Empire State Realty OP, L.P. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing, not a standalone fourth-quarter report; quarterly figures below are unaudited. The partnership owns and operates office and retail properties in Manhattan and the greater New York metropolitan area, including the Empire State Building, and runs its observatory operations. Its portfolio comprised 10.1 million rentable square feet and was 87.3% occupied (89.1% leased including signed leases not yet commenced) at year-end.
Financial performance and position
| Metric | 2015 | 2014 | Change / context |
|---|---|---|---|
| Total revenue | $657.6 million | $635.3 million | +3.5% |
| Operating income | $151.4 million | $141.3 million | +7.1%; operating margin approximately 23.0% versus 22.2% |
| Net income | $79.9 million | $70.2 million | +13.8%; net margin approximately 12.2% versus 11.1% |
| Net income attributable to common unitholders | $79.0 million | $69.7 million | +13.3%; $0.29 per unit versus $0.27 |
| FFO per diluted unit | $0.94 | $0.84 | Core FFO per diluted unit was $0.97 versus $0.89 |
| Cash from operating activities | $203.2 million | $138.6 million | Increase attributed primarily to the full-year contribution of 2014 acquisitions and free-rent periods expiring |
| Cash and cash equivalents | $46.7 million | $45.7 million | Year-end balances |
| Total debt, principal | $1.64 billion | $1.60 billion | 4.12% weighted-average interest rate; 5.4-year weighted-average maturity |
Net cash used in investing activities was $142.3 million, mainly reflecting property improvements and tenant investments; net cash used in financing activities was $59.9 million. The partnership declared and paid $0.34 per unit for 2015. It reported $760 million of available capacity on its $800 million unsecured revolving facility at year-end. Debt was 25.3% of enterprise value and net debt to EBITDA was 4.9x. Approximately 81.4% of debt was fixed-rate; $355.8 million of principal maturities were scheduled for 2017, excluding amortization.
Changes versus the prior comparable period
- Rental revenue rose 11.7% to $447.8 million, driven mainly by the two properties acquired in July 2014 and higher rental rates. Total revenue growth was moderated by the construction business winding down.
- Operating expenses increased 2.5%. Higher depreciation and amortization, real estate taxes, and property costs were partly offset by lower construction and acquisition expenses.
- Net income improved, while reported results also reflect the cessation of new construction business in 2015; construction revenue fell to $2.0 million from $38.6 million.
- Leasing activity reflected rent growth: new and renewed Manhattan office leases covering 958,704 square feet had a 43.3% increase in mark-to-market rent over previously fully escalated rents. Across the total portfolio, the reported increase was 73.7%.
- Debt financing shifted toward unsecured borrowing: the company replaced its secured credit facility with an $800 million unsecured revolver, issued $350 million of senior unsecured notes, and closed a $265 million unsecured term loan. It repaid mortgage loans on 1359 Broadway and One Grand Central Place.
Outlook, risks, contingencies and unusual items
- Capital program: Management estimated $30–$50 million of additional capital, primarily in 2016, to substantially complete Manhattan office repositioning by year-end 2016. This estimate excludes tenant improvements and leasing commissions. Existing lease commitments were expected to require about $51.2 million of tenant improvements and leasing commissions in 2016.
- Leasing and occupancy: Management expects to capture growth from below-market leases and continued repositioning, but acknowledged that construction and space aggregation may temporarily reduce occupancy. About 1.1 million square feet was vacant at year-end; 7.7% and 7.3% of portfolio space was scheduled to expire in 2016 and 2017, respectively.
- Observatory and broadcasting: Observatory revenue increased 0.6% to $112.2 million, despite visitors declining to 4.1 million from 4.3 million. Competition, tourism, weather and currency movements are risks. CBS, NBC and WNET planned to leave at lease expiry in 2017–2018; their 2015 revenue, including reimbursements, was approximately $6.3 million. Univision’s annual revenue was scheduled to reset lower in 2016.
- Concentration and property risks: Five properties generated 66.2% of rental revenue; the Empire State Building alone generated 31.4%. Three properties are subject to long-term ground leases. The portfolio is concentrated in the New York region and exposed to tenant credit, market rents, property taxes, interest rates, weather, terrorism and insurance risks.
- Legal and environmental matters: Appeals relating to the consolidation litigation remained pending, including a request for leave to appeal; arbitration hearings involving 12 investors were scheduled to begin in May 2016. Management said it could not reasonably estimate the timing, outcome or potential loss. Soil contamination at 69–97 Main Street, Westport is contained under an environmental land-use restriction that may constrain redevelopment and financing. The filing reported no known environmental liability expected to materially affect operations.
- Other notable items: Goodwill was $491.5 million, with no impairment recorded. Management ceased soliciting new construction-management business as of March 27, 2015 and completed projects in progress. The filing states management expected positive operating cash flow, but provides no formal earnings or occupancy guidance.
Important facts for investors to verify
- Whether the planned 2016 redevelopment spending and lease-up deliver the expected occupancy, rent growth and returns, after tenant improvements and leasing commissions.
- How the 2016–2018 lease expirations, major tenant retention and scheduled broadcast departures affect rental income and observatory-related property revenue.
- Refinancing plans and costs for 2017 maturities, covenant headroom, and exposure to floating rates despite hedges.
- Updates on consolidation-related litigation and arbitration, including any estimable financial exposure or indemnification obligations.
- Any changes in environmental restrictions, property insurance coverage, and the terms or economics of the three ground leases.