Empire State Realty Trust, Inc. quarterly report, Q1 FY2015

Empire State Realty Trust, Inc. — Q1 2015 Form 10-Q

Reporting period: Three months ended March 31, 2015. ESRT is a self-managed REIT focused on office and retail properties in Manhattan and the greater New York metropolitan area, including the Empire State Building. Its portfolio totaled 10.0 million rentable square feet.

Financial and operating results

Metric	Q1 2015	Q1 2014
Total revenue	$151.9 million	$140.3 million
Operating income	$23.8 million	$24.1 million
Net income	$7.9 million	$11.2 million
Net income attributable to common stockholders	$3.1 million; $0.03 per basic and diluted share	$4.4 million; $0.05 per share
Net cash from operating activities	$47.4 million	$23.9 million
Net cash used in investing activities	$28.0 million	$15.0 million
Net cash used in financing activities	$28.6 million	$24.9 million

Operating margin was approximately 15.6%, down from 17.2%. Property net operating income (NOI), a non-GAAP measure, increased to $75.1 million from $63.1 million. FFO was $48.9 million, or $0.18 per diluted share, versus $41.3 million, or $0.17; Core FFO was $52.7 million, or $0.20 per diluted share, versus $41.7 million, or $0.17. FFO and Core FFO are supplemental measures, not substitutes for GAAP income or cash flow.

At March 31, cash and cash equivalents were $36.5 million, restricted cash $61.0 million, and total assets $3.27 billion. Principal debt was approximately $1.60 billion; reported debt carrying amounts totaled approximately $1.61 billion. Weighted-average debt interest rate was 4.1% and weighted-average maturity 5.6 years. Management reported consolidated debt to total market capitalization of about 24% and no debt maturities in 2015 or 2016. The $800 million unsecured revolving facility had $165 million drawn and $635 million available; the company reported compliance with its covenants.

Portfolio occupancy was 87.6%, or 90.0% including signed leases not yet commenced. Manhattan office occupancy was 86.1% (88.8% including signed leases); retail occupancy was 91.2% (92.7% including signed leases). The quarterly dividend was $0.085 per share.

Changes versus prior period

Revenue grew 8.3%, primarily reflecting the July 2014 acquisitions of 112 West 34th Street and 1400 Broadway, higher occupancy and rents, and increased observatory revenue.
Operating expenses rose 10.2%, including higher depreciation and amortization, property costs and real estate taxes. Operating income declined 1.4%; common-stockholder net income fell 28.2%.
Interest expense increased 11.9%, partly due to the acquired properties and a $1.3 million write-off of deferred financing costs. Depreciation and amortization rose 37.5%, mainly due to the acquisitions.
Construction revenue fell 89.3% as project volume declined. ESRT stopped soliciting new construction-management business on March 27 and planned to finish projects already underway.
Operating cash flow more than doubled, partly reflecting improved collections and the acquired properties. Investing outflows increased due to building improvements.

Outlook, risks and unusual items

No specific earnings or revenue guidance was provided. Management expected positive operating cash flow and planned to fund near-term needs through operations, debt financing and available revolver capacity.
Management estimated $72.4 million of capital expenditures, tenant improvements and leasing commissions under existing leases, and a further $65 million–$105 million to substantially complete the Manhattan redevelopment program beyond March 31, 2015. The Empire State Building work was expected to continue through 2016. Estimates are subject to change.
In March, ESRT issued $350 million of senior unsecured notes due 2025, 2027 and 2030, with coupons of 3.93%, 4.09% and 4.18%. Proceeds funded mortgage repayment, revolver reduction and general corporate purposes. ESRT replaced its secured credit facility with an unsecured revolver in January. Subsequent to quarter-end, it repaid a $91 million One Grand Central Place loan.
ESRT signed 60 leases covering 418,092 square feet; management reported a 149.5% increase in mark-to-market rent versus previously fully escalated rents on new, renewal and expansion leases. Observatory revenue grew 5.2% to $18.2 million despite lower visitor numbers, with higher admission prices offsetting lower attendance and more bad-weather days.
Risks include leasing and occupancy, tenant defaults and renewals, redevelopment and leasing costs, interest-rate exposure, tourism and weather, ground-lease obligations, and access to capital. A 1 percentage-point rise in short-term rates was estimated to increase period interest expense by about $2.6 million.
Litigation relating to the earlier consolidation remains relevant: the original class-action settlement was final and non-appealable, but a separate class action was on appeal and 12 investors had brought arbitration and related litigation. ESRT warned that a successful claim could result in monetary damages or equitable relief; indemnification obligations may also entail costs. Management said it would defend the claims.
Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting. No material changes to the 2014 Form 10-K risk factors were reported.

Important facts for investors to verify

Whether leasing, occupancy and rent mark-to-market gains translate into cash rent growth, accounting for concessions, tenant improvements and leasing commissions.
Funding and execution of the $72.4 million lease-related commitments and the remaining redevelopment budget, including potential cost or schedule changes.
Debt maturity and refinancing exposure, particularly the reported maturities in 2017–2019, floating-rate borrowings, and availability under the revolver.
Progress and potential financial consequences of the pending appeal and arbitration, including any indemnification exposure.
How much of the increase in operating cash flow reflects recurring operations versus working-capital movements, and the distinction between unrestricted and restricted cash.