Empire State Realty Trust, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. ESRT is a REIT focused on office and retail properties in Manhattan and the greater New York metropolitan area, with a separate Empire State Building observatory segment. Its portfolio comprised 10.0 million rentable square feet.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $164.8 million | $155.2 million | $316.7 million | $295.5 million |
| Operating income | $45.0 million | $42.5 million | $68.8 million | $66.6 million |
| Net income | $26.6 million | $25.3 million | $34.5 million | $36.5 million |
| Net income attributable to common stockholders | $11.1 million | $9.8 million | $14.3 million | $14.2 million |
| Diluted EPS | $0.10 | $0.10 | $0.13 | $0.15 |
| Core FFO per diluted share | $0.26 | $0.23 | $0.45 | $0.40 |
- Q2 revenue rose 6.2%; rental revenue grew 22.4%, principally reflecting the July 2014 acquisitions of 112 West 34th Street and 1400 Broadway, alongside higher occupancy and rents. Q2 operating income increased 5.9%.
- For the first half, revenue grew 7.2%, but net income declined 5.6%; higher depreciation and interest expense contributed. Common-stockholder net income was nearly unchanged year over year.
- Six-month operating cash flow was $77.1 million, versus $46.1 million; investing cash use was $63.1 million and financing cash use was $25.5 million. Cash and cash equivalents ended at $34.2 million, down from $45.7 million at year-end 2014. Restricted cash was a separate $69.7 million.
- At June 30, total debt principal was approximately $1.63 billion; weighted average interest rate was 4.04% and weighted average maturity 5.4 years. Debt to total market capitalization was approximately 26%. No debt matured in 2015 or 2016.
- The company had $515 million available under its $800 million unsecured revolver, with $285 million drawn. It reported compliance with facility covenants. The facility bears floating rates; a 1 percentage-point rate increase would have added approximately $1.4 million to first-half interest expense, based on period balances.
- The quarterly dividend was $0.085 per share, unchanged from the prior-year quarter; first-half dividends were $0.17 per share.
Operating changes and outlook
- At quarter-end, the total portfolio was 88.0% occupied and 90.0% leased including signed leases not yet commenced. Manhattan office occupancy was 86.2% (88.4% leased including signed leases); retail occupancy was 92.3% (94.1% leased including signed leases).
- ESRT signed 79 leases covering 254,360 square feet in Q2, reporting a 46.0% mark-to-market rent increase over previous fully escalated rents. Manhattan office new leases covered 121,145 square feet and had a reported 49.4% mark-to-market increase.
- Observatory revenue increased 0.7% to $30.6 million in Q2, despite visitor counts falling to approximately 1.165 million from 1.222 million; management cited higher admission prices and more bad-weather days. Observatory activity is seasonal, with the third quarter typically the strongest.
- Construction operations were being wound down: ESRT stopped soliciting new business in March 2015 and completed projects in progress. This sharply reduced construction revenue and expense compared with 2014; first-half 2015 construction expense included $0.9 million of severance.
- Management estimated $55–$85 million of remaining capital to substantially complete its Manhattan redevelopment and repositioning program, expected by the end of 2016. Separately, approximately $64.5 million of capital commitments under signed leases were expected over the following 12 months. These estimates are subject to change and exclude certain tenant improvement and leasing costs from the redevelopment estimate.
- Management expected positive operating cash flow and anticipated meeting near-term needs through operating cash flow, debt issuance and revolver capacity; long-term needs may also be funded with mortgage financing, equity issuance or asset sales. No earnings or FFO guidance was provided.
Risks, contingencies and notable items
- Several disputes relating to the company’s formation and consolidation transactions remained in process. The original $55 million class-action settlement was final and non-appealable, and ESRT stated it would not bear that settlement payment. A separate class-action appeal and an arbitration brought by investors who opted out remained pending; the company noted potential adverse effects and indemnification obligations for certain executives.
- Interest-rate exposure is primarily associated with the floating-rate revolver. Other key risks cited include leasing demand and renewals, tenant defaults, property taxes and operating costs, redevelopment timing and cost overruns, tourism and weather, competition for observatory and broadcast activity, and access to capital.
- Asbestos-containing materials were identified at certain properties; management had no plans that would trigger removal requirements and could not reasonably estimate a related conditional retirement obligation. Management stated environmental remediation matters were not expected to have a material impact, while noting that not all potential liabilities may be identified.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the period. No subsequent events were reported.
Important facts for investors to verify
- Whether leasing momentum, reported rent mark-ups and signed-but-not-commenced leases translate into occupied space, collected rent and durable same-property growth.
- How the $64.5 million of signed-lease commitments and $55–$85 million redevelopment estimate evolve, and their effect on liquidity and borrowing needs.
- Debt balances, revolver utilization, covenant headroom and refinancing exposure, particularly the 2017–2019 maturities and floating-rate sensitivity.
- Progress and potential financial exposure from the pending appeal and arbitration, including the scope of company indemnification obligations.
- Observatory visitor trends, weather impacts, pricing, and potential renewal economics for broadcasting licenses and leases expiring from 2016 to 2023.
- Core FFO is a non-GAAP supplemental measure, not operating cash flow or cash available for distributions; compare it with GAAP results and capital and leasing costs.