Empire State Realty OP, L.P. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods. The partnership owns and operates office and retail properties in the New York metropolitan area and the Empire State Building Observatory. Its portfolio totaled 10.1 million rentable square feet.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $165.0 million | $146.6 million | $463.8 million | $457.8 million |
| Operating income | $13.2 million | $11.9 million | $58.0 million | $39.2 million |
| Net loss | $10.2 million | $12.3 million | $9.0 million | $23.6 million |
| Net loss attributable to common unitholders | $11.2 million | $13.3 million | $12.1 million | $26.7 million |
| GAAP loss per unit | $0.04 | $0.05 | $0.04 | $0.10 |
| Net operating income (NOI, non-GAAP) | $93.1 million | $72.2 million | $254.8 million | $235.9 million |
| Core FFO attributable to common stockholders (non-GAAP) | $55.3 million | $34.9 million | $145.1 million | $128.1 million |
At September 30, cash and cash equivalents were $582.2 million, with $38.8 million of restricted cash and $850 million available under the revolving facility. Total debt principal was approximately $2.15 billion; weighted-average rate was 3.9%, weighted-average maturity 7.4 years, and 94.2% of debt was fixed-rate. Net debt to total market capitalization was 34.7%. The company reported compliance with debt covenants.
For the first nine months, operating cash flow was $167.0 million, investing cash outflow $70.8 million, financing cash outflow $43.2 million, and cash plus restricted cash increased $53.0 million to $621.0 million. The filing reports same-store property cash NOI, excluding lease termination fees, declined 5.7% year over year in Q3. A GAAP operating margin calculated from reported operating income divided by revenue was approximately 8.0% for Q3 2021 and 8.6% for Q3 2020.
Changes versus prior period
- Q3 revenue rose 12.6%, mainly from Observatory revenue increasing to $12.8 million from $4.4 million and lease termination fees increasing to $11.3 million from $0.3 million. Rental revenue was nearly flat. For the nine months, revenue increased 1.3%; rental revenue fell 1.3% and Observatory revenue fell 1.2%.
- Operating income improved in both periods. Lower property, general and administrative, and Observatory costs, and no impairment charge in 2021, helped the nine-month comparison; depreciation and amortization increased to $155.3 million from $143.6 million.
- Net losses narrowed, while nine-month interest expense rose 5.5% to $70.6 million. The 2020 comparison included $6.2 million of impairment charges and $1.2 million of IPO litigation expense.
- Cash from operations increased $3.5 million year over year for the nine months; investing outflow declined with lower capital spending. Financing cash flows reflected lower distributions and repurchases in 2021, while 2020 included debt issuance and repayment activity.
Outlook, management commentary, risks and unusual items
- No quantified earnings or operating guidance is provided. Management expects positive operating cash flow and plans to fund near-term needs from operations, cash, debt issuance and available credit. It described long-term office demand positively but noted near-term uncertainty.
- Leasing activity improved: 34 new, renewal and expansion leases totaling 268,055 square feet were signed in Q3. The portfolio was 86.5% leased at quarter-end, including leases signed but not commenced. Management reported collecting 95% of Q3 billings.
- COVID-19, remote-work trends, weaker office and retail demand, vacancies, tenant defaults, tourism and international travel remain significant risks. Observatory revenue was $12.8 million in Q3; visitation continued to recover but was affected by the Delta variant and travel restrictions. Management did not expect the typical international visitor mix to return before 2022.
- Global Brands Group filed for bankruptcy and rejected two leases. The company converted its $17.0 million letter of credit to cash, recognizing $10.1 million as lease termination income and $1.7 million as rental revenue, and applying $5.2 million against a straight-line rent receivable. A $1.6 million noncash write-off was recorded for straight-line receivables. Management was discussing direct leases with subtenants.
- Observatory goodwill was $227.5 million; its estimated fair value exceeded carrying value by less than 15%, leaving impairment risk if assumptions weaken. The company reported $85.2 million of expected capital expenditures, including tenant improvements and leasing commissions, under existing leases.
- A court entered a judgment of approximately $1.2 million in an IPO-related arbitration on September 27, 2021; respondents were considering options. Separately, on October 26, the partnership signed conditional agreements to acquire two Manhattan multifamily properties with 625 units for approximately $307 million, including about $186 million of assumed debt; closing was not assured.
- The quarterly distribution was reinstated at $0.035 per unit for Q3, an annualized rate of $0.14. The board retained discretion over future distributions and repurchases. The filing also identifies LIBOR transition, interest rates, refinancing, environmental matters and REIT qualification as risks.
Important facts for investors to verify
- Whether office occupancy, rent collections and leasing improve, and how much the GBG bankruptcy affects cash rent and vacancy.
- Whether Observatory visitation and revenue recover as international travel resumes, and whether its limited goodwill valuation cushion leads to impairment.
- Debt maturities, refinancing costs, covenant headroom and the transition from LIBOR; verify the reported fixed/floating debt details against the debt footnotes.
- Funding and timing for the $85.2 million of expected lease-related costs, distributions and any repurchases.
- Whether the conditional multifamily acquisition closes, and its financing, retained ownership and expected contribution.
- Potential outcome and costs of the IPO-related judgment and any remaining related claims.