Empire State Realty Trust Announces Second Quarter 2019 Results

- Earnings of $0.06 Per Fully Diluted Share -

- Core FFO of $0.22 Per Fully Diluted Share -

- Leased 261,052 Square Feet of Office and Retail Space -

NEW YORK--()--Empire State Realty Trust, Inc. (NYSE: ESRT) (the "Company"), a real estate investment trust with office and retail properties in Manhattan and the greater New York metropolitan area, today reported its operational and financial results for the second quarter of 2019.

Tenants continue to be attracted to our well-located, amenity-rich office buildings and during the second quarter, we leased approximately 261,000 square feet of office and retail space. In aggregate for the quarter, we delivered strong cash rent spreads of 22.2% on new Manhattan office leases and 12.2% on all leases portfolio-wide over previous fully escalated cash rents,” stated John B. Kessler, Empire State Realty Trust’s President and Chief Operating Officer.

Year-to-date, Observatory revenue adjusted for the closure of the 102nd floor observation deck was roughly flat due to improved pricing, offset by lower visitation, primarily due to 24 bad weather days in the second quarter,” added Kessler. “We are excited to open phase 2 of our Observatory redevelopment, the 2nd floor galleries, at the end of July. We remain well positioned, with a fortress balance sheet and deep bench of talent, as we continue to execute on our long-term strategy to consolidate, redevelop and re-lease space to larger, higher credit quality tenants at higher rents and create long-term value for shareholders.”

Second Quarter Highlights

  • Net income attributable to the Company was $0.06 per fully diluted share.
  • Core Funds From Operations (“Core FFO”) was $0.22 per fully diluted share.
  • Occupancy and leased percentages at June 30, 2019:
    • Total portfolio was 90.2% occupied; including Signed Leases Not Commenced (“SLNC”), the total portfolio was 92.2% leased.
    • Manhattan office portfolio (excluding the retail component of these properties) was 90.7% occupied; including SLNC, the Manhattan office portfolio was 93.0% leased.
    • Retail portfolio was 90.5% occupied; including SLNC, the retail portfolio was 92.3% leased.
    • Empire State Building was 93.5% occupied; including SLNC, was 95.2% leased.
  • Signed 55 leases, representing 261,052 rentable square feet across the total portfolio, and achieved a 12.2% increase in mark-to-market cash rent over previous fully escalated cash rents portfolio-wide on new, renewal, and expansion leases.
  • Signed 22 new leases, representing 119,235 rentable square feet for the Manhattan office portfolio (excluding the retail component of these properties), and achieved an increase of 22.2% in mark-to-market cash rent over previous fully escalated cash rents.
  • Empire State Building Observatory revenue for the second quarter 2019 decreased by 6.6% to $32.9 million from $35.2 million in the second quarter 2018. Net operating income for the second quarter 2019 decreased by 10.9% to $24.5 million from $27.5 million in the second quarter 2018. As a reminder, the 102nd floor observation deck was closed in the second quarter 2019.
  • Declared a dividend of $0.105 per share.

Financial Results for the Second Quarter 2019

Net income attributable to common stockholders was $11.1 million, or $0.06 per fully diluted share, compared to $16.7 million, or $0.10 per fully diluted share, in the second quarter of 2018.

Core FFO was $64.5 million, or $0.22 per fully diluted share, compared to $71.0 million, or $0.24 per fully diluted share, in the second quarter of 2018.

Modified FFO was $64.5 million, or $0.22 per fully diluted share, compared to $71.0 million, or $0.24 per fully diluted share, in the second quarter of 2018.

FFO was $62.5 million, or $0.21 per fully diluted share, compared to $69.0 million, or $0.23 per fully diluted share, in the second quarter of 2018.

A reconciliation of net income to FFO, Modified FFO and Core FFO is provided in the tables accompanying this press release.

Financial Results for the Six Months Ended June 30, 2019

Net income attributable to common stockholders was $16.8 million, or $0.09 per fully diluted share, compared to $26.4 million, or $0.16 per fully diluted share, in the six months ended June 30, 2018.

