Conference Transcript - ESRT 2026-06-02

Speaker 2

All right, well, the clock is already running, so we're going to get started here. My name is Blaine Heck. I am the Senior Office Industrial and Cold Storage Reed Analyst for Wells Fargo, and I'm very privileged and honored to have ESRT here for their presentation. We've got Christina Chu, the President of ESRT, Ryan Cass Operations, And we've got Steve Horn at the end of the table, CFO of ESRT. So I'll, without further ado, turn it over to Christina for any introductory remarks if you want. But we would like this to be as interactive as possible, so please don't hesitate to ask your questions.

Speaker 1

Yeah, so I'll try to cover a lot of these in the remarks, and then you guys should definitely feel free to ask questions. So, thanks, everyone. ESRT is a pure-play New York City read aligned with today's city's live, work, play, and visit demand drivers. We benefit from four complementary sources of NOI, our top-of-tier office portfolio that's well-leased and targets the deepest segment of tenants' demand, our iconic and top-ranked Empire State Building observation deck, and our high-quality multifamily and Prime Street retail portfolio. Over the past five years, we very intentionally transformed ESRT's portfolio and sharpened our strategic focus. We exited out of the suburban commercial asset exposure, recycled capital, and acquired over $1 billion of high-quality New York City properties, all in a tax-efficient manner. At acquisition value, we acquired approximately $400 million of high-quality multifamily in Manhattan, approximately $300 million of prime retail on North 6th Street in Williamsburg, Brooklyn, and at 130 Mercer, a mixed office and retail property in Soho for $386 million. These transactions enhance our portfolio quality, improve our long-term cash flow growth profile, and were enabled by our well-positioned and flexible balance sheet. This morning, we announced two additional value-enhancing transactions that further demonstrate our active approach to capital recycling and portfolio optimization. First, we completed the disposition of 250 West 57th Street for $275 million, which included the buyer's assumption of $180 million of mortgage debt. The transaction represents a tax-efficient recycling of capital into our previously announced December 2025 acquisition of 130 Mercer Street. This is consistent with our strategy to recycle capital from assets where we've executed on the business plan and into high-quality assets with long-term cash flow growth prospects. Second, we strengthened our ownership position of two Broadway campus assets through the acquisition of the land underlying 111 West 33rd Street and 1400 Broadway for an aggregate $110 million, which enhances long-term asset value. Turning to our office portfolio, it remains a compelling value proposition that targets the deepest part of the market, as we mentioned, is 93% leased and continues to perform very well under the haves and have-nots bifurcation within the marketplace. We have delivered our 13th consecutive quarter above 90% leased, and we now have delivered 19 consecutive quarters of positive mark-to-market lease spreads, and office leases continue to execute at a high level over long terms with 10.5 years in the first quarter on average. Turning to the observation deck, it remains a strong cash flow contributor with low-cap acts and significant global recognition. It is a great complement to our property portfolio. We would note that macro and geopolitical environment remains uncertain, and we have continued to experience weakness in visitation attributed to fewer budget-conscious travelers, international tourists, and challenges with past programs. That said, our focus remains on levers that are within our control to run the operations well, cultivate our brand, enhance the guest experience, broaden our marketing reach, and manage expenses. Longer term, the observation deck has attractive cash flow characteristics, continues to be top-ranked TripAdvisor number one. Our retail portfolio includes well-located high-foot traffic assets in Manhattan and the Williamsburg portfolio that I previously mentioned. That $300 million portfolio aggregates 124,000 square feet along the main corridor and is a very strategic position in a sought-after supply-constrained market that has now allowed a lot of flexibility and optionality and upside. In multifamily, our three assets, two of them are free market, they have low vacancy, minimal new supply, and very solid tenant demand. So overall, the balance sheet remains very strong and a competitive advantage to allow for all of this. We have strong liquidity, lower leverage versus peers, and we continue to maintain this strength from a capital allocation perspective we'll continue to evaluate opportunities within the portfolio and recycle capital and new opportunities within New York City office retail multi-family as well as share repurchases with that I'll turn to your questions so you covered a lot of bases there but you know maybe just taking a step back I guess Can you describe what you think differentiates ESRT from, excuse me, others in the office REIT sector and maybe the areas that any newcomers to the story should really focus on? Yeah, I think it's the factors that we mentioned, pure play, New York City, live, work, play, visit, and I think all of that with a very strong balance sheet. We've also been very proactive to add value within our assets and recycle continuously into assets that generate better cash flow growth over time. And so while the share price is very undervalued, we continue to do the things within our control, which is execute on the business and drive portfolio value.

