Empire State Realty OP, L.P. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless noted. The Operating Partnership owns and operates office, retail and multifamily properties in the New York metropolitan area, as well as the Empire State Building Observatory.
Key financial results
| Metric | Q3 2022 | Q3 2021 | First nine months 2022 | First nine months 2021 |
|---|---|---|---|---|
| Total revenue | $183.7M | $165.0M | $545.8M | $463.8M |
| Operating income | $35.5M | $13.2M | $88.1M | $58.0M |
| Net income (loss) | $10.1M | $(10.2)M | $41.6M | $(9.0)M |
| Net income (loss) attributable to common unitholders | $9.1M | $(11.2)M | $38.7M | $(12.1)M |
| Basic and diluted earnings per unit | $0.03 | $(0.04) | $0.14 | $(0.04) |
| Net operating income (NOI; non-GAAP) | $97.8M | $93.1M | $304.7M | $254.8M |
| Core FFO attributable to common unitholders (non-GAAP) | $56.5M | $55.3M | $184.9M | $145.1M |
Q3 revenue growth reflected observatory recovery and higher rental revenue, including multifamily properties acquired in December 2021. Observatory revenue was $33.1M, up 158% year over year; rental revenue was $148.3M, up 6%. The observatory hosted 687,000 visitors versus 255,000 a year earlier. Higher property and observatory operating costs partly offset revenue growth. Nine-month earnings also included a $27.2M non-cash gain from transferring 383 Main Avenue to its lender in a consensual foreclosure.
Cash flow, debt and liquidity
- Operating cash flow for the first nine months was $174.0M, compared with $167.0M in 2021. Investing activities used $89.1M, principally for building improvements; financing activities used $119.7M, principally for unit repurchases and distributions.
- Cash and cash equivalents were $387.2M and restricted cash was $52.6M at September 30, 2022. The company reported $850M available under its unsecured revolving credit facility, with no revolver borrowings.
- Total debt principal was approximately $2.298B; weighted-average interest rate was 3.9% and weighted-average maturity was 6.7 years. No debt maturities were reported before November 2024, excluding scheduled amortization. Debt covenants were met.
- Interest expense was $25.5M for Q3 and $75.6M for the first nine months, higher than comparable 2021 periods. Interest rate swaps and caps had $576.3M aggregate notional value; swaps had a reported fair-value asset of $18.5M.
- Capital expenditures were $28.8M for the first nine months. The company estimated a further $117.9M of tenant improvements and leasing commissions under existing leases.
Material developments, outlook and risks
- At quarter-end, the total commercial portfolio was 88.5% leased and the New York City office portfolio was 89.4% leased. The company signed 335,382 rentable square feet of new, renewal and expansion leases in Q3.
- Management cited an uncertain near-term environment but expects long-term occupancy and rental revenue growth as redevelopment and repositioning progress. No specific earnings or revenue guidance was provided.
- After quarter-end, the company entered into agreements to sell 500 Mamaroneck Avenue and 10 Bank Street for a stated gross asset valuation of $95.0M, with closings expected in Q1 2023 subject to customary conditions.
- Key risks include office and retail demand, vacancies and lease renewals, tourism and observatory visitation, interest rates and refinancing, property valuations, development execution, climate and environmental matters, and REIT qualification. The observatory remains exposed to travel trends, seasonality, competition and weather.
- The filing describes an outstanding appeal relating to a roughly $1.2M arbitration award in former Empire State Building Associates investor litigation. Management says other potential claims are meritless. It also reports asbestos-containing materials at certain properties, with no currently estimable retirement obligation, and notes environmental risks cannot be ruled out.
- The filing states disclosure controls were effective and reports no material changes in internal control over financial reporting. It reports no material changes to the risk factors in the 2021 Form 10-K.
Most important facts for investors to verify
- Whether the two announced property sales close on the expected terms and timing, and how proceeds are used.
- Office leasing, occupancy, rent trends, upcoming lease expirations and the cost of tenant improvements and leasing commissions.
- Observatory visitor and revenue recovery, including sensitivity to travel conditions and operating costs.
- Debt service and refinancing exposure, interest-rate hedging, covenant headroom, and the planned funding of the estimated $117.9M lease-related commitments.
- The quality and sustainability of reported earnings and non-GAAP NOI/Core FFO, particularly the impact of the $27.2M foreclosure gain and the distinction between FFO and cash available for distributions.
- The filing’s post-quarter property-sale disclosure appears alongside a subsequent-events note stating “None”; verify the intended treatment and timing of those transactions.