Empire State Realty OP, L.P. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The partnership owns and operates office and retail properties in Manhattan and the greater New York metropolitan area, and operates the Empire State Building Observatory. Unless stated otherwise, amounts below are in USD millions.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $146.6 | $192.9 | $457.8 | $536.4 |
| Operating income | $11.9 | $45.3 | $39.2 | $107.6 |
| Net income (loss) | $(12.3) | $26.8 | $(23.6) | $55.6 |
| Net income (loss) attributable to common unitholders | $(13.3) | $26.6 | $(26.7) | $54.9 |
| Basic and diluted earnings (loss) per unit | $(0.05) | $0.09 | $(0.10) | $0.18 |
| Net cash provided by operating activities | — | — | $163.6 | $198.4 |
Q3 operating margin was approximately 8.1%, compared with 23.5% a year earlier; nine-month margin was approximately 8.6%, versus 20.1%. Core FFO attributable to common stockholders, a non-GAAP measure, was $34.9 million for Q3 versus $71.8 million, and $128.1 million for the nine months versus $193.0 million.
- Revenue drivers: Q3 rental revenue fell 6.9% to $139.9 million, while observatory revenue fell 88.2% to $4.4 million. For the nine months, rental revenue was down 2.0% and observatory revenue down 73.6%.
- Expenses and margins: Nine-month property operating expenses fell $26.0 million, primarily from reduced building use and cost controls. This was offset by lower revenue, higher general and administrative expenses, real estate taxes, depreciation and amortization, and $6.2 million of impairment charges. Q3 NOI was $72.2 million versus $103.7 million; management separately reported same-store property cash NOI, excluding lease termination fees, up 9.3% year over year.
- Cash and liquidity: September 30 cash and cash equivalents were $373.1 million; including restricted cash, total cash was $428.0 million. The company reported $1.1 billion undrawn on its revolving facility and total liquidity of approximately $1.5 billion. Operating cash flow for nine months declined to $163.6 million from $198.4 million.
- Debt: Principal debt was approximately $2.0 billion, with a 4.0% weighted-average interest rate and 8.3-year weighted-average maturity. Management reported 93.7% fixed-rate and 6.3% variable-rate debt, and net debt to total market capitalization of 46.3%. The $550 million revolving-facility draw made in March was repaid in September. No scheduled debt maturity was reported before 2024, excluding amortization; however, the revolving facility has an August 2021 initial maturity, with two optional six-month extensions. All debt covenants were met at quarter-end.
Material changes and operating developments
- COVID-19-related observatory closure from March 16 through July 19 sharply reduced tourism revenue. The 86th-floor deck reopened July 20 and the 102nd-floor deck August 24. Q3 visitors were approximately 30,000 versus 1.042 million a year earlier.
- At September 30, the portfolio was 89.7% leased. The company signed 18 new, renewal and expansion leases totaling 247,449 rentable square feet in Q3. It reported collecting 94% of Q3 billings: 96% from office tenants and 84% from retail tenants.
- Management reported repurchases of $134.1 million year to date through September 30, at a weighted-average price of $8.30 per share; the filing also reports further repurchases in October. The $500 million repurchase authorization ran through December 31, 2020.
- Common distributions were suspended for Q3 and Q4 2020. Nine-month distributions to securityholders totaled $65.4 million, compared with $96.4 million in 2019. Management cited balance-sheet priorities and expected no taxable income for 2020.
Outlook, risks and unusual items
- No specific full-year earnings or revenue guidance is provided. Management expected near-term leasing volumes to remain lower and said observatory recovery depends on travel conditions; it did not expect the usual international visitor mix to return until broad international air travel resumed, potentially in 2022. Management continued to express confidence in long-term office demand while acknowledging possible changes in how tenants use space.
- COVID-19 risks include weaker tenant rent payments, deferrals or abatements, vacancies and lower rents, tenant defaults or bankruptcies, reduced office and retail demand, slower leasing, limits on construction and redevelopment, and prolonged weakness in observatory attendance. Rent collection may also be affected by government restrictions on enforcement of lease obligations.
- The $6.2 million impairment charge comprised $4.1 million for an energy-efficiency project deemed uneconomic and $2.1 million for a halted build-to-suit project. The observatory goodwill test found fair value exceeded carrying value by less than 5%; no observatory goodwill impairment was reported, but management said estimates could change.
- An arbitration panel denied former investors’ claims except for an award of approximately $1.2 million, including interest. The partnership recorded $1.165 million of IPO-litigation expense and stated respondents were considering next steps.
- Approximately $130.1 million of capital expenditures, tenant improvements and leasing commissions remained expected under existing leases. Interest-rate and LIBOR transition risks, future refinancing, real estate valuations, and environmental matters are also disclosed risks. The filing reports no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether tenant collections, leasing and occupancy recover, particularly among retail tenants, and how rent deferrals or abatements affect cash receipts.
- The pace of observatory visitation and revenue recovery, and whether updated goodwill valuations result in impairment.
- Liquidity and refinancing plans, including the revolving facility’s August 2021 initial maturity, extension conditions and covenant headroom.
- Progress and funding for the $130.1 million of committed tenant-related costs and other capital needs.
- Final outcome and potential costs of the investor arbitration, and the timing and extent of any resumed distributions or further repurchases.