Empire State Realty Trust, Inc. — Q1 2022 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2022, ESRT operated a New York metropolitan-area portfolio of office, retail and multifamily properties, as well as the Empire State Building Observatory. The portfolio comprised 10.1 million rentable square feet and two multifamily properties with 625 units. ESRT is a REIT and owned 60.3% of its operating partnership at quarter-end.
Financial and operating performance
- Total revenue was $164.0 million, up 12.9% from $145.3 million. Rental revenue rose 5.2% to $147.5 million; Observatory revenue increased to $13.2 million from $2.6 million.
- Operating expenses increased 24.4% to $158.0 million. Operating income fell to $6.0 million from $18.3 million; operating margin was approximately 3.7%, versus 12.6% in Q1 2021.
- Net loss was $17.2 million, compared with $3.2 million; net loss attributable to common stockholders was $11.3 million, or $0.07 per basic and diluted share, versus $2.6 million, or $0.02 per share. Core FFO, a non-GAAP measure, was $49.2 million versus $41.0 million.
- Net cash provided by operating activities was $67.7 million, down from $73.4 million. Investing activities used $35.0 million, primarily for building improvements; financing activities used $24.7 million. Cash, cash equivalents and restricted cash totaled $482.7 million at quarter-end.
- Total debt principal was $2.332 billion, with a weighted-average interest rate of 3.9% and weighted-average maturity of 7.2 years. Net debt to total market capitalization was 40.0%. The $850 million revolving facility was undrawn; the company reported compliance with debt covenants. No debt maturity, excluding amortization, was due before November 2024.
- Total assets were $4.243 billion and total liabilities were $2.581 billion. Common dividends were $0.035 per share; the company paid $5.9 million in common dividends and $3.8 million in distributions to operating partnership holders.
- Occupancy/leasing indicators: the total portfolio was 87.0% leased and the New York City office portfolio 88.6% leased. ESRT signed 318,646 rentable square feet of new, renewal and expansion leases.
Material changes versus Q1 2021
- Observatory revenue rose substantially as visitation recovered: 269,000 visitors versus 51,000. Observatory expenses also increased, to $6.2 million from $4.6 million.
- Higher property operating expenses reflected payroll, utilities, repairs, cleaning and costs from recently acquired multifamily properties. Depreciation and amortization rose to $67.1 million from $44.5 million, including accelerated depreciation at a property following a Q4 2021 impairment charge and depreciation from the multifamily acquisitions.
- Revenue growth did not translate into higher operating income: the increase in expenses, especially depreciation and amortization, more than offset revenue gains. Interest expense rose to $25.0 million from $23.6 million.
- Operating cash flow decreased by $5.7 million, while investing cash outflow increased by $14.2 million. The filing attributes lower cash balances year over year mainly to the late-2021 property acquisition, higher capital spending, share repurchases and dividends.
Outlook, risks and unusual items
- Management anticipated positive operating cash flow and expected to meet near-term liquidity needs through operating cash, cash on hand, debt issuance and available revolver capacity. The filing provides no specific earnings or revenue guidance.
- Existing lease obligations were expected to require approximately $102.9 million of tenant improvements and leasing commissions. Management expected to fund these costs with operating cash flow, cash, mortgage financing and revolver borrowings.
- Management cited continued uncertainty from COVID-19, hybrid work and office demand, tourism and Observatory visitation, tenant defaults or vacancies, interest rates and LIBOR transition, refinancing, property valuations, development execution, environmental matters and legal proceedings.
- Observatory goodwill was $227.5 million; its estimated fair value exceeded carrying value by less than 15%, leaving impairment dependent on assumptions that may change. Management said it would continue to assess impairment.
- In April 2022, ownership of 383 Main Avenue was transferred to the lender and $30 million of associated mortgage debt was discharged. The company reported a pending appeal relating to an approximately $1.2 million arbitration award in a long-running dispute concerning its formation transactions; related claims remain in litigation.
- The company repurchased $12.0 million of common shares in Q1 and reported $23.3 million of repurchases in Q1 through April 21. A $500 million authorization runs through December 31, 2023; it does not require the company to repurchase shares.
Key facts investors should verify
- Whether occupancy, leasing volumes and rents continue to improve, and how much space expiring in 2022–2023 is renewed or re-leased.
- Whether Observatory visitation and revenue recover sustainably, given tourism, seasonality and competition risks.
- How operating costs, depreciation and impairment assumptions affect GAAP earnings versus Core FFO and NOI; these supplemental measures are not substitutes for GAAP results or cash flow.
- Funding and timing for the $102.9 million of lease-related costs, capital spending and debt maturities, and the effect of interest rates and LIBOR transition.
- Developments in the 383 Main Avenue transfer, the arbitration appeal and related claims, and the Observatory goodwill impairment assessment.