Empire State Reported Decent Q4 Results; Observatory Recovered to 88% of 2019 Levels in December

No-moat-rated Empire State Realty reported decent fourth-quarter results as the core funds from operations, or FFO, was $0.22 per share in the current quarter, lower than the $0.18 in core FFO during the same quarter last year. Same-store property cash net operating income, or NOI, excluding lease termination fees decreased by 3.3% in the current quarter on a year-over-year basis, primarily because of higher property-operating expenses and real estate taxes. The company reported an occupancy rate of 85.2% in the fourth quarter, up 100 basis points on a sequential basis and 280 basis points compared with a year ago. The company has guided for an 85% to 87% occupancy rate for the 2023 year-end. The average starting cash rents on the newly executed leases in the office and retail portfolio of the company were 2.2% lower than the previously escalated cash rents in the fourth quarter. We are maintaining our $10 per share fair value estimate for the firm after incorporating fourth-quarter results.

The results from the observatory were a bright spot during the quarter. The observatory revenue for the fourth quarter increased to $32.3 million from $17.7 million in the fourth quarter of the previous year as the number of visitors increased to 660,000 compared with 360,000 in the same quarter last year. The observatory attendance in the current quarter and December month reached approximately 74% and 88% of 2019 levels, respectively. This resulted in the observatory NOI reaching $23.8 million for the fourth quarter of 2022, which represented approximately 90% of the average prepandemic NOI. We believe that observatory NOI in December would have exceeded prepandemic levels since revenue per capita of observatory visitors has increased considerably over the past three years.

For investors considering office REITs, we believe that Kilroy Realty offers a better risk/return profile than Empire State Realty given its high-quality portfolio, low leverage, and appealing valuations.