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ES

Empire State Realty Trust, Inc. (ESRT)·Q4 2023 Earnings Summary

Executive Summary

  • Q4 2023 delivered stable operational results: total revenues rose to $192.9M, diluted EPS was $0.06, and Core FFO per diluted share was $0.25, aided by an 11.3% YoY increase in Same-Store Property Cash NOI and strong Observatory performance .
  • Management highlighted a quarter above expectations, noting FFO came in $0.05 above expectations with ~$0.015 from nonrecurring items; the beat was driven by higher same-store revenues, Observatory strength, and lower-than-anticipated expenses from tax refunds and R&M savings .
  • Leasing momentum continued: Manhattan office leased rate increased to 92.1% (up 250 bps YoY), with Q4 mark-to-market spreads of +5.8% in Manhattan office; retail mark-to-market was -34.3% in the quarter .
  • 2024 outlook was raised vs 2023 guidance: Core FFO $0.90–$0.94, Observatory NOI $94–$102M, and YE commercial occupancy 87–89%; cost inflation remains a headwind (Opex/RE taxes +6–8% YoY), partially offset by higher reimbursements .
  • Balance sheet remains a key support: $1.2B liquidity, no floating-rate debt, weighted average interest rate 3.9%, and net debt/adjusted EBITDA at 5.4x; management is engaged with lenders on late-2024/early-2025 maturities .

What Went Well and What Went Wrong

What Went Well

  • “FFO came in $0.05 above expectations,” with most of the beat from recurring operations and ~$0.015 from nonrecurring items, underscoring execution on leasing and Observatory performance .
  • Eighth consecutive quarter of positive leased percentage absorption and tenth consecutive quarter of positive mark-to-market lease spreads in Manhattan; Manhattan office leased percentage rose to 92.1% (up 250 bps YoY) .
  • Same-Store Property Cash NOI increased 11.3% YoY in Q4, driven by early cash rent commencement, free-rent burn-off, higher tenant reimbursements, and other income; expenses were lower than anticipated due to tax appeals and R&M savings .

What Went Wrong

  • Retail leasing saw negative mark-to-market in Q4 (new cash rent -2.6% overall; retail -34.3%), reflecting pressure at certain retail assets despite office strength .
  • Q4 diluted EPS declined sequentially (to $0.06 from $0.07 in Q3), with a $2.5M loss on sale of properties versus Q3 gains; net income attributable to common fell to $9.1M .
  • 2024 guidance embeds 6–8% YoY increases in property operating expenses and real estate taxes, a continuing cost headwind only partially offset by reimbursements .
  • Analyst Q&A flagged tenant-specific risk (Flagstar/NYCB), though exposure is limited (~3.4% of commercial rent, ~2.5% of total revenue) and the asset (1400 Broadway) is fully modernized and 100% leased .

Financial Results

Core GAAP and FFO Metrics (chronological: prior year → prior quarter → current)

MetricQ4 2022Q3 2023Q4 2023
Total Revenues ($USD Thousands)$181,273 $191,526 $192,882
Rental Revenue ($USD Thousands)$145,905 $151,458 $151,167
Observatory Revenue ($USD Thousands)$32,318 $37,562 $36,217
Net Income Attributable to Common ($USD Thousands)$12,595 $11,560 $9,111
Diluted EPS ($USD)$0.08 $0.07 $0.06
Core FFO Per Share - Diluted ($USD)$0.22 $0.25 $0.25

Segments and KPIs (chronological: prior year → prior quarter → current)

KPI (Units)Q4 2022Q3 2023Q4 2023
Manhattan Office Leased (%)89.6% 91.9% 92.1%
Total Commercial Occupied (%)85.2% 87.0% 86.3%
Total Commercial Leased (%)88.6% 90.5% 90.6%
Same-Store Property Cash NOI ($USD Thousands)$66,397 $67,719 $73,894
Observatory NOI ($USD Thousands)$23,789 $28,091 $26,935

Q4 2023 Leasing Activity (detail)

PortfolioTotal Leases ExecutedTotal Square FootageAvg Cash Rent psfPreviously Escalated Cash Rent psfNew vs Prior Cash Rent
Total Overall19 163,896 $69.98 $71.87 -2.6%
Manhattan Office14 135,017 $63.40 $59.93 +5.8%
Retail3 7,452 $189.20 $288.16 -34.3%

Balance Sheet and Leverage

MetricQ3 2023Q4 2023
Liquidity ($USD Millions)$354 cash + $850 revolver = $1,204 $347 cash + $850 revolver = $1,197
Total Debt Outstanding ($USD Millions)~$2,200 ~$2,200
Weighted Avg Interest Rate (%)3.9% 3.9%
Weighted Avg Term to Maturity (years)5.7 5.4
Net Debt / Adjusted EBITDA (x)5.5x 5.4x

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Core FFO per Fully Diluted ShareFY 2023 vs FY 20242023: $0.85–$0.87 2024: $0.90–$0.94 Raised
Same-Store Property Cash NOI (ex termination fees)FY 2023 vs FY 20242023: -2% to -4% YoY 2024: -1% to +2% YoY Raised
Commercial Occupancy at Year-EndYE 2023 vs YE 20242023: 85%–87% (Actual 86.3% )2024: 87%–89% Raised
Observatory NOIFY 2023 vs FY 20242023: $88M–$96M 2024: $94M–$102M Raised
Dividend per ShareOngoing$0.035 paid Q2/Q3/Q4 2023 $0.035 (no change indicated) Maintained

Drivers: 2024 guide assumes revenue growth, Observatory expenses ~$9M per quarter, and Opex/RE taxes +6–8% YoY offset by higher reimbursements .

