Empire State Realty OP(ESBA) - 2018 Q4 - Annual Report

Part I Item 1. Business A REIT managing a 10.1 million sq. ft. portfolio of office and retail properties, including the Empire State Building Portfolio Overview as of December 31, 2018 | Metric | Value | | :--- | :--- | | Total Portfolio Size | 10.1 million rentable sq. ft. | | Total Properties | 14 office, 6 standalone retail | | Portfolio Occupancy | 88.8% | | Portfolio Leased (incl. signed not commenced) | 91.8% | | Manhattan Office Properties | 9 properties, 7.6 million rentable sq. ft. | | Greater NY Metro Office Properties | 5 properties, 1.8 million rentable sq. ft. | - The Empire State Building's observatories are a significant revenue source, attracting approximately 3.8 million visitors in 2018, a slight decrease from 3.94 million in 2017[12] - The company's competitive strengths include its irreplaceable Midtown Manhattan portfolio, expertise in repositioning properties, and leadership in energy efficiency retrofitting, which has reduced energy use at the Empire State Building by 45% from pre-retrofit levels[14][16][17] - Primary business strategies focus on vacating, redeveloping, and re-leasing space at higher rents to better credit tenants, increasing below-market rents as leases expire, and opportunistically pursuing acquisitions[22][23][26] - The company operates through two reportable segments: a Real Estate segment for all property-related activities and an Observatory segment for the 86th and 102nd-floor observatories at the Empire State Building[32] Item 1A. Risk Factors The company faces significant risks from its concentrated New York portfolio, reliance on key properties, lease expiration, and debt structure - All properties are located in Manhattan and the greater New York metropolitan area, exposing the company to greater economic risks than a more geographically diverse portfolio[56] - The company relies heavily on six properties for 72.2% of its portfolio's rental revenue, with the Empire State Building alone accounting for 31.9% for the year ended December 31, 2018[59] - The Empire State Building's observatory faces increasing competition from two existing and two new observatories projected for completion in 2020, which could negatively impact visitor numbers and revenue[59] - Lease expiration risk is notable, with leases representing 7.2% of the portfolio's square footage expiring in 2019 and 8.3% in 2020[61] - As of December 31, 2018, the company had approximately $1.9 billion in total debt, exposing it to risks such as default, refinancing challenges, and restrictive covenants[86] - Tax protection agreements with the Malkin Group and another investor could limit the company's ability to sell four specified properties or reduce certain indebtedness without incurring tax indemnification obligations[99] Item 1B. Unresolved Staff Comments As of December 31, 2018, the company reported no unresolved comments from the SEC staff - The company had no unresolved comments with the SEC staff as of the end of the fiscal year[211] Part II Item 2. Properties The company's 10.1 million sq. ft. portfolio, 88.8% occupied, comprises 14 office and 6 retail properties, undergoing active redevelopment Portfolio Summary by Segment (as of Dec 31, 2018) | Segment | Rentable Square Feet | Percent Occupied | Annualized Rent (in millions) | | :--- | :--- | :--- | :--- | | Manhattan Office Properties | 8,076,058 | 88.9% | $450.6 | | Greater NY Metro Office Properties | 1,847,033 | 87.6% | $66.1 | | Standalone Retail Properties | 205,748 | 94.4% | $18.8 | | Portfolio Total | 10,128,839 | 88.8% | $535.5 | - The tenant base is diversified by industry, with Consumer Goods (21.8%), Retail (17.1%), and Finance, Insurance, Real Estate (16.1%) being the largest sectors by annualized rent[218] - The five largest tenants (Global Brands Group, LinkedIn, Coty Inc., PVH Corp., and Sephora) represent approximately 27.7% of the portfolio's occupied square footage and 19.7% of its annualized rent[218] - The company has invested approximately $865.7 million in its Manhattan office properties' redevelopment and repositioning program from 2002 through December 31, 2018[234] - A multi-year capital project at the Empire State Building began in 2017 with a total anticipated investment of approximately $163 million to enhance the visitor experience and improve tenant access, with the first phase completed in August 2018[238][239][240] Item 3. Legal Proceedings The company is defending an ongoing arbitration claim from former investors alleging breach of fiduciary duty related to its IPO - The company is defending an arbitration claim from 12 former investors of Empire State Building Associates L.L.C. alleging breach of fiduciary duty in connection with the IPO, which the company believes is without merit[588][589] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[243] Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's OP units are listed on NYSE Arca, with regular quarterly distributions and an equity incentive plan - The company's traded OP units (Series ES, 60, and 250) are listed on the NYSE Arca under the symbols ESBA, OGCP, and FISK, respectively[246] - The company has a 2013 Equity Incentive Plan authorizing up to 12.2 million shares for awards, with 4,323,054 securities remaining available for future issuance