Core FFO was $121.1 million, or $0.41 per fully diluted share, compared to $130.2 million, or $0.44 per fully diluted share, in the six months ended June 30, 2018.

Modified FFO was $121.1 million, or $0.41 per fully diluted share, compared to $130.2 million, or $0.44 per fully diluted share, in the six months ended June 30, 2018.

FFO was $117.2 million, or $0.39 per fully diluted share, compared to $126.3 million, or $0.43 per fully diluted share, in the six months ended June 30, 2018.

Portfolio Operations

As of June 30, 2019, the Company’s total portfolio contained 10.1 million rentable square feet of office and retail space. The Company’s occupancy levels fluctuate in certain periods due to the timing lag between the date of tenants’ move out and the date of Company’s completion of redevelopment work for new leases to commence. As of June 30, 2019, the Company’s portfolio was occupied and leased as shown below. Leased percentages include signed leases not commenced.

 

 

 

June 30, 2019

March 31, 2019

June 30, 2018

Percent occupied:

 

Total portfolio

90.2%

88.8%

88.4%

 

Total office

90.1%

88.6%

88.4%

 

Manhattan office

90.7%

88.9%

88.3%

 

Empire State Building

93.5%

92.9%

92.9%

 

Retail

90.5%

90.7%

88.3%

Percent leased:

 

Total portfolio

92.2%

91.5%

91.4%

 

Total office

92.2%

91.4%

91.4%

 

Manhattan office

93.0%

92.2%

91.9%

 

Empire State Building

95.2%

94.1%

94.6%

 

Retail

92.3%

92.3%

91.1%

 

Leasing

For the three months ended June 30, 2019, the Company signed 55 new, renewal, and expansion leases within the total portfolio, comprising 261,052 rentable square feet with an average starting rental rate of $61.25 per rentable square foot, representing an increase of 12.2% over the previous fully escalated cash rent.

On a blended basis, the 38 new, renewal, and expansion office leases, comprising 175,446 rentable square feet signed within the Manhattan office portfolio during the second quarter, had an average starting rental rate of $64.21 per rentable square foot, representing an increase of 18.7% over the previous fully escalated cash rent.

Leases Signed in the Second Quarter 2019 for the Manhattan Office Portfolio

  • 22 new leases, comprising 119,235 rentable square feet, with an average starting rental rate of $65.08 per rentable square foot, representing an increase of 22.2% over the previous fully escalated cash rent, and
  • 16 renewal leases, comprising 56,211 rentable square feet, with an average starting rental rate of $62.37 per rentable square foot, representing an increase of 11.6% over the previous fully escalated cash rent.

Significant Leases Executed During the Second Quarter 2019

  • At 111 West 33rd Street, the Company signed a new lease totaling 26,134 rentable square feet with The Interpublic Group of Companies, Inc. for a term of 5.5 years.
  • At 111 West 33rd Street, the Company signed a new lease totaling 20,962 rentable square feet with L’Occitane, Inc. for a term of 10.5 years.

Observatory

Observatory revenue for the second quarter 2019 declined 6.6% compared to the second quarter 2018 driven by the closure of the 102nd floor observation deck as part of the Observatory upgrade program and a visitation decline, partially offset by improved pricing and the timing of the Easter holiday week. As set forth in the chart below, excluding the second quarter 2018 102nd floor revenue, year-over-year revenue would have increased 2.3%.

Second Quarter Observatory Results

 

(dollars in thousands)

2019

 

2018

 

Percent
Change

 

 

 

 

 

 

Observatory revenue

$32,895

 

$35,201

 

(6.6%)

Less: 102nd floor revenue

-

 

(3,041)

 

-

Observatory revenue excluding 102nd floor

$32,895

 

$32,160

 

2.3%

 

 

 

 

 

 

Number of visitors

968,000

 

1,049,000

 

(7.7%)

Bad weather days

24

 

11

 

 

 

In the second quarter 2019 there were more bad weather days compared to the second quarter 2018 which offset the benefit from the Easter holiday shift. The 24 bad weather days in the second quarter 2019 were the highest number of bad weather days reported in the second quarter since 2013 and were concentrated in the seasonally busier months of May and June. The Company estimates that 2019 bad weather days resulted in approximately 67,000 fewer visitors than in the prior year period. As a reminder, in 2018, the Easter holiday week was split between the first and second quarters, versus 2019, when the Easter holiday week was entirely in the second quarter. The Company estimates the Easter holiday shift provided a benefit of approximately 20,000 visitors and other factors resulted in 34,000 fewer visitors.

