Empire State Realty Trust, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. The company is a Manhattan and greater New York metropolitan area REIT with office, retail, construction, and Empire State Building observatory operations. It completed its IPO and formation transactions on October 7, 2013; therefore, Q1 2014 results include four properties and the observatory that were not consolidated in the predecessor’s Q1 2013 results. The reported year-over-year changes are not directly comparable.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 | |
|---|---|---|---|
| Total revenue | $140.3 million | $62.4 million | |
| Operating income | $25.6 million | $14.3 million | |
| Net income | $11.2 million | $1.9 million | |
| Net income attributable to ESRT | $4.4 million; $0.05 per basic and diluted share | No company EPS reported | |
| Operating cash flow | $23.9 million | $43.2 million | |
| Investing cash flow | $(15.0) million | $(12.8) million | |
| Financing cash flow | $(24.9) million | $23.6 million | |
| FFO | $41.3 million; $0.17 per share/OP unit | $15.8 million |
Q1 2014 revenue growth chiefly reflects the post-IPO consolidation of the four formerly non-controlled properties and observatory. Rental revenue was $90.2 million; observatory revenue was $17.3 million. Construction revenue rose to $15.0 million, largely due to the timing and volume of projects. Management reported observatory revenue up 3.6% year over year, despite visitor attendance declining 6.3% to approximately 644,000.
At March 31, 2014, total assets were $2.45 billion, total liabilities $1.46 billion, and total equity $994.5 million. Cash and cash equivalents were $44.7 million; restricted cash was $54.8 million. Debt totaled approximately $1.204 billion: $878.5 million of mortgage debt and $325.0 million under the secured term and revolving credit facility. Management reported a 4.55% weighted-average interest rate, 2.9-year weighted-average maturity, and 69% fixed-rate debt. The filing reports $444.3 million of facility availability, reduced by $30.7 million pending specified Empire State Building capital expenditures.
Operating cash flow declined by $19.3 million, principally because Q1 2013 included a $24.2 million additional-rent receipt from Empire State Building Company, which was consolidated after the 2013 formation transactions. The company paid a $0.085-per-share and OP-unit dividend for Q1; total dividends and distributions were $20.9 million.
Operating performance and changes
- At quarter-end, the 8.4-million-square-foot portfolio was 87.2% occupied and 88.8% leased including signed leases not yet commenced. Office occupancy was 86.8%; retail occupancy was 92.2%.
- Q1 leasing activity included approximately 191,000 square feet of new leases, expansions, and renewals. Approximately 0.9 million square feet was available to lease. Leases representing 4.5% of portfolio area expire in 2014 and 8.5% in 2015.
- Management attributed higher property expenses, real estate taxes, and depreciation primarily to the newly consolidated properties. Formation transaction expense fell to zero from $1.7 million. Interest expense was broadly stable at $14.3 million.
- NOI, a company-defined non-GAAP measure, was $63.1 million versus $36.5 million; the different consolidation perimeter limits comparability. The filing also cautions that NOI and FFO are not substitutes for GAAP results or cash flow.
Outlook, risks, and notable items
- No specific earnings or revenue guidance was provided. Management expects positive operating cash flow and says it expects to refinance the approximately $196.5 million of 2014 and $90.0 million of 2015 debt maturities, citing liquidity and low-leverage financing on those maturities.
- Management estimates $100 million to $140 million of additional capital beyond 2013 to substantially complete the Manhattan office redevelopment and repositioning program, expected to continue through 2016. It also estimated $57.1 million of capital expenditures, including tenant improvements and leasing commissions, under existing leases, and approximately $62.0 million of lease-related costs over the following 12 months. Estimates may change.
- Interest-rate exposure is material: 31% of debt was floating rate. The filing estimates interest expense would have increased approximately $3.7 million for the period if short-term rates had been 1 percentage point higher. Facility covenants may limit distributions; the company reported compliance at quarter-end.
- Occupancy and rent growth depend on leasing, market conditions, and redevelopment execution. Risks include lease nonrenewals, tenant credit deterioration, construction delays or cost overruns, higher costs, competition, weather and tourism effects on observatory activity, and refinancing availability. Observatory revenue is seasonal; the first quarter typically contributes 16%–18% of annual revenue.
- Related-party options to acquire long-term leasehold interests in 1400 Broadway and/or 112 West 34th Street were subject to appraisal and a decision process, with independent-director oversight. The filing does not state that either option was exercised.
- Litigation relating to the formation transactions remained a risk. An appeals court affirmed a key ruling in February 2014, but further appeal activity and separate putative class actions were pending. The company stated that an adverse outcome could materially affect it. The earlier $55 million settlement was payable by other parties, not ESRT.
- Asbestos-containing materials were identified at certain properties. Management had no removal plans triggering abatement obligations and said the timing and fair value of any conditional removal obligation could not be reasonably estimated. Management considered other identified environmental remediation complete, subject to ongoing requirements.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material risk-factor changes from its 2013 Form 10-K.
Most important facts for investors to verify
- How much of reported revenue, NOI, and FFO growth reflects the change in consolidation perimeter rather than underlying same-property performance.
- Upcoming 2014–2015 debt maturities, actual refinancing progress, facility availability after restrictions, and compliance with debt covenants.
- Lease-up and renewal results, tenant improvement and leasing costs, and progress and total spending on the redevelopment program.
- Whether the option-property appraisal and any acquisition proceed, including price, funding, and independent-director approval.
- Developments and potential exposure in the formation-related appeals and separate class actions, as well as any asbestos or other environmental obligations.