Empire State Realty OP, L.P. — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual filing; it does not provide a standalone fourth-quarter income statement. Amounts below are U.S. dollars.
Business context
The partnership is the operating entity for Empire State Realty Trust, Inc. (ESRT), a REIT focused on office, retail and multifamily properties in Manhattan and the greater New York metropolitan area, as well as the Empire State Building Observatory. At year-end, its office and retail portfolio totaled 9.7 million rentable square feet, was 85.2% occupied and 88.6% leased including signed leases not yet commenced. Three Manhattan multifamily properties totaled 721 units and were 96.3% leased.
Financial and operating performance
| Metric | FY 2022 | FY 2021 | Change or context |
|---|---|---|---|
| Total revenue | $727.0 million | $624.1 million | Up 16.5% |
| Rental revenue | $591.0 million | $559.7 million | Up 5.6%; partly reflects the acquired multifamily properties |
| Observatory revenue | $106.0 million | $41.5 million | Up 155.5% as visitation recovered |
| Operating income | $127.0 million | $79.1 million | Up 60.5%; calculated operating margin was 17.5%, versus 12.7% |
| Net income (loss) | $63.2 million | $(13.0) million | Net income attributable to common unitholders was $59.3 million, or $0.22 per unit, versus a loss of $17.2 million, or $(0.06) per unit |
| Core FFO | $243.6 million | $194.9 million | Up approximately 25%; non-GAAP measure |
| Net cash from operating activities | $211.2 million | $212.5 million | Down $1.3 million |
| Cash and cash equivalents | $264.4 million | $423.7 million | Restricted cash was an additional $50.2 million |
| Total debt principal | $2.266 billion | $2.334 billion | Weighted-average rate 3.9%; weighted-average maturity 6.4 years |
Calculated net margin was approximately 8.7% in 2022; the comparison year had a net loss. NOI, a non-GAAP property-performance measure, was $404.3 million versus $343.4 million. FFO and Core FFO are not cash flow measures and should not be treated as cash available for distributions.
Observatory attendance rose to approximately 2.19 million visitors from 0.83 million in 2021, still below 3.5 million in 2019. Leasing activity totaled 1.12 million square feet; average cash rent on new and renewal leases was $59.42 per square foot, 1.4% above the prior leases’ average.
Material changes versus prior year
- Revenue and earnings improved substantially, led by the Observatory’s post-pandemic recovery and higher rental revenue. Property operating expenses increased 24.4%, partly due to higher building utilization and multifamily operating costs; interest expense rose 7.2%.
- FY 2022 included a $34.0 million gain on property dispositions: $27.2 million from transferring the Norwalk property to its lender and $6.8 million from the sale of 10 Bank Street. The Norwalk transfer was a consensual foreclosure; the property had incurred a $7.7 million impairment charge in 2021.
- The partnership acquired 298 Mulberry Street for $114.9 million in December 2022, adding 96 multifamily units. It sold 10 Bank Street for a gross asset valuation of $42.0 million.
- Cash and cash equivalents plus restricted cash fell to $314.7 million from $474.6 million, primarily due to the Mulberry acquisition, repurchases, capital spending and distributions. Financing cash use increased to $140.2 million, including $90.2 million of unit repurchases.
Liquidity, debt and capital allocation
At December 31, 2022, the company reported $850 million available under its unsecured revolving credit facility, with no revolver borrowings. Debt principal maturities begin in November 2024; scheduled principal maturities are $77.7 million in 2024, $315.0 million in 2025, $225.0 million in 2026 and $319.0 million in 2027, with $1.269 billion thereafter. Management reported compliance with debt covenants, including total leverage of 35.6% against a maximum of 60%, and fixed-charge coverage of 2.8x against a 1.50x minimum. Debt is described as fixed-rate after swaps; the credit and term facilities were amended to use SOFR in place of LIBOR.
Distributions were $0.035 per unit per quarter in 2022, equivalent to $0.14 annually. A $500 million repurchase authorization ran through December 31, 2023; $90.2 million of units were repurchased during 2022, and approximately $409.8 million remained authorized at year-end. The filing does not provide clear numeric forward earnings or distribution guidance, although management says it introduced guidance for the first time in 2022.
Outlook, risks and unusual items
- Management cites leasing progress and tenant demand for high-quality space, but office demand remains exposed to remote-work trends, competition, rent concessions and tenant credit risk. Approximately 1.1 million square feet was available at year-end; leases covering 5.1% of commercial portfolio area expire in 2023 and 6.6% in 2024.
- Recovery in Observatory results depends on domestic and international travel, visitor pricing, weather and competition. 2022 revenue of $106.0 million remained below the 2019 level of $128.8 million.
- Revenue is concentrated: the Empire State Building represented approximately 29.9% of rental revenues in 2022, and six properties together represented 72.5%. The five largest commercial tenants accounted for 15.9% of annualized rent at year-end.
- Other material exposures include New York-area geographic concentration, inflation and operating costs, refinancing and interest-rate conditions, ground leases, environmental matters, insurance deductibles and climate regulation. Management estimated no Local Law 97 fines for commercial properties in the 2024–2029 first enforcement period, based on its current understanding and calculations; this is not a guarantee.
- Goodwill totaled $491.5 million, including $227.5 million allocated to the Observatory reporting unit. No impairment was recorded in 2022, but valuation depends on estimates of future revenue, costs and discount rates; goodwill valuation was the auditor’s critical audit matter.
- After year-end, two Westport retail properties were sold for $40.0 million to an entity affiliated with CEO Anthony Malkin. The filing describes the related-party review process and a loan of up to $1.0 million to the buyer. A sale agreement for 500 Mamaroneck Avenue at a $53.0 million gross asset valuation was expected to close in Q1 2023.
- The company disclosed an ongoing appeal in legacy arbitration litigation. The arbitration award was approximately $1.2 million, inclusive of interest through October 2020; the appeal and related motion were pending at filing. Management stated that, apart from this matter, it was not involved in material litigation at year-end.
Most important facts for investors to verify
- Confirm cash available for operations after restricted cash, planned tenant improvements and leasing commissions of approximately $118.3 million, and capital expenditures.
- Track office occupancy, signed-but-not-started leases, lease expirations and achieved rents against the cost of tenant improvements and leasing commissions.
- Assess Observatory visitation and revenue recovery relative to pre-pandemic levels and the assumptions supporting the $227.5 million Observatory goodwill valuation.
- Review debt refinancing needs, floating-rate exposure despite hedges, covenant headroom and the ability to maintain distributions and repurchases.
- Evaluate the related-party Westport sale, buyer loan repayment, and status and proceeds of the 500 Mamaroneck disposition.
- Distinguish GAAP earnings and operating cash flow from non-GAAP NOI, FFO and Core FFO when assessing recurring performance and distribution capacity.