as of December 31, 2018[250][253] Item 6. Selected Financial Data This section provides a five-year summary of the company's key financial data, including revenues, income, assets, and debt Selected Financial Data (2017-2018) | Metric (in thousands) | 2018 | 2017 | | :--- | :--- | :--- | | Total revenues | $731,511 | $709,526 | | Operating income | $190,857 | $192,903 | | Net income | $117,253 | $118,253 | | Total assets | $4,195,780 | $3,931,347 | | Total Debt | $1,918,933 | $1,688,721 | | FFO attributable to common stockholders | $282,609 | $276,491 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes 2018 financial performance, highlighting revenue growth, liquidity, debt structure, and ongoing redevelopment initiatives - Key achievements in 2018 included achieving Core FFO of $290.4 million, signing 1 million square feet of leases with a 19.8% mark-to-market rent increase, and opening the new Observatory entrance at the Empire State Building[266][268][271] Comparison of Operations: 2018 vs. 2017 (in thousands) | Line Item | 2018 | 2017 | Change % | | :--- | :--- | :--- | :--- | | Total Revenues | $731,511 | $709,526 | 3.1% | | Observatory Revenue | $131,227 | $127,118 | 3.2% | | Lease Termination Fees | $20,847 | $13,551 | 53.8% | | Total Operating Expenses | $540,654 | $516,623 | 4.7% | | Operating Income | $190,857 | $192,903 | (1.1)% | | Net Income | $117,253 | $118,253 | (0.8)% | - As of December 31, 2018, the company had a strong liquidity position with $605.0 million in cash and short-term investments and $1.1 billion available under its unsecured revolving credit facility[329] - Total consolidated debt was approximately $1.9 billion with a weighted average interest rate of 3.84% and a weighted average maturity of 8.1 years, with 100% of the debt being fixed-rate[331] FFO Reconciliation (in thousands) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Net income | $117,253 | $118,253 | | FFO | $282,609 | $276,491 | | Modified FFO | $290,440 | $284,322 | | Core FFO | $290,440 | $286,925 | Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, actively managed through hedging instruments, with no variable-rate debt exposure - The principal market risk is interest rate risk, and as of December 31, 2018, the company had no variable rate debt outstanding, as its $265.0 million unsecured term loan was fixed via an interest rate swap[399][415] - The company utilized interest rate LIBOR swap agreements with an aggregate notional value of $515.0 million to fix interest rates on existing and anticipated debt[416] Item 8. Financial Statements and Supplementary Data This section incorporates the company's audited consolidated financial statements and supplementary data by reference - The company's financial statements are incorporated by reference and begin on page F-1 of the report[419] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reported no changes in or disagreements with its accountants on accounting and financial disclosure - None reported[420] Item 9A. Controls and Procedures Management and independent auditors concluded that the company's disclosure controls and internal control over financial reporting were effective - Management concluded that disclosure controls and procedures were effective as of the end of the period[423] - The company's management concluded that its internal control over financial reporting was effective as of December 31, 2018, based on the COSO criteria[425] - The independent auditor, Ernst & Young LLP, issued an unqualified opinion, stating that the company maintained effective internal control over financial reporting as of December 31, 2018[426] Item 9B. Other Information The company reported no other information for this item - None[433] Part III Item 10. Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the company's 2019 Annual Meeting of Stockholders proxy statement - Information is incorporated by reference from the ESRT Proxy Statement[435] Item 11. Executive Compensation Information for this item is incorporated by reference from the company's 2019 Annual Meeting of Stockholders proxy statement - Information is incorporated by reference from the ESRT Proxy Statement[436] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information for this item is incorporated by reference from the company's 2019 Annual Meeting of Stockholders proxy statement - Information is incorporated by reference from the ESRT Proxy Statement[436] Item 13. Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the company's 2019 Annual Meeting of Stockholders proxy statement - Information is incorporated by reference from the ESRT Proxy Statement[438] Item 14. Principal Accounting Fees and Services Information for this item is incorporated by reference from the company's 2019 Annual Meeting of Stockholders proxy statement - Information is incorporated by reference from the ESRT Proxy Statement[439] Part IV Item 15. Exhibits, Financial Statements and Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K - This section lists all documents filed as part of the report, including financial statements, schedules for Valuation and Qualifying Accounts and Real Estate and Accumulated Depreciation, and various material contracts and agreements[441][442][443] Item 16. Form 10-K Summary The company did not provide a summary for this item - None[448]