Empire State Realty OP(OGCP) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements The company reported a net loss of $19.6 million for Q2 2020, primarily due to COVID-19 closures, with total assets increasing to $4.55 billion from new debt issuances Condensed Consolidated Balance Sheets Total assets increased to $4.55 billion by June 30, 2020, primarily due to a significant rise in cash and cash equivalents, while total liabilities also substantially increased to $2.79 billion from new debt issuances Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Commercial real estate properties, net | $2,213,503 | $2,246,899 | | Cash and cash equivalents | $872,970 | $233,946 | | Total assets | $4,550,395 | $3,931,834 | | Liabilities & Capital | | | | Mortgage notes payable, net | $603,974 | $605,542 | | Senior unsecured notes, net | $973,053 | $798,392 | | Unsecured revolving credit facility, net | $546,778 | $— | | Total liabilities | $2,794,357 | $1,983,921 | | Total capital | $1,756,038 | $1,947,913 | Condensed Consolidated Statements of Operations The company reported a net loss of $19.6 million for Q2 2020, a significant decline from prior year's net income, primarily due to a 99.7% collapse in Observatory revenue caused by COVID-19 closures Statement of Operations Summary (in thousands) | Metric | Q2 2020 | Q2 2019 | YTD 2020 | YTD 2019 | | :--- | :--- | :--- | :--- | :--- | | Rental revenue | $137,999 | $141,071 | $286,112 | $284,488 | | Observatory revenue | $86 | $32,895 | $19,630 | $53,464 | | Total revenues | $141,030 | $176,244 | $311,254 | $343,537 | | Total operating expenses | $140,696 | $140,005 | $283,947 | $281,222 | | Operating income | $334 | $36,239 | $27,307 | $62,315 | | Net income (loss) | ($19,618) | $18,930 | ($11,330) | $28,786 | | Basic EPS | ($0.07) | $0.06 | ($0.05) | $0.09 | - An impairment charge of $4.1 million was recorded in Q2 2020, with no similar charge in 2019[12] Condensed Consolidated Statements of Cash Flows Net cash from operating activities decreased to $74.4 million for the six months ended June 30, 2020, while financing activities provided a substantial $665.5 million inflow from new debt, resulting in a $660.3 million net increase in cash Cash Flow Summary for Six Months Ended June 30 (in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $74,423 | $89,280 | | Net cash (used in) provided by investing activities | ($79,713) | $119,352 | | Net cash provided by (used in) financing activities | $665,541 | ($66,067) | | Net increase in cash and cash equivalents | $660,251 | $142,565 | | Cash and cash equivalents at end of period | $931,848 | $413,378 | Notes to Condensed Consolidated Financial Statements The notes detail the company's 10.1 million rentable square feet portfolio, a goodwill impairment test on the Observatory segment, and significant debt increases in March 2020 to bolster liquidity, alongside common stock repurchases - The company's portfolio as of June 30, 2020, contained 10.1 million rentable square feet of office and retail space[29] - Due to the extended closure of the Observatory, a goodwill impairment test indicated its fair value exceeded carrying value by less than 5.0%, signaling future impairment risk[50] - In March 2020, the company issued $175 million in new senior unsecured notes and entered new credit facilities to significantly enhance liquidity[58][61][66] Segment Operating Results - Q2 2020 (in thousands) | Segment | Total Revenues | Total Operating Expenses | Operating Income (Loss) | Net Income (Loss) | | :--- | :--- | :--- | :--- | :--- | | Real Estate | $144,997 | $136,669 | $8,328 | ($14,428) | | Observatory | $86 | $8,080 | ($7,994) | ($5,190) | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the severe impact of COVID-19, leading to the Observatory's closure and revenue drop, while the company bolstered liquidity to $1.4 billion, achieved 84% rent collection, implemented cost reductions, and reported Core FFO of $39.5 million Overview and Highlights Q2 2020 highlights include a net loss of $20.7 million, Core FFO of $39.5 million, strengthened liquidity to $1.4 billion, $52 million in stock repurchases, and 84% rent collection, with the Observatory closed for the quarter - Key Q2 2020 highlights include a strong liquidity position of $1.4 billion, the repurchase of $52 million in common stock, and 84% collection of total billings[141] - The Empire State Building Observatory was closed for the entire second quarter and reopened on July 20, 2020[141][143] Empire State Building Revenue Mix - Six Months Ended June 30 (dollars in thousands) | Revenue Source | 2020 | % of Total | 2019 | % of Total | | :--- | :--- | :--- | :--- | :--- | | Office leases | $74,907 | 62.4% | $71,337 | 47.4% | | Observatory operations | $19,630 | 16.3% | $53,464 | 35.6% | | Broadcasting licenses and leases | $9,596 | 8.0% | $7,457 | 5.0% | | Other | $16,058 | 13.3% | $18,131 | 12.0% | | Total | $120,091 | 100.0% | $150,389 | 100.0% | Impact of COVID-19 In response to COVID-19, the company enhanced liquidity by raising $300 million and drawing $550 million from its credit facility, resulting in $0.9 billion cash, while implementing significant cost reductions and achieving 91.3% rent collection by July 