Empire State Realty Trust, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. ESRT is a REIT focused on office, retail and multifamily properties in the New York metropolitan area, and operates the Empire State Building Observatory. Figures below are in U.S. dollars; financial statement amounts are in millions unless otherwise indicated.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $190.5 | $198.0 | $355.2 | $362.1 |
| Operating income | $46.2 | $46.5 | $63.7 | $52.5 |
| Net income | $37.0 | $48.7 | $48.6 | $31.5 |
| Net income attributable to common stockholders | $21.9 | $29.6 | $28.4 | $18.3 |
| Basic and diluted EPS | $0.14 | $0.18 | $0.18 | $0.11 |
| Core FFO attributable to common stockholders and OP | $69.2 | $79.2 | $112.2 | $128.3 |
| Net operating income (NOI) | $108.2 | $120.4 | $188.3 | $206.3 |
Rental revenue was $154.6 million in Q2, up 3.5%; observatory revenue was $33.4 million, up 22.2%. For the first half, rental revenue was $294.7 million, down 0.7%, while observatory revenue rose 36.9% to $55.6 million. Quarterly dividends were $0.035 per share, unchanged from 2022.
For the first half, operating cash flow was $105.9 million, versus $83.7 million. Investing activities provided $12.7 million, compared with $56.6 million used in the prior-year period, principally reflecting property-sale proceeds. Financing used $37.5 million, versus $88.9 million, largely because share repurchases were lower. Cash and cash equivalents were $315.4 million and restricted cash was $80.5 million at quarter-end.
At June 30, total debt principal was $2.261 billion; debt carrying value, net of financing costs and discounts, was $2.243 billion. Management reported a 3.9% weighted-average interest rate and 5.9-year weighted-average maturity. Cash plus the undrawn $850 million revolving credit facility provided approximately $1.165 billion of stated available liquidity. The company was in compliance with debt covenants; it reported no revolver borrowings.
Material changes versus the comparable period
- Q2 revenue declined 3.8%, largely because the prior-year quarter included $18.9 million of lease termination fees. Q2 2023 also had a smaller property-disposition gain ($13.6 million versus $27.2 million).
- Q2 common-stockholder income fell to $21.9 million from $29.6 million, while six-month common-stockholder income increased to $28.4 million from $18.3 million. The six-month comparison benefited from stronger observatory results and disposition gains; the prior year also included lease termination fees.
- Q2 observatory visitation was 666,000, versus 573,000; higher visitor volume supported revenue growth. Observatory expenses also increased with longer operating hours and related labor, marketing and maintenance costs.
- Core FFO and NOI declined in both comparison periods. ESRT reported lower depreciation and amortization, partly reflecting accelerated depreciation in 2022 and properties sold before June 2023.
- ESRT sold 69-97 and 103-107 Main Street in Westport for a stated gross asset valuation of $40 million and 500 Mamaroneck Avenue for $53 million. The sales contributed reported gains of $15.7 million and $13.6 million, respectively.
Outlook, risks and unusual items
- Management gave no quantified earnings or FFO guidance. It described first-half demand and leasing activity as sustained, while citing economic uncertainty, inflation, higher interest rates, office-space utilization and refinancing conditions. Management believes its diversified, modernized portfolio, observatory performance, balance sheet and liquidity position it to navigate uncertainty.
- The commercial portfolio was 90.3% leased and the Manhattan office portfolio 91.6% leased. ESRT signed 336,314 rentable square feet of new, renewal and expansion leases in Q2. Approximately 0.9 million square feet was available to lease; leases covering 3.4% and 5.4% of portfolio area expire in 2023 and 2024, respectively.
- ESRT estimated $138.4 million of future capital spending for tenant improvements and leasing commissions under existing leases. Six-month portfolio capital expenditures, excluding those costs, were $26.0 million.
- Debt principal maturities total $86.5 million in 2024, $321.9 million in 2025 and $325.5 million in 2027. Excluding scheduled amortization, management said no debt matured before November 2024. Floating-rate exposure, refinancing costs and interest-rate changes remain relevant risks; interest-rate swaps and caps had $574 million aggregate notional value.
- After Signature Bank entered receivership, ESRT had recorded a $6.4 million reserve on straight-line rent receivables; it reversed $5.8 million after Flagstar assumed the 1400 Broadway lease in May. It retained a $0.2 million reserve for First Republic Bank’s retail lease, which had not been assumed or rejected as of quarter-end.
- Environmental remediation obligations include estimated post-closing work at sold properties. The 500 Mamaroneck disposition gain included approximately $2.0 million of estimated post-closing obligations. A long-running arbitration-related award of approximately $1.2 million was confirmed by New York State court on July 31, 2023; respondents were considering options. ESRT said it did not expect the disclosed environmental matters to materially affect the business, but noted uncertainty.
- ESRT repurchased approximately 1.22 million shares in April at a weighted-average $6.09 per share; $396.7 million remained under its authorized repurchase program at June 30. Management reported no off-balance-sheet arrangements and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Lease expirations, leasing spreads, occupancy trends and the cost and timing of the $138.4 million tenant-improvement and leasing-commission commitments.
- Observatory visitor volumes, revenue per visitor, seasonality and sensitivity to tourism, weather and competition.
- Debt maturities, refinancing access and borrowing costs, covenant headroom, and the effect of interest rates despite hedging.
- Whether property-sale proceeds and gains are recurring sources of liquidity or earnings; reconcile GAAP results with Core FFO and NOI, which are non-GAAP measures.
- Resolution and financial impact of the First Republic lease and legal and environmental matters, including post-closing remediation obligations.
- Capital allocation trade-offs among dividends, share repurchases, property investment and debt reduction.