First Half Observatory Results

Observatory revenue for the first half of 2019 declined 5.3% compared to the first half of 2018 driven by the closure of the 102nd floor observation deck as part of the Observatory upgrade program and a visitation decline, partially offset by improved pricing. As set forth in the chart below, excluding the 102nd floor revenue, year-over-year revenue growth in the first half of 2019 would have been approximately flat. In the first half of 2019 there were more bad weather days compared to the first half of 2018.

 

(dollars in thousands)

2019

 

2018

 

Percent
Change

 

 

 

 

 

 

Observatory revenue

$53,464

 

$56,450

 

(5.3%)

Less: 102nd floor revenue

(180)

 

(3,124)

 

-

Observatory revenue excluding 102nd floor

$53,284

 

$53,326

 

(0.1%)

 

 

 

 

 

 

Number of visitors

1,569,000

 

1,693,000

 

(7.3%)

Bad weather days

39

 

26

 

 

 

The Company continues its work on the 102nd floor component of its Observatory upgrade program and the 102nd floor Observatory is currently expected to remain closed through September 2019 during the upgrade.

Balance Sheet

At June 30, 2019, there was no outstanding balance under the Company’s $1.1 billion unsecured revolving credit facility, and the Company’s $265 million term loan facility was fully drawn. The facilities have an accordion feature allowing for an increase in the maximum aggregate principal balance to $1.75 billion under certain circumstances. The Company held cash, cash equivalents and short-term investments of $525.3 million at June 30, 2019.

As of June 30, 2019, the Company had total debt outstanding of approximately $1.9 billion, with a weighted average interest rate of 3.84% per annum, and a weighted average term to maturity of 7.6 years. None of the Company’s outstanding debt is subject to variable interest rates. At June 30, 2019, the Company’s consolidated net debt to total market capitalization was approximately 23.6% and consolidated net debt to EBITDA was 3.9x.

Dividend

On June 28, 2019, the Company paid a dividend of $0.105 per share for the second quarter 2019 to holders of the Company’s Class A common stock (NYSE: ESRT) and Class B common stock and to holders of the operating partnership’s Series ES, Series 250 and Series 60 operating partnership units (NYSE Arca: ESBA, FISK and OGCP, respectively) and Series PR operating partnership units. The Company paid a dividend of $0.15 per unit for the second quarter 2019 to holders of the operating partnership’s private perpetual preferred units.

Webcast and Conference Call Details

Empire State Realty Trust, Inc. will host a webcast and conference call, open to the general public, on Thursday, July 25, 2019 at 8:30 am Eastern time.

The webcast will be accessible in the “Investors” section of the Company’s website at www.empirestaterealtytrust.com. To listen to the live webcast, go to the site at least five minutes prior to the scheduled start time in order to register, download and install any necessary audio software. Shortly after the call, a replay of the webcast will be available for 90 days on the Company’s website.

The conference call can also be accessed by dialing 1-877-407-3982 for domestic callers or 1-201-493-6780 for international callers. A dial-in replay will be available starting shortly after the call until August 1, 2019, which can be accessed by dialing 1-844-512-2921 for domestic callers or 1-412-317-6671 for international callers. The passcode for this dial-in replay is 13691962.

The Supplemental Report will be available prior to the conference call in the “Investors” section of the Company’s website at www.empirestaterealtytrust.com.

