Empire State Realty Trust(ESRT) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The unaudited financial statements detail balance sheets, operations, equity, and cash flows for periods ended September 30, 2021 Condensed Consolidated Balance Sheets Total assets and liabilities slightly decreased while cash and cash equivalents increased from year-end 2020 | Metric | September 30, 2021 (thousands) | December 31, 2020 (thousands) | | :--- | :--- | :--- | | Total Assets | $4,112,163 | $4,150,695 | | Total Liabilities | $2,398,482 | $2,419,388 | | Total Equity | $1,713,681 | $1,731,307 | | Cash and Cash Equivalents | $582,188 | $526,714 | Condensed Consolidated Statements of Operations Net loss narrowed year-over-year, driven by significant growth in observatory revenue and lease termination fees | Metric | Three Months Ended Sep 30, 2021 (thousands) | Three Months Ended Sep 30, 2020 (thousands) | Nine Months Ended Sep 30, 2021 (thousands) | Nine Months Ended Sep 30, 2020 (thousands) | | :--- | :--- | :--- | :--- | :--- | | Net Loss | $(10,183) | $(12,269) | $(8,963) | $(23,599) | | Total Revenues | $165,048 | $146,575 | $463,760 | $457,829 | | Observatory Revenue | $12,796 | $4,419 | $23,758 | $24,049 | | Lease Termination Fees | $11,321 | $331 | $15,949 | $1,575 | | Basic Earnings Per Share | $(0.04) | $(0.05) | $(0.04) | $(0.09) | | Dividends Per Share | $0.035 | $— | $0.070 | $0.210 | - Observatory revenue increased by 189.6% for the three months ended September 30, 2021, compared to the same period in 2020[168] - Lease termination fees surged by 3,320.2% for the three months ended September 30, 2021, compared to the same period in 2020[168] Condensed Consolidated Statements of Comprehensive Loss Comprehensive loss significantly decreased due to improved unrealized gains on interest rate swap agreements | Metric | Three Months Ended Sep 30, 2021 (thousands) | Three Months Ended Sep 30, 2020 (thousands) | Nine Months Ended Sep 30, 2021 (thousands) | Nine Months Ended Sep 30, 2020 (thousands) | | :--- | :--- | :--- | :--- | :--- | | Comprehensive Loss | $(7,366) | $(9,332) | $(415) | $(36,953) | | Unrealized gain (loss) on valuation of interest rate swap agreements | $(103) | $64 | $(139) | $(19,340) | Condensed Consolidated Statements of Stockholders' Equity (Three Months) Stockholders' equity decreased in Q3 2021 due to share repurchases and dividends, partially offset by other comprehensive income | Metric | Balance at June 30, 2021 (thousands) | Balance at September 30, 2021 (thousands) | | :--- | :--- | :--- | | Total Stockholders' Equity | $1,055,659 | $1,038,978 | | Repurchases of common shares | N/A | $(6,510) | | Dividends and distributions | N/A | $(11,029) | | Other comprehensive income | N/A | $2,817 | Condensed Consolidated Statements of Stockholders' Equity (Nine Months) Total equity decreased over nine months due to share repurchases and dividends exceeding other comprehensive income | Metric | Balance at Dec 31, 2020 (thousands) | Balance at September 30, 2021 (thousands) | | :--- | :--- | :--- | | Total Equity | $1,731,307 | $1,713,681 | | Repurchases of common shares | N/A | $(10,043) | | Dividends and distributions | N/A | $(22,584) | | Other comprehensive income | N/A | $8,548 | Condensed Consolidated Statements of Cash Flows Cash from operations increased while financing activities used cash, resulting in a net increase in total cash | Metric | Nine Months Ended Sep 30, 2021 (thousands) | Nine Months Ended Sep 30, 2020 (thousands) | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $167,027 | $163,553 | | Net Cash Used in Investing Activities | $(70,760) | $(113,354) | | Net Cash (Used in) Provided by Financing Activities | $(43,239) | $106,157 | | Net Increase in Cash and Cash Equivalents and Restricted Cash | $53,028 | $156,356 | | Cash and Cash Equivalents and Restricted Cash—End of Period | $620,967 | $427,953 | Notes to Condensed Consolidated Financial Statements These notes provide essential context and detailed breakdowns for the financial statements 1. Description of Business and Organization Empire State Realty Trust, Inc. is a self-managed REIT focused on office and retail properties in the New York area - ESRT is a self-administered and