Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Empire State Realty Trust Inc (ESRT, Financial) reported strong second quarter results with continued leasing momentum and positive rent spreads.
- The company achieved its 10th consecutive quarter of increased lease percentage and 12th consecutive quarter of positive New York City mark-to-market lease spreads.
- Observatory performance remains strong, being named the number one destination attraction in the United States for the third consecutive year and number one in the world for the first time by TripAdvisor.
- ESRT has a best-in-class balance sheet with the lowest leverage among New York City REITs and no meaningful debt maturities until December 2026.
- The company continues to make progress with capital recycling initiatives, acquiring prime retail assets in Williamsburg, Brooklyn, which are expected to provide significant long-term upside.
Negative Points
- Despite positive leasing trends, the company faces modest lease expirations and tenant vacates in the near term, which could impact occupancy rates.
- The Observatory business, while performing well, is subject to fluctuations in tourism and weather, which can impact quarterly results.
- There is a noted lower international traveler presence in New York City, which has affected visitor counts at the Observatory.
- The company expects a larger than usual increase in 2024 G&A expenses due to recent promotions and accelerated recognition of non-cash stock-based compensation.
- The acquisition of retail assets in Williamsburg, while promising, involves near-term ramp-up from signed leases not yet commenced and vacancy lease-up, which could pose initial challenges.
Q & A Highlights
Q: Can you provide additional thoughts on the leasing activity and expansion opportunities? Are tenants willing to come to you early to lock in space?
A: We have always executed on early renewals, often in connection with tenant expansions. Our pipeline includes a recent 24,000 square foot lease at 1350 Broadway and another 160,000 square feet in negotiation. Tenants are moving beyond work-from-home issues and committing to their space in New York City. (Thomas Durels, Executive Vice President - Real Estate)
Q: Can you provide details on the retail transactions, including going-in yields and NOI growth expectations?
A: While we can't provide specific details due to confidentiality, our acquisition last year in Williamsburg was just under a 6% stabilized cap rate. The new acquisitions have near-term ramp-up potential and long-term upside. (Christina Chiu, President, Chief Operating Officer)
Q: How are tenant improvements and other concessions trending in the market?
A: Our net effective rents have increased by 10% over the past three years. We benefit from having built space throughout our portfolio, which helps lower our TI costs. We continue to deliver turnkey spaces, which is attractive to tenants. (Thomas Durels, Executive Vice President - Real Estate)
Q: What are your expectations for leasing activity among tech tenants? Are you seeing a shift in their preference to be in New York?
A: We have seen tech firms expanding in our portfolio. New York City is a desired location for new tech jobs, and our portfolio is attractive due to its modernization and amenities. (Tony Malkin, Chairman and CEO)
Q: Can you discuss the decision to reaffirm 2024 FFO guidance despite positive developments?
A: Our $0.04 FFO guidance range captures various scenarios, including tourism fluctuations and bad weather. We also had some onetime revenue items in the first half of the year that won't recur. (Stephen Horn, Chief Financial Officer, Executive Vice President, Chief Accounting Officer)
Q: How do you weigh the purchase of retail assets versus investing in stock repurchases?
A: We see the retail acquisition as having tremendous upside over time. While stock buybacks remain a strategic part of capital allocation, this acquisition was a unique opportunity with long-term growth potential. (Tony Malkin, Chairman and CEO; Christina Chiu, President, Chief Operating Officer)
Q: What are your views on structural vacancy for your office portfolio? Can you grow your lease percentage above current levels?
A: We are well-positioned with modest lease expirations and a strong leasing pipeline. We expect to continue making progress on our lease percentage, which will drive occupancy higher. (Thomas Durels, Executive Vice President - Real Estate)
Q: What factors contributed to the lower visitor count at the Observatory despite less bad weather?
A: The shift of Easter into the first quarter impacted comparability. Additionally, there has been a lower international traveler presence in New York City this summer. Despite this, we have continued to grow our top-line and bottom-line. (Tony Malkin, Chairman and CEO)
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
