Empire State Realty OP, L.P. — Q1 2020 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2020; unaudited results. The partnership owns and operates office and retail properties in Manhattan and the greater New York metropolitan area, as well as the Empire State Building Observatory. Its portfolio comprised 10.1 million rentable square feet. ESRT is its general partner and owned approximately 59.5% of its operating partnership units.
Financial performance
Amounts below are in millions, except per-unit data. Comparisons are with Q1 2019.
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $170.2 | $167.3 | +1.8% |
| Rental revenue | $148.1 | $143.4 | +3.3% |
| Observatory revenue | $19.5 | $20.6 | -5.0% |
| Operating income | $27.0 | $26.1 | +3.4% |
| Net income | $8.3 | $9.9 | -15.9% |
| Net income attributable to common unitholders | $7.2 | $9.6 | -24.8% |
| Basic and diluted earnings per unit | $0.02 | $0.03 | Down |
| Cash from operating activities | $64.8 | $77.9 | Down $13.1 |
| Core FFO attributable to common stockholders | $53.7 | $56.7 | Down |
Operating margin was approximately 15.8%, versus 15.6%. Management-reported NOI was $88.7 million versus $85.9 million. These and FFO measures are non-GAAP metrics and are not substitutes for GAAP earnings or cash flow.
Operating cash flow declined mainly due to working-capital changes. Investing activities used $40.6 million, primarily for building improvements; financing activities provided $750.1 million, principally from new debt and the revolver draw. Distributions were $32.7 million, and dividends per unit were $0.105, unchanged year over year.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $1.009 billion; restricted cash was $36.9 million. The company reported $550 million of additional undrawn revolving capacity.
- Total debt principal was approximately $2.525 billion, up from $1.676 billion at December 31, 2019. Debt carrying value, net of financing costs, was approximately $2.511 billion. The weighted-average interest rate was 3.60%, and weighted-average maturity was 7.2 years.
- Debt included $609.9 million of mortgage principal, $973 million of senior unsecured notes, $765 million under revolving and term facilities, and $175 million of new Series G and H notes. The $550 million revolving-facility balance matures in August 2021, with two six-month extension options.
- Management reported net debt to total market capitalization of approximately 35.5%; 78% of debt was described as fixed-rate and 22% variable-rate. Interest-rate swaps fixed rates on $390 million of term loans. The swaps had a $30.4 million net liability fair value at quarter-end.
- The company reported compliance with debt covenants. Maximum leverage was 35.4% against a 60% limit; fixed-charge coverage was 3.6x against a 1.50x minimum.
- Required principal maturities include $554.1 million in 2021, largely the revolving facility, and $85.6 million in 2024. Committed tenant improvements and leasing commissions were estimated at $146.1 million.
Material changes, outlook and risks
- COVID-19 effects: The Observatory closed on March 16, 2020 under government mandates. It had approximately 422,000 Q1 visitors, down 29.8% year over year. Before closure, revenue for the first two months rose 13.2% after adjustment for the 102nd-floor deck.
- Rent collection and deferrals: As of April 30, the company had collected 72% of April rent charges (78% office and 46% retail). Applying eligible security deposits could raise total collections to 79%. Deferral requests had come from 186 tenants representing approximately 32% of annual rental revenue; three tenants, representing 8.8% of annualized rent, had documented deferral agreements.
- Leasing and occupancy: The portfolio was 88.7% occupied and 91.1% leased including signed leases not commenced. Management said pandemic uncertainty had slowed leasing and could increase vacancy, extend lease-up periods or reduce rents. In-person prospect tours had stopped by April 30.
- Operating response: Office buildings remained open for permitted essential tenants. Reduced building operations were expected to cut operating expenses by roughly 25% from 2019 levels, or $40–45 million annualized, partly offset by lower tenant recoveries. Most New York capital improvement work was paused pending lifting of restrictions.
- Observatory outlook: Management’s illustrative base case assumed reopening July 1, 2020, with admissions at 20% of 2019 levels initially, 40% through March 2021, and a gradual recovery to 100% by January 2022. Management stressed that these were its own estimates, not guaranteed results; international travel recovery was not expected until sometime in 2022.
- Other items: The company raised new debt and drew $550 million on its revolver to bolster liquidity. ESRT repurchased 6.6 million shares in March and 2.3 million in April; the filing reports approximately $83 million of aggregate repurchases through April 30. An arbitration involving former Empire State Building investors remains pending; respondents consider the claims without merit and intend to defend them. No material subsequent event was reported in the financial-statement note.
- Key risks: Pandemic duration and tenant solvency, tourism and Observatory recovery, office and retail demand, refinancing and floating-rate exposure, project delays, lease expirations, and the unresolved arbitration. The filing provides no formal earnings or distribution guidance.
Most important facts for investors to verify
- Whether rent collections, deferral agreements and tenant defaults worsened after April 30, particularly among retail tenants.
- Actual Observatory reopening timing, visitor volumes and operating costs versus management’s illustrative recovery assumptions.
- Available liquidity after revolver draws, repurchases, distributions and required tenant-improvement spending; also assess the 2021 revolver maturity and extension conditions.
- Whether leasing, occupancy, rents and renewal terms deteriorated as leases expired and the pandemic continued.
- How management’s non-GAAP NOI, FFO and Core FFO compare with GAAP earnings and cash available after capital and leasing expenditures.
- Developments in the investor arbitration and any resulting financial exposure.