I'm joined by our President, Christina Chiu. Two weeks ago, we reported Q4 and full- year 2025 results. 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 sq ft leased in 2025. We have now delivered four consecutive years of occupancy growth and 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 market leader. 2025, we delivered resilient bottom-line performance through disciplined 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. 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. 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. With that, we welcome your questions.
Great. Thanks. Just a few housekeeping items. This session is for Citi clients only. Disclosures have been made available at the corporate access desk. If anyone in here wants to ask a question, you can raise your hand or go to liveqa.com and enter code GPC26 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 recently acquired the Scholastic Building. Is office kind of currently the most compelling asset class to you?
We took actions to seize opportunities, which give us better prospects for cash flow growth. 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. It's just this was a really good opportunity within the set where we consider opportunities on which to act.
Then, you know, SoHo, I think, was kind of a new submarket for you with the Scholastic Building. Is that kind of a submarket that you're interested in kind of growing in? Or, you know, what specific submarkets do you kind of look at within New York City?
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. 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.
Yeah. I would add, on 130 Mercer that we're rebranding the Scholastic property. SoHo has very strong supply and demand fundamentals, right? No new supply getting built. 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. Apart from being unique space, the ability to offer institutional sponsorship, extremely unique. Finally, we all focus on deal metrics, right?
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 5.5% yield. Following the lease-up of three contiguous floors, which aggregates about 110,000 sq ft, we will get to roughly 8% stabilized yield, you know, a few years out. 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 markets.
I think that's, you know, been an acquisition that's been well received, and we hope to do more. Every deal is extremely bespoke, and we'll continue to exercise discipline.
Just on that, kind of what is the leasing interest been and kind of the balance of the space there?
The leasing spend?
The leasing interest, because you have, it's 70%.
We already have one very strong indication for one floor which more than meets our underwriting.
Okay.
The market demand in general in New York, from our experience right up until Friday remains strong.
Okay. I guess just given kinda 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 kinda share buybacks?
Look, share buybacks are always a key component of our consideration. We've done over around $300 million 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 we look at everything from a perspective of company growth, value, use of the balance sheet, and, you know, what's the best outcome, and everything goes against the capital allocation framework. I don't know, Christina, if you want to add anything to that.
No. Sums it up.
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?
It's interesting. First of all, we're exposed to everything but hospitality in what we do, 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, you know, things have Volumes are up considerably. Though definitively below 2019, the volumes are up considerably. With the return of institutional interest towards certain assets in New York City, no longer just opportunistic or high net worth, we see significant transaction opportunity, number one. Number two, we also do see, you know, in that reduced pricing sort of 20%- 30% below the last peak. Nonetheless, that's the market.
As in 130 Mercer was a hotly competed for transaction. Could it have gotten more in 2019? Maybe. You know, but it was hot competition on that. Overall, residential is probably the slowest volume, lowest volume right now because people aren't really certain about what will happen under the Mamdani new regime. What 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. In general, the transaction market, you know, is quite strong. We had a presentation in 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 markets side, the sales side. Also they spoke to, you know, we're in the market right now for financing, very strong interest and for property. We'll see what happens from there. Anything you wanna add?
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 really interesting. It's still very early. As I said in 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. That said, should we have increased taxes, we get pass-throughs of taxes on existing leases off of base years. 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. I think everyone will have to take that into account.
We wait to see exactly what Mamdani actually accomplishes and so far, it's very early days.
You know, just kinda given the lack of space availability, do you kinda 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 TIs 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-market, 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. Overall in the marketplace, you're seeing net effective growth through rising asking rents and some compression or, you know, concessions staying flat.
Just on that, I think on the call you talked about.
By the way, just so we're clear on concessions flat, TIs haven't really moved in three or four years.
Okay.
The cost of the actual work up, we both had great cost control and in essence, we provide on a real dollar basis less.
Helpful. Can you just provide some more color on the leasing pipeline? I think it was 170,000 sq ft, kind of as of the call. Just kind of where you're seeing strength and weakness across the New York City submarkets.
We see strength across the portfolio when we reference that 170,000 feet in the, in our Q4 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 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 sq ft plus rents.
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 at, for instance, OGCP, where we plan to have an 80,000 sq ft block, okay, I'd like to start construction tomorrow. We don't have it yet. We will have it in 2026, and we are in discussion with tenants about that. Those aren't leases out, those are discussions. For us, it's really a matter of you'll see our leased percentage will drop a bit. Well, the FDIC moves out. On that one, actually, occupancy will drop. FDIC moves out, it's already leased to LinkedIn.
You'll see our occupancy, you know, drift a little bit. 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.
I guess you talked about the FDIC move out. You know, what's like, kind of like the activity been on backfilling that space?
Again, tours are strong. Yeah. Well, FDIC is leased to LinkedIn. Yeah. That's already done. 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.
Okay. Maybe kind of switching gears to the Empire State Observatory, you know, how do you kind of think about the 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. You know, 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 brand of the Empire State Building is unmatched. 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. Flows of visitor shift, we see a really big drop in the budget transocean traveler, period. The past programs with whom we've worked for a significant volume over, you know, more than a decade and a half, they are significantly and 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. You know, for us, we have to be flexible, and we need to respond, and that's what we do. 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.
