Empire State Realty OP, L.P. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; comparisons are with the same 2014 periods. Dollar amounts are in millions unless otherwise noted. The partnership owns and operates office and retail properties, including the Empire State Building and its observatory, in Manhattan and the greater New York metropolitan area. Its portfolio totaled 10.1 million rentable square feet.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $175.8 | $169.4 | $492.4 | $464.9 |
| Operating income | $45.3 | $43.4 | $114.1 | $110.0 |
| Net income | $26.1 | $22.7 | $60.6 | $59.2 |
| Net income attributable to common unitholders | $25.9 | $22.5 | $59.9 | $59.0 |
| Basic and diluted earnings per unit | $0.10 | $0.09 | $0.22 | $0.23 |
| Core FFO per unit, non-GAAP | $0.27 | $0.25 | $0.72 | $0.65 |
- Q3 revenue increased 3.7%, operating income 4.4%, and net income 14.7% year over year. Nine-month revenue rose 5.9%, while operating income rose 3.7% and net income 2.2%.
- Approximate operating margin was 25.8% in Q3 2015 versus 25.6% in Q3 2014, and 23.2% for the first nine months of 2015 versus 23.7% in 2014.
- Net cash provided by operating activities was $159.6 versus $101.6 for the nine-month periods. Investing used $105.0 versus $264.6; financing used $54.0 versus providing $155.2. Cash and cash equivalents were $46.4 at September 30, 2015.
- At September 30, debt principal was approximately $1.623 billion (reported carrying amount $1.629 billion). Total debt was reported at approximately $1.6 billion, with a 4.11% weighted-average rate and 5.7-year weighted-average maturity. Debt to total market capitalization was approximately 26%. No debt maturities were scheduled for 2015 or 2016.
- The $800 million unsecured revolving facility had $20 million drawn, leaving $780 million available. The partnership reported compliance with its revolving facility, senior note, and term loan covenants.
- Declared distributions of $0.085 per unit for Q3; reported dividends per unit were $0.085 for the quarter and $0.255 for the nine months.
Material changes and operating trends
- Rental revenue increased 4.5% in Q3 and 15.7% over nine months, driven chiefly by the July 2014 acquisitions of 112 West 34th Street and 1400 Broadway, plus higher rents.
- Q3 observatory revenue was essentially unchanged at $35.7 million. Nine-month observatory revenue rose 1.4% to $84.5 million, despite fewer visitors, reflecting higher admission prices.
- Construction operations were wound down: the partnership stopped soliciting new business in March 2015 and completed in-progress projects. Construction revenue fell to zero in Q3 and to $2.0 million for nine months.
- Q3 other revenue included a $2.5 million acquisition break-up fee. Management’s overview separately describes a netted $2.3 million fee; the filing does not clearly reconcile the difference.
- Q3 depreciation and amortization increased 19.2%, including a $5.7 million write-off of acquired intangible lease costs following a tenant space reduction. Nine-month interest expense increased 7.8%, partly reflecting acquired properties and financing-cost write-offs, offset in part by refinancing at lower rates.
- Portfolio occupancy was 87.4%, or 90.0% including signed leases not yet commenced. Manhattan office occupancy was 85.4% (88.4% including signed leases); retail occupancy was 92.7% (94.6% including signed leases). The Empire State Building was 83.7% occupied, or 91.2% including signed leases.
Outlook, risks and unusual items
- No specific full-year earnings or revenue guidance is provided. Management expects positive operating cash flow and plans to fund liquidity needs through operations, cash, debt financing and available revolver capacity.
- Management estimated $65.7 million of capital expenditures, tenant improvements and leasing commissions under existing leases. It expected $45 million to $75 million of additional capital investment beyond September 30, 2015 to substantially complete the Manhattan office redevelopment program by the end of 2016; estimates are subject to change.
- Q3 leasing activity included 67 leases covering 338,477 square feet, with a reported 34.5% mark-to-market rent increase over prior fully escalated rents. For Manhattan office leases signed in the quarter, management reported a 41.0% increase.
- Interest-rate swaps with $465 million aggregate notional value produced a $4.4 million unrealized loss recognized in other comprehensive income. Management estimated a $2.9 million increase in annual interest expense if short-term rates were 1% higher, based on variable balances.
- Legal exposure includes an appeal in a separate class-action matter and arbitration brought by 12 investors who opted out of an earlier settlement; arbitration hearings were scheduled to begin in May 2016. The partnership says it cannot reasonably estimate potential losses or timing and has indemnification obligations for certain executives. The earlier class-action settlement was final and non-appealable, and its $55 million payment was not the partnership’s responsibility.
- Other risks include leasing and tenant defaults, property taxes and operating costs, redevelopment execution and cost overruns, observatory tourism and weather, broadcasting-license renewals and competition, interest rates, financing availability, and environmental matters. Management said no material changes had occurred to the risk factors in the 2014 Form 10-K.
Most important facts for investors to verify
- Whether occupancy, signed-but-not-commenced leases, and rent mark-to-market gains translate into durable rental growth and improved occupancy.
- Whether the $65.7 million of lease-related spending and the remaining redevelopment budget can be funded without materially weakening liquidity or increasing leverage.
- Debt refinancing, maturities, floating-rate exposure, covenant headroom, and the continued availability of the $780 million revolver capacity.
- The sustainability of observatory revenue and the outcome of broadcasting renewals amid lower visitor counts, weather sensitivity, competition, and industry changes.
- Developments in the pending investor litigation and arbitration, including any potential indemnification or financial exposure.
- The composition and repeatability of reported growth, including acquired-property contributions, the break-up fee, the lease-intangible write-off, and non-GAAP Core FFO adjustments.