Empire State Earnings: Occupancy Gains and Decent Leasing Activity Drive a Strong Quarter

No-moat-rated Empire State Realty ESRT reported a good set of numbers in the third-quarter results as core funds from operations, or FFO, was reported at $0.25 per share in the current quarter, around 19% higher than the $0.21 in core FFO during the same quarter last year. The shares of the company were up around 7% after the company released its third-quarter results. The demand for Manhattan office real estate remains muted because of macroeconomic factors and a slower recovery in physical office utilization rates, but the company has performed relatively well given the current environment. We are maintaining our fair value estimate of $9.50 per share for Empire State Realty after incorporating the third-quarter results.

The overall occupancy rate for the company’s commercial portfolio was up 20 basis points sequentially and 280 basis points on a year-over-year basis, as it was reported at 87.0% for the current quarter. The company has been able to achieve a Manhattan office portfolio lease rate (occupancy rate including signed leases) of 91.9% as of the third quarter, which is very impressive in the current environment. Same-store property cash net operating income excluding lease termination fees increased an impressive 8.8% on a year-over-year basis, primarily driven by cash rent commencement and increased tenant expense reimbursements. Management has increased the same-store cash NOI guidance range for full-year 2023 by 100 basis points on the back of strong results. The company signed 245,292 square feet of new leases in the third quarter, with the average starting cash rents on the newly executed leases in the office and retail portfolio of the company being 10.3% higher than the previously escalated cash rents.