self-managed REIT that owns, manages, operates, acquires, and repositions office and retail properties in Manhattan and the greater New York metropolitan area[29] - As of September 30, 2021, the total portfolio contained 10.1 million rentable square feet of office and retail space[30] - ESRT owned approximately 60.8% of the aggregate operating partnership units in the Operating Partnership as of September 30, 2021[31] 2. Summary of Significant Accounting Policies Financial statements adhere to GAAP and SEC regulations, with key policies involving significant estimates and recent adoptions - Unaudited condensed consolidated financial statements are prepared in conformity with GAAP for interim financial information and SEC rules[33] - The company consolidates entities where it has a controlling financial interest, including variable interest entities where it is the primary beneficiary (e.g., the Operating Partnership)[37] - Significant accounting estimates include allocation of purchase price for acquired real estate, useful life of assets, impairment analysis, tenant expense reimbursements, and valuation of derivative instruments and debt[40] - The company elected to apply hedge accounting expedients related to probability and effectiveness assessments for future LIBOR-indexed cash flows under ASU 2020-04 (Reference Rate Reform)[42][44] 3. Deferred Costs, Acquired Lease Intangibles and Goodwill Deferred costs decreased, while goodwill underwent an impairment test with the observatory unit's fair value exceeding its carrying value | Metric | September 30, 2021 (thousands) | December 31, 2020 (thousands) | | :--- | :--- | :--- | | Total deferred costs, net (excluding financing) | $181,495 | $201,721 | | Acquired below-market ground leases, net | $338,862 | $344,735 | | Acquired below-market leases, net | $(23,512) | $(31,705) | - Goodwill as of September 30, 2021, was $491.5 million, allocated $227.5 million to the observatory segment and $264.0 million to the real estate segment[46] - An impairment test for the Observatory reporting unit's goodwill determined its fair value exceeded its carrying value by less than 15.0%, influenced by COVID-19 impacts[46][48] 4. Debt The company maintained compliance with all debt covenants, with total principal debt of approximately $2.15 billion | Metric | September 30, 2021 (thousands) | | :--- | :--- | | Total Principal Debt | $2,148,831 | | Weighted Average Interest Rate | 3.9% | | Weighted Average Maturity | 7.4 years | - The company was in compliance with all debt covenants as of September 30, 2021[49][55][58] - Excluding principal amortization, no outstanding debt matures until November 2024[146] - The company has an amended senior unsecured credit facility of up to $1.065 billion, including an $850.0 million revolving credit facility (undrawn as of Sep 30, 2021) and a $215.0 million term loan facility[53] 5. Accounts Payable and Accrued Expenses Accounts payable and accrued expenses decreased, with a notable reduction in interest rate swap agreement liability | Metric | September 30, 2021 (thousands) | December 31, 2020 (thousands) | | :--- | :--- | :--- | | Total Accounts Payable and Accrued Expenses | $94,216 | $103,203 | | Interest Rate Swap Agreement Liability | $4,887 | $8,849 | 6. Financial Instruments and Fair Values The company uses interest rate swaps to manage interest rate risk, with derivatives classified as Level 2 fair value - Derivative financial instruments, primarily interest rate swap and forward agreements, are used to manage interest rate risk and are not considered speculative[60] - As of September 30, 2021, an interest rate LIBOR swap with an aggregate notional value of $265.0 million had a fair value of $(4.9) million (liability) and was designated as a highly effective cash flow hedge[62][65] - Derivatives are classified as Level 2 in the fair value hierarchy, while mortgage notes, senior unsecured notes, and term loan facilities are determined using Level 3 inputs[67][68] 7. Leases The company's rental revenue includes fixed and variable payments, with future minimum lease payments totaling $3.9 billion | Metric | Three Months Ended Sep 30, 2021 (thousands) | Nine Months Ended Sep 30, 2021 (thousands) | | :--- | :--- | :--- | | Total