Business Context and Reporting Period
Company: Empire State Realty OP, L.P. (ESRO), the operating partnership of Empire State Realty Trust, Inc. (ESRT).
Reporting Date: July 15, 2014.
Event: Completion of the acquisition of ground and operating leases for two major Manhattan properties: 112 West 34th Street and 1400 Broadway. The filing includes unaudited pro forma financial information assuming the acquisitions occurred on March 31, 2014 (balance sheet) and January 1, 2013 (income statement).
Key Financial Metrics
Acquisition Details
- 112 West 34th Street: Total purchase price of approximately $423.6 million ($570/sq. ft.).
- Assumed Mortgage Debt: $87.7 million
- Cash Consideration: $106.9 million
- Equity Consideration: $229.0 million (ESRT Class A/B stock and ESRO Series PR units)
- 1400 Broadway: Total purchase price of approximately $310.0 million ($346/sq. ft.).
- Assumed Mortgage Debt: $80.0 million
- Cash Consideration: $79.7 million
- Equity Consideration: $150.3 million (ESRT Class A/B stock and ESRO Series PR units)
- Total Transaction Value: $733.6 million.
Pro Forma Financial Impact (Three Months Ended March 31, 2014)
| Metric | Historical ESRO | Pro Forma ESRO |
|---|---|---|
| Total Revenues | $140.3 million | $157.8 million |
| Total Operating Expenses | $114.7 million | $130.7 million |
| Operating Income | $25.6 million | $27.1 million |
| Net Income | $11.2 million | $10.6 million |
| Diluted Earnings Per Unit | $0.05 | $0.04 |
Pro Forma Financial Impact (Year Ended December 31, 2013)
| Metric | Historical ESRO | Pro Forma ESRO |
|---|---|---|
| Total Revenues | $333.7 million | $402.6 million |
| Operating Income | $75.7 million | $81.6 million |
| Net Income Attributable to ESRO | $193.4 million | $190.6 million |
| Diluted Earnings Per Unit | $0.79 | $0.71 |
Balance Sheet Impact (As of March 31, 2014)
- Total Assets: Increased from $2.45 billion to $3.26 billion.
- Total Liabilities: Increased from $1.46 billion to $1.88 billion.
- Debt: Pro forma mortgage notes payable increased to $1.06 billion; term loan and credit facility increased to $515 million.
Material Changes and Commentary
The primary material change is the expansion of the company's portfolio through the acquisition of two significant office properties. The transaction was funded through a mix of assumed debt, cash from the credit facility, and the issuance of equity securities (1,217,685 Class A shares, 77,495 Class B shares, and 12.5 million Series PR units for 112 West 34th Street; 1,338,488 Class A shares, 32,452 Class B shares, and 7.7 million Series PR units for 1400 Broadway).
Accounting Adjustments: The pro forma statements reflect significant adjustments, including:
- Amortization of acquired above- and below-market lease assets and liabilities.
- Elimination of supervisory and management fees previously paid to related parties.
- Increased depreciation and amortization due to the step-up in asset basis under purchase accounting.
- Increased interest expense due to the fair value adjustment on assumed debt ($15.7 million premium) and additional borrowings.
While revenues and operating income increased pro forma, net income and earnings per unit decreased slightly due to the higher interest and amortization expenses associated with the acquisitions.
Risks and Contingencies
- Concentration of Credit Risk: For 112 West 34th Street, three tenants comprised approximately 46% of rental revenue for the three months ended March 31, 2014. For 1400 Broadway, four tenants comprised approximately 18% of rental revenue for the same period.
- Ground Lease Obligations: Both properties are subject to non-cancellable ground leases. 112 West 34th Street has a lease extended through May 31, 2077, with total future minimum payments of $46.7 million. 1400 Broadway has a lease extended through December 31, 2039 (with an option to extend to 2063), with total future minimum payments of $17.6 million.
- Related Party Transactions: Insurance policies are purchased by an entity affiliated with ESRT Management, and supervisory services are provided by a related party.
- Unaudited Pro Forma Data: The pro forma financial information is unaudited and assumes the acquisitions occurred at the beginning of the periods presented; it is not necessarily indicative of future results.
Investor Verification Checklist
- Verify the final allocation of the $733.6 million purchase price between tangible assets, intangible assets (in-place leases), and liabilities, as current figures are preliminary estimates.
- Review the specific terms of the ground leases for 112 West 34th Street and 1400 Broadway to assess long-term liability exposure.
- Confirm the occupancy rates and lease expiration schedules for the acquired properties to evaluate revenue stability.
- Assess the impact of the $15.7 million debt premium amortization on future interest expense and net income.
- Monitor the utilization of the credit facility, as $186.6 million of the cash consideration was funded through this facility.