Empire State Realty Trust, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing is an annual report, not a standalone fourth-quarter report; selected Q4 figures are noted below. The company is a REIT focused on office and retail properties in Manhattan and the greater New York metropolitan area, with observatory operations at the Empire State Building.
Business context and operating performance
- At year-end, the portfolio comprised 10.1 million rentable square feet and was 85.9% occupied, or 88.7% leased including signed leases not yet commenced. Annualized rent was $542.7 million.
- The portfolio included 14 office properties and six standalone retail properties. The company also owns an entitled Stamford site for a potential approximately 0.4 million-square-foot office tower and garage.
- COVID-19 caused the Empire State Building observatory to close from March 16 through July 20, 2020; the 102nd-floor deck reopened August 24. Visitors fell 85.6% to 507,000, and observatory revenue declined 77.4% to $29.1 million.
Financial results and liquidity
| Metric | FY 2020 | FY 2019 | Change |
|---|---|---|---|
| Total revenue | $609.2 million | $731.3 million | Down 16.7% |
| Operating income | $58.7 million | $154.7 million | Down 62.1% |
| Net income (loss) attributable to common stockholders | $(16.7) million | $49.4 million | Turned to a loss |
| Net cash from operating activities | $182.3 million | $232.6 million | Down $50.3 million |
| Net operating income (NOI; non-GAAP) | $316.0 million | $396.1 million | Down 20.2% |
| FFO attributable to common stockholders and non-controlling interests (non-GAAP) | $162.5 million | $260.1 million | Down 37.5% |
| Core FFO (non-GAAP) | $175.4 million | $267.9 million | Down 34.5% |
Rental revenue decreased 4.0% to $563.1 million; observatory revenue was the largest driver of the overall decline. Property operating expenses fell $38.8 million, but real estate taxes and depreciation and amortization increased. The filing does not provide a single reported operating margin; operating income was approximately 9.6% of revenue in 2020 versus 21.1% in 2019.
- Cash and liquidity: Cash and cash equivalents were $526.7 million at year-end; an additional $1.1 billion was available under the revolving credit facility. The company reported approximately $1.6 billion of total liquidity.
- Debt: Year-end principal debt was approximately $2.152 billion ($2.137 billion net of deferred financing costs). Weighted-average interest rate was 3.91%, weighted-average maturity 8.2 years, and 94.2% of indebtedness was fixed rate. Net debt to enterprise value was 37.2%.
- Maturities and covenants: Excluding principal amortization, no debt maturity was due before November 2024. The $1.1 billion revolver’s initial maturity was August 2021, with two six-month extension options subject to conditions; management was evaluating a recast or extension. The company reported compliance with debt covenants at year-end.
- Cash uses: Investing activities used $143.1 million, including $143.1 million of additions to buildings, improvements and development costs. The company repurchased 17.3 million shares during 2020 for $143.7 million, at an average $8.32 per share.
Material changes versus the prior comparable period
- Revenue fell $122.1 million year over year, primarily due to the observatory shutdown and lower tenant reimbursements and rental revenue. Observatory revenue declined by $99.7 million.
- Operating income fell $96.0 million and common-stockholder results shifted from $49.4 million of income to a $16.7 million loss. Core FFO declined to $175.4 million from $267.9 million.
- Operating cash flow decreased to $182.3 million from $232.6 million. Debt increased from $1.669 billion to $2.137 billion net, reflecting new financing; the company also ended the year with substantially higher cash.
- Manhattan office new and renewal leases covered 923,379 square feet. Average annualized cash rent was $57.45 per square foot versus $61.18 on the previous leases, a 6.1% negative mark-to-market, compared with positive mark-to-market in 2019.
- Dividends were paid at $0.105 per share in each of the first two quarters, or $0.21 for the year. The company suspended third- and fourth-quarter 2020 dividends and announced suspension for the first two quarters of 2021.
Outlook, risks, contingencies and unusual items
- Management cited continued uncertainty around the pandemic, reduced leasing activity and delayed office reoccupation, while expressing a belief in long-term office demand. It expected international tourism recovery to depend on broad resumption of air travel, which it did not expect until sometime in 2022. The filing provides no numerical earnings or revenue guidance.
- Management reduced operating costs, including a $39 million year-over-year reduction in property operating expenses, and curtailed capital spending during government restrictions. It reported approximately $4 million of annualized permanent property-cost reductions.
- Vacant space was approximately 1.1 million square feet at year-end, excluding signed leases not commenced. Leases covering 6.4% of portfolio area were scheduled to expire in 2021 and 5.5% in 2022. Existing signed leases carried approximately $121.9 million of future tenant improvement and leasing commission commitments.
- COVID-19 creates risks to tenant rent payment, occupancy, rents, leasing costs, asset values, cash flow and distributions. Other significant exposures include concentration in the New York metropolitan area, potential lasting shifts to remote work, retail tenant stress, observatory tourism dependence, and the upcoming revolving-facility maturity.
- Goodwill totaled $491.5 million, including $227.5 million allocated to the observatory. The observatory reporting unit’s estimated fair value exceeded carrying value by less than 5%; management reported no goodwill impairment but will continue testing. The company recorded $6.2 million of write-offs for a halted development project and an uneconomic energy-efficiency project.
- An arbitration panel awarded former investors approximately $1.2 million, including interest, in IPO-related litigation; the company recorded $1.165 million of expense and sought to vacate the award. The filing describes further related claims as possible and considered them meritless. It reported no other material litigation as of year-end.
- Environmental restrictions apply at two properties, including soil contamination restrictions at 69–97 Main Street in Westport. The company says it is not aware of environmental liabilities expected to materially affect operations, but acknowledges possible financing, redevelopment or resale impacts.
Important facts for investors to verify
- Progress and terms of the revolving credit facility recast or extension, including continued covenant compliance and available borrowing capacity.
- Rent collections, tenant concessions, leasing and occupancy trends, particularly 2021 expirations and the negative 2020 Manhattan office leasing spread.
- Observatory visitor recovery, revenue, operating costs and assumptions underlying the observatory goodwill valuation.
- Cash available after committed tenant improvements, capital spending and debt service, and the board’s timing and rationale for restoring dividends.
- Resolution of the IPO-related litigation, environmental restrictions, and any changes to the company’s debt, repurchase activity or other material commitments.
FFO, Core FFO and NOI are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow. The company’s financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of December 31, 2020.