Executive Summary / Key Takeaways

• Empire State Realty has established itself as a definitive "have" in New York City's bifurcated real estate market, delivering 17 consecutive quarters of positive mark-to-market lease spreads while achieving 90.3% Manhattan office occupancy—metrics that demonstrate pricing power in an environment where lesser properties are being converted to residential use.
• The company is executing a tax-efficient capital recycling strategy, redeploying $250 million from low-growth suburban office assets into high-growth Manhattan multifamily and prime Williamsburg retail properties, fundamentally improving the portfolio's growth profile and reducing long-term capital expenditure requirements.
• The Empire State Building Observatory, while facing 2025 headwinds from adverse weather and reduced international tourism, remains a unique, high-margin cash flow generator with dynamic pricing providing resilience, generating approximately $6.3 million in NOI during the third quarter alone.
• A fortress balance sheet featuring 5.6x net debt-to-EBITDA, no unaddressed debt maturities until December 2026, and $774 million in total liquidity provides optionality to capitalize on distressed opportunities while peers face refinancing risks in a higher-rate environment.
• The critical investment variable is whether management can sustain leasing momentum and successfully execute its capital recycling strategy while navigating Observatory volatility and macro uncertainty, with share buybacks representing an additional lever for capital allocation at current valuation levels.

Setting the Scene: The "Haves" vs. "Have-Nots" in NYC Real Estate

Empire State Realty OP, L.P. (ESBA) operates as the operating partnership of Empire State Realty Trust, a REIT that has spent the past decade building a portfolio of irreplaceable New York City assets. Since commencing operations in October 2013 following its IPO, the company has focused on a simple but powerful strategy: own, modernize, and operate top-tier properties in the world's most dynamic urban market. This approach has positioned ESBA as a clear "have" in an increasingly bifurcated market where demand concentrates on modernized, amenitized, energy-efficient buildings while older, obsolete properties face conversion or obsolescence.

The company's portfolio spans approximately 7.8 million rentable square feet of office space, 0.8 million square feet of retail, and 743 residential units concentrated in Manhattan and Brooklyn. What distinguishes ESBA from larger competitors like SL Green (SLG) (30.7 million square feet) or Vornado (VOR) (20 million NYC square feet) is not scale but quality and strategic focus. While peers spread capital across broader geographies and asset types, ESBA has concentrated on creating a portfolio that commands premium pricing through sustainability leadership—evidenced by six consecutive years of GRESB 5-star ratings—and experiential assets like the Empire State Building Observatory, which Tripadvisor ranked as the #1 attraction in New York City for four straight years.

This concentration is important because New York City's office market has fundamentally changed. Hybrid work has compressed demand into only the highest-quality buildings, while rising construction costs and lengthy development timelines have created a supply drought that will persist for years. ESBA's Manhattan office portfolio, now 93% leased with 17 consecutive quarters of positive mark-to-market spreads, directly benefits from this dynamic. The company isn't competing on price; it's competing on quality, location, and tenant experience—factors that support sustained rent growth even as overall market vacancy remains elevated.

Strategic Differentiation: Capital Recycling and Portfolio Transformation

ESBA's most significant strategic move since 2021 has been its tax-efficient capital recycling program, which represents a fundamental repositioning of the portfolio toward higher-growth, lower-CapEx assets. The company has sold or foreclosed on suburban office properties—notably completing the consensual foreclosure of First Stamford Place in February 2025, which released it from senior mortgage obligations—and redeployed approximately $250 million into Manhattan multifamily and prime Williamsburg retail assets.

This transformation highlights the core challenge facing office REITs: secular headwinds from remote work. By shifting capital into multifamily properties achieving 99% occupancy with 9% year-over-year net rent growth, ESBA is tapping into a segment with strong fundamentals, virtually no new supply, and frequent rent resets that better track inflation. The March 2024 buyout of the 10% non-controlling interest in two Manhattan multifamily properties for $14.2 million cash plus $18 million in assumed debt gave ESBA 100% ownership of assets delivering consistent cash flow growth.

