Empire State Realty OP, L.P. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. The partnership owns and operates office and retail properties in Manhattan and the greater New York metropolitan area, including the Empire State Building and its observatory.
Business context and comparability
Operations began after the October 7, 2013 IPO and formation transactions. Q1 2014 results include four properties and the Empire State Building observatory acquired in those transactions; Q1 2013 figures reflect the predecessor and exclude those operations from consolidated revenue and expenses. Therefore, year-over-year changes are substantially affected by the change in consolidation scope and should not be read as same-property growth.
At March 31, the 8.4 million-square-foot portfolio was 87.2% occupied and 88.8% leased including signed leases not yet commenced. Office properties were 86.8% occupied; retail properties were 92.2% occupied.
Key financial results
| 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 cash from operating activities | $23.9 million | $43.2 million |
| Net cash used in investing activities | $15.0 million | $12.8 million |
| Net cash used in financing activities | $24.9 million | Net cash provided: $23.6 million |
| FFO | $41.3 million; $0.17 per unit | $15.8 million |
| NOI | $63.1 million | $36.5 million |
Revenue increases included rental revenue of $90.2 million (up $44.9 million), observatory revenue of $17.3 million, and construction revenue of $15.0 million. The observatory’s revenue rose 3.6% from the prior-year period, while visitor count fell 6.3% to approximately 644,000. Net income and operating income also reflect the expanded consolidated portfolio. Operating cash flow fell by $19.3 million; management attributed the comparison largely to a $24.2 million additional-rent receipt by the predecessor in Q1 2013 that did not recur after the relevant acquisition.
Interest expense was $14.3 million. The filing does not provide a clear consolidated operating-margin measure as a headline metric; reported operating income was 18.2% of revenue, calculated from the reported figures. Distributions of $0.085 per unit were paid during the quarter, totaling $20.9 million.
Balance sheet, debt and liquidity
- Total assets were $2.450 billion and total liabilities were $1.456 billion at March 31, 2014.
- Cash and cash equivalents were $44.7 million; restricted cash was $54.8 million.
- Debt was approximately $1.204 billion: $878.5 million of mortgage notes and $325.0 million under the secured term loan and credit facility. Debt carrying value was $1.204 billion; estimated fair value was $1.219 billion.
- Management reported a 4.55% weighted-average interest rate, 2.9-year weighted-average maturity, and 69% fixed-rate debt. Floating-rate debt was $372.7 million. A 1 percentage-point increase in short-term rates was estimated to increase interest expense by approximately $3.7 million for the period analyzed.
- Cash plus reported availability under the secured revolving credit facility was approximately $489.0 million ($44.7 million cash and $444.3 million available). Availability was reduced by $30.7 million pending specified Empire State Building capital expenditures.
- Scheduled principal maturities included approximately $196.5 million in 2014 and $90.0 million in 2015. Management stated it expected to refinance these maturities, citing liquidity and low-leverage financing; this is an expectation, not an assurance.
Outlook, investment plans and risks
- The company expects to continue its Manhattan redevelopment and repositioning program, with an estimated $100 million to $140 million of capital still needed beyond 2013 and work at the Empire State Building expected to continue through 2016. Estimates exclude tenant improvement and leasing commission costs and may change.
- At March 31, estimated capital expenditures, including tenant improvements and leasing commissions, under existing leases were approximately $57.1 million. Separately, the company projected about $62.0 million of tenant improvements and leasing commissions related to signed leases over the following 12 months.
- Management cited leasing activity of approximately 191,000 square feet in Q1. Leases covering 4.5% of portfolio net rentable area were due to expire in 2014 and 8.5% in 2015; lease expirations, vacancy, leasing costs, and redevelopment disruption could affect results.
- Observatory revenue is seasonal and sensitive to tourism, weather, admission pricing, and competition, including planned competition at One World Trade Center. Management attributed lower Q1 attendance to the Easter calendar shift and severe weather.
- Interest-rate exposure, refinancing needs, real-estate market conditions, tenant credit and renewals, construction costs and delays, and reliance on access to capital are identified risks. The company reported compliance with secured credit facility covenants at quarter-end.
- Material litigation remains a contingency. The 2012 class-action settlement provides for $55 million, payable by the estate of Leona M. Helmsley and certain Malkin affiliates and investors—not the partnership. Appeals and separate subsequent class actions remained pending; the filing warns an adverse outcome could result in damages or equitable relief. Indemnification rights for certain individuals could also result in defense costs for the partnership or ESRT.
- The company reported no material property impairment for the quarter, no off-balance-sheet arrangements, and no material change to the risk factors in its 2013 Form 10-K. No formal earnings or operating guidance was provided.
Most important facts for investors to verify
- How much of reported revenue, profit, NOI and FFO change reflects acquired operations and accounting scope rather than comparable-property performance.
- Whether near-term mortgage maturities can be refinanced on acceptable terms and whether credit-facility availability remains sufficient after planned capital spending.
- Actual redevelopment, tenant-improvement and leasing-commission spending versus the stated estimates, and its effect on occupancy and cash flow.
- Progress on lease-up and renewals, particularly for the 2014–2015 expirations, and observatory attendance and revenue trends after the weather- and holiday-affected quarter.
- Developments in the pending litigation and any resulting indemnification, defense costs, damages or restrictions.