Empire State Realty OP, L.P. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; unaudited. The operating partnership owns and operates a New York-area portfolio of office, retail and multifamily properties, and the Empire State Building Observatory.
Financial performance
Amounts below are in millions except per-unit data and percentages.
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Total revenue | $190.5 | $198.0 | $355.2 | $362.1 |
| Operating income | $46.2 | $46.5 | $63.7 | $52.5 |
| Net income | $37.0 | $48.7 | $48.6 | $31.5 |
| Net income attributable to common unitholders | $35.9 | $47.8 | $46.6 | $29.6 |
| Basic and diluted earnings per unit | $0.14 | $0.17 | $0.18 | $0.11 |
| Core FFO attributable to common unitholders | $69.2 | $79.2 | $112.2 | $128.3 |
| Net operating income (NOI) | $108.2 | $120.4 | $188.3 | $206.3 |
Q2 operating margin was approximately 24.2% versus 23.5% a year earlier; first-half operating margin was approximately 17.9% versus 14.5%. These are calculated from reported operating income and revenue. Distributions were $0.035 per unit in Q2 and $0.070 per unit for the first half, unchanged year over year.
Balance sheet, liquidity and cash flow
- At June 30, cash and cash equivalents were $315.4 million; restricted cash was $80.5 million. Cash plus restricted cash totaled $395.8 million.
- Debt principal was approximately $2.26 billion, with a weighted-average interest rate of 3.9% and weighted-average maturity of 5.9 years. Balance-sheet debt, net of financing costs and discounts, was $2.24 billion. The revolving facility had no borrowings, leaving $850 million available.
- Management reported no debt maturity, excluding amortization, before November 2024. Required principal payments include $86.5 million in 2024, $321.9 million in 2025, $232.3 million in 2026 and $325.5 million in 2027.
- All reported debt financial covenants were satisfied: total leverage 33.8% (maximum 60%), secured leverage 13.2% (maximum 40%), fixed-charge coverage 3.1x (minimum 1.50x), unencumbered interest coverage 5.3x (minimum 1.75x), and unsecured leverage 25.1% (maximum 60%).
- First-half operating cash flow was $105.9 million, versus $83.7 million in 2022. Investing activities provided $12.7 million, compared with $56.6 million used in 2022; financing activities used $37.5 million, versus $88.9 million used. Cash and restricted cash increased by $81.1 million during the first half.
- First-half capital expenditures, excluding tenant improvements and leasing commissions, were $26.0 million. Estimated costs under existing leases for tenant improvements and leasing commissions were approximately $138.4 million.
Material changes and operating activity
- Q2 revenue fell 3.8%, principally because the prior-year quarter included $18.9 million of lease termination fees. Rental revenue rose 3.5% and Observatory revenue rose 22.2% to $33.4 million, driven by increased visitation. The Observatory received 666,000 visitors, versus 573,000.
- First-half revenue declined 1.9%. Observatory revenue increased 36.9% to $55.6 million, but rental revenue decreased 0.7%, reflecting property dispositions, and the prior-year period included $20.0 million of lease termination fees.
- Q2 net income was lower year over year, in part because the gain on property dispositions was $13.6 million versus $27.2 million. First-half net income increased year over year, reflecting lower depreciation and amortization and higher disposition gains, among other items.
- The company sold 69-97 and 103-107 Main Street in Westport for a stated gross asset valuation of $40.0 million, recording a $15.7 million gain, and sold 500 Mamaroneck Avenue for $53.0 million, recording a $13.6 million gain. The Westport sale was a related-party transaction approved under the company’s policy.
- At quarter end, the commercial portfolio was 90.3% leased and the Manhattan office portfolio was 91.6% leased. The company reported signing 336,314 rentable square feet of new, renewal and expansion leases during Q2. Separately, 9.7% of portfolio space was available to lease; leases covering 3.4% of portfolio area expire in 2023 and 5.4% in 2024.
Outlook, risks and unusual items
- The filing gives no numerical earnings or FFO guidance. Management described first-half leasing demand and Observatory performance as solid, and said its diversified, modernized portfolio and liquidity position provide resilience.
- Management highlighted economic uncertainty, inflation and higher interest rates, office utilization and remote-work trends, commercial real estate refinancing conditions, potential recession, tenant defaults or non-renewals, property valuations, and tourism and Observatory competition as risks.
- Signature Bank’s receiver, Flagstar, assumed the 313,109-square-foot lease at 1400 Broadway in May on amended terms. The company reversed $5.8 million of a $6.4 million first-quarter straight-line rent reserve. For First Republic Bank’s 14,430-square-foot retail lease, the company retained a $0.2 million reserve; the FDIC had until September 28, 2023 to assume or reject the lease.
- Environmental remediation obligations remain associated with certain previously sold properties, including 500 Mamaroneck; approximately $2.0 million of estimated post-closing obligations was included in that sale’s gain calculation. Management said it did not expect the disclosed environmental matters to materially affect the business, but noted that not all liabilities may have been identified.
- A long-running arbitration involving former Empire State Building investors resulted in an approximately $1.2 million award. On July 31, 2023, after quarter end, a New York State court denied the respondents’ petition to vacate in part and confirmed the award; respondents were considering their options.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. The filing reported no material change to previously disclosed risk factors.
Investor verification priorities
- Confirm subsequent leasing, occupancy, rent levels and renewal outcomes, particularly for the 2023–2024 expirations and currently available space.
- Review refinancing plans and funding costs for the 2024–2027 maturities, and confirm continuing covenant compliance and access to the revolving facility.
- Track collection and lease status for tenants affected by bank failures, including the First Republic lease decision and remaining Signature-related rent effects.
- Monitor the $138.4 million of estimated lease-related spending, ongoing capital expenditure needs, and the funding assumptions for these commitments.
- Check developments in the investor arbitration and outstanding environmental remediation obligations, including any changes to estimated costs or contingencies.
- Compare future results with GAAP measures as well as NOI and Core FFO; the filing cautions that these non-GAAP measures are not substitutes for net income or operating cash flow.