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 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. 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. 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 invest in New York City, we are the best option for a balanced investment. Our modernized buildings close to mass transit with great amenities and more to come, along with our industry leadership in energy efficiency and indoor environmental quality, help us to maintain consistent leasing volumes, and the third quarter was no exception. We have received independent validation of how the market values our portfolio, particularly highlighted by the video from our tenant COOKFOX Architects at 250 West 57th Street, which can be found in our investor presentation. There are several videos in our presentation, all of which are worth viewing for anyone interested in understanding our company. The Empire State Building Observatory is the top attraction on TripAdvisor in the United States and ranks third globally. In today's market, customer reviews enhance brand value. Our iconic brand has gained universal and international significance due to the high ratings from our visitors. Our strong and flexible balance sheet, with no exposure to floating rate debt and a well-structured maturity schedule without debt obligations for the next two years, puts us in a great position for strategic capital allocation. We continued our share buyback program during the third quarter and beyond. Our search for cash-accretive external growth, along with portfolio recycling for better cash performance, has been very successful. Christina will discuss our current balance sheet recycling. We have built our business to thrive in unstable markets, and we see significant opportunities ahead. Tom Durels will cover our robust leasing this quarter, which totaled 335,000 square feet with strong mark-to-market spreads on new leases in our Manhattan office portfolio. ESRT benefits from the trend of tenants seeking quality spaces. They prioritize buildings with amenities, energy efficiency, low emissions, and convenient access to mass transit. Our modernized buildings at attractive price points particularly appeal to tenants in the current environment. Existing tenants who appreciate our offerings continue to expand within our portfolio. Recent expansions include Universal Services of America, iCapital, Burlington, and Signature Bank. LinkedIn, our largest office tenant, has frequently expanded within our portfolio and recently showcased in a video how their space at the Empire State Building supports their talent acquisition and retention efforts. The link to that video is available in our investor presentation. We are consistently increasing our lease percentage, which will drive higher occupancy and earnings in the future. Third quarter visitation to the Empire State Building Observatory reached 687,000, and we enjoyed strong revenues per visitor. Factors such as airport disruptions, the war in Europe, and ongoing shutdowns in China have impacted international travel growth to the U.S. this quarter. Our recapture rate of pre-pandemic levels was at 66%. We have adjusted our projected fourth quarter visitation recapture to match the third quarter's levels. While it may take longer than we initially expected to fully recover the observatory business to pre-pandemic levels, we remain confident in that recovery. Our team has effectively navigated previous market downturns, as shown in our investor presentation. Our focus on expense management has been enhanced by our all-reservation ticketing system implemented during the COVID shutdown, which allows us to deliver a superior experience and establish excellent partnerships for our iconic brand. The Empire State Building Observatory has unmatched brand recognition and is a must-visit for anyone coming to New York City, as recognized by TripAdvisor. We continue to explore new acquisition opportunities that align with our New York City-focused portfolio where we can achieve competitive risk-adjusted returns. Our local knowledge and nimbleness, supported by our solid balance sheet, give us a unique advantage. We also continuously review our portfolio to monetize assets where we have added value and reinvest the proceeds into cash-accretive acquisitions, as Christina will explain shortly. We are pleased to report sustainability milestones achieved during the quarter. ESRT achieved carbon neutrality for our entire commercial portfolio in 2022 through our leadership in energy efficiency retrofits, reducing operational emissions by 54% at the Empire State Building and 43% portfolio-wide since 2009. Using renewable energy credits, we offset 100% of our electrical usage and preserved nearly 9,000 acres of biodiverse forest to offset all non-electric fossil fuel emissions. Our efforts in emissions reduction are driven by our proactive energy efficiency initiatives alongside ongoing tenant engagement. ESRT is America’s first commercial office REIT to join the United Nations Global Compact and commit to Women’s Empowerment Principles. Just earlier this month, we announced that ESRT received the highest possible GRAS 5-star rating and Green Star recognition for the third consecutive year, scoring 95. Additionally, we achieved a score of 96 in the U.S. diversified group and an A rating in public disclosure assessment, which evaluates ESG disclosure practices. We are thrilled with these accomplishments and recognitions in the ESG space this quarter and look forward to building on this progress. 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. 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. Additionally, we 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; the original space at One Grand Central Place is already leased to another tenant. We also signed a new 28,000 square foot 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. Additionally, we 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, with blended lease spreads signed at our Manhattan office properties improving to a positive 10% on a cash basis compared to prior escalated rents driven by new leases, which were up 23.6%. The 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 lease 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, of which we expect about 280,000 square feet to vacate 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, basketball and pickleball court, tenant lounge with bar service, and two golf simulators at the Empire State Building. 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, which will benefit from shared access to new amenities planned for 2023, including a 300-person town hall presentation room and lounge at 1400 Broadway, and a new rooftop lounge with private cabanas at 1333 Broadway. 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 or more years, very few of our tenants have decided to operate under a hoteling model. 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 now exceeds pre-pandemic levels, with close to 200,000 office-using jobs 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. 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 comprised of 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 approximately 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 agreements 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 in 2021 reflected certain temporary cost savings in a 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 advance 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. 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 are able to keep the same high end and able to 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 with 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 your latest insights on capital allocation given the challenges with bank financing, despite the fact that Empire State doesn't have any upcoming debt? How are you managing investment opportunities such as development and 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 are you 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 coupled with a high cash balance and an undrawn credit facility. With that, we really do focus on ways to enhance shareholder value. 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. Last piece is capital recycling. We have the balance sheet that affords us flexibility. All of our commercial assets are 100% owned. That affords us additional flexibility. 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 market is 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? So as of that date, it ran in the mid-$70s million. I mentioned that because currently, our dividend runs at about one-third of our previous levels. 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. We're clearly entering into peak uncertain market periods. 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. 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?

