ESRT sticking to strategy despite slipping occupancy

REIT will continue to look to "embedded" growth rather than i-sales
By Rey Mashayekhi | October 29, 2015 02:00PM

Empire State Realty Trust won’t be pulling off an 11 Madison-type deal anytime soon — and its top executives are more than alright with that.

In its third quarter earnings call on Thursday, the REIT said that despite a year-on-year drop in Manhattan portfolio occupancy, it was committed to a strategy that would see it maintain a “low-leveraged balance sheet” that would “put it in a position over the long term.”

Despite leasing over 1 million square feet of space through the first nine months of 2015 – including a 126,000-square-foot expansion with LinkedIn at its flagship Empire State Building – the Tony Malkin-led REIT reported a year-on-year decline in occupancy for its 7.5 million-square-foot Manhattan office portfolio.

Occupancy dropped to 85.4 percent, from 87.6 at the same point last year, and that number was not helped by factoring signed leases not commenced – which took the Manhattan office portfolio to 88.4 percent leased, compared to 89.4 percent through September of last year.

Empire State Realty Trust was buoyed, however, by a slight increase in occupancy for its 724,000-square-foot retail portfolio – which, including signed leases not commenced, increased to 94.6 percent from 92.7 percent through the third quarter of 2014.

The REIT’s flagship Empire State Building, while seeing occupancy decline to 83.7 percent from 86 percent at the same point last year, will also benefit from signed leases yet to commence that take its occupancy to 91.2 percent, compared to 87.6 percent last year.

Growth prospects, it said, would come from redeveloping and adding value to hundreds of thousands of square feet of space upon vacancy, with the hope of leasing “better-credit tenants at higher rents.”

The long-term growth strategy would also see it explore opportunistic off-market transactions, executives said in the call. Empire State Realty Trust entered a contingent contract for one such deal last quarter before the seller found a higher bidder for the property, which it declined to disclose.

The REIT received a $2.3 million break-up fee upon declining to match to higher bid, however, with COO John Kessler saying the company will continue to “adhere to our view of value” in exploring potential transactions moving forward.

Revenues from the Empire State Building Observatory, meanwhile, remained flat year-on-year at $35.7 million. The observatory hosted around 1.3 million visitors in the third quarter, compared to 1.4 million visitors in the year-earlier period, and Malkin said that market research “tells us there has been a dip in tourism” in the city this year.