Rental Revenue | $139,558 | $420,586 | | Fixed Payments | $124,764 | $374,968 | | Variable Payments | $14,794 | $45,618 | - Future contractual minimum lease payments (as lessor) on non-cancellable operating leases total $3,902,670 thousand as of September 30, 2021, expiring through 2039[74] - Operating lease agreements (as lessee) relate to three ground lease assets, with right-of-use assets and lease liabilities of $28.9 million each, and a weighted average remaining lease term of 48.6 years[75] 8. Commitments and Contingencies The company faces ongoing IPO-related litigation and anticipates $85.2 million in unfunded capital expenditures - An arbitration panel awarded claimants approximately $1.2 million (inclusive of interest) in IPO-related litigation, with the court denying the company's motion to vacate[80][81] - Estimated unfunded capital expenditures of approximately $85.2 million for tenant improvements and leasing commissions under existing lease agreements[83] - The company is unable to reasonably estimate the fair value of conditional asset retirement obligations related to asbestos removal due to indeterminable settlement dates[85] 9. Equity The company reauthorized a $500 million stock repurchase program and reinstated quarterly dividends in Q3 2021 - As of September 30, 2021, there were 285,104,512 common stock and OP Units outstanding, with ESRT owning 60.8%[96] - The Board of Directors reauthorized a stock repurchase program of up to $500 million of Class A common stock and OP units through December 31, 2021[97] | Metric | Three Months Ended Sep 30, 2021 (thousands) | Nine Months Ended Sep 30, 2021 (thousands) | | :--- | :--- | :--- | | Total Dividends Paid to Common Stockholders | $6,100 | $12,100 | | Total Distributions Paid to OP Unitholders | $3,900 | $7,300 | | Total Distributions Paid to Preferred Unitholders | $1,100 | $3,200 | - The company reinstated its quarterly dividend, declaring $0.035 per share for the third quarter of 2021[227] - Unrecognized compensation expense for LTIP units and restricted stock was $28.1 million at September 30, 2021, to be recognized over a weighted average period of 2.4 years[109] 10. Related Party Transactions The company engages in various transactions with entities affiliated with its Chairman and CEO, Anthony E. Malkin | Metric | Three Months Ended Sep 30, 2021 (thousands) | Three Months Ended Sep 30, 2020 (thousands) | Nine Months Ended Sep 30, 2021 (thousands) | Nine Months Ended Sep 30, 2020 (thousands) | | :--- | :--- | :--- | :--- | :--- | | Supervisory Fees Revenue | $300 | $200 | $800 | $700 | | Property Management Fee Revenue | $100 | $100 | $200 | $200 | | Other Revenue (rent & computer support) | $100 | $100 | $200 | $200 | 11. Segment Reporting The company operates in two segments, with the real estate segment reporting a net loss and the observatory segment generating net income in Q3 2021 - The company has two reportable segments: real estate (ownership, management, operation of properties) and observatory (Empire State Building observatories)[117] | Metric | Real Estate (3 Months Ended Sep 30, 2021, thousands) | Observatory (3 Months Ended Sep 30, 2021, thousands) | | :--- | :--- | :--- | | Net Income (Loss) | $(11,329) | $1,146 | | Total Operating Income | $11,984 | $1,219 | | Total Revenues | $157,424 | $12,934 | | Metric | Real Estate (9 Months Ended Sep 30, 2021, thousands) | Observatory (9 Months Ended Sep 30, 2021, thousands) | | :--- | :--- | :--- | | Net Loss | $(3,906) | $(5,057) | | Total Operating Income (Loss) | $66,732 | $(8,696) | | Total Revenues | $456,135 | $23,896 | - During the nine months ended September 30, 2020, the real estate segment recorded $6.2 million in impairment charges, including a $4.1 million write-off for a power generation project and a $2.1 million write-off for a halted build-to-suit development[125] 12. Subsequent Events The company signed conditional agreements to acquire two Manhattan multifamily assets for approximately $307 million - On October 26, 2021, the company signed conditional agreements to purchase two multifamily assets in Manhattan (625 residential units) for approximately $307 million, including $186 million of assumed debt[126] - The