Empire State Realty Trust(ESRT) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements The company's financial statements for the period ended September 30, 2023, show total assets of $4.22 billion, a slight increase from $4.16 billion at year-end 2022. For the nine months ended September 30, 2023, net income attributable to common stockholders was $39.9 million, a significant increase from $23.8 million in the prior-year period, driven by higher observatory revenue and gains on property dispositions. Cash flow from operations also increased to $196.0 million from $174.0 million year-over-year Condensed Consolidated Balance Sheets As of September 30, 2023, total assets were $4.217 billion, a slight increase from $4.164 billion at December 31, 2022. The increase was primarily driven by a rise in cash and cash equivalents. Total liabilities remained stable at approximately $2.48 billion, while total equity increased to $1.733 billion from $1.683 billion Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2023 (unaudited) | Dec 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Commercial real estate properties, net | $2,402,130 | $2,414,182 | | Cash and cash equivalents | $353,999 | $264,434 | | Total assets | $4,216,547 | $4,163,594 | | Liabilities & Equity | | | | Mortgage notes payable, net | $878,757 | $883,705 | | Senior unsecured notes, net | $973,819 | $973,659 | | Total liabilities | $2,483,227 | $2,480,503 | | Total equity | $1,733,320 | $1,683,091 | | Total liabilities and equity | $4,216,547 | $4,163,594 | Condensed Consolidated Statements of Operations For the third quarter of 2023, total revenues increased to $191.5 million from $183.7 million year-over-year, primarily due to a 13.6% rise in Observatory revenue. Net income attributable to common stockholders more than doubled to $11.6 million, or $0.07 per diluted share, compared to $5.6 million, or $0.03 per diluted share, in Q3 2022. For the nine-month period, net income attributable to common stockholders rose to $39.9 million from $23.8 million Q3 2023 vs Q3 2022 Performance (in thousands, except per share) | Metric | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | Total revenues | $191,526 | $183,712 | | Rental revenue | $151,458 | $148,290 | | Observatory revenue | $37,562 | $33,051 | | Total operating income | $42,257 | $35,527 | | Net income attributable to common stockholders | $11,560 | $5,557 | | Diluted EPS | $0.07 | $0.03 | Nine Months Ended Sep 30, 2023 vs 2022 Performance (in thousands, except per share) | Metric | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | | Total revenues | $546,690 | $545,768 | | Observatory revenue | $93,149 | $73,660 | | Gain on disposition of property | $29,261 | $27,170 | | Net income attributable to common stockholders | $39,933 | $23,847 | | Diluted EPS | $0.25 | $0.14 | Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2023, net cash provided by operating activities increased to $196.0 million from $174.0 million in the prior-year period. Net cash used in investing activities decreased significantly to $39.4 million from $89.1 million, mainly due to proceeds from property dispositions. Net cash used in financing activities also decreased to $50.4 million from $119.7 million, primarily due to lower share repurchases Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $196,048 | $173,985 | | Net cash used in investing activities | ($39,379) | ($89,116) | | Net cash used in financing activities | ($50,394) | ($119,692) | | Net increase (decrease) in cash | $106,275 | ($34,823) | Notes to Condensed Consolidated Financial Statements The notes detail the company's business as a New York City-focused REIT with a portfolio of office, retail, and multifamily assets, including the Empire State Building Observatory. Key notes cover acquisitions and dispositions, debt structure, lease information, segment performance, and equity compensation. In Q3 2023, the company acquired a retail property in Brooklyn for $26.4 million. Total debt stood at $2.26 billion, with no significant maturities until November 2024. The company remains in compliance with all debt covenants - As of September 30, 2023, ESRT's portfolio comprised approximately 8.6 million rentable sq. ft. of office space, 0.7 million rentable sq. ft. of retail space, and 727 residential units, primarily in New York City[26] - On September 14, 2023, the company acquired a retail property in Williamsburg, Brooklyn for $26.4 million. In early 2023, it disposed of properties in Harrison, NY, and Westport, CT, for a total of $93.0 million, generating a combined gain of $29.3 million[37][40] - Total principal debt as of September 30, 2023, was approximately $2.26 billion, consisting of mortgage debt, senior unsecured notes, and unsecured term loan facilities. The company was in compliance with all debt covenants[48][49] - The company has two reportable segments: Real Estate and Observatory. For Q3 2023, the Real Estate segment generated $15.2 million in net income, while the Observatory segment generated $4.7 million[113][115] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management reports strong Q3 2023 results, with net income attributable to common stockholders of $11.6 million and Core FFO of $65.9 million. The performance was driven by a 13.6% year-over-year increase in Observatory revenue and stable rental revenue. The company maintains a strong liquidity position with $354.0 million in cash and $850 million available on its credit facility, with no significant debt maturities until late 2024. While acknowledging macroeconomic uncertainties, management believes its diversified, modernized New York City-focused portfolio and strong balance sheet position it well competitively - Highlights for Q3 2023 include net income of $11.6 million, Core FFO of $65.9 million, and signing 248,479 rentable square feet of leases. The Empire State Building Observatory generated $28.1 million of net operating income[126] - The company maintains a strong liquidity position with $354.0 million in cash and cash equivalents and $850 million available under its unsecured revolving credit facility as of September 30, 2023[146] - Management acknowledges global economic uncertainty but believes ESRT is well-positioned due to its diversified income drivers (office, retail, multifamily, observatory), modernized NYC-focused portfolio, and a strong balance sheet with no near-term debt maturities[188][189] Results of Operations For Q3 2023, total revenues grew 4.3% YoY to $191.5 million, driven