Empire State Realty Trust, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; filed May 5, 2016. ESRT is a self-managed REIT focused on office and retail properties in Manhattan and the greater New York metropolitan area. Its 10.1 million rentable-square-foot portfolio includes the Empire State Building and its observatory business.
Financial and operating performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $157.1 million | $151.9 million | +3.4% |
| Operating income | $34.1 million | $23.8 million | +43.6% |
| Net income | $16.7 million | $7.9 million | +111.8% |
| Net income attributable to common stockholders | $7.4 million; $0.06 per share | $3.1 million; $0.03 per share | +136.7% |
| Net cash from operating activities | $59.5 million | $47.4 million | +$12.1 million |
| Core FFO per diluted share and OP unit | $0.22 | $0.20 | +10% |
| Dividend per share | $0.085 | $0.085 | No change |
Operating margin was approximately 21.7%, compared with 15.6% a year earlier; net margin was approximately 10.6%, versus 5.2%. These are calculated from reported revenue and income. Core FFO is a non-GAAP measure and the filing cautions that it is not cash flow or a measure of cash available for distributions.
Revenue growth reflected higher rental revenue (+4.4%) and observatory revenue (+16.2%). Observatory revenue was $21.2 million; visitor count rose to approximately 719,000 from 622,000. Property operating expenses declined 7.0%, but general and administrative expense rose 20.0% and interest expense rose 11.9%. Construction revenue and expense were nil after the company ceased soliciting new construction-management business in 2015.
Balance sheet, debt and liquidity
- Total assets were $3.26 billion at March 31, 2016, versus $3.30 billion at December 31, 2015. Cash and cash equivalents were $44.4 million; restricted cash was $60.2 million.
- Total debt principal was approximately $1.627 billion, with a weighted average interest rate of 4.14% and weighted average maturity of 5.4 years. Debt to total market capitalization was approximately 26%.
- The $800 million unsecured revolver had no borrowings outstanding, leaving $800 million available, subject to facility terms. The company reported compliance with applicable debt covenants.
- There was no debt maturity in 2016 other than scheduled amortization; approximately $336 million of principal maturities were due in 2017. The company refinanced the 10 Union Square East mortgage with a $50 million, 10-year loan at 3.7%, down from 6.0%, and applied approximately $29.8 million of net proceeds to reduce credit-facility borrowings.
- Operating cash flow was $59.5 million; investing activities used $24.1 million and financing activities used $37.7 million. Cash declined $2.2 million during the quarter. Cash dividends and distributions to securityholders totaled approximately $22.9 million.
- Expected capital expenditures and leasing commitments under signed leases were approximately $59.5 million, including tenant improvements and leasing commissions; management expected to fund these with operating cash flow and financing sources.
Material changes, outlook and risks
- At quarter-end, the total portfolio was 88.2% occupied and 89.8% leased including signed leases not yet commenced. Manhattan office occupancy was 86.4%; the retail portfolio was 91.4% occupied. ESB occupancy was 89.2%.
- ESRT signed 47 leases covering 255,723 square feet, reporting a 42.9% increase in mark-to-market rent over prior fully escalated rents. For Manhattan office leases, it reported a 50.9% mark-to-market increase on 15 new leases.
- Management said its Manhattan redevelopment and repositioning program was substantially complete as originally contemplated and expected it to support higher occupancy and rents over time. It cautioned that repositioning can temporarily reduce occupancy. No formal earnings guidance was provided.
- Observatory results benefited from visitor growth, favorable weather, ticket mix and Easter’s timing. Management notes tourism seasonality, weather, competition and visitor levels can affect future results.
- Broadcasting faces industry changes, a new competitor at One World Trade Center and potential spectrum-auction effects. CBS, NBC and WNET had notified ESRT they would leave at lease expiration in 2017 or 2018; their leases generated approximately $6.3 million of 2015 revenue including reimbursements. Univision’s annual revenue reset to an initial $1.9 million from January 2016, subject to escalations.
- Interest-rate swaps with $465 million aggregate notional value had a $21.3 million net liability at quarter-end. A $19.4 million unrealized loss was recorded in other comprehensive loss, not current-period net income. Management estimated a 1% increase in short-term rates would raise interest expense by approximately $2.7 million based on variable-rate debt balances.
- Former-investor litigation and arbitration remain risks. A motion for leave to appeal in the Second Class Actions was pending, and arbitration hearings for 12 investors were scheduled to begin May 24, 2016. The company said it could not reasonably estimate potential loss or timing; a successful claim could materially adversely affect it. Management also disclosed indemnification obligations that may expose the company to defense costs or claims.
- Other disclosed risks include lease expirations and tenant defaults, refinancing and capital availability, redevelopment costs, ground-lease obligations, environmental uncertainties, REIT qualification and tourism demand. Management reported effective disclosure controls and no material changes to internal control over financial reporting.
Key facts for investors to verify
- Whether leasing, occupancy and rent mark-to-market gains persist as signed leases commence and leases expire.
- Refinancing plans and funding capacity for approximately $336 million of 2017 maturities and the $59.5 million of committed lease-related expenditures.
- Actual effects of broadcast-tenant departures, Univision’s lower revenue baseline and competitive or regulatory changes.
- Developments in the pending investor litigation and arbitration, including any change in the company’s ability to estimate exposure.
- Whether reported Core FFO growth translates into durable operating cash flow and supports distributions; Core FFO is not a substitute for GAAP earnings or cash flow.