Empire State Realty Trust, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a standalone fourth-quarter filing; quarterly results are also summarized below. Amounts are in U.S. dollars.
Business context
ESRT is a self-managed REIT focused on office and retail properties in Manhattan and the greater New York metropolitan area. Its two reportable segments are real estate and the Empire State Building observatories. At year-end, the portfolio comprised 10.1 million rentable square feet across 14 office properties and six standalone retail properties; occupancy was 88.6%, or 91.2% leased including signed leases not yet commenced. The company also owns entitled land for a proposed 415,000-square-foot office tower in Stamford, Connecticut.
Financial results and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $731.3 million | $731.5 million | Approximately flat |
| Operating income | $154.7 million | $190.9 million | Down 18.9% |
| Operating margin | 21.2% | 26.1% | Down 4.9 percentage points |
| Net income | $84.3 million | $117.3 million | Down 28.1% |
| Net income attributable to common stockholders | $49.4 million | $65.6 million | Down 24.6% |
| Diluted earnings per share | $0.28 | $0.39 | Down $0.11 |
| FFO / Core FFO | $260.1 million / $267.9 million | $282.6 million / $290.4 million | Both down about 8% |
| Net cash from operating activities | $232.6 million | $279.0 million | Down $46.4 million |
| Capital expenditures, excluding tenant improvements and leasing commissions | $138.6 million | $135.0 million | Up $3.5 million |
Total revenue was nearly unchanged, but operating costs increased 6.7% and operating income declined. The year-over-year revenue comparison is affected by adoption of lease-accounting Topic 842: 2019 tenant expense reimbursements are included in rental revenue, whereas 2018 presents them separately. Lease termination fees fell to $4.4 million from $20.8 million. General and administrative expense rose 15.9%, including higher equity compensation, leasing costs expensed under the new standard, and preferred-unit exchange-offer costs. Real estate taxes, property operating expenses, and depreciation also increased.
Fourth quarter: Revenue was $194.9 million versus $199.3 million in Q4 2018; operating income was $47.1 million versus $58.5 million; net income attributable to common stockholders was $16.8 million versus $22.8 million; and basic and diluted EPS was $0.09 versus $0.13.
Balance sheet, debt and liquidity
- Year-end total assets were $3.93 billion and debt carrying value was $1.67 billion; debt principal was approximately $1.68 billion. Total equity was $1.95 billion.
- Debt had a 4.03% weighted-average interest rate and 8.3-year weighted-average maturity; management reported all outstanding debt as fixed-rate after swaps. Consolidated net debt was 25.2% of enterprise value/market capitalization, as described in the filing.
- Cash and cash equivalents were $233.9 million; restricted cash was $37.7 million. Short-term investments were zero at year-end. Approximately $1.1 billion of revolving credit capacity was available.
- No principal maturities were scheduled in 2020 or 2021, excluding amortization; $265 million of term-loan principal matures in 2022. The company repaid $250 million of exchangeable senior notes in August 2019. Mortgage debt was $605.5 million net, with its first stated maturity in 2024.
- Operating cash flow covered neither all reported building additions ($250.3 million) nor total distributions and investment needs on its own; the company also used cash, investment maturities, and financing sources. These amounts are not a company-reported free-cash-flow measure.
- Annual dividends were $0.42 per share, unchanged from 2018. 2019 dividends were classified for tax purposes as 31.4% taxable ordinary dividends eligible for the Section 199A deduction and 68.6% return of capital.
Material changes, outlook and risks
- Leasing activity was positive: ESRT signed 1.3 million square feet of leases across the portfolio, with an 18.1% mark-to-market cash-rent increase on new, renewal, and expansion leases. Manhattan office leases signed during 2019 showed a 26.4% increase over prior fully escalated cash rents.
- Management expects to re-lease approximately 558,000 square feet of Manhattan office space expiring in 2020, which it generally considers below market. It also expects to spend about $40 million through 2020 on common areas and amenities; approximately $29 million had been spent by year-end 2019. No formal earnings or FFO guidance is provided.
- The Empire State Building observatory renovation was completed in 2019, with total project spending of $155.4 million. Observatory revenue declined 1.9% to $128.8 million and NOI declined 3.5% to $95.0 million. Attendance fell 7.9% to 3.505 million; the 102nd-floor observatory was closed for about nine months and reopened October 12, 2019.
- Risks include geographic concentration in New York, softness in the greater New York office market, tenant and retail-sector stress, competition from new observatories, lease expirations and vacancy, redevelopment costs, and exposure to tourism and weather. The filing specifically flags the novel coronavirus as a potential risk to observatory demand.
- Six properties generated 73.1% of portfolio rental revenue in 2019; the Empire State Building alone contributed 32.9%. The five largest tenants represented 17.1% of annualized rent. The company also disclosed environmental restrictions affecting properties in Westport and Harrison, New York, and a pending arbitration alleging claims related to the 2013 offering and formation transactions; management disputes the allegations.
- ESRT reported compliance with debt covenants, effective disclosure controls and internal control over financial reporting, and unqualified audit opinions. Goodwill was $491.5 million, including $227.5 million assigned to the observatory reporting unit; no impairment was recorded, and goodwill valuation was identified as a critical audit matter.
Important facts for investors to verify
- Confirm the underlying year-over-year rental performance, accounting-presentation effects from Topic 842, and how much revenue growth reflects recurring rent versus termination fees and other items.
- Track occupancy, signed-but-not-commenced leases, rent spreads, leasing costs, and the 2020–2021 lease-expiration exposure.
- Review observatory attendance, pricing, operating costs, and competitive openings, especially given tourism-related risks noted in the filing.
- Assess capital needs and funding for tenant improvements, leasing commissions, redevelopment, and the proposed Metro Tower, alongside debt maturities and available revolver capacity.
- Evaluate concentration in key properties and tenants, the environmental restrictions and arbitration disclosures, and the sensitivity of goodwill to observatory performance.
- Interpret FFO and Core FFO as supplemental non-GAAP measures, not substitutes for GAAP earnings or operating cash flow; the filing cautions that these measures do not represent cash available for distributions.