Executive Summary / Key Takeaways

• Empire State Realty OP (OGCP), the operating partnership of ESRT, is a diversified New York City-focused REIT leveraging a modernized, high-quality portfolio and iconic brand to drive performance in a bifurcated market favoring "haves" buildings.
• Recent performance highlights include continued strong leasing momentum in the Manhattan office portfolio, achieving 15 consecutive quarters of positive mark-to-market rent spreads and expecting occupancy gains in 2025, alongside resilient performance from the top-ranked Empire State Building Observatory.
• A strategic capital recycling program, involving the disposition of non-core suburban assets and acquisition of high-quality NYC multifamily and prime Williamsburg retail, is enhancing long-term cash flow growth potential and portfolio diversification.
• The company maintains a best-in-class balance sheet with strong liquidity, low leverage relative to peers, and a well-laddered debt maturity schedule, providing operational flexibility and the capacity for opportunistic investments.
• While macroeconomic uncertainty and specific headwinds (lower interest income, higher G&A) are expected to impact 2025 Core FFO guidance ($0.86 - $0.89), management anticipates positive cash revenue growth, a decrease in CapEx, and solid cash flow growth beyond 2025 driven by strategic execution.

The Enduring Appeal of a Modernized Icon

Empire State Realty OP, L.P. (OGCP) stands as the operational engine for Empire State Realty Trust, Inc. (ESRT), a real estate investment trust deeply rooted in the fabric of New York City. Since commencing operations following ESRT's 2013 IPO, OGCP has cultivated a portfolio spanning office, retail, and multifamily assets, anchored by the globally recognized Empire State Building. The company's journey has been marked by a deliberate, decade-long strategy to modernize its properties, transforming them into what management terms "top of tier" assets designed to meet the evolving demands of tenants in a competitive urban landscape. This foundational work, coupled with a recent pivot towards strategic capital recycling, forms the core of OGCP's investment narrative.

The New York City real estate market, particularly for office space, is increasingly characterized by a flight to quality, creating a distinct separation between "haves" and "have-nots." ESRT positions its modernized portfolio squarely in the "haves" category, emphasizing prime locations near mass transit, comprehensive amenities, leadership in sustainability and indoor environmental quality (IEQ), and the stability of a financially sound landlord. This value proposition targets a broad segment of tenant demand in Manhattan, enabling the company to attract and retain quality occupants even amidst broader market uncertainties.

In the competitive arena, OGCP faces established peers like SL Green Realty Corp. (SLG), Vornado Realty Trust (VNO), and Boston Properties (BXP), all vying for market share in the desirable Manhattan office sector. While these competitors may boast larger overall portfolios or national footprints (in BXP's case), ESRT differentiates itself through the unique branding power of the Empire State Building, its demonstrated leadership in sustainability, and its accessible price point within the top-tier segment. Management highlights that the price gap between brand new, ultra-luxury offices and ESRT's modernized product allows for competitive positioning. While direct quantitative comparisons across all metrics can be complex, ESRT's focus on tenant experience, sustainability, and balance sheet strength are key strategic responses aimed at capturing demand and driving value against its rivals.

A critical differentiator for ESRT lies in its deep commitment to energy efficiency and indoor environmental quality. This isn't merely a compliance exercise but a core technological advantage embedded in its assets through significant prior investment. The company is a recognized leader in this space, evidenced by its top rankings in GRESB scores and prestigious awards like the BOMA International Earth Award. These efforts translate into tangible benefits, including lower utility costs for tenants and a healthier, more attractive workspace, which are increasingly important factors in tenant decision-decision making. While specific, comprehensive quantitative metrics comparing the precise cost savings or IEQ performance against all competitors are not detailed, management emphasizes that this focus enhances the company's competitive moat and contributes to leasing success and tenant retention. The company's proactive approach also positions it favorably to meet regulatory requirements like New York City's Local Law 97, where it expects to incur no fines on covered buildings in the initial enforcement period (2024-2029) based on current understanding and calculations.

Performance Reflecting Strategy and Market Position

Recent financial and operational performance underscores the impact of ESRT's strategic focus. The Manhattan office portfolio has shown consistent strength, marked by 15 consecutive quarters of positive mark-to-market rent spreads. In the first quarter of 2025, blended spreads increased by over 10%. Leasing activity remains robust, with 231,000 rentable square feet leased in Q1 2025, contributing to a Manhattan office portfolio that stands at 93% leased. Management retains its guidance for full-year 2025, anticipating further leasing and occupancy gains, targeting an occupancy rate between 89% and 91% by year-end. This expected increase is supported by a healthy pipeline of leases in negotiation and signed leases not yet commenced, which represent $57 million in incremental cash revenue from signed leases not commenced and free rent burn off as of Q1 2025.

