Conference Transcript - ESRT 2026-03-02

Tony Malkin, CEO

In 2025, we put more points on the board across our five priorities. Our commercial portfolio stands at 93.6% leased, with more than 1 million square feet leased in 2025. We have now delivered four consecutive years of occupancy growth in positive New York City office rent spreads. Our leasing pipeline supports further occupancy gains, as reflected in our 2026 guidance. Second, our iconic Empire State Building Observatory remains a market leader. In 2025, we delivered resilient bottom-line performance through discipline cost management price execution despite lower visitation from our cross-ocean international tourist visitors. We continue to grow our direct sales program and address the changes and challenges to inbound travel to New York City. Third, we continue to identify growth and capital recycle opportunities that enhance our cash flow. In 2025, we closed $417 million of all cash transactions of well-located high-quality office and retail assets and completed the disposition of our last suburban commercial asset. Fourth, we maintain a well-positioned balance sheet. Our capital position allows us to exit the suburbs without recognized taxable gain and differentiates us with tenants and brokers and provides us with flexibility to lease space and transact opportunistically. Finally, we remain a leader in sustainability and focused on measurable business results. Over the past five years, we thoughtfully transformed ESRT. The new first few slides in our updated investor presentation share the highlights of our work. We upgraded our portfolio with the exit from our suburban commercial assets and $1 billion of high-quality New York City acquisitions, all without the recognition of taxable gain, and in the process improved cash flow prospects and durability. We set management succession through key hires and internal promotions. Our balance sheet remains strong and gives continued flexibility.

Operator

The result, we are more focused, high-quality, pure-play New York City portfolio built to drive durable cash flow growth and long-term shareholder value. we remain confident in our portfolio position and our ability to execute and with that we welcome your questions great thanks just a few housekeeping items this session is for city clients only disclosures have been made available at the corporate access desk and then if anyone here wants to ask a question you can raise your hand or go to liveqa.com and enter code GPC 26 to submit questions thanks for the introduction Tony I guess to start off You kind of gave us the reasons, you know, why investors should be, you know, should buy your stock. You know, how are you weighing opportunities kind of across office, retail, and multifamily? You know, you recently acquired this classic building. Is office kind of currently the most compelling asset class to you?

Tony Malkin, CEO

So we took actions to seize opportunities, which give us better prospects for cash flow growth. and our actions have given us a sharper New York City focus. Office, retail, and multi-family all compete for capital under the same risk-adjusted return capital allocation framework. So it's just this was a really good opportunity within the set where we consider opportunities on which to act.

Speaker 4

And then, you know, Soho, I think, was kind of a new sub-market for you with this classic building. Is that kind of a sub-market that you're interested in kind of growing in or what specific sub-markets do you kind of look at within New York City?

Tony Malkin, CEO

So we look at the New York City opportunity set broadly. There are not a lot of opportunities in SoHo like the one we acquired. Floor plate size, building size, location. So I wouldn't say that we should consider that SOHO was anything other than opportunistic. It met what we think is really important to us from our standards. I will also say that when we acquired our initial assets on North 6th Street, we didn't intend to do more on North 6th Street, and we did because the opportunities presented themselves, and we really, through our presence there, understood the market and saw the inbound.

Christina Chiu, COO

I would add on 130 Mercer they were rebranding this classic property. Soho has very strong supply and demand fundamentals right no new supply getting built and as Tony mentioned to have that kind of floor plate and offer three contiguous floors on top of stable income and fully leased retail was really compelling to us you can't even assemble that type of property if you tried the second is that market does not currently have a lot of institutional products so apart from being unique space the ability to offer institutional sponsorship extremely unique and finally we all focus on deal metrics right and so that deal is unique in that going in with 70% occupancy because we have scholastic taking up all floors except three floors and we have the retail fully leased we're at a five and a half percent yield and following the lease up of three contiguous floors which aggregates about a hundred and ten thousand square feet we will get to roughly eight percent stabilized yield in a few years out and so for us that's a compelling risk adjusted return that allows us to both deploy capital as well as exercise our operating expertise and offer institutional product in the market we acquired that asset all cash unlevered and we think that affords us a lot of flexibility on the long-term capital structure for that asset and at large as we continue to navigate the market. So I think that's you know been an acquisition that's been well received and we hope to do more but every deal is extremely bespoke and will continue to exercise discipline.

