Empire State Realty Trust, Inc. · NYSE:ESRT
Empire State Realty Trust — Q3 2017 Earnings Presentation
42 slides from Empire State Realty Trust's earnings presentation, 2017
Slide 1: Third Quarter 2017
EMPIRE STATE REALTY TRUST Third Quarter 2017
Slide 2: Disclaimer
Disclaimer We make forward-looking statements in this presentation within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You should not rely on them as predictions of future events. For these statements, we cl
Slide 3: Investor Highlights
Investor Highlights › Pure-play Manhattan and greater New York metropolitan area › Embedded, de-risked growth potential from four drivers of growth › Strong and flexible balance sheet, lowest leverage among office REIT peers › Proven management team 3
Slide 4: Management Team
Management Team EXPERIENCED AND COMMITTED Anthony E. Malkin John B. Kessler Thomas P. Durels David A. Karp Thomas N. Keltner, Jr. Chairman & President & Chief Executive Vice President Executive Vice President Executive Vice President, Chief Executive Officer Operating Officer & Director of Leasing a
Slide 5: Delivered on Promises
Delivered on Promises STEADY CASH NOI GROWTH; EXECUTING ON LEASING Q2 2017 › 329,866 SF of leasing Steady Cash NOI Growth Even With Fluctuating Occupancy › 49.9% spreads achieved on new $380,000 thousand 90.0% Manhattan office $360,000 89.5% leases $340,000 89.0% 88.5% › Signed larger leases $320,00
Slide 6: Portfolio Overview
Portfolio Overview PURE-PLAY MANHATTAN AND GREATER NEW YORK METROPOLITAN AREA 10.1 Million Total Rentable 9.4 Million Rentable Square Feet Square Feet of Office Space GNYMA GNYMA Office Office 18.4% 19.8% Retail 6.9% Manhattan Office Manhattan Office 74.7% 80.2% Company data and filings as of June 3
Slide 7: Varied Tenant Base
Varied Tenant Base DIVERSIFIED BY INDUSTRY Non-Profit 4.5% Other Consumer 11.8% Goods 21.3% Media & Advertising 4.5% Technology 8.4% Finance, Insurance, Real Estate Legal Services 17.0% 3.9% Retail 17.7% Professional Services 10.9% Industry diversification by annualized fully escalated rent. Company
Slide 8: Manhattan Portfolio
Manhattan Portfolio 111 West 33rd Street One Grand Central Place 1359 Broadway 1400 Broadway Office Properties Retail Properties 8
Slide 9: Tenant Lease Expirations
Tenant Lease Expirations WELL-LADDERED MANHATTAN OFFICE PORTFOLIO LEASE EXPIRATIONS 54.8% 9.3% 8.6% 8.8% 4.2% 6.0% 5.9% 2.4% Available SLNC 2017 2018 2019 2020 2021 Thereafter Company data and filings as of June 30, 2017. 9
Slide 10: Four Drivers of Embedded De-risked Growth
Four Drivers of Embedded De-risked Growth RELATIVE TO TTM CASH NOI OF $370M1 Free rent & signed Lease up of leases not commenced2 vacant space $36 M $31 M $94 Million Retail Redevelopment opportunity opportunity $8 M $19 M 1 Amounts reflect management’s estimates of additional revenues from the four
Slide 11: Signed Leases Not Commenced
Signed Leases Not Commenced 6/30/17 Incremental New Annual Expected Tenant SF Escalated Annual Rent Commencement Date Annual Rent Revenue James & Company, LLC 5,717 $0.00 M $0.33 M Jul. 2017 $0.33 M Distinguished Concerts Int’l LLC 4,758 0.00 M 0.29 M Jul. 2017 0.29 M Preqin 7,642 0.00 M 0.42 M Aug.
