Empire State Realty OP(OGCP) - 2019 Q4 - Annual Report

Part I Item 1. Business Empire State Realty OP, L.P. is a REIT managing 10.1 million sq. ft. of NYC properties, with the Empire State Building as a key asset Portfolio Overview as of December 31, 2019 | Metric | Value | | :--- | :--- | | Total Rentable Square Feet | 10.1 million | | Total Occupancy | 88.6% | | Total Leased (incl. signed not commenced) | 91.2% | | Number of Office Properties | 14 | | Office Space | 9.4 million sq. ft. | | Manhattan Office Properties | 9 (7.6 million sq. ft.) | | Standalone Retail Properties | 6 (205,595 sq. ft.) | - The Empire State Building's observatories are a key revenue driver, attracting approximately 3.5 million visitors in 2019, a decrease from 3.8 million in 2018[13] - The company highlights competitive strengths including its irreplaceable Midtown Manhattan portfolio, expertise in property repositioning, leadership in energy efficiency retrofitting, and a strong balance sheet with low leverage (25.2% consolidated net debt to enterprise value)[15][17][20] - Key growth strategies include capturing embedded growth from below-market leases (7.4% of Manhattan office leases expiring in 2020), completing portfolio redevelopment, and opportunistically pursuing acquisitions[20][23] - The business is divided into 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[25] - The observatory business experiences seasonality, with the second and third quarters being the strongest, generating approximately 26-28% and 31-33% of annual observatory revenue, respectively[45] Item 1A. Risk Factors The company faces significant risks from NYC property concentration, observatory competition, key asset reliance, indebtedness, and tax/governance - All properties are located in Manhattan and the greater New York metropolitan area, exposing the company to greater economic risks than a geographically diverse portfolio[52][53] - Six properties, including the Empire State Building, accounted for approximately 73.1% of the portfolio's rental revenues for the year ended December 31, 2019[59] - The observatory operations face increasing competition from new and existing observatories in New York City, which could negatively impact revenue, with new observatories projected to open in Q1 2020 and by year-end 2021[60][61] - The five largest tenants represented approximately 17.1% of the total portfolio's annualized rent as of December 31, 2019[71] - Tax protection agreements with the Malkin Group and another investor could limit the ability to sell four specified properties or reduce certain indebtedness levels without incurring tax indemnification obligations[109][140] - As of December 31, 2019, Anthony E. Malkin and the Malkin Group held approximately 17.6% of the voting power of ESRT's outstanding common stock, giving them significant influence over company matters[152] Item 1B. Unresolved Staff Comments As of December 31, 2019, the company reported no unresolved SEC staff comments - The company states that it did not have any unresolved comments from the SEC staff as of December 31, 2019[193] Item 2. Properties As of December 31, 2019, the company's 10.1 million sq. ft. portfolio was 88.6% occupied, generating $554.8 million annualized rent Portfolio Summary (December 31, 2019) | Metric | Value | | :--- | :--- | | Total Properties | 20 (14 office, 6 retail) | | Total Rentable Square Feet | 10,138,057 | | Percent Occupied | 88.6% | | Percent Leased (incl. SLNC) | 91.2% | | Annualized Rent | $554.8 million | Top 5 Tenants by Annualized Rent (December 31, 2019) | Tenant | % of Portfolio Annualized Rent | | :--- | :--- | | Global Brands Group | 6.6% | | LinkedIn | 3.3% | | Coty Inc. | 3.2% | | PVH Corp. | 2.1% | | Sephora | 1.9% | - For new and renewal leases in the Manhattan office portfolio in 2019, the company achieved a 20.4% increase in mark-to-market rent, with the weighted average rent increasing from $54.72 to $65.91 per square foot[209] - The company has invested approximately $918.6 million (excluding TI and leasing commissions) in its Manhattan office properties' redevelopment and repositioning program since gaining full management control through 2006[220] - A multi-year capital project to enhance the Empire State Building's observatory experience was completed in Q4 2019, with total expenditures of $155.4 million through December 31, 2019[223][225][226] Item 3. Legal Proceedings The company is in arbitration with former