Morningstar | Empire State Realty Trust Meets Expectations While Redeveloping Portfolio
Empire State Realty Trust reported a reasonable third quarter that met our bottom-line expectations, and we are maintaining our $17 fair value estimate and our no-moat rating for the company. The key factor behind Empire State Realty Trust’s results is the company’s planned redevelopments. The company is declining to renew leases on fractured office floors for the purpose of creating more consolidated spaces, which it hopes will eventually be more desirable to better tenants. We were encouraged to see some success in attracting top tenants, as it landed expansion leases with Uber and Workday. We think that the redevelopment strategy may be successful in increasing rent per square foot, but we do not expect Empire State Realty Trust’s properties to compete with trophy real estate, which should limit pricing power. This redevelopment strategy impacts the company’s income statement through 140-basis-point declines year over year in occupancy coupled with strong 24.1% releasing spreads. Top-line rental revenue growth lagged our expectations at 1% year over year, but we recognize the time required to redevelop a portfolio and we were encouraged to see that the company beat our operating expense estimates. As a result of the lower-than-anticipated revenue and expenses, the company met our quarterly core funds from operations estimate of $0.25.Empire State Realty Trust’s observatory continues to be an attractive non-rental stream of income, and year-to-date revenue is slightly ahead of expectations. We think that management is doing the right thing by raising prices and offering premium experiences because there is no close substitute for the observation deck as of yet. We recognize the risk that SL Green’s upcoming tower One Vanderbilt may provide a substitute, but we do not expect additional supply to materially detract from results because we think the Empire State Building itself is iconic enough to attract tourists and we expect increasing Manhattan tourism.
Empire State Realty Trust is a self-administered and self-managed real estate investment trust. The company owns, manages, operates, acquires and repositions office and retail properties in Manhattan and the greater New York metropolitan area, including the Empire State Building. The company's operating partnership, Empire State Realty OP, L.P., conducts substantially all of the company's business. The company has two reportable segments: Real Estate and Observatory. The company's real estate segment includes all activities related to the ownership, management, operation, acquisition, repositioning and disposition of its real estate assets. The company's observatory segment operates the floor observatories at the Empire State Building.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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