Empire State Realty OP(OGCP) - 2019 Q2 - Quarterly Report

Part I Item 1. Financial Statements The company's financial statements for Q2 2019 show total assets of $4.16 billion, a decrease from $4.20 billion, with net income of $18.9 million, down from $30.2 million, impacted by new lease accounting standards Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Commercial real estate properties, net | $2,184,458 | $2,137,182 | | Cash and cash equivalents | $375,335 | $204,981 | | Total assets | $4,155,575 | $4,195,780 | | Mortgage notes payable, net | $607,072 | $608,567 | | Senior unsecured notes, net | $1,047,939 | $1,046,219 | | Total liabilities | $2,207,543 | $2,204,671 | | Total capital | $1,948,032 | $1,991,109 | Condensed Consolidated Statements of Income Highlights (in thousands) | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $176,244 | $178,529 | $343,537 | $345,800 | | Total operating expenses | $140,005 | $128,864 | $281,222 | $261,971 | | Operating income | $36,239 | $49,665 | $62,315 | $83,829 | | Net income | $18,930 | $30,184 | $28,786 | $48,242 | | Basic EPS | $0.06 | $0.10 | $0.09 | $0.16 | Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $89,280 | $109,687 | | Net cash provided by (used in) investing activities | $119,352 | $(498,568) | | Net cash provided by (used in) financing activities | $(66,067) | $169,200 | | Net increase (decrease) in cash | $142,565 | $(219,681) | - The company adopted FASB Topic 842 (Lease Accounting) on January 1, 2019, which resulted in recognizing right-of-use assets and lease liabilities of approximately $29.5 million This also led to expensing non-contingent leasing costs as incurred, which totaled $2.2 million for the first six months of 2019[29][30][31] Note 1: Business Description The company manages a 10.1 million square foot portfolio of office and retail properties in the greater New York area, including the Empire State Building - As of June 30, 2019, the company's portfolio contained 10.1 million rentable square feet of office and retail space, primarily in Manhattan and the greater New York area[26] - The portfolio includes 14 office properties (9.4 million sq. ft.) and six standalone retail properties (205,595 sq. ft.) Nine of the office properties, including the Empire State Building, are in midtown Manhattan[26] Note 4: Debt Total principal debt was $1.93 billion as of June 30, 2019, with a $250 million maturity in August 2019, and the company complied with all debt covenants Debt Composition as of June 30, 2019 (in thousands) | Debt Type | Principal Balance | | :--- | :--- | | Mortgage debt | $612,735 | | Senior unsecured notes - exchangeable | $250,000 | | Senior unsecured notes (Series A-F) | $800,000 | | Unsecured term loan facility | $265,000 | | Total Principal | $1,927,735 | - The company has a $250 million principal payment for exchangeable senior notes maturing in 2019 The company has provided notice that it will settle the principal amount in cash[52][60] - The company has a $1.365 billion facility, consisting of a $1.1 billion revolving credit facility (maturing August 2021) and a $265 million term loan facility (maturing August 2022) As of June 30, 2019, the company was in compliance with all debt covenants[58][51] Note 8: Commitments and Contingencies The company faces an ongoing arbitration claim from former investors and has $93.9 million in unfunded capital expenditure commitments for existing leases - The company is defending against an arbitration claim filed by former investors of Empire State Building Associates L.L.C. related to the company's IPO and formation Post-hearing briefing is scheduled to be completed by January 2020[81][82] - As of June 30, 2019, the company estimates it will incur approximately $93.9 million in future capital expenditures for tenant improvements and leasing commissions under existing lease agreements[84] Note 11: Segment Reporting The company operates Real Estate and Observatory segments, reporting Q2 2019 net income of $16.2 million and $2.7 million respectively Segment Net Income (in thousands) | Segment | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Real Estate | $16,244 | $26,170 | | Observatory | $2,686 | $2,616 | | Total Net Income | $18,930 | $28,786 | Segment Revenue Comparison - Q2 2019 vs Q2 2018 (in thousands) | Segment | Q2 2019 Total Revenue | Q2 2018 Total Revenue | Change | | :--- | :--- | :--- | :--- | | Real Estate | $164,840 | $165,318 | -0.3% | | Observatory | $32,895 | $35,201 | -6.5% | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management reported 90.2% portfolio occupancy, a 6.6% decrease in Observatory revenue, and total Q2 2019 revenues of $176.2 million, while continuing a $165 million capital project - Key highlights for Q2 2019 include achieving $18.9 million in net income and $64.5 million in Core Funds From Operations (Core FFO)[125] - Total portfolio occupancy was 90.2% at quarter-end, and 92.2% including signed leases not yet commenced The Manhattan office portfolio was 93.0% leased[125] - Empire State Building