Part I. Financial Information This section presents the unaudited condensed consolidated financial statements for Empire State Realty OP, L.P. as of September 30, 2020, and for the three and nine months then ended Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including Balance Sheets, Statements of Operations, Comprehensive Income, Capital, and Cash Flows, along with detailed Notes, reflecting the significant negative impact of the COVID-19 pandemic Condensed Consolidated Balance Sheets Total assets increased to $4.01 billion as of September 30, 2020, from $3.93 billion at year-end 2019, primarily due to a rise in cash and cash equivalents, while total liabilities also increased to $2.27 billion from $1.98 billion, leading to a decrease in total capital from $1.95 billion to $1.74 billion Condensed Consolidated Balance Sheet Highlights (in thousands) | | Sep 30, 2020 (unaudited) | Dec 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Commercial real estate properties, net | $2,207,149 | $2,246,899 | | Cash and cash equivalents | $373,088 | $233,946 | | Total assets | $4,010,714 | $3,931,834 | | Liabilities & Capital | | | | Mortgage notes payable, net | $603,178 | $605,542 | | Senior unsecured notes, net | $973,106 | $798,392 | | Total liabilities | $2,266,899 | $1,983,921 | | Total capital | $1,743,815 | $1,947,913 | | Total liabilities and capital | $4,010,714 | $3,931,834 | Condensed Consolidated Statements of Operations The company reported a net loss of $12.3 million for Q3 2020, a sharp reversal from a net income of $26.8 million in Q3 2019, with the decline primarily driven by an 88% drop in observatory revenue and lower rental revenue due to the COVID-19 pandemic Statement of Operations Highlights (in thousands) | | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $146,575 | $192,873 | $457,829 | $536,410 | | - Rental revenue | $139,909 | $150,225 | $426,021 | $434,713 | | - Observatory revenue | $4,419 | $37,575 | $24,049 | $91,039 | | Total operating income | $11,928 | $45,279 | $39,235 | $107,594 | | Net income (loss) | $(12,269) | $26,784 | $(23,599) | $55,570 | | Net income (loss) attributable to common unitholders | $(13,319) | $26,550 | $(26,746) | $54,868 | | Basic EPS | $(0.05) | $0.09 | $(0.10) | $0.18 | Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2020, net cash from operating activities decreased to $163.6 million from $198.4 million in the prior-year period, while net cash used in investing activities was $113.4 million, a significant shift from $210.3 million provided by investing activities in 2019, and net cash from financing activities was $106.2 million, driven by new debt proceeds, compared to cash used of $349.2 million in 2019 Cash Flow Summary (in thousands) | | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $163,553 | $198,373 | | Net cash (used in) provided by investing activities | $(113,354) | $210,332 | | Net cash provided by (used in) financing activities | $106,157 | $(349,199) | | Net increase in cash and cash equivalents and restricted cash | $156,356 | $59,506 | Notes to Condensed Consolidated Financial Statements The notes provide detailed information supporting the financial statements, including a description of the company's 10.1 million sq. ft. portfolio, the significant impact of COVID-19 on the Observatory business which led to a goodwill impairment test, details on new debt financing, lease revenue composition, and segment performance showing a loss in the Observatory segment versus income in the Real Estate segment - As of September 30, 2020, the company's portfolio contained 10.1 million rentable square feet of office and retail space, primarily in Manhattan and the greater New York metropolitan area29 - Due to the COVID-19 pandemic, the Empire State Building Observatory was closed on March 16, 2020, and reopened on July 20, 2020, which triggered a goodwill impairment test for the Observatory reporting unit, determining its fair value exceeded its carrying value by less than 5.0%50 - In March 2020, the company issued $175 million of new senior unsecured notes (Series G and H) and entered into a new $175 million senior unsecured term loan facility6267 Future Minimum Lease Payments (as of Sep 30, 2020, in thousands) | Year | Amount | | :--- | :--- | | Remainder of 2020 | $126,997 | | 2021 | $502,160 | | 2022 | $484,131 | | 2023 | $459,992 | | 2024 | $423,039 | | Thereafter | $2,139,096 | | Total | $4,135,415 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant negative impact of the COVID-19 pandemic on operations, particularly the Observatory, which saw an 88% revenue decline in Q3 2020, resulting in a net loss of $13.3 million for the quarter, despite maintaining strong liquidity of $1.5 billion and improving rent collections to 94% of total Q3 billings Overview and Recent Developments For Q3 2020, the company incurred a net loss of $13.3 million but achieved Core FFO of $34.9 million, maintaining a strong liquidity position of $1.5 billion, repurchasing $19.5 million in common