Empire State Realty Trust, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Dollar amounts below are in millions unless otherwise noted. ESRT is a REIT focused on office and retail properties in Manhattan and the greater New York metropolitan area; its portfolio included 10.1 million rentable square feet and the Empire State Building Observatory.
Financial highlights
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $141.0 | $176.2 | $311.3 | $343.5 |
| Operating income | $0.3 | $36.2 | $27.3 | $62.3 |
| Net income (loss) | $(19.6) | $18.9 | $(11.3) | $28.8 |
| Net income (loss) attributable to common stockholders | $(12.8) | $11.1 | $(8.3) | $16.8 |
| Basic and diluted EPS | $(0.07) | $0.06 | $(0.05) | $0.09 |
| Operating cash flow | Not separately reported for the quarter | $74.4 | $89.3 |
- Revenue and operations: Q2 revenue fell 20.0%, mainly because the Observatory was closed from March 16 through the end of the quarter; Observatory revenue was $0.1 million versus $32.9 million. Rental revenue declined 2.2% in Q2, with the filing citing write-offs of straight-line rent and reserves for uncollectible tenant receivables.
- Costs and earnings: Q2 property operating and Observatory expenses declined with reduced operations, but operating income nearly disappeared. Interest expense increased to $23.9 million from $20.6 million, reflecting March financings and revolving-credit borrowings. Q2 included a $4.1 million write-off of costs for an energy-efficiency project deemed uneconomic.
- Cash flow: Six-month operating cash flow was $74.4 million, down from $89.3 million. Investing activities used $79.7 million; financing activities provided $665.5 million, principally from new debt and revolver draws. Cash and restricted cash ended June at $931.8 million.
- Liquidity and debt: Cash and cash equivalents were $873.0 million, with $550 million available on the revolver, for reported total liquidity of approximately $1.4 billion. Debt principal was $2.524 billion; weighted-average interest rate was 3.41%, weighted-average maturity 6.9 years, and 73.3% of debt was fixed-rate. Net debt to total market capitalization was 43.7%. The $550 million revolver matures in August 2021, with two six-month extension options subject to conditions. ESRT reported compliance with debt covenants at quarter-end.
- Distributions and repurchases: The quarterly dividend was $0.105 per share, unchanged year over year. ESRT repurchased $114.6 million of common shares during the first half; it reported $119 million repurchased through July 31.
Material changes and management commentary
- The pandemic drove a steep reduction in tourism-related revenue and disrupted leasing. The Observatory reopened July 20, 2020 with reduced capacity and operating hours. Management expected recovery to depend on visitor and international travel trends, and did not expect a typical international visitor mix until broad resumption of international air travel, anticipated sometime in 2022.
- Management reported 89.6% portfolio leased at June 30, including 3.4% of space with leases expiring in 2020 and 6.6% in 2021. It expected lower leasing volume in the second half of 2020. Q2 collections were reported at 84% of total billings; July collections were 91% through July 31. Retail collections lagged office collections.
- Management highlighted Q2 Core FFO of $39.5 million and $0.14 per diluted share after a $0.03-per-share reserve against tenant receivables and non-cash straight-line rent reductions. Core FFO is a non-GAAP measure and is not cash flow available for distributions. Same-store cash NOI excluding lease termination fees increased 18.0%; excluding COVID-related rent deferrals, it increased 9.9%, primarily due to lower property operating expenses.
- Management cited expense reductions, including $12 million of one-time property operating expense savings planned for the second half of 2020, $4 million in annualized permanent reductions, and $24 million lower planned 2020 building-improvement spending versus 2019. Approximately $132.3 million of tenant improvements and leasing commissions remained expected under existing leases.
- The Observatory goodwill impairment test found fair value exceeded carrying value by less than 5%; no goodwill impairment was recorded. Management said estimates could change and planned continued monitoring.
- COVID-19 risks include tenant defaults or requests for rent relief, reduced office and retail demand, weaker rents and occupancy, delayed capital projects, tourism weakness, financing and refinancing risk, and possible pressure on cash flows and dividends. The filing provides no formal earnings or revenue guidance.
- A previously disclosed arbitration by former Empire State Building investors remained pending; ESRT said it believed the claims were without merit and intended to defend them. The filing reported no other material litigation apart from ordinary-course matters.
Important facts for investors to verify
- Subsequent rent collections, tenant deferrals and defaults, especially the comparatively weaker retail collections, and the effect on receivables and rental revenue.
- Leasing, occupancy, rent levels and upcoming 2020–2021 expirations as the New York office and retail markets respond to the pandemic.
- Observatory attendance, capacity limits, revenue recovery and the assumptions supporting its narrow goodwill valuation cushion.
- Liquidity and refinancing plans for the $550 million revolver due in 2021, alongside floating-rate debt exposure and covenant headroom.
- Whether planned cost savings and reduced capital spending are achieved, and how the $132.3 million of existing lease-related commitments are funded.
- Dividend sustainability in light of operating cash flow, required REIT distributions, debt service and continuing pandemic uncertainty.