investors alleging breach of fiduciary duty related to its IPO, claims it believes are without merit - The company is engaged in an arbitration proceeding filed by 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 are without merit[580][581] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[229] Part II Item 5. Market for Registrant's Common Equity, Related Stockholders Matters and Issuer Purchases of Equity Securities The company's OP units are listed on NYSE Arca, with regular distributions planned, and a 4.6 million unit exchange offer completed in 2019 - The company's traded operating partnership units are listed on the NYSE Arca under the symbols "ESBA," "OGCP," and "FISK"[232] - In December 2019, the company issued 4,610,383 Series 2019 Private Perpetual Preferred Units in a tax-exempt exchange for an equal number of existing OP Units[241] - The 2019 Equity Incentive Plan authorizes approximately 11.0 million shares of common stock for issuance as equity awards[236] Item 6. Selected Financial Data Selected financial data shows stable revenues around $731 million, 2019 net income at $82.5 million, total assets at $3.9 billion, and debt around $1.7 billion Selected Financial Data (2015-2019) (in thousands) | (in thousands) | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total revenues | $731,343 | $731,511 | $709,526 | $677,353 | $657,534 | | Operating income | $154,706 | $190,857 | $192,903 | $183,896 | $151,269 | | Net income attributable to common unitholders | $82,547 | $116,317 | $117,317 | $106,314 | $78,992 | | Total assets | $3,931,834 | $4,195,780 | $3,931,347 | $3,890,953 | $3,300,650 | | Debt | $1,668,574 | $1,918,933 | $1,688,721 | $1,612,331 | $1,632,416 | | FFO attributable to common stockholders | $260,062 | $282,609 | $276,491 | $260,519 | $249,924 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In 2019, net income was $82.5 million and Core FFO $267.9 million, with total revenues flat at $731 million and operating expenses up 6.7% 2019 Performance Highlights | Metric | Value | | :--- | :--- | | Net Income Attributable to Company | $82.5 million | | Core FFO | $267.9 million | | Total Portfolio Leased % (incl. SLNC) | 91.2% | | Manhattan Office Leased % (incl. SLNC) | 92.7% | | Leases Signed (Total Portfolio) | 1,303,395 sq. ft. | | Mark-to-Market Rent Increase | 18.1% | - Empire State Building Observatory revenue decreased by 1.9% to $128.8 million in 2019 from $131.2 million in 2018, partly due to the 102nd-floor observation deck being closed for approximately nine months for redevelopment[253][261] Comparison of Operations: 2019 vs. 2018 (in thousands) | Line Item | 2019 | 2018 | Change % | | :--- | :--- | :--- | :--- | | Total Revenues | $731,343 | $731,511 | 0.0% | | Total Operating Expenses | $576,637 | $540,654 | 6.7% | | Operating Income | $154,706 | $190,857 | (18.9)% | | Net Income | $84,290 | $117,253 | (28.1)% | - The company adopted FASB Topic 842 (Lease Accounting) on January 1, 2019, which changed revenue presentation and requires non-contingent leasing costs to be expensed as incurred, contributing to higher General and Administrative expenses[268][277] - As of December 31, 2019, the company had $1.7 billion of total debt outstanding with a weighted average interest rate of 4.03% and a weighted average maturity of 8.3 years, and liquidity included $233.9 million in cash and $1.1 billion available under its unsecured revolving credit facility[309][311] FFO Reconciliation Summary (in thousands) | Metric | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net Income | $84,290 | $117,253 | $118,253 | | FFO | $260,062 | $282,609 | $276,491 | | Modified FFO | $267,893 | $290,440 | $284,322 | | Core FFO | $267,893 | $290,440 | $286,925 | Item 7A. Quantitative and Qualitative Disclosure about Market Risk The company's primary market risk is interest rate volatility, mitigated by interest rate swaps on its $265.0 million term loan - The company's principal market risk is interest rate volatility on its variable rate debt, however, as of December 31, 2019, it had no variable rate debt outstanding due to an interest rate swap fixing the rate on its $265.0 million unsecured term loan[397][381] - The company utilizes interest rate swap agreements to manage interest rate exposure, with swaps having an aggregate notional value of $390.0 million designated as cash flow hedges as of year-end 2019[400] - The fair value of the company's outstanding debt was estimated