Empire State Realty Trust, Inc. — Q3 2021 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2021; figures are unaudited. ESRT is a self-managed REIT focused on office and retail properties in Manhattan and the greater New York metropolitan area, with the Empire State Building Observatory as a separate business segment. Its portfolio totaled 10.1 million rentable square feet.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $165.0m | $146.6m | $463.8m | $457.8m |
| Operating income | $13.2m | $11.9m | $58.0m | $39.2m |
| Net loss | $(10.2)m | $(12.3)m | $(9.0)m | $(23.6)m |
| Net loss attributable to common stockholders | $(7.0)m | $(8.2)m | $(7.5)m | $(16.5)m |
| Basic and diluted loss per share | $(0.04) | $(0.05) | $(0.04) | $(0.09) |
| Core FFO attributable to common stockholders and non-controlling interests | $55.3m | $34.9m | $145.1m | $128.1m |
Q3 Observatory revenue rose to $12.8m from $4.4m a year earlier as visitation recovered; Q3 NOI was $6.4m, its second consecutive quarter of positive NOI since the pandemic began. Q3 lease termination fees were $11.3m versus $0.3m. Rental revenue was nearly unchanged in Q3, but fell 1.3% for the nine-month period to $420.6m. Nine-month operating cash flow was $167.0m, investing cash outflow was $70.8m, and financing cash outflow was $43.2m. Cash and restricted cash totaled $621.0m at quarter end.
At September 30, total debt principal was approximately $2.15bn; debt carrying value, net of financing costs, was $2.14bn. Management reported a 3.9% weighted-average interest rate, 7.4-year weighted-average maturity, 94.2% fixed-rate debt, and 34.7% consolidated net debt to total market capitalization. Cash and cash equivalents were $582.2m, and the $850m revolving facility was undrawn. No debt was scheduled to mature before November 2024, excluding amortization. The company was in compliance with debt covenants.
Material changes versus the prior comparable period
- Q3 revenue increased 12.6%, primarily reflecting higher Observatory revenue and lease termination fees. Q3 operating income rose 10.7%; common-stockholder loss narrowed 15.0%.
- Nine-month revenue increased 1.3%, while operating income rose 47.9% and common-stockholder loss narrowed 54.4%. Lower property, G&A, and Observatory expenses and the absence of 2020 impairment charges contributed to the improvement; lease termination fees also increased materially.
- Q3 depreciation and amortization rose 47.1% to $65.8m, primarily due to write-offs associated with a tenant. Nine-month interest expense increased 5.5% to $70.6m.
- Nine-month capital spending on buildings and improvements was $70.7m, down from $112.0m in 2020. Cash and restricted cash increased by $53.0m during the first nine months.
Outlook, commentary, risks and unusual items
- No numerical earnings or revenue guidance was provided. Management said it expects positive operating cash flow in the foreseeable future and believes office demand has long-term potential, while acknowledging near-term leasing uncertainty.
- Portfolio occupancy was 86.5% leased, including signed leases not yet commenced. ESRT signed 34 new, renewal, and expansion leases totaling 268,055 square feet in Q3. Same-store property cash NOI, excluding termination fees, declined 5.7% year over year. Management reported collection of 95% of Q3 billings.
- COVID-19, reduced office utilization, work-from-home patterns, travel restrictions, and tourism recovery remain risks. Observatory attendance was approximately 255,000 in Q3, below 2019 levels; management said international visitor recovery depended on travel resuming broadly, which it did not expect until sometime in 2022.
- Global Brands Group filed for bankruptcy and rejected leases covering space at 1333 Broadway and the Empire State Building. ESRT applied a $17.0m letter of credit to receivables, rental revenue, and $10.1m of lease termination income, and recorded a $1.6m noncash straight-line rent write-off. Subtenants remain liable for portions of the space; ESRT was discussing direct leases with them.
- The Observatory goodwill reporting unit’s estimated fair value exceeded carrying value by less than 15%; further impairment testing may be required as assumptions change. ESRT estimated $85.2m of future tenant improvements and leasing commissions under existing leases.
- A court entered judgment in September 2021 for approximately $1.2m in an IPO-related arbitration matter; respondents were considering their options. Certain related federal-court claims remained pending. Other material litigation was not reported.
- On October 26, 2021, ESRT signed conditional agreements to acquire two Manhattan multifamily properties with 625 units for approximately $307m, including about $186m of assumed debt. Closing was not assured.
- The quarterly dividend was reinstated in 2021; Q3 dividend was $0.035 per share, equivalent to an annualized $0.14. The board retains discretion to review the dividend and capital allocation policy.
Important facts for investors to verify
- Whether office leasing, occupancy, rent collections, and same-store cash NOI improved after quarter end, and the renewal or re-leasing outcome for leases expiring in 2021–2022.
- Whether GBG-related space was converted to direct leases and whether any additional rent receivable, impairment, or leasing costs arise.
- Observatory attendance, revenue, and goodwill valuation assumptions, particularly in light of international travel recovery and pandemic-related changes.
- Debt covenant headroom, refinancing exposure, LIBOR-to-alternative-rate transition, and funding plans for the estimated $85.2m of lease commitments.
- Status and financing terms of the proposed multifamily acquisition, and the final outcome of the IPO-related litigation.
- How Core FFO trends compare with GAAP results and cash available for distributions; Core FFO is a non-GAAP measure and does not represent operating cash flow.