Empire State Realty Trust, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing is an annual report; quarterly figures below identify the fourth quarter where useful.
Business context
ESRT is a self-managed REIT owning and operating office and retail properties concentrated in Manhattan and the greater New York metropolitan area, including the Empire State Building. At year-end, its 10.1 million rentable square feet were 88.1% occupied and 90.2% leased including signed leases not yet commenced. The Empire State Building observatory is a separately reported business segment.
Financial performance and position
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $678.0 million | $657.6 million | +3.1% |
| Operating income | $184.5 million | $151.4 million | +21.9% |
| Net income | $107.3 million | $79.9 million | +34.2% |
| Net income attributable to common stockholders | $51.5 million | $33.7 million | +52.6% |
| Basic/diluted EPS | $0.38/$0.38 | $0.30/$0.29 | — |
| Operating cash flow | $218.6 million | $203.2 million | +7.6% |
| FFO / Core FFO | $260.5 million / $269.0 million | $249.9 million / $257.7 million | +4.2% / +4.4% |
Operating margin was approximately 27.2%, up from 23.0%. FFO and Core FFO are non-GAAP measures and do not represent cash available for distributions. Capital expenditures were $80.0 million, excluding tenant improvements and leasing commissions; investing cash outflow was $181.8 million.
Fourth quarter: Revenue was $179.3 million versus $165.2 million in Q4 2015; operating income was $52.7 million versus $37.2 million; net income was $33.0 million versus $19.4 million; and net income attributable to common stockholders was $17.0 million versus $8.3 million. Basic and diluted EPS were $0.11 versus $0.07.
Debt and liquidity: Year-end debt was approximately $1.6 billion, with a 4.19% weighted-average interest rate and 4.7-year weighted-average maturity; 83.6% was fixed-rate. Cash and cash equivalents were $554.4 million, and available capacity under the unsecured revolving facility was approximately $1.1 billion. Debt maturities, excluding principal amortization, included approximately $336.0 million in 2017 and $262.2 million in 2018. The company reported compliance with its credit covenants.
Changes, outlook and notable items
- Revenue growth reflected higher rental revenue and observatory receipts. Observatory revenue increased 11.3% to $124.8 million, supported by increased visits, ticket pricing and mix; attendance was 4.25 million, up from 4.06 million.
- Operating expenses declined 2.5% overall. Lower property and observatory expenses and reduced depreciation were partly offset by a 28.9% increase in general and administrative expense, including higher compensation, equity compensation and legal costs.
- Manhattan office leases signed or renewed in 2016 showed a reported 42.2% increase in mark-to-market rent over prior rents. Management said the portfolio redevelopment and repositioning program was substantially complete as originally contemplated, while continuing to expect occupancy and rental growth as older leases expire and space is re-leased.
- The company issued 29.6 million Class A shares to Qatar Investment Authority (QIA) at $21 per share, generating approximately $621.8 million gross proceeds. QIA received a 9.9% fully diluted economic interest and has rights including potential top-up purchases and a right of first offer on certain joint ventures.
- Dividends totaled $0.40 per share in 2016, up 18% from 2015. After year-end, the board declared a $0.105-per-share first-quarter 2017 dividend. Future distributions remain subject to board discretion, operating results, liquidity and REIT requirements.
- No formal financial guidance was provided in the supplied filing text. Metro Tower, an entitled Stamford development site for an approximately 380,000-square-foot office building and garage, is to proceed when management considers market and other conditions appropriate.
Risks and contingencies
- Geographic and asset concentration is material: six properties generated 71.4% of 2016 portfolio rental revenue, and the Empire State Building alone generated 32.6%. The observatory is tourism-, weather- and competition-sensitive.
- Approximately 1.0 million square feet was vacant at year-end. Leases covering 7.0% of portfolio area expire in 2017 and 8.1% in 2018; renewal, re-leasing and redevelopment costs could affect occupancy and cash flow.
- Refinancing risk is notable given the 2017–2018 maturities. Rising rates could increase borrowing and refinancing costs, although the company reported interest-rate swaps and said it believed refinancing alternatives were available.
- An arbitration and related stayed court action by former Empire State Building investors concerning the offering and formation transactions remained pending; hearings were scheduled to continue in 2017. The respondents disputed the allegations. The filing also describes potential indemnification and defense costs.
- Environmental restrictions apply at 69–97 Main Street in Westport and 500 Mamaroneck Avenue in Harrison, potentially limiting development or affecting financing and resale. The company said it was not aware of environmental liabilities it expected to materially harm operations.
- Other disclosed risks include ground-lease obligations on three properties, REIT qualification and tax-protection obligations, tenant and market risks, terrorism/insurance exposure, and cybersecurity and labor risks.
Important facts for investors to verify
- Whether leasing and occupancy gains continue, particularly in Manhattan office space and against near-term lease expirations.
- How the 2017 and 2018 debt maturities are refinanced, and the resulting interest costs and covenant headroom.
- Whether recurring operating cash flow supports redevelopment, committed tenant improvements and distributions; distinguish GAAP earnings, FFO/Core FFO and cash flow.
- The durability of observatory revenue and the effect of broadcaster departures, renewals and changing industry conditions.
- Developments in the investor arbitration, environmental restrictions and any related costs or constraints.
- The effect of QIA’s ownership, top-up rights and potential resale registration on share count, governance and market supply.