at $1.7 billion as of December 31, 2019, approximately $69.4 million higher than its historical book value[402] 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 Form 10-K[406] 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[407] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[409] - Based on the COSO criteria, management concluded that the company's internal control over financial reporting was effective as of December 31, 2019[411] - 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, 2019[416] Item 9B. Other Information The company reported no other information for this item - None[423] Part III Items 10-14 Information for Items 10-14 is incorporated by reference from the ESRT 2020 Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the ESRT Proxy Statement[425][426][427][428][429] Part IV Item 15. Exhibits, Financial Statements and Schedules This section lists all 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, and various agreements such as the partnership agreement, indentures, and employment contracts[431][434] Item 16. Form 10-K Summary No Form 10-K summary was provided - None[438] Financial Statements Consolidated Balance Sheets As of December 31, 2019, total assets were $3.93 billion, liabilities $1.98 billion, and capital $1.95 billion Consolidated Balance Sheet Summary (in thousands) | Account | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Commercial real estate properties, net | $2,246,899 | $2,137,182 | | Cash and cash equivalents | $233,946 | $204,981 | | Short-term investments | $0 | $400,000 | | Goodwill | $491,479 | $491,479 | | Total Assets | $3,931,834 | $4,195,780 | | Mortgage notes payable, net | $605,542 | $608,567 | | Senior unsecured notes, net | $798,392 | $1,046,219 | | Total Liabilities | $1,983,921 | $2,204,671 | | Total Capital | $1,947,913 | $1,991,109 | Consolidated Statements of Income For 2019, total revenues were $731.3 million, operating expenses $576.6 million, operating income $154.7 million, and net income $84.3 million Consolidated Income Statement Summary (in thousands) | Account | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Total Revenues | $731,343 | $731,511 | $709,526 | | Total Operating Expenses | $576,637 | $540,654 | $516,623 | | Operating Income | $154,706 | $190,857 | $192,903 | | Net Income | $84,290 | $117,253 | $118,253 | | Net Income per Unit (Diluted) | $0.27 | $0.39 | $0.39 | Consolidated Statements of Cash Flows In 2019, net cash from operations was $232.6 million, investing activities provided $149.7 million, and financing activities used $381.6 million Consolidated Cash Flow Summary (in thousands) | Cash Flow Category | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $232,591 | $279,022 | $194,202 | | Net cash provided by (used in) investing activities | $149,744 | $(643,023) | $(223,013) | | Net cash (used in) provided by financing activities | $(381,551) | $104,617 | $(56,877) | | Net increase (decrease) in cash | $784 | $(259,384) | $(85,688) | Notes to Consolidated Financial Statements The notes detail accounting policies, business segments, and debt structure, including the 2019 adoption of FASB Topic 842 and $1.7 billion debt - The company adopted FASB Topic 842 (Lease Accounting) on January 1, 2019, resulting in the recognition of right-of-use assets and lease liabilities of approximately $29.5 million and requiring non-contingent leasing costs to be expensed as incurred[477][479][538] - As of December 31, 2019, goodwill was $491.5 million, allocated primarily to the Empire State Building's observatory ($227.5 million) and real estate operations ($250.8 million), with no impairment found after an annual review[543][544] Debt Principal Maturities as of Dec 31, 2019 (in thousands) | Year | Total Principal Due | | :--- | :--- | | 2020 | $3,938 | | 2021 | $4,090 | | 2022 | $270,628 | | 2023 | $7,876 | | 2024 | $85,633 | | Thereafter | $1,303,656 | - The company has two reportable segments: Real Estate and Observatory, with the Real Estate segment having total assets of $3.7 billion and net income of $73.3 million in 2019, while the Observatory segment had assets of $260.6 million and net income of $11.0 million[650][652] - In December 2019, the company issued 4,610,383 Series 2019 Private Perpetual Preferred Units in exchange for an equal number of OP units, with these preferred units having a liquidation preference of $13.52 and a cumulative annual distribution of $0.70 per unit[606][607]