About Empire State Realty Trust

Empire State Realty Trust, Inc. (NYSE: ESRT), a leading real estate investment trust (REIT), owns, manages, operates, acquires and repositions office and retail properties in Manhattan and the greater New York metropolitan area, including the Empire State Building, the world's most famous building. Headquartered in New York, New York, the Company's office and retail portfolio covers 10.1 million rentable square feet, as of June 30, 2019, consisting of 9.4 million rentable square feet in 14 office properties, including nine in Manhattan, three in Fairfield County, Connecticut, and two in Westchester County, New York; and approximately 700,000 rentable square feet in the retail portfolio.

Forward-Looking Statements

This press release includes “forward looking statements” within the meaning of the federal securities laws. Forward-looking statements may be identified by the use of words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates,” “contemplates,” “aims,” “continues,” “would” or “anticipates” or the negative of these words and phrases or similar words or phrases. The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: changes in our industry, the real estate markets, either nationally or in Manhattan or the greater New York metropolitan area; resolution of legal proceedings involving the company; reduced demand for office or retail space; general volatility of the capital and credit markets and the market price of our Class A common stock and our publicly-traded operating partnership units; changes in our business strategy; changes in technology and market competition which affect utilization of our broadcast or other facilities; changes in domestic or international tourism, including geopolitical events and currency exchange rates; defaults on, early terminations of, or non-renewal of, leases by tenants; fluctuations in interest rates; declining real estate valuations and impairment charges; termination or expiration of our ground leases; our failure to obtain or maintain necessary outside financing, including our unsecured revolving credit facility and term loan facility; our leverage; decreased rental rates or increased vacancy rates; our failure to redevelop and reposition properties, or to execute any newly planned capital project, successfully or on the anticipated timeline or at the anticipated costs; difficulties in identifying properties to acquire and completing acquisitions; risks of real estate development (including our Metro Tower development site) and capital projects, including the cost of construction delays and cost overruns; impact of changes in governmental regulations, tax laws and rates and similar matters; and our failure to qualify as a real estate investment trust, or REIT. For a further discussion of these and other factors that could impact the Company's future results, performance or transactions, see the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, and other risks described in documents subsequently filed by the Company from time to time with the Securities and Exchange Commission.

While forward-looking statements reflect the Company's good faith beliefs, they are not guarantees of future performance. The Company disclaims any obligation to update or revise publicly any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events, or other changes after the date of this press release, except as required by applicable law. Prospective investors should not place undue reliance on any forward-looking statements, which are based only on information currently available to the Company (or to third parties making the forward-looking statements).

 

Empire State Realty Trust, Inc.

Condensed Consolidated Statements of Income

(unaudited and amounts in thousands, except per share data)

 

 

 

Three Months Ended June 30,

2019

 

2018

Revenues

Rental revenue (1)

$

141,071

$

124,038

Tenant expense reimbursement (1)

 

-

 

16,205

Observatory revenue

 

32,895

 

35,201

Lease termination fees

 

363

 

357

Third-party management and other fees

 

331

 

376

Other revenue and fees

 

1,584

 

2,352

Total revenues

 

176,244

 

178,529

Operating expenses

Property operating expenses

 

40,227

 

39,418

Ground rent expenses

 

2,332

 

2,332

General and administrative expenses

 

15,998

 

13,225

Observatory expenses

 

8,360

 

7,678

Real estate taxes

 

28,267

 

26,743

Depreciation and amortization

 

44,821

 

39,468

Total operating expenses

 

140,005

 

128,864

Total operating income

 

36,239

 

49,665

Other income (expense):

 

 

Interest income

 

3,899

 

2,499

Interest expense

 

(20,597)

 

(20,525)

Income before income taxes

 

19,541

 

31,639

Income tax expense

 

(611)

 

(1,455)

Net income

 

18,930

 

30,184

Preferred unit distributions

 

(234)

 

(234)

Net income attributable to non-controlling interests

 

(7,609)

 

(13,299)

Net income attributable to common stockholders

$

11,087

$

16,651

Total weighted average shares

Basic

 

176,796

 

165,256

Diluted

 

298,131

 

297,244

Net income per share attributable to common stockholders

 

Basic

$

0.06

$

0.10

Diluted

$

0.06

$

0.10

 

Note:

 

 

(1) The Company adopted Financial Accounting Standards Board Topic 842 using the modified retrospective approach as of January 1, 2019 and elected to apply the transition provisions of the standard at adoption. As such, the prior period amounts presented under ASC 840 were not restated to conform with the 2019 presentation. The Company adopted the practical expedient in Topic 842, which allowed the Company to avoid separating lease and non-lease rental income. Consequently, all rental income earned pursuant to tenant leases in 2019 is reflected as one category, “Rental Revenue,” in the 2019 consolidated statements of income. The billed tenant expense reimbursement was $15.9 million for the three months ended June 30, 2019.

