Empire State Realty OP, L.P. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited interim results. The Operating Partnership owns and operates office and retail properties in Manhattan and the greater New York metropolitan area, including the Empire State Building Observatory. Its portfolio totaled 10.1 million rentable square feet.
Financial results and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $153.4 million | $141.0 million | $298.7 million | $311.3 million |
| Operating income | $26.5 million | $0.3 million | $44.8 million | $27.3 million |
| Net income (loss) | $4.4 million | ($19.6 million) | $1.2 million | ($11.3 million) |
| Net income (loss) attributable to common unitholders | $3.4 million | ($20.7 million) | ($0.9 million) | ($13.4 million) |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $83.7 million | $74.4 million |
Q2 operating margin was approximately 17.3%, versus 0.2% a year earlier; first-half operating margin was approximately 15.0%, versus 8.8%. Q2 Core FFO attributable to common stockholders was $48.8 million, compared with $39.5 million; first-half Core FFO was $89.8 million, compared with $93.2 million. FFO and Core FFO are non-GAAP measures and are not substitutes for net income or operating cash flow.
At June 30, cash and cash equivalents were $540.6 million and restricted cash was $38.0 million. Total debt principal was approximately $2.15 billion; the company reported a 3.9% weighted-average interest rate, 7.7-year weighted-average maturity, and 94.2% fixed-rate debt. No revolving-credit borrowings were outstanding; $850 million of revolver capacity was available. Net debt to total market capitalization was 31.4%. Debt covenants were reported in compliance. Total assets were $4.12 billion and total liabilities were $2.39 billion.
For the first half, investing activities used $48.4 million, primarily for building improvements; financing activities used $24.7 million. Cash and restricted cash increased by $10.6 million. Expected capital expenditures, tenant improvements, and leasing commissions under existing leases totaled approximately $89.1 million.
Changes versus the prior comparable period
- Q2 revenue rose 8.8%, mainly as Observatory revenue recovered from a full-quarter closure in Q2 2020 and lease termination fees increased. Rental revenue rose 2.0%, partly reflecting prior-year straight-line rent write-offs.
- First-half revenue declined 4.0%, including a 44.2% decline in Observatory revenue and a 1.8% decline in rental revenue. Observatory results remained affected by the pandemic and travel restrictions.
- Operating income improved in both comparisons. Lower general and administrative costs and depreciation, and the absence of a $4.1 million 2020 impairment charge, contributed; real estate taxes increased.
- First-half operating cash flow increased $9.3 million, primarily due to working-capital changes. Investing cash use fell $31.3 million, reflecting lower capital expenditures.
- Cash and restricted cash at June 30, 2021 was $578.6 million, compared with $931.8 million at June 30, 2020; the filing attributes the prior-year higher balance primarily to a $550 million revolver draw in March 2020, later repaid.
Operations, outlook, and risks
- Management reported 88.2% of the portfolio leased, including signed leases not yet commenced. Q2 included 35 new, renewal, and expansion leases totaling 190,838 square feet. Manhattan office leasing tours reached about 84% of pre-pandemic levels; management said transactions from the increased touring could appear in the second half.
- Second-quarter billings collection was 95% overall, including 95% for office and 91% for retail tenants. Same-store property cash NOI, excluding lease termination fees, declined 6.0% year over year, primarily due to revenue reductions associated with write-offs taken over the prior year.
- Observatory revenue was $8.4 million in Q2 and Observatory NOI was $3.1 million. Attendance was nearly 17% of comparable 2019 attendance. Management expected Observatory expenses of approximately $6–7 million per quarter for the balance of 2021, depending on visitor recovery; it did not provide company-wide earnings guidance. Management expected a typical, roughly two-thirds international visitor mix to return only after a broad resumption of international air travel, anticipated sometime in 2022.
- The quarterly distribution was reinstated at $0.035 per unit/share for Q2, one quarter earlier than previously announced. Management cited confidence in New York City’s recovery and improved results and liquidity. The annualized rate was $0.14.
- Subsequent event: GBG USA filed for Chapter 11 on July 29, 2021. Its leases covered 353,325 square feet, representing approximately 3.5% of portfolio area and 3.6% of annualized rent; 191,000 square feet remained unsublet. The company converted GBG USA’s $17.0 million letter of credit to cash and expected a $1.6 million non-cash straight-line rent receivable write-off in Q3.
- Key risks include continued COVID-19 impacts on office occupancy, retail tenants and tourism; lease defaults, vacancies and rental-rate pressure; Observatory goodwill impairment sensitivity (fair value exceeded carrying value by less than 15%); interest-rate exposure and LIBOR transition; and refinancing, capital spending, environmental and regulatory risks. A legacy arbitration award of approximately $1.2 million was recorded in 2020; respondents sought to vacate it, and related court claims remained pending.
Important facts for investors to verify
- Track office leasing, occupancy, rent collections, lease expirations, tenant concessions, and whether tours convert into signed leases.
- Monitor Observatory attendance, revenue, costs, international travel recovery, and the assumptions underlying the goodwill impairment assessment.
- Assess the GBG USA bankruptcy’s rent recovery, the application of the letter of credit, and the Q3 receivable write-off.
- Review the sustainability of distributions against operating cash flow, debt service, and the approximately $89.1 million of committed leasing and tenant-improvement costs.
- Reconcile GAAP results with non-GAAP FFO/Core FFO, and note that the six-month EPS note includes unvested-unit allocations in its common-unitholder numerator.