by a $4.5 million (13.6%) increase in Observatory revenue. Real Estate rental revenue saw a modest 2.1% increase. For the nine-month period, Observatory revenue grew 26.5% YoY, while a $20 million lease termination fee in 2022 kept total revenue growth nearly flat at 0.2%. The decrease in nine-month depreciation and amortization was due to accelerated depreciation on a disposed property in 2022 - Q3 2023 vs. Q3 2022: Observatory revenue increased by $4.5 million (13.6%) due to higher visitation and revenue per visitor. Rental revenue increased by $3.2 million (2.1%) from new leases and higher rents[127][129][130] - YTD 2023 vs. YTD 2022: Observatory revenue increased by $19.5 million (26.5%). Total revenue growth was muted by the absence of a $20.0 million lease termination fee that was recognized in 2022[133] - YTD 2023 vs. YTD 2022: Depreciation and amortization decreased by $32.1 million, primarily reflecting accelerated depreciation in 2022 related to the consensual foreclosure of the 383 Main Avenue property[133][138] Liquidity and Capital Resources The company has a strong liquidity position with $354.0 million in cash and $850 million available under its credit facility. Total debt is approximately $2.2 billion with a weighted average interest rate of 3.9% and no maturities until November 2024. The company is in compliance with all financial covenants, maintaining a total leverage ratio of 33.2% against a required maximum of 60%. Capital expenditure commitments for existing leases are estimated at $139.3 million Financial Covenant Compliance (as of Sep 30, 2023) | Financial covenant | Required | Actual | In Compliance | | :--- | :--- | :--- | :--- | | Maximum total leverage | < 60% | 33.2 % | Yes | | Maximum secured leverage | < 40% | 13.0 % | Yes | | Minimum fixed charge coverage | > 1.50x | 3.0x | Yes | | Minimum unencumbered interest coverage | > 1.75x | 5.3x | Yes | | Maximum unsecured leverage | < 60% | 24.8 % | Yes | - As of September 30, 2023, the company had approximately $2.2 billion of total consolidated debt with a weighted average interest rate of 3.9% and a weighted average maturity of 5.7 years[146] - The company expects to incur approximately $139.3 million for future tenant improvements and leasing commissions related to existing lease agreements[159] Non-GAAP Financial Measures The company uses non-GAAP measures like NOI, FFO, and Core FFO to evaluate performance. For Q3 2023, Net Operating Income (NOI) was $104.6 million, up from $97.8 million in Q3 2022. Core Funds From Operations (Core FFO) for Q3 2023 was $65.9 million, an increase from $56.5 million in the prior-year quarter Reconciliation of Net Income to NOI (in thousands) | | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | Net income | $19,928 | $10,118 | | Adjustments... | ... | ... | | Net operating income | $104,625 | $97,847 | Reconciliation of Net Income to Core FFO (in thousands) | | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | Net income | $19,928 | $10,118 | | Real estate depreciation and amortization | $45,174 | $45,461 | | Other adjustments... | ... | ... | | FFO | $63,941 | $54,578 | | Amortization of below-market ground leases | $1,957 | $1,957 | | Modified FFO | $65,898 | $56,535 | | Core FFO | $65,898 | $56,535 | Quantitative and Qualitative Disclosure About Market Risk The company is primarily exposed to interest rate risk on its variable-rate debt and future refinancings. To mitigate this, ESRT uses fixed-rate debt and derivative instruments like interest rate swaps. As of September 30, 2023, the company had interest rate swap and cap agreements with a notional value of $573.6 million. The weighted average interest rate on its $2.2 billion of fixed-rate debt was 3.9% per annum - The company uses derivative financial instruments, such as interest rate swaps and caps, to manage interest rate risk on floating-rate debt[192] - As of September 30, 2023, the company had interest rate swap and cap agreements with an aggregate notional value of $573.6 million[193] - The weighted average interest rate on the company's $2.2 billion of fixed-rate debt was 3.9% per annum as of September 30, 2023[194] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures as of September 30, 2023. They concluded that these controls were effective. There were no material changes to the company's internal control over financial reporting during the quarter - The CEO and CFO concluded that as of September 30, 2023, the company's disclosure controls and procedures were effective[197] - No material changes to internal control over financial reporting occurred during the third quarter of 2023[198] PART II. OTHER INFORMATION Legal Proceedings The company is involved in an ongoing arbitration dispute with former investors of Empire State Building Associates L.L.C. related to the IPO. An initial award of approximately $1.2 million to the claimants was confirmed by a New York State court in July 2023. The company has appealed this ruling and believes it is incorrect. Other than this, the company is not involved in any material litigation outside the ordinary course of business - The company is appealing a New York State court ruling that confirmed a ~$1.2 million arbitration award in favor of former investors related to the IPO[78] - The company believes the ruling is incorrect and the appeal is pending. Other than routine litigation, no other material legal proceedings are reported[77][78] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2022 - As of September 30, 2023, there were no material changes to the company's risk factors[200] Unregistered Sales of Equity Securities and Use of Proceeds The company did not have any unregistered sales of equity securities. Under its stock repurchase program, authorized through December 31, 2023, no equity securities were repurchased during the three-month period ended September 30, 2023. Approximately $396.7 million remains available under the $500 million authorization - No equity securities were repurchased in the three months ended September 30, 2023[203] - The company has a $500 million stock repurchase program authorized through December 31, 2023, with approximately $396.7 million remaining available as of September 30, 2023[202] Exhibits The report includes several exhibits filed herewith, including CEO and CFO certifications pursuant to Sarbanes-Oxley Act Sections 302 and 906, and XBRL data files - Exhibits filed include CEO/CFO certifications (31.1, 31.2, 32.1, 32.2) and XBRL data files (101 series)[208]