Company Overview
Empire State Realty OP, L.P. (ESBA) is a New York City-focused real estate investment trust (REIT) that owns and operates a portfolio of modernized, amenitized, and well-located office, retail, and multifamily assets. The company's flagship property, the iconic Empire State Building, features its renowned Observatory that was recently declared the #1 Attraction in the World and the #1 Attraction in the U.S. for the third consecutive year in Tripadvisor's 2024 Travelers' Choice Awards.
History and Formation
The company's history can be traced back to its formation in 2011, when it was organized as a Delaware limited partnership. In 2013, ESBA completed its initial public offering, which allowed it to commence operations. Since then, the REIT has strategically grown its portfolio, focusing on acquiring and repositioning properties in the New York City metropolitan area. Empire State Realty Trust, Inc. serves as the sole general partner of the company, with responsibility and discretion in its management and control.
Portfolio
As of September 30, 2024, ESBA's portfolio consisted of approximately 7.8 million rentable square feet of office space, 0.7 million rentable square feet of retail space, and 732 residential units. The company's office portfolio includes 10 properties, with nine located in midtown Manhattan and one in Stamford, Connecticut. Additionally, ESBA has entitled land adjacent to its Stamford property that can support the development of either office or residential space, depending on local zoning.
Financials
ESBA's financial performance has been solid, with the company reporting net income of $84.34 million and total revenue of $739.57 million for the full year 2023. The REIT's core funds from operations (Core FFO), a key metric for REITs, reached $191.45 million for the nine months ended September 30, 2024, up from $178.05 million in the same period of the prior year.
For the third quarter of 2024, ESBA reported revenue of $199,599,000 and net income of $14,591,000. The company's operating cash flow (OCF) for the quarter was negative $108,050,000, while free cash flow (FCF) was negative $11,533,000. The decrease in OCF and FCF was primarily due to higher capital expenditures and acquisitions during the quarter.
ESBA reported core FFO of $69 million, or $0.26 per diluted share, for Q3 2024, which was above consensus expectations. The company's same-store property cash NOI, excluding lease termination fees, increased 5.2% year-over-year in Q3 2024. When adjusted for non-recurring items, the increase was around 2.6%.
Sustainability Focus
One of the primary drivers of ESBA's success has been its focus on sustainability and energy efficiency. The company has been recognized as a leader in this area, with its overall GRESB score ranking first amongst all U.S. listed companies in the Americas for the second consecutive year in 2024. This commitment to sustainability not only aligns with the company's values but also positions it to attract environmentally-conscious tenants, which is becoming increasingly important in the commercial real estate market.
Liquidity
ESBA's balance sheet is another strength, with the company maintaining a well-laddered debt maturity schedule and the lowest leverage among New York City-focused REITs. As of September 30, 2024, the REIT had approximately $2.3 billion in total debt outstanding, with a weighted average interest rate of 4.27% and a weighted average term to maturity of 5.3 years. This solid financial position provides ESBA with the flexibility to pursue growth opportunities and weather any potential market volatility.
The company's liquidity position remains strong, with $421.9 million in cash and a $500 million available credit line under its unsecured revolving credit facility. In March 2024, ESBA further strengthened its financial position by closing on a second amended and restated credit agreement governing its senior unsecured revolving credit facility and term loan facility. The credit facilities, totaling $715 million, replaced the company's existing revolving credit and term loan facilities. Additionally, in April 2024, ESBA issued $225 million of senior unsecured notes, further diversifying its funding sources and enhancing its financial flexibility.
Key Business Segments
Observatory Business
One of the key focus areas for the company has been its Observatory business, which has continued to perform well despite the challenges faced by the broader tourism industry. For the nine months ended September 30, 2024, the Observatory generated net operating income of $71 million, an increase of approximately 6% year-over-year. In Q3 2024 alone, the Observatory business generated $30 million in net operating income, up approximately 6% year-over-year. ESBA's management team has been proactive in managing this business, implementing a reservation-based model and focusing on enhancing the visitor experience to drive revenue growth.
Retail Portfolio
In addition to its flagship Observatory, ESBA has been actively expanding its retail portfolio, particularly in the Williamsburg neighborhood of Brooklyn. In 2023 and 2024, the company acquired several prime retail assets in this fast-growing area, which now make up the largest retail frontage on the two best blocks within the neighborhood. These acquisitions are expected to provide attractive cash flow and growth potential in the coming years as the portfolio is stabilized and rents are marked to market.
