Greetings, and welcome to the Empire State Realty Trust Third Quarter 2026 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Susanne J. Lieu, Senior Vice President, Chief Counsel, Real Estate. Thank you. You may begin.
Good afternoon. Welcome to Empire State Realty Trust's Third 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. Now I will turn the call over to Tony Malkin, our Chairman and Chief Executive Officer.
Thanks, Susanne. Good afternoon, everyone. Yesterday, we reported ESRT's Third Quarter Results. Through disposition and acquisition, we have focused our portfolio on properties and locations which the market wants. Our decisions to exit the properties we disposed of has proven to be prescient. We had a strong quarter across our property portfolio, and our property portfolio represents close to 85% of our NOI. Leasing progress has been good in our office and retail, and we have continued with high occupancy in our residential properties. Our office and retail property type at our quality level is limited with no new supply. Our portfolio, from office to retail to multifamily, delivered strong operating results. We achieved our 21st consecutive quarter of positive mark-to-market rent spreads within our Manhattan office portfolio, as our commercial portfolio reached 95.6% leased at quarter- end.
On October 29, we completed the sale of 1359 Broadway. Starting in late July, we redeployed the proceeds towards the repurchase of shares, which we believe to be a highly compelling investment. We will also utilize sale proceeds to pay down debt and maintain balance sheet strength. [audio distortion] In conclusion of a search we began in the second quarter, on October 1, Andy Giancamilli joined us as President of Empire State Building Observation Deck. In that position, he manages the commercialization of the Empire State Building brand as well. We conducted a comprehensive search with active direct involvement of our board. Andy's early career between his University of Michigan undergraduate business degree and MBA from Kellogg was at McKinsey, and he rejoined McKinsey after his MBA.
Andy's last role was at FanDuel, where he served as a central pillar of the leadership team for over a decade. He was VP of Revenue, then Chief Financial Officer, and ultimately Chief Operating Officer. He scaled digital consumer platforms, drove customer engagement, and monetized customer relationships. During Andy's executive operational watch, annual revenue increased from $490 million in 2019 to $6.96 billion by the end of 2025. The company also captured and maintained over 40% market share and secured its position as the undisputed number one sportsbook in North America. At ESRT, Andy now oversees all aspects, operations, marketing, strategy, brand growth, and monetization for the observation deck and Empire State Building brand, and reports directly to Christina and me. The Empire State Building is a globally recognized brand with a top-tier office building and an iconic visitor experience.
We have been clear in prior calls. New York City's destination attraction game has changed, and we have work to do. There is clear opportunity through integrated efforts to maintain the successes of the office building, generate more revenue from the brand, and build back our visitor volumes through new sources. We want to see improved operating performance and cash flow, and we will update shareholders on our progress. ESRT has achieved a leadership position in and differentiated ourselves through sustainability for nearly two decades. Our focus remains on measurable business outcomes which make money and attract better credit tenants at higher rent. In the process, we reduce energy consumption, improve operational efficiency, support high-performance workplaces for our tenants, and mitigate risk for our stakeholders. ESRT, for the second year in a row, was the highest-rated GRESB corporate filer.
Hats off to our team for our continued leadership and excellence of our integration of sustainability into all aspects of the tenant experience and property operations. The leadership changes we have implemented are nearly complete. We are already and will be leaner, more agile, and more efficient. For 2026, we remain on track to reduce run- rate G&A by approximately 5%-10% by year-end, consistent with our prior guidance. We will remain on our front foot in all respects. Our current priorities are clear: lease space, optimize Empire State Building observation deck and brand cash flow, drive long-term value through strategic capital allocation and operational efficiency, maintain our balance sheet, and achieve our sustainability goals. These priorities guide every decision 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 details on our results and outlook. Christina?