transaction is subject to conditions, and there is no assurance that it will close[127] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management discusses financial performance, liquidity, and capital resources, including COVID-19 impacts and non-GAAP measures Overview The company reported a net loss of $7.0 million but achieved Core FFO of $55.3 million for Q3 2021 amid recovering operations - Incurred net loss attributable to the Company of $7.0 million and achieved Core Funds From Operations ('Core FFO') of $55.3 million for the three months ended September 30, 2021[136] - Empire State Building Observatory revenue for Q3 2021 increased to $12.8 million, more than doubling Q2 earnings contribution, as visitation continued to ramp up[138] - Signed 34 new, renewal, and expansion leases, representing a total of 268,055 rentable square feet, including 21 leases totaling 212,301 rentable square feet in the Manhattan office portfolio[139] - Repurchased $6.5 million of common stock at a weighted average price of $10.41 per share in Q3 2021 and through October 26, 2021[140] - As of September 30, 2021, the total portfolio contained 10.1 million rentable square feet of office and retail space[141] Impact of COVID-19 The pandemic continued to impact operations, particularly the observatory and leasing, though the company maintains strong liquidity - The company holds $582.2 million in cash and cash equivalents and has $850 million undrawn capacity under its unsecured revolving credit facility[148] - All office buildings remained open, with scaled-back operations to reduce costs, while the company implemented plans for safe tenant reoccupation[152][153] - Leasing activity slowed due to economic uncertainty, with the portfolio 86.5% leased as of September 30, 2021[155] - GBG USA Inc. filed for Chapter 11 bankruptcy, leading to a $1.6 million non-cash write-off of straight-line receivables and the conversion of a $17.0 million letter of credit to cash, applied against receivables and recognized as rental revenue and lease termination income[158][159][160] - The Empire State Building Observatory fully reopened with interactive exhibits on June 16, 2021, but visitor mix remains impacted by international travel restrictions, with full restoration expected in 2022[164] Results of Operations Net loss improved year-over-year for both three and nine-month periods, driven by increased observatory and lease termination revenue Three Months Ended September 30, 2021 Compared to the Three Months Ended September 30, 2020 Total revenues increased 12.6% in Q3 2021, driven by a 189.6% surge in observatory revenue and a 3,320.2% rise in lease termination fees | Metric | 2021 (thousands) | 2020 (thousands) | Change (thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $165,048 | $146,575 | $18,473 | 12.6% | | Observatory Revenue | $12,796 | $4,419 | $8,377 | 189.6% | | Lease Termination Fees | $11,321 | $331 | $10,990 | 3,320.2% | | Net Loss Attributable to Common Stockholders | $(6,977) | $(8,204) | $1,227 | 15.0% | | Depreciation and Amortization | $65,794 | $44,733 | $(21,061) | (47.1)% | - The increase in depreciation and amortization reflects write-offs primarily related to one tenant[180] - Real estate taxes decreased due to a reduction in assessed value for the tax period July 1, 2021, to June 30, 2022[179] Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September 30, 2020 Total revenues rose 1.3% over nine months, driven by a significant increase in lease termination fees, improving net loss by 54.4% | Metric | 2021 (thousands) | 2020 (thousands) | Change (thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $463,760 | $457,829 | $5,931 | 1.3% | | Lease Termination Fees | $15,949 | $1,575 | $14,374 | 912.6% | | Net Loss Attributable to Common Stockholders | $(7,523) | $(16,502) | $8,979 | 54.4% | | Property Operating Expenses | $92,429 | $105,054 | $12,625 | 12.0% | | General and Administrative Expenses | $42,369 | $48,617 | $6,248 | 12.9% | - The decrease in property operating expenses was primarily due to lower payroll, cleaning, and repair/maintenance costs, driven by lower tenant utilization[193] - The decrease in general and administrative expenses was primarily due to lower equity