Empire State Earnings: Strong Observatory Recovery Drives Decent Results

No-moat-rated Empire State Realty ESRT reported middling second-quarter results as the core funds from operations, or FFO, were reported at $0.26 per share in the current quarter, around 11% lower than the $0.29 in core FFO during the same quarter last year. The demand for Manhattan office real estate remains muted due to macroeconomic factors and a slower recovery in physical office utilization rates. The shares have rallied by around 50% in the past few months on the back of some encouraging Manhattan office building transactions. The shares are still currently trading around 10% below our fair value estimate for the firm. We are maintaining our fair value estimate of $9.50 per share for Empire State Realty after incorporating the second-quarter results.

Same-store property cash net operating income excluding lease termination fees increased 1.1% on a year-over-year basis, primarily driven by an increase in cash rental revenue and timing of tenant expense reimbursements, which was partially offset by increases in property operating expenses and real estate taxes. Management has guided for a negative 3.0% to negative 5.0% same-store cash NOI decline in 2023. The company reported an occupancy rate of 86.8 % in the second quarter, up 10 basis points on a sequential basis and 250 basis points compared with a year ago. The company has guided for an 85%-87% occupancy rate for the 2023 year-end. The company signed 336,314 square feet of new leases in the second quarter with the average starting cash rents on the newly executed leases in the office and retail portfolio of the company being 10.1% higher than the previously escalated cash rents.