 

In connection with the adoption of Topic 842, beginning in 2019, we expensed certain leasing costs that were previously capitalized. Had we adopted in 2018, we would have expensed in general and administrative expenses an additional $1.2 million of such costs in the second quarter 2018.

 

Empire State Realty Trust, Inc.

Condensed Consolidated Statements of Income

(unaudited and amounts in thousands, except per share data)

 

 

 

Six Months Ended June 30,

2019

2018

Revenues

Rental revenue (1)

$

284,488

$

246,349

Tenant expense reimbursement (1)

 

-

 

33,999

Observatory revenue

 

53,464

 

56,450

Lease termination fees

 

751

 

979

Third-party management and other fees

 

651

 

839

Other revenue and fees

 

4,183

 

7,184

Total revenues

 

343,537

 

345,800

Operating expenses

Property operating expenses

 

83,182

 

83,603

Ground rent expenses

 

4,663

 

4,663

General and administrative expenses

 

30,024

 

25,853

Observatory expenses

 

15,935

 

15,014

Real estate taxes

 

56,499

 

53,487

Depreciation and amortization

 

90,919

 

79,351

Total operating expenses

 

281,222

 

261,971

Total operating income

 

62,315

 

83,829

Other income (expense):

 

 

Interest income

 

7,638

 

3,724

Interest expense

 

(41,286)

 

(38,116)

Income before income taxes

 

28,667

 

49,437

Income tax benefit (expense)

 

119

 

(1,195)

Net income

 

28,786

 

48,242

Preferred unit distributions

 

(468)

 

(468)

Net income attributable to non-controlling interests

 

(11,554)

 

(21,355)

Net income attributable to common stockholders

$

16,764

$

26,419

Total weighted average shares

Basic

 

176,495

 

164,311

Diluted

 

298,100

 

297,029

Net income per share attributable to common stockholders

 

Basic

$

0.09

$

0.16

Diluted

$

0.09

$

0.16

 

Note:

(1) The Company adopted Financial Accounting Standards Board Topic 842 using the modified retrospective approach as of January 1, 2019 and elected to apply the transition provisions of the standard at adoption. As such, the prior period amounts presented under ASC 840 were not restated to conform with the 2019 presentation. The Company adopted the practical expedient in Topic 842, which allowed the Company to avoid separating lease and non-lease rental income. Consequently, all rental income earned pursuant to tenant leases in 2019 is reflected as one category, “Rental Revenue,” in the 2019 consolidated statements of income. The billed tenant expense reimbursement was $32.7 million for the six months ended June 30, 2019.

 

In connection with the adoption of Topic 842, beginning in 2019, we expensed certain leasing costs that were previously capitalized. Had we adopted in 2018, we would have expensed in general and administrative expenses an additional $2.2 million of such costs in the six months ended June 30, 2018.

 

 

Empire State Realty Trust, Inc.

Reconciliation of Net Income to Funds From Operations (“FFO”),

Modified Funds From Operations (“Modified FFO”) and Core Funds From Operations (“Core FFO”)

(unaudited and amounts in thousands, except per share data)

 

 

 

Three Months Ended June 30,

2019

2018

 

Net income

$

18,930

$

30,184

Preferred unit distributions

 

(234)

 

(234)

 

Real estate depreciation and amortization

 

43,822

 

39,049

FFO attributable to common stockholders and non-controlling interests

 

62,518

 

68,999

 

Amortization of below-market ground leases

 

1,958

 

1,958

Modified FFO attributable to common stockholders and non-controlling interests

 

