Business context and reporting period
Empire State Realty OP, L.P. is the operating partnership through which Empire State Realty Trust, Inc. (ESRT), a REIT, owns and operates office, retail and observatory businesses. This Form 10-K covers the fiscal year ended December 31, 2020; it is an annual report, not a standalone fourth-quarter filing. Its portfolio was concentrated in Manhattan and the greater New York metropolitan area, with 10.1 million rentable square feet across 14 office properties and six standalone retail properties. At year-end, occupancy was 85.9% and leased space, including signed leases not yet commenced, was 88.7%.
Financial and operating performance
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $609.2 million | $731.3 million |
| Operating income | $58.7 million | $154.7 million |
| Net income (loss) | $(22.9) million | $84.3 million |
| Net income (loss) per common unit | $(0.10) | $0.27 |
| Net operating income (NOI, non-GAAP) | $316.0 million | $396.1 million |
| Core FFO (non-GAAP) | $175.4 million | $267.9 million |
| Cash from operating activities | $182.3 million | $232.6 million |
| Cash and cash equivalents at year-end | $526.7 million | $233.9 million |
| Total debt, principal | $2.15 billion | $1.68 billion |
Operating margin was approximately 9.6% in 2020, compared with 21.1% in 2019; net margin was approximately (3.8)%, compared with 11.5%. These ratios are calculated from reported revenue and income.
Observatory revenue fell 77.4% to $29.1 million, from $128.8 million, following pandemic closures and weak tourism. Total rental revenue declined 4.0% to $563.1 million, reflecting uncollectible and written-off tenant receivables and lower expense reimbursements. Property operating expenses fell about $38.8 million, but real estate taxes, depreciation and amortization, and interest expense increased. The company reported a $6.2 million impairment charge for abandoned project costs, not a write-down of its real estate portfolio.
Cash provided by operating activities decreased $50.3 million. Investing activities used $143.1 million, primarily for building improvements and development costs. Financing activities provided $257.2 million, including debt issuance; the year also included $143.7 million of repurchases of common units. The filing reports $1.1 billion of undrawn revolving-credit capacity and approximately $1.6 billion of total liquidity. Debt had a 3.91% weighted-average interest rate and 8.2-year weighted-average maturity; 94.2% was fixed-rate. Excluding scheduled amortization, the company reported no debt maturities before November 2024. Consolidated net debt was 37.2% of enterprise value.
Material changes versus the prior comparable period
- Revenue declined 16.7% year over year, and net income attributable to common unitholders shifted from $82.5 million of income to a $27.1 million loss.
- Observatory attendance was approximately 507,000, versus 3.5 million in 2019. The observatory closed from March 16 to July 20, 2020; the 102nd-floor deck reopened August 24.
- Management signed 923,379 square feet of new, renewal and expansion leases during 2020. Manhattan office lease activity included 923,379 square feet, at an average annualized cash rent of $57.45 per square foot, down 6.1% from expiring rents; 2019 had a 20.4% increase.
- Year-end debt rose by about $476 million, with new term loans and a $180 million mortgage on 250 West 57th Street; the $550 million revolving-credit draw made in March was repaid in September.
- Annual distributions fell to $65.0 million from $127.8 million in 2019. The company suspended third- and fourth-quarter 2020 distributions and announced suspension for the first two quarters of 2021.
Outlook, commentary, risks and unusual items
Management expressed confidence in long-term office demand but expected a slow return to office use and leasing activity. It noted that remote work could persist and alter space needs. The company aims to lease vacant redeveloped space, pursue selective acquisitions and defer Metro Tower development until market conditions are appropriate; the filing provides no numerical earnings or revenue guidance.
- COVID-19 and leasing: Pandemic effects on tenants, rent payment, occupancy, concessions, leasing costs and office demand remain uncertain. Approximately 1.1 million square feet was vacant at year-end; leases representing 6.4% and 5.5% of portfolio square footage expire in 2021 and 2022, respectively.
- Tourism and observatory: Management did not predict when attendance would return to pre-pandemic levels and anticipated that a typical international visitor mix would depend on broader recovery in air travel. Observatory goodwill was $227.5 million; the reporting unit’s estimated fair value exceeded carrying value by less than 5%, leaving limited headroom and requiring continued monitoring.
- Liquidity and refinancing: The $1.1 billion revolving facility initially matures in August 2021, with two six-month extension options subject to conditions. Management said it had begun evaluating a recast or extension. LIBOR transition, covenant compliance and future refinancing costs are additional considerations. The company reported compliance with debt covenants at year-end.
- Costs and contingencies: Approximately $121.9 million of tenant improvements and leasing commissions remained tied to signed leases. A 2020 IPO-related litigation accrual was $1.165 million; respondents sought to vacate an arbitration award of approximately $1.2 million, and related claims could continue. Environmental restrictions at a Westport property and ground leases expiring from 2050 to 2077 also merit attention.
- Unusual items: The $6.2 million project-cost write-off comprised $4.1 million for an uneconomic energy-efficiency project and $2.1 million for a development project unlikely to proceed. The company also paid $20.3 million to terminate a $125 million interest-rate swap and recorded a $1.165 million litigation expense.
ESRT’s board said dividend payments were not then the highest and best use of the balance sheet. Distributions remain discretionary, subject to liquidity, capital needs and REIT requirements. The audited financial statements received an unqualified opinion, and the auditor also gave an unqualified opinion on internal control over financial reporting.
Important facts for investors to verify
- Updated rent collection, tenant deferrals, concessions and leasing pipeline data, including the progress of signed leases not yet commenced.
- Observatory attendance, revenue, operating costs and the assumptions and valuation cushion used in goodwill impairment testing.
- Renewal, extension or replacement terms for the August 2021 revolving credit facility, alongside debt covenants, liquidity and refinancing plans.
- Capital spending and funding needs, including the $121.9 million lease-related commitment, and the status of Metro Tower plans.
- Future distribution policy and the effect of unit and share repurchases, preferred-unit distributions and any new financing on per-unit returns.