Empire State Realty Trust 2026 Q2 Earnings Call

Good afternoon. Welcome to Empire State Realty Trust second quarter 2026 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. During today's call, management's prepared remarks and responses to questions may include forward-looking statements within the meaning of applicable securities laws. These statements reflect management's current views and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially. Empire State Realty Trust assumes no obligation to update any forward-looking statement in the future. We encourage listeners to review the more detailed discussions related to these forward-looking statements in the company's filings with the SEC.

During today's call, we will discuss certain non-GAAP financial measures such as FFO, modified and Core FFO, NOI, Same-Store Property Cash NOI, EBITDA, and adjusted EBITDA, which we believe are meaningful in evaluating the company's performance. The definitions and reconciliations of these measures to the most directly comparable GAAP measures are included in the earnings release and supplemental package, each available on the company's website. I will turn the call over to Tony Malkin, our Chairman and Chief Executive Officer.

Good afternoon, everyone. Yesterday, we reported ESRT's second quarter results. We delivered strong performance across the property portfolio, which represents approximately 80% of our NOI. Office leasing accelerated from the first quarter as we converted our pipeline into executed leases. Our retail portfolio was highly leased, and our multifamily properties delivered solid growth. We remain active on transactions. During the quarter, we completed the once-in-a-lifetime opportunity to acquire the land under 111 West 33rd Street and 1400 Broadway and executed on the sale of 250 West 57th Street, the proceeds from which we swapped into the prior purchase of 130 Mercer. Against excellent leasing in our property portfolio, the Empire State Building Observation Deck weighed on performance.

In our press release, we gave an updated FFO range under an assumption there is no improvement to current visitation levels, and it utilizes $55 million of NOI for the observation deck for full year 2026. I'll spend a few minutes on our observation deck business, then get to our strong leasing. During our first quarter call, we called out softer visitation amidst today's geopolitical environment and K-shaped consumer economy and stated it was premature to alter guidance based upon performance in our seasonally lightest quarter. We did say we would reassess our outlook after six months of results. In our Nareit meetings and updated presentation we shared that softer visitation persisted through the second quarter. The Empire State Building remains the world's most famous building, and its brand is undiminished. Our iconic Empire State Building Observation Deck remains a world-class attraction with absolute top-of-sector customer reviews.

The Empire State Building Observation Deck was ranked number 1 as an attraction in the U.S. by TripAdvisor last year. We had 326 billion global media impressions. We remain the international symbol of New York City. The path ahead is to convert our international brand to revenues amidst the following changes in the market. Historically, we have relied on international visitors. In the past, more than 60% of our visitors were international. Last week, in which we had our second highest visitor numbers of 2026, more than 60% of our visitors were domestic. While not as high a number for the year to date, the shift is definitely to a majority of domestic visitors. The pass program channel that has been a source of significant visitor traffic to us has experienced significant headwinds.

Historically, these pass programs have been largely international and specifically with the international budget-conscious traveler. One pass program operator went out of business in 2025. From 2024 year to date to 2026 year to date, we have seen a 45% decline in pass program visitors. While all attractions have experienced reduced visitorship in 2026, our drop compared to the market in general is larger due to our prior dominance with pass programs and their international presence. These, in fact, may be tailwinds in the future. The competitive environment with other observation decks and alternatives is also a factor. We began a total reevaluation of our observatory business model and execution early in the first quarter in anticipation that market conditions may continue to work against our historic customer sourcing mix. With our team and logical partners, this is a fresh channel-by-channel approach.

Part of that is the shift from traditional search engine to AI search. This is ongoing work. We have adjusted our online presence to accommodate the impacts of this shift. Some of our actions have already produced positive results. Historically, our operational costs have been relatively fixed and made tremendous operating leverage with increased visitors and revenue. At the same time, we will reinvest to strengthen the business and monetize on the strong brand and operations over the long term. We remain confident in the long-term value of our iconic asset. Let me turn to our real estate business. The Manhattan office leasing market remains healthy for our top-of-tier product. Tenant demand remains broad-based and resilient. Availability of high-quality space remains constrained. There is no new construction on our price point. These dynamics continue to support strong leasing fundamentals for our portfolio.

Our commercial portfolio was 94.9% leased at quarter end, and we expect occupancy gains for the year. We achieved our 20th consecutive quarter of positive mark-to-market spreads within our Manhattan office portfolio, which reflects sustained demand for our best-in-class assets. Our portfolio remains well-positioned to deliver strong operating results. Ryan will discuss our and his significant leasing accomplishments in the second quarter. ESRT has maintained a leadership position in sustainability for more than a decade. Our focus remains on measurable business outcomes that produce viable outcomes. Sustainability remains an important differentiator that attracts tenants and supports retention, renewals, and expansions across our portfolio. Across the organization, we remain laser-focused on four priorities: lease space, optimize Empire State Building Observation Deck and Empire State Building brand cash flow, maintain our balance sheet, and achieve our sustainability goals.

These priorities guide every decision that we make and align directly with our objectives to drive long-term cash flow growth and value creation. Christina, Ryan, and Steve will provide additional detail on our results and outlook.

Christina? Thanks, Tony. I'll provide some comments on our recent transaction activity, including the sale of 250 West 57th Street and the acquisition of land beneath two Broadway campus properties.

Our capital allocation strategy is focused on value creation and long-term cash flow per share, even when at times individual transactions are not immediately accretive to earnings. Our second quarter activity reflects that disciplined approach. During the quarter, we completed the sale of 250 West 57th Street for $275 million, which includes the buyer's assumption of $180 million of mortgage debt. The disposition effectively recycled capital into our prior acquisition of 130 Mercer Street in SoHo, executed in December 2025, without the recognition of a taxable gain. In the second quarter, we executed on the unique opportunity to acquire the land beneath 111 West 33rd Street and 1400 Broadway for an aggregate $110 million or approximately $65 per sq ft.

The acquired ground leases carried below-market annual rent of $1.4 million, which applies a sub 2% cap rate. If we include below-market rent amortization, the implied cap rate is just under 7%, which better illustrates what the cap rate would be on rents that are closer to market. While this transaction reduces our FFO, it creates a permanent and material increase in the value of our real estate, given the substantial difference in valuations and exit cap rates for owned real estate versus leasehold assets. Shifting to our balance sheet, subsequent to quarter end, we announced a new $245 million unsecured delayed draw term loan that matures in 2032. Proceeds are expected to be drawn in January 2027 and used to repay existing debt, including our line of credit. We remain disciplined in our proactive approach to balance sheet management.

We maintain ample liquidity, a well-laddered debt maturity schedule, and have no unaddressed debt maturities until January 2028. We maintain a well-positioned and flexible balance sheet and predominantly unencumbered portfolio that provides substantial optionality. At the end of the second quarter, our leverage was approximately 6.6 times net debt to trailing 12-month adjusted EBITDA. Against the backdrop of a healthy transaction market, we continue to underwrite opportunities across New York City office, retail, and multifamily, evaluate strategic capital recycling opportunities that enhance long-term cash flow, and assess opportunistic share repurchases. In each instance, our evaluation is guided by whether the transaction creates long-term value per share. New York City's enduring strength is rooted in its property fundamentals, and ESRT owns high-quality New York City real estate aligned with the city's live, work, play, and visit demand drivers.