The Williamsburg retail acquisitions on North 6th Street are particularly strategic. The $195 million portfolio purchase in late 2024, followed by a $31 million acquisition in June 2025, established a significant presence in one of Brooklyn's most dynamic retail corridors. Management noted that in-place rents are well below market, providing clear mark-to-market upside as leases roll. This retail exposure diversifies revenue away from traditional office while capturing the residential population growth in Williamsburg. The recent signing of a Rolex store at 86-90 North 6th Street validates the investment thesis and demonstrates the company's ability to attract premium tenants to the corridor.

This capital recycling strategy implies a higher long-term growth rate and lower capital intensity compared to peers still heavily weighted toward suburban office. While SL Green (SLG) and Vornado (VOR) remain primarily office-focused, ESBA's evolving mix positions it to capture demand from both office tenants seeking quality and retail tenants following residential density—a dual advantage that supports sustained NOI growth.

Financial Performance: Leasing Momentum Offsetting Expense Pressure

ESBA's third-quarter 2025 results reveal a tale of two stories: exceptional leasing execution offset by temporary expense headwinds. Real estate segment revenue increased 0.84% year-over-year to $161.3 million, driven by 2024-2025 acquisitions, higher tenant reimbursements, and new lease commencements exceeding expirations. However, net operating income declined 4.07% to $98.9 million due to higher repair and maintenance costs, cleaning-related payroll, and real estate taxes.

This divergence demonstrates the company's pricing power in action. While expenses increased—a combination of planned maintenance timing and acquisition-related costs—ESBA continued to push rents higher on new leases. The 17th consecutive quarter of positive mark-to-market spreads, combined with Manhattan office occupancy rising 80 basis points sequentially to 90.3%, proves tenants will pay premium rates for quality space. Management's guidance of reaching 89-91% occupancy by year-end appears conservative given the 150,000 square feet of leases currently in negotiation and the $46 million in incremental cash revenue from signed leases not yet commenced.

The Observatory segment tells a similar story of resilience amid headwinds. Third-quarter revenue declined 8.5% to $36.0 million due to lower international visitation and adverse weather, yet NOI increased 2.2% to $6.3 million. This margin expansion resulted from dynamic pricing implementation, which drove revenue per capita up 2.7% year-over-year. More than half of visitation is domestic, and no single international region exceeds 10% of total volume, providing diversification against geopolitical or currency shocks. While management revised full-year Observatory NOI guidance down to $90-94 million from $97-102 million, the segment still generated approximately $6.3 million in Q3 alone, demonstrating its cash-generating capability even in challenging conditions.

Same-store cash NOI, excluding lease termination fees and $1.7 million of nonrecurring items from Q3 2024, increased 1.1% year-over-year. This modest growth reflects the company's strategy of holding space off-market to assemble large contiguous blocks, which temporarily suppresses occupancy but positions ESBA to capture premium rents from tenants seeking scale in a supply-constrained market. The implied trade-off—near-term occupancy for long-term pricing power—aligns with the "haves" thesis and suggests stronger growth as these blocks lease up.

Balance Sheet: Fortress Position Providing Strategic Optionality

ESBA's balance sheet represents its most significant competitive advantage in the current environment. As of September 30, 2025, the company held $154.1 million in cash and $620 million available under its unsecured revolving credit facility, totaling $774 million in liquidity. Total consolidated debt of $2.1 billion carries a weighted average interest rate of 4.34% with a 4.8-year weighted average maturity, and critically, no unaddressed maturities until December 2026.

This positioning stands in stark contrast to peers facing refinancing pressures. While SL Green (SLG) and Vornado (VOR) must navigate rising rates on near-term debt maturities, ESBA has locked in low-cost financing and preserved ample dry powder. The company repaid $120 million on its revolving facility and $100 million in senior unsecured notes in March 2025, then issued $175 million of 5.47% Series L Senior Notes in October 2025 to fund December investments. This proactive liability management demonstrates discipline and provides flexibility for opportunistic acquisitions.

