Empire State Realty Trust, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023, compared with the three months ended March 31, 2022, unless otherwise noted. Amounts are in millions except per-share data, square footage, percentages and ratios. ESRT is a REIT focused on office, retail and multifamily properties in the New York metropolitan area and operates the Empire State Building Observatory.
Financial and operating performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total revenue | $164.6 | $164.0 |
| Rental revenue | $140.1 | $147.5 |
| Observatory revenue | $22.2 | $13.2 |
| Operating income | $17.5 | $6.0 |
| Net income (loss) | $11.7 | $(17.2) |
| Net income (loss) attributable to common stockholders | $6.5 | $(11.3) |
| Diluted EPS | $0.04 | $(0.07) |
| Core FFO attributable to common stockholders and Operating Partnership | $43.0 | $49.2 |
| Net cash provided by operating activities | $86.4 | $67.7 |
Total revenue was nearly flat as stronger Observatory results largely offset lower rental revenue. Rental revenue decreased 5.0%, including a $6.4 reserve against Signature Bank straight-line rent receivables. Observatory revenue increased 67.3%; visitor count rose to 443,000 from 269,000. Operating income increased, aided in part by depreciation and amortization falling to $47.4 from $67.1. Net income also included a $15.7 gain on the sale of Westport properties. Core FFO declined approximately 12.6% year over year. The filing cautions that FFO measures are non-GAAP and do not represent operating cash flow or cash available for distributions.
Commercial portfolio occupancy was 89.4% leased, and the Manhattan office portfolio was 90.7% leased. ESRT signed 202,057 rentable square feet of new, renewal and expansion leases during the quarter. Management reported Observatory net operating income of $14.3.
Balance sheet, debt and liquidity
- At March 31, 2023, total assets were $4.16 billion and total liabilities were $2.48 billion.
- Principal indebtedness was approximately $2.26 billion; carrying value was approximately $2.24 billion. Management reported a 3.9% weighted average interest rate and 6.2-year weighted average maturity. No debt maturity was due before November 2024, excluding scheduled amortization.
- Cash and cash equivalents were $272.6 million; restricted cash was $108.2 million. The company reported $850 million of unused revolving credit capacity and no revolver borrowings.
- All stated debt covenants were in compliance. Reported ratios included 36.9% maximum total leverage against a limit below 60%, and 2.8x fixed-charge coverage against a minimum of 1.50x.
- Q1 cash used in investing activities was $2.6 million, including $41.8 million of building additions and $39.1 million of net property-sale proceeds. Cash used in financing was $17.6 million. Cash and restricted cash totaled $380.8 million at quarter end.
- Common dividends were $0.035 per share. Approximately $107.9 million of tenant improvements and leasing commissions remained expected under existing lease agreements.
Material changes, outlook and risks
- Property transactions: ESRT sold two Westport, Connecticut properties on February 1 for a $40.0 million gross asset valuation and recorded a $15.7 million gain. The transaction was related-party and approved under the company’s related-party policy. The sale of 500 Mamaroneck Avenue closed April 5, 2023, after quarter end.
- Signature Bank tenant exposure: Following the bank’s receivership, the filing said the lease assignment or assumption remained uncertain. Although rent was current through April 2023, ESRT recorded a $6.4 million reserve against its straight-line rent receivable and said it would continue to assess collectability.
- Leasing and capital needs: Approximately 10.6% of portfolio rentable area was available to lease at quarter end. Leases covering 4.6% and 6.7% of rentable area expire in 2023 and 2024, respectively. Leasing costs and tenant improvements can fluctuate with leasing activity.
- Management outlook: Management expects positive operating cash flow in the foreseeable future and expects to fund near-term needs using operating cash flow, cash on hand, debt issuance and available revolver capacity. No specific earnings or revenue guidance was provided.
- Risks: The filing highlights office demand and remote-work trends, tenant defaults and non-renewals, tourism and weather sensitivity in the Observatory business, higher borrowing costs, refinancing and property valuation risks, and the ability to fund capital needs. The five largest tenants represented 15.7% of commercial portfolio annualized rent; the largest represented 6.1%.
- Other matters: A long-running investor arbitration and related court proceedings remained pending. ESRT reported no material change to its critical accounting estimates, no off-balance-sheet arrangements and effective disclosure controls.
Important facts for investors to verify
- Whether Signature Bank’s lease is assumed, assigned or rejected, and the ultimate rent and receivable recovery.
- Underlying rental trends, leasing spreads, occupancy and costs to lease available space, beyond the reported portfolio-wide leasing percentage.
- How much of the reported earnings improvement reflects recurring operations versus the property-sale gain and lower depreciation and amortization.
- Debt refinancing terms and interest-rate exposure as maturities approach, including the effect of variable-rate debt and hedges.
- Funding and timing for the estimated $107.9 million of tenant improvements and leasing commissions, and for other planned property investment.
- Progress and outcome of the pending investor litigation and any resulting financial exposure.