to are excited and engaged. And we've got a healthy pipeline of activity going into the third quarter.

The next question is from Manny Korchman of Citi.

I have a quick question for Manny. Given the trends for the month-to-date and June, why are you not considering raising your guidance or expectations for visitor levels at this time?

Well, look, to begin with, we do feel comfortable with the hypothetical with the reasons I mentioned in the opening comments, number one. Number two, with all the strength that we see, we want to be—and we always said that we would present a conservative hypothetical, and that's what we've done. We don't want to look at this as guidance. It is hypothetical, and we have provided, unusually, an update really right up to today or yesterday as far as performance. I think it's just important to note, we held it out as a conservative approach. We do better than that now. We've done better on expenses than we originally laid out. I think the most important thing is the incredible immediate delivery to the bottom line of every piece of benefit that we get from the operation of the Observatory. I think a lot of people have questioned that in the past as why does this fit, how does this fit? And I think that stands out clearly now as a real asset to the business.

The next question is from John Kim of BMO Capital Markets.

Can you provide some more color on the write-offs that we're taking this quarter? Was that—I'm assuming it's not Global Brands with another tenant?

We took no write-off this quarter.

But you did revenue reduction due to write-off?

Write-off over the period. So as you recall, we took write-off in 2Q, 3Q, 4Q of 2020 and a little bit in 1Q. When you have that cumulative impact that drives lower revenues, if that's what you're referring to. But this quarter, we did not take any write-offs on our receivables, nor our straight-line balances.

Okay. With the issues announced this morning with Global Brands, what is your view of the financial health of Li & Fung? I know it's no longer listed on the Hang Seng.

We feel pretty good about Li & Fung. It is no longer listed. It is controlled by the Fung family. Global Brands Group was a spinout out of that, but we feel pretty good about Li & Fung. And again, as I said, we have a good relationship with these folks. They've been very open with us. We've been very open with them, obviously, within the limitations of public company disclosures back and forth. So I hope that answers your question.

Yes, it does. I noticed they had a June 21 expiration or that was one of their expirations. Did they renew that lease?

We had previously announced that Li & Fung has a 79,000 square feet set to expire this year at 1359 Broadway. We've already leased approximately half of that space to the previously announced lease with Zentalis that we executed during the first quarter. So that was anticipated vacate by LF, and as I said, we've already backfilled approximately half of that in advance of their lease expiration.

And finally, on Page 10, where you're looking at near-term expirations in 2022. Right now, you're expecting a pretty low retention rate. Is there anything you do to address this as far as—some feedback from some of your tenants as far as being more aggressive on rate or flexibility of leases?

Well, what we see is that particularly with the smaller tenants is that they generally make their decision closer to their lease expiration date, and there's still about 137,000 square feet of unknowns in our Manhattan office portfolio. I feel good about that at least more than 30,000 square feet of that; we'll update that to tenant renewal and retention this coming quarter. So we constantly and regularly update this, as you know, every quarter. And as we execute on renewals, those come off of this list. So one cannot necessarily conclude the retention rate from this Page 10 in the supplemental.

But it looks like from this disclosure that you expect occupancy to pick up this year and then next year, it's a little bit unknown. But as of now, there's a bit of a gap.

Right, because we have about 234,000 square feet of leases that are set to commence this year, offset by about 141,000 square feet of move-outs this year. So the occupancy will depend on the exact timing of that, but that's what we expect to happen in the second half of this year, which should be positive for our occupancy.

The next question is from James Feldman of Bank of America.

This is Elvis on for Jamie. Just a couple of questions, maybe the first for Tony. You mentioned bidding on multifamily assets. Can you perhaps share any details? Are you looking at those assets in New York City as well or the greater metropolitan area?

So our focus is on New York City office, retail, and multifamily. And that's really been—maybe we haven't made it clear enough—that's really been our intention. I think that if we were to move to a different market, we would give you a telegraph on that. Right now, our focus is on New York City office, retail, and multifamily.

And are you able to share sort of an outlook of what the pipeline is, what you're bidding on, like the size of the deals? Anything you can share for us to think about?

Our primary interest is to do something that is worth the effort and moves the needle for the company. So from that perspective, we're conscious of the dollars we have available. We're conscious of the fact that there is significant capital in the system against which we have to compete. And most of what we look at in the pipeline, I would say, are things that are not actively marketed, though we have looked at some actively marketed transactions. We feel very good about the work that our team has done and has underway. And we look forward to, as soon as we have something specific to discuss to that discussion.

Great. And then maybe just one quick follow-up on the Observatory. Can you share a makeup? I know you mentioned most of the visitors are domestic, but are you seeing some—a little bit of a pickup in international travel?

