Empire State Realty OP, L.P. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016. The 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. Its portfolio totaled 10.1 million rentable square feet.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue | $165.0 million | $157.1 million |
| Operating income | $36.7 million | $34.1 million |
| Net income | $19.1 million | $16.7 million |
| Net income attributable to common unitholders | $18.9 million | $16.5 million |
| Operating margin | 22.2% | 21.7% |
| Net cash from operating activities | $60.0 million | $59.5 million |
| Core FFO, non-GAAP | $61.3 million | $58.2 million |
Revenue increased 5.0%, while operating income rose 7.5% and net income rose 14.6%. Basic and diluted earnings were $0.06 per unit in both periods. The distribution per unit was $0.105, compared with $0.085 a year earlier.
Rental revenue increased 1.9% to $117.1 million, primarily from higher rental rates. Other revenue and fees increased to $10.6 million from $2.3 million, principally reflecting lease cancellation income; management cited $7.7 million of higher lease cancellation income and $0.6 million of higher interest income. Tenant reimbursements fell 11.8% to $16.0 million. Observatory revenue declined 1.1% to $20.9 million.
Operating cash flow was nearly flat year over year. Investing cash use increased to $47.1 million from $24.1 million, primarily due to higher building and improvement spending. Financing cash use was $34.8 million, including $31.6 million of distributions. Cash and cash equivalents were $532.4 million at quarter-end, down from $554.4 million at year-end 2016; restricted cash was $62.5 million.
Debt, liquidity and capital
Total debt principal was approximately $1.615 billion; the balance sheet carrying amount was approximately $1.609 billion. The weighted-average interest rate was 4.22% and weighted-average maturity 4.5 years. Net debt to total market capitalization was approximately 14.8%. The company had no revolver borrowings and reported $1.1 billion of revolving-credit capacity available. It reported compliance with all debt covenants.
Approximately $336.0 million of debt maturities were scheduled for the remainder of 2017 and $262.2 million for 2018, excluding amortization. Management said it believed refinancing was achievable, citing liquidity and preliminary lender discussions. In April 2017, after quarter-end, the company refinanced the 1542 Third Avenue mortgage with a $30.0 million fixed-rate loan at 4.29%, maturing in May 2027.
Q1 additions to buildings and improvements were $47.0 million. The filing estimated approximately $51.5 million of future expenditures under signed leases, including tenant improvements and leasing commissions, to be funded from operating cash flow, cash, borrowing capacity and other financing sources.
Portfolio, outlook and notable matters
- At March 31, total portfolio occupancy was 88.8%, or 89.5% leased including signed leases not yet commenced. Manhattan office occupancy was 87.8%; retail occupancy was 94.4%.
- The company signed 27 leases covering 200,992 square feet, reporting a 44.0% mark-to-market rent increase over previous fully escalated rents. A new 20.8-year Target lease covered 43,019 square feet at 112 West 34th Street.
- The observatory welcomed approximately 636,000 visitors versus 719,000 in Q1 2016. Management attributed the decrease to unfavorable weather, travel disruption and Easter falling in a different quarter. Observatory revenue is seasonal, with a greater share typically earned in Q2 and Q3.
- Management said Manhattan office repositioning was nearing substantial completion and expected longer-term benefits to occupancy and rents, while noting repositioning can depress occupancy in the short term. No specific full-year financial guidance was provided.
- Broadcasting revenues face industry and spectrum-auction uncertainty. Two radio broadcaster renewals were signed; Ion Television said it would leave at the end of 2017. Preliminary renewal proposals could mean lower revenue and higher capital spending.
- An arbitration and related stayed court action brought by former Empire State Building investors allege claims concerning the offering and formation transactions. Hearings had taken place and additional sessions were scheduled for May and June 2017; respondents said they intended to defend vigorously.
- Interest-rate swaps had $970.0 million aggregate notional value. Management estimated a 1% increase in short-term rates would raise interest expense by approximately $2.6 million based on variable-rate debt balances. A partial swap termination and hedge redesignation contributed to a $0.2 million recognized loss.
- The filing identifies risks including lease expirations and tenant defaults, real estate market weakness, refinancing and interest-rate exposure, redevelopment costs, tourism variability, environmental matters and the ability to maintain REIT qualification. Management reported no material change to previously disclosed risk factors.
Key facts for investors to verify
- Whether lease cancellation income is recurring; it materially contributed to the year-over-year revenue increase.
- Progress on refinancing the 2017 and 2018 debt maturities, and the terms of the subsequent 1542 Third Avenue refinancing.
- Leasing, occupancy and rent trends, including commencement of signed leases and upcoming expirations.
- Funding and timing of the estimated $51.5 million lease-related spending and remaining repositioning capital needs.
- Observatory visitor and revenue trends, broadcasting renewals and any resulting revenue or capital-spending changes.
- Developments in the investor arbitration and any resulting financial exposure; the filing does not provide a clear estimate of potential damages.