Empire State Realty Trust, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. ESRT is a New York City-focused REIT with office, retail and multifamily properties, and operates the Empire State Building Observatory. Its portfolio included 9.9 million rentable square feet of office and retail space and two multifamily properties with 625 units.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $183.7 million | $165.0 million | $545.8 million | $463.8 million |
| Operating income | $35.5 million | $13.2 million | $88.1 million | $58.0 million |
| Net income (loss) | $10.1 million | $(10.2) million | $41.6 million | $(9.0) million |
| Net income (loss) attributable to common stockholders | $5.6 million | $(7.0) million | $23.8 million | $(7.5) million |
| Basic and diluted EPS | $0.03 | $(0.04) | $0.14 | $(0.04) |
| Operating cash flow | Not separately provided for the quarter | $174.0 million | $167.0 million |
- Q3 revenue rose 11.3%; operating income improved to $35.5 million from $13.2 million. Nine-month revenue increased 17.7%, and operating income rose 51.8%.
- Rental revenue increased 6.3% in Q3 and 5.8% year to date, with the acquired multifamily properties contributing to the increase. Observatory revenue increased 158.3% in Q3 and 210.0% year to date as visitation recovered.
- Q3 net operating income (NOI), a non-GAAP measure, was $97.8 million versus $93.1 million; nine-month NOI was $304.7 million versus $254.8 million. Q3 Core FFO attributable to common stockholders and the operating partnership was $56.5 million versus $55.3 million; nine-month Core FFO was $184.9 million versus $145.1 million.
- Property operating and observatory expenses rose as operating hours, payroll, utilities and other costs increased; depreciation and amortization fell in Q3, partly reflecting prior-period write-offs. Interest expense increased 8.2% in Q3 and 7.1% year to date.
- At September 30, cash and cash equivalents were $387.2 million and restricted cash was $52.6 million. Cash and restricted cash combined totaled $439.8 million, down from $474.6 million at year-end 2021.
- Debt principal was $2.298 billion, with $2.277 billion reported as net carrying value. Management reported a 3.9% weighted-average interest rate and 6.7-year weighted-average maturity. No revolving-credit borrowings were outstanding; $850 million of revolving capacity was available.
- Nine-month investing cash use was $89.1 million, including $89.1 million of additions to buildings and improvements; financing cash use was $119.7 million, including $82.5 million of share repurchases. Capital expenditures excluding tenant improvements and leasing commissions were $28.8 million, versus $15.6 million.
- Quarterly dividends were $0.035 per share, unchanged from Q3 2021; nine-month dividends were $0.105 per share versus $0.070 in 2021.
Material developments and outlook
- At quarter-end, the total commercial portfolio was 88.5% leased and the New York City office portfolio was 89.4% leased. ESRT signed 335,382 rentable square feet of new, renewal and expansion leases during Q3. Management reported approximately 1.1 million square feet available to lease; 5.5% of portfolio area was scheduled to expire in 2023.
- The Observatory hosted 687,000 visitors in Q3, compared with 255,000 a year earlier, and generated $33.1 million of revenue. Management said attendance remains dependent on domestic and international travel and may be affected by COVID-19 developments, competition, pricing, seasonality and weather.
- In April 2022, ESRT transferred 383 Main Avenue, Norwalk, to its lender through a consensual foreclosure, extinguishing a $30.0 million mortgage and recording a noncash gain of $27.2 million. The gain contributed to reported year-to-date earnings.
- After quarter-end, ESRT entered into agreements to sell 500 Mamaroneck Avenue and 10 Bank Street for a gross asset valuation of $95.0 million, with closings expected in Q1 2023 subject to customary conditions. The filing’s subsequent-events note states “None,” despite these sale agreements being described elsewhere in the filing.
- ESRT estimated $117.9 million of capital expenditures, tenant improvements and leasing commissions under existing lease agreements. Management expects to fund these with operating cash flow, cash on hand, property-level financing and/or its unsecured revolving facility.
- Management expects positive operating cash flow and identifies cash, operating cash flow, debt issuance, unused revolver capacity and asset sales as liquidity sources. No specific earnings or revenue guidance was provided.
- All reported debt covenants were in compliance at September 30, 2022. Reported covenant measures included 39.0% maximum total leverage against a limit below 60%, and 2.6x fixed-charge coverage against a minimum of 1.50x.
- ESRT uses interest-rate swaps and caps to manage rate exposure. It reported $576.3 million of derivative notional value and $18.5 million of swap fair-value assets. Variable-rate benchmark transition from LIBOR to SOFR and future borrowing costs remain relevant risks.
- A long-running arbitration-related matter remains under appeal; a motion to dismiss the appeal and judgment was pending. ESRT said it was not involved in other material litigation, apart from ordinary-course matters, and believes environmental matters are not expected to have a material impact.
Investor verification priorities
- Reconcile the post-quarter property sale agreements with the filing’s statement that there were no subsequent events; confirm closing status, proceeds and any debt or gain effects.
- Review the debt maturity schedule, refinancing needs beginning in 2024–2025, rate exposure and covenant headroom in light of interest-rate changes.
- Track leasing, occupancy, rent levels and the cost of tenant improvements and leasing commissions, including the estimated $117.9 million commitment.
- Assess the sustainability of Observatory recovery and its sensitivity to tourism, competition, seasonality and weather.
- Separate recurring performance from the $27.2 million foreclosure gain and consider that NOI and Core FFO are non-GAAP measures, not substitutes for GAAP earnings or operating cash flow.
- Monitor share repurchases, liquidity and capital returns alongside operating and leasing requirements; the repurchase program had approximately $417.5 million remaining at September 30.