Well, first, we had a really solid quarter with 335,000 square feet, and that follows three solid quarters prior to that. We have a good pipeline of activity heading into the fourth quarter, and whether those tenants that we're negotiating with close in the fourth or first quarter, the good news is we've got activity from a broad range of industry types that includes financial services, professional services, health care, tech, legal, and others. I would say that we benefit from a flight to quality as tenants are focused on the things that our portfolio provides. So I think we are in a strong position because we offer healthy buildings that are modernized for the 21st century, the latest technologies in indoor environmental quality, newly built energy-efficient tenant spaces, great access to mass transit, and great amenities to which we're adding at accessible price points. Remember, we've invested $1 billion into our assets, upgrading common areas and building systems. We've redeveloped 95% of our tenant space to deliver modern, efficient office spaces that tenants seek today. So those tenants are looking at their alternatives; I think that we are well positioned to outperform. We have not given our guidance for 2023. Of course, we'll be paying that and that will be provided in a later quarter. But right now, where we sit today, I feel very good about our portfolio and our offering.

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 things to consider. The statistic I pay the most attention to isn't the traditional data, as we don't have it across our entire portfolio and much of that data is inaccurate. It provides daily numbers but doesn't reflect how often individuals are in the office each week. What I find most relevant is the utilization of the Empire State Building fitness center, which is exclusive to tenants. I can share that we are nearing two-thirds of our membership levels from 2019. We can monitor our usage. We believe that the commonly cited statistics are not accurate and that work dynamics have evolved. Our tenants recognize that they don't want a situation where people are hovering around, waiting to claim a space. This has been observed with tenants who have expanded their leased space. Another key factor for us is the trend toward quality, as we benefit from it. We offer excellent amenities, both currently available and forthcoming. Our properties provide healthy, energy-efficient environments in great locations at very reasonable prices. All these factors encourage tenants who need to employ workers to utilize and lease space from us. I'll ask Tom if he has any further comments on this.

Look, definitely, the way tenants work has changed, but you can see the vibrancy of New York City. Walk around the streets and look at the activity in general. We're not seeing a diminishing demand from tenants because of the change in how they use our space. Constantly, I ask our leasing folks what are tenants saying and why are they leasing the space? Fundamentally, they still want a place to work, a place for their employees to collaborate and work together, regardless of the daily utilization that everybody is fixated on. 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 around asset values and cap rates in this increasing interest rate environment. 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 the cost of debt and low availability. Maybe you can touch on both office and multifamily.

It's sort of interesting. If Christina and I sound a little slower this morning, it's because we both got in late last night from Dallas from Urban Land Institute, where we got to chat with a lot of different folks, councils, and people with whom we met. I saw a few things out. First of all, the primary activity of new acquisitions right now appears to be 1031 exchanges. We fit in there, and it makes logical sense from that perspective. I suppose people want to sell assets and are looking to do 1031 exchanges. Secondly, don't focus solely on the headline cap rate; focus on how people underwrite their investments. There are multiple ways to approach this. One is you make a decision based on what you think interest rates will be over the time of your holding period. There's no question that we approach, though we're not yet there, the peak of the Federal Reserve activity. We had two members of the San Francisco Fed and a former member of the Dallas Fed comment that they expect further increases coming. But also consider that certain assets, particularly those that are not managed properly or those that have capital deficiencies, may be purchased at lower cap rates, but there exists an opportunity to improve their performance over time. I think there's been a widening at certain levels of what people are prepared to pay. Transactions are fewer, but there are still some active ones, such as the recent partial purchase by Boston Properties.