Slide 12: Superior Leasing Spreads
Superior Leasing Spreads ILLUSTRATES MARK TO MARKET OPPORTUNITY Strong re-leasing spreads1 Manhattan office leasing spreads Q2 20173 All leases Q2 2017 New leases Q2 2017 Compared to peer group $ 59.76 $ 60.11 45.0% 40.3% 40.0% 35.0% $ 42.61 $ 40.11 30.0% 25.0% 20.0% 15.0% 10.0% 7.4% 5.0% 0.0% Prev.
Slide 13: Vacant Office Space
Vacant Office Space Current vacancy (Manhattan Office / ESB only) 704,000 SF / 196,000 SF Weighted average starting rent (Manhattan Office / ESB only) $59 PSF / $64 PSF MANHATTAN OFFICE PORTFOLIO EMPIRE STATE BUILDING Broadcasting Prebuilt 6,000 SF 273,000 SF Prebuilt 1% 39% 80,000 SF Broadcasting 4
Slide 14: Leasing Opportunity
Leasing Opportunity INVENTORY OF CURRENT VACANT SPACE AND EXPECTED SPACE TO BE VACATED BY YEAR-END 2017 Square Feet Total portfolio vacant space 1,094,000 Less signed leases not commenced (209,000) Total portfolio net vacant space 885,000 Retail vacant space 28,000 GNYMA vacant space 153,000 Manhatt
Slide 15: Manhattan Office Mark to Market
Manhattan Office Mark to Market CURRENT 2017 MARKET RENT VS. CURRENT FULLY ESCALATED RENT 6 mos 12 mos 12 mos 12 mos 12 mos 6 mos 2017 2018 2019 2020 2021 2022 Current fully escalated rent PSF1 $50 $53 $49 $52 $50 $55 Leased square feet expiring2 316,104 649,409 457,470 665,706 444,433 184,484 Weigh
Slide 16: Redevelopment Opportunity
Redevelopment Opportunity EMBEDDED, DE-RISKED GROWTH Tenant space to be redeveloped Empire State Building 236,000 SF Balance of Manhattan office portfolio 804,000 SF Total 1,040,000 SF Probable Renovations of Undeveloped Space through 2021 300,000 230,000 SF 200,000 170,000 SF 115,000 SF 100,000 80,
Slide 17: Creating Full Floor Availabilities
Creating Full Floor Availabilities REDEVELOPMENT CASE STUDY Floors 55-58 originally had 42 tenants Adjacent tenants are grouped by lease expiration dates Spaces are vacated as expired leases 2014 are not renewed Floors 55-58 leased to only 2 tenants 17
Slide 18: Redevelopment Capital Expenditures
Redevelopment Capital Expenditures NEARING SUBSTANTIAL COMPLETION OF COMMON AREA RENOVATIONS, $773 MILLION SPENT TO DATE Before Before After After Company data and filings as of June 30, 2017. 18
Slide 19: Superior Returns from Redevelopment
Superior Returns from Redevelopment AN ILLUSTRATION OF THE RETURNS ON INVESTMENTS White Box Pre-Built Low High Low High INVESTMENT PER SQUARE FOOT Tenant space: Base building $37 $65 $37 $65 Tenant allowance / improvement1 $75 $90 $115 $130 Leasing commission $24 $29 $15 $21 TOTAL INVESTMENT $136 $1
Slide 20: Manhattan Portfolio Proposition
Manhattan Portfolio Proposition DOMINANT POSITION WITH LITTLE COMPETITION New Build Class A “Aged Trophy” Class A › New construction › Stock over 40 years old that needs base building renovation of approx. $100 PSF › Asking rents of $100-230 PSF1 › Asking rents of $85-185 PSF1 › Well-located, redeve
Slide 21: Tenants Relocating to ESRT