Office Leasing
The company's office leasing activity has also been a bright spot, with ESBA signing over 946,000 square feet of leases year-to-date through September 30, 2024. This includes 13 consecutive quarters of positive mark-to-market rent spreads in the Manhattan office portfolio, demonstrating the strong demand for the company's high-quality, well-located office space.
Multifamily Portfolio
While ESBA has navigated the challenges of the COVID-19 pandemic relatively well, the REIT has not been immune to its impacts. The company's multifamily portfolio, for example, experienced some softness in occupancy and rent levels during the height of the pandemic. However, with the gradual recovery of the New York City rental market, ESBA's multifamily assets have regained their footing, with occupancy at 96.8% as of the end of the third quarter of 2024.
Future Outlook
Looking ahead, ESBA remains cautiously optimistic about its future prospects. The company's management team has provided guidance for 2024, projecting a core FFO range with a midpoint of $0.93 per diluted share, which represents an increase from previous guidance. This guidance factors in continued strength in the company's commercial portfolio, as well as an expected 8% increase in same-store property operating expenses year-over-year, largely due to the timing of various repair and maintenance projects.
ESBA expects 2024 same-store cash NOI excluding lease termination fees for the commercial portfolio to range from 3% to 4% growth versus 2023. The company has also raised its expectations for 2024 commercial occupancy, now projecting it to reach 88% to 89% by year-end, up 100 basis points at the low end of the range.
For the Observatory business, ESBA anticipates 2024 NOI to be approximately $96 million to $100 million, maintaining the midpoint at $98 million. The company expects 2024 Observatory expenses to be around $9 million per quarter on average.
ESBA has also provided guidance on its general and administrative expenses, projecting approximately $70 million for 2024. Looking further ahead to 2025, the company noted an expected adverse net impact of approximately $0.05 per share related to changes in its capital structure and real estate transactions.
Risks
In terms of risks, ESBA, like other REITs, is exposed to changes in interest rates, which can impact the cost of its debt financing. Additionally, the company's focus on the New York City market means it is susceptible to any fluctuations in the regional economy and real estate market. However, the REIT's diversified portfolio, strong balance sheet, and commitment to sustainability position it well to navigate these challenges.
Conclusion
Overall, Empire State Realty OP, L.P. (ESBA) appears to be a well-run, diversified REIT with a strong presence in the attractive New York City real estate market. Its focus on high-quality, modernized assets, coupled with its proven track record of operational excellence and financial discipline, makes ESBA an intriguing investment opportunity for those seeking exposure to the commercial real estate sector.
COVID-19 Impact and Recovery
The company has demonstrated resilience in the face of challenges, particularly during the COVID-19 pandemic. In 2020, ESBA recorded a $6.2 million write-off and $1.25 million in other special charges related to the pandemic's impact. Despite these setbacks, the company was able to maintain operations and occupancy levels throughout this difficult period.
Growth and Expansion
ESBA has also shown its ability to adapt and grow over time. Since its IPO, the company has consistently expanded existing tenants, signing 293 expansion leases for a total of 2.8 million square feet. This track record of tenant retention and expansion speaks to the quality of ESBA's properties and management team.
Recent Financial Developments
ESBA's financial performance in recent quarters has been encouraging. The company's core FFO of $0.26 per diluted share for Q3 2024 exceeded consensus expectations, demonstrating the strength of its business model and the effectiveness of its strategy. The continued growth in same-store property cash NOI and the strong performance of the Observatory business underscore the company's ability to generate value from its diverse portfolio of assets.
The company's decision to raise the midpoint of its 2024 core FFO guidance to $0.93 per fully diluted share reflects management's confidence in ESBA's near-term prospects. This optimistic outlook is supported by the projected growth in same-store cash NOI for the commercial portfolio and the expected increase in commercial occupancy rates.
ESBA's focus on maintaining a strong balance sheet and ample liquidity has positioned the company well to pursue growth opportunities and navigate potential market uncertainties. The recent refinancing of its credit facilities and the issuance of senior unsecured notes have further enhanced the company's financial flexibility.
As ESBA continues to execute its strategy of owning and operating high-quality, well-located properties in the New York City metropolitan area, investors can expect the company to capitalize on the ongoing recovery in the commercial real estate market and the resurgence of urban centers post-pandemic. With its strong financial position, diverse portfolio, and focus on sustainability, Empire State Realty OP, L.P. remains well-positioned to deliver value to its shareholders in the years to come.