stock, signing 247,449 rentable square feet of leases, and collecting 94% of total Q3 billings - The company maintains a strong liquidity position of $1.5 billion as of September 30, 2020, consisting of $373.0 million in cash and $1.1 billion available under its revolving credit facility, with no debt maturity until 2024145 - In Q3 and through October 30, 2020, the company repurchased $19.5 million of its common stock, bringing the year-to-date total to $134.1 million145 - For Q3 2020, the company signed 18 new, renewal, and expansion leases, totaling 247,449 rentable square feet145 Impact of COVID-19 The COVID-19 pandemic has severely impacted operations, leading the company to bolster liquidity by raising $300 million and initially drawing on its credit facility, closing the Observatory from March 16 to July 20, which led to a 60% reduction in its operating expense run-rate, while rent collections steadily improved to 94% for Q3 2020, alongside broad cost reduction measures Rent Collections as of October 30, 2020 | Collections as of October 30, 2020 | Second Quarter 2020 | Third Quarter 2020 | October 2020 | | :--- | :--- | :--- | :--- | | Total billings collected | 85% | 94% | 93% | | Rent deferrals | 4% | —% | —% | | Security deposits collected | 8% | 1% | —% | | Uncollected - covered by security deposit | 1% | 2% | 3% | | Uncollected | 2% | 3% | 4% | | Total | 100% | 100% | 100% | - The Empire State Building Observatory closed on March 16, 2020, and reopened on July 20, 2020, during which the annualized operating expense run-rate was reduced by 60% from $35 million to approximately $14 million160 - The company has undertaken significant cost reductions, including cuts to NEO compensation, corporate overhead, and a $24 million reduction in planned 2020 capital expenditures164 Results of Operations For Q3 2020 compared to Q3 2019, total revenues fell 24.0% to $146.6 million, primarily due to an 88.2% drop in Observatory revenue, resulting in a net loss of $12.3 million versus a $26.8 million net income in the prior year, and for the nine-month period, revenues fell 14.6% with a net loss of $23.6 million compared to a $55.6 million net income in 2019 Comparison of Three Months Ended September 30, 2020 and 2019 (in thousands) | | 2020 | 2019 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $146,575 | $192,873 | $(46,298) | (24.0)% | | - Observatory revenue | $4,419 | $37,575 | $(33,156) | (88.2)% | | Total operating expenses | $134,647 | $147,594 | $12,947 | 8.8% | | Net income (loss) | $(12,269) | $26,784 | $(39,053) | (145.8)% | Comparison of Nine Months Ended September 30, 2020 and 2019 (in thousands) | | 2020 | 2019 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $457,829 | $536,410 | $(78,581) | (14.6)% | | - Observatory revenue | $24,049 | $91,039 | $(66,990) | (73.6)% | | Total operating expenses | $418,594 | $428,816 | $10,222 | 2.4% | | Net income (loss) | $(23,599) | $55,570 | $(79,169) | (142.5)% | Liquidity and Capital Resources The company maintains a strong liquidity position with $373.1 million in cash and $1.1 billion available under its unsecured revolving credit facility as of September 30, 2020, with total debt of approximately $2.0 billion at a weighted average interest rate of 4.0% and no maturities until 2024, while also suspending its Q3 and Q4 dividends to preserve capital - As of September 30, 2020, the company had $373.1 million in cash and $1.1 billion available under its unsecured revolving credit facility206 - Total consolidated debt was approximately $2.0 billion, with a weighted average interest rate of 4.0% and a weighted average maturity of 8.3 years, with no debt maturing until 2024208 - The company suspended its third and fourth quarter 2020 dividends for common stock and operating partnership units, citing that it was not the highest and best use of the balance sheet at the time240 Financial Covenant Compliance as of September 30, 2020 | Financial covenant | Required | September 30, 2020 | In Compliance | | :--- | :--- | :--- | :--- | | Maximum total leverage | < 60% | 33.2% | Yes | | Maximum secured debt | < 40% | 10.2% | Yes | | Minimum fixed charge coverage | > 1.50x | 2.8x | Yes | | Minimum unencumbered interest coverage | > 1.75x | 5.2x | Yes | | Maximum unsecured leverage | < 60% | 28.2% | Yes | Non-GAAP Financial Measures (NOI & FFO) This section provides reconciliations for non-GAAP measures, with Net Operating Income (NOI) for Q3 2020 at $72.2 million, down from $103.7 million in Q3 2019, and Core Funds From Operations (Core FFO) for Q3 2020 at $34.9 million, compared to $71.8 million in the prior-year quarter, reflecting significant operational challenges during the pandemic Reconciliation of Net Income to NOI (in thousands) | | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net income (loss) | $(12,269) | $26,784 | $(23,599) | $55,570 | | Net operating income | $72,154 | $103,656 | $235,891 | $286,263 | Reconciliation of Net Income to FFO and Core FFO (in thousands) | | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net