Empire State Realty OP, L.P. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; balance-sheet comparisons are against December 31, 2022. Amounts below are in U.S. dollars. The partnership owns and operates a New York City-focused portfolio of office, retail and multifamily properties, as well as the Empire State Building Observatory.
Business context and operating performance
- At quarter-end, the portfolio included approximately 8.6 million rentable square feet of office space, 0.7 million square feet of retail space and 727 residential units. Commercial occupancy was 90.5% leased; the Manhattan office portfolio was 91.9% leased.
- During Q3, the company signed 248,479 square feet of new, renewal and expansion leases. Approximately 0.9 million square feet was available to lease at September 30.
- The Observatory hosted 743,000 visitors, versus 687,000 in Q3 2022. Management notes that Observatory results are seasonal and depend on tourism, weather, pricing and competition.
Financial results and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $191.5 million | $183.7 million | $546.7 million | $545.8 million |
| Operating income | $42.3 million | $35.5 million | $105.9 million | $88.1 million |
| Net income | $19.9 million | $10.1 million | $68.6 million | $41.6 million |
| Net income attributable to common unitholders | $18.8 million | $9.1 million | $65.4 million | $38.7 million |
| Basic and diluted earnings per unit | $0.07 | $0.03 | $0.25 | $0.14 |
| Net cash provided by operating activities | — | — | $196.0 million | $174.0 million |
- Q3 revenue rose 4.3%; operating income margin was approximately 22.1%, compared with 19.3% a year earlier. Nine-month revenue was nearly flat, while operating income increased about 20.3%.
- Q3 rental revenue increased 2.1%, and Observatory revenue rose 13.6%. For the first nine months, Observatory revenue increased 26.5%; rental revenue increased 0.2%.
- Nine-month net income included $29.3 million of gains on property dispositions. The comparable 2022 period included $27.2 million of disposition gains and $20.0 million of lease termination fees.
- Q3 Core FFO attributable to common unitholders was $65.9 million, up from $56.5 million. Nine-month Core FFO was $178.1 million, down from $184.9 million. Core FFO and NOI are non-GAAP measures and are not substitutes for GAAP income or cash flow.
- At September 30, cash and cash equivalents were $354.0 million and restricted cash was $67.0 million. The company reported $850 million of available capacity under its revolving credit facility, with no revolver borrowings.
- Total debt principal was approximately $2.259 billion; the balance sheet reported debt, net, of $2.242 billion. Management reported a 3.9% weighted-average interest rate and 5.7-year weighted-average maturity. Excluding scheduled amortization, the next debt maturity was November 2024. The company reported compliance with its debt covenants.
- Cash and restricted cash increased by $106.3 million during the first nine months, to $421.0 million. Investing activities used $39.4 million; financing activities used $50.4 million. Distributions were $30.8 million for the period, and dividends per unit were $0.035 for Q3.
Material changes and notable transactions
- Increased Observatory visitation and revenue per visitor supported revenue and earnings growth. Management attributed higher Observatory costs to longer operating hours and associated labor, marketing and maintenance costs.
- Real estate operating costs increased year over year, including property operations, payroll and real estate taxes. Higher interest income partly reflected higher rates on cash balances.
- The company sold Westport retail properties for $40.0 million in February and 500 Mamaroneck Avenue for $53.0 million in April. It acquired a fully leased Williamsburg, Brooklyn retail property with three retail tenants and six residential units for $26.4 million in September, using a 1031 exchange.
- Capital expenditures, excluding tenant improvements and leasing commissions, were $38.7 million in the first nine months, versus $28.8 million in 2022. Estimated remaining costs under existing leases for tenant improvements and leasing commissions were approximately $139.3 million.
Outlook, risks and contingencies
- No numerical earnings or revenue guidance is provided. Management reported sustained property demand and solid leasing and Observatory performance, while describing the outlook as subject to uncertainty.
- Management cited inflation, higher interest rates, reduced commercial real estate lending, refinancing challenges, office utilization and return-to-office trends, possible recession and geopolitical risks. Other identified risks include tenant defaults or nonrenewals, tourism declines, property-value impairment, refinancing availability, environmental obligations and execution of capital projects.
- Management expects to fund operating needs and capital requirements through operating cash flow, cash on hand, debt and available credit capacity, with potential use of mortgage financing, equity issuance and asset sales for longer-term needs. REIT distribution requirements and debt service constrain capital allocation.
- Approximately $1.2 million was awarded to former investors in an arbitration matter. A state-court ruling confirmed the award; the respondents’ appeal is pending, as is a separate claimant’s petition. The company states that it believes the challenged claims are without merit.
- The gain on the 500 Mamaroneck sale included estimated post-closing soil-remediation and rent-delay obligations. The filing states that an additional rent-delay reimbursement exposure could reach $3.6 million, subject to amounts held in escrow.
- Management reported no material litigation other than the matters described, no material changes to risk factors, no off-balance-sheet arrangements and effective disclosure controls.
Important facts for investors to verify
- Lease expirations, leasing spreads, occupancy and the cost and timing of tenant improvements and leasing commissions, particularly against the $139.3 million estimated commitment.
- Debt refinancing and interest-rate exposure, including the 2024–2027 maturities and the effectiveness and duration of interest-rate hedges.
- Whether Observatory visitation and revenue per visitor remain strong given tourism seasonality, weather and competition.
- Outcomes and potential costs of the arbitration appeal and environmental or post-closing obligations related to disposed properties.
- How reported GAAP earnings compare with NOI and Core FFO, and how much of period-to-period earnings reflects property operations versus asset-sale gains and prior-period lease termination fees.