Empire State Realty OP, L.P. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing is an annual report, with unaudited fourth-quarter results also provided. The partnership owns and operates office and retail properties in Manhattan and the greater New York metropolitan area, as well as the Empire State Building observatory. It began operations after the October 2013 offering and formation transactions, so comparisons with 2013 are affected by changes in the assets consolidated and are not fully like-for-like.
Business and portfolio
- At year-end, the portfolio comprised 14 office properties and six standalone retail properties, totaling approximately 10.0 million rentable square feet. Occupancy was 88.6%; including signed leases not yet commenced, it was 89.6% leased.
- Annualized rent was approximately $430.3 million. The Empire State Building, One Grand Central Place and First Stamford Place together represented about 54% of portfolio annual rent.
- Empire State Building observatory attendance was approximately 4.3 million visitors in 2014, up 0.7% from 2013.
Financial results and liquidity
| Metric | FY 2014 | Prior comparable information |
|---|---|---|
| Total revenue | $635.3 million | $333.7 million for combined 2013 |
| Operating income | $141.3 million | $(63.6) million for combined 2013 |
| Net income | $70.2 million; $69.7 million attributable to common unitholders | $156.2 million for combined 2013 |
| Diluted earnings per unit | $0.27 | $0.79 for the post-offering period in 2013; not a full-year comparable |
| FFO / Core FFO | $214.8 million / $227.4 million | Core FFO was $41.8 million for the post-offering period in 2013; not a full-year comparable |
| Cash from operating activities | $138.6 million | 2013 cash-flow figures are affected by formation-related costs and transactions |
Revenue rose 90.4% year over year, largely because the 2013 period did not include a full year of the acquired properties and observatory operations, and because two Manhattan properties were acquired in July 2014. Observatory revenue was $111.5 million, up 9.5% on a non-consolidated operating comparison, reflecting higher ticket prices. Operating margin was approximately 22.2% (operating income divided by revenue); the filing does not present this as a reported margin. Net income fell from the combined 2013 figure, which included a $322.6 million gain on consolidation of non-controlled entities.
For fourth-quarter 2014, revenue was $170.4 million, operating income $31.3 million, net income $11.0 million and net income attributable to common unitholders $10.7 million. Observatory revenue was $28.2 million, up 10.9% from fourth-quarter 2013.
- Debt: Approximately $1.612 billion outstanding at year-end, with a 3.55% weighted-average interest rate and 3.6-year weighted-average maturity. About 62.2% was fixed-rate; floating-rate debt was $605.1 million. A 1 percentage-point increase in short-term rates was estimated to raise 2014 interest expense by approximately $6.1 million.
- Liquidity: Cash and cash equivalents were $45.7 million, in addition to $60.3 million of restricted cash. Approximately $330 million was available under the secured credit facility at year-end. On January 23, 2015, the company replaced it with an $800 million unsecured revolving facility, with an accordion feature up to $1.25 billion subject to conditions.
- Capital needs: 2014 capital expenditures were $64.8 million, excluding tenant improvements and leasing commissions. The company estimated $75 million–$115 million of additional redevelopment capital beyond 2014, substantially completing the Manhattan program by the end of 2016, and expected approximately $57.4 million of tenant improvements and leasing commissions under signed leases in 2015.
Material changes, outlook and risks
- In July 2014, the partnership acquired the ground and operating leases at 112 West 34th Street and the ground lease at 1400 Broadway for total consideration of approximately $733.6 million, including assumed debt, cash and equity units or shares.
- Leasing activity showed positive rent spreads: 2014 new and renewed Manhattan office leases covering approximately 621,224 square feet achieved a 23.4% increase over prior fully escalated rents. The company reported 20.2% mark-to-market rent growth across the portfolio’s new, renewal and expansion leases.
- Management expects to pursue redevelopment, leasing, acquisitions and development opportunities, including the entitled Metro Tower site in Stamford. No numerical earnings or FFO guidance is provided. Distributions remain subject to board discretion, results, available cash and REIT requirements.
- Key risks include concentration in the New York metropolitan area and at three major properties; tenant and lease rollover risk; competition for office space and observatory visitors; redevelopment cost, timing and lease-up uncertainty; floating interest rates and substantial future debt maturities; and ground-lease obligations.
- The filing describes continuing disputes related to the formation transactions, including an appeal concerning a second putative class action and arbitration and related litigation brought by investors who opted out of an earlier settlement. Management states that it intends to defend the claims; outcomes and potential costs remain uncertain.
- Environmental restrictions apply at 69–97 Main Street in Westport and 500 Mamaroneck Avenue in Harrison. The company states it is not aware of environmental liabilities expected to have a material adverse effect, but remediation and redevelopment restrictions could affect financing or property value.
Important facts for investors to verify
- Compare performance on a consistent basis: 2013 includes formation transactions, a large consolidation gain and incomplete-year contributions from acquired assets.
- Track lease-up of vacant space, commencement of signed leases, 2015–2016 expirations and whether reported rent spreads translate into cash rent and NOI growth.
- Review the $75 million–$115 million redevelopment estimate, 2015 tenant-improvement commitments and funding needs against actual costs and occupancy effects.
- Confirm refinancing and repayment plans for debt maturities, especially the sizable maturities shown for 2017–2019, and monitor floating-rate exposure and facility covenants.
- Assess the progress and financial exposure from the investor litigation and arbitration, tax-protection commitments, and environmental restrictions at affected properties.