Very helpful. And if I could just do 1 follow-up to that, Tony. You talked before about your interest in complicated transactions. Based on some 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. It really comes down to not just FFO accretion, but cash accretion. It depends on how we can structure things. Most of what we have on our plate right now consists of either failed transactions from quite some time ago or transactions that have not even hit the market. Office investments will be interesting to us when they reach a point of traction; however, 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 lease 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% to 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 and should commence in the fourth quarter or first quarter of '23. So, depending on when those leases commence, we will see positive absorption and increased occupancy in the near term of well over 100 basis points. In 2023, we only have about 5.5% of our portfolio leases expiring; we have 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. Given the signed leases due to commence in the near term and in 2023, along with a very modest lease rollover in tenant move-outs, we're well positioned to increase our occupancy, which obviously trails our lease percentage.

Great. On the disposition, you mentioned in the press release that you would be looking to reinvest the proceeds from the two suburban sales. I'm curious if this is a firm commitment to buy something or if we need to make a purchase for tax protection. Does the net operating loss help offset that, and could share repurchases be a more effective 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. We also have cash on the balance sheet, so that always provides us an avenue to do share repurchases. Without any real need to forcefully pay down debt, we can allocate capital towards buybacks. All of those are options for us. I think 1031 is an appealing option because that allows us to monetize the NOLs in other ways to generate shareholder value. That continues to be the interest. In terms of what categories we look at, we focus on New York City; it's office, multifamily, and retail. 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 stalled out a little bit with the strengthening U.S. dollar. Does that give you any sort of pause for concern just around the ramp into '23? Do you need strong international tourism to get back to the prior peak levels?

I understand that you might expect me to agree with the idea that international travel has stalled. However, we are aware of our traffic sources, and while some of our international sources are performing nearly at full capacity, others are not. In the third quarter, we noticed a reduction in the seasonality of domestic travel along with an increase in international visits, which balances things out. Frankly, we are a bit puzzled by the varying return rates to U.S. visits from neighboring countries. At the Observatory, we are hearing more foreign languages and accents. Our initial thought is that travelers are hesitant due to negative stories about airport experiences, lost luggage, and other issues, leading them to stay put until things stabilize. What’s most important for us is that we know we are number one. According to public disclosures, during a recent period reported by another company, we welcomed 1.7 million visitors. This reflects our consistent ability to capture attention in the market. We are pleased with our performance and are excited about how well our reservation system is functioning, as it has alleviated crowds and improved the visitor experience, which has been well-received. Our offerings are top-tier, and guests have more time to enjoy without the stress of long lines. Sales in our gift shop are improving on a per-capita basis, nearing previous levels. Our fixed menus in the restaurants are also showing positive results. Additionally, we are looking forward to opening a stunning, three-level Starbucks Reserve that will attract both coffee lovers and tourists in New York. Overall, we feel optimistic. As we approach guidance for 2023, we will provide insights into our expectations for the Observatory.

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, call it, earlier in the year? And have they been quicker or slower to make decisions recently? Any color around that would be great.

Well, on your second question, I would comment that as we look at our tour volume, while we're seeing total tours that are below maybe the high points of 2018 and '19, our conversion of deals to tour has increased significantly. What that tells us clearly is that the business leaders and decision-makers who are touring space and spending the time are committed to transact, so that's kind of an interesting stat and quite telling. In terms of what tenants are seeking, it goes back to the things that we are offering. We've been building pre-COVID and as we've redeveloped 95% of our portfolio space since IPO, including healthy buildings, technologies in energy efficiency, and of course, easy access to mass transit. Certainly, we are adding to our amenities, as I mentioned before, because that's certainly something tenants are focused on, but it's the right amenities. We believe we are delivering the right mix, including a new best-of-all sports pickleball court, a 400-person all-hands presentation room, a tenant lounge with bar service, and golf simulators. Together with the eight on-site food and beverage options at that 23,000-square-foot Starbucks mentioned, the rooftop at 1333 Broadway, and the expanded lounge and town hall on Broadway, these are the things that tenants are looking for. Remember, we're in great neighborhoods with excellent neighborhood amenities to complement our in-building offerings. We think we deliver the right suite and package of amenities and efficient, modern-built office spaces that tenants are seeking.

