Empire State Realty Trust, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. ESRT is a REIT focused on office and retail properties in Manhattan and the greater New York metropolitan area, including the Empire State Building. Its portfolio totaled 10.1 million rentable square feet.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $187.3 million | $175.8 million | $529.4 million | $498.7 million |
| Operating income | $56.8 million | $53.6 million | $144.9 million | $131.9 million |
| Net income | $35.5 million | $32.9 million | $86.0 million | $74.2 million |
| Net income attributable to common stockholders | $18.8 million | $16.0 million | $45.4 million | $34.5 million |
| Basic and diluted EPS | $0.12 | $0.12 | $0.29 | $0.27 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $173.9 million | $162.1 million |
| Capital expenditures, excluding tenant improvements and leasing commissions | Not stated for quarter | Not stated for quarter | $86.7 million | $55.0 million |
- Q3 operating margin was approximately 30.3%, versus 30.5% a year earlier; nine-month operating margin was approximately 27.4%, versus 26.4%.
- Core FFO was $77.5 million for Q3, up from $71.9 million; nine-month Core FFO was $212.0 million, up from $194.8 million. These are non-GAAP measures and are not cash flow.
- Dividends were $0.105 per share for Q3 and $0.315 per share for the nine months, versus $0.105 and $0.295 in the comparable 2016 periods.
Liquidity, debt and portfolio
- At September 30, cash and cash equivalents were $432.1 million; restricted cash was $64.0 million. The $1.1 billion revolving facility was undrawn, providing stated availability of $1.1 billion.
- Total consolidated debt was approximately $1.6 billion, with a 4.05% weighted-average interest rate and 6.2-year weighted-average maturity. Net debt to total market capitalization was approximately 15.7%. The company reported compliance with debt covenants.
- Approximately $262.2 million of debt maturities were due in 2018, excluding amortization. Management said it believed refinancing was achievable, citing liquidity and preliminary lender discussions.
- Q3 occupancy was 89.8% portfolio-wide; including signed leases not yet commenced, 91.7% was leased. Manhattan office occupancy was 89.1% and the Empire State Building was 93.3%.
- Q3 leasing included 34 leases covering 487,854 square feet, with a reported 27.7% increase in mark-to-market rent over previous fully escalated rents. Manhattan office new leases achieved a reported 46.1% increase.
Changes, outlook and risks
- Revenue increased 6.5% year over year in Q3 and 6.1% for nine months. Rental revenue rose 5.8% and 5.0%, respectively, primarily on higher rents and occupancy. Observatory revenue rose 3.2% and 3.4%, respectively.
- Common-stockholder income increased 17.7% in Q3 and 31.6% for nine months. Results included higher other revenue, notably lease-cancellation income of $1.0 million in Q3 and $9.9 million for nine months, plus tax refunds, interest income and insurance reimbursements. Q3 included a $2.2 million debt-extinguishment loss from the August credit-facility refinancing.
- Operating expenses rose 6.8% in Q3 and 4.8% for nine months, including higher property costs, observatory expenses, real estate taxes and depreciation. Interest expense declined, partly reflecting lower rates on refinanced mortgages.
- In August, ESRT amended and extended its unsecured credit facility: the $1.1 billion revolver now matures in August 2021, with two possible six-month extensions; the $265 million term loan matures in August 2022. The transaction lowered borrowing costs and increased covenant flexibility, but generated the debt-extinguishment charge.
- Management described a multi-year Empire State Building project, expecting to invest approximately $40 million to $50 million annually over three years. It also estimated approximately $78.2 million of capital expenditures under existing lease agreements, including tenant improvements and leasing commissions.
- No earnings or full-year financial guidance was provided in the filing. Management expected positive operating cash flow and planned to fund liquidity needs through operating cash, cash on hand, debt and available credit. REIT status requires annual distribution of at least 90% of REIT taxable income, subject to the stated tax rules.
- Observatory revenue increased despite visitor counts declining 4.8% in Q3 and 4.6% for nine months; management cited ticket mix and higher average ticket prices, while noting weather, tourism, seasonality and competition as drivers.
- Broadcasting operations face industry pressure. Four radio broadcasters renewed long-term agreements; Ion Television and Fox Television gave notice they would leave at year-end 2017. Preliminary renewal proposals could mean lower revenue and higher capital expenditures.
- Material risks include lease expirations, tenant defaults, vacancy and re-leasing costs, interest rates and refinancing, development and redevelopment costs, tourism and weather, environmental matters, and the pending arbitration alleging claims related to the IPO and formation transactions. ESRT said it considers the claims without merit and intends to defend them; hearings were scheduled to resume in late 2017.
Important facts for investors to verify
- How recurring rental and operating performance compares with growth supported by lease-cancellation income and other unusual revenue items.
- Whether occupancy, signed leases and mark-to-market rent translate into commenced leases, cash rent growth and sustained property margins.
- The refinancing plan and terms for the approximately $262.2 million of 2018 maturities, and continued compliance with facility covenants.
- The cost, timing and expected returns of the Empire State Building project and committed tenant improvements.
- Effects of broadcasting departures and renewals, and the eventual outcome and potential financial exposure of the arbitration.
- Cash available for dividends after capital spending and debt service; Core FFO is non-GAAP and does not represent cash available for distributions.