Empire State Realty OP, L.P. — Q2 2020 Form 10-Q
Business context and period. The Operating Partnership owns and operates office and retail properties in Manhattan and the greater New York metropolitan area, as well as the Empire State Building Observatory. This unaudited quarterly report covers the three and six months ended June 30, 2020. The portfolio comprised 10.1 million rentable square feet; ESRT owned 59.6% of the operating partnership units.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $141.0 million | $176.2 million | $311.3 million | $343.5 million |
| Operating income | $0.3 million | $36.2 million | $27.3 million | $62.3 million |
| Net income (loss) | $(19.6) million | $18.9 million | $(11.3) million | $28.8 million |
| Net income (loss) attributable to common unitholders | $(20.7) million | $18.7 million | $(13.4) million | $28.3 million |
| Operating margin, approximate | 0.2% | 20.6% | 8.8% | 18.1% |
| Core FFO attributable to common stockholders, non-GAAP | $39.5 million | $64.5 million | $93.2 million | $121.1 million |
Rental revenue was $138.0 million in Q2, down 2.2%; observatory revenue fell to $0.1 million from $32.9 million. For the first half, rental revenue increased 0.6% to $286.1 million, while observatory revenue fell 63.3% to $19.6 million. Management reported Q2 Core FFO of $0.14 per fully diluted share after a reserve for tenant receivables and a noncash reduction in straight-line rent balances. FFO and Core FFO are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
For the first half, operating cash flow was $74.4 million, versus $89.3 million in 2019; investing activities used $79.7 million, versus $119.4 million provided in 2019; and financing activities provided $665.5 million, versus $66.1 million used. Cash and cash equivalents were $873.0 million at June 30, with an additional $58.9 million of restricted cash. Cash and restricted cash totaled $931.8 million.
At June 30, total debt principal was $2.524 billion, compared with $1.676 billion at year-end 2019. Weighted average interest rate was 3.41%, weighted average maturity 6.9 years, and debt was 73.3% fixed-rate and 26.7% variable-rate. Net debt to total market capitalization was 43.7%. The $550 million revolving facility balance matures in 2021, with two possible six-month extensions subject to conditions. The company reported compliance with debt covenants; covenant measures included 34.2% total leverage against a 60% maximum and 3.3x fixed-charge coverage against a 1.50x minimum. Liquidity was approximately $1.4 billion: $873 million cash plus $550 million undrawn revolving capacity.
Total assets were $4.550 billion and total liabilities $2.794 billion at June 30, 2020. The quarterly distribution was $0.105 per unit, unchanged from the prior-year quarter.
Material changes and management commentary
- COVID-19 closures drove the collapse in observatory revenue: the Observatory closed March 16 and remained closed throughout Q2, reopening July 20 under restrictions. Management anticipated a gradual visitor recovery and did not expect the typical visitor mix, about two-thirds international in recent years, to return before broad resumption of international air travel, potentially in 2022.
- Portfolio was 89.6% leased at June 30, including leases scheduled to expire covering 3.4% of space in 2020 and 6.6% in 2021. Management expected lower leasing volume in Q3 and Q4 due to tenant activity and pandemic uncertainty. Q2 leasing comprised 19 leases totaling 113,431 square feet at an average starting rent of $64.43 per square foot.
- Rent collection improved but remained pressured: the filing reports 84% collected on Q2 billings. Monthly collections were 86.2% in April, 83.2% in May, and 83.1% in June; July collections were 91.3% through July 31. Management described rent deferrals and individual tenant assessments, with smaller food and service retailers particularly affected.
- Property operating expenses declined 26.0% in Q2, mainly from lower payroll, repairs and maintenance, and utilities; observatory expenses fell 52.1% due to closure. These savings partly offset lower revenue. General and administrative costs increased 13.4%, primarily due to severance, while interest expense rose 16.2% from new financing and revolver borrowings.
- Management cited cost actions including reduced observatory operating costs, staffing and corporate expense reductions, and lower planned 2020 capital spending. It also described continuing long-term office repositioning plans while acknowledging that tenant demand, layouts, leasing pace, and project timing could change.
Risks, contingencies, and unusual items
- The company raised debt and drew $550 million on its revolver during March to bolster liquidity, adding materially to debt. It also issued $175 million of senior unsecured notes and entered into term-loan facilities. Floating-rate exposure, refinancing needs, covenant compliance, and LIBOR transition are risks identified in the filing.
- A $4.1 million impairment charge was a write-off of prior costs for an energy-efficiency project judged uneconomic under current regulation. Separately, the Observatory goodwill impairment test found fair value less than 5% above carrying value; management said future assumptions could change and impairment assessment would continue.
- The company terminated a $125 million interest-rate swap in Q2 and paid a $20.3 million settlement. It estimated $11.5 million of accumulated derivative losses would be reclassified to interest expense within 12 months.
- Existing lease agreements imply approximately $132.3 million of future tenant improvements and leasing commissions. The filing also discloses a longstanding arbitration brought by former investors alleging claims connected to the 2013 offering and formation transactions; management considers the claims without merit and intends to defend them. No other material litigation was reported.
- COVID-19 risks include tenant nonpayment, deferrals, defaults or bankruptcies; weaker office and retail demand; tourism disruption; possible lower rents and higher vacancy; project delays; and reduced access to capital. Management provided no quantitative full-year earnings or revenue guidance in the supplied filing text.
Important facts for investors to verify
- Subsequent rent collections, deferral repayments, tenant defaults, and office and retail occupancy and leasing trends.
- Observatory attendance and revenue recovery following its July 20 reopening, including the pace of tourism recovery and goodwill valuation headroom.
- Liquidity after operating needs and planned capital commitments, and the refinancing or extension plan for the $550 million 2021 revolver maturity.
- Variable-rate debt exposure, interest-rate hedges, covenant headroom, and the effect of any LIBOR replacement on borrowing costs.
- Whether distributions and repurchases remain supportable given operating cash flow, debt levels, and ongoing tenant improvement and leasing obligations.