Empire State Realty OP, L.P. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparative period is Q1 2023. The Operating Partnership owns and operates ESRT’s New York-focused office, retail and multifamily properties and the Empire State Building Observatory. Its portfolio included approximately 8.6 million square feet of office space, 0.7 million square feet of retail space and 727 residential units.
Financial performance and position
| Metric | Q1 2024 | Q1 2023 / prior date |
|---|---|---|
| Total revenue | $181.2 million | $164.6 million; up 10.1% |
| Operating income / margin | $31.1 million / 17.1% | $17.5 million / 10.6% |
| Net income | $10.2 million | $11.7 million |
| Net income attributable to common unitholders | $9.2 million; $0.03 per unit | $10.7 million; $0.04 per unit |
| Core FFO attributable to common unitholders | $56.5 million | $43.0 million |
| Net operating income (NOI) | $92.9 million | $80.2 million |
| Cash from operating activities | $70.9 million | $86.4 million |
| Cash and cash equivalents | $333.6 million | $346.6 million at Dec. 31, 2023 |
| Cash plus restricted cash | $385.3 million | $406.956 million at Dec. 31, 2023 |
| Total debt, principal | $2.256 billion | $2.257 billion at Dec. 31, 2023 |
Rental revenue rose 9.8% to $153.9 million; Observatory revenue increased 11.0% to $24.6 million. Observatory visitation rose 9% to 485,000. Operating expenses increased 2.0% overall, while property operating expenses rose 7.2%. Interest expense was $25.1 million, little changed year over year. The 2023 comparison included a $15.7 million gain on property disposition, absent in 2024, helping explain why GAAP net income declined despite higher operating income and revenue. Q1 2024 also included a $0.6 million loss on early extinguishment of debt.
Cash from operations fell $15.5 million, primarily reflecting a reduction in tenant security deposits as tenants replaced cash deposits with letters of credit. Investing activities used $71.3 million, including the $14.2 million buyout of a partner’s interest in two multifamily properties and $53.0 million of building additions. Financing activities used $21.3 million. Capital distributions were $10.6 million.
At March 31, debt had a reported weighted-average interest rate of 3.97% and weighted-average maturity of 5.4 years. Cash and cash equivalents were $333.6 million, with $500 million of available capacity under the revolving credit facility. The company reported compliance with debt covenants; key ratios included maximum total leverage of 34.7% against a 60% limit and fixed-charge coverage of 3.2x against a 1.50x minimum.
Material changes and transactions
- In March, the company replaced its expiring revolving and term credit facilities with a $620 million revolving facility and a $95 million term loan, both maturing March 2029, subject to extension options. At quarter-end, $120 million was drawn on the revolver and $95 million on the new term loan.
- After quarter-end, the company agreed to issue $225 million of green senior notes, bearing rates of 7.20% to 7.41%, with maturities in 2029, 2031 and 2034. The planned June 17, 2024 sale is subject to customary closing conditions.
- In April, the company and the First Stamford Place mortgage lender agreed to structure a cooperative consensual foreclosure, anticipated by June 30, 2024. If completed, the transaction is expected to remove a $175.9 million liability that otherwise matures in July 2027.
- The company bought its partner’s 10% interests in two Manhattan multifamily properties for $14.2 million cash and assumed $18.0 million of existing debt, bringing ownership to 100%.
- Commercial portfolio occupancy was 91.1% leased and the Manhattan office portfolio 92.7% leased. The company signed 248,108 square feet of new, renewal and expansion leases.
Outlook, risks and contingencies
Management cited sustained leasing demand and Observatory performance, and described the portfolio as diversified and supported by a well-positioned balance sheet. It gave no specific earnings or operating guidance. Management also noted uncertainty around inflation, interest rates, commercial real estate lending and valuations, return-to-office trends, recession risk and geopolitical conditions. It identified tenant defaults or nonrenewals, lower rents or higher vacancies, refinancing constraints, reduced Observatory tourism, and capital-project execution as material risks.
- Existing lease agreements are expected to require approximately $125.2 million of tenant improvements and leasing commissions.
- Leases representing 6.2% and 6.5% of commercial portfolio area expire in 2024 and 2025, respectively; they represent an estimated 6.0% and 7.5% of annualized rent for those periods.
- The company expects no fines under New York City Local Law 97 for its commercial portfolio during the 2024–2029 first enforcement period, based on its current understanding and calculations.
- A court entered an approximately $1.26 million judgment in January 2024 in a long-running IPO-related arbitration matter; respondents appealed. Other routine litigation was not expected by management to materially affect results.
- Management stated that no material risk-factor changes occurred during the quarter. It also reported effective disclosure controls and no material changes to internal control over financial reporting.
Key investor verification points
- Track the First Stamford Place foreclosure process, expected completion and actual accounting treatment of the $175.9 million mortgage liability.
- Confirm closing, proceeds use and debt-cost impact of the planned $225 million senior-note issuance.
- Monitor lease expirations, occupancy, leasing costs and funding of the $125.2 million tenant-improvement and commission commitments.
- Reconcile GAAP earnings with Core FFO and NOI; these non-GAAP measures are not substitutes for net income or operating cash flow.
- Follow office-market conditions, Observatory visitor trends, interest-rate exposure and the appeal of the arbitration judgment.