Thanks, Tony. Following our second quarter earnings call, and upon execution of an agreement to sell 1359 Broadway in August, we began to repurchase shares. On October 29, we closed on the sale of 1359 Broadway for $217.5 million. Since July 30, 2026, as of November 2, we have repurchased $85.8 million of our shares at an average cost of $4.56 per share. We will also utilize sale proceeds to pay down debt such that we maintain balance sheet strength. We have no unaddressed debt maturity until March 2029. These capital allocation decisions are consistent with our view that our current share price is not reflective of the value of our assets, which has been reinforced by discussions with our investors over the past quarters.
Over five years ago, Tony, our board, and I began to execute on a strategy to reposition our property portfolio and allocate capital to enhance long-term growth in cash flow and value per share. Our planned exit from suburban markets and weaker New York City properties resulted in redeployment of capital into higher-quality properties. Further, we consolidated building and land ownership at two properties, which total approximately 1.7 million square feet, and executed substantial share repurchases. We maintained the strength and flexibility of our balance sheet and implemented leadership succession plans and G&A reduction. Inclusive of the year-to-date share repurchases, the company has repurchased approximately $388 million of its common stock since 2020. We also maintain 100% ownership of our assets, which provides substantial optionality.
We have spoken for years about how we are on our front foot, and we will continue to find ways to grow portfolio cash flow and quality, maintain a strong and flexible balance sheet, and generate long-term value per share. With that, I'll turn the call over to Ryan to review our leasing activity.
Thanks, Christina, and good afternoon, everyone. In the third quarter, leasing performance remained strong, with volume of 189,000 sq ft, which includes over 130,000 sq ft of new leases. Year-to-date, we have leased 685,000 sq ft, with 460,000 sq ft of new Manhattan office leases, and we continue to grow our lease percentage. Our lease percentage increased to 95.6%, up from 95% in the second quarter on a comparable basis, excluding 1359 Broadway from both periods. This demonstrates strong tenant demand for our top-of-tier portfolio. In the third quarter, we achieved mark-to-market spreads of 9.9% in office, our 21st consecutive quarter of positive spreads, which underscores our sustained pricing power. Tenants continue to expand with us and make long-term commitments, highlighted by our average lease duration on new leases of nine and a half years years.
Notable leases signed during the quarter include a 29,000 sq ft full-floor new office lease with Octaura Holdings at 111 West 33rd Street, a 15,000 sq ft expansion office lease with Corgan Associates at the Empire State Building, and a 13,000 sq ft new office lease with Zenyth Advisors at the Empire State Building. Our pipeline of leases in negotiation remains healthy at 250,000 sq ft. New York City's leasing market remains strong and provides a favorable backdrop for execution, with demand broad-based across finance, professional services, TAMI, and consumer products. Lastly, our multifamily portfolio continues to perform well. Net rents increased by nearly 6%, and our portfolio is approximately 97% occupied. Thank you. I will now turn the call over to Steve. Steve?
Thanks. Thanks, Ryan. For the third quarter of 2026, we reported Core FFO of $0.20 per diluted share. Same-store property cash NOI, excluding lease termination fees, increased 50 basis points year-over-year. The improvement is primarily attributed to increases in tenant reimbursement income and insurance recoveries. This was partially offset by operating expense growth and the approximate $2 million year-over-year revenue decline from the previously disclosed FDIC expiration, which was pre-leased. Adjusted for FDIC and $1.2 million of positive non-recurring items this quarter, same-store property cash NOI increased by 1.9%. Our observation deck generated approximately $15.6 million of net operating income during the third quarter, as compared to $26.5 million of NOI in the prior- year period, with revenue of $26.8 million and expenses of $11.2 million. Our results are consistent with the revised framework we provided last quarter.
Visitation was lower by approximately 26% year-over-year, and revenue per capita, excluding license fees, increased by approximately 2% year-over-year. We remain committed to a strong and flexible balance sheet. At the end of the third quarter, our net debt to adjusted EBITDA was approximately 6.7 x. We maintain ample liquidity of $600 million and a well-laddered debt maturity schedule, with no unaddressed debt maturities until March 2029. We also maintain a predominantly unencumbered portfolio that provides substantial optionality. We reported G&A of approximately $17 million in the third quarter, which is consistent with our prior guidance of a 5%-10% reduction in run- rate G&A by year-end. We remain committed to further reducing G&A and maintaining disciplined cost management across the organization.