Observatory revenue for Q2 2019 decreased 6.6% year-over-year to $32.9 million, attributed to the closure of the 102nd-floor observation deck for upgrades and a decline in visitation[125] - The company is investing approximately $165 million over three years in a capital project at the Empire State Building, with $119.6 million spent through June 30, 2019[130] - As of June 30, 2019, the company had $525.3 million in cash and short-term investments and $1.1 billion available under its unsecured revolving credit facility[174] Results of Operations Q2 2019 total revenues decreased 1.3% to $176.2 million, while operating expenses rose 8.6% to $140.0 million, resulting in a 27.0% decline in operating income Comparison of Operations - Three Months Ended June 30 (in thousands) | Line Item | 2019 | 2018 | Change % | | :--- | :--- | :--- | :--- | | Total revenues | $176,244 | $178,529 | (1.3)% | | Total operating expenses | $140,005 | $128,864 | 8.6% | | Operating income | $36,239 | $49,665 | (27.0)% | | Net income | $18,930 | $30,184 | (37.3)% | - Observatory revenue decreased in Q2 2019 primarily due to the closure of the 102nd-floor observation deck for upgrades and a decline in visitation, partially offset by improved pricing[142] - General and administrative expenses increased primarily due to higher equity compensation and leasing costs that were previously capitalized before the adoption of Topic 842[148] - Depreciation and amortization increased due to assets newly placed in service after Q2 2018[151] Liquidity and Capital Resources The company maintains liquidity with $525.3 million cash and a $1.1 billion credit facility, holding $1.9 billion in debt while complying with all financial covenants - Primary sources of liquidity are cash from operations, cash on hand ($525.3 million as of June 30, 2019), and a $1.1 billion unsecured revolving credit facility[173][174] - Total consolidated debt was approximately $1.9 billion with a weighted average interest rate of 3.84% and a weighted average maturity of 7.6 years $250.0 million of debt matures in 2019[176] Financial Covenant Compliance as of June 30, 2019 | Financial Covenant | Required | Actual | Status | | :--- | :--- | :--- | :--- | | Maximum total leverage | < 60% | 29.6% | Yes | | Maximum secured debt | < 40% | 9.3% | Yes | | Minimum fixed charge coverage | > 1.50x | 3.9x | Yes | | Minimum unencumbered interest coverage | > 1.75x | 5.7x | Yes | Non-GAAP Financial Measures The company uses non-GAAP measures, reporting Q2 2019 NOI of $96.7 million and Core FFO of $64.5 million, both lower than prior year Reconciliation of Net Income to NOI (in thousands) | Period | Net Income | Net Operating Income (NOI) | | :--- | :--- | :--- | | Three Months Ended June 30, 2019 | $18,930 | $96,727 | | Three Months Ended June 30, 2018 | $30,184 | $101,982 | | Six Months Ended June 30, 2019 | $28,786 | $182,607 | | Six Months Ended June 30, 2018 | $48,242 | $188,194 | Reconciliation of Net Income to Core FFO (in thousands) | Period | Net Income | FFO | Modified FFO | Core FFO | | :--- | :--- | :--- | :--- | :--- | | Three Months Ended June 30, 2019 | $18,930 | $62,518 | $64,476 | $64,476 | | Three Months Ended June 30, 2018 | $30,184 | $68,999 | $70,957 | $70,957 | | Six Months Ended June 30, 2019 | $28,786 | $117,232 | $121,148 | $121,148 | | Six Months Ended June 30, 2018 | $48,242 | $126,291 | $130,207 | $130,207 | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, mitigated by interest rate swaps on $515.0 million notional value, with no variable rate debt as of June 30, 2019 - The company's main market risk is interest rate risk on its indebtedness It uses hedging instruments like interest rate swaps to reduce floating rate exposure[225][226] - As of June 30, 2019, the company had interest rate LIBOR swap agreements with an aggregate notional value of $515.0 million, fixing rates between 2.1485% and 2.9580% with maturities from 2022 to 2026[228] - The weighted average interest rate on the $1.9 billion of fixed-rate indebtedness was 3.84% per annum as of June 30, 2019[229] Item 4. Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of June 30, 2019, with no material changes to internal control over financial reporting - Based on an evaluation as of June 30, 2019, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[233] - No material changes to internal control over financial reporting occurred during the quarter ended June 30, 2019[234] Part II Item 1. Legal Proceedings The company refers to Note 8 of the financial statements for details on ongoing legal proceedings, including an arbitration with former investors - For a description of legal proceedings, the report refers to Note 8 in the financial statements[235] Item 1A. Risk Factors No material changes to the risk factors previously disclosed in the 2018 Annual Report on Form 10-K were reported - No material changes to the risk factors from the 2018 Annual Report on Form 10-K were reported[236] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds during the period - None[237]