Earnings Call Themes & Trends

TopicPrevious Mentions (Q2 & Q3 2023)Current Period (Q4 2023)Trend
Leasing momentum (mark-to-market, absorption)Q2: Manhattan office leased 91.6%; strong leasing volumes; Q3: 250 bps YoY leased rate increase; positive spreads Eighth quarter of positive absorption; tenth quarter of positive spreads; Manhattan office leased 92.1% Improving
Observatory performanceQ2: NOI $24.8M; 101% of 2019; Q3: NOI $28.1M; 99% of 2019 Q4: NOI $26.9M; FY 2023 NOI $94.1M, in line with 2019; 2024 guide $94–$102M Improving
Balance sheet and liquidityQ2/Q3: $1.2B liquidity; no floating-rate debt; net debt/EBITDA ~5.8–5.5x $1.2B liquidity; net debt/EBITDA 5.4x; WAM 5.4 years; lenders engaged for maturities Stable
Sustainability/governanceQ3: GRESB 5-Star; awards for ESB; leadership in IEQ Reinforced as tenant demand driver; recognized by Newsweek and governance awards Maintained
Capital allocation (buybacks, acquisitions, JV openness)Q2: capital recycling to retail/multifamily; buybacks; Q3: Williamsburg retail acquisition “Once-in-a-generation” NYC office opportunities contemplated; open to third-party capital/JVs if logical Opportunistic
Tenant-specific risk (Flagstar)Q2: Flagstar assumed Signature lease Exposure quantified; confidence in 1400 Broadway and leasing pipeline Managed risk

Management Commentary

  • Anthony Malkin: “FFO came in $0.05 above expectations… the majority from recurring operations. We delivered our eighth consecutive quarter of positive leased percentage absorption… our observatory performance continues, and our balance sheet remains best-in-class.”
  • Christina Chiu: “Core FFO of $0.25 per diluted share increased 15% year-over-year… same-store property cash NOI increased 11.3% year-over-year… Observatory generated NOI of $27 million, up 13% year-over-year.”
  • Christina Chiu on 2024 guide: “We expect 2024 core FFO to range between $0.90 and $0.94 per diluted share… same-store cash NOI modestly positive… Observatory NOI $94 million to $102 million; Opex/RE taxes up ~6% to 8%.”
  • Thomas Durels: “We leased 862,000 square feet in our Manhattan office portfolio, our highest annual volume since 2019… positive mark-to-market lease spreads for the tenth consecutive quarter… a 17-year 52,000 square foot new lease with Greater New York Mutual at the Empire State Building.”

Q&A Highlights

  • Flagstar exposure: Management quantified exposure (~3.4% of commercial rent; ~2.5% of total revenue) and expressed confidence in re-leasing/asset quality at 1400 Broadway, which is 100% leased .
  • Capital opportunities: Team is evaluating “once-in-a-generation” NYC office acquisitions amid capital dislocation; would consider third-party capital/JVs when logical and accretive .
  • Guidance bridge: Midpoint assumes flattish same-store cash NOI with Observatory uplift; costs up 6–8% YoY offset by reimbursements .
  • Debt maturities: Discussions ongoing with lenders regarding late-2024/early-2025 maturities; updates will be provided when available .
  • Dividend framework: Dividend “tracks the business”; NOL monetization provides optionality for buybacks or investments before a potential raise .

Estimates Context

  • S&P Global consensus estimates for Q4 2023 Primary EPS and Revenue were unavailable due to data access limits at the time of this analysis; therefore, explicit comparisons to Street estimates are not provided. Values would normally be anchored to S&P Global consensus.
  • Management indicated FFO was ~$0.05 above expectations for the quarter, but this reflects company commentary rather than S&P Global data .

Key Takeaways for Investors

  • Leasing trajectory is constructive: Manhattan office leased rate reached 92.1% with positive mark-to-market spreads; pipeline and signed-not-commenced leases support 2024 occupancy gains .
  • Observatory recovery is durable and a differentiator: FY 2023 NOI matched 2019 levels; 2024 guide suggests further upside ($94–$102M) .
  • 2024 guide is higher vs 2023: Core FFO raised to $0.90–$0.94; YE occupancy targeted at 87–89%; watch expense inflation and tax trends (Opex/RE taxes +6–8%) .
  • Balance sheet strength reduces downside risk: $1.2B liquidity, no floating-rate debt, net debt/EBITDA at 5.4x; lender dialogue ongoing for upcoming maturities .
  • Retail headwinds warrant monitoring: Q4 retail mark-to-market was notably negative; office remains the performance engine .
  • Tenant concentration risks appear manageable: Flagstar exposure limited; assets are fully modernized and attracting expansions (e.g., Burlington) .
  • Near-term trading: Positive narrative catalysts include incremental leasing announcements and Observatory momentum; medium-term thesis hinges on sustained occupancy gains, disciplined capital recycling, and opportunistic acquisitions .