We have additional cost reduction initiatives underway that could yield at least a further 2% reduction in G&A relative to our year-end 2026 run- rate that we will benefit from throughout 2027. Lastly, with no change to our Observation Deck framework we shared in our 2Q earnings release, we increased our 2026 Core FFO per share guidance that now stands at $0.77-$0.80 per fully diluted share. This reflects higher-than-expected year-to-date results from our property portfolio, driven primarily by non-recurring items, which we have explained in our prior two earnings calls, in addition to our capital markets activity, which included share repurchases and the sale of 1359 Broadway. This concludes our prepared remarks. I'll now turn the call back to the operator to begin the Q&A session.
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first questions come from the line of Manus Ebbecke with Evercore ISI. Please proceed with your questions.
Great. Thanks. I just wanted to ask if you can touch on your further appetite and capacity for additional share repurchases beyond kind of like the 1359 Broadway sale proceeds?
Sure. Thanks, Manus. As we mentioned, share buybacks continue to be a strategic part of our capital allocation, so we would certainly evaluate that, and we have been active with the portfolio, as mentioned, over the last five years, have sold out of suburbs, began to look at Manhattan assets on where we've executed the business plan and look at sales, and will continue to be active. The key objective is cash flow per share as well as value per share. So all those items are on the table, including share buybacks.
Okay, great. Thanks. I just wanted to touch on one of the comments that was just made at the end in terms of further expense reductions on the G&A side, if you could just expand on that a little bit, as you go bridging into 2027.
Yeah, so similar to what we've gone through as far as succession planning in 2026, we'll continue down that path as we look forward to 2027, and also remain committed to reducing this organizational cost and increase efficiency. So we'll look to do more there. It's where the 2% figure comes from. We'll keep the market updated as we continue to execute along those plans.
Okay, thank you.
Thank you. Our next question is coming from the line of Seth Bergey with Citi. Please proceed with your questions.
Hey, thanks for taking my question. Just maybe following- up on those comments, can you just kind of touch on maybe some of the transaction market and how you're seeing that evolve? I appreciate kind of the focus on the share opportunities, but maybe just touch on maybe the transaction market and some of what's most attractive to you between kind of the office, multifamily, and retail, if you're looking at anything there?
Well, thanks for your question. We are and continue to be omnivorous opportunivores within our food groups of office, retail, and residential. Of course, importantly, share repurchase. I'll let Christina cover any comment with regard to share repurchase. Our view of the market is transactions are down, and cap rates are up, and relative to where any other market would have been six years after the commencement of a recovery. That said, we've been able to execute good exits with the right properties to the right buyer profiles at 250 and at 1359, and we will continue to test the market where it's appropriate. Then we look to redeploy as makes sense for growth. What's the best bargain? What's the best value?
We have four very good options, and they're driven by the fact as to whether or not within this lower volume transaction market, can we continue to do things which we think are sensible? If not, we're happy with what we have, and we'll move forward. Christina, do you want to make any additional comment there or on share buybacks?
Sure. As I mentioned earlier, share buybacks are definitely part of the equation. Just to underscore, we have consistently mentioned keeping an eye on prioritizing the flexibility and strength of our balance sheet is key so that we can operate, invest, capital recycle accordingly. So it's both looking at the opportunities and cash flow and value per share, as well as having the balance sheet that allows us to navigate all sorts of markets.
Then just maybe as a follow-up with the kind of observatory traffic, how much of that do you view as kind of macroeconomic or increased competition from similar observatory decks versus levers you can pull, and when do you kind of expect to get more visibility into kind of the progress that you are making on improving performance at the observatory?
Well, look, this problem did not happen overnight, and it will not be fixed overnight. You can be certain we will be transparent with the market and keep you updated on our progress. With regard to our overall perspective, we know how to run an attraction and get reviews, which make us the number one reviewed attraction in the U.S., according to Tripadvisor. With new competition, there are changes in the geopolitical environment, K-shaped economy. We recognize the need to reinvent our customer acquisition program. We need to re-examine our experience and focus anew on the monetization of our brand. Customer acquisition is now largely and will soon be all digital and AI-driven. I think we just want to point to Andy Giancamilli. We conducted a thorough process with meaningful direct board involvement.