Speaker 4

And then just on that kind of what is the leasing interest been and kind of the balance of the space there? The leasing spend?

Tony Malkin, CEO

The leasing interest because you have it's we already have one very strong indication for one floor at which which more than meets our underwriting and then so that the market demand market demand in general in New York from our experience right up until Friday remains strong and then I guess just given kind of where the stock trades how do you view you know the opportunity set amongst kind of the asset classes that you're exposed to versus opportunistic kind of share buybacks well look share buybacks are always a key component of our consideration we've done over 300 million dollars since we began that program and began to act on that program and we're authorized by the board to do it that said the reality is it's we look at everything from the perspective of company growth value use of the balance sheet and you know what's what's the best outcome and everything goes against the capital allocation framework and our Christine if you want to add anything to that and then just kind of within the asset classes that you're exposed to within New York kind of how are you seeing kind of pricing trend is there anything you know we should be thinking about from where or how pricing has changed so it's interesting first of all we're exposed to everything but hospitality and what we do so we get a pretty clear bead second of all there is no question that the big story right now in New York City is interest from lenders is up even banks and also that that volumes are up considerably, though definitively below 2019, the volumes are up considerably. With the return of institutional interest for certain assets in New York City, no longer just opportunistic or high net worth, we see significant transaction opportunity, number And number two, we also do see in that reduced pricing, sort of 20 to 30% below the last peak. Nonetheless, that's the market. As in 130 Mercer was a hotly competed for a transaction. Could it have gotten more in 2019? Maybe, but it was hot competition on that. So overall, residential is probably the slowest volume, lowest volume right now because people aren't really certain about what will happen under the Mandani new regime but he'll actually be able to accomplish in concert with New York State because he requires New York State approval for a bunch of the things which he wants to do but in general the transaction market is quite strong we had a presentation at our last board dinner by Newmark for the differences between 12 months ago to today and what they see going forward. Needless to see going forward, they see nothing but excitement and upside. This is the capital market side, the sales side. But also they spoke to, you know, we're in the market right now for financing, very strong interest and for property and so we'll see what happens from there. Kind of just on that topic of, you know, the political landscape in New York kind of what are your views on kind of the discussion around proposed property tax increases or you know the potential tax change affecting high income individuals in New York well you know it's it's really interesting it's still very early as I said in the the earnings in our earnings call it's not even that things are fully baked on all the ingredients are in the kitchen There are requirements that people have when you are in charge of New York City. To do certain things, you need state approvals. So that said, should we have increased taxes, we get pass-throughs of taxes on existing leases off of base years. And with respect to new leases, keep in mind that rents are on an upward trajectory due to strong tenant demand and low availability of high quality space, so I think everyone will have to take that into account. But we wait to see exactly what Mondani actually accomplishes, and so far, it's very early days.

Christina Chiu, COO

You know, just kind of given the lack of space availability, do you kind of have a sense of where there's the portfolio mark to market is just given how much market rent has kind of improved and concessions have stabilized within new york sure concessions have stabilized as you point out you know if we look at ti's and free rent we see the area of compression more in free rent particularly if you have multiple tenants looking at a space in a supply constrained environment we have a slide within our portfolio and as reported in our mark to markets you could see you know double digit teens type of mark to market opportunities a lot of that depends on what's rolling off so that's what we try to show in each lease expiration and overall in the marketplace you're seeing net effective growth through rising asking rents and some compression or stack you know concession staying flat and then just on that I think on the call you thought and by the way just so we're clear on concessions flat TI's haven't really moved in three or four years okay so the cost of the actual work up we both had great cost control and in essence we provide on a real dollar basis less can you just provide some more color on the