income (loss) | $(12,269) | $26,784 | $(23,599) | $55,570 | | FFO attributable to common stockholders | $30,969 | $69,853 | $117,169 | $187,085 | | Modified FFO attributable to common stockholders | $32,926 | $71,810 | $123,042 | $192,958 | | Core FFO attributable to common stockholders | $34,896 | $71,810 | $128,106 | $192,958 | Factors That May Influence Future Results Future results will be heavily influenced by the ongoing COVID-19 pandemic, with key factors including slowed leasing activity and the performance of the Observatory, which depends on the recovery of tourism, as 10.3% of the portfolio was available to lease as of September 30, 2020, with an additional 2.6% expiring in 2020 and 6.2% in 2021 - As of September 30, 2020, approximately 1.0 million square feet (10.3%) of the portfolio was available for lease, with leases representing 2.6% of net rentable square footage expiring in the remainder of 2020, and 6.2% expiring in 2021263 - The Observatory hosted approximately 30,000 visitors in Q3 2020, a 97.1% decrease from 1,042,000 visitors in Q3 2019, with a full recovery dependent on the return of national and international travel267 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk on its variable-rate debt, which was $125.0 million as of September 30, 2020, mitigated by hedging instruments like an interest rate LIBOR swap of $265.0 million fixing the rate at 2.1485% until August 2022, with a hypothetical 1% increase in short-term rates increasing interest expense by approximately $1.3 million for the nine months ended September 30, 2020 - The company's primary market risk is interest rate risk, with floating-rate debt of $125.0 million representing 3.3% of total enterprise value as of September 30, 2020273 - An interest rate LIBOR swap with a notional value of $265.0 million is in place to fix the interest rate at 2.1485% through August 2022276 - A hypothetical 1% increase in short-term interest rates would have increased interest expense by approximately $1.3 million for the nine months ended September 30, 2020277 Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of September 30, 2020, with no material changes to the company's internal control over financial reporting identified during the quarter - The CEO and CFO concluded that as of September 30, 2020, the company's disclosure controls and procedures were effective282 - No material changes to internal control over financial reporting were identified during the period283 Part II. Other Information Item 1. Legal Proceedings The company discloses an update on an arbitration case filed by former investors in Empire State Building Associates L.L.C., where on August 26, 2020, the arbitration panel denied most claims but awarded the claimants approximately $1.2 million, which the company believes is without merit and is considering its next steps - In a long-standing arbitration with former investors, a panel awarded the claimants approximately $1.2 million on August 26, 2020, which the company believes is without merit and is exploring its options8889 Item 1A. Risk Factors The primary risk factor discussed is the ongoing COVID-19 pandemic, which has had serious adverse effects on the business, particularly the Observatory, which was closed for four months and continues to see low visitor volume, impacting tenants' ability to pay rent, and posing challenges to human capital management and potential claims related to health and safety measures - The COVID-19 pandemic has had serious adverse effects, including the closure of the Observatory from March 16 to July 20, 2020, and continued low visitor volume due to travel restrictions286 - The pandemic has adversely impacted tenants' ability to pay rent, resulting in lower collection percentages and requests for rent deferral or abatement287 - Potential future impacts include prolonged reduction in business vitality, decreased demand for office space due to remote work acceptance, and impairment of the company's ability to refinance debt or pay dividends290 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reports no unregistered sales of equity securities and provides details on its stock repurchase program, which is authorized for up to $500 million through December 31, 2020, with over 1.1 million shares repurchased for approximately $7.3 million in Q3 2020 Equity Repurchases (Q3 2020 and October 2020) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Maximum Approximate Dollar Value Available for Future Purchase (in thousands) | | :--- | :--- | :--- | :--- | | July 2020 | 656,318 | $6.72 | $380,982 | | August 2020 | — | $— | $380,982 | | September 2020 | 477,620 | $6.14 | $378,050 | | October 2020 | 1,952,013 | $6.21 | $365,934 | Item 3. Defaults Upon Senior Securities None reported - The company reported no defaults upon senior securities294 Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications pursuant to the Sarbanes-Oxley Act of 2002 and XBRL data files
Empire State Realty OP(OGCP) - 2020 Q3 - Quarterly Report