Tenants Relocating to ESRT ATTRACTING TENANTS FROM ALL PARTS OF NYC AND BEYOND OVER PAST 12 MONTHS From Outside Manhattan 18 Tenants Representing 176,466 SF From Midtown (West) (Madison/Fifth, Penn Station/ Times Square South, Rockefeller Center, West Side) 27 Tenants Representing 168,841 SF From Mi
Slide 22: Retail Opportunity
Retail Opportunity › 699,762 SF of total retail space › 95.9% occupied › Annualized fully escalated rent of $92.2 million › 27,000 SF of retail space available to lease in 4 high traffic locations › Broadway corridor, Union Square and Empire State Building Company data and filings as of June 30, 201
Slide 23: Retail Mark to Market and Vacant Space
Retail Mark to Market and Vacant Space CURRENT 2017 MARKET RENT VS. CURRENT FULLY ESCALATED RENT 6 12 12 12 12 6 months months months months months months Vacant 2017 2018 2019 2020 2021 2022 Current fully escalated rent N/A $106 $109 $146 $135 $154 $230 PSF1 Leased square feet expiring2 27,206 14,7
Slide 24: Retail Value Creation Case Study
Retail Value Creation Case Study SUCCESSFUL REPOSITIONING OF 112 WEST 34th STREET › 88,513 SF on 3 floors leased to one › New leases were signed with tenant, including 2 levels of office and Footlocker, Sephora and Target by storage, for $2.2 million in annualized March 2017 for annualized rent of f
Slide 25: Creating Value Through Sustainability
Creating Value Through Sustainability EMPIRE STATE BUILDING CASE STUDIES Replicable Process Forms Basis for ULI’s Tenant Energy Optimization and EPA’s Tenant Star Program Utility costs represent the third largest component of tenant expenses after salaries and rent 3 ESB Tenant Energy Optimization P
Slide 26: Sustainability Measures
Sustainability Measures Energy Efficiency Example › 100% of portfolio has undergone whole building energy retrofit analysis › Work pioneered by ESRT lead to EPA’s Energy Star for Tenants Building Certification › 86% of portfolio has a robust or partial building management system in-place Day to Day
Slide 27: Greater NY Metropolitan Portfolio
Greater NY Metropolitan Portfolio QUALITY ASSETS AND TENANTS › Best assets located Highway Metro-North Railroad 66-99 Main St Metro-North Train Westport 103-107 Main St near major 684 Stop 95 Norwalk transportation hubs 287 Stamford › Full amenities › 12.7% of 1H 2017 NOI White Plains › 18.4% of tot
Slide 28: Tenant Lease Expirations
Tenant Lease Expirations WELL-LADDERED GREATER NY METROPOLITAN PORTFOLIO LEASE EXPIRATIONS Add 44.4% 11.5% 12.3% 11.5% 8.2% 9.4% 1.3% 1.4% Available SLNC 2017 2018 2019 2020 2021 Thereafter Company data and filings as of June 30, 2017. 28
Slide 29: Observatory Performance
Observatory Performance CONSISTENT PERFORMANCE THROUGH ECONOMIC CYCLES, NEW ATTRACTIONS AND FX One World Observatory annual revenue (millions) Observatory 9/11 Museum Opens Opens 2.3 Million 2001 – 2016 CAGR 3 Million Visitors Visitors 11.3% (estimated 2016) (estimated 2016) $124.8 $111.5 $112.2 $10
Slide 30: Who Visits the Observatory?