Andy has the right experience and leadership chops for this dynamic environment to diversify our customer base, redefine the revenue model, and translate our strengths into improved operating performance and cash flow. We look forward to the future. We have got opportunity, and we need to go out and monetize on it.
Thank you. Our next questions come from the line of John Kim with BMO Capital Markets. Please proceed with your questions.
Thank you. I wanted to ask if you can elaborate on what drove the decision to sell 1359 Broadway. I think your other office sales were in slower growth suburban markets. This asset had in-place rents of $61, so it seems like there would have been some upside potential as you mark-to-market those rents. But, yeah, again, if you could talk about why that asset and the exit cap rate that you achieved.
Christina and I will take that on. I'll just say that, look, the sale of 250 West 57th Street was logical to us, as was 1359. We appreciate that they are different from the exits in the suburbs. We also had different outcomes and results. We had a very unique opportunity to reinvest in an outstanding asset, which will prove to be very, very good for us at 130 Mercer. We had a unique opportunity to buy the land under 111 West 33rd Street and 1400 Broadway, and to do so and create tremendous value for our stakeholders and shareholders. When we look at the choices we made and the choices we make, we try to just determine, is there a better use of the money for us? Is there a better use for the property for somebody else?
And can we make those two equations work in a way that with what we do with the proceeds, it's logical? So, pay down debt, repurchase shares, these are all part of the mix. Christina, what would you like to add on?
I think that covers it. 1359 executed on the business plan, compelling use of proceeds, and this reiterates all the points that we have made. If we can recycle towards assets with better cash flow growth prospects or add value, if we can buy back shares, if we can maintain a strong balance sheet, all to generate shareholder value, that's exactly what we'll do, and you'll continue to see us actively reviewing the portfolio in that light.
Any comments around cap rates?
If you look at the sub, roughly seven, you can go through that. But I think a lot of assets in the market, it is very bespoke to the specific situation and tenancy in place. As we have mentioned, a lot of times the market reverts to per foot, and the cap rates do vary quite a bit across the market.
Okay. Then as you have improved and repositioned the portfolio, I guess my question is, when do you think we will see that in improved cash same-store cash NOI? This quarter, you mentioned it is 1.9% if you exclude the FDIC lease. Overall, it is up 50 basis points. But when can we see that kind of trend closer to some of your peers?
Yeah. Thanks, John. We continue to execute leases with that strong mark-to-market growth, and also you saw posting our continued occupancy gains. In isolation, those will generate positive cash NOI returns as free rent periods amortize. As you know, we continue to sign leases with shorter periods of free rent, which only help in that regard. So our progress to quickly bring up occupancy and efforts to shave free rent and increase term has benefits outside of cash NOI, and that is within FAD. If you look at our trailing 12-month basis, our FAD has increased $64 million, or 114% year- over- year. That is on the back of a 5% decline in FFO over that same period. We see a similar framework if you look year- to- date. It is a $36 million increase in FAD over a 5% decline in FFO.
As of four consecutive quarters now of positive FFO to FAD conversion, or improvement in FFO to FAD conversion. It is important to keep in mind that while these are positive, those stats are going to ebb and flow as we move through periods of rollover. But the focus on increasing term and reducing concessions has allowed us to benefit further from those positive trends.
Yeah, I would just add to that, but we recognize that current investors look for short-term signals. Our actions may take longer, and still they will result in the changes for which investors look. And our focus is cash flow. We cannot eat FFO. We can eat cash flow.
Thank you.
Thank you. Our next questions come from the line of Blaine Heck with Wells Fargo. Please proceed with your questions.