Speaker 2

Yeah. I mean, to that last point, share price being undervalued relative to the market, what kind of discount do you actually see in the share price versus where you're seeing transactions at this point?

Speaker 1

Yeah, I mean, well, I should ask you what your thought on the market is, but it's highly discounted. Look, even if you look at the acquisitions that we've done, which aggregate $1.1 billion at acquisition price, which is comprised of multifamily, the Williamsburg portfolio, the Scholastic Headquarters building at 130 Mercer, that's a little over a billion, so call it $1.1, and apply any kind of multiple to the observatory, you already get to the equity market cap of the company. That doesn't even account for all the office. That's 93% lease, fully modernized, ready to go, and high demand with no competing supply, given there's no replenishment. So any variety of metrics really speaks to that. It's frustrating. We obviously want to deliver on share price performance. And at the same time, while that goes on, we'll maintain a flexible, strong balance sheet so we can continue to be very active in capital allocation and strengthening what's in the portfolio, driving better cash flow growth and better portfolio quality.

Speaker 2

Maybe for you, Ryan, can we just dig into recent office fundamentals in New York and how you're viewing this recovery relative to others that you've seen in this market?

Speaker 5

Yeah, absolutely. So demand remains strong. And I think one of the big things we've seen that's different from other recoveries is that story of the haves and the have-nots. So as Christina spoke about, We're fully modernized, amenitized, we're well-located. Majority of our assets are what we call our one-seat commute. You can come into Penn Station, Port Authority, or Grand Central and walk to your office. And that's sort of the biggest differential. So we've continued to outperform. We're at 93% leased, as Christina spoke about earlier. We entered this year and we are forecasting that our lease percentage will increase over the course of the year. We have been able to continue to push our pricing. And that's, you know, evidenced by 19 consecutive quarters of positive mark-to-market spreads and 13 quarters above 90% leased. What we see is we're also focused on high-quality credit tenants, long-term transactions with a high probability for renewal and expansions. And, you know, that's really evidenced by last quarter's lease term, which was roughly 10 and a half years on our office transactions.

Speaker 2

Are there any specific tenant profiles by size or industry that are really active within New York?

Speaker 5

So one of our benefits is because we're best in class, we're actually fishing in the deepest part of the pond right now. From a price standpoint, we were 60s, 70s. Now we're 70s, 80s, into the 90s. We're seeing everything from financial services, TAMI, professional services, consumer goods. we have our pre-built portfolio that is meant roughly a million square feet for more boutique sized tenants those tenants will come in we treat those as our one two-bedroom apartments build them once tenant comes in we work to expand them over time and a plan is a good example of that and then when they move we paint carpet get the next group in the other thing we have our individual full floors ranging from 10,000 square feet to 20,000 square feet we've been very successful there continuing to push pricing one grand central place tower floors 12 000 square feet in building access to grand central terminal you know our goal is to set a record rent for that building and i'm not talking record post covet it's a record pre and post covet we've also worked as we've shared in our investor deck to create large blocks of space so we have a few large blocks of space at the empire state building we're actively marketing roughly 100 000 square feet right now with a large mark-to-market opportunity and you know lots of demand for that space and as Christina spoke about earlier 130 Mercer we've leased one of our full floors already having closed on that in December two full floors 75,000 square feet what's unique about 130 Mercer is fully modernized building financial stability amenitized and a large

Speaker 2

floor plate all in soho and when we say soho you know you're on prince and mercer and broadway this is main and main of soho and by the way ryan referred to the presentation if you scan your qr code right there i think you can can find it there um what about concessions ryan are they plateauing have they come down for the the highest quality properties so our net effective of rents have grown.

