10-Q: Empire State Realty OP, L.P. Reports First Quarter 2024 Results

Empire State Realty OP, L.P. reported a net income attributable to common unitholders of $9.2 million and Core FFO of $56.5 million for the first quarter of 2024.

Summary

• Empire State Realty OP, L.P. reported a net income attributable to common unitholders of $9.2 million for the first quarter of 2024.
• The company's Core Funds From Operations (Core FFO) was $56.5 million for the quarter.
• The commercial portfolio was 91.1% leased, with the Manhattan office portfolio at 92.7% leased.
• The Empire State Building Observatory generated $16.2 million of net operating income.
• A total of 248,108 rentable square feet of new, renewal, and expansion leases were signed during the quarter.
• Rental revenue increased to $153.9 million, up from $140.1 million in the same period last year.
• Observatory revenue increased to $24.6 million, up from $22.2 million in the same period last year.
• The company closed on the acquisition of a retail property in Williamsburg, Brooklyn in September 2023 for $26.4 million.
• In March 2024, the company executed a buyout of its partner's 10% interest in two multifamily properties for $14.2 million in cash and the assumption of $18.0 million of in-place debt.
• The company entered into a second amended and restated credit agreement with Bank of America, N.A. on March 8, 2024, which includes a $620 million senior unsecured revolving credit facility and a $95 million term loan facility.
• On March 13, 2024, the company entered into a third amendment to its credit agreement with Wells Fargo Bank, National Association, which governs a $175 million senior unsecured term loan facility.
• On April 10, 2024, the company entered into a Note Purchase Agreement for a private placement of $225 million aggregate principal amount of senior unsecured notes.

Sentiment

Score: 7

Explanation: The document presents a generally positive outlook with strong leasing and observatory performance, but acknowledges economic uncertainties and some negative impacts on cash flow. The sentiment is cautiously optimistic.

Positives

• The company experienced increased visitation and revenue per visitor at the Empire State Building Observatory.
• The company has a diversified portfolio across office, retail, multifamily and the Empire State Building Observatory.
• The company has a well-positioned balance sheet, modest leverage and good access to liquidity.
• The company has no near term debt maturities or floating rate debt exposure.

Negatives

• Net cash provided by operating activities decreased by $15.5 million due to changes in working capital.
• Net cash used in investing activities increased by $68.7 million due to the acquisition of non-controlling interests in other partnerships and there being no proceeds from the disposition of property in the current period.
• Net cash used in financing activities increased by $3.7 million due to financing costs in connection with the recast of the revolving credit and term loan facilities.

Risks

• The global economy, including the real estate sector, currently navigates an environment of uncertainty around inflation, rising interest rates, reduced commercial real estate new loans, questions on the direction of capital markets, risk of recession and geopolitical unrest.
• There have been concerns about the softening of the commercial real estate market, and particularly the office real estate market, amidst refinancing challenges of existing low interest rate loans and associated reduced new loan availability and increased costs of loans and related increased expectations of equity returns, coupled with the gradual pace of return-to-office and its impact on the physical utilization of space and asset valuations.
• The risk of a global economic recession could impact the number of visitors to the Empire State Building Observatory, as well as our pricing power.

Future Outlook

The company believes that it is in a good competitive position with diversified drivers of income across office, retail, multifamily and the Empire State Building Observatory. The company believes its business is further fortified by the continued performance of its Observatory attraction and is supported by a well-positioned balance sheet, modest leverage and good access to liquidity.

Industry Context

The document acknowledges the current uncertain economic environment, including concerns about inflation, rising interest rates, and the softening of the commercial real estate market, particularly the office sector. It highlights the company's diversified portfolio and strong balance sheet as competitive advantages in this environment.

Comparison to Industry Standards

• The document does not provide specific comparisons to industry standards or competitors.
• However, the company's focus on a diversified portfolio, strong leasing activity, and the performance of its iconic Empire State Building Observatory are consistent with strategies employed by other large real estate investment trusts.
• The company's emphasis on energy efficiency and indoor environmental quality aligns with growing industry trends towards sustainability and tenant well-being.

Legal Proceedings

• The company is involved in ongoing litigation related to the 2014 IPO, with a judgment entered in favor of the Claimants for approximately $1.26 million, inclusive of interest, which the Respondents have appealed.

Related Party Transactions

• The company earned supervisory fees of $0.2 million and property management fees of $0.1 million from entities affiliated with Anthony E. Malkin.
• The company leases space to an entity affiliated with Anthony E. Malkin and has a shared use agreement with such tenant.
• One of the company's directors, Hannah Yang, is sister to Heela Yang, who is Founder and Chief Executive Officer of Sol de Janerio USA, a tenant at One Grand Central Place.

Stakeholder Impact

• Shareholders will be impacted by the company's financial performance and dividend policy.
• Employees will be impacted by the company's operational performance and compensation policies.
• Tenants will be impacted by the company's leasing and property management practices.
• Customers of the Empire State Building Observatory will be impacted by the company's pricing and operational decisions.
• Creditors will be impacted by the company's debt management and financial performance.

Next Steps

• The company will continue to assess the impairment of the Observatory reporting unit goodwill going forward.
• The sale and purchase of the senior unsecured notes is scheduled to be held on June 17, 2024, subject to customary closing conditions.
• The company anticipates a cooperative consensual foreclosure of the First Stamford Place mortgage to be completed by June 30, 2024.

Key Dates

Keywords

real estate, office, multifamily, retail, observatory, leasing, debt, finance, New York City, Empire State Building