Tony Malkin, CEO

leasing pipeline I think it was a hundred and seventy thousand square feet kind of as of the call and just kind of where you're seeing strength and weakness across the New York City sub markets so we see strength across the portfolio when we reference that hundred and seventy thousand feet in our fourth quarter call the pipeline is actionable with most deals expected to close in the first half of 2025 you know we have less space available right now and and our Our focus has been, as we noted over the prior several quarters of calls, to create bigger blocks of space because those are what is more in demand. As Christine likes to say, no one builds any more product like ours. Anything new delivered to the market, you have to look at $200 a square foot plus rents. So, from our perspective, you know, our goal is to find those larger tenants for the larger blocks of space that we have underway the creation of them. I mean, we have, if you wanted to walk in right now and say, for instance, OGCP, where we plan to have an 80,000 square foot block. okay I'd like to start construction tomorrow we don't have it yet we will happen in 2026 and we are in discussion with tenants about that those aren't leases out those are discussions so for us it's really a matter of you'll see our least percentage will drop a bit well the FDIC moves out on that one and actually occupancy will drop. FDIC moves out, it's already leased to LinkedIn. So you'll see our occupancy drift a little bit. And then part of it also is the fact that we plan to assemble these blocks of space because we think that they're of higher value. We'll get better credit tenants over longer terms.

Speaker 4

I guess you talked about the FDIC move out. What's kind of like the activity been on backfilling that space?

Tony Malkin, CEO

Again, tours are strong. Well, FDIC is leased to LinkedIn, yeah, that's already done. And the LinkedIn space, they had the right to give up certain space and move to the base of the building. Some of the space they have given up is already leased, and we have activity on the balance.

Operator

Maybe kind of switching gears to the Empire State Observatory, you know, how do you kind of think about the um increased competition from other observatory decks and you know has that impacted the demand for the empire state building observatory well the market's been competitive for a long time uh and uh you know there's been yeah we'll just we'll just put it that way we focus on the levers we control guest experience price optimization direct marketing excuse me in response to changes in travel trends the the the brand of the Empire State

Tony Malkin, CEO

Building is unmatched and what we need to do as we're still the number one rated attraction in New York City is we need to shift with the flows of visitorship as they shift so flows of visitor shift we see a really big drop in the budget transocean traveler period and the past programs with whom we've worked for a significant volume over no more than it's more than a decade decade and a half they are significantly materially down on the other hand our direct sales online are way up and these are very high revenue per person add-ons premium product additional add-ons so you know for us we have to be flexible and we need to respond and that's what we do so from our perspective you know we always have as a tailwind the return of the international traveler the budget traveler right now for geopolitical and economic reasons that's impacted it'll be interesting to see what happens around the World Cup. We'll see, I think, a modest uptick there. Those will all be very high spending visitors because everything in New York City has been marked up tremendously during the World Cup. And we see co-branding opportunities with the World Cup opportunity coming up where people like to use the Empire State Building in their advertising, their branding and their licensing from us of our image for their use just just on the code branding opportunity you know how are those partnerships being structured is that just a licensing fee or it's all licensing you know we as we've discussed before first we wanted to develop the brand and then we wanted to profit from the brand so we've established the brand equity the billions of dollars of international presence for the brand on advertising value equivalency as measured by Scission which is the firm we use to to measure and now we have and and then by the way for a period of time we provided very inexpensive licenses for people to get the brand out there and now we charge and so we look forward to more bottom line production from those we've got a licensing firm that we've hired and a sponsorship firm that we have hired those two firms together have really taken over and the professionalization of what we did before is just in-house those were both end of last year outcomes you mentioned kind of the international traveler could be a tailwind for demands you know kind of what visibility do you have into the you know return of the traveler kind of what's your base case you know as you kind of laid out guidance for for this year in terms of how that demand you know kind of comes back in in 26 so let Christina comment on our guidance in general that said you know we do subscribe to a number of services which talk about inbound travel expressions of interest online airline reservations so what we what we've seen is that the the planning phase is much shorter it's not as far

Christina Chiu, COO

off in the future the inquiries are much more near-term we think that's consistent with what we see from higher income higher wealth travelers they don't plan as far in the future they have the ability on a whim just to go and do something so you know outside of that our view is constructive and Christina can talk to our actual yeah our guidance is roughly flat to last year and it takes into account a variety of outcomes if we do get recovery we're not here to crystal ball but if you get upside to the international travel picture that could be here to the higher end and if conditions remain that's also captured in the range in the meantime we'll focus on top experience cost