Speaker 5

As I spoke about earlier, especially over the last 12 months, what we've seen is the ability to push rents on the concession front. TIs have remained stable within our portfolio. The free rent, we used to say one month per lease year. What we're seeing now is the ability for the team to deliver and come in inside of that. And the goal right now is how do we get multiple tenants submitting offers on the same space?

Speaker 2

When we can get competition for like-kind space that's where we really have an opportunity to push for the best result in that transaction and then ultimately shareholders sure any questions from the audience before i keep going don't be shy so there's been a lot of discussion around the potential impact of ai on the office market how is esrt thinking thinking about that dynamic and whether it could be a headwind or even tailwind to to leasing in the near to midterm so for us right now it's been a tailwind so we've seen a lot of ai companies

Speaker 5

either expand in new york city or come look to open offices in new york city so that increases demand we're focused on the high credit high quality credit ones an increase in demand we're seeing the reduction in supply from conversations with our tenants you know we are not seeing a noticeable impact in fact what we've heard from them is right now they're in the exploratory stages but what they view it as is okay how do we do how do we make the employee do more work better work in that same amount of space so we're continuing to see the majority of our pipeline right now are expansions whether it be within our portfolio or new tenants coming to our portfolio and that's what we're focused on execute maybe a question for all of you how are you guys

Speaker 4

using AI in your business yeah yeah there's you know the company as a whole we've taken a an approach that everyone should look at any new tasks they're taking on or existing tasks would take an AI first mentality or AI curiosity mentality and build from there it's not immediately replacing any individual roles but what it's doing is finding those in the company that are really proficient at using AI and then developing them and developing others so and in my part of the company you know we look a lot at using you know our connectors into Yardi and getting data out quicker and doing analysis with that and generate reports automatically that others can use across the company On property, get some of the...

Speaker 5

On property, on the... Yeah. Christina knows I love to dive right into the weeds. High level from the operations team, we're continuing to use AI for early detection and preventative maintenance. On the marketing front, renderings would used to take a week. We can get done in a matter of minutes. So great differentiator for us if we have a prospective tenant tour.

Speaker 1

Customized book, customized graphics in the space can all be done within 24 hours we're using the data we're doing a lot more data mining and also research and drafting off of when we have information from a broker how do we make sure we're targeting the right spaces based on the feedback we're getting from one specific space yeah so overall i think as you've heard we're pushing it throughout the departments really looking for efficiency efficiencies enhanced productivity it's a mindset shift right getting rid of sort of the fear and that it makes mistakes into now that this exists how do you use it to your advantage upscale the work and really building that in along the way you can't discount that it comes with the need for guardrails as well right security measures confidentiality proper ways to use it the review of work so it's a real balance and all of this technology has evolved extremely quickly like the real democratization of really really useful llms is like inside of nine months right and so we're really seeing that shift want to make sure we adapt and a quick comment on the landscape the narrative has gotten so far ahead in terms of elimination on jobs as ryan mentioned we're not seeing that on the leasing front now that doesn't mean that companies aren't going through their own versions of haves have nots and adaptation right we're adapting other companies are and over time you could have you know increased productivity increase profitability, and there could also be certain that fall more behind and lag. So I think this is evolving landscape. We all have to adapt to that environment and really do sort of tenant and space underwriting and make sure we're really well positioned.

Speaker 2

Great.

Speaker 1

So the observatory at the Empire State Building is a major source of revenue and NOI for the can you just talk about recent performance and some of the challenges and opportunities that that lie in that line of business yeah so as i mentioned earlier we are seeing continued weakness coming from the first quarter as a reminder in the first quarter we said historically 1q represents about 15 percent of annual admissions because of the seasonality of the business when you get through the first half you'll have historically about 40 percent of visitation and that's a better juncture to evaluate how the trends have evolved with a lot of macro uncertainty. So what we've seen is a continuation of some of that weakness, again, mostly attributable to weaker international, some challenges with the past programs, which is mostly international, and then a bit more on the budget-conscious traveler. The business remains a very good complement, good cash flow generator, top brand, TripAdvisor number one. What we will do is focus on the levers we can control, which is great experience, great operations, assessing this landscape, and how we can focus on building resiliency into the cash flows amidst a shifting landscape comprised of both macro factors as well as the ways in which tickets are sold and how we cultivate our audience. So all of that is underway. It's a moment in time, but we have within this a very valuable asset, and we'll continue to look for ways to optimize, even in a temporarily weak environment.