2020 - To ensure liquidity during the pandemic, the company raised $300 million in net proceeds and drew down $550 million from its revolving credit facility in March 2020, holding $0.9 billion in cash[148] Rent Collection Percentages as of July 31, 2020 | Month | Total Billings Collected | | :--- | :--- | | April | 86.2% | | May | 83.2% | | June | 83.1% | | July | 91.3% | - While the Observatory was closed, its annualized operating expense run-rate was reduced by 60%, from $35 million to approximately $14 million[158] - The company implemented significant expense reductions, including cuts to NEO compensation, a $12 million one-time saving in 2H 2020 property operating expenses, and a $24 million reduction in planned 2020 capital expenditures[163][165] Results of Operations For Q2 2020, total revenues fell 20.0% to $141.0 million due to a 99.7% drop in observatory revenue, leading to a net loss of $19.6 million despite a 26.0% decrease in property operating expenses - Q2 2020 total revenues decreased by 20.0% primarily due to the near-complete loss of Observatory revenue, while property operating expenses decreased by 26.0% ($10.5 million) due to cost-saving measures[166][173] - Year-to-date 2020 total revenues decreased by 9.4% ($32.3 million), while general and administrative expenses increased by 13.6% ($4.1 million) mainly due to severance costs[184][194] Liquidity and Capital Resources As of June 30, 2020, the company maintained a strong liquidity position with $873.0 million in cash and $550.0 million available credit, with total debt at approximately $2.5 billion and compliance with all financial covenants - As of June 30, 2020, the company had $873.0 million in cash and cash equivalents and an additional $550.0 million available under its unsecured revolving credit facility[206] - Total consolidated debt was approximately $2.5 billion, with a weighted average interest rate of 3.41% and a weighted average maturity of 6.9 years[146][208] - The company was in compliance with all financial covenants as of June 30, 2020, including a total leverage ratio of 34.2% against a required maximum of 60%[225] Non-GAAP Financial Measures The company uses non-GAAP measures like NOI, FFO, and Core FFO to evaluate performance, reporting Q2 2020 NOI of $75.1 million, FFO of $30.4 million, and Core FFO of $39.5 million Reconciliation of Net Income to FFO and Core FFO (in thousands) | Metric | Q2 2020 | Q2 2019 | YTD 2020 | YTD 2019 | | :--- | :--- | :--- | :--- | :--- | | Net income (loss) | ($19,618) | $18,930 | ($11,330) | $28,786 | | FFO attributable to common stockholders | $30,431 | $62,518 | $82,099 | $117,232 | | Modified FFO attributable to common stockholders | $32,389 | $64,476 | $86,015 | $121,148 | | Core FFO attributable to common stockholders | $39,498 | $64,476 | $93,210 | $121,148 | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk on its $675.0 million variable-rate debt, mitigated by an interest rate swap, where a 1% rate increase would raise interest expense by approximately $6.8 million - The principal market risk is interest rate risk on $675.0 million of floating-rate debt, where a 1% increase in short-term rates would have increased interest expense by approximately $6.8 million for the first half of 2020[267][271] - The company utilizes an interest rate swap with a notional value of $265.0 million to fix the LIBOR rate at 2.1485% through August 2022[270] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal control over financial reporting during the quarter - As of June 30, 2020, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[276] - No material changes to internal control over financial reporting occurred during the quarter[277] PART II. OTHER INFORMATION Risk Factors The primary update to risk factors highlights the serious adverse effects of the COVID-19 pandemic on business, particularly the Observatory's closure, heightened tenant default risks, and potential long-term impacts on demand for office and retail space - The COVID-19 pandemic has had, and is expected to continue to have, serious adverse effects on business, operations, and financial condition[280] - The closure and subsequent reduced capacity of the Observatory, which relies on tourism, has discontinued a major revenue stream[281] - There is a heightened risk of tenants requesting rent deferrals or abatements, defaulting on leases, or declaring bankruptcy, which would materially reduce revenue[282] Unregistered Sales of Equity Securities and Use of Proceeds The company continued its stock repurchase program, authorized up to $500 million, repurchasing 6,499,834 shares for approximately $52.0 million in Q2 2020 and an additional 656,318 shares for $4.4 million in July Summary of Equity Repurchases | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2020 | 2,345,129 | $8.66 | | May 2020 | 3,913,709 | $7.66 | | June 2020 | 240,996 | $6.90 | | July 2020 | 656,318 | $6.72 | Other Information Following the 2020 Annual Meeting, the company confirmed it will continue to hold an annual advisory stockholder vote on executive compensation, as favored by 98.5% of votes cast - The company will continue to hold an annual advisory stockholder vote on executive compensation[289]