Operator

controls but the guidance specifically reflects roughly flattish results okay and then you know what's i guess been topical over the last couple of weeks has just been ai and its impact on you know how much office space people will need in the future how many employees companies will have um you know i guess just starting with the conversations you're having with tenants you know is that kind of coming up at all as people think about um their future space needs it's kind of interesting i think that there's just a a mention this morning of an article

Tony Malkin, CEO

uh published over the weekend that the gen zers prefer to be in the office and that it's the the millennials who most would prefer to be out of the office and there is also a reference that the people that the jobs available for truly remote work are materially down I think that was in the Wall Street Journal but I read a bunch of periodicals each morning so I think that the whole back to office story is over you know and and that's what we see number one number two with regard to to AI it's definitely you know a big a big story but the technology is constantly evolving so from our perspective you know our view on it is very few people have very few AI companies have a clear vision forward what it sounds to date like is and we had a presentation at this at the about this last night at the city investment bank dinner to which we were invited we attended from R. David Edelman of MIT and Washington DC think tank world and AI at this point appears to create more work for a lot of people number one and number two really hit the software side hard and software people the other way in which I personally look at this is they'll just be tremendous capital destruction from the AI investment, more about the actual investment that people have invested in AI than anything else. Because the juice worth the squeeze, the revenue from these different offerings as they go through the money they've raised and actually have to start to charge for their services, right now everybody gets this stuff virtually for free. You can have a corporate sign-up, but it's still, it's not unless you're a really professional coder, you're probably not paying for the capabilities. So we have not seen, and now back to specifically your question, we have not seen any abatement in, we haven't seen a lease up for signature canceled. We haven't heard about a lease up for signature in New York City canceled. Right now the move in New York City is definitively there's a shortage of space and people look for space and there are approximately estimated a million and a half square feet of new AI company demand for space in New York City. That said, as Christina likes to say, signed leases are a backward looking indicator. So the real issue is what do we see as far as new and when leases get up to the CEO or president or CFO or whoever signs the actual lease do they get pulled because until then people do their jobs and if their job is to find space and lease space they'll do it so we haven't seen anything yet we haven't seen any abatement and demand for residential we haven't seen any abatement and demand for retail we haven't seen any abatement for demand in office Christine anything you want to add um you know i think in a speculative period on what happens all right the news headlines are um you know at a much quicker pace than reality so in terms of actionable

Christina Chiu, COO

items watch out for supply and demand there is limited supply in new york city right cost of new construction is high those will go for certain rents our our price point is not getting a replenishment of new supply, and there continues to be demand. The first phase of AI seems to be more about enhancement of productivity, and so to that extent, companies that adapt can get more from their people. I think the notion that they will just go half-staff and try it out is probably something that most companies can't absorb. So I think this is work in progress. It doesn't mirror the pace of disaster that the headlines say. That said, it is important for companies to adapt. we will actively focus on that as we underwrite tenant credits and look out for the landscape but in real estate terms watch for the supply and demand backdrop and having low supply is very favorable to that and the final thing is you know the biggest thing to look out for on AI is probably more the economic and recessionary impact right because that's what really can drive as opposed to individual companies making a specific call to let go of a lot of staff or not it's sort of what does it do for the overall economy and productivity so sorry I will say that you know when Jack Dorsey you know comments he's firing fired 40% of his staff number one there was a comment

Tony Malkin, CEO

that's been out there for a long time that he specifically has over hired and number two we look at a market like San Francisco which is in sort of a mid phase of its nascent recovery and we say okay an area like that is always boom and bust it's always more exposed we feel very comfortable in new york city with the multiple drivers uh and and then we'll see but the the number one thing that we see is no change yet and a lot of conversation and uh you know obituaries about office once again uh written and i we think that's reflected in our stock price and that's why frankly our solid balance sheet is so important we don't have any maturity uh for which we have not had uh resolution until march of 2027 and you know we've got it you know we've got a very good balance sheet where we've upped our leverage slightly in order to shift to higher production of cash flow over time more dependable better upside from investment. So we feel very good that we're prepared for whatever may happen.

Speaker 4

Have you, I mean, obviously some of the office stocks have kind of sold off over the past two weeks on the AI headlines. Are you seeing any changes to kind of office pricing or the buyer pool or just the competitive landscape for assets? And, you know, it sounds like your comments are pretty positive in terms of haven't seen an impact and having a view that it can enhance worker productivity. Are you seeing, you know, maybe some of this disruption present an opportunity for Empire?