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 on the co-branding opportunity, you know, how are those partnerships being structured? Is that just a licensing fee or like what-?
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. We've established the brand equity, the billions of dollars of international presence for the brand on Advertising Value Equivalency as measured by Cision, which is the firm we use to measure. Now we have, by the way, for a period of time, we provided very inexpensive licenses for people to get the brand out there. Now we charge. 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 this year in terms of how that demand, you know, kind of comes back in 2026?
I'll 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. What we've seen is that the planning phase is much shorter. It's not as far 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. You know, outside of that, our view is constructive, and Christina can talk to our actual guidance.
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 veer to the higher end. If conditions remain, that's also captured in the range. In the meantime, we're focused on top experience, cost controls, but the guidance specifically reflects roughly flattish results.
Okay. 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. 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 their future space needs?
It's kind of interesting, I think, that there's just a mention this morning of an article published over the weekend that the Gen Zers prefer to be in the office and that it's the millennials who most would prefer to be out of the office. There is also a reference that 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. I think that the whole back-to-office story is over, you know, and that's what we see, number one. Number two, with regard to AI, it's definitely, you know, a big story, but the technology is constantly evolving. From our perspective, you know, our view on it is very few AI companies have a clear vision forward.
What it sounds to date like is, and we had a presentation about this last night at the Citi Investment Bank dinner too, which we were invited and we attended from R. David Edelman of MIT and Washington, D.C. think tank world. AI at this point appears to create more work for a lot of people, number one. Number two, really hit the software side hard and software people. The other way in which I personally look at this is there'll just be tremendous capital destruction from the AI investment, more about the actual investment that people have invested in AI than anything else. 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. We have not seen, and now back to specifically your question, we have not seen any abatement in, we haven't seen a lease for signature canceled. We haven't heard about a lease 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. There are approximately estimated 1.5 million sq ft of new AI company demand for space in New York City. That said, as Christina Chiu likes to say, signed leases are a backward-looking indicator. The real issue is what do we see as far as new?
When leases get up to the CEO or president or CFO or whoever signs the actual lease, do they get pulled? Until then, people do their jobs. If their job is to find space and lease space, they'll do it. We haven't seen anything yet. We haven't seen any abatement in demand for residential. We haven't seen any abatement in demand for retail. We haven't seen any abatement for demand in office. Christina, anything you want to add?
You know, I think in a speculative period on what happens, right, the news headlines are, you know, at a much quicker pace than reality. In terms of actionable 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 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. 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. 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. In real estate terms, watch for the supply and demand backdrop, and having low supply is very favorable to that. 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.
I will say that, you know, when Jack Dorsey, you know, comments he fired 40% of his staff, number one, there was a comment that's been out there for a long time that he specifically has overhired. Number two, we look at a market like San Francisco, which is in, you know, 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, and then we'll see. The number one thing that we see is no change yet and a lot of conversation, and, you know, obituaries about office once again, written.
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 for which we have not had resolution until March of 2027. You know, we've got a, you know, 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. We feel very good that we're prepared for whatever may happen.
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? You know, it sounds like your comments are pretty positive in terms of having 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?
We've been active with over $1 billion of transactions, around $1 billion of transactions, you know, since we began our shift out of the suburbs. $1 billion of acquisitions. 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 Mamdani. Institutional investors are back. Institutional lenders are back in the market. We see strength in the capital markets and in the transaction world, and at the same time, at prices below where they were.
The volume is materially down from its peak, though it's up from 2024. 2025 was up over 2024. Still in a recovery phase, and at the same time, the bellwether indicators are strong.
You touched on kind of the balance sheet. You know, your leverage is slightly above 6 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?
I think that's a very comfortable level of leverage. 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. 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 an all-cash basis, doing some recent financings affords us great flexibility on the go-forward while maintaining a lot of liquidity. Our leverage is still well below peer averages. Very comfortable at this level.
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. We, we have no JV in our portfolio anywhere. Own everything 100% ourselves, and we have a lot of unlevered property that is not part of the unsecured pool for our bonds.
You know, maybe just, you know, your FAD kind of increase in 25 due to kind of CapEx. You know, as leases kind of commence. You know, how do you kind of view CapEx over the next few years? 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?
Let me answer the CapEx piece and then the capital allocation separately. The last few years, we've had very significant lease up of the portfolio, right? 600 basis points when you look over the last 3+ years, and that has been great for increasing lease percentage. 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'll always be some noise.
We've said, you know, at, below 150 is how to think about CapEx and all things being equal. 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. 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 re-summarize, 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. That will be a consideration as well. It will be a balanced approach. It won't be back up the truck, use all our liquidity just towards share buyback. 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. 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.
All right. Maybe moving into some of our rapid fire. What will net effective rent growth be for your property sector overall, not your company, in 2027?
Net effective rent growth will be positive, and the market will be carried by the haves. Haves modernized, amenitized, energy-efficient property, which there have been full investment or brand-new property.
Will your property sector have more, fewer, or the same number of public companies a year from now?
Fewer.
Great. Thank you so much.
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