Great, thanks. Good afternoon. Ryan, the supplemental now shows about 174,000 sq ft of expected vacates and 68,000 sq ft of unknowns for 2027. I think that forecast excludes 1359 Broadway. Can you talk about how much of the improvement reflects good leasing progress or retention progress versus removing that building, and whether any particular tenants or blocks in the remaining rollover could meaningfully change the occupancy trajectory for next year?
Hey, Blaine. Yes, absolutely. Let me start with, the team has really done a great job. Throughout the year, they've proactively managed the rent roll. We've been marketing and opportunistically have pre-leased a lot of the 2027 known availabilities. We'll continue to engage with those tenants, talk about early renewals, and market those known vacates to minimize downtime and manage our rent roll. 1359 specifically, roughly 88,000 sq ft was removed from a 2027 expiration. Would actually flag, in terms of large block, no single tenant within that is greater than 60,000 sq ft. Of the unknowns, only two tenants are over 6,000 sq ft. Lastly, roughly half of our known vacate expires December of 2027.
Great. That's helpful. Just to clarify, that 88,000 came out of expected vacates, is that right?
The 88,000 came out of a few areas. 30,000 was removed from the tenant vacate, 25,000 from new leases, 24,000 from unknown, and 10,000 from renewal and relocations.
Great. Very helpful. Second question, Tony. There have been reports of an activist investor taking a position in the company. Recognizing you might be limited in what you can share, can you talk about whether you've had any dialogue with that investor, how constructive those conversations have been, and whether those conversations led you to executing on any of the transactions during the quarter, or could in the future lead you to consider any changes to capital allocation or broader strategy?
First, I will tell you that all of the actions we took through the quarter, going back to the end of June 30, were already in place and taken without regard to anyone's input. I think importantly, we note, we have a consistent active engagement with our shareholders and welcome their views on our strategy, performance, and business objectives. Board members participate proactively and in response to requests and conversations with meaningful shareholders. Beyond that, we will not comment today on specific discussions or interactions with investors. I would merely say that everything which we have reported today began and was put in place and conceived before we had any outreach by this particular investor.
Great. Thank you all.
Thank you. Our next questions come from the line of Dylan Burzinski with Green Street. Please proceed with your questions.
Okay. Thanks for taking the question. Going back to, I think, a question that was asked earlier about the observatory, and Tony, you mentioned, the problem with what's happening didn't happen overnight, it won't be fixed overnight, and you laid out some things that you guys are looking at. I guess, as you guys sit there and evaluate all those things that you guys are looking at to improve on, I mean, is there a timeline in mind as to where you guys would evaluate that and be satisfied or dissatisfied with how long it took to roll out some of these things that you guys are looking at?
I really appreciate that question. It's super helpful. Andy began on October 1, and he definitely did a lot of reading and a lot of awareness building before October 1. He began October 1. We actually look forward to the execution of his plans. He has a process, and he's in his process now. Christina and I, in fact, just met with him yesterday, and he gave us the first one-month update. From a practical perspective, we have to understand that there are already changes that we have put in place before Andy's arrival. Through that process, which we began, and through Andy's involvement and interactions, we anticipate that we'll begin to see the first opportunities for improvement in the high season in the summer of 2027.
We may see something before then, and we and he have worked together to prioritize, and we start at the bottom, we work our way up the tree as far as opportunity.
Great, Tony. That's all I have. Thank you so much.
Thank you. That does now conclude our question and answer session. I would now like to hand the call back over to Tony Malkin for any closing comments.
Thanks, everybody, very much, and great work, ESRT team. At ESRT, we remain focused on a clear and consistent set of priorities: lease space, optimize Empire State Building Observation Deck and brand cash flow, drive long-term value through strategic capital allocation and operational efficiency, manage our balance sheet, and achieve our sustainability goals. We look forward to the opportunity to meet with you, our investors, and on the sell side in the months to come, and will continue, as always, to engage with and listen to our investors. The organization is focused and aligned to drive the business forward. Our high-quality portfolio and strong financial foundation position us to execute in the quarters ahead. We will continue to take steps to drive long-term growth in cash flow and value per share. Thanks very much.
Ladies and gentlemen, thank you. This does now conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.