Speaker 2

What do you think needs to change to kind of spur the foreign tourism again? And is it all geopolitical? Is it cost?

Speaker 1

That helps. I mean, inflation, right, oil prices or tariffs, you know, none of that is very helpful. It's hard to predict exactly. But, you know, New York is a strong market, and I think it's continuing to look at the business. if you have a strong brand great potential how do you think about revenues and four walls how do you think about revenues outside the four walls and position accordingly right what we're seeing is a great opportunity to say there are factors in the business and like any business you want to get in front of it and think differently and not just operate off of what has historically been a great brand and still is but you want to carry it further sure um there's also been a lot of competition that's come to the market with one summit and the edge you know are you guys seeing that impact your uh esb performance well there's certainly more options for sure you know customers to go to so that's just fact and the business is spread out more that said each of them do something different we continue to be highly ranked right with ratings amongst attractions and they each do something different so summit has done a beautiful job right with the experience and Instagram and tie-in Edge does something very different by Hudson Yards off of the restaurant base really high you know point and Empire State Building is the only one that's iconic New York sort of historically tied so I think when it comes down to it each of them are going for something a little bit different there are more choices and the onus is on each attraction to run the business well and think about the cultivation of different channels of customers and how to approach this with some of the macro backdrop.

Speaker 2

Sure. Okay. I'll open it up to the audience again.

Speaker 7

Can you just talk about 1.30, Marissa? How long were you circling the property? I know I own some chairs as a scholastic seller. I'm just curious as to what the thought process was. How many other bidders? Sure.

Speaker 1

They ran a marketed process. So I won't say too much. The company has its own press releases, but they were going through their own strategic transactions analysis, and it included the divestment of a corporate headquarters and a distributions facility. so on the corporate headquarters we found it very attractive both in terms of having Scholastic as a long-term tenant and so they were in there right $85 with escalations no downtime no TI's that provides a yield component the bottom of the building is as Ryan said prime and prime retail eight-year lease term Sephora Capital One on Broadway right by Prince Street so that left three vacant floors so to us the opportunity to be able to buy in with a mid-fives yield lease up three floors a very clean mandate and get to an eight inside of four years was extremely compelling other factors that we looked at include price per square foot metrics there's about 45 million dollars of capex beyond the 386 million dollar acquisition price that we think we need for the full lease up of the three spaces and some updating of the amenities and overall that creates a very attractive all-in cost per square foot for very unique real estate that sub market also does not have institutional supply and doesn't have a lot of large floor plates so the opportunity to be able to deliver that within our operating expertise and our service orientation was also really exciting so overall we thought it was excellent standing on its own two feet as a deal, but in addition to that, to be able to execute on 250, West 57th as a sale and have that be a redeployment and do that in a tax-efficient manner really generates a huge amount of value for shareholders.

Speaker 2

Go ahead.

Speaker 3

Is there an escalation?

Speaker 1

Annual escalation? 3% on the scholastic portion, and on the one of the three floors, we start in the mid-90s, and it goes to a bit above $100 in a few years. so yes yeah so we have about a little 50 percent in office and then we have about 20 percent in the observatory about just under 20 percent in retail and then the balance in multifamily so that's sort of the rough mix. Over time, you know, we continue to look at New York City office, retail, as well as multifamily. It'll really be opportunity dependent. You know, as you can see, we did more office, but we love the risk adjusted return and cash flow profile of that asset for super unique high quality space. So it's a very disciplined approach to the quality of real estate, cash flow growth potential. And we very much focus on going in basis because if you get the right basis, it allows you to spend the capex and do the work needed to get to the appropriate level of return. It's vintage and overpaying that usually causes issues in real estate deals.

Speaker 2

Any others?