So I personally believe that we are primarily virtually entirely domestically sourced. That said, we do have something less than 10% of international addresses for credit cards who purchased from us on a retail basis. Mike's strong feeling is that those people are not actually international tourists but rather expats who live within the United States and who originate their visit from a U.S.-based location and come to New York City. So I'd say the exciting thing for us is that the city actually has taken steps to clean things up. If you were to look at 34th Street, fortunately, not at the Empire State Building, but between Sixth and Seventh Avenues, even 4 months ago, it was wall-to-wall street vendors, literally people with clothing racks, you name it. A lot of disputes and hassles amongst those people. All cleaned up. The police have established a very strong presence in the area with the homeless and others who need special services and need to be taken care of, and finally, the city has begun to reopen and deliver those services and to move those people into places where those services can be delivered. A lot of optimism that we have on our side that we've seen the worst. The reporters won't acknowledge that for the most part. But I think we've seen the worst, and we work our way towards the bottom. Again, I think we have a much clearer base picture at the end of the first quarter of 2022.

Our next question is from Brian Spahn of Evercore ISI.

Tony, as you think about capital deployment, you didn't buy back any stock in the quarter, only $3.5 million year-to-date. I know that the stock is up quite a bit from its lows, but how are you kind of thinking about buybacks and balancing that with potential acquisitions?

Brian, I'll take that one. So look, we continue to view our share price as very much discounted, just given how New York City office landlords have traded. We continue to believe in the importance of management teams, boards, and companies to view the opportunity to buy back their portfolio, potentially at a discounted valuation as a very important consideration for capital allocation and a hurdle for what you do. Having said that, we have done some buybacks. We have the authorization. We have the balance sheet, but we're also weighing that against opportunities in the marketplace in terms of investment opportunities that will help drive long-term shareholder value into the future. So we take it all in balance. I would not take the lower level of buyback activity that it's off. It shows that's the level, and we're weighing it against other opportunities for capital allocation, but we continue to fundamentally believe in share buybacks.

I would just add to Christina's helpful and accurate comment that we have a sort of a 10-slot scoreboard on each acquisition opportunity at which we look. And some of those are quantitative and some of those are qualitative measures. And absolutely, one of them is a constant, which is based on what we see: should we deploy our capital into our stock, or should we continue to focus on the deployment of our capital in acquisitions? So this is an ongoing regular dialogue that we have, and we adjust our sights as we go forward.

That's helpful. And maybe, Tom, can you just talk about space needs and space configuration? Maybe just provide some color on what tenants are asking about and looking forward to kind of determine their office presence going forward?

Yes, this question has come up in the past, and my response hasn't changed really all that much. We're not seeing an awful lot of change in the design of tenants' office space. What we saw pre-COVID was from our tenants in any ways that many times, we're focused on employee productivity, employee happiness, employee retention, and that they really occupied spaces at maximum density. There is more thought given to furniture configuration for more space between employees, and I think tenants are focused on how their employees will work in the future and continue to be focused on their employee engagement and health, and I anticipate seeing more collaboration space, more amenities, perks offered by employers. And certainly, the fact that we have amenities such as the gym, the conference center, and food offerings throughout our entire portfolio are looked at very positively by tenants as an employee perk and amenity. So that's the focus I see going forward.

We have a follow-up question from James Feldman of Bank of America.

Just one quick one on Global Brands. If you were to relet that space, let's say, you were to get it back, how much will it cost to reposition that space for a tenant like LinkedIn?

First of all, we're starting with build space. We've already redeveloped this space in the past, so incurred prior base building costs for scraping the space, putting in HVAC electric distribution collect coverage and the like. Therefore, our base building costs will be reduced. It would—we'd have to look at—it would be unique to the incoming tenant as to what their requirement is relative to the build-out of that existing space. Some of it is quite nice. And I think a good amount can be retained. But if a tenant wants to do a new long-term lease and looks for all new build-out, then we'll have a modest base building cost and simply a market rate TI contribution that can be anywhere from $100 to $120 a foot depending upon the overall deal economics.

There are no additional questions at this time. I would like to turn the call back to Mr. Malkin for closing remarks.

So thank you very much for joining us today. Please remember that forward-looking statements on plans to ramp up the Observatory and return to business are for discussion purposes only and to help with your models. They are not guidance nor are they guarantees. As business has resumed in person, we have had the opportunity to meet a lot of you on tours with different folks on the sell side. And we look forward to roadshow in the months ahead and to get our work done and share further results with you in the—for the third quarter in October. So until then, please stay safe, get vaccinated, and thank you for your continued interest, onward and upward.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.