The Observatory segment, a unique asset for a REIT, continues to be a significant contributor to NOI. Despite a year-over-year decline in revenue and NOI in Q1 2025, primarily attributed to the timing shift of the Easter holiday and unfavorable weather, the Observatory demonstrated resilience. It generated $15 million in NOI in Q1 2025 and achieved a 5.9% growth in revenue per capita. Recognized as the #1 Attraction in the World by Tripadvisor (TRIP), the Observatory benefits from strong brand awareness and operational strategies like dynamic pricing and reservation-based cost controls, which help manage expenses and optimize revenue. Management has not changed its Observatory guidance for 2025, projecting NOI between $97 million and $102 million.

The company's strategic capital recycling program has reshaped its portfolio composition. Since 2022, ESRT has disposed of five non-core suburban assets while acquiring approximately $650 million of high-quality New York City multifamily and retail properties. This includes the $195 million acquisition of nine retail properties on North 6th Street in Williamsburg, Brooklyn, in late 2024, and an agreement to acquire an additional property on the same street for $30 million, expected to close mid-2025. These acquisitions, particularly the Williamsburg retail assets, are seen as having better growth profiles and lower future capital expenditure requirements compared to the disposed assets. The Williamsburg portfolio is currently 90% leased with a weighted average lease term of 7.4 years, offering an estimated initial yield of approximately 4% and a projected yield of just over 6% by 2027, with further mark-to-market upside potential. This strategic shift is intended to enhance long-term cash flow growth and diversify the portfolio, which pro forma for recent transactions is approximately 58% office, 12% retail, 5% multifamily, and 25% Observatory.

A Strong Balance Sheet and Forward Outlook

A cornerstone of ESRT's strategy and competitive strength is its balance sheet. As of March 31, 2025, the company reported approximately $187.8 million in cash and cash equivalents and $620.0 million available under its unsecured revolving credit facility. Total consolidated indebtedness stood at approximately $2.1 billion, with a weighted average interest rate of 4.3% and a weighted average maturity of 5.3 years. Notably, the company has no mortgage debt maturity until April 2026 and no meaningful uncovered debt maturity until December 2026. Recent debt management includes the repayment of $100 million Series A senior unsecured notes and a $120 million paydown on the revolving credit facility in Q1 2025. ESRT maintains low leverage relative to its NYC-focused REIT peers, with a net debt-to-EBITDA of 5.2 times as of March 31, 2025, and remains in compliance with all financial covenants.

This financial strength provides significant operational flexibility and the capacity to pursue opportunistic investments. Management describes the company as "omnivorous opportunivores," open to various deal structures across multifamily, retail, and office sectors, including assisting lenders with workouts, provided they offer attractive returns. While opportunistic share buybacks remain part of the capital allocation strategy (with $500 million authorized and $2.1 million repurchased subsequent to Q1 2025), management emphasizes a measured approach given the uncertain environment, prioritizing operating runway and flexibility for potential acquisitions.

Looking ahead, ESRT's 2025 guidance for Core FFO is projected to be between $0.86 and $0.89 per diluted share. This outlook reflects anticipated headwinds, including lower interest income due to the deployment of cash for acquisitions and debt paydowns, and higher general and administrative expenses, partly from accelerated stock-based compensation recognition and increased payroll costs. However, the guidance also incorporates expected positive drivers: adjusted same-store property cash NOI growth (excluding non-recurring items) of 0.5% to 4%, driven by positive cash revenue growth from expected occupancy gains (89%-91% target by year-end) and manageable lease expirations. Property operating expenses and real estate taxes are expected to increase by 2% to 4%, partially offset by higher tenant reimbursements, with some quarterly fluctuations anticipated. Capital expenditures are projected to decrease in 2025 relative to 2024, reflecting the high leased percentage achieved and less need for significant building improvements, although TI spend continues from prior leasing success. Management anticipates solid cash flow growth beyond 2025, fueled by the strategic portfolio shift and continued operational execution.

Conclusion

Empire State Realty OP is executing a clear strategy centered on leveraging its modernized, high-quality New York City portfolio and iconic brand within a market that increasingly rewards differentiated assets. The company's recent performance demonstrates continued leasing momentum and resilient Observatory operations, while its strategic capital recycling initiatives are positioning the portfolio for enhanced long-term growth and diversification. Supported by a robust balance sheet that provides flexibility and stability, ESRT is well-equipped to navigate the prevailing macroeconomic uncertainties and capitalize on potential opportunities. While near-term FFO may see some pressure from capital structure adjustments and expense trends, the underlying operational strength, expected occupancy gains, and strategic portfolio enhancements point towards a positive trajectory for cash flow generation and value creation beyond 2025. Investors should monitor the pace of leasing, Observatory visitation trends, and the execution of the capital allocation strategy as key indicators of progress against the company's stated goals.