compensation expense, lower legal leasing costs, and higher severance costs in 2020[195] - Impairment charges in 2020 included a $4.1 million write-off for a power generation project and a $2.1 million write-off for a halted build-to-suit development[197] Liquidity and Capital Resources The company maintains strong liquidity with $582.2 million in cash and $850 million undrawn credit, with no debt maturing until 2024 - As of September 30, 2021, the company had $582.2 million in cash and cash equivalents and $850 million available under its unsecured revolving credit facility[206] - Total consolidated indebtedness was approximately $2.1 billion, with a weighted average interest rate of 3.9% and a weighted average maturity of 7.4 years[207] - Excluding principal amortization, there is no outstanding debt maturing until November 2024[207] - The company was in compliance with all financial covenants under its credit facilities and senior unsecured notes as of September 30, 2021[210][213] - The company reinstated its quarterly dividend in May 2021, declaring $0.035 per share for Q3 2021[227] - The Board of Directors authorized the repurchase of up to $500 million of Class A common stock and OP units through December 31, 2021[230] Net Operating Income ("NOI") NOI, a non-GAAP measure used to evaluate property performance, increased for both the three and nine-month periods - NOI is a non-GAAP financial measure used to evaluate property performance, excluding cost of funds, depreciation, amortization, and general and administrative expenses[236] | Metric | Three Months Ended Sep 30, 2021 (thousands) | Three Months Ended Sep 30, 2020 (thousands) | Nine Months Ended Sep 30, 2021 (thousands) | Nine Months Ended Sep 30, 2020 (thousands) | | :--- | :--- | :--- | :--- | :--- | | Net Operating Income | $93,110 | $72,154 | $254,827 | $235,891 | Funds from Operations ("FFO") FFO, a supplemental non-GAAP measure of operating performance for REITs, increased significantly year-over-year - FFO is a non-GAAP financial measure, defined by NAREIT, that excludes impairment write-offs, gains/losses from debt restructurings and property sales, and includes real estate-related depreciation and amortization[240] | Metric | Three Months Ended Sep 30, 2021 (thousands) | Three Months Ended Sep 30, 2020 (thousands) | Nine Months Ended Sep 30, 2021 (thousands) | Nine Months Ended Sep 30, 2020 (thousands) | | :--- | :--- | :--- | :--- | :--- | | FFO attributable to common stockholders and non-controlled interests | $53,332 | $30,969 | $139,035 | $117,169 | Modified Funds From Operations ("Modified FFO") Modified FFO, which adjusts for ground lease amortization, provides a more comprehensive view of operating performance - Modified FFO adds back an adjustment for any above or below-market ground lease amortization to traditionally defined FFO[242] | Metric | Three Months Ended Sep 30, 2021 (thousands) | Three Months Ended Sep 30, 2020 (thousands) | Nine Months Ended Sep 30, 2021 (thousands) | Nine Months Ended Sep 30, 2020 (thousands) | | :--- | :--- | :--- | :--- | :--- | | Modified FFO attributable to common stockholders and non-controlled interests | $55,289 | $32,926 | $144,908 | $123,042 | Core Funds From Operations ("Core FFO") Core FFO adjusts for non-recurring items like litigation and severance expenses to clarify core operating performance - Core FFO adds back to Modified FFO items such as IPO litigation expense, severance expenses, and loss on early extinguishment of debt to provide a supplemental measure of operating performance[243] | Metric | Three Months Ended Sep 30, 2021 (thousands) | Three Months Ended Sep 30, 2020 (thousands) | Nine Months Ended Sep 30, 2021 (thousands) | Nine Months Ended Sep 30, 2020 (thousands) | | :--- | :--- | :--- | :--- | :--- | | Core FFO attributable to common stockholders and non-controlled interests | $55,289 | $34,896 | $145,122 | $128,106 | Factors That May Influence Future Results of Operations Future results depend on COVID-19's impact on tourism and office demand, leasing activity, and observatory operations - The economic uncertainty relating to the COVID-19 pandemic continues to impact leasing activity, potentially leading to higher vacancy, longer fill