Speaker 1

So I guess at this point, you guys have done a lot of asset recycling. what's the next page in the the game plan are you guys pursuing additional acquisitions or you know steve are you shoring up the balance sheet you know what's yeah well i think it's all of those things um you know the capital recycling is never just done sure added value to a lot of our assets um and we'll continue to look through the portfolio executed the business plan find opportunities to add more cash flow growth um over time that's always a great opportunity along the way maintaining a very strong and flexible balance sheet hugely important one a recognition that um shares shares trade at a big discount so equity issuance is not available to us so even more important to run the balance sheet where you don't require equity issuance um you know to bail you out so to speak right so that's really important the other is if you think about the trade that we did we bought first at 130 mercer and then lined up the sale it really takes a well-positioned balance sheet to be able to fund a purchase in advance of a sale and come out with a good outcome on behalf of shareholders. So we want to make sure we always have the ability to do that. On shoring up the balance sheet, you know, there were specific actions taken to make sure that we get to no unaddressed debt maturities until January 2028. So if the capital markets continue to be accommodative, that's great, right? Great financing for all. If it goes sideways, whether it's because of private credit issues or other things that are out of our control, we're extremely well positioned. And if that results in more opportunities in the marketplace, more distress, more sideways capital stacks, then that allows us to be really opportunistic. And then importantly, you know, share buybacks do remain, you know, within our strategic capital allocation plan. We just want to be careful that we don't want to lever up to do that and put the balance sheet in a worse position than when we started. But it's definitely part of the plan as we evaluate other capital recycling.

Speaker 2

Yeah, I guess to that point, like where do repurchases stack up in your potential uses of capital?

Speaker 1

Yeah, so it's part of our strategic plan. We did get about $700 million of our billion dollars of acquisition without leverage, but we used balance sheet capacity in our corporate line. Our net debt to EBITDA is 6.3 times currently. it'll go down a bit but you know we're very focused on that not so much the absolute that that's EBITDA but to ensure that we continue to have flexibility to be able to navigate and that we're not levering up with share buyback so very attractive we do think our shares are undervalued I gave some metrics earlier and at the same time want to make sure we have ample flexibility and on the disposition side is there anything that kind of screams at you guys that that is non-core and other than what you guys just just executed on exited suburban New York that's easier as non-core 250 was in a different sub market so as we look through our portfolio is actually quite easy to understand we have 100% ownership of all of our assets we can definitely evaluate JVs across the board which is a form of sales but when we look at the assets we have one Grand Central place so great beneficiary of the great leasing and rent growth that's happening at Grand Central we have Empire State Building that benefits from both mass transit hubs and then we have the Broadway campus you know which is six buildings in close proximity that have shared amenities and we've done a great job with leasing we've executed on the business plan so we can certainly evaluate those and at the same time we want to think about what else there is in the marketplace and do it in a thoughtful manner. The good thing with a good balance sheet is we're not forced into a situation and so we want to make sure we get the best execution as we evaluate all of these options.

Speaker 2

Great. We've got a minute left. Anyone? Okay. So maybe just digging into AI real quick with the minute we have left. Have you guys leased to AI? How do you think about the credit there? and?

Speaker 1

Yeah, look, a lot of companies utilize forms of AI, right? You could have tech companies and they utilize it. So I think it's everywhere there. But to your point about, you know, you just leasing AI, the operative piece is evaluating credit and viability of a business overall, right? If it's a business that, you know, doesn't quite have a tie-in with a business, if it's really dashboard, stresses software, right? Then you have to think about some of the risks that come with that. If it's a really viable, value-added business, could be an acquisition target, could have a lot of growth prospects, that's another form. So you can't paint AI with one brush and say, you know, it's not viable, and at the same time, you can't assume that all of it will be positive. And in the meantime, as Ryan had mentioned, it has added to demand here. You're hearing it in San Fran. So they are a big driver of it. it will also add to company productivity, and that is a positive thing, both between the spending and the training and the upscaling. So we're going through an adjustment period, and our job is to be really diligent in how we underwrite assets and tenants as we navigate all these shifts.

Speaker 2

Very helpful. Well, we're out of time. Thank you, Christina, Ryan, and Steve. Appreciate it, and thank you all for attending.