Empire State Realty Trust, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparative period is Q1 2020. ESRT is a self-managed REIT focused on office and retail properties in Manhattan and the greater New York metropolitan area, with the Empire State Building Observatory as a separate business segment. Its portfolio comprised 10.1 million rentable square feet.
Financial and operating metrics
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total revenue | $145.3 million | $170.2 million |
| Net income (loss) | $(3.2) million | $8.3 million |
| Net income (loss) attributable to common stockholders | $(2.6) million; $(0.02) per share | $4.5 million; $0.02 per share |
| Net cash provided by operating activities | $73.4 million | $64.8 million |
| Net operating income (NOI; non-GAAP) | $76.4 million | $88.7 million |
| Core FFO (non-GAAP) | $41.0 million | $53.7 million |
At March 31, 2021, cash and cash equivalents were $567.1 million, with a further $850 million available under the undrawn revolving credit facility. Total debt principal was approximately $2.15 billion (carrying value $2.14 billion); weighted-average interest rate was 3.9%, weighted-average maturity 7.9 years, and 94.2% of debt was fixed-rate. Net debt to total market capitalization was 32.6%. ESRT reported compliance with its debt covenants. No debt maturity was scheduled before November 2024, excluding principal amortization.
Material changes versus Q1 2020
- Revenue decreased 14.6%, mainly because Observatory revenue fell 86.7% to $2.6 million amid pandemic-related travel restrictions; rental revenue declined 5.3% to $140.2 million.
- Operating expenses decreased 11.4% to $127.0 million, including lower property and Observatory expenses. Real estate taxes rose 7.5%, and interest expense increased 20.1% to $23.6 million, which ESRT attributed to higher debt levels.
- Operating income declined 32.0% to $18.3 million, and the company moved from net income to a net loss. Management cited tenant receivable and straight-line rent write-offs and lower tenant reimbursements as factors in lower rental revenue.
- Cash from operations rose $8.6 million, primarily due to working-capital changes. Investing cash outflow narrowed to $20.8 million, largely reflecting lower capital expenditures.
- Same-Store Property Cash NOI, excluding lease termination fees, increased 3.0%, primarily due to lower property operating expenses, partly offset by lower revenue.
Outlook, management commentary, and risks
- Management reported 88.7% leased occupancy, including signed leases not yet commenced; 5.9% of portfolio area was subject to leases expiring in 2021 and 5.5% in 2022. ESRT signed 26 new, renewal, and expansion leases totaling 171,817 square feet and collected 94% of Q1 billings (96% office; 86% retail).
- Management observed increased office tour activity in March and April, reaching about two-thirds of pre-pandemic levels, but said resulting transactions would likely appear in the second half of 2021. It continued to express long-term confidence in office demand while warning that near-term leasing could be slower, vacancies higher, and rents lower.
- The Observatory had approximately 51,000 visitors, about 9% of comparable Q1 2019 attendance. Management expected the typical international visitor mix to take until broad resumption of international air travel, anticipated sometime in 2022. It estimated Observatory expenses of $6–7 million per quarter for the remainder of 2021, depending on visitor recovery.
- ESRT suspended common dividends for Q1 and Q2 2021, citing balance-sheet flexibility and its capital allocation review; the board would continue reviewing dividend policy. It repurchased $3.5 million of common stock in Q1 and through April 27, 2021, at an average price of $9.22 per share.
- Existing lease agreements were expected to require approximately $99.3 million in tenant improvements and leasing commissions. The company expected to fund these with operating cash flow, cash, property financing, and borrowings.
- Observatory goodwill of $227.5 million had estimated fair value less than 10% above carrying value after impairment testing. Future assumptions could change and lead to impairment. Other risks include COVID-19 effects on leasing and tourism, tenant defaults or non-renewals, real estate valuation changes, debt refinancing and interest-rate exposure, and Local Law 97 emissions limits and potential penalties.
- A 2014 arbitration matter resulted in an approximately $1.2 million award against certain respondents, which they sought to vacate; related court claims remained subject to a district judge’s decision. Management described other litigation as routine and not expected to materially affect the company.
Guidance: The filing provides Observatory expense expectations but no company-wide earnings or revenue guidance. Subsequent events: none reported.
Most important facts for investors to verify
- Whether office leasing, occupancy, tenant collections, and rent levels recover as pandemic restrictions ease, and how upcoming lease expirations affect revenue.
- Observatory attendance and revenue recovery, particularly the timing of tourism normalization, and whether reduced carrying-value headroom results in a goodwill impairment.
- Liquidity after funding the estimated $99.3 million of tenant improvements and leasing commissions, and continued covenant compliance and access to the revolving facility.
- The duration of the dividend suspension and the balance between dividends, share repurchases, capital spending, and debt management.
- Exposure to Local Law 97 compliance costs and penalties, LIBOR transition effects, and outcomes of the arbitration and related court proceedings.
- Interpretation of non-GAAP NOI and Core FFO alongside GAAP results; neither measure represents cash available for distributions.