Who Visits the Observatory? 85% OF VISITORS DECIDE TO VISIT BEFORE LEAVING HOME International vs. Domestic: 64% International, 36% Domestic Domestic Age Group: 36% International 55% 18-34 years old 64% Male vs. Female: 59% Female, 41% Male Top 6 foreign countries: England/ Scotland/ France China Can
Slide 31: Observatory Ticket Mix
Observatory Ticket Mix ACTIVE MANAGEMENT OF TICKET MIX TO MAXIMIZE MARGINS Steady Growth in Observatory Revenue Per Capita1 Direct sales at $32.00 full price is $31.00 largest source $30.00 $30.31 $30.77 $29.00 $29.44 $28.00 $28.84 $28.46 $27.90$27.94 $27.00 $27.68 $27.30 $26.95 $26.00 $26.14 $25.00
Slide 32: Valuing The Observatory
Valuing The Observatory SUM OF THE PARTS VALUES BOTH RENTAL REVENUE AND RESIDUAL PROFIT STREAMS Observatory Results – 2Q 2017 Trailing Twelve Months In $MM Revenue $127 Less Operating Expenses 30 NOI 97 Intercompany rent expense 77 NOI after intercompany rent $20 › If ESRT did not operate the Observ
Slide 33: Iconic NY Brand
Iconic NY Brand VALUE OF THE EMPIRE STATE BUILDING BRAND › 85 years of brand references and popular cultural references make ESB an iconic brand › Branding yields millions in advertising value equivalent (AVE) annually representing › Top of the Rock effectively free advertising VS. › One WTC › 30 Hu
Slide 34: Harper's Bazaar Projections
Harper’s Bazaar Projections MEDIA COVERAGE 1.4B $1.6MM 198MM MEDIA IMPRESSIONS AD VALUE EQUIVALENCY TWITTER IMPRESSIONS 625MM 198MM MEDIA IMPRESSIONS SOCIAL MEDIA IMPRESSIONS 34
Slide 35: Strong and Flexible Balance Sheet
Strong and Flexible Balance Sheet CAPITAL STRUCTURE STRATEGY Low leverage with laddered debt maturities FINANCIAL STRATEGY Significant cash on hand Access to a variety of forms of capital 35
Slide 36: Fortress Balance Sheet
Fortress Balance Sheet STEADY IMPROVEMENT THROUGH PERFORMANCE Net Debt to EBITDA1 7.0 6.0 5.7X 5.4X PEERS 4.9X 5.0 Net Debt / EBITDA 3.3x 6.8x 4.0 3.3X 3.1X 3.0 2.0 Net Debt / 16% 39% Enterprise Value 1.0 0.0 2013 2014 2015 2016 2017 1 2013 based on fourth quarter EBITDA annualized. 2014, 2015, 2016
Slide 37: Improved Balance Sheet Flexibility
Improved Balance Sheet Flexibility UNENCUMBERING THE PORTFOLIO Repaid $580 million in mortgage loans, adding approximately 5.9 million square feet to the unencumbered pool since IPO Repaid $580 million, At IPO including mortgage loans June 2017 99% 100% securing: 80% 59% 60% › Empire State Building
Slide 38: Debt Maturity
Debt Maturity WEIGHTED AVERAGE MATURITY INCREASED FROM 3.1 YEARS AT IPO TO 6.5 YEARS Prior DEBT MATURITY PROFILE (AT IPO OCTOBER 2013) ($ millions) $403 $381 $103 $193 $88 $92 $300 $0 $0 $0 $0 $0 $0 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 CURRENT DEBT MATURITY PROFILE (AS OF JUNE 2017
Slide 39: Support for Future Growth
Support for Future Growth BALANCE SHEET STRENGTH AND FLEXIBILITY Low Leverage Capital Structure1 › Net debt / enterprise value: 16% Exchangeable Senior › Net debt / EBITDA: 3.3x Mortgage Debt Unsecured Notes Senior $250 mm Unsecured Notes › $725 mm Interest coverage: 5.5x 9% 3% $350 mm › Attractive
Slide 40: ESRT Metrics Since IPO
ESRT Metrics Since IPO DAILY VOLUME, FLOAT, AND COMPARABLE PERFORMANCE Daily Average Trading Volume in 2016: 984,876 shares Volume Average Trading Volume in 2015: 844,333 shares Average Trading Volume in 2014: 590,317 shares Class A common shares now comprise 52% of the operating Float partnership,
Slide 41: MetLife
MetLife UJ
Slide 42: Appendix: Reconciliation of Non-GAAP Financial Measures
Appendix RECONCILIATION OF NON-GAAP FINANCIAL MEASURES Three Months and Year Ended June 30, March 31, December 31, September 30, June 30, March 31, December 31, December 31, December 31, Reconciliation of Net Income to NOI and Cash NOI 2017 2017 2016 2016 2016 2016 2015 2014 2013 Net income $ 31,359
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