Empire State Realty Trust(ESRT) - 2018 Q4 - Annual Report

Part I Item 1. Business Empire State Realty Trust, Inc. is a REIT specializing in office and retail properties in Manhattan and the greater New York metropolitan area, with the Empire State Building as its flagship asset Portfolio Overview as of December 31, 2018 | Metric | Value | | :--- | :--- | | Total Rentable Square Feet | 10.1 million | | Total Properties | 14 office, 6 standalone retail | | Occupancy Rate | 88.8% | | Leased Rate (incl. signed leases) | 91.8% | | Manhattan Office Properties | 9 properties, 7.6 million sq. ft. | | Empire State Building Observatory Visitors (2018) | Approx. 3.8 million | - The company's competitive strengths include its irreplaceable Midtown Manhattan portfolio, expertise in property repositioning, leadership in energy efficiency retrofitting, and a strong balance sheet with low leverage[9][11][12] - Key growth strategies involve vacating and redeveloping spaces to lease to higher-credit tenants at higher rents, capitalizing on below-market in-place rents, completing the repositioning of the current portfolio, and pursuing opportunistic acquisitions[13][14][16] - The company operates under two reportable segments: a Real Estate segment for all property-related activities and an Observatory segment for the Empire State Building's 86th and 102nd-floor observatories[18] - The company utilizes a wholly-owned captive insurance company, ESRT Captive Insurance, to provide terrorism insurance for the Empire State Building, offering aggregate coverage of $2 billion[25] Item 1A. Risk Factors The company faces significant risks due to its high concentration of properties in the New York metropolitan area, making it vulnerable to local economic downturns - All properties are located in Manhattan and the greater New York metropolitan area, creating a high dependency on the local economy; six properties, including the Empire State Building, accounted for approximately 72.2% of portfolio rental revenues in 2018[33][34] - The Empire State Building's observatory, which generated $131.2 million in 2018 revenue, faces increasing competition from existing and new observatories planned for Hudson Yards and One Vanderbilt[34] - The company is exposed to leasing risks, with 7.2% of its portfolio square footage expiring in 2019 and 8.3% in 2020, posing a risk of being unable to renew or re-lease space on favorable terms[35] - Financial risks include managing approximately $1.9 billion in total debt, potential foreclosure on mortgaged properties, and obligations under tax protection agreements that could limit the ability to sell certain properties[44][47] - Organizational risks include the significant voting power of Class B common stock (50 votes per share when paired with 49 OP units) and a dependency on key personnel, particularly Chairman and CEO Anthony E. Malkin[63][64] - The company faces tax risks related to maintaining its REIT qualification, which requires distributing at least 90% of its taxable income annually and adhering to complex asset and income tests[86][88] Item 1B. Unresolved Staff Comments As of December 31, 2018, the company reported no unresolved comments from the staff of the Securities and Exchange Commission (SEC) - The company states that it did not have any unresolved comments with the SEC staff as of the end of the fiscal year[101] Item 2. Properties The company's portfolio as of December 31, 2018, comprised 14 office and 6 retail properties totaling 10.1 million rentable square feet, with an 88.8% occupancy rate Portfolio Summary (December 31, 2018) | Property Type | Rentable Square Feet | Percent Occupied | Annualized Rent (USD) | | :--- | :--- | :--- | :--- | | Manhattan Office | 8,076,058 | 88.9% | 450,613,791 | | Greater NY Metro Office | 1,847,033 | 87.6% | 66,088,796 | | Standalone Retail | 205,748 | 94.4% | 18,785,347 | | Portfolio Total | 10,128,839 | 88.8% | 535,487,934 | Lease Expirations (All Properties) | Year of Expiration | % of Portfolio Rentable Sq. Ft. Expiring | % of Annualized Rent | | :--- | :--- | :--- | | 2019 | 7.2% | 7.1% | | 2020 | 8.3% | 8.7% | | 2021 | 6.9% | 7.5% | | 2022 | 5.3% | 6.4% | | 2023 | 6.8% | 7.7% | - The company achieved a 24.5% increase in mark-to-market rent on new and renewal leases in its Manhattan office portfolio during 2018, compared to previous leases[110] - A multi-year capital project at the Empire State Building is underway with a total anticipated investment of approximately $163 million; $91.3 million had been spent through December 31, 2018[120][121] Item 3. Legal Proceedings The company is involved in an ongoing arbitration with 12 former investors of Empire State Building Associates L.L.C. who allege breach of fiduciary duty related to the company's IPO and formation - The primary legal proceeding is an arbitration filed by 12 former investors of Empire State Building Associates L.L.C. alleging breach of fiduciary duty in connection with the company's formation and IPO[122][302] - The company believes the allegations are without merit and intends to defend them vigorously; arbitration hearings concluded in August 2018, with post-hearing briefing scheduled for completion by June 2019[302] Item 4. Mine Safety Disclosures This item is not applicable to the company's operations - The company reports that this section is not applicable[123] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A common stock trades on the NYSE under the symbol 'ESRT', with total dividends of $0.42 per share declared in 2018 - Class A common stock is listed on the NYSE under the symbol 'ESRT', while traded OP Units are listed on NYSE Arca[126][127] - The company paid total dividends of $0.42 per share in 2018; for tax purposes, 83.8% of this was classified as a taxable