Business context and reporting period
Empire State Realty OP, L.P. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. The REIT operating partnership owns and operates a 10.0 million-square-foot office and retail portfolio concentrated in Manhattan, including the Empire State Building, and operates its observatories. Comparisons below are with the corresponding 2014 periods.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $164.8 million, up 6.2% | $316.7 million, up 7.2% |
| Operating income | $45.0 million, up 5.9% | $68.8 million, up 3.3% |
| Net income | $26.6 million, up 5.2% | $34.5 million, down 5.6% |
| Net income attributable to common unitholders | $26.4 million; $0.10 per unit | $34.0 million; $0.13 per unit |
| Operating margin | 27.3%, versus 27.4% | 21.7%, versus 22.6% |
| Core FFO per diluted unit | $0.26, versus $0.23 | $0.45, versus $0.40 |
Core FFO is a non-GAAP measure and is not cash flow available for distributions. Six-month net cash provided by operating activities was $77.1 million, versus $46.1 million. Investing activities used $63.1 million and financing activities used $25.5 million; cash and cash equivalents fell $11.5 million to $34.2 million. Distributions paid to equity holders were $45.9 million for the six months.
At June 30, 2015, total assets were $3.29 billion and total capital was $1.37 billion. Debt principal was approximately $1.63 billion; management reported a 4.04% weighted-average interest rate, 5.4-year weighted-average maturity, and debt equal to approximately 26% of total market capitalization. Cash was $34.2 million and unused capacity under the $800 million unsecured revolver was $515 million. The filing reports covenant compliance. The company had no debt maturities in 2015 or 2016; significant maturities include 2017, 2018 and 2019.
Material changes versus the prior comparable period
- Revenue growth was led by rental revenue, up 22.4% in Q2 and 22.2% for the six months, largely reflecting the July 2014 acquisitions of 112 West 34th Street and 1400 Broadway, as well as higher occupancy and rents.
- Higher depreciation and amortization, real estate taxes, ground rent and interest expense offset revenue growth. Six-month common-unit income fell 6.9%, while Core FFO per unit increased.
- Construction revenue declined sharply as the construction-management business wound down; the company stopped soliciting new business in March 2015 and completed existing projects.
- The company replaced its secured revolving and term facility with an unsecured revolver in January 2015 and issued $350 million of senior unsecured notes in March. It repaid the former $470 million term/credit balance and certain mortgages, while drawing $285 million on the new revolver.
Outlook, commentary, risks and contingencies
Management expects positive operating cash flow and plans to fund operating needs, distributions, leasing costs and redevelopment through operating cash, borrowings and other financing sources. It estimated $55 million to $85 million of additional Manhattan redevelopment capital beyond June 30, 2015, with substantial completion targeted by the end of 2016. Approximately $64.5 million of lease-related capital expenditures, including tenant improvements and leasing commissions, was expected over the following 12 months. Estimates are subject to change; no formal earnings guidance was provided.
At quarter-end, the total portfolio was 88.0% occupied and 90.0% leased including signed leases not commenced. Q2 leasing included 254,360 square feet across the portfolio, with reported mark-to-market rent increases of 46.0% on new, renewal and expansion leases. Observatory revenue rose 0.7% in Q2 despite fewer visitors, which management attributed to higher admission prices; bad weather reduced attendance. Management noted competition from other observatories and potential pressure on broadcasting revenue as licenses and leases expire between 2016 and 2023.
Risks include office and retail demand, vacancies and lease renewals, tenant credit, redevelopment costs and timing, interest-rate exposure, refinancing and leverage, tourism and weather, ground leases, environmental matters, and litigation. A 1-percentage-point increase in short-term rates would have increased six-month interest expense by an estimated $1.4 million. The original consolidation class-action settlement is final and is not payable by the partnership. A separate appeal and an arbitration brought by investors who opted out remain unresolved; the filing notes possible adverse financial or equitable consequences and indemnification obligations for certain individuals. Management states that it cannot reasonably estimate certain asbestos-related retirement obligations. It also estimates $64.5 million of lease-related capital commitments.
Most important facts for investors to verify
- Whether leasing, occupancy and rent growth persist as acquired properties are integrated and upcoming leases expire.
- Actual cash requirements and funding for the redevelopment program and signed-lease commitments, including use of the revolver.
- Debt maturities, floating-rate exposure, covenant headroom and refinancing conditions, particularly around 2017–2019.
- Progress and outcomes of the pending appeal and arbitration, including any potential indemnification exposure.
- Observatory attendance and revenue trends, and renewal economics for broadcasting licenses and leases.
- Reconciliation of non-GAAP Core FFO with GAAP results and cash available for distributions.