64,476

 

70,957

 

 

 

Core FFO attributable to common stockholders and non-controlling interests

$

64,476

$

70,957

 

 

Total weighted average shares

Basic

 

298,131

 

297,244

Diluted

 

298,131

 

297,244

 

FFO per share

Basic

$

0.21

$

0.23

Diluted

$

0.21

$

0.23

 

 

 

Modified FFO per share

 

 

Basic

$

0.22

$

0.24

Diluted

$

0.22

$

0.24

 

 

 

Core FFO per share

 

 

Basic

$

0.22

$

0.24

Diluted

$

0.22

$

0.24

 

 

Empire State Realty Trust, Inc.

Reconciliation of Net Income to Funds From Operations (“FFO”),

Modified Funds From Operations (“Modified FFO”) and Core Funds From Operations (“Core FFO”)

(unaudited and amounts in thousands, except per share data)

 

 

 

Six Months Ended June 30,

2019

 

2018

 

Net income

$

28,786

$

48,242

Preferred unit distributions

 

(468)

 

(468)

Real estate depreciation and amortization

 

88,914

 

78,517

FFO attributable to common stockholders and non-controlling interests

 

117,232

 

126,291

 

Amortization of below-market ground leases

 

3,916

 

3,916

Modified FFO attributable to common stockholders and non-controlling interests

 

121,148

 

130,207

 

 

 

Core FFO attributable to common stockholders and non-controlling interests

$

121,148

$

130,207

 

 

Total weighted average shares

Basic

 

298,100

 

297,028

Diluted

 

298,100

 

297,029

 

FFO per share

 

Basic

$

0.39

$

0.43

Diluted

$

0.39

$

0.43

 

 

 

Modified FFO per share

 

 

Basic

$

0.41

$

0.44

Diluted

$

0.41

$

0.44

 

 

 

Core FFO per share

 

 

Basic

$

0.41

$

0.44

Diluted

$

0.41

$

0.44

 

Empire State Realty Trust, Inc.

Condensed Consolidated Balance Sheets

(unaudited and amounts in thousands)

 

 

June 30,
2019

December 31,
2018

Assets

Commercial real estate properties, at cost

$

2,993,655

$

2,884,486

Less: accumulated depreciation

 

(809,197)

 

(747,304)

Commercial real estate properties, net

 

2,184,458

 

2,137,182

Cash and cash equivalents

 

375,335

 

204,981

Restricted cash

 

38,043

 

65,832

Short-term investments

 

150,000

 

400,000

Tenant and other receivables

 

31,264

 

29,437

Deferred rent receivables

 

209,510

 

200,903

Prepaid expenses and other assets

 

60,818

 

64,345

Deferred costs, net

 

228,782

 

241,223

Acquired below market ground leases, net

 

356,482

 

360,398

Right of use assets

 

29,404

 

-

Goodwill

 

491,479

 

491,479

Total assets

$

4,155,575

$

4,195,780

 

Liabilities and equity

Mortgage notes payable, net

$

607,072

$

608,567

Senior unsecured notes, net

 

1,047,939

 

1,046,219

Unsecured term loan facility, net

 

264,394

 

264,147

Unsecured revolving credit facility

 

-

 

-

Accounts payable and accrued expenses

 

131,842

 

130,676

Acquired below market leases, net

 

45,651

 

52,450

Ground lease liabilities

 

29,404

 

-

Deferred revenue and other liabilities

 

48,858

 

44,810

Tenants’ security deposits

 

32,383

 

57,802

Total liabilities

 

2,207,543

 

2,204,671

Total equity

 

1,948,032

 

1,991,109

Total liabilities and equity

$

4,155,575

$

4,195,780

 

 

Contacts

Investors:
Empire State Realty Trust Investor Relations
(212) 850-2678
IR@empirestaterealtytrust.com

Media:
Sard Verbinnen & Co.
(212) 687-8080

Contacts

Investors:
Empire State Realty Trust Investor Relations
(212) 850-2678
IR@empirestaterealtytrust.com

Media:
Sard Verbinnen & Co.
(212) 687-8080