Business Context and Reporting Period
Company: Empire State Realty Trust, Inc. (ESRT)
Filing Type: Form 8-K (Current Report)
Date of Report: July 15, 2014
Event: Completion of acquisitions of ground and operating leases for two major New York City properties: 112 West 34th Street and 1400 Broadway. The transactions were executed by ESRT's operating partnership, Empire State Realty OP, L.P. (ESRO).
Key Financial Metrics and Transaction Details
Acquisition Summary
| Property | Total Purchase Price | Price per Sq. Ft. | Cash Consideration | Debt Assumed | Equity/OP Units Issued |
|---|---|---|---|---|---|
| 112 West 34th Street | $423.6 million | $570 | $106.9 million | $87.7 million | $229.0 million |
| 1400 Broadway | $310.0 million | $346 | $79.7 million | $80.0 million | $150.3 million |
| Total | $733.6 million | N/A | $186.6 million | $167.7 million | $379.3 million |
Equity Issuance Details
Shares and units were issued at a price of $16.65 per share/unit.
- 112 West 34th Street: 1,217,685 Class A shares, 77,495 Class B shares, and 12,457,379 Series PR OP units.
- 1400 Broadway: 1,338,488 Class A shares, 32,452 Class B shares, and 7,658,516 Series PR OP units.
Pro Forma Financial Impact (Three Months Ended March 31, 2014)
Based on unaudited pro forma condensed consolidated statements of income assuming acquisitions occurred on January 1, 2013:
- Total Revenues: $157.8 million (vs. $140.3 million historical).
- Total Operating Expenses: $130.7 million (vs. $114.7 million historical).
- Net Income Attributable to ESRT: $4.2 million (vs. $4.4 million historical).
- Diluted EPS: $0.04 (vs. $0.05 historical).
Pro Forma Balance Sheet (As of March 31, 2014)
- Total Assets: $3.26 billion (vs. $2.45 billion historical).
- Total Liabilities: $1.88 billion (vs. $1.46 billion historical).
- Total Equity: $1.37 billion (vs. $0.99 billion historical).
Material Changes and Property Performance
The filing includes historical financial statements for the acquired properties for the three months ended March 31, 2014, and years ended December 31, 2011–2013.
112 West 34th Street Performance
- Revenue (3 months ended Mar 31, 2014): $6.6 million.
- Revenues in excess of certain expenses: $3.4 million.
- Lease Concentration: Three tenants comprised approximately 46% of rental revenue for the three months ended March 31, 2014.
1400 Broadway Performance
- Revenue (3 months ended Mar 31, 2014): $9.1 million.
- Revenues in excess of certain expenses: $5.1 million.
- Lease Concentration: Four tenants comprised approximately 18% of rental revenue for the three months ended March 31, 2014.
Guidance, Risks, and Contingencies
Registration Rights Agreement
ESRT entered into a registration rights agreement covering the shares and OP units issued to investors. ESRT agreed to file resale shelf registration statements no later than 12 months from the beginning of the first full calendar month following its IPO. The company must use commercially reasonable efforts to declare these statements effective within 120 days of filing.
Accounting Adjustments
The acquisition method of accounting resulted in a $15.7 million premium on the assumed mortgage debt, which will be amortized to interest expense over the remaining lives of the debt instruments. Pro forma adjustments include the elimination of supervisory and management fees and the amortization of acquired above- and below-market lease assets.
Risks and Contingencies
- Lease Commitments: Both properties are subject to non-cancellable ground leases. 112 West 34th Street's lease extends through May 31, 2077; 1400 Broadway's lease extends through December 31, 2039, with an option to extend through 2063.
- Legal: Neither property is involved in material litigation, other than routine tenant disputes.
- Related Parties: Insurance policies are purchased by an entity affiliated with ESRT Management. Supervisory fees are paid to ESRT Management.
Investor Verification Checklist
- Debt Assumption: Verify the terms and interest rates of the $167.7 million in mortgage debt assumed.
- Ground Lease Terms: Review the specific rent escalation clauses and extension options for the ground leases at 112 West 34th Street and 1400 Broadway.
- Tenant Concentration: Assess the risk associated with the top three tenants at 112 West 34th Street representing 46% of revenue.
- Registration Rights: Confirm the timeline for the filing of resale shelf registration statements to understand potential dilution from share resales.
- Pro Forma Adjustments: Review the $15.7 million debt premium amortization impact on future interest expense and net income.