Net debt-to-EBITDA of 5.6x is among the lowest in the NYC-focused REIT peer group, giving ESBA capacity to pursue growth without diluting shareholders. Management explicitly noted that all $250 million of Williamsburg acquisitions were executed on an unlevered basis, preserving borrowing capacity for future opportunities. This financial strength translates directly into strategic optionality: the ability to act as a "local sharpshooter" on distressed assets while competitors are capital-constrained.

The company's capital allocation framework balances three priorities: maintaining operating runway, funding growth opportunities, and returning capital via share buybacks. With $497.9 million remaining on its $500 million repurchase authorization through 2025, ESBA has demonstrated willingness to buy back stock at attractive prices—having repurchased $2.1 million at $6.92 per share in early 2025. This creates a clear value floor and signals management's view that the stock trades below intrinsic value.

Outlook and Execution: Can Momentum Offset Macro Headwinds?

Management's 2025 guidance reflects cautious optimism in an uncertain environment. Core FFO is projected at $0.83-0.86 per share, down from 2024's adjusted $0.91 due to lower interest income from cash deployment and higher G&A from stock-based compensation. However, the company reaffirmed this range in Q3 despite Observatory headwinds, suggesting confidence in the real estate segments' performance.

The key execution variable is leasing velocity. With slightly over 500,000 square feet of Manhattan office vacancy, ESBA is deliberately holding space off-market to assemble large contiguous blocks—a strategy that sacrifices near-term occupancy for premium pricing. Management indicated they can "easily see us getting above 95% leased by year-end," well above the 89-91% occupancy guidance. This discrepancy implies significant embedded upside if demand remains strong. The 150,000 square feet in negotiation spans diverse industries including finance, professional services, TAMI , and consumer products, reducing tenant concentration risk.

Observatory performance remains the primary uncertainty. The revised $90-94 million NOI guidance assumes continued headwinds from reduced international tourism, particularly from budget-conscious travelers, and weather volatility. However, the dynamic pricing model and domestic visitor mix provide resilience. More than half of visitation is domestic, and revenue per capita continues growing despite volume declines. If international tourism recovers or weather normalizes, the segment could deliver upside.

Macro risks are substantial but manageable. Management acknowledged uncertainty around inflation, interest rates, tariffs, and geopolitical unrest. Slower global economic growth could impact Observatory visitation and office demand, while potential increases in NYC payroll taxes to fund MTA budgets create additional cost pressures. However, the company's low leverage and diversified tenant base provide cushions that peers lack. The "haves vs. have-nots" dynamic may even accelerate if economic stress forces more landlords to sell quality assets at distressed prices.

Risks and Asymmetries: What Could Break the Thesis

The most material risk is concentration. With nearly all assets in New York City, ESBA faces idiosyncratic risks—from tax policy changes to quality-of-life concerns—that diversified peers like Boston Properties (BXP) can offset across multiple markets. A severe NYC economic downturn or exodus of financial services firms would disproportionately impact ESBA. While management notes that New York remains the "#1 desired desk" for major employers like Amazon (AMZN), this concentration creates higher volatility than sector averages.

Observatory sensitivity represents a second key risk. The segment generated approximately $100 million in NOI in 2024 (exceeding 2019 levels) but faces structural challenges. Direct flights from China to NYC have collapsed from 72 per week in 2019 to just 10, limiting a key international visitor source. Adverse weather during peak holiday periods can materially impact quarterly results, as seen in Q2 2025. While dynamic pricing helps, the segment remains exposed to factors beyond management's control.

Interest rate risk is mitigated but not eliminated. While ESBA has no floating-rate debt exposure and no near-term maturities, rising rates affect tenant demand and cap rates for potential acquisitions. If rates remain elevated, the company's cost of capital for future deals increases, potentially compressing returns on the Williamsburg retail investments and limiting acquisition opportunities.

