Business context and reporting period
Empire State Realty OP, L.P. (the operating partnership through which Empire State Realty Trust, Inc. conducts its business) filed this Form 10-K for the fiscal year ended December 31, 2021. It owns and operates office, retail, multifamily and Empire State Building observatory assets concentrated in Manhattan and the greater New York metropolitan area. The office and retail portfolio totaled 10.1 million rentable square feet and was 82.4% occupied, or 85.7% leased including signed leases not yet commenced. The partnership acquired a 90% interest in two Manhattan multifamily properties with 625 units in December 2021.
Financial and operating performance
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total revenue | $624.1 million | $609.2 million | +2.4% |
| Rental revenue | $559.7 million | $563.1 million | -0.6% |
| Observatory revenue | $41.5 million | $29.1 million | +42.7% |
| Operating income | $79.1 million | $58.7 million | +34.9% |
| Net loss | $13.0 million | $22.9 million | Loss narrowed |
| Net loss attributable to common unitholders | $17.2 million | $27.1 million | Loss narrowed |
| Net cash provided by operating activities | $212.5 million | $182.3 million | +$30.2 million |
| Net operating income (NOI, non-GAAP) | $343.4 million | $316.0 million | +8.7% |
| Core FFO (non-GAAP) | $194.9 million | $175.4 million | +11.1% |
Operating margin was approximately 12.7% of revenue, compared with 9.6% in 2020. Net loss per unit was $0.06, versus $0.10. NOI and Core FFO are supplemental non-GAAP measures, not substitutes for GAAP earnings or cash flow.
At year-end, cash and cash equivalents were $423.7 million, restricted cash was $50.9 million, and the $850 million revolving credit facility was undrawn. Total debt principal was approximately $2.334 billion; the reported carrying value, net of financing costs and discount, was $2.310 billion. Weighted-average interest rate was 3.89%, weighted-average maturity was 7.5 years, and net debt to total market capitalization was 42.4%. Management reported compliance with applicable debt covenants. Maturities include $88.1 million in 2024 and $323.5 million in 2025, including scheduled amortization.
Material changes versus the prior comparable period
- Revenue rose despite slightly lower rental revenue, primarily as observatory activity recovered from pandemic closures and lease termination fees increased to $16.2 million from $9.4 million.
- Observatory revenue remained far below 2019’s $128.8 million. Visitor attendance was approximately 827,000 in 2021, versus 507,000 in 2020 and 3.5 million in 2019.
- Operating expenses decreased 1.0%, while depreciation and amortization increased 5.7% and interest expense increased 5.0%. Higher depreciation included tenant-improvement write-offs associated with GBG USA.
- Operating cash flow increased to $212.5 million. Cash and restricted cash together fell to $474.6 million from $567.9 million, primarily reflecting the property acquisition, partly offset by lower capital spending, distributions and unit repurchases.
- The partnership purchased two multifamily properties for a transaction value of $307 million, including $186 million of assumed debt. The acquired properties were 96.4% occupied at year-end.
- Manhattan office leasing activity improved in the second half of 2021. Across the portfolio, 129 leases totaling approximately 1.0 million square feet were signed; Manhattan office new and renewal leasing mark-to-market was -0.8% for the year.
Outlook, management commentary, risks and unusual items
- Outlook: The filing provides no specific quantified earnings or revenue guidance. Management expects positive operating cash flow in the foreseeable future and plans to fund operating needs, debt service and capital spending through operating cash flow, cash, borrowing capacity and other financing sources. It intends to pursue acquisitions selectively and develop the approved Metro Tower site when market and other conditions are appropriate.
- COVID-19 recovery: Management cited increased leasing tours and observatory visitation, but office utilization and tourism remained affected by hybrid work and travel restrictions. The return of international visitors—and observatory revenue to pre-pandemic levels—was uncertain.
- Leasing and capital needs: Approximately 1.4 million square feet was available to lease, excluding signed leases not commenced. Leases covering 5.7% and 6.3% of portfolio area expire in 2022 and 2023, respectively. The company estimated $109.6 million of tenant improvements and leasing commissions under signed leases.
- Tenant bankruptcy: GBG USA filed for Chapter 11 in July 2021 and rejected its leases. The company converted its $17.0 million letter of credit to cash, applying amounts to straight-line rent receivables and recognizing $10.1 million as lease termination income; a $1.6 million non-cash write-off was also recorded.
- Default and impairment: The company suspended debt service on its $30 million mortgage secured by 383 Main Avenue in Norwalk in November 2021, was in default at year-end, and intends to transfer the property to the lender. It recorded a $7.7 million impairment charge. This was the disclosed exception to management’s statement that it was otherwise not in default on loan agreements.
- Goodwill: Observatory goodwill was $227.5 million, and its estimated reporting-unit fair value exceeded carrying value by less than 15%. Valuation depends on uncertain revenue and cost forecasts and other assumptions; further impairment remains possible.
- Distributions and capital allocation: Quarterly distributions were reinstated in 2021 at $0.035 per unit for the second through fourth quarters, an annualized rate of $0.14. The company repurchased approximately 4.9 million units in 2021 for an average $9.56 each and authorized a new $500 million repurchase program for 2022–2023. Future distributions remain discretionary.
- Other risks: The portfolio’s geographic concentration, office demand shifts, tenant defaults, competition, ground leases, refinancing and interest-rate exposure, environmental conditions, and REIT qualification are significant risks. Management expects no Local Law 97 fines for its buildings in the 2024–2030 first enforcement period based on its current calculations; this is an expectation, not a guarantee.
- Contingencies: Former Empire State Building investors’ claims resulted in a judgment of approximately $1.2 million, which defendants appealed. The filing also discusses environmental restrictions at properties in Westport and Harrison, and tax-protection obligations that may constrain certain property sales or debt changes.
Important facts for investors to verify
- Review the Norwalk mortgage default, intended lender transfer, impairment assumptions and any subsequent developments.
- Assess the pace of office leasing and occupancy recovery, lease expirations, signed leases not yet commenced, and tenant-improvement and leasing-commission requirements.
- Track observatory attendance and revenue against the pre-pandemic baseline, and monitor the sensitivity of the $227.5 million observatory goodwill balance to valuation assumptions.
- Confirm debt maturities, covenant headroom, liquidity after the multifamily acquisition, and the effects of LIBOR transition and interest-rate changes.
- Evaluate whether distributions and unit repurchases are supported by recurring cash generation, noting that Core FFO is non-GAAP and does not represent cash available for distributions.
- Monitor the GBG USA lease outcome, environmental restrictions, pending litigation appeal, and potential tax-protection obligations.