Overview

Empire State Realty Trust, Inc. (ESRT) is a real estate investment trust (REIT) that owns and operates office, retail, and observatory properties, primarily in New York City. In this report, ESRT provides an overview of its financial performance for the three and nine month periods ended September 30, 2024, compared to the same periods in 2023.

Financial Highlights

• Net income attributable to common unitholders was $21.7 million for the three months ended September 30, 2024, up from $18.8 million in the same period in 2023.
• Core Funds From Operations (Core FFO), a key metric for REITs, was $69.2 million for the three months ended September 30, 2024, compared to $65.9 million in the same period in 2023.
• ESRT signed 304,000 rentable square feet of new, renewal, and expansion leases during the three-month period.
• ESRT closed on $143.0 million of a $195.0 million acquisition of retail assets in Williamsburg, Brooklyn, with the remaining $52.0 million closing in October 2024. ESRT also agreed to acquire an additional $30.0 million retail asset in Williamsburg.

Revenue and Profit Trends

ESRT’s total revenues increased by 4.2% in the three months ended September 30, 2024 compared to the same period in 2023, driven by:

• A 1.1% increase in rental revenue, primarily due to higher occupancy and higher operating and real estate tax expense escalations, partially offset by the impact of acquisitions and dispositions.
• A 4.8% increase in observatory revenue, driven by higher ticket prices.
• $4.8 million in lease termination fees, which were not present in the prior year period.

Operating expenses increased by 3.3% in the three-month period, primarily due to:

• A 7.3% increase in property operating expenses, mainly from higher utilities and payroll costs.
• A 14.7% increase in general and administrative expenses, reflecting higher audit costs and non-cash stock-based compensation.

These factors led to a 7.3% increase in operating income for the three-month period.

For the nine-month period, total revenues increased by 4.3%, with rental revenue up 3.0% and observatory revenue up 5.3%. Operating expenses increased by 3.1%, resulting in a 9.3% increase in operating income.

Strengths and Weaknesses

Key strengths of ESRT’s business include:

• Diversified portfolio of office, retail, multifamily, and observatory properties, providing multiple revenue streams.
• Modernized, amenitized, and energy-efficient properties in desirable New York City locations.
• Strong performance of the Empire State Building Observatory, a major tourist attraction.
• Solid balance sheet with modest leverage and good access to liquidity.

Potential weaknesses and risks include:

• Softening of the office real estate market due to economic uncertainty and reduced return-to-office trends.
• Potential decline in observatory visitors due to changes in tourism, currency exchange rates, or competition.
• Tenant defaults, early lease terminations, or non-renewals.
• Rising interest rates and their impact on borrowing costs and asset valuations.
• Challenges in executing capital projects or development plans successfully.
• Potential failure to qualify as a REIT or comply with REIT requirements.

Outlook

ESRT believes it is well-positioned to navigate the current economic environment, with a diversified portfolio, strong balance sheet, and good liquidity. However, the company acknowledges the risks posed by factors such as inflation, higher interest rates, potential recession, and changes in office and tourism trends.

Despite these uncertainties, ESRT remains focused on executing its business strategy, including capital recycling, acquisitions, and share buybacks. The company believes its modernized, well-located properties and the continued performance of the Empire State Building Observatory will support its long-term success.

Conclusion

ESRT has delivered solid financial results in 2024, with growth in revenue, profits, and key operational metrics. The company’s diversified portfolio, strong balance sheet, and strategic initiatives position it well to navigate the current economic environment. However, ESRT faces risks related to the office market, tourism, and rising interest rates that could impact its future performance. Overall, ESRT appears to be a well-managed REIT with a promising outlook, though investors should closely monitor the company’s progress in addressing the identified risks.