Empire State Realty Trust, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. ESRT is a New York-area office and retail REIT with a separate Empire State Building Observatory segment. Its portfolio comprised 10.1 million rentable square feet.
Financial performance and position
- Q2 revenue: $153.4 million, up 8.8% year over year. Rental revenue was $140.8 million (+2.0%); Observatory revenue was $8.4 million versus $0.1 million during the year-ago quarter, when the attraction was closed. Lease termination fees were $3.3 million.
- Q2 earnings: Operating income was $26.5 million versus $0.3 million; net income was $4.4 million versus a $19.6 million net loss. Net income attributable to common stockholders was $2.1 million, or $0.01 per diluted share, versus a $12.8 million loss, or $0.07 per share. The calculated operating margin was approximately 17.3%, compared with 0.2%.
- First-half results: Revenue was $298.7 million, down 4.0%; net income was $1.2 million versus a $11.3 million loss, while common stockholders recorded a $0.5 million loss versus an $8.3 million loss. Operating income was $44.8 million versus $27.3 million.
- Cash flow: First-half operating cash flow was $83.7 million, investing cash outflow was $48.4 million, and financing cash outflow was $24.7 million. Cash and restricted cash totaled $578.6 million at June 30. Capital expenditures were $48.3 million in the cash flow statement.
- Debt and liquidity: Principal debt was approximately $2.15 billion, at a 3.9% weighted-average rate and 7.7-year weighted-average maturity; 94.2% was fixed-rate. There were no revolving-credit borrowings and $850 million of undrawn capacity. Net debt to total market capitalization was 31.4%. Debt covenants were met. Cash and cash equivalents were $540.6 million.
- Other operating measures: Management reported Q2 Core FFO of $48.8 million and Q2 Same-Store Property Cash NOI, excluding lease termination fees, down 6.0% year over year. These are non-GAAP measures. The portfolio was 88.2% leased, including signed leases not yet commenced.
Changes versus prior comparable periods
- Q2 revenue and earnings improved substantially, reflecting the Observatory’s reopening, higher lease termination fees, lower general and administrative expense, and no repeat of the prior-year $4.1 million impairment charge. Observatory attendance remained well below 2019 levels.
- For the first half, total revenue fell 4.0%, mainly because Observatory revenue declined 44.2% amid pandemic-related travel disruption and rental revenue declined 1.8%. Lower property and Observatory costs, general and administrative expense, and depreciation helped lift operating income.
- First-half interest expense rose 7.9% to $47.0 million, while operating cash flow increased $9.3 million to $83.7 million. Cash and restricted cash was $578.6 million, down from $931.8 million a year earlier; the comparison reflects a $550 million revolving-credit draw in March 2020 that was repaid in September 2020.
- The quarterly common dividend was reinstated at $0.035 per share for Q2 2021, after suspension for the second half of 2020 and first half of 2021.
Outlook, risks and unusual items
- Management cited a soft Greater New York office market and ongoing COVID-19 uncertainty. Leasing tour volume in Manhattan reached about 84% of pre-pandemic levels during Q2; management said resulting leases might appear in the second half of 2021. It reported signing 35 leases totaling 190,838 square feet in Q2 and collecting 95% of Q2 billings.
- The Observatory was fully reopened with interactive exhibits in June. Q2 attendance was nearly 17% of comparable 2019 attendance. Management expected Observatory expenses of approximately $6–7 million per quarter for the balance of 2021, depending on visitor recovery, and did not expect the typical international visitor mix to return until international air travel broadly resumed, potentially in 2022.
- Management estimated approximately $89.1 million of future capital expenditures, including tenant improvements and leasing commissions, under existing leases. No formal full-year financial guidance is stated in the supplied filing text.
- Observatory goodwill of $227.5 million was subject to impairment testing; estimated fair value exceeded carrying value by less than 15%, leaving valuation sensitive to assumptions and future conditions. No impairment was recorded in the first half.
- After quarter-end, a tenant, GBG USA, filed for Chapter 11 bankruptcy. Its leases covered 3.5% of portfolio area and approximately 3.6% of annualized rent; most of the space was sublet, with the tenant and subtenants liable. ESRT converted the tenant’s $17.0 million letter of credit to cash and expected a $1.6 million non-cash straight-line rent write-off in Q3.
- Other risks include tenant defaults or vacancies, tourism recovery, interest-rate and LIBOR transition exposure, refinancing and capital needs, environmental and regulatory requirements, and possible future Observatory goodwill impairment. A long-running investor arbitration resulted in an approximately $1.2 million award, which the respondents sought to vacate; related court proceedings remained pending.
Important facts for investors to verify
- How leasing, occupancy, rent collections and tenant concessions evolve, particularly for retail tenants and leases expiring in 2021–2022.
- Whether Observatory visitation and revenue recover as anticipated, and whether future impairment testing changes the reported value of Observatory goodwill.
- The financial and occupancy impact of the GBG USA bankruptcy, subtenant arrangements, letter-of-credit proceeds and expected rent-receivable write-off.
- Funding and timing for the estimated $89.1 million of lease-related costs, alongside debt maturities, interest-rate exposure and LIBOR transition plans.
- How much the reported earnings improvement reflects recurring operations versus reopening effects, lease termination fees and prior-year comparison items; assess Core FFO and NOI alongside GAAP results.