ordinary dividend and 16.2% as a return of capital[127] - As of December 31, 2018, 4,323,054 securities remained available for future issuance under equity compensation plans approved by securityholders[131][133] Item 6. Selected Financial Data The company presents five years of selected financial data from 2014 to 2018, showing growth in total revenues, net income, and Core FFO Selected Financial Data (2016-2018) | (in thousands) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Total revenues | $731,511 | $709,526 | $677,353 | | Operating income | $190,857 | $192,903 | $183,896 | | Net income | $117,253 | $118,253 | $107,250 | | Net income attributable to common stockholders | $65,603 | $62,647 | $51,456 | | Total assets | $4,195,780 | $3,931,347 | $3,890,953 | | Total debt | $1,918,933 | $1,688,721 | $1,612,331 | | Core FFO | $290,440 | $286,925 | $269,000 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In 2018, the company achieved net income of $65.6 million and Core FFO of $290.4 million, driven by higher rental rates and increased Observatory revenue - 2018 Highlights: - Achieved net income of $65.6 million and Core FFO of $290.4 million[141] - Signed 156 leases for over 1 million sq. ft., with a 24.5% mark-to-market rent increase on Manhattan office leases[141] - Realized $20.8 million in lease termination fee income[143] - Opened the new Observatory entrance as part of a major redevelopment project[143] - Authorized a $500 million stock and OP unit repurchase program[143] Comparison of Operations (2018 vs. 2017, in thousands) | Line Item | 2018 | 2017 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $731,511 | $709,526 | $21,985 | 3.1% | | Total Operating Expenses | $540,654 | $516,623 | ($24,031) | (4.7)% | | Operating Income | $190,857 | $192,903 | ($2,046) | (1.1)% | | Net Income | $117,253 | $118,253 | ($1,000) | (0.8)% | - The increase in 2018 revenue was primarily driven by higher rental rates, a $7.3 million increase in lease termination fees, and a $4.1 million increase in Observatory revenue[149] - As of Dec 31, 2018, the company had $1.9 billion of total debt with a weighted average interest rate of 3.84% and a weighted average maturity of 8.1 years; it maintained $1.1 billion in available borrowing capacity under its unsecured revolving credit facility[158] FFO Reconciliation (in thousands) | Metric | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net Income | $117,253 | $118,253 | $107,250 | | FFO | $282,609 | $276,491 | $260,519 | | Modified FFO | $290,440 | $284,322 | $268,350 | | Core FFO | $290,440 | $286,925 | $269,000 | Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, which was mitigated as of December 31, 2018, by fixing its $265.0 million unsecured term loan via an interest rate swap - The principal market risk is interest rate volatility on variable rate debt; however, as of December 31, 2018, the company had no variable rate debt outstanding due to an interest rate swap agreement fixing the rate on its $265.0 million term loan[202] - The company utilizes derivative financial instruments, such as interest rate swaps, to reduce floating rate exposure; as of year-end 2018, it had swap agreements with an aggregate notional value of $515.0 million[202] Item 8. Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for the fiscal year ended December 31, 2018, along with accompanying notes and schedules - This section incorporates by reference the company's complete audited consolidated financial statements and supplementary data schedules as of and for the year ended December 31, 2018[203] - The independent auditor, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements, stating they present fairly the financial position and results of operations in conformity with U.S. GAAP[235] 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 any matter of accounting principles or practices, or financial statement disclosure - There were no disagreements with accountants on accounting and financial disclosure[203] Item 9A. Controls and Procedures Based on an evaluation as of December 31, 2018, the company's Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were effective - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2018[206] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2018[208] - The independent auditor, Ernst & Young LLP, issued an unqualified attestation report on the effectiveness of the company's internal control over financial reporting as of December 31, 2018[209] Item 9B. Other Information The company reported no information required to be disclosed in a report on Form 8-K during the fourth quarter of 2018 that was not previously reported - No other information was reported for this item[213] Part III Items 10-14 Information required for Items 10-14 is incorporated by reference from the company's definitive proxy statement for its 2019 Annual Meeting of Stockholders - The information for Directors, Executive Compensation, Security Ownership, Related Transactions, and Accounting Fees is incorporated by reference from the company's 2019 Proxy Statement[215][217][218] Part IV Item 15. Exhibits, Financial Statement Schedules This section lists all documents filed as part of the Form 10-K report, including consolidated financial statements, schedules, and a comprehensive index of exhibits - This section lists the financial statements, schedules, and exhibits filed with the Form 10-K[220] - Key exhibits include the company's charter and bylaws, debt agreements, equity incentive plan, employment agreements, and various registration rights and tax protection agreements[222][223] Item 16. Form 10-K Summary The company has elected not to provide a summary under this item - The company reports 'None' for this item, indicating no summary is provided[225]