Empire State Realty OP, L.P. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are to Q1 2021 unless otherwise noted. The partnership owns and operates office, retail, multifamily and Empire State Building observatory assets in the New York metropolitan area, totaling 10.1 million rentable square feet.
Financial and operating performance
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Total revenue | $164.0 million | $145.3 million; up 12.9% |
| Rental revenue | $147.5 million | $140.2 million; up 5.2% |
| Observatory revenue | $13.2 million | $2.6 million; up 408.7% |
| Operating income | $6.0 million | $18.3 million |
| Net loss | $17.2 million | $3.2 million |
| Net loss attributable to common unitholders | $18.2 million; loss of $0.07 per unit | $4.2 million; loss of $0.02 per unit |
| Net operating income (NOI), non-GAAP | $86.5 million | $76.4 million |
| Core FFO, non-GAAP | $49.2 million | $41.0 million |
| Net cash from operating activities | $67.7 million | $73.4 million |
| Cash and cash equivalents | $429.7 million | $423.7 million at year-end 2021 |
Operating expenses rose to $158.0 million from $127.0 million. Depreciation and amortization increased to $67.1 million from $44.5 million, reflecting accelerated depreciation at a property following a Q4 2021 impairment charge and depreciation on recently acquired multifamily properties. Higher property and observatory operating costs also weighed on operating income. The filing reports a $0.035 per-unit distribution for Q1 2022, versus none in Q1 2021.
Debt, liquidity and capital
- Total consolidated indebtedness was approximately $2.3 billion, with a 3.9% weighted-average interest rate and 7.2-year weighted-average maturity. No debt maturity was scheduled before November 2024, excluding principal amortization.
- The partnership had $850 million of unused revolving-credit capacity and reported $429.7 million of cash and cash equivalents. Net debt to total market capitalization was 40.0%.
- All reported debt covenants were in compliance at quarter-end. Covenant measures included 38.9% maximum total leverage against a 60% limit and 2.8x fixed-charge coverage against a 1.50x minimum.
- Operating activities provided $67.7 million; investing activities used $35.0 million, primarily for building improvements; financing activities used $24.7 million, including unit repurchases and distributions. Cash and restricted cash totaled $482.7 million at quarter-end.
- Estimated future capital expenditures under existing leases, including tenant improvements and leasing commissions, were approximately $102.9 million.
Changes, outlook and risks
- Portfolio occupancy was 87.0% leased; the New York City office portfolio was 88.6% leased. The partnership signed 318,646 rentable square feet of new, renewal and expansion leases.
- The observatory hosted 269,000 visitors, versus 51,000 a year earlier. Management said the recovery remains tied to domestic and international tourism and COVID-19 developments. Observatory NOI was $7.0 million.
- Management expects positive operating cash flows in the foreseeable future and anticipates meeting short-term needs through operating cash flow, cash, debt issuance and available credit. It expects to make distributions as required for REIT purposes. No numerical earnings or occupancy guidance was provided.
- Key stated risks include office demand and hybrid work, lease defaults or non-renewals, tourism and observatory competition, interest-rate changes and LIBOR transition, refinancing and covenant capacity, property valuations and impairment, development execution, environmental matters and climate risks.
- Observatory goodwill was $227.5 million; its estimated fair value exceeded carrying value by less than 15%, leaving impairment sensitive to changes in assumptions. A $30 million mortgage on 383 Main Avenue was discharged after the property was transferred to the lender in April 2022.
- An appeal is pending concerning a court judgment of approximately $1.2 million in a long-running dispute involving former Empire State Building investors. The filing says the district judge will decide whether to adopt a recommendation rejecting certain related claims.
Important facts for investors to verify
- Whether leasing, occupancy and office rent trends continue to improve, including the timing and economics of lease commencements and renewals.
- Whether observatory visitation and revenue recover alongside tourism, and how seasonal patterns affect results.
- The causes and sustainability of higher depreciation, property costs and interest expense, and their impact on GAAP earnings versus NOI and Core FFO.
- Debt maturity and refinancing plans, exposure to variable rates and LIBOR transition, and continued covenant compliance.
- Funding for the estimated $102.9 million of lease-related capital commitments, distributions and repurchases.
- Developments in the 383 Main Avenue loan/property transfer, the investor litigation and the observatory goodwill impairment assessment.