Execution risk on capital recycling is real. The Williamsburg retail strategy depends on successful lease-up and rent growth. While early signs like the Rolex signing are positive, retail faces its own headwinds from e-commerce and changing consumer preferences. If the neighborhood's evolution stalls or tenant demand weakens, the $250 million investment could underperform expectations.

The asymmetry lies in ESBA's optionality. If the NYC market weakens further, the company's balance sheet positions it to acquire distressed assets from overlevered competitors. If the market strengthens, the embedded lease-up of contiguous blocks and mark-to-market upside in Williamsburg retail could drive NOI growth well above guidance. The Observatory could recover faster than expected if international tourism rebounds or airline capacity increases. This favorable risk-reward profile—limited downside from balance sheet strength versus significant upside from operational leverage—defines the investment case.

Valuation Context: Pricing a Transformation Story

At $6.52 per share, ESBA trades at a significant discount to the cash flow multiples of larger NYC office peers. The company's price-to-operating-cash-flow ratio of 6.78 and EV/EBITDA of 11.78 compare favorably to SL Green (SLG)'s 28.70 and 60.89, Vornado (VOR)'s 5.51 and 17.11, and Boston Properties (BXP)'s 10.04 and 15.11. This discount reflects ESBA's smaller scale and higher concentration risk, but may not fully account for the portfolio's quality and transformation potential.

The price-to-book ratio of 1.03 suggests the market values ESBA near its net asset value, implying little premium for the company's operational expertise or growth prospects. However, this metric may understate the value of the Observatory—a unique asset that generates approximately $100 million in annual NOI with minimal capital requirements—and the mark-to-market upside in both the Manhattan office portfolio and Williamsburg retail holdings.

ESBA's 2.15% dividend yield, while lower than SL Green (SLG)'s 7.26%, is supported by a more conservative 70% payout ratio and stronger underlying cash flow growth potential. The company's return on equity of 3.35% and return on assets of 2.10% trail some peers but reflect the temporary margin pressure from acquisition integration and planned maintenance spending.

For valuation, the trajectory of cash flows is key rather than current multiples. If ESBA executes on its leasing strategy and achieves 95% leased status, same-store NOI growth could accelerate from the current 1.1% rate. If the Williamsburg retail assets achieve market rents, the $250 million investment could generate returns well above the implied sub-7% initial yield. If the Observatory recovers to 2019 visitation levels, NOI could exceed $110 million annually. These potential inflection points are not priced into the current valuation, creating opportunity for investors who recognize the transformation underway.

Conclusion: Quality, Transformation, and Optionality Converge

Empire State Realty has engineered a compelling investment proposition by combining three distinct advantages: a portfolio of irreplaceable "have" assets in a bifurcated market, an active capital recycling strategy shifting toward higher-growth multifamily and retail, and a fortress balance sheet providing optionality in an uncertain environment. The 17 consecutive quarters of positive mark-to-market spreads and 90.3% Manhattan occupancy demonstrate pricing power that peers cannot replicate, while the $250 million Williamsburg investment positions the company to capture residential-driven retail growth.

The Observatory, despite 2025 headwinds, remains a unique cash flow generator with dynamic pricing providing resilience. More importantly, the company's 5.6x net debt-to-EBITDA and $774 million liquidity create a strategic moat—ESBA can outlast distressed sellers, capitalize on opportunities, and return capital to shareholders while competitors scramble to refinance.

The investment thesis hinges on two variables: sustained leasing momentum that drives occupancy above 95% and successful execution of the capital recycling strategy that transforms the portfolio's growth profile. If management delivers on these fronts while navigating Observatory volatility and macro uncertainty, the current valuation represents an attractive entry point for a company that has become essential infrastructure in New York City's real estate ecosystem. The "haves" will continue to separate from the "have-nots," and ESBA has positioned itself squarely among the former.