Empire State Realty Trust, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. ESRT is a REIT owning and operating office and retail properties in Manhattan and the greater New York metropolitan area, plus the Empire State Building Observatory. Its portfolio comprised 10.1 million rentable square feet. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions unless stated otherwise.
Key financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $170.2 million | $167.3 million |
| Operating income | $27.0 million | $26.1 million |
| Net income | $8.3 million | $9.9 million |
| Net income attributable to common stockholders | $4.5 million; $0.02 per share | $5.7 million; $0.03 per share |
| Operating cash flow | $64.8 million | $77.9 million |
| Net cash used in investing activities | $40.6 million | $11.2 million |
| Net cash from (used in) financing activities | $750.1 million | ($32.9 million) |
Operating margin was approximately 15.8%, compared with 15.6% in Q1 2019. Rental revenue rose 3.3% to $148.1 million, while Observatory revenue fell 5.0% to $19.5 million. Net income attributable to common stockholders declined 20.8%. Core FFO, a non-GAAP measure, was $53.7 million, down from $56.7 million; the company cautions that Core FFO is not cash flow or a measure of cash available for distributions.
At March 31, cash and cash equivalents were $1.009 billion, with restricted cash of $36.9 million. Total assets were $4.665 billion. Debt principal was approximately $2.525 billion; weighted-average interest rate was 3.60%, weighted-average maturity was 7.2 years, and 78% of debt was fixed-rate. Net debt to total market capitalization was approximately 35.5%. The company reported $550 million of undrawn revolver capacity and compliance with debt covenants. The $550 million revolver borrowing is scheduled to mature in 2021, with two six-month extension options.
Changes versus Q1 2019
- Total revenue increased 1.8%, principally due to higher rental revenue. Operating income increased 3.4% as total operating expenses rose 1.4%.
- Interest income declined to $0.6 million from $3.7 million. Interest expense fell to $19.6 million from $20.7 million, reflecting repayment of a $250 million exchangeable senior note in 2019, partly offset by March 2020 financings and revolver borrowing.
- Operating cash flow decreased $13.1 million, primarily due to working-capital changes. Financing cash flow increased substantially because of new debt and revolver proceeds.
- Q1 Observatory revenue was lower following its March 16 closure; the company reported approximately 422,000 visitors versus 601,000 a year earlier. It said revenue during the first two months of 2020 rose 13.2% after adjusting for the 102nd-floor observation deck.
- Comprehensive income attributable to common stockholders was a loss of $6.0 million, compared with income of $1.4 million, reflecting a larger unrealized loss on interest-rate swaps.
COVID-19, outlook, and material matters
- Rent and leasing: As of April 30, ESRT had collected 72% of April rent charges (78% from office tenants and 46% from retail tenants). Applying eligible security deposits could raise the collected proportion to 79%, subject to tenants restoring deposits. Rent-deferral requests had come from 186 tenants representing approximately 32% of annual rental revenue; three tenants representing 8.8% of annualized rent had documented deferral terms. The company said requests were assessed individually. It reported that COVID-19 had slowed leasing activity and could lead to higher vacancy, longer lease-up periods, and lower rents.
- Occupancy and leases: At March 31, the portfolio was 88.7% occupied and 91.1% leased including signed leases not commenced. The Manhattan office portfolio was 90.0% occupied; retail was 88.5% occupied. The filing reports 6.8% of portfolio area scheduled to expire in 2020 and 6.6% in 2021.
- Property operations: Office buildings remained open to permitted essential tenants, while some operations were scaled back. ESRT estimated these steps would reduce operating expenses by approximately 25% from 2019 levels, or $40–45 million annualized, partly offset by lower tenant expense recoveries. New York State capital work, other than essential work, was stopped under restrictions.
- Observatory: The Observatory was closed March 16. ESRT reduced its annualized operating-expense run-rate from $35 million in February to approximately $14 million, expecting to reach that level in May. Its illustrative base case assumed a July 1 reopening: admissions at 20% of 2019 levels initially, 40% from August 2020 through March 2021, and a gradual recovery to full admissions by January 2022. These are management assumptions, not formal company-wide guidance, and depend on reopening and travel conditions.
- Financing and capital: In March, ESRT issued $175 million of senior notes due 2032 and 2035, entered into new or amended credit facilities, and drew $550 million on its revolver. It reported raising $300 million in net incremental proceeds from financings, in addition to the revolver draw. Estimated capital expenditures, tenant improvements, and leasing commissions under existing leases were approximately $146.1 million.
- Share repurchases and distributions: ESRT repurchased 6.57 million shares for $62.7 million during Q1 at an average $9.54 per share. Through April 30, repurchases totaled 8.9 million shares for $83.0 million at an average $9.31 per share. The declared Q1 dividend was $0.105 per share.
- Risks and contingencies: The filing highlights uncertainty around tenant payment and lease renewals, tourism and Observatory recovery, office and retail demand, capital-market access, debt refinancing, and project delays. An arbitration brought by former Empire State Building investors remains pending; the company said it considers the claims without merit and intends to defend them. It reported no other material litigation, no off-balance-sheet arrangements, and no material change in risk factors other than COVID-19-related risks.
- Other: ESRT reported a $30.4 million interest-rate-swap liability and estimated $10.9 million of accumulated swap losses would be reclassified to interest expense within 12 months. The filing reported no subsequent events; it also disclosed that Christina Chiu was appointed CFO effective May 7, 2020.
Most important facts for investors to verify
- Subsequent-quarter rent collections, deferral agreements, tenant defaults, and actual restoration of security deposits.
- Whether occupancy, leasing spreads, expirations, and the pipeline of signed but uncommenced leases hold up amid weaker demand.
- Observatory reopening timing, visitor recovery, and actual expenses compared with management’s stated scenario.
- Available liquidity, revolver usage, covenant headroom, and refinancing plans for the 2021 maturity.
- Execution and funding of the approximately $146.1 million of estimated existing lease-related costs, alongside dividends and repurchases.
- Changes in swap fair value and resulting interest expense, as well as developments in the pending investor arbitration.