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? Looking to run rate through to 2023, understanding you haven't given 2023 guidance, how should we think about this? Is this a good starting point for that? Any color around that would be great.

Sure. So in Q4, we already mentioned the slower recovery of the Observatory, for the backdrop and the reasons that Tony already mentioned. That's reflected in there. We're still not through the end of the year. As I mentioned, the factors that are considered variable are still present, including the Observatory, operating expenses, and maybe some variation in leases going into commencement. That's pretty much it. We're really transparent on each of the drivers. It's been pretty consistent with the rest of our earnings guidance. We have not issued guidance yet for '23. But I think one comment we made regarding operating expenses is that this was a year where the increase in operating expenses compared to the prior year is exaggerated because our team did a phenomenal job of proactively lowering expenses when building utilization was very low. The drawback of that is that it created a tough comparison year as we normalize. That said, we're moving into a normal path, and assuming operating expenses are the main drag on NOI, it gets us to a better trajectory.

Awesome. That’s it for me. Thanks for the time.

Our next questions come from the line of Daniel Ismail with Green Street. Please proceed with your question.

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. Those assets have been on the market since then. Like any process, you go through back and forth. Ten Bank actually has assumable debt; the other one has no debt on it, and there are various factors. Without getting into too many specifics, we are still in the deal. You have these conversations and work through all the points. For us, as we've mentioned, we're not forced sellers. 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 it would, based on where we launched the sales.

Got it. I'm curious about Local Law 97, as the Mayor's office released some new guidance a few weeks ago. How do you think it will be broadly implemented for office spaces? It seems like there are some new technical changes that might be unfair to office owners. How do you view the overall implementation of this new law, and how is Empire State adjusting to these changes?

As we've said, we know we have no fines in 2024, and we have plans for how we get successfully through 2030. We'll see how that goes. I'm on the advisory board for the implementation of Local Law 97. The only commercial land I don’t think there's been anything unfair put out there; I think it's pretty straightforward. I would say that residential is one level of performance achievement versus office. There are other challenges and opportunities for achievement in retail and logistics. The partnership that we developed with our tenants, which comes from our groundbreaking work led by Dana Schneider in energy sustainability and ESG, is very much scientific-based targets. I think the big challenge for several companies is that they've pursued soft targets to date, and they might have lead of their own, to some degree, as a softer target. When you get to Local Law 97, it's all about data and actual performance. It's pretty much in line with many of the data and performance proposals under the SEC's proposed new reporting requirements. There may be a lawsuit against Local Law 97, but we have no involvement in that. So, we will see how that rolls out. That said, we believe it's good business to be an asset rather than a liability to users. Tenants whose actual companies have a footprint, are tasked with the increasing responsibility and burden of reporting their own carbon footprint, and that makes a difference in their scores. We look at everything strictly from a perspective of how do we compete best for tenants? How does this put points on the board for ESRT? Everything we do is integrated to any other expense we have, including life cycle cost analysis. We spend the money and achieve results; we attract better tenants on longer leases with better credit quality and we think better rents. We are accessible through our price points, along with indoor environmental quality and healthy buildings, factors we began to institutionalize back in 2009; it's a real competitive advantage. Local Law 97 is something that occurs along the way.

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 offsets. You really need to engage with the tenants. We are better positioned than most others.

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 expectations?

No, John, they've done well. That's the best color we can share. We are ahead of where we thought we would be when we acquired them and underwrote them. We love our partner, the Fetter organization. The success we've had with them makes us quite appealing for others who might like to recap. 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 dislocations in the market? 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, if potentially you look at other asset types for use of proceeds?

We've said we're not really looking at office right now, which narrows down the food groups.

Yes. We've spoken on this. We have interest in multifamily. We've made it clear, but it's not just about reaching scale at all costs. We are going to wait for healthy asset classes, so probably not likely to see a ton of distress. We'll look for situations, and our team is working diligently 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 70s a week yet, and I was wondering if that played a part in your reduced outlook for the third story.

We didn't outpace Summit; we crushed them. It's not out of pace. Look at the numbers I just cited, number one. Number two, our revenue per capita is excellent. 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 for The Summit will also pass. We are number one. We are the international icon. Our brand is recognized 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. Unless we have many other calls, we probably want to wrap up and let people go. You can also listen to what we said earlier in the call. 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 worked incredibly hard, and I have every confidence we'll continue doing 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.