Tony Malkin, CEO

So we've been active with over a billion dollars of transactions, around a billion dollars of transactions, you know, since we began our shift out of the suburbs. billion dollars of acquisitions and what we've seen is what's reflected in the market prices are as I mentioned before 20 30% below their peak residential has seen a degree of decline in volume as people are uncertain about what will happen with Mondani institutional investors are back institutional lenders are back in the market so so we see okay so evidently that part doesn't get announced in here we see strength in the capital markets and in the transaction world and at the same time at prices below where they were and and the volume is materially down from its peak though it's up from 2024 2025 was up over 2024. So still in the recovery phase. And at the same time, the bellwether indicators are strong.

Speaker 4

And then you touched on kind of the balance sheet. You know, your leverage is slightly above six times. You know, how are you thinking about managing the balance sheet going forward? Is that kind of the leverage range we should expect you to kind of run at? Or any thoughts there?

Christina Chiu, COO

Yeah, I think that's a very comfortable level of leverage. But we've always said we're not trying to be extremely under levered or try to be over levered. We think about managing a very flexible and well positioned balance sheet so that we can navigate all sorts of market circumstances and I think coming from the years of COVID into now and the various disruptions we've proven that out. As Tony mentioned we saw a great opportunity for an acquisition acquiring it on all cash basis doing some recent financings affords us great flexibility on the go forward while maintaining a lot of liquidity and our leverage is still well below peer averages so very comfortable at this level but any time we tick up we also ensure that we have various alternatives to bring it back down so that we can continue to weather the markets in a very healthy way yeah but we've got no jv in our portfolio anywhere we own everything 100 ourselves and we have a lot of unlevered property that is not part of the unsecured pool for our bonds And then, you know, maybe just, you know, your fad kind of increased in 25 due to kind

Speaker 4

of capex.

Christina Chiu, COO

You know, as leases kind of commence, you know, how does, how do you kind of view capex over the next few years and, you know, how does, you know, kind of, you know, if cash flow improves kind of as the free rent burns off, you know, how does that change kind of your capital allocation priorities oh well let me answer the capex piece and then the capital allocation separately so the last few years we've had very significant lease up of the portfolio right 600 basis points when you look over the last three plus years and that has been great for increasing lease percentage but as a result of that we've had capex increase ahead of all of that leasing translating into cash and cap NOI. We think there is about another year or so where you'll see some of that TI continue to flow through, leasing commissions likely come down and base building comes down because those were sort of paid for ahead of the full commitments towards TIs. On a go forward basis, there will always be some noise. We've said, you know, at below 150 is how to think about CapEx and all things being But things are never equal, right? You'll always have early renewals and situations that come up, but we'll do our best to provide the market with transparency on how that looks. And as a reminder, the portfolio is fully modernized, so it's extremely ready for, you know, being 93% leased and continued leasing without having to double back and get the portfolio up to speed. In terms of capital allocation, you know, to resummarize, right, strategically we always think about share buybacks. The opportunity to buy back our portfolio that is well-leased, well-invested in, is always attractive. That said, we also believe there could be opportunities that could leverage the platform, our skills, and add to shareholder value and allow growth in overall cash flows and use of the platform. And so that will be a consideration as well. So it will be a balanced approach. It won't be back up the truck, use all our liquidity just towards share buyback. And at the same time, that's definitely a part of what we think of. And that's why we've done over $300 million and continue to engage in that activity while also looking for acquisition opportunities. So the benefit of a good balance sheet is you don't have to make a choice and do one at the expense of the other. Ideally, we can do both and add to shareholder value over the years.

Speaker 4

Okay. And then maybe moving on to some of our rapid fire. What will net effective rent growth be for your property sector overall, not your company, in 2027?

Tony Malkin, CEO

That effect of rent growth will be positive and the market will be carried by the haves, haves modernized, amenitized, energy efficient property in which there have been full investment or brand new property.

Operator

And then will your property sector have more or fewer or the same number of public companies a year from now? Fewer. Great. Thank you so much.