Empire State Realty Trust (ESRT) is a leading New York City-focused real estate investment trust that owns and operates a diverse portfolio of modernized, amenitized, and well-located office, retail, and multifamily assets. The company's flagship property, the iconic Empire State Building, features an Observatory that was recently named 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.

Business Overview and History ESRT was organized as a Maryland corporation in 2011 and commenced operations upon completion of its initial public offering in 2013. The company's operating portfolio as of September 30, 2024 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. ESRT's office portfolio includes 10 properties, with 9 located in midtown Manhattan and one in Stamford, Connecticut. In 2014, the company faced a challenge when 12 former investors in the entity that previously owned the Empire State Building filed an arbitration alleging breach of fiduciary duty related to ESRT's formation transactions. This arbitration resulted in an award against ESRT of approximately $1.2 million in 2020, which was recorded as an IPO litigation expense. ESRT believed the award was without merit and appealed the decision, though the appeal was ultimately unsuccessful. In 2020, ESRT's operations were significantly impacted by the COVID-19 pandemic, leading to a steep decline in visitors to the Empire State Building Observatory and reduced occupancy and rent collections across its commercial portfolio. Despite these challenges, ESRT maintained a strong balance sheet and liquidity position throughout the pandemic. The company has since demonstrated its ability to attract and retain high-quality tenants, with 11 consecutive quarters of increased leased percentage in its Manhattan office portfolio as of the third quarter of 2024.

ESRT is recognized as a leader in energy efficiency and indoor environmental quality. The company operates primarily in the New York City metropolitan area and does not have significant operations outside of this region.

Financial Performance and Metrics Financials In the third quarter of 2024, ESRT reported core funds from operations (Core FFO) of $69 million, or $0.26 per diluted share. This beat consensus estimates, driven by higher-than-expected revenue from cash rent commencement and tenant expense reimbursements, partially offset by increases in operating expenses. For the full year 2024, the company raised its Core FFO guidance to a range of $0.92 to $0.94 per diluted share, with the midpoint representing a 3.3% increase compared to 2023.

ESRT's total revenue for the most recent fiscal year (2023) was $739.57 million, with a net income of $53.24 million. Operating cash flow (OCF) and free cash flow (FCF) for 2023 were both $232.49 million. In the most recent quarter (Q3 2024), the company reported revenue of $199.60 million, net income of $22.80 million, OCF of -$108.05 million, and FCF of -$11.53 million. The increase in revenue was primarily attributable to higher occupancy and higher operating and real estate tax expense escalations. The decrease in OCF and FCF was due to working capital changes, including a reduction in security deposits, and the derecognition of the First Stamford Place property.

ESRT's same-store property cash NOI, excluding lease termination fees, increased 5.2% year-over-year in Q3 2024. However, when adjusted for non-recurring items, the increase was around 2.6%.

Liquidity ESRT's balance sheet remains strong, with $421.9 million in cash and cash equivalents and $500 million available under its unsecured revolving credit facility as of September 30, 2024. The company's total debt stood at $2.3 billion, with a weighted average interest rate of 4.27% and a weighted average maturity of 5.3 years. ESRT's leverage, as measured by net debt to EBITDA, was 5.2x, the lowest among New York City-focused REITs.

Additional financial metrics include: - Debt/Equity ratio: 2.42 as of December 31, 2023 - Current ratio: 1.26 as of December 31, 2023 - Quick ratio: 1.26 as of December 31, 2023

Operational Highlights ESRT's office portfolio continued its positive momentum in the third quarter, with the Manhattan office portfolio standing at 93.6% leased, up 170 basis points year-over-year. The company signed over 304,000 square feet of new, renewal, and expansion leases during the quarter, including an 11-year, 27,000 square foot expansion lease with Hecker Fink and an 11-year, 25,000 square foot new lease with Dynamic Corp.

The company's Observatory business also performed well, generating $30 million in net operating income during the third quarter, up approximately 6% year-over-year. Year-to-date, Observatory net operating income increased by 6% compared to the same period in 2023.

ESRT has two main reportable segments: the Real Estate segment and the Observatory segment. The Real Estate segment includes all activities related to the ownership, management, operation, acquisition, redevelopment, repositioning, and disposition of ESRT's traditional real estate assets. For Q3 2024, this segment generated $183.68 million in total revenues and $39.18 million in total operating income. The Observatory segment operates the 86th and 102nd floor observatories at the Empire State Building. In Q3 2024, this segment generated $39.38 million in total revenues and $6.17 million in total operating income.

Acquisitions and Capital Recycling In September 2024, ESRT closed on the acquisition of a portfolio of retail properties on North 6th Street in Williamsburg, Brooklyn for $143 million. The company also entered into an agreement to acquire an additional retail asset on North 6th Street for approximately $30 million. These acquisitions are part of ESRT's broader strategy to recycle capital from non-core suburban assets into high-quality New York City assets.

Sustainability Leadership ESRT continues to be a leader in sustainability, with the company's overall GRESB score ranking first among all U.S. listed companies in the Americas for the second consecutive year. The company's commitment to innovation and execution in sustainability has been recognized industry-wide.

Outlook and Risks Looking ahead, ESRT remains well-positioned to capitalize on the flight to quality in the New York City office market. The company's modernized, amenitized, and well-located assets, combined with its strong balance sheet and liquidity, position it to navigate the current economic environment.

For 2024, ESRT expects: - Same-store cash net operating income excluding lease termination fees for the commercial portfolio to range from 3% to 4% relative to 2023 levels, representing a 200 basis point increase at the midpoint. - Commercial occupancy of 88% to 89% by year-end 2024, an increase of 100 basis points at the low end of the range. - Observatory NOI to be approximately $96 million to $100 million, maintaining the midpoint at $98 million. - G&A of approximately $70 million.

The company noted an adverse net impact of approximately $0.05 on 2025 FFO, primarily due to the impact of capital markets and transaction activity.

Risks to ESRT's business include a potential slowdown in the New York City office market, a decline in Observatory visitation due to changes in tourism patterns, and rising interest rates that could impact the company's cost of capital and ability to finance acquisitions. However, ESRT's diversified portfolio, active capital recycling strategy, and focus on sustainability mitigate these risks to some extent.

In conclusion, Empire State Realty Trust is a well-positioned, NYC-focused REIT that is leveraging its high-quality portfolio, strong financial position, and sustainability leadership to drive value for its shareholders. The company's consistent operational performance, strategic acquisitions, and focus on the flight to quality make it an attractive investment opportunity in the current market environment.