times, increased concessions, and lower rental rates[155] - As of September 30, 2021, 13.5% of the portfolio's net rentable square footage was available to lease, with 2.3% and 5.5% of leases expiring in 2021 and 2022, respectively[250] - Observatory operations are closely tied to national and international travel trends, which remain adversely impacted by the COVID-19 pandemic, with pre-COVID-19 attendance levels not expected until 2022[253][254] Critical Accounting Estimates No material changes were made to the critical accounting estimates disclosed in the 2020 Annual Report on Form 10-K - No material changes to critical accounting estimates since the Annual Report on Form 10-K for the year ended December 31, 2020[256] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The company's primary market risk is interest rate risk, which it mitigates with hedging instruments while monitoring the LIBOR transition - The primary market risk is interest rate risk on variable rate indebtedness, with floating rate debt representing 2.5% of total enterprise value as of September 30, 2021[258] - The company uses hedging instruments, such as interest rate swap agreements, to mitigate interest rate volatility and fix a portion of interest rates for financing and refinancing transactions[259][260] - As of September 30, 2021, an interest rate LIBOR swap agreement with a notional value of $265.0 million fixes the LIBOR interest rate at 2.1485% and matures on August 24, 2022[261] - The company is monitoring and evaluating risks related to the phasing out of USD LIBOR after June 30, 2023, and the transition to alternative reference rates like SOFR[264][266] ITEM 4. CONTROLS AND PROCEDURES Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2021[272] - No material changes to internal control over financial reporting were identified during the period covered by the report[273] PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS This section refers to Note 8 of the financial statements for details on legal proceedings, including IPO-related litigation - Legal proceedings are described in Note 8 to the Notes to Condensed Consolidated Financial Statements[274] ITEM 1A. RISK FACTORS No material changes have been made to the risk factors previously disclosed in the 2020 Annual Report and Q1 2021 Quarterly Report - No material changes to the risk factors included in the Annual Report on Form 10-K for 2020 and the Quarterly Report on Form 10-Q for Q1 2021[275] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The company reported no unregistered sales of equity securities and continued its $500 million stock repurchase program - No recent sales of unregistered securities[276] - The Board of Directors authorized the repurchase of up to $500 million of Class A common stock and operating partnership units through December 31, 2021[278] Equity Repurchases (Three Months Ended September 30, 2021) | Period | Total Shares Purchased | Weighted Average Price per Share | Maximum Approximate Dollar Available for Purchase (in thousands) | | :--- | :--- | :--- | :--- | | July 2021 | — | — | $496,467 | | August 2021 | 403,831 | $10.54 | $492,212 | | September 2021| 221,771 | $10.17 | $489,958 | ITEM 3. DEFAULTS UPON SENIOR SECURITIES The company reported no defaults upon its senior securities - No defaults upon senior securities[280] ITEM 4. MINE SAFETY DISCLOSURES The company stated that mine safety disclosures are not applicable - Mine safety disclosures are not applicable[280] ITEM 5. OTHER INFORMATION The company reported no other information for this period - No other information to report[280] ITEM 6. EXHIBITS This section lists the exhibits filed with the Form 10-Q, including officer certifications and XBRL documents - Exhibits include certifications from the Chief Executive Officer (31.1, 32.1) and Principal Financial Officer (31.2, 32.2), along with XBRL Instance, Schema, Calculation, Definitions, Labels, and Presentation Documents[282] SIGNATURES The report is duly signed by the company's Chief Financial Officer and Chief Accounting Officer - The report is signed by Christina Chiu, Executive Vice President and Chief Financial Officer, and Stephen V. Horn, Senior Vice President, Chief Accounting Officer[287]