ESRT braces for more pain at Empire State Building
REIT reported uptick in Q2 lease signing across portfolio, but said major tenant filed for bankruptcy
Empire State Realty Trust is bracing for its second largest tenant to exit its most iconic office property.
While the real estate investment trust reported a second quarter uptick in leases across its portfolio, CEO Tony Malkin shared the news on Thursday that GBG, which leases 353,000 square feet at the Empire State Building, had just filed Chapter 11 proceedings.
But Malkin told analysts at the earnings call that “we’ve been on top of this situation for several months.”
GBG, a subsidiary of Global Brands Group Holding, is only behind LinkedIn as the largest tenant at ESRT’s Empire State Building. GBG has already subleased 162,000 square feet of space to a single tenant, said ESRT Chief Financial Officer Christina Chiu. She added the REIT will continue to receive rent payments directly from the subtenant as GBG goes through its restructuring process.
For the remaining GBG space — the company still has six years on its lease — ESRT will draw on the tenant’s $17 million letter of credit, which is not part of the bankruptcy. That still leaves $1.6 million of rent outstanding, which will be written down in the third quarter, Chiu said.
The bankruptcy announcement overshadowed a bit of positive news for a company that has been — like many office landlords — slammed by the pandemic. The REIT inked 35 leases — including renewals — totaling 191,000 square feet last quarter. That was up slightly from the first quarter, when 25 leases were signed for a total of 172,000 square feet.
ESRT reported a net income of $4.4 million last quarter, a substantial improvement from the first quarter net loss of $3.1 million. Revenue was $153 million, up 5.6 percent from the first quarter and up nearly 9 percent year over year. Funds from operations was $48.8 million in the second quarter, up nearly 24 percent year over year.
The REIT also resumed quarterly dividend payments in April. That had been suspended since the third quarter of last year to conserve cash in the face of the pandemic.
ESRT’s office and retail portfolio totals 10 million square feet, mainly in Manhattan. The Empire State Building’s observation deck has always been an important component of that revenue stream.
Attendance there has suffered amid the pandemic. In the second quarter there were 162,000 visitors, compared to the nearly 1 million people who went during the same period in 2019.
The latest figure still marked an improvement on recent quarters. The company reported $3.1 million in net income at the observation deck, the first positive quarter since the onset of the pandemic, it said.
But with international travel restrictions still in place and Delta variant cases surging, Malkin said it was unlikely the building would see full attendance recovery in the near future. Visitor volume, he said, would likely return “sometime in 2022.”