Empire State Realty OP, L.P. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020. The Operating Partnership owns and operates office and retail properties in Manhattan and the greater New York metropolitan area, including the Empire State Building Observatory. Its portfolio totaled 10.1 million rentable square feet.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total revenue | $145.3 million | $170.2 million |
| Operating income | $18.3 million | $27.0 million |
| Net income (loss) | $(3.2) million | $8.3 million |
| Net income (loss) attributable to common unitholders | $(4.2) million; $(0.02) per unit | $7.2 million; $0.02 per unit |
| Net cash provided by operating activities | $73.4 million | $64.8 million |
| Net cash used in investing activities | $20.8 million | $40.6 million |
| Cash and cash equivalents, period-end | $567.1 million | $1,009.0 million |
- Revenue fell 14.6% year over year. Observatory revenue declined 86.7% to $2.6 million as tourism remained disrupted; rental revenue decreased 5.3% to $140.2 million.
- Operating expenses decreased 11.4% to $127.0 million, led by lower property and Observatory costs. Real estate taxes rose 7.5%, while interest expense increased 20.1% to $23.6 million, contributing to the loss.
- Operating margin was approximately 12.6%, compared with 15.8% in Q1 2020. Same-store Property Cash NOI, excluding lease termination fees, increased 3.0%, mainly from lower property operating expenses.
- Core FFO attributable to common stockholders was $41.0 million, down from $53.7 million. NOI was $76.4 million versus $88.7 million. Both are non-GAAP measures and are not substitutes for GAAP income or operating cash flow.
- Operating cash flow increased by $8.6 million, primarily from working-capital changes. Investing outflows declined mainly because of lower capital expenditures. Financing used $13.1 million, versus $750.1 million provided in Q1 2020, when substantial debt proceeds were raised.
Debt, liquidity and capital
- At March 31, total debt principal was approximately $2.151 billion; the filing reports a weighted average interest rate of 3.9%, weighted average maturity of 7.9 years, and 94.2% fixed-rate debt. Excluding scheduled amortization, no debt maturity was due before November 2024.
- Cash of $567.1 million plus $850 million of undrawn revolving credit capacity provided reported liquidity of approximately $1.4 billion. The revolver matures in March 2025, with two conditional six-month extensions. Net debt to total market capitalization was 32.6%.
- The company reported compliance with debt covenants. Its reported covenant measures included total leverage of 40.7% against a 60% maximum and fixed-charge coverage of 2.2x against a 1.50x minimum.
- It entered into an amended credit agreement on March 31, 2021, including an $850 million revolving facility. The filing also describes LIBOR transition provisions and potential use of SOFR-based rates.
- Common-unit distributions were suspended for Q1 2021; preferred-unit distributions were $1.1 million. The company repurchased $3.5 million of common stock in Q1 and through April 27, 2021, at an average price of $9.22 per share.
Changes, outlook and risks
- COVID-19 continued to weigh on tourism, Observatory receipts, office leasing activity and retail tenants. Observatory attendance was about 9% of the comparable 2019 level; the Observatory generated $2.6 million of revenue against $4.6 million of expenses.
- Management anticipated Observatory expenses of approximately $6–7 million per quarter for the balance of 2021, depending on visitor recovery. It expected the typical international visitor mix to return only with broader international air travel, not anticipated until sometime in 2022.
- The portfolio was 88.7% leased, including signed leases not yet commenced. Management reported increased Manhattan office tour activity in March and April, but said resulting transactions might not appear until the second half of 2021. It signed 26 new, renewal and expansion leases totaling 171,817 square feet in Q1.
- Management collected 94% of Q1 billings overall (96% office, 86% retail). It recorded a $0.6 million non-cash reduction in straight-line balances and wrote off $0.5 million of tenant receivables as uncollectible.
- Management cited continued long-term demand for office space, while noting near-term uncertainty around leasing, vacancy and rental rates. Approximately $99.3 million of tenant improvements and leasing commissions were expected under existing leases.
- Observatory goodwill was $227.5 million, and its estimated fair value exceeded carrying value by less than 10%; future impairment remains possible if assumptions or conditions worsen.
- Other risks include lease defaults or non-renewals, refinancing and interest-rate exposure, LIBOR transition, real estate valuation declines, development costs and delays, and potential Local Law 97 emissions-compliance costs or penalties. A previously disclosed arbitration award of approximately $1.2 million was recorded in 2020; the company sought to vacate that portion of the award. No subsequent events were reported.
Important facts for investors to verify
- Whether Observatory attendance and revenue recover as travel restrictions ease, and whether goodwill valuation headroom remains adequate.
- Office leasing, occupancy, rent levels, tenant collections and retail tenant health, including the timing and economics of leases signed but not yet commenced.
- Cash needs for the $99.3 million of expected tenant improvements and leasing commissions, and the sustainability of liquidity and covenant headroom.
- Debt exposure and refinancing terms, including the treatment of variable-rate debt and contracts transitioning from LIBOR.
- The status and potential cost of the arbitration matter and the company’s ability to meet New York City Local Law 97 requirements.