Empire State Realty OP, L.P. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a standalone fourth-quarter filing; selected Q4 results are included below. The partnership owns and operates office and retail properties principally in Manhattan and the greater New York metropolitan area, including the Empire State Building, and operates its observatories.
Business context and portfolio
- Portfolio comprised 14 office properties and six standalone retail properties, totaling approximately 10.1 million rentable square feet. Occupancy was 88.6%; leased occupancy including signed leases not yet commenced was 91.2%.
- Annualized rent was $554.8 million. Six properties generated 73.1% of portfolio rental revenue; the Empire State Building alone generated 32.9%.
- ESRT, the sole general partner, owned approximately 60.7% of the partnership units at year-end. The business reports real estate and observatory segments.
Financial performance and liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $731.3 million | $731.5 million | Flat |
| Operating income | $154.7 million | $190.9 million | Down 18.9% |
| Net income | $84.3 million | $117.3 million | Down 28.1% |
| Net income attributable to common unitholders | $82.5 million | $116.3 million | Down 29.0% |
| Net income per unit, diluted | $0.27 | $0.39 | Down |
| Core FFO | $267.9 million | $290.4 million | Down 7.8% |
| Net operating income (NOI) | $396.1 million | $410.6 million | Down 3.5% |
| Cash from operating activities | $232.6 million | $279.0 million | Down $46.4 million |
- Operating margin was approximately 21.2%, versus 26.1% in 2018; net income margin was approximately 11.5%, versus 16.0%.
- Year-end debt was $1.676 billion principal (approximately $1.669 billion carrying value), at a 4.03% weighted-average interest rate and 8.3-year weighted-average maturity. Debt was reported as fixed-rate, including debt whose floating rate was swapped to fixed.
- Cash and cash equivalents were $233.9 million; restricted cash was $37.7 million. The $400 million of short-term investments held in 2018 had matured by year-end 2019. Available capacity under the unsecured revolving facility was approximately $1.1 billion. Net debt to enterprise value was 25.2%.
- No debt maturities were scheduled for 2020 or 2021, excluding amortization; $265 million of principal matured in 2022. The partnership reported compliance with debt covenants.
- Distributions were $0.42 per unit for 2019, unchanged from 2018; total distributions to unitholders and preferred holders were $127.8 million.
- Fourth-quarter 2019 revenue was $194.9 million and net income was $28.7 million; net income attributable to common unitholders was $27.7 million, or $0.09 per unit.
Material changes versus prior year
- Revenue was essentially unchanged, but operating income and net income declined. Operating expenses rose 6.7%, including higher property operating costs, general and administrative expense, real estate taxes, and depreciation and amortization.
- Reported rental revenue increased 18.9%, while the separate tenant-reimbursement revenue line disappeared. The company adopted lease accounting Topic 842 in 2019 and presented tenant lease income in a single rental-revenue line; prior-year figures were not restated. The filing identifies 2019 rental revenue as including $75.3 million of tenant expense reimbursements.
- Lease termination fees fell to $4.4 million from $20.8 million, and observatory revenue declined 1.9% to $128.8 million. Observatory visitors fell 7.9% to approximately 3.505 million.
- Operating cash flow decreased; investing cash flow was positive $149.7 million, mainly reflecting maturity of short-term deposits, while financing cash flow was negative $381.6 million, principally reflecting repayment of $250 million of exchangeable notes at maturity in August 2019.
- The partnership exchanged 4.61 million common OP units for newly issued Series 2019 private perpetual preferred units. These units carry a $13.52 liquidation preference and cumulative annual distributions of $0.70 per unit.
Outlook, management commentary, risks and unusual items
- Management highlighted leasing spreads: 2019 Manhattan office new and renewal leases achieved a 20.4% increase in cash rent over prior leases; 2020 expirations included approximately 558,246 square feet of Manhattan office space, which management generally viewed as below market.
- The observatory modernization was completed in 2019. The 102nd-floor observatory was closed for approximately nine months and reopened October 12; management attributed lower observatory revenue partly to the closure and visitor decline, partly offset by improved pricing.
- Management expected approximately $40 million of spending through 2020 on common areas and amenities, and reported approximately $125.9 million of tenant improvements and leasing commissions associated with signed leases. Metro Tower, an entitled 415,000-square-foot office development in Stamford, had no stated start date; development depends on market and other conditions.
- No specific earnings, revenue, or FFO guidance was provided. Management anticipated positive operating cash flow but noted capital needs, distributions, refinancing and access to capital depend on market conditions.
- Key risks include concentration in the New York metropolitan area and six major properties; vacant space and lease expirations; tenant credit and retail-sector weakness; competition from new offices and observatories; development and redevelopment cost or leasing risk; ground-lease expirations; interest-rate and refinancing risk; and REIT qualification and tax-protection obligations.
- The filing specifically identified the novel coronavirus (COVID-19) as a potential threat to tourism and observatory demand. It also disclosed a pending arbitration brought by former Empire State Building investors; defendants consider the claims without merit and intend to defend them. No material environmental liability was identified, but soil restrictions at a Westport retail property may constrain redevelopment, financing or resale.
- Goodwill was $491.5 million, including $227.5 million allocated to the observatory reporting unit. No impairment was recorded; goodwill valuation was identified by the auditor as a critical audit matter, sensitive to competition, tourism and costs.
Important facts for investors to verify
- Reconcile the 2019 rental-revenue presentation with 2018 under Topic 842 before interpreting reported growth; separately assess recurring rent against lower lease-termination fees and other items.
- Review lease-up progress, tenant retention, concessions and capital costs, particularly the 2020 Manhattan office expirations and the portfolio’s vacant space.
- Assess the observatory’s post-renovation attendance, pricing, margins and competitive impact, including the effects of tourism, weather and COVID-19.
- Confirm debt maturities, revolver availability, covenant headroom, capital commitments and the ability to fund distributions while meeting leasing and redevelopment needs.
- Track the preferred-unit distribution burden, the pending arbitration, environmental restrictions, tax-protection commitments and goodwill impairment assumptions.
FFO, Core FFO and NOI are non-GAAP measures; the filing cautions that they are not substitutes for GAAP income or operating cash flow and may not be comparable across companies.