Empire State Realty Trust, Inc. — Form 10-Q Summary
Period: Quarter and nine months ended September 30, 2014; filed November 10, 2014. Amounts are in U.S. dollars. The company is a New York-area office and retail REIT, including the Empire State Building and its observatory.
Business context and comparability
At quarter-end, the portfolio comprised 10.0 million rentable square feet and was 88.7% occupied, or 89.7% leased including signed leases not yet commenced. The company completed its IPO and formation transactions on October 7, 2013. Accordingly, 2014 results include properties and the observatory operations that were not consolidated in the predecessor’s 2013 results; reported year-over-year changes are not like-for-like.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $169.4 million in 2014; $62.3 million in 2013 predecessor results | $464.9 million in 2014; $184.3 million in 2013 predecessor results |
| Operating income | $43.4 million; $10.3 million | $110.0 million; $36.3 million |
| Net income | $22.7 million; $2.3 million | $59.2 million; $7.3 million |
| Net income attributable to common stockholders / EPS | $8.3 million / $0.09 per basic and diluted share | $22.5 million / $0.23 per basic and diluted share |
The filing does not provide a directly comparable 2013 company EPS figure. The substantial reported revenue and earnings increases primarily reflect consolidation of the four previously non-controlled properties and the July 2014 acquisitions, rather than solely organic growth. Observatory revenue was $35.7 million for the quarter and $83.4 million for nine months.
Cash flow, nine months: Operating cash flow was $101.6 million; investing cash outflow was $264.6 million; financing cash inflow was $155.2 million. Cash and cash equivalents declined by $7.8 million to $52.9 million.
Debt and liquidity: Total debt principal was approximately $1.59 billion, with a reported weighted-average interest rate of 4.29% and weighted-average maturity of 3.0 years. Approximately 75% was fixed-rate. Cash was $52.9 million, and disclosed availability under the secured revolving and term facility was $422.8 million; availability was subject to a $21.6 million reduction until specified Empire State Building capital expenditures were made. Total assets were $3.30 billion and total liabilities $1.91 billion. The company reported compliance with its credit facility covenants.
Margins and supplemental measures: GAAP operating income was $43.4 million for the quarter and $110.0 million for nine months. The filing does not state operating margin as a reported metric. Nine-month NOI was $236.4 million; FFO was $155.4 million and Core FFO $162.2 million, or $0.62 and $0.65 per diluted share/OP unit, respectively. NOI, FFO and Core FFO are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
Material changes and notable transactions
- On July 15, 2014, the company acquired the ground and operating lease interests at 112 West 34th Street and the ground lease at 1400 Broadway, for aggregate stated consideration of $733.6 million, including assumed debt, cash and equity/operating partnership units. Preliminary purchase price allocations remain subject to adjustment.
- In August, the company issued $250 million of 2.625% exchangeable senior notes due 2019, receiving $246.9 million net proceeds. The notes’ accounting includes a separately recorded equity conversion component and non-cash discount amortization.
- Reported debt increased from $1.20 billion at December 31, 2013 to $1.59 billion in principal at September 30, 2014, including debt assumed with acquisitions and new notes.
- Subsequent to quarter-end, the company repaid $13.7 million of 1350 Broadway mortgage debt and refinanced Metro Center with a $100 million, 3.59% fixed-rate loan due 2024, and One Grand Central Place with a $91 million floating-rate loan due 2017.
- The company declared quarterly common share and OP unit distributions of $0.085 each. It also issued 1.61 million private perpetual preferred units, with a $16.62 liquidation preference and a $0.60 annual cumulative distribution per unit.
Outlook, risks and contingencies
- Management expected to refinance 2014 and 2015 debt maturities, citing liquidity and the relatively low leverage of those maturities. Approximately $108.1 million matured in 2014 and $145.0 million in 2015. This is management’s expectation, not a guarantee.
- The company estimated $63.8 million of capital expenditures, tenant improvements and leasing commissions under existing leases, and another $85 million to $125 million to substantially complete its Manhattan redevelopment and repositioning program after September 30, 2014. It expected the Empire State Building program to continue through the end of 2016. Estimates may change.
- Leasing, occupancy, rents and tenant retention depend on market conditions and successful repositioning. Leases covering 2.5% of portfolio area were due to expire in Q4 2014 and 8.6% in 2015; management noted renovation activity could temporarily reduce occupancy. Observatory performance is seasonal and exposed to tourism, weather and competition.
- Interest-rate exposure includes floating-rate debt. The filing estimated that a 1 percentage-point increase in short-term rates would have increased interest expense by approximately $4.0 million for the period analyzed. Other identified risks include refinancing and capital availability, tenant defaults or vacancies, redevelopment costs and delays, REIT qualification, and environmental matters.
- Litigation connected to the predecessor consolidation remains a contingency. The filing describes an appeal in a second set of class actions and a new arbitration filed by 12 investors who opted out of an earlier class settlement. The company says it will defend the arbitration and notes a successful adverse outcome in litigation could have a material adverse effect. The company also has indemnification obligations that may result in defense costs.
- Management reported no material changes to previously disclosed risk factors, no off-balance-sheet arrangements, and effective disclosure controls and procedures.
Important facts for investors to verify
- Separate acquisition-driven growth and consolidation effects from comparable-property operating performance; review occupancy, signed leases, rental rates and lease expirations.
- Confirm current borrowing availability, covenant compliance, refinancing outcomes and the effects of floating-rate debt and post-quarter-end transactions.
- Track actual redevelopment spending, tenant improvement commitments, leasing costs and project timing against management’s estimates.
- Monitor outcomes and potential company exposure from the consolidation-related appeals, arbitration and indemnification obligations.
- Assess distributions alongside REIT requirements, operating cash flow, capital needs and debt service; reported FFO and Core FFO are non-GAAP measures.