Empire State Realty OP, L.P. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; compared with the three months ended March 31, 2022. The Operating Partnership owns and operates office, retail and multifamily properties in the New York metropolitan area, as well as the Empire State Building Observatory.
Financial performance
- Revenue: $164.6 million, up 0.4% from $164.0 million. Rental revenue declined 5.0% to $140.1 million; Observatory revenue rose 67.3% to $22.2 million.
- Profit: Net income attributable to common unitholders was $10.7 million, or $0.04 per unit, versus a loss of $18.2 million, or $0.07 per unit, a year earlier. The improvement included a $15.7 million property-sale gain and lower depreciation and amortization, partly reflecting accelerated depreciation in the prior-year quarter.
- Operating metrics: Operating income was $17.5 million versus $6.0 million. NOI, a non-GAAP measure, was $80.2 million versus $86.5 million. Core FFO attributable to common unitholders, also non-GAAP, was $43.0 million versus $49.2 million.
- Cash flow: Cash provided by operations was $86.4 million, compared with $67.7 million. Investing activities used $2.6 million versus $35.0 million, with sale proceeds offsetting property investment. Financing activities used $17.6 million, including distributions and unit repurchases.
- Liquidity: Cash and cash equivalents were $272.6 million; restricted cash was $108.2 million. The company reported $850 million available under its revolving credit facility, with no revolver borrowings.
- Debt: Consolidated indebtedness was approximately $2.3 billion, with a 3.9% weighted-average interest rate and 6.2-year weighted-average maturity. The first debt maturity, excluding scheduled amortization, was November 2024. The company reported compliance with debt covenants.
- Capital returns: Distributions were $9.7 million in the quarter; dividends per unit were $0.035. ESRT repurchased $11.6 million of its common stock during Q1 and through April 25, 2023.
Material changes and operating activity
- Observatory attendance increased to 443,000 from 269,000, and Observatory revenue rose to $22.2 million from $13.2 million. Observatory net operating income was $14.3 million.
- The commercial portfolio was 89.4% leased; the Manhattan office portfolio was 90.7% leased. The company signed 202,057 rentable square feet of new, renewal and expansion leases.
- Rental revenue fell partly because of a $6.4 million reserve against Signature Bank straight-line rent receivables. Higher property costs, real estate taxes, general and administrative expenses, and Observatory operating expenses also affected results.
- The company sold two Westport, Connecticut properties on February 1, 2023 for a gross asset valuation of $40.0 million and recorded a $15.7 million gain. It subsequently completed the sale of 500 Mamaroneck Avenue on April 5, 2023; that property had been classified as held for sale at quarter-end.
Outlook, risks and contingencies
- Management expects positive operating cash flow and anticipates funding near-term needs through operating cash flow, cash, debt issuance and available credit. No numerical earnings or revenue guidance is provided.
- Approximately $107.9 million of capital expenditures, tenant improvements and leasing commissions were expected under existing lease agreements. Management cited operating cash flow, cash on hand, property financing and the revolving facility as potential funding sources.
- Signature Bank was in receivership. At filing, it had paid rent through April 2023, but the company said the lease assignment and future performance remained uncertain; the receiver or Flagstar could assume or reject the lease under stated deadlines.
- Risks highlighted include office-space demand and remote work, tenant defaults or non-renewals, tourism and weather impacts on Observatory traffic, interest rates and refinancing, property valuations, and development and environmental risks. The five largest tenants represented 15.7% of commercial annualized rent.
- A long-running arbitration-related matter remained pending in New York State court following an April 2023 federal court ruling. The filing also notes remaining post-closing environmental remediation obligations relating to Westport retail assets.
Important facts for investors to verify
- Whether Signature Bank’s lease was assumed, rejected or otherwise resolved, and the resulting rent and receivable impact.
- Whether Observatory attendance and revenue growth persist beyond this seasonally weaker quarter.
- Leasing, occupancy and renewal trends, including the stated 2023 and 2024 lease expirations and associated annualized rent.
- Debt refinancing plans and borrowing costs ahead of the 2024 and 2025 maturities, alongside continued covenant compliance.
- Funding and timing for the estimated $107.9 million of existing lease-related capital commitments and other planned property investment.
- The ongoing effects of property dispositions, including the completed Mamaroneck sale, on cash, earnings and the portfolio.