Empire State Realty Trust, Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Leasing: Leasing team had over 300,000 sq ft leased in Q3, 11th consecutive quarter of leased percentage growth, 13th consecutive quarter of positive New York City office rent spreads. Manhattan office portfolio leased at 93.6%, occupancy 89.2%.
• Observatory: Continued sequential and year-over-year growth, still below 2019 levels but room for upside; focused on providing unmatched customer experience to drive growth.
• Acquisitions: Closed on substantial portion of Williamsburg retail acquisition, entered into contract for additional retail asset; Manhattan office leasing volumes strong with notable leases signed.
• Balance Sheet: $2.3 billion debt outstanding, weighted average interest rate 4.27%, weighted average term to maturity 5.3 years; no floating rate debt exposure, lowest leverage among NYC REITs at 5.2 times net debt to EBITDA.

Segment Performance

• Office: In the third quarter, Manhattan office portfolio leased at 93.6% (30 basis points increase from last quarter, 170 basis points increase from year ago), occupancy at 89.2% (up 140 basis points year-over-year). Leased 304,000 square feet in Q3, year-to-date leasing 946,000 square feet. Had 13th consecutive quarter with positive mark-to-market lease spreads, new and renewal leases with 2.6% positive mark-to-market rent spreads.
• Retail: Closed on $143 million of $195 million acquisition of prime retail assets in Williamsburg, Brooklyn, with balance to close in Q4. Assets comprise ~81,000 sq ft retail space, 90% leased, weighted average lease term 7.4 years. Entered into agreement to acquire additional prime retail asset in Williamsburg for ~$30 million.
• Observatory: Generated net operating income $30 million in Q3, ~6% higher year-over-year. Year-to-date net operating income $71 million, ~6% higher year-over-year.

Guidance

• Raised midpoint of core FFO guidance for 2024 to $0.93 per fully diluted share. Same-store property cash NOI excluding lease termination fees expected to increase ~2.6% adjusted. Observatory NOI expected $96-100 million in 2024.
• Anticipate leverage to tick up modestly in coming quarters, trending towards 6 times net debt to EBITDA with closing of recent acquisitions and use of cash from unsecured notes offering to pay down maturing debt.
• 2025 FFO expected to have adverse net impact of ~$0.05 due to acquisition of Williamsburg Retail assets, disposition of First Stamford Place, capital movements, and non-cash stock-based compensation.

Risks

• Tourism fluctuations affecting Observatory performance.
• Adverse impact from capital movements, non-cash stock-based compensation, and interest rate changes.
• Uncertainty in market conditions affecting leasing and acquisition opportunities.

Q: Steve Sakwa from Evercore ISI asks about tenant conversations and renewal urgency.

A: Tom Durels says they've been working on early renewals, like extending HNTB's lease term by five years, and tenants recognize limited quality options in the market.

Q: Steve Sakwa from Evercore ISI asks about Observatory visitor growth.

A: Tony Malkin says Easter shift and softer third quarter tourist visits in NYC affect observatory, net per person high, and China visitors have doubled but overall NYC visitor numbers needed to grow.

Q: John Kim from BMO Capital Markets asks about impact of Flagstar layoffs on leased space.

A: Tony Malkin says Flagstar is on long-term lease, will work proactively with tenants to recast space.

Q: John Kim from BMO Capital Markets asks about commitment to wholly owning assets.

A: Tony Malkin says will consider joint ventures if there's